When Michael Traill, investment banker turned social entrepreneur, went touting for funds to make a bid for the collapsed childcare group ABC Learning ten years ago, more than one person told him it was a flight of fancy.
Why would hard-headed investors put their money into a venture based on the assumption, as Traill recounts it, that “a bunch of do-gooder non-profits could run a very large-scale business and do social good.” Traill surprised the doubters: the money from charities, private investors, banks and government that he helped bring together into a winning bid created a highly successful social enterprise called Goodstart.
The new company paid $95 million for a stripped-down version of ABC Learning, which at its peak had more than 1000 centres, and raised another $70 million to fund its ongoing operations. A non-profit outbidding private rivals was one surprise. Another has been the success of combining an unsentimental business approach with a soft heart.
Today Goodstart is the largest provider of childcare and early learning in Australia, with 665 centres catering for 75,600 children and employing 16,700 people. In 2018–19, its revenue grew by 8.2 per cent to $1.1 billion. The surpluses it earns as a not-for-profit are invested in raising the quality of early learning and supporting centres in disadvantaged areas.
That’s not to say everyone is happy. Particularly in the earlier years, staff complained about cost cutting, minimum staffing levels and having to pay for needed resources out of their own pocket. More recently, an employee posted a comment that “a lot is expected to be done out of goodwill” and another that staff were “not being recognised and rewarded for their hard work.” But Goodstart argues it has been steadily improving its performance.
According to John Cherry, the company’s advocacy manager (and a former Australian Democrats senator), the number of Goodstart centres meeting the national quality standard — which measures such things as staff-to-child ratios and staff qualifications and is administered by state and territory governments — has grown from about half in 2012 to 93 per cent. It’s now higher than the average among preschools, which have been regarded as the high-quality end of the early learning sector. Fee increases have been below average for the past four years, in contrast to those of ABC Learning, which were above average.
Cherry says Goodstart pays above award wages, has spent about $100 million on professional development and has increased the number of teachers it employs by about 300, bringing the total to 1300. Its social inclusion budget — which helps disadvantaged children get access to early learning — has risen from $1.5 million to $12 million in the past four years, though arguably this is still a modest amount in proportion to its revenue. Goodstart’s policy is not to turn any child away, and it provides speech therapists, occupational therapists, psychologists and other support.
What would Goodstart be worth now? “You would probably list it for over $1 billion if you wanted to run it more commercially,” says Traill, who chairs the company. As part of the original deal, three charities — Mission Australia, the Benevolent Society and the Brotherhood of St Laurence — each put in $2.5 million, an investment that returned them 12 per cent a year, as well as another 15 per cent in the form of a dividend based on the success of the business. Another $22.5 million was raised from forty-one investors, who put in amounts ranging from $100,000 to $3 million and also earned 12 per cent a year, with the money repaid after seven years. The National Australia Bank lent $50 million and the federal government a further $15 million — debts that have also been repaid.
Traill is driven partly by his upbringing in Morwell, a disadvantaged town in country Victoria, where he witnessed bright kids missing out on the opportunities that his own parents were able to give him. He went to Melbourne University and then to Harvard for an MBA, before joining Macquarie Bank, where he spent fourteen years during the 1980s and 1990s. He was co-founder and executive director of the bank’s private equity arm, Macquarie Direct Investment, which boasted a gross rate of return of 32.3 per cent.
Deciding there was more to life than getting rich at the millionaires’ factory, he left in 2002 to start Social Ventures Australia. A not-for-profit, it has supported more than fifty projects that deliver social as well as financial returns, and has a busy consulting arm.
Achieving a return on investment in its broadest sense remains central to Traill’s thinking. “We know that waiting until a child begins formal schooling is the least effective intervention if a child’s development is falling behind their peers, both for the individual and from a return on investment point of view,” he wrote in an introduction to the Goodstart’s 2018 annual report. “If as a nation we begin to place an emphasis on early learning — as nations as diverse as Finland, China and New Zealand are already doing — we will reap the rewards for this and the following generations.”
A wealth of evidence attests to the ability of children to soak up learning in the first five years of life. A report to federal and state governments in 2017 argued that children who received high-quality early education were more likely to complete year 12 and less likely to repeat grades or require additional support. A recent PwC study that attempts to quantify the returns on investment in early childhood education calculates that every $1 spent produces about $2 in benefits, taking into account factors such as children’s higher future earnings, extra income for parents and carers from additional work, higher government revenue from taxation, lower welfare and healthcare costs, and reduced criminal activity.
Other countries, particularly Britain and the United States, are ahead of Australia in social impact investing. British legislation gave the not-for-profit social sector access to almost £600 million (A$1.13 billion) in unclaimed money in banks that has been leveraged into £1.7 billion (A$3.2 billion) in investment. Mostly, though, social businesses here and overseas operate on a small scale. Goodstart’s success has attracted attention particularly because of its size.
“I think we are regarded as a bit of a global exemplar,” says Traill. “My hope has always been that Goodstart becomes a precedent, and not just in early learning.” He sees its application in areas such as aged care, further education, and social and affordable housing — areas where there is scope for the superannuation sector in particular to invest in low-risk, long-term ventures with many of the same characteristics as infrastructure projects.
One of Traill’s other hats is as chair of the investment committee of Sunsuper, an industry superannuation fund that has put $200 million into an investment trust for aged-care housing — money it says is a good property investment that also delivers social benefits. The HESTA industry super fund has a $70 million social impact investment trust managed by Social Ventures Australia and recently allocated $20 million to a Melbourne apartment project to provide affordable housing.
Traill is exploring further opportunities in aged care, where he sees many similarities with early childhood education. The hearings of the royal commission into aged care certainly are reinforcing the need for high-quality, ethical care, as are the financial difficulties the sector is facing. Traill argues that returns in the order of the 12 per cent achieved for Goodstart investors should be attractive, particularly in the present circumstances of a low-growth economy, and that it would be a comfortable level of risk for a well-run company. He adds that as a board member of Sunsuper he has a legally enforceable responsibility to maximise the return to fund members. “If these businesses are run ethically there is no reason they should not be able to generate a long-term rate of return.” He also sees potential in the further education sector, where private colleges “have lost sight of the quality agenda.”
Traill says there is no need for stratospheric executive salaries, with Goodstart showing that a business can achieve a depth and balance of skills without having to pay “nosebleed” packages. “People are paid well by non-profit standards, but nothing like the seven-figure bonuses people of comparable talent would be getting in the private sector.”
Of course, aged care is not the only sector that has suffered reputational damage. There’s the banks. And there’s business more generally, in the wake of a global financial crisis that has led to a debate about the very future of capitalism. “We need a more sophisticated form of capitalism, one imbued with a social purpose,” Michael Porter, one of Traill’s lecturers at Harvard, has argued. “But that purpose should arise not out of charity but out of a deeper understanding of competition and economic value creation… It is not philanthropy but self-interested behaviour to create economic value by creating social value.”
This not only challenges the traditional obligation of the corporation to act solely in the best interest of shareholders but greatly expands notions of corporate social responsibility. Consumers, particularly young people, are increasingly insisting that businesses behave honestly and transparently, says Traill.
And then there is government. Why is it, Traill asked in a speech five years ago, “that despite a generation of economic growth and in many areas quite significant funding growth, the data tells us that we haven’t made much progress on the core moral and economic issue that we face in this country — that many Australians live in a cycle of exclusion and cannot fully participate in the community?” He quoted two examples: at age fifteen, the poorest 25 per cent of students were nearly two-and-a-half years behind the most affluent students; and, based on 2014 statistics, more than 1.6 million Australians were without work or without sufficient hours of work. “Our conclusion is simple and powerful: money isn’t flowing to the right places to achieve social impact.”
The question is how much difference can be made by social impact investment. With governments progressively withdrawing from public or social housing and with 190,000 households on the waiting list, there is plenty of scope for a social enterprise like Goodstart. But the scale of the problem is such that, even with investment by superannuation funds, such a project can go only a small way towards filling the gap.
The same applies more generally to affordable housing. According to a report prepared for federal and state Treasury heads, the main barrier to the supply of affordable housing by the private sector is the lower returns compared to those for other property. It argued that no innovative financing model could close this gap and that “a sustained increase in the investment by governments is required to stimulate affordable housing production and attract private and institutional investment.”
Traill was appointed this year to chair a federal government taskforce to develop a social impact investment strategy. But what the government has in mind, at least at this stage, is far more modest than large scale social entrepreneurship. Rather, it is exploring the use of the social impact bonds that Traill, through Social Ventures Australia, helped pioneer in the states. According to a federal government announcement last month, it is looking for “solutions to address entrenched disadvantage and some of society’s most intractable social problems” in areas ranging from welfare dependence to social housing. As well as providing $5 million for the taskforce, this year’s federal budget dipped a small toe into the water by allocating $14 million for three social impact investment trials.
Details remain to be worked out, but the Department of Social Services says the trials will seek to increase labour force participation of people receiving working-age income support payments and to “strengthen the wellbeing and self-reliance of families with children.” Organisations will receive funding based on the results they achieve. These outcome-based payments, as opposed to fee-for-service or block grants, are a key element of social impact investments. But the department says the trials won’t involve another typical characteristic — funding from private investors.
The taskforce comes under the prime minister’s department, reflecting Scott Morrison’s interest in the area. This was expressed most clearly in 2015, when as social services minister he dressed up the concept in conservative garb. Governments would get smaller in proportion to the size of the social challenges, he said, which meant that non-government players would have to get bigger, including through private investment in social needs. “What I am basically saying is that welfare must become a good deal for… private investors.”
If this is the real motivation of governments then it raises an obvious question. If social impact investing is simply a substitute for government programs, what exactly will it achieve? According to proponents, it is a more efficient way of delivering services that focuses on the outcomes actually achieved; a more innovative approach to some of the social problems that have defeated successive governments; and perhaps, if private wealth is harnessed for social purposes, a modest attempt to address inequality.
The first social impact bond was launched in New South Wales in 2013. The state’s seven “social benefit bonds,” as they’re called, cover challenges like reducing the number of children in out-of-home care, driving down rates of youth unemployment, homelessness, and reoffending among former prisoners, and improving palliative care and mental health services.
Victoria has its own version, called Partnerships Addressing Disadvantage, which aim for a wider source of private funding, including pure philanthropy and loans. The Andrews government stresses they will not replace existing government services, whereas Gladys Berejiklian’s NSW government says that “achieving the outcomes should reduce the need for, and government spending on, acute services.” South Australia has introduced a social impact bond to target homelessness and Queensland has three pilot bonds, with many of the projects in the different states covering similar areas to those in New South Wales.
On paper, the early bonds introduced in New South Wales have been successful, with outcomes better than those under government programs, as well as returns to private investors of up to 12 per cent a year and potentially as high as 30 per cent for investors prepared to risk losing their capital if the project is not successful. But they have been operating on a small scale. The first bond, Newpin, an intensive and therefore costly program to reduce out-of-home care for children, has returned 328 children to their families in six years, compared to the estimated 114 in the absence of the program.
That result is impressive, but the net figure of 214 makes barely a dent in the 17,879 children in out-of-home care in New South Wales in 2017 and the 47,915 in Australia. It does show the potential savings available, though, given that it costs around $60,000 a year to keep a child in out-of-home care. But many children do not meet the criteria of the Newpin program.
The structure of the bonds can be complex. An average of 11,712 staff hours was taken up in developing each of the first two NSW bonds. While experience has streamlined the process, the requirements for measuring outcomes and investor risks and returns can vary. A substantial risk premium is needed to attract investment in the first place, meaning the total cost of a social impact investment project is higher than if it were funded directly by government — and also explaining why some of the more recent projects have moved away from seeking private investment, reducing their complexity but retaining the emphasis on outcomes-based funding.
Contrary to the impression often given, the money raised from private investors via the bonds doesn’t represent additional funding, since investors expect their money back, plus earnings. The only exception is if projects fail and investors’ capital is not protected. The advantage to government — assuming that it would otherwise have funded the program itself — is that it has contracted out the risk.
Elyse Sainty, director of impact investing at Social Ventures Australia, sees social impact bonds occupying the middle ground between purely experimental projects, where outcomes are hard to predict, and tried and tested programs where governments have greater certainty about results and so are more confident about carrying the performance risk themselves.
Olivia Wright, engagement manager at the NSW Council of Social Service, says there have been some savings to the NSW government from social benefit bonds but they are less than expected. She sees merit in the scheme but also has serious reservations. “They probably are not the silver bullet that they were conceived to be maybe five years ago,” she says. Her main concern is that they are a huge burden on the social sector, requiring large amounts of time, money and human resources, meaning they are not an option for the many small social welfare organisations and those dealing with disadvantage as the result of very complex social problems. “They are really only available as a tool for a very small number of organisations that have access to the human and financial resources to allow them to go through the long and arduous process of developing a bond.”
On the other hand, she sees benefits in the discipline that social impact bonds impose, especially with the requirement for measurable outcomes. And she sees an increasing trend towards people wanting to use their everyday investments to do good. “The primary issue from our perspective is how does the social sector build the capacity to meet that demand?”
On the present evidence, social impact bonds will only contribute at the margins to tackling social disadvantage, compared with the kind of resources that can be marshalled by governments through taxation revenue. But social entrepreneurship on the scale of Goodstart can make a larger impact. Traill’s ambition is to shift the traditionally conservative mindset of the superannuation funds and unlock the $2.8 trillion that they manage. Just a tiny fraction of that would be enough to fund hundreds of Goodstarts.
That requires a wider acceptance of the idea of capitalism with a social purpose, or capitalism 2.0, as it has been dubbed. It suggests a profound change in business culture that will be a challenge to achieve. But at least rhetorically, change is in the air. Some large businesses in Australia are more openly promoting social and environmental values, even at the cost of offending conservative politicians. In August the US Business Roundtable, representing big business, declared a new purpose — not just serving shareholders but also investing in employees, fostering diversity, inclusion, dignity and respect, dealing ethically with suppliers and supporting the communities in which businesses operate.
It may only be words at this stage, but it at least suggests that even big business feels under pressure to change the way it sees its role. •