With the city’s impact investment industry buzzing with anticipation at the potential for Hong Kong’s first social impact bond (SIB) issue being imminent, I thought this is an opportune time for revisit key points we need to know about the structure.
1. Why you need to know about this NOW.
Since its introduction in the UK in 2010, the SIB structure has now been launched in 22 countries, raising close to $400m in investment for social projects. Take-up in Asia has been relatively slow, but clearly gaining momentum with consistent project launches in recent years (India’s first launch in 2015, Korea’s 2016, Japan’s 2017), and Singapore is said to be launching their first programme within the coming 6 months. Excitingly, Korea has also launched the world’s first Smart SIB earlier this year, adopting blockchain technology to improve distribution (although this is but a baby step in the full disruptive potential of blockchain on the structure).
The rising adoption of this structure globally and regionally have yielded sufficient examples to learn from, and if it clears in Singapore it would clearly have strong implications for HK, given the comparability of the cash-rich city-states. In testament to the mounting pressure for HK to catch up, OurHK Foundation (the think tank started by HKSAR’s first Chief Executive) published an in-depth report on the topic late last year, adopting the stance that the appeal of SIBs may not only be applicable to Western countries with heavy public debt.
All this is to say – this is becoming highly topical in our city, and knowing this would make you sound smart on dinner tables.
2. Social Impact Bonds are not Bonds.
Well, not the traditional debt security anyway. A “bond” is a bit of a misnomer – this is actually a cross-sector partnership structure where there may not be principal obligation. Some people prefer to use the term “Pay for Success”, which gives a more literal description of the idea. These should not be confused with green bonds.
Typically, a SIB structure would involve 5 parties:
A non-profit organization, managing a project that addresses a specific social challenge;
Private investors, which fund the costs of running the project;
An independent evaluator, which measures the impact of the project and determines whether it has succeeded or not;
A government pledge to pay for the project on a cost-plus basis, subject to its success; and
The intermediary which structures the deal.
In 2010, the first project was structured targeting recidivism in Peterborough in the UK, providing released offenders with support to reduce potential reconviction. The 7-year programme raised a total of GBP5m, and successfully reduced reoffending by 9%, exceeding the original target of 7.5% set within the terms. As a result, the principal investment got repaid in full, combined with a return of just over 3% p.a.
3. The key is Risk-sharing.
By engaging external partners, the SIB structure helps reduce the government’s potential risks in both financial (taken up by private investors) and execution (project managed by a non-profit that is expert in the space) areas. This improves the efficiency of government spending, and promotes a more transparent and market-oriented operational model for the project.
Globally, local and national governments that have participated in related projects have done so for various reasons, e.g. increasing budget efficiency in a time of mounting public debt, or enabling government-endorsed scaling of socially innovative programmes without risking taxpayer dollars.
In the case of Hong Kong, the argument for cost-savings might be relatively weak given the comfortable public budget surplus. The true value of a SIB, in my humble opinion, is in improving cross-sector collaboration in a transparent, low-risk way that could withstand general distrust in the government, as is evident in the persistent filibustering, media outcry and resultant delays in recent large-scale projects – no matter how worthy and justified the project scope.
Difficult as this may sound, the value of this possibility is so great that we must remain optimistic, and aim straight and true. Project selection may be key, in order to ensure public agreement of neutrality in all parties involved.
4. Who are the investors?
Which brings us back to the other crucial party – the private investors forking the bill. Based on the investor profile of past deals, we should note that they remain predominantly philanthropic foundations or the impact investment arms of “traditional” investment firms and financial institutions. Outcomes of past SIBs have not been universally successful, and risk-adjusted returns may not necessarily justify a purely financial investment decision. In many ways, therefore, SIBs remain an “impact-first” consideration.
5. Not all projects should be SIBs.
Political sensitivities in HK would only add to the difficulty in selecting an appropriate project – which is considerable. The need for accurate, transparent evaluation and impact measurement precludes a lot of potential projects; even for those that can be measured, the costs of conducting these evaluation projects can be inefficiently high. The cause itself is also an issue – if it is too essential, it would not make sense at all for the government to outsource, regardless of costs – the SIB structure is supposed to enhance, instead of replace, government spending.
6. What does this have to do with OurConservatory?
We are following the development of SIBs in HK keenly, and will continue to update you! That said, even in this early stage, we believe that the concepts of risk-sharing and Pay-for-Success can be applied to all impact investment decisions in order to attract greater participation.
At OurConservatory, we hope to fully align ourselves with both investors and project owners, and as such we commit to structuring performance-dependent fees for all deals we facilitate.
If you have any questions, suggestions or POTENTIAL DEAL LEADS (!!!), please remember to say email@example.comJ