First published in Pro Bono News
The Living Learning program is important, writes Dale Renner, not just because of its social impact on young people, but also because of the way the impact investment is structured. It provides a new way to partner for the delivery of social outcomes.
The Living Learning program was launched last week at the Hester Hornbrook Academy (HHA) in Sunshine in Melbourne’s west. HHA is an independent school run by Melbourne City Mission for young people disengaged from the traditional school system. The program is funded as an impact investment under the Victorian government’s $30 million Partnerships Addressing Disadvantage (or PAD) program (also known as social impact bonds, or SIBs).
The service innovation which will be tested through the program is a more integrated mental health and flexible secondary school education program for young people whose educational and long-term employment prospects are being affected by ongoing mental health challenges.
The program is important not just because of the social impact on young people, but also because of the way this impact investment is structured. We have worked on a variety of social impact investments in the last few years and have encountered a range of barriers to a wider takeup of social financing mechanisms such as SIBs. They are complex to negotiate given the three parties involved (government, social organisation and investors) and their need to balance a range of risks as well as target measurable financial and social outcomes. SIBs were originally designed to allow socially-minded investors to help fund the upfront costs of social programs where their investment was “at risk”, meaning they would lose some of their investment if the program did not deliver the target outcomes. They were specifically designed with private investors, not philanthropic trusts, in mind.
Philanthropic trusts operate differently to a traditional impact investor.
Philanthropic trusts and foundations usually have a corpus of funds built from an original or historic donation invested in “safe” market investments so that the interest earned on those investments can be given away as grants. For an overly simplified example, if your corpus is $10 million and you earn 5 per cent per annum from your investments, you can give away $500,000 (less expenses) per year and keep the trust going “in perpetuity”’. A more modern way of thinking about the granting side is that, it too is an investment but the return is in social outcomes rather than in financial returns. This means each alternative use of grant money should be compared to the level of outcome it achieves compared with the next best use of that money.
As a result, the amount of money that philanthropic trusts and foundations give away each year is tiny compared with the amount that is locked away in their corpus. People in the social impact space have been thinking for years about how to unlock this corpus for investing in impact directly. The social finance innovation that enables the Living Learning project represents one way we can now unlock that corpus to be used for specific types of social impact investment projects. This is a “philanthropic impact investment” (PII) model, as distinct from the more common impact investing model which tends to focus on investors that may not be philanthropic trusts.
Why is it difficult for some philanthropic trusts to use the corpus for social impact investing?
The problem is that social investments are competing against asset classes that are very well known – whether listed companies, property or, increasingly, renewable energy investments. Social impact investments are newer and far more variable (a SIB service model and program logic is usually an innovation that is unique or new to the sector), so it is harder for an investor to assess the risk of an investment in such a project compared to those in well-known assets. As a result, the understandably conservative investment strategies employed by trusts and foundations mean these newer and more complex social investments are passed over.
The new PII approach developed for the Living Learning program enables a trust or foundation to combine both its corpus and its grant funding in the same investment through a “split tranche” structure. The investment generates a return if the project achieves its social outcome goals while the grant portion is called upon to cover the loss if the program fails to achieve the target social outcomes.
Latitude Network with Social Enterprise Finance Australia (Sefa) and Melbourne City Mission worked together with the Victorian government to ensure this model suited the program and complied with all legal and government requirements. This approach has the potential to make it easier for social service organisations to develop high impact social programs that attract impact investment from their philanthropic partners.
Benefits of the new split tranche structure
One of the benefits of this new structure is that it leverages and deepens the natural relationship between philanthropy and the social sector and allows philanthropists to use part of their large capital base to help unlock funding from the government for worthy programs. Philanthropic trusts can use their dual ability to invest capital, but also to provide grants that enable them to reduce the internal risk of these investments and provide the working capital that outcomes based contracts require.
This is useful because outcomes-based contracts are powerful tools to drive higher accountability for social impact. One of the core public benefits that we at Latitude Network have witnessed in organisations that undertake outcomes contracts (such as SIBs or PII projects) is that the focus on outcomes and the rigour of the contracting and financial structure create strong incentives to achieve social outcomes. This in turn leads to stronger use of data and performance systems that drive continuous improvement in programs. Well-designed outcomes contracts align financial and mission-based incentives to deliver high performing social programs.
While SIBs have been important vehicles for helping the social sector develop new tools and skills for achieving outcomes, they are very complex to develop and negotiate and are not suitable for all forms of social service funding. Government, philanthropy and the social sector need to continue to find new and lower-cost ways of contracting for the delivery of social outcomes. The PII structure developed for Living Learning is an example of a new way to partner for delivery of social outcomes.
Latitude Network congratulates Melbourne City Mission (MCM) on the announcement of its Partnership Addressing Disadvantage (PAD) contract with the Victorian State Government known as the ‘Living Learning’ program.
Latitude Network supported MCM in its initial PAD application and throughout the negotiation with Government, providing advice and technical assistance across service design, financial model, negotiation and data use. We are now working with MCM to develop a live data and performance system set up to help them achieve their outcomes targets.
‘Living Learning’ is a new, targeted program which addresses barriers for young people who are disengaged from school and living with mental illness. MCM developed the program using its expertise in re-engaging with, and supporting, young people through their independent school, the Hester Hornbrook Academy.
As lead advisors to MCM throughout the journey, we are excited to see the program announced and young people able to start entering the program from today.
Latitude Network was also pleased to work with leading Australian social finance experts, Sefa, who provided advice on blended capital structuring options, targeting foundation investors using their corpus and granting arm.
Innovative financing structure: Watch this space
We can’t yet share the details of the innovative financial structure behind Living Learning. Sign up to our newsletter so we can let you know those details as soon as they are available.
At a future date we will also be running a Webinar with Sefa in collaboration with Pro Bono News to talk through the details of the investment structure. Keep an eye out for the invitation.
Key elements of the program
Key program elements include -
See the Victorian Government's Press Release here.
Outcomes funding, Homelessness, policy, Social Impact Bonds, Social Impact Investments
Victoria's first social impact bond: Journey to Social Inclusion
Sacred Heart Mission successfully negotiated Victoria’s first Social Impact Investment (outcomes-based contract) and Latitude Network supported them each step of the way.
SHM began life with the opening of the parish doors in Grey Street, St Kilda, to host meals for locals experiencing homelessness.
Nearly 40 years on and SHM is now a leader in providing intensive support for people right across the homelessness spectrum using engagement services (meals and welcoming physical spaces) and individualised service support as well as providing accommodation and support.
SHM’s program, Journey to Social Inclusion (J2SI), was born in the late-2000s out of the organisation’s concern that ‘business as usual’ was not allowing them to do the job they wanted to do - end homelessness for some of Melbourne’s most vulnerable people. As a result of the inherent silos in the social and health service systems, SHM decided to invest in building an evidence-based, outcomes-focused program for clients linking a ‘rapid-housing’ response with targeted help over the long-term (three years) - something the current service system found almost impossible to do.
After raising funds to run J2SI as a pilot as well as an expanded phase 2, SHM’s challenge was to continue to attract funding to both keep the program going but also to grow the program so that SHM could reach more of those it knew needed more targeted support.
In late 2016 the Victorian Department of Treasury and Finance issued a ‘Request for Proposal’ for its Social Impact Bond (SIB) Pilot Program. SHM saw this as an opportunity to both continue the growth and reach of J2SI while also testing an ‘outcomes-based funding’ approach for J2SI.
But this was going to be a competitive tender with perhaps up to 20 organisations interested in applying. How do we make SHM’s J2SI program stand out and then, if successful, negotiate something that had no precedent in Victoria?
THE ROLE LATITUDE NETWORK PLAYED / THE OUTCOME
Latitude Network acted as a specialist advisor, project manager and negotiator through both the tender application and contract negotiation stages. Russ Wood helped coordinate the existing expertise, talent and energy within SHM and the J2SI program, translating that into a negotiating approach that would help meet the Government’s outcomes, policy and financial agenda while also getting SHM the best outcome.
It was intense work - fortnightly negotiation meetings with Government (led by Treasury officials) meant weekly SHM team meetings to review the meeting agenda and do the work to prepare to negotiate and, importantly, problem-solve the many challenges.
Latitude Network not only helped keep the process on track - but also provided timely advice on the political and policy environment as well as the emerging outcomes-based funding environment.
THE TRANSFORMATION / IMPACT
J2SI became Victoria’s first ever SIB to be agreed when Victoria's Minister for Housing signed the contract with SHM in December 2017.
As a result of this, SHM is now able to provide intensive, tailored support over three years to 180 individuals experiencing chronic homelessness. Keep in touch to hear further updates as the project progresses.
This article was originally published in Pro Bono News.
Latitude Network recently took some clients with us on an ‘outcomes tour’ of the US to learn from organisations, funders and governments that are shifting to outcomes-based funding. This includes what the US calls “Pay For Success” projects, and we call Social Impact Bonds, as well as newer forms of outcomes contracting where a range of financial and non-financial incentives are provided for performance. Outcomes-based contracting is when a commissioner of services (usually a government but can include large philanthropy) agrees to fund a social service program where at least some of the funding is contingent upon the organisation achieving a target performance on clear, agreed outcomes metrics for service users.
Key lessons learned -
1) A shift to outcomes funding, while difficult, is a must
Our observation in Australia and in the US is that most people who work in the social sector (including government) want the work they do to lead to improvements in people’s lives. There is generally a strong desire in organisations - from the frontline to the Board - to work towards outcomes. The difficulty is that merely measuring outcomes or drawing up an outcomes framework, while necessary, is often far from sufficient to change behaviours and performance. Funding on the basis of inputs or outputs is a very blunt instrument with very low levels of data or feedback on what is working for long term, relevant outcomes.
Funding on the basis of outcomes, however, can provide the joint incentive to properly define, measure, track and deliver outcomes that matter to the service user. A range of different outcomes have been contracted, from reduction in recidivism, to early childhood development milestones to family reunification. Despite their challenges, everyone we met - from local and state governments such as Ventura County or LA County Department of Mental Health, to impact funders such as Maycomb Capital and First5 LA and service providers such as the Center for Employment Opportunities and Interface - everyone was focused on making the shift to outcomes-based funding.
2) Social Impact Bonds have been a useful tool to kick start the outcomes revolution, but will be only one of many tools for the next era in outcomes funding.
Our discussions with Emily Gustafsson-Wright and Izzy Bogild-Jones at the Brookings Institution highlighted how Social Impact Bonds have had powerful impacts on social sector performance, innovation and flexibility in service delivery, but there is little evidence that they bring a net additional amount of private sector funding into the social sector. This aligns with Latitude Network’s view that outcomes funding is best used to drive alignment of interests and flexibility for innovation between government, social sector and philanthropy, and should not be seen primarily as a tool for increasing private funding of social services.
3) Organisations that build outcomes-funded projects are transformed for the better - especially in managerial focus and performance capability.
All the organisations we spoke to had used the experience of an outcomes contract to drive important changes in capability and process within their organisations. One organisation, Center for Employment Opportunities (or CEO) in New York City, has built a sophisticated outcomes and performance management system that gives visibility to everyone, from the frontline to the Board, on how the organisation is tracking in delivering its mission. The organisation has a strong, singular focus on a cohort of high risk offenders leaving prison. It’s focus allows for a robust program logic and service methodology and it uses detailed performance reporting to achieve employment goals and reduce recidivism. Their data has helped them identify the most effective early responses (e.g. ensuring a client starts a job on the day they turn up), and helps frontline workers adjust their activities by getting regular, timely feedback and learning from high performers. CEO’s outcomes contracts with governments have helped provide the incentives to focus on outcomes.
4) A new ‘Outcomes Partnership’ approach between Government and providers can lead to better achievement of outcomes
Forward-thinking governments are entering into what we are calling ‘Outcomes Partnerships’ with social organisations to work together over time on defining and aligning around key outcomes that matter to services users. These partnerships allow for better targeted procurement procedures from government, adding additional incentives into contracts for achieving short and longer term outcomes, and ensuring transparency of data sharing that can shed light on areas of highest and lowest performance. They also provide a much higher degree of flexibility to both Government and service providers through ‘active contract management’ methods that allow for adjustment of performance goals as theory hits reality.
These partnerships are a part of the journey of various governments in the US to shift large parts of their funding base to be procured on the basis of outcomes rather than inputs or outputs.
Our visit to the Massachusetts Department of Transitional Assistance in Boston revealed a forward-thinking government department that is leading the internal systems and behaviour change required to procure on the basis of outcomes, increase quality and sharing of data and establish trust between government employees and leaders and the social organisations they fund.
Latitude Network and our clients see Outcomes Partnerships as the next important step for the social sector in Australia.
The South Australian Government opened its second round of Social Impact Investments, with a focus on better outcomes for children and young people in out-of-home care, and after leaving guardianship. This follows South Australia's first social impact investment in the Aspire homelessness program delivered by The Hutt St Centre.
Interestingly, the Commonwealth Government is providing $5m as partner with the South Australian Treasury Department, as an early foray into learning and engaging in the social impact investment space.
Latitude Network is assisting with the preparation and development of an application focusing on improved outcomes from the residential care context.
New South Wales
The NSW Office of Social Impact Investment (OSII) is reviewing proposals from three organisations focusing on Indigenous employment and empowerment. Latitude Network was been supporting one Indigenous organisation through the 'co-development phase' where OSII collaborated with the social organisation to advise and develop a proposal together. The intent is to support organisations to prepare robust proposals that are more likely to meet Treasury's requirements and be successful through what can sometimes be an arduous 'Joint Development Phase' of financial and contract negotiations to conclude a social benefit (impact) bond legal agreement.
The Victorian Treasury is a long way through negotiations with two organisations in the 'Joint Development Phase' for its next round of social impact bond investments. This round focuses on primary and secondary school aged children who have become disengaged from school and have a variety of other complexities in their lives. Latitude Network is supporting Melbourne City Mission and the Hester Hornbrook Academy in the negotiations.
The NSW Government's Office for Social Impact Investment (OSII) has been busy. While they are about to close a tender round for a formal social impact investment based on homelessness, they have also kicked off an exciting new funding process called 'Social Impact Investment - Evolve' (SII Evolve). The SII Evolve process invites social organisations to propose an outcomes-based project based on any cohort and social policy area. This is a significant step forward for outcomes-based funding in Australia as it is, essentially, an open invitation for organisations to come forward with great ideas about how to address social disadvantage and lowers the barriers to apply.
This advance is important because it recognises that social organisations (and their clients) need to be the initiators of progress and innovation - and often are. But not every idea or initiative with promise can fit into either the narrow criteria of a large funding round nor the complexity of a formal social impact investment (think 'Social Impact Bonds').
This funding round is different because it simplifies the first step; by requiring only a 5 page submission, rather than the 30+ pages that are behind a social impact bond-type application that is typical of the Australian funding rounds so far. The OSII understands that the complexity of preparing an outcomes-based project proposal is higher than a standard tender and can therefore be a barrier for smaller social organisations (and even larger ones) to spend the time developing the proposal.
While we aren't, yet, at the stage where social organisations have strong incentives to invest in new, outcomes-focused service delivery, initiatives such as SII Evolve mark the start of what could become a structural change in our system which recognises and rewards social organisations that invest in testing and building new models that are proven to work to shift disadvantage.
Latitude Network is supporting social organisations and communities to develop proposals for the 'Evolve' funding round in NSW as well as current social impact investment rounds in Victoria. In our experience, most social organisations are excited by the opportunity to build new or adapt existing systems free from the output-focused shackles which currently hold them and their staff back. We would encourage organisations to start working on suitable proposals now, whether for this round or future rounds of funding.
The proposals are due by 12 October 2018, so now is the time to develop an application.
Find out more from the Office of Social Impact Investment's announcement here.