In Confidence
Office of the Minister of Health
Cabinet Social Policy Committee
Social Bonds Project: Payment on Results
Proposal
1. This paper:
a. briefs Cabinet on work the Ministry of Health is leading to explore the value of implementing a social bonds pilot in New Zealand
b. seeks Cabinet approval to test potential provider and investor interest in a social bond pilot.
Executive Summary
2. Social bonds are a way for governments to contract non-government organisations (including possibly private companies) to achieve specific social sector outcomes, such as reducing drug and alcohol use. The provider only gets payment on achieving the agreed results.
3. Essentially, the government enters into a pay-for-performance contract with an accountable group, which may include not-for-profit non-governmental organisations (NGOs), philanthropic funds, or even private businesses. Payment to the group is contingent on a specified social outcome being achieved. The group applies its expertise to achieving the outcome. Because the group finances the project (either out-of-pocket, by issuing bonds, or by some other mechanism), and receives payments only if the specified outcome is achieved, it has a strong incentive to succeed.
4. Given the Government’s significant spend on social sector services (around $12.4 billion in 2011/12) this approach provides new opportunities to improve service delivery, if it is implemented well, and in the right areas.
5. The Ministry of Health is leading cross-government work to investigate the value of a social bond pilot in New Zealand. This work is part of a Treasury-led work programme called ‘Best Sourcing’ (under the ‘Better Public Services’ initiative (BPS)).
6. Key next steps are:
a. information seminars to explain social bonds and this project to NGOs (in late February/March 2013)
b. testing the idea with the market to assess provider and investor interest in a social bond pilot (in late February/March 2013)
c. a business case on the costs, benefits, risks and commercial form of a pilot (in June 2013)
d. Cabinet decision on whether to implement any pilot (in July 2013).
Background
Project origin
7. Encouraging innovation in the New Zealand public service is a priority for the Government’s BPS initiative. The Treasury established a Development Pipeline Fund and called for proposals from outside the public service for ideas to improve efficiency and effectiveness across the state sectors.
8. Through this competitive process, a KPMG proposal to investigate the value of a social bonds pilot in New Zealand was selected by a cross-agency panel for further exploration. The Ministry of Health agreed to lead the project, with funding of $300,000 from Treasury.
9. In October 2012, the Ministry of Health contracted KPMG to provide:
a. a Concept and Feasibility Report – completed in December 2012
b. a Business Case for a social bond pilot – due in June 2013.
What are social bonds?
10. Social bonds are a way of contracting to achieve specific social outcomes where:
a. a government promises to pay an accountable group if it achieves a certain social outcome (such as reducing drug and alcohol use by 10 percent)
b. the group decides how best to achieve the outcome and funds its services with charitable and/or private sector funds (for example, from NGOs and philanthropists)
c. funds are raised using a bond (or other financing mechanism)
d. if the specified outcome is achieved, the government pays the group (for example, by redeeming bonds).
11. This approach to contracting is not necessarily suitable for all areas of the Government’s social sector spend. For the approach to be effective, the desired outcome area should have these properties:
a. measurable targets, which must be defined clearly enough for a contract with an accountable group to be enforceable
b. progress towards a target can be meaningfully attributed to a project financed by social bonds
c. a project financed by social bonds will not unduly interfere with other government efforts in the same area.
12. Social bonds are at the cutting edge of public sector reforms. Trials are underway in the UK, USA, Australia and Canada. Information about how social bonds are being used by other countries is provided in the table below. The amount of private investment is included (where available) to provide an indication of the size of each trial. The amount of government funding for each trial is not publicly available.
Country / Summary / Private investment / Progress /UK / Peterborough prison has adopted a social impact bond to test the feasibility of entering a socially financed contract to lower recidivism. It is the first pilot in the UK and is seen as a world leader. / £5 million
(approximately NZ$9.3 million) / Development of the concept began in 2009 and contracts for a Peterborough social impact bond were put in place in September 2010, to enable:
· Social Finance to raise finance from a number of charities and foundations (e.g. Barrow Cadbury Trust and Esmee Fairburn Foundation)
· St Giles Trust to provide services
· Big Lottery Fund and Ministry of Justice to pay investors on success of the services
· QinetiQ and University of Leicester to act as independent assessors.
UK / Eight Payment-by-Result programmes for drug and alcohol recovery are running across the UK. Each pilot has a different set of stakeholders, including providers, local authorities and National Health Service trusts. / Not publicly available / Expressions of interest were sought in December 2010. In April 2012, eight selected tenders entered a co-design phase to further develop outcomes, services, and measurements.
USA (New York) / The Payment for Success programme is a four-year programme to provide education and intensive training and counselling to at-risk incarcerated youth. / US$10 million
(approximately NZ$11.8 million) / The bond was launched in February 2012.
Goldman Sachs has invested in the bonds, largely underwritten Bloomberg Philanthropies. The social services provider is MDRC.
Australia (New South Wales) / Three Social Benefits Bonds pilots are proposed to attract private funds into preventative social programmes: one for recidivism and two for foster care. / Expected to be AUD$5 - $10 million
(approximately NZ$6.2 - $12.3 million) / Development and procurement commenced in March 2012 and the successful tenders were announced in September 2012.
Successful tenders included: the Benevolent Society, Westpac and Commonwealth Bank for out of home care; and Mission Australia and Social Finance for re-offending.
The Joint Development phase was expected to take six months, but is taking longer.
Canada / The Canadian Federal government has expressed an interest in social impact bonds. / Still in development / The government sought ideas from the market to trial in late 2012.
13. The social bond project will draw on lessons from these trials. These show, for example, that well-defined outcomes are needed to measure success and design incentives. These trials are in their early stages, with limited evaluation. Information on whether these trials have achieved their intended outcomes is not yet available.
Alignment with existing contracting innovations
14. The social bond project is one aspect of the Government’s work to improve its procurement by better integrating contracts, focusing on outcomes and having decisions made locally. It sits under the Treasury-led workstream called ‘Best Sourcing’ which is part of BPS. Best Sourcing is about agencies working as effectively and cost-efficiently as possible using whatever combination of government, NGO or private provision achieves this.
15. This project will build on, and learn from, other contracting innovations, including:
a. existing work to better integrate contracts (for example the Ministry of Business, Innovation and Employment-led work to streamline NGO contracts)
b. Social Sector Trials and Investing for Outcomes initiatives, led by the Ministry of Social Development, that offer lessons on contracting and measuring outcomes
c. the procurement of Public Private Partnerships led by Treasury that offers insight into procurement, contracting and using non-government finance to transfer risk that services don’t deliver desired outcomes.
16. A social bond pilot would complement existing contracting innovations – it would be small scale, and in an outcome and geographic location that minimises impact on existing work. It may also provide lessons transferable to other contracting innovations.
Opportunity for the Government
17. Social bonds are a possible next step in the Government’s use of contracting for social outcomes. A social bond approach builds on current approaches to contracting by:
a. transferring the risk that services don’t deliver on outcomes to the investor; government only pays if outcomes are achieved
b. allowing providers to determine what and how services will be delivered, thereby encouraging innovation
c. improving how governments evaluate, monitor and hold service providers to account – as the approach relies on good measures of success.
18. Private and charitable sector funders are motivated to use their expertise, networks and funding to drive performance to achieve social outcomes and recoup their investment.
19. KPMG’s Concept and Feasibility Report concluded there is value in continuing to investigate implementing a social finance pilot in New Zealand. Given the Government’s significant spend on social sector services (around $12.4 billion in 2011/12) this approach provides new opportunities to improve service delivery, if it is implemented well, and in the right areas.
Next steps
20. Key next steps are (refer Appendix 1 for further details):
a. information seminars to explain social bonds and this project to NGOs (in late February/March 2013)
b. testing the idea with the market to assess provider and investor interest in a social bond pilot (in late February/March 2013)
c. a business case on the costs, benefits, risks and commercial form of a pilot (in June 2013)
d. Cabinet decision on whether to implement any pilot (in July 2013).
21. In late February/early March 2013, seminars will be held for NGOs about social bonds, facilitated by the Association of Non-Governmental Organisations of Aotearoa (ANGOA). The purpose is to engage NGOs and increase their understanding and support for the social bonds concept and project. The seminars will be led by the Ministry of Health and the Treasury.
22. Also later this month, potential providers and investors will be invited (via a public notice and targeted invitations) to express interest in piloting social bonds for outcomes in the areas below.
a. Improving the quality of housing for vulnerable families – this would impact on a number of important health outcomes, including rheumatic fever and child respiratory conditions. Potential pilot ideas in this area could include wrap-around services to help vulnerable families progress out of state housing.
b. Reducing alcohol and drug use, especially among young people – alcohol and drug problems are widespread and are a common cause behind poor performance in a number of BPS Result Areas, and other priority cross-government initiatives, such as Injury Prevention, Family Violence and the Methamphetamine Action Plan.
c. Reducing teenage pregnancy rates – unplanned pregnancy can be associated with increased risks for the mother and any resulting child.
d. Any other areas suggested by providers/investors.
23. The Ministry of Health considers the first three areas proposed above are good candidates given the practicalities of resourcing and evaluating a pilot. In these areas:
a. the Ministry of Health already contracts for these services and there is potential for funding to be diverted to a pilot
b. there is potential to improve service delivery and measure outcomes
c. the Ministry of Health has the resources to support pilots (particularly around data to measure the outcomes)
d. there are likely to be relatively low risks associated with a new pilot.
24. The Ministry of Health will test, with service providers and investors, whether they have an interest in, and the ability to carry out, a social bond pilot in the above areas.
25. This market sounding will feed into a business case for a social bond pilot. The business case will provide more information about:
a. the (clear, measurable) social outcome sought
b. the value of a social bond pilot (its benefits, risks and costs)
c. how it could operate (including how success would be measured, attributed, and paid for, and links with the Government’s other work).
26. If this business case shows value in a social bond pilot, the Minister of Health will seek Cabinet approval to take such a pilot to market, following the milestones set out in Appendix 1.
Risks
27. As with any innovative idea, there are risks associated with discussing the project with the market. The table below outlines potential risks identified and how these will be mitigated.
Risk / Mitigation /The proposed outcomes areas for a potential pilot do not include the areas that major investors are interested in. / The market sounding notice will also indicate an openness to receive ideas and information in other outcomes areas where providers or investors have a significant interest.
Providers do not respond to the market sounding invitation as they do not understand the concept. / The Ministry of Health and Treasury are holding five seminars at the end of February/early March to help increase the understanding of NGOs. These seminars have been funded by the Treasury. Similar seminars were undertaken in late 2012 as part of the streamlining of NGO contracts project (lead by the Ministry of Business, Innovation and Employment); they were a successful way of creating NGO engagement and support.
Investors do not respond to the market sounding invitation as they do not understand the concept. / Investor understanding of the concept is likely to be higher than providers’. However, in order to ensure the market sounding is focused on gaining answers rather than responding to questions, KPMG is considering running an information session before the market sounding meetings.
Providers may be concerned that the pilot will take money away from existing services. / The Ministry of Health will need to carefully communicate with providers to reassure them that funding will only be diverted to a pilot where that funding is not achieving the desired outcomes.
While this concern may remain among providers, our discussions with the Ministry of Health’s NGO Working Group have shown that there is NGO support for the Government investigating the application of social bonds in New Zealand.
Philanthropic funding is diverted from existing beneficial projects to the pilot. / This may occur at the outset of a social bond pilot. However, if the target outcome is achieved, the investor will receive a payment for success that could be reinvested in other initiatives.
In addition, the market soundings will identify the types of organisations interested in the different outcome areas. If possible, the preference will be to select an outcome area where organisations are interested in diverting funds from private investments into the pilot.
28. The risks of implementing a social bonds pilot will be analysed during the development of business case and reflected in the Cabinet paper seeking approval for a pilot.