Executive summary
In its 2010 report Contribution of the Not-for-Profit
Sector, the Productivity Commission (PC) observed that there is a need to
develop a sustainable primary market for not-for-profit (NFP) debt in
Australia. It considered that a lack of access to capital for NFP
organisations could be due to concerns that NFPs are unable to service debt, the
high costs for specialist financial intermediaries to provide capital, and the
'still young market' for capital that accepts returns in social as well as
financial benefits. The PC argued the need for change in all three areas but
noted that the Australian Government has limited experience in this area.
Accordingly, the PC recommended that the federal government should establish an
advisory panel 'to consider options and assess progress in developing a
sustainable market for not-for-profit organisation debt products'.[1]
Whereas the PC considered these issues only in passing, this
inquiry has focussed on the barriers and the options available to develop a
mature capital market for the social economy sector in Australia. The committee
has found that some of these constraints reflect on social economy
organisations themselves: they lack a steady revenue stream to attract
investment and the collateral to guarantee loans; they remain grant focussed
and risk averse to debt and equity capital; and often lack the capacity and the
organisational structure to raise equity capital. Other constraints to social
economy organisations accessing debt and equity capital reflect the limitations
of mainstream financial institutions. Many are unaware of the needs of social
economy organisations, while others are dissuaded by the large transactions
costs relative to the capital required by these organisations. In addition, the
market has been stymied to some degree by the lack of an enabling regulatory
environment and, in particular, the lack of targeted incentives for financial intermediaries.
A Social Finance Taskforce
In the committee's view, there is a clear need for strategic
direction to coordinate the opportunities for social economy organisations to
access capital in Australia. Currently, these needs are not coordinated and, as
a result, many of the potential benefits for both social economy organisations
and investors are not realised.
The central recommendation of this report is that a Social
Finance Taskforce should be established. The Taskforce must have a high-level
advisory role, similar to that which has operated successfully in the United
Kingdom and Canada. It should identify and publicise opportunities for social
economy organisations and the investment community to collaborate and shape a
policy framework to develop a capital market for the social economy sector. The
Taskforce should be composed of high profile and influential members from the mainstream
finance sector, Community Development Finance Institutions (CDFIs), the superannuation
industry, the philanthropic sector, the social sector itself and academia. The
Taskforce should also have representatives from the departments of Treasury,
Prime Minister and Cabinet and Finance and Deregulation.
The committee emphasises that the Taskforce must be separate
from current arrangements to establish the Australian Charities and
Not-for-Profits Commission (ACNC) and the work of the Office for the
Not-for-Profit Sector and the NFP Sector Reform Council. Only as a separate
body will social finance issues receive the prominence and the attention that
they have lacked in the past.
Further, the committee is encouraged that key stakeholders
support the idea of a Taskforce. Most notably, during the course of this
inquiry, the Community Council for Australia (CCA) convened a roundtable of 15
social finance experts which commended a Taskforce. The CCA envisaged that the
Taskforce should build on the work of this inquiry and provide recommendations
to government on the capacity of the sector, its access to capital, enhancing
the role of intermediaries and simplifying the sector's legislation and regulations.
Intermediaries and capacity building
As noted, social economy organisations are accustomed to a
culture that is reliant on grant capital and are often risk averse to debt and
equity capital. They often prioritise resources directly towards their social
mission rather than developing the financial literacy and organisational
capacity necessary for long term sustainability. Finding the means to explore
emerging financial products for many social economy organisations is simply not
an option. Additionally, organisations that do seek finance are often unable to
present a robust business case and fail to engage potential investors. Without
adequate capacity among social economy organisations, new forms of finance for
these organisations may go unnoticed, and new types of capital may be
mismanaged.
The delicate balance between supply and demand is best met
through the work of specialist intermediaries which work to connect financial
investors and mainstream financial institutions with social economy organisations.
Financial intermediaries such as CDFIs actively engage with social economy
organisations to build financial capacity, providing knowledge about the
finance options best suited to the organisation and helping to link them to
suitable sources of capital.
Intermediaries are integral to the infrastructure of a
capital market for social economy organisations, although there are few
currently operating in Australia. The committee has made several
recommendations to support the current activities undertaken by intermediaries.
The government's current CDFI pilot provides impetus to guide the development
of the intermediary market, and the possibility of using tax incentives to
encourage investment in CDFIs is also an option.
Education of financial and corporate stakeholders
The financial and corporate sectors have a crucial role to
play in the development of a capital market for social economy organisations.
Mainstream financial institutions are cautious of lending to social economy
organisations, often not understanding the needs and realities of how these
organisations operate. Additionally, there is a lack of awareness in the
financial sector of emerging social investment products that could be a useful
way of channelling capital into the sector. Financial advisors and planners
have little expertise in social finance, and generally do not offer social
investment opportunities as part of the range of options available to
investors. Trustees of superannuation funds, philanthropic trusts and
foundations are often unaware of the potential to make investments in social
projects, and there is uncertainty around the extent to which they can invest
in any ventures which may deliver a 'sub-commercial' rate of return.
The corporate sector is also a significant source of capital
for the social economy, through corporate philanthropy and community investment
initiatives. While there is a trend towards integrating corporate social
responsibility and community investment into the core of business activities
for many companies, there is still a need for company directors and senior
managers to become more aware of social investment opportunities. The committee
recommends that investors, financial advisors and corporate directors undertake
educational and training opportunities relating to the social economy and
emerging social investment opportunities. This will facilitate the engagement
of the financial and corporate sectors more fully with social economy
organisations.
Promoting social investment products
One of the primary ways to attract additional capital to the
social economy is through new and innovative financial products. Financial
intermediaries such as CDFIs are increasingly offering social economy
organisations tailored financial products that fit their organisational needs,
including new debt instruments, equity-type investments and long term 'patient
finance'. The development of these products reflects the diversity among social
economy organisations and allows them to access capital on a more consistent
and equitable basis.
In addition to new products being offered directly to social
economy organisations, there is a trend towards the development of new
financial instruments which will help attract capital from mainstream investors
into social ventures. The advent of social investment funds, which aggregate
capital from a variety of institutional and retail sources and then provide
finance to a range of social economy organisations, can act as a conduit
between large-scale investors and small social organisations. Finance
mechanisms such as social bonds provide an alternate means for raising capital
for social projects, particularly infrastructure projects such as social
housing developments. Additionally, the utilisation of social impact bonds and
other pay-for-success financing models can allow government to pay for service delivery
only when specified social outcomes are achieved.
These emerging social investment products have the potential
to engage institutional investors, such as superannuation funds, that have not
traditionally been involved in providing capital to the sector. These products
may also increase the effectiveness and quality of the capital provided from
existing sources such as philanthropy and the corporate sector. Support is
required from government, the financial sector, and the social economy itself
if the potential of these emerging options is to be realised and social
investment is to become a mainstream feature of the Australian economy.
Strengthening social enterprise
The social enterprise sector has the capability to foster a
great number of innovative approaches to target social issues. Social
enterprises in Australia are currently servicing a broad range of societal
needs and contributing to a diversified economy. Social enterprises generate a
profit as part of their work, and reinvest the majority of that profit back
into the fulfilment of their social missions. This in and of itself is
generating finance for these enterprises. However, without access to suitable
seed capital, the growth of the social enterprise sector is somewhat limited.
Further, providing finance to social enterprises differs to
that of a commercial entity. The financial needs, as well as the social
purpose, of a social enterprise must be taken into account to ensure its
long-term viability. For example, a social enterprise should meet its own core
operational costs to guarantee sustainability and guard against a reliance on
fluctuating grant income. On the whole, mainstream financial institutions
demonstrate a limited understanding of the capital needs of social enterprises
and accordingly, do not offer them suitable financial products at start-up and
beyond. Financial intermediaries are best placed to address this void, and the
government's recent development of the Social Enterprise Development Investment
Fund effectively supports two CDFIs to foster innovation in the social
enterprise sector.
In addition to the assistance offered by intermediaries,
there are a number of existing government programs supporting small businesses
that could be extended to social enterprises. Measures should be taken to
ensure that the extension of these programs considers the unique needs of
social enterprises, and upholds their social purpose.
Government social procurement policies also play a key role
in the development of the social enterprise sector and can provide social
enterprises with opportunities to secure a long-term, stable source of revenue.
The committee recommends options to improve the government's competitive
tendering and contracting (CTC) framework and increase tendering opportunities
for social enterprises.
Developing a measurement framework
Evaluation and measurement are fundamental to the development
of a robust capital market for social economy organisations. Accepted
performance metrics for the sector will instil confidence in potential
investors, and offer an assessment of the risks and returns of different types
of investments. Government, as a key investor in the sector, would also benefit
from the development of a measurement framework as it would provide further insight
into the operation of the sector as a whole and better inform funding
decisions.
In addition, the emergence of social investment in Australia
is dependent on the measurement of social returns. Social impact bonds in
particular, can only be applied to policy areas that have measureable results.
The committee recommends that policy areas that already utilise results based
funding could inform the development of a measurement framework.
The committee recognises that the PC has undertaken
significant work to develop a measurement framework for the sector which takes
into account the diversity of the sector's activities and structures. While
proposing a measurement framework for the social economy sector presents a
number of challenges, the committee believes a framework applied consistently
across governments will minimise compliance costs and maximise the value of
data collected.
The measurement framework should be flexible and allow for a
number of measurement methodologies. It should consider the sensitivities
surrounding beneficiaries and the core social objective of organisations. To
accelerate the take-up of this framework, and to reduce compliance costs for
social organisations, the Office for the Not-for-Profit Sector should publish
guidance material on the measurement framework that should be supplied to all
Australian governments.
Recommendations
Establishing a Social Finance Taskforce
Recommendation 2.1
2.56 The committee recommends
that the government establish a Social Finance Taskforce to assess mechanisms
and options in the progress and development of a robust capital market for
social economy organisations in Australia. The taskforce should initially
report to government by July 2012.
Recommendation 4.3
4.71 The committee recommends
that the proposed Social Finance Taskforce consider the potential for
philanthropic trusts and foundations to invest a percentage of their corpus in
social investments options, particularly with regard to:
-
whether a requirement for
philanthropic foundations to invest a percentage of their corpus in mission or
program related investments is appropriate in the Australian context;
-
how to develop appropriate
social investment vehicles for philanthropic intermediaries; and
-
any other mechanisms by which
the corpus of philanthropic funds could be better utilised to invest in the
social economy.
Recommendation 4.4
4.96 The committee recommends
that the proposed Social Finance Taskforce consider the potential for
superannuation funds and other institutional investors to invest in emerging
social impact investment products, with particular regard to ascertaining:
-
what clarification, if any, is
necessary regarding the fiduciary duties of superannuation funds and their
ability to engage with social impact investment opportunities;
-
how social impact investment
classes can be used as a portfolio diversification tool by superannuation
funds;
-
whether incentives may be
required in order to attract institutional investment to the sector;
-
how social investment funds can
be developed to attract institutional investment; and
-
what possible mechanisms are
available to lower the transaction costs for institutional investors seeking to
engage with social investment opportunities.
Recommendation 5.2
5.98 The committee recommends
that the proposed Social Finance Task Force consider possible options to
develop Community Development Financial Institutions in Australia, taking into
account:
-
the findings of the forthcoming
study commissioned by the Department of Families, Housing, Community Services
and Indigenous Affairs into the current regulatory and legislative environment
for Community Development Financial Institutions in Australia;
-
whether tax incentives should be
established to encourage investment in CDFIs in Australia; and
-
any other initiatives that may
benefit the development of CDFIs investing in social economy organisations.
Education, awareness and capacity building
Recommendation 4.5
4.104 The committee recommends
that professional organisations such as the Australian Institute of Company
Directors and investment advisory services develop materials and professional
development workshops to inform the corporate sector of investment
opportunities in the social economy.
Recommendation 5.1
5.28 The committee recommends
that philanthropic and financial advisory services promote and encourage
opportunities for social investment and engagement with the sector.
Recommendation 6.1
6.32 The committee recommends
that programs and workshops relating to social impact investment be developed
by investment organisations to encourage investors to engage in social
investment projects and opportunities.
Promoting social investment products
Recommendation 4.1
4.69 The committee recommends
that the Australian Taxation Office, in consultation with the Australian
Charities and Not-for-Profits Commission and other relevant stakeholders, issue
explanatory material for Private Ancillary Fund trustees informing them of:
-
the ability of these funds to
treat any discount to the market returns on social investments as benefit for
the purpose of the minimum distribution requirements; and
-
the necessity of including a
clause regarding social investment classes in their investment strategy
documents in order to invest in social investment products.
Recommendation 4.2
4.70 The committee recommends
that the Commissioner of Taxation, Treasury and the Office for the
Not-For-Profit Sector work to create benchmarks and standards for financial
returns on social investment classes such as debt products and social bonds, in
order to help trustees and fund managers make informed investment decisions in
this area.
Recommendation 6.2
6.96 The committee recommends
that the Departments of Treasury and Finance and Deregulation to examine ways
to create incentives to invest in a social bond market in Australia including
the feasibility of tax exempt income returns, a government top up on coupons
through cash or tax credits and the use of government guarantees.
Recommendation 6.3
6.97 The committee recommends
that the Office for the Not-for-Profit Sector identify policy areas where
social impact bonds could be applied, including intractable problems in indigenous
communities. The plausibility of creating social impact bonds in partnership
with state governments should also be examined.
6.98 The Office for the
Not-for-Profit Sector should work with relevant government departments and
agencies and social organisations to implement a social impact bond trial.
Strengthening Social Enterprise
Recommendation 8.1
8.75 The Office for the
Not-for-Profit Sector identify relevant current and future government programs,
such as Enterprise Connect and the New Enterprise Incentive Scheme, that could
be extended to offer specialised support for social enterprises. The programs
should be extended to include support for cooperatives, employee share
ownership plans and employee buyouts.
Recommendation 8.2
8.76 The Department of Finance
and Deregulation, Treasury and the Office for the Not-for-Profit Sector should
jointly conduct a review of the competitive tendering and contracting framework
and examine the costs and benefits of:
-
social tendering to identify a
social purpose business rather than a competitive tendering process; and
-
including a community/social
benefit criterion in the call for and assessment of competitive tenders.
Developing a measurement framework
Recommendation 7.1
7.38 The committee recommends that
the Department of the Prime Minister and Cabinet identify policy areas where
results based funding is already utilised and use any relevant programs as an
evidence base towards the development of a robust measurement framework for
social economy organisations in Australia.
Recommendation 7.2
7.39 The committee recommends
the Office for the Not-for-Profit Sector in the Department of the Prime
Minister and Cabinet prepare a guide for social economy organisations to assist
in evaluation of their performance. The guide should be based on the evaluation
framework recommended by the Productivity Commission using inputs, outputs,
outcomes and impacts and include Australian case studies and emerging
international measurement tools.
7.40 The guide should provide
social economy organisations with a number of measurement techniques as options
to measure their outcomes and impacts. The committee recommends that the guide
be adopted by the Council of Australian Governments and distributed to all
government departments and agencies.
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