Mental Health Minister Matt Doocey sought advice on ‘social impact bonds’ to fund services

The coalition is interested in the idea of 'social impact bonds' for mental healthcare and social housing. Officials have warned they're not without risks.

Ministerial briefing papers show Mental Health Minister Matt Doocey requested advice on social bonds in February.

The coalition government has already indicated it might use social bonds to provide transitional housing, but this is the first time it has explored the tool to provide mental health services.

A social impact bond is a contract with an organisation that pays for better social outcomes. It uses private investors' money, instead of public money, to pay a provider to deliver a service. If an agreed set of outcomes are reached the government pays the investor a return.

The paper sent to Doocey's office warns most social bonds are "costly to implement", are "not cost saving" and not risk-free for the taxpayer.

"Some bonds required that the Crown share the risk of under-performance (either intentionally or because contracts cannot be enforced) in which case Crown funding is also required if performance measures are not met," the briefing paper said.

Doocey did not respond to requests for an interview on the issue but in a statement said using social bonds for mental health services was not on the cards for the time being.

"As a new Minister, I have been provided updates on a range of topics in the weekly reports including social bonds. Social bonds for mental health services are not something I'm actively pursuing at this stage."

The previous National-led government introduced the country's first two social bonds in 2017, which the briefing paper noted had mixed success.

One designed to reduce youth offending in South Auckland using non-for-profit provider Genesis Youth Trust was completed in 2023. It reduced reoffending by 30 percent.

Another aimed to get more people with mental health issues into employment in South Auckland, but ended in 2018 due to low numbers of participants.

"Researchers have suggested that these social bonds were costly to implement. This is consistent with international experience - that social bonds can involve very high contracting or transaction costs," the briefing paper said.

Mental health social bonds had been issued in the United Kingdom, USA, Australia and Portugal, it said.

"These initiatives included, for example, providing additional community support to try and reduce hospitalisations, and providing additional support to improve carers' quality of life."

Housing Minister Chris Bishop confirmed the use of social bonds for homes was still on the cards.

"We will be considering social bonds as part of our plans to significantly reduce emergency housing. Work is at an early stage," he said in a statement.

'Good in theory': The case against social bonds

The performance of social bonds internationally has been mixed, Auckland University associate professor Tom Baker said.

"For governments, it's often seen as a way to outsource risk of failure to private investors, it's seen as a way to build innovation. The reality of social impact bonds is that they've tended not to do the things that they were promoted as doing.

"They tend not to be particularly good at incentivising more innovative services, they tend to be not particularly good at saving government money. There's also no particular qualities of social impact bonds that lead me to think that they deliver better quality services than you would using standard procurement models."

Baker interviewed more than 100 people around the world involved in social impact bonds as part of a Marsden Fund-backed research project in 2016.

"There is no country that seems to have cracked the code when it comes to social impact bonds. They are good in theory but in practice there are simpler, better ways to fund services."

'Clear alignment of interest': The case for social bonds

ANZ's head of sustainable finance Dean Spicer believed there were still benefits to using social bonds and there was growing appetite among private investors for them.

"There have been mixed results globally but ultimately the benefits that social impact bonds can bring is that they fund a program and the repayment of that program to investors is directly linked to the successful outcomes achieved. So there is a clear alignment of interest between the investors to get their returns and having a program that actually does deliver outcomes."

While they were not totally risk-free for governments, risks could be reduced if the contracts were structured right, he said.

"It's important to look carefully at the contractual arrangements that are embedded in these contracts. It also means you need robust data, to be able to measure the outcomes and know whether the programs are delivering."

Genesis Youth Trust was one of the organisations that issued a social bond in 2017 to reduce youth offending.

Trust chief executive Henare Clarke said the bond enabled them to work with kids over two years, rather than the usual six months, and they managed to reduce reoffending rates by 30 percent.

While the social bond contract was at times "overly complex", the performance-driven targets pushed them to constantly improve their service delivery, said Clarke.

"Would we do it again? Most definitely. We've got the processes in place, we've got the learnings in place, we're ready to go."

Contractual complexities

Carl Bakker was one of the original architects of the 2017 social bonds. He's now the chairman of G-Fund which is the funding arm of Genesis Youth Trust for the social bond

While investors in the Genesis social bond received a maximum return and indicated they would invest again, social bonds are not necessarily needed to get good outcomes, he said.

"Social bonds are the most complex type of payment for results contracting. They are designed to discover new ways of working that deliver better outcomes.

"Now that we've shown how to reliably reduce reoffending you could get the same level of service with a good performance-based contract without all the complexities that come with a social bond."