Innovative uses of philanthropic funds to tackle complex social problems
19 August 2019 at 4:29 pm
A recent case study by the Centre for Social Impact highlights the power and potential of innovative solutions to address long-term homelessness. Moreover, it highlights the potential of innovative approaches to funding such initiatives that arise when the community sector, the financial sector, governments and philanthropy, work together. Here, Libby Ward-Christie and Dr Michael Moran share their key findings.
The Journey to Social Inclusion (J2SI) social impact investment transaction was developed by Sacred Heart Mission (SHM), the National Australia Bank and the Victorian government in 2017/2018. It is the first transaction in Australia to include guarantees from philanthropy in the delivery of a government pay-for-performance contract.
As such it is an important innovation for understanding how organisations may fund programs addressing some of our most complex social challenges, such as homelessness.
The financing structure itself was a response to help SHM access debt finance to fund their participation in a payment-for-outcomes contract (effectively a social impact bond) with the Victorian government as part of its SIB Pilot Program that led to the development of the scaled-up Partnerships Addressing Disadvantage initiative.
For SHM to be able to access the debt finance they required, philanthropic guarantees from charitable trusts were used to reduce the cost of capital, with SHM additionally taking a “first loss guarantee” position, should J2SI not deliver the social outcomes expected. The guarantees effectively underwrite the project-delivery risk carried by SHM, with the Victorian government carrying the balance of the risk.
Despite a strong case for significant social impact and potential financial benefits for ancillary funds flowing from Commonwealth government reforms to the Ancillary Fund Guidelines adopted in 2016, SHM experienced some challenges in raising philanthropic guarantees to support J2SI.
The case study was funded by the NAB Foundation, one of the philanthropic guarantors; it aims to both document this innovative structure and understand the barriers to participation, with the hope of informing this and similar uses of philanthropic guarantees in the future.
The case study found that the combination of the innovative nature of this hybrid transaction and the nascency of social impact investment in Australia resulted in a number of communications, positioning and execution challenges that hampered this pioneering approach.
A major finding of the research was the confusion created by the term “guarantee” which has resulted in the mechanism being re-named as a “contingent grant” – a term more reflective of the role that philanthropy plays in the overall impact investment structure.
Subsequently, SHM has taken several steps to address some of these challenges, including: obtaining a class ruling from the Australian Taxation Office to provide guidance on quantification of the gifting benefit for ancillary funds in circumstances of philanthropic guarantees; and working with the Victorian government to develop sample legal template documents to enable review and adoption of guaranteed transactions structure by others.
The case study identified the need for greater understanding of (and investment) across the full impact investment spectrum and the important role that philanthropy plays in the delivery of concessionary finance for social impact initiatives.
The full case study is available here.