The public health authorities in Kobe, the central Japanese city famed for its marbled beef, have reason to celebrate. A year after the city of 1.5m people launched a ¥31.1m ($270,000) programme aimed at improving the lifestyles of 109 citizens at high risk of kidney disease, initial readings show health officials — and their patients — are making progress.
The project has been funded by investors, including Japan’s Sumitomo Mitsui Banking Corporation. The inspiration for it, however, was drawn from 6,000 miles away.
In 2010, the UK created the first social impact bonds, whereby private investors fund a public service, often tackling challenges such as homelessness, education, healthcare or prisoner reoffending rates. In return, investors share in the long-term savings that result from the programme. For a city or state apparatus, it pulls much-needed investment into social services where welfare funding has often been cut. However, the vehicles repay investors when certain social outcomes are achieved, thus raising the risk and lowering the appeal of the vehicles for many investors.
Investors in the Kobe city project received their first payments last month. If the programme hits all its goals when it runs its course in March 2020, they stand to earn about 5 per cent a year on their initial outlay.
Nanako Kudo, the executive director of the Japan Social Impact Investment Foundation — which has invested in the Kobe project — expects another two or three healthcare-focused social impact bonds to launch in Japan before the end of the year. More than 20 others are in the works across the country.
“Social impact bonds are seen as a tool to try new, innovative approaches to social issues while mitigating the risk of losing budget,” Ms Kudo says. “Especially because the Japanese public sector is struggling with financial deficit, social impact bonds can be the driver to allocate resources to preventive intervention.”
Japan has lagged behind other countries in the development of social impact bonds, but that is changing rapidly. A 2016 law requires Japan’s banks to donate a portion of long-dormant deposits to non-profit organisations. The government has also pushed those non-profits to develop ways to measure the success of programmes that receive the donations, adding to the appeal of social impact bonds.
So far, more than $300m has been raised for social impact bonds in more than two dozen countries, according to Emily Gustafsson-Wright, a fellow at the Brookings Institution, a Washington DC-based think-tank. In the US, where they are known as pay-for-success bonds, the federal government has launched a $100m programme to support state and local projects.
Returns on the vehicles range from 1 per cent to 15 per cent, although globally the majority are in the low to mid single-digit range. Sixteen of the 38 social impact bonds to have reached the end of their contract have reported their results to the Brookings Institution. Of these, one failed to pay investors — a bond that sought to cut reoffending rates at the Rikers Island prison in New York, backed by Goldman Sachs and media mogul Michael Bloomberg’s charity, Bloomberg Philanthropies.
Although interest in impact investing has been on the ascent — portfolio managers have pumped billions of dollars into green bonds and sustainability-focused stock funds — social impact bonds have remained on the margins.
The value of the vehicles is minuscule relative to what local governments borrow to support their budgets. The city of Kobe is expected to raise ¥115bn through bond markets this fiscal year, notes Akane Enatsu, a senior analyst at Nomura Institute of Capital Markets Research.
The structure of the vehicles has proved to be one of the biggest impediments to their wider acceptance. Despite their name, social impact bonds are not bonds in the true sense of the word. Rather, as somewhat complex financial contracts that pay out on the achievement of specific objectives, each is different and investors take on the risk of an individual project, with the possibility of losing all their capital if outcomes fall short.
Judging that risk is often difficult and time consuming, which has mostly limited the funding base to foundations and non-governmental organisations. The projects also tend to be small in nature, benefiting a few hundred or thousand participants. This is in part why the World Bank has largely avoided the structure. But their existence, even if relegated to a small role in how municipal governments fund vital projects, has nonetheless found champions. Proponents note that the projects often force governments or third parties to begin collecting data and create programmes with measurable outcomes.
“It is part of this move for governments and social services providers across the world to more intently achieve outcomes for the people we serve,” says Justin Milner, an associate vice-president at the Urban Institute in Washington. Social impact bonds have “a strong forcing mechanism for governments . . . to focus on tangible outcomes and find ways to address needs with evidence-based programmes.”
In Japan in particular, with its ageing population and mature economy, local governments are “facing severe financial challenges,” Ms Enatsu says. Social impact bonds are filling a void as “social welfare expenditures have increased dramatically while tax revenue growth has been stagnant,” she adds.
Backers of the projects will take heart that a second social impact bond in the country, led by retail bank Mizuho, has also met its initial targets. The project aimed to increase colon cancer screening rates in Hachioji, a city in the Tokyo prefecture. Its backers have just received their first payments, which bodes well for projects still in the offing.
Source Financial Times