The Social Enterprise Development and Investment Funds. Lessons from the implementation process

Transcription

1 The Social Enterprise Development and Investment Funds Lessons from the implementation process

2 Contents The Social Enterprise Development and Investment Funds... 1 Lessons from the implementation process... 1 Contents Introduction... 3 The Social Enterprise Development and Investment Funds (SEDIF)... 3 Social enterprises... 4 The social investment context... 4 Why investment funds?... 5 The implementation process Process steps of the SEDIF initiative Genesis of the SEDIF... 7 Policy need and opportunity... 7 Allocation for the SEDIF from the Jobs Fund... 7 Early engagement - Building market access and credibility SEDIF development... 9 Supplementary selection process... 9 Phase 1 - Research Phase 2 - Designing the initiative Phase 3 - Public consultation process Phase 4 Developing the SEDIF Program Guidelines and Assessment Documents Phase 5 - Assessing proposals Phase 6 Negotiating Funding Agreements Conclusion Future initiatives Appendix A Useful Resources Appendix B SEDIF Supplementary Process EOI Template

3 1. Introduction This document draws on the experience of the Australian Government Department of Education, Employment and Workplace Relations (DEEWR) in establishing the Social Enterprise Development and Investment Funds (SEDIF), the first impact investment funds of their kind in Australia. It outlines, at a high-level, the process followed over the course of a two-year period from to design, develop and implement the SEDIF. The implementation process has been formally reviewed by APIS, consultants that specialise in capturing organisational and process learning. The APIS review, as well as the APSC State of the Service Report 2011 and the Australian Innovation System Report 2011, have recognised the SEDIF as an innovative initiative implemented through a well-executed process consistent with the Commonwealth Grant Guidelines and Australian and international best practice. This document draws on the APIS process review and the experience of the SEDIF project team to capture the story of the implementation of the SEDIF and expand on the key lessons from the process that may help to inform the development of other similar initiatives. The Social Enterprise Development and Investment Funds (SEDIF) The SEDIF is an Australian Government initiative designed to improve access to capital for social enterprises to help them grow their operations, and by doing so, increase the positive impact of their work in the communities in which they operate. The SEDIF is also designed, in the longer-term, to catalyse the Australian social (impact) investment market: that is, the market for investments that deliver positive social, cultural and/or environmental outcomes and some measure of financial return. Through the SEDIF, the Australian Government has provided $20 million in non-refundable grants to seed the establishment of three social investment funds. A key feature of the SEDIF is that each fund manager was required to at least match the level of grant funding provided by the Government with additional private investment. The grant funding provided a cornerstone investment to seed the establishment of the new funds. Each fund manager was allocated the full grant on finalising the funding agreement. The three funds managers have attracted a range of private investors, including a superannuation fund, an international social bank and high-net worth individuals, to create a total investment pool of over $40 million. The three SEDIF funds managers are: Foresters Community Finance (Foresters); Social Enterprise Finance Australia (SEFA); and Social Ventures Australia (SVA). The three SEDIF fund managers are now using this capital to provide tailored finance to social enterprises to help them purchase premises and equipment, develop new services, or expand existing services for the benefit of their communities. Further information on the SEDIF fund managers and the types of loans and investments being made is at the SEDIF website. 3

4 Figure 1: the SEDIF initiative flow of capital Social enterprises Social enterprises play a vital role in generating new opportunities, businesses and services in communities and are important partners with Government in a range of areas including the arts, community development, education, employment, health care and social services. A social enterprise is an organisation that combines commercial trading with a social, cultural or environmental mission. The defining feature of a social enterprise is that it trades in order to fulfil its social mission rather than trading only to create a profit for private benefit. One definition is that social enterprises are organisations that derive a substantial portion of their income from trade and reinvest the majority of their surplus in the fulfilment of their mission. New forms of organisations which put purpose as well as profit at the centre of their work are emerging in Australia and internationally. Social enterprises can be found in both the for-profit and not-for-profit sectors and come in a variety of forms such as independent businesses, co-operatives, social businesses or the trading arms of charities. Social enterprises are found across a range of industries such as hospitality, childcare, retail, light manufacturing and recycling services. The types of social outcomes that are achieved by social enterprises include training and employment opportunities for job-seekers, especially those facing barriers to employment, and the delivery of new or additional services to communities. The social investment context The SEDIF initiative reflects the Government s recognition of the potential for social investment approaches to drive effective solutions to social challenges and to encourage meaningful partnerships between the private, community and government sectors. Other examples include the National Rental Affordability Scheme and Community Development Financial Institutions Pilot. Social investment is the term that is used to describe a range of ways in which those with resources can contribute to solving social, cultural or environmental issues. Social investment is sometimes used to encompass philanthropy, volunteering and corporate social responsibility, as well as a variety of collaborations and partnerships across sectors. The SEDIF is a social investment initiative, but focuses specifically on promoting impact investing (sometimes called social finance) as a tool to generate resources to support social enterprise activity in communities. The defining feature of impact investing is that transactions are made with the intention of achieving a positive social, cultural and/or environmental impact and a financial return. An investment fund is just one impact investment mechanism that can be used by government to work in partnership with private and community sectors to create positive impact. Impact investing can utilise 4

5 a range of financial mechanisms such as investment funds, direct debt or equity investments into organisations, social impact bonds, tax incentives and guarantees. Why investment funds? The term funds is used in the SEDIF context to refer to investment funds that create and manage a portfolio of investments. The funds do this by offering repayable financial products to social enterprises which generate a financial return. The SEDIF funds are managed by independent fund managers at arms length from Government. This is different to many other government programs that may be described as funds, but are managed by public officials and generally offer one-off grants. The Australian Government has established investment fund initiatives to pursue public policy outcomes before. Examples include the support provided by Government for the venture capital market and scientific innovation through the Renewable Energy Venture Capital Fund and Innovation Investment Fund. Internationally, impact investment funds are making investments into organisations in both the forprofit and not-for-profit sectors in areas such as the arts, community development, economic regeneration, the environment and social enterprise. The SEDIF initiative was intentionally designed to utilise investment funds as the mechanism to target sustainable support and finance for social enterprises to grow and develop. The funds were not designed to provide start-up or seed funding, but to provide later stage finance for organisations that have already been through that early phase of developing their operating model. The fund mechanism was selected because it offered the opportunity to: pool financial resources from multiple investors with different appetites for risk and return through a familiar structure for Government and other investors; target capital to social enterprises and recycle the capital through many enterprises over time; create a demonstration effect that forges a new path for government involvement in impact investment and introduces a range of investors to the social enterprise sector; and harness the skills and market-focus of experienced fund managers to guide investment decisions and further growth. The terms on which the government funding was available provided an incentive to other investors to participate. In particular, applicants were asked to demonstrate how they would use the government capital to attract other investors. This design feature provided flexibility for applicants to consider a range of approaches for the use of the government funding such as first loss capital and to offset management costs which were able to maximise a risk-return profile that was attractive to other investors in a nascent market with no detailed track record of success. The implementation process Each section of this document provides an overview of a phase of the SEDIF development and implementation process Research, Design, Consultation, Development of the Guidelines and Assessment Documents, Assessing Proposals, and Negotiating Agreements. The SEDIF process was iterative and a number of phases overlapped, particularly in the early research, design and consultation phases. Each section summarises what the SEDIF project team did during each phase, highlights the approaches that worked best and notes some issues that would need to be considered in developing a similar initiative. Other resources that may be useful in considering social investment initiatives are listed at the end and can be found at the Social Innovation website. 5

6 2. Process steps of the SEDIF initiative This section provides an overview of the phases of work that the project team undertook; from initial conception of the SEDIF initiative through the phases of research, design, consultation, assessment and selection of the fund managers, including a supplementary process to select the third fund manager. The initiative took over two years to implement, although the timeline was affected by the 2010 election process; the supplementary process was able to be streamlined based on learning from the initial selection process. The following process timeline captures the indicative duration of each phase. Figure 2: The SEDIF implementation process timeline 6

7 3. Genesis of the SEDIF Policy need and opportunity Prior to the introduction of the SEDIF, programs like the Australian Government s Jobs Fund and Innovation Fund had provided one-off grants to social enterprises for discrete projects or to develop an aspect of their operations, especially in the start-up phase. While this grant funding was valuable, some enterprises were beginning to report feeling trapped by success in that grant funding was often harder to secure as their organisations became more mature. Increasingly, social enterprises were seeking alternatives to grant funding to help them grow their operations and move their businesses onto a more financially sustainable footing. In Australia, however, there were no specialist providers of finance and support for social enterprises and many were reporting difficulties in accessing the right sort of finance for their business needs in the mainstream financial market. This issue was also highlighted in the 2010 Productivity Commission report into the Contribution of the Not-for-Profit Sector which recommended that Australian governments should assist in the development of a sustainable market for not-for-profit organisations to access debt financing. 1 Internationally, social investment had been generating interest from governments and impact investment funds were proving successful in creating new avenues of finance and support for social enterprises. The Australian Government saw the opportunity to build on the international experience to support the social enterprise sector in Australia. The Government also recognised the potential catalytic effect of making a relatively modest investment to stimulate private investment to contribute to establishing new impact investing intermediaries and providing the opportunity to recycle the funds through social enterprises thereby creating more value than might be generated through regular grants-based funding. Allocation for the SEDIF from the Jobs Fund The Jobs Fund was a grants program that was designed to assist communities most affected by the economic downturn by providing employment and training opportunities over the short term and targeting job creation and skill development as pathways to employment for the most disadvantaged job seekers over the medium to longer term. The Jobs Fund targeted projects that created and protected jobs, and built community infrastructure and social capital in local communities including establishing social enterprises. The opportunity was identified to allocate $20 million from the Jobs Fund to develop a new mechanism to leverage investment in social enterprises so that they could develop and scale their businesses to achieve positive social changes in their communities across Australia. The parameters of the Jobs Fund shaped some of the elements of the SEDIF including the focus on social enterprise investment and development. The allocation from the Jobs Fund recognised the potential of impact investment initiatives to make a contribution to promoting economic activity, stimulate enterprise development and create jobs in communities. Early engagement Building market access and credibility In the early stages of considering the design and approach of the SEDIF initiative, DEEWR s Social Innovation Strategist, a senior official charged with driving the social innovation and investment agenda within DEEWR, engaged with key finance and community sector stakeholders to explore possibilities for 1 This has since been reinforced by the Senate Economics References Committee Inquiry Report, Investing for good: the development of a capital market for the not-for-profit sector in Australia, November

8 how an impact investment fund might operate and be utilised in the Australian context. The Strategist drew on existing networks and made new connections with international stakeholders to draw on their experiences developing investment funds elsewhere. The Strategist used her networks particularly to research the drivers of success for impact investment funds; ensure that the vision for SEDIF was grounded in the reality of the market where the implementation would take place; and brokered a network of expertise and support that could be drawn on to support the SEDIF initiative as it developed. This early engagement work was a critical element in seeding the idea of government interest in an impact investment fund in Australia and was an important priming step that would lay the groundwork for the development of the SEDIF process and for establishing the funds in the market. 8

9 4. SEDIF development This diagram represents the process of development and implementation of the SEDIF initiative from the early research phase through to the SEDIF funds selection and operating in the market. In particular, the research, design and consultation phases overlapped and informed each other, for example research of particular features continued through the design phase and the consultation process raised perspectives that influenced design elements of the initiative. Supplementary selection process The SEDIF implementation included two selection processes. The initial SEDIF selection process awarded $16 million of the available $20 million to two funds managers, Foresters and SEFA. The project team conducted a supplementary selection process to award the remaining portion of the funding allocation consistent with the objectives of the initial process. SVA was awarded $4 million through the supplementary selection process. The phases of the supplementary selection process were largely consistent with the initial process however given the restricted timelines and the modest amount of remaining funding the team refined and streamlined the approach based on the learnings from the initial process. The lessons and refinements that were made to this supplementary process are reflected throughout each phase of this document where relevant. 9

10 Phase 1 - Research What we did The SEDIF was the first social investment initiative of its kind in Australia. As there were no local precedents to draw upon, the project team started its work by conducting a comprehensive review of the international literature on social investment and social investment funds. The research process included an analysis of the key features of social investment funds operating in the UK, US and Europe, as well as an in-depth literature review of approaches to social enterprise investment and support, and reviewing examples of other leading social investment practice. The project team drew on international experiences about: how government could best support new investors to enter the social investment market; ways to test the capacity of social finance intermediaries to connect investors with social enterprises in need of finance; and ways to build the capacity of social enterprises to use new forms of finance to create scalable and sustainable social change. The project team also focused on developing a thorough understanding of the design features necessary to ensure the fund would be an attractive and viable proposition for a range of private and social investors. This international research was supplemented by a review of the social investment activities that were already happening in Australia and an investigation of taxation in the philanthropic and social investment context. This research formed part of the evidence base for the design elements of the SEDIF. The research process particularly identified research from the US Investing for Social and Environmental Impact developed by the Monitor Institute and Solutions for Impact Investors: From Strategy to Implementation developed by Rockefeller Philanthropy Advisors that influenced the design parameters of the SEDIF to ensure a good value for money proposition for investing public funds. In particular, these reports verified and reinforced: the value of the catalytic effect of government involvement in impact investing and the importance of developing networks to engage stakeholders before launching the initiative; and The key elements of excellence and success that investors are looking for when considering whether to invest in impact investment funds of this type. The project team used this research to inform the design of the SEDIF initiative in order to attract credible applications from Fund Managers that could demonstrate these critical elements for success or else demonstrate through the assessment process that the necessary quality of proposition was not available in the Australian market at that time. To support the research process and the translation of the research findings into a viable design, the project team engaged a consultant with experience in international and Australian social finance contexts, including in capital raising and establishing investment funds. The consultant contributed 10

11 specialist knowledge to the research and design phases which bolstered the design integrity, the attractiveness of the initiative to investors, and in turn, the overall success of the initiative. The Social Innovation Strategist continued to engage with stakeholders in the social enterprise and finance sectors during the information gathering and research phase of the SEDIF. This was important to ensure the project team was utilising the best available research, to reality test elements of the approach, gauge interest from key stakeholders and gain an early assessment of the likelihood of investors being attracted to SEDIF. The research and design phases were reflexive and additional research continued to be progressed as the project team moved through the design and consultation phases. What worked best The combination of comprehensive desktop research and early engagement with leading practitioners was critical to the team s ability to develop a clear vision for the SEDIF and identify the most appropriate mix of features to include in its eventual design. Given that social investment is a relatively new field of practice, it was essential to supplement the literature reviews with dialogue with experts and practitioners to gain a thorough understanding of the design options and to tailor them for the emerging Australian social investment market. Things to consider The SEDIF project team benefitted from the expertise and connections of the Social Innovation Strategist, and was able to access expertise and guidance through these networks. In circumstances where these deep connections to the market and social sector are not present within the project team, it may be necessary for public sector officials to contract specialist assistance from experts to explore the potential and build the connections with the target organisations. Rich sources of information are now available to inform research and design processes for impact investing initiatives. An example is ImpactBase, which is a searchable, online database of impact investment funds and products, developed by the Global Impact Investing Network. This resource was not available during the SEDIF research phase and should be drawn upon in considering similar initiatives. A useful list of resources is provided at Appendix A. Key Questions What is the nature of the social change sought and is there evidence to inform the objectives of the initiative? What linkages could be made with organisations that have experience developing similar initiatives? What resources are available to offer information on international approaches to impact investment funds? What insights can be gleaned from case studies? How can the international research be contextualised to suit the Australian context and market conditions? 11

12 Phase 2 - Designing the initiative What we did The research on international and local impact investing approaches underpinned the design process and shaped many of the key design elements of the SEDIF. The SEDIF initiative was intentionally designed for the social enterprise context and to act as a demonstration of how Government could work differently to enable communities to address social and environmental challenges beyond that offered by traditional grant-based funding. The design process was deliberate and iterative and was informed in a continuous manner by the emerging literature and feedback from stakeholder engagement and public consultations to design an initiative that simultaneously met public policy objectives and the needs of investors and investees. The design phase focused on realising the vision for SEDIF through a rigorous process to refine the key elements of the initiative and the strategy for delivery. In the early stages of the design process, the SEDIF team established an inter-departmental committee (IDC) to provide whole-of-government input to the initiative. An expert Advisory Committee was also established including members with expertise in finance and funds management, social enterprise and social investment, as well as legal and governance fields applicable to the SEDIF. Figure 3: the SEDIF assessment governance arrangements 12

13 The Advisory Committee was not a decision-making forum, but provided expert advice to the DEEWR on certain aspects of the design of the initiative as well as on applications during the assessment phase. Members were selected for their expertise and experience across a range of areas including sound investment, legal and governance issues, risk management and social enterprise. During the design phase the SEDIF project team began engagement with the departmental legal advisers so that all essential accountability requirements could be built in to the design of the initiative at the early stages. The project team, with support from the consultant and Advisory Committee developed the critical design elements of the SEDIF which included: that government grant funding be leveraged on at least a 1:1 basis to increase the overall pool of funds available for investment in social enterprises; flexibility in how the Australian Government grant funding was used to support the funds and attract investment in lending to support operating costs in the early stages as well as to provide a buffer to absorb some of the risk for investors coming in to a new market; clear focus on capacity building support for social enterprises and that the finance was used effectively to support the achievement of social policy goals; attention to the need for the fund managers to develop a pipeline of social enterprises that are ready to take on investment to grow their business and sustain their impact; the requirement for the fund managers to demonstrate robust governance and riskmanagement arrangements; appropriate and regular reports to ensure Government could monitor the establishment of the funds and manage any risks appropriately without undue administrative burden distracting fund managers from the task at hand. This also helps to build the evidence base for possible future initiatives and the evaluation of SEDIF; and a reserved right for the project team not to recommend an applicant in the process if the required standards were not met. This was an important provision in light of the nascent state of the social investment market in Australia. Effectively it enabled the grant process to simulate a reverse auction dynamic into the market and maximise scope to achieve value for money or not deploy the funds. What worked best The project team was careful to establish and make use of appropriate expertise including the consultants, the IDC, internal legal team and Advisory Committee throughout the design process. By drawing on the skills, interest and experience of others early in the process, the team was able to develop a robust vision and set of objectives for the SEDIF and move quickly into the development of the SEDIF Guidelines and assessment documentation. Taking the time to fully explore and road-test how the SEDIF initiative could be used to best effect in attracting investors, and designing the fund accordingly, was central to its eventual success. A key design decision was to allow for the use of the grant funding in a way that helped to reduce some of the financial risk for investors, for instance, by allowing the grant funding to meet some of the operational costs for the fund managers. This decision was taken in recognition that this was a new type of investment fund in Australia and that the fund managers and investors would be the first entrants into this relatively new market. This design decision had the intended effect of stimulating interest from a range of fund managers and private and institutional investors. The expert consultant s experience in establishing and managing investment funds enabled the team to test the design features and objectives against her practical experience. It was invaluable that the theory that had been drawn out of the research process could be tested against a pragmatic framework that was contextualised for the Australian market. This opportunity to stress-test design elements against what was practical and realistic for the Australian context was critical to selecting design features such as the leverage requirement of at least 1 to 1 on the government investment, and the requirement for 13

14 the government contribution and the private investor contributions to be paid into and held as a unified fund. The decision to engage with DEEWR s legal branch early in the process was also important as it provided the opportunity for the legal team to become familiar with social investment, a relatively new area given that DEEWR had not established an investment fund initiative of this type before. Ensuring the legal officers had adequate time to develop their understanding, rather than waiting until the Program Guidelines were developed, helped to expedite later stages of the assessment and negotiation process. Things to consider During the design phase of a similar initiative, it is important to balance the public policy objectives with the likely needs of investors and investee organisations (in this case, social enterprises). Finding the right mix of design features is essential to eliciting a positive response from social investors and to meeting the needs of the end-users of the investment. Investment markets are constantly evolving and what may appeal to investors at one point in time may not be as attractive at another. It is essential to understand early in the process what type of investors may be attracted to the social impact of the proposal, their likely appetite for risk and return, and how the investment can be structured to meet these needs while also meeting accountability requirements for the use of government funding. Similarly, it is important to ensure that the initiative will deliver products and services that will meet the needs of the investee organisations so that the investment capital is being used for its principle purpose of creating social impact and generating financial returns. In this case, the mechanism for government funding a grant was a given. In other circumstances, different options could be considered e.g. concessional loan (e.g. Bridges Ventures, UK) or equity -like investments (e.g. Innovation Investment Funds, DIISRTE). Some grand funding is subject to income and/or capital gains tax assessment in the hands of the recipient. In the context of an investment fund this can be a significant factor affecting cash flow and viability. The issue should be explored early in consultation with both the Department of Finance and Deregulation and the Australian Taxation Office. Key Questions What expert assistance is required to support the design process and translate the research and evidence to inform the design parameters? What is the appropriate financial mechanism to establish funds for your timeframes, policy, and market circumstances? Would a mechanism such as a grant, loan, guarantee or investment generate the most value? How have the needs of investors and investees been accounted for in the design process and how can they be reality-tested? How can the design parameters for the initiative promote collaboration and cross-sector partnerships to get the right mix of skills to support the initiative? What are the key impacts sought by the initiative and how will performance be measured and evaluated? What are the governance arrangements to support the implementation of the initiative? Have the taxation implications of the initiative and funding mechanism been explored? 14

15 Phase 3 - Public consultation process What we did To test the proposed design, and to gain further input from stakeholders, a consultation paper was developed that set out the key themes in the international and Australian literature on social investment to assist in explaining the Government s vision, objectives and proposed strategy for establishing the SEDIF. The consultation paper set out the two main policy goals for SEDIF to improve access to finance for social enterprises and to catalyse the development of the social investment market in Australia. The paper set out the possible design elements of the initiative including leverage arrangements, target impact areas, social enterprise eligibility, impact measurement, financial products, approach to building the capacity of social enterprise and possible rates of investment returns. The paper also provided an overview of the possible governance elements of the SEDIF such as fund manager eligibility, legal structures, governance systems, regulatory and accountability capabilities, and the cost of management arrangements. The paper sought views and feedback on these elements from interested organisations and individuals including social finance intermediaries, philanthropic organisations, social sector organisations and relevant state and territory government departments. A public consultation briefing session was held and was well attended by representatives from a range of organisations. All written submissions to the consultation process and views from the briefing session were recorded, analysed and collated by the project team. This material was used to refine the final design of the SEDIF and inform the development of the SEDIF Program Guidelines and the Assessment Guide which is described in more detail in the following section. What worked best The consultation process was designed to elicit the views of stakeholders about what would be important to consider in order to contextualise the overseas evidence and experience for the Australian market. The feedback that was garnered through the process informed and reinforced the key design elements of the initiative. Consistent with good practice consultation, the process allowed for both formal written submissions and a briefing session for interested organisations to engage in face-to-face dialogue and seek clarification on issues from the project team. This ensured that a range of views could be sought and considered in the development of the SEDIF Program Guidelines. The project team synthesised the submissions into a detailed matrix which served as a useful tool and source of evidence for the development of the SEDIF Program Guidelines. All organisations and individuals that participated in the briefing session and submission process were added to a stakeholder database and were provided with updates on important milestones during the process, such as the call for fund manager applications and the announcement of the successful fund managers. 15

16 Things to consider During the process of designing a similar initiative it will be important to engage with the target sector or organisations at a timely point in the process. This will help to build relationships, develop credibility and allow sufficient time for quality contributions to be taken into consideration in the design process. Consideration of a range of forums to achieve engagement and insights from different parts of the market is important. Key Questions How can a stakeholder network be developed that allows for an appropriate mix of views and experiences to be heard through the consultation process? What is the strategy to build credibility in the market? What networks can be accessed to develop relationships with stakeholders? 16

17 Phase 4 Developing the SEDIF Program Guidelines and Assessment Documents What we did A competitive grants process was used as the mechanism to establish the funds from the $20 million allocation. The SEDIF Program Guidelines (the Guidelines) which governed the grants process were developed, drawing on the requirements of the Commonwealth Grant Guidelines, the Financial Management and Accountability Act and Financial Management and Accountability Regulations 1997, international research, design process, submissions to the consultation process, feedback from the IDC and advice of the expert consultant and the SEDIF Advisory Committee. The principal objective of the SEDIF was to establish two or more investment funds which generate social impact investment in addition to financial return and increase capital for social enterprises in Australia through capacity building. The short term objectives of the SEDIF were to: provide a catalyst for market development; test capacity for, and existing barriers to, social impact investment and access to capital for social enterprises; capacity building for social enterprises; and target investment in priority areas for impact. The longer term objectives of the SEDIF were to: support development of infrastructure to build the social impact investment market; support innovative product development; and attract longer term investment in priority areas for impact. Overall the Government was seeking applications from fund managers which articulated an approach to achieving these objectives through demonstrating: optimisation of the social impact of the fund with an appropriate financial returns floor and effective and efficient market investment practice and decisions; capacity to establish the fund and perform consistent with the strategic intent, including appropriate mix of skills, experience and staff qualifications; an approach designed to deliver a balanced portfolio of supported social enterprises and of investment products which deliver social and economic impact; effective processes to establish an investment pipeline, including a robust approach to developing investment readiness in social enterprise in the Australian context; robust governance, risk management and internal systems; a contribution to the development of investment for social and economic impact in Australia, including contribution to shared knowledge and practice; transparent evaluation and reporting and clear application of evidence in strategy and operations; optimisation of innovation while applying the rigour of the market; and utilisation of the initial Australian Government investment to attract further investment including the required initial leverage of at least 1:1 and the requirement to attract ongoing investment to grow and sustain the fund for the medium and longer term. The Guidelines were framed around a set of objectives with a focus on the targeted outcomes rather than prescriptive program rules. This flexible approach recognised the prospective fund managers expertise in establishing and managing investment funds, as well as encouraged innovative design and 17

18 consortia arrangements for the collaborative delivery of the SEDIF. It also reflected the objective of providing a catalyst for market development. The selection criteria were designed to allow prospective fund managers to demonstrate their capacity to deliver across all elements of the SEDIF objectives, support the market development aims of the program and deliver a fund that represented good value for money for the Government. Specifically the selection criteria were seeking responses that would demonstrate: the fund manager s vision for the fund, the proposed strategy to achieve this vision and objectives for the SEDIF; capacity to deliver on the strategy and plans articulated; the proposed investment strategy and approach to achieving social and economic impact; the proposed scale, investment model, risk management and governance arrangements for the fund; the overview of the proposed approach to measuring and demonstrating social impact and maintaining relationships with investors; and overall value for money of the proposal for the Australian Government. In addition to the responses to selection criteria, the applicants were required to provide financial and credit information to demonstrate: their financial viability; that they held or could obtain any applicable financial service licence; projected budget and cashflow statements for the proposed fund out to three to five years; a risk management plan for the fund; and evidence of indicative commitments for the leveraged investment. The requirement for this detailed information was designed to test the fund managers capacity to deliver on their vision and strategy for the fund. The Guideline s requirements for this rigorous evidence of the applicants capacity to execute their vision, coupled with flexibility and an outcomes focus were features designed expressly to elicit a range of different but credible proposals for investment funds, thereby maximising the potential for social investment market development outcomes from the initiative. The Guidelines also set out the rigorous two-stage assessment process which the project team would follow to select the successful fund managers. Consistent with the requirements of the Commonwealth Grant Guidelines, the document set out the roles and responsibilities of applicants, government assessment team and program delegate; terms of eligibility; and the conditions of funding. The Guidelines were released with a call for proposals and allowed a two month period for applications to be submitted. A comprehensive assessment guide was also developed as a reference tool for the project team to draw on as a resource and moderating tool during the assessment process. In consultation with the Advisory Committee, the guide included summary points of suitable responses to assist the assessment team to apply the criteria consistently and accurately to all applications. The documents also set out the roles and responsibilities of all members of the assessment team and the processes for consultation with the delegate and highlighted the procedures that would be followed to ensure probity standards were consistently applied and maintained. What worked best Maintaining an outcomes orientation to the Guidelines and avoiding an overly prescriptive approach provided an opportunity for prospective fund managers to design and propose delivery strategies which reflected their particular strengths and approach to building the social investment market in Australia. A strength of the Guidelines was the provision for applications to include partnerships or consortia arrangements, recognising that different organisations have different capabilities and supporting a collaborative approach offers the opportunity to bring the right mix of expertise to the fund. This provision also recognised the value of supporting intermediaries in the social investment fund context and the importance of including organisations that are best placed to connect social enterprises with the opportunity for investment. 18

19 The Guidelines also clearly established the compliance requirements and the details of the two stage assessment process. This helped applicants to make an assessment of the expectations, timing and likely resource requirements of the process in advance of submitting applications. For the SEDIF supplementary selection process, the project team chose to undertake a limited selection process that targeted only the compliant applicants from the initial process. This was a deliberate decision that took account of the quality of applications in the initial process, the quantum of remaining funding and the timelines for disbursing it. To ensure continued transparency, an Addendum to the SEDIF Guidelines which set out the requirements of the supplementary selection process was developed by the project team in consultation with the departmental legal advisers and published on the DEEWR website. The application process was also streamlined to reflect learning from the initial selection process. There were two specific features of the supplementary selection process which had a significant impact on streamlining the assessment. The first was the development of an Expression of Interest template (see Appendix B) which helped to target specific elements of the selection criteria. This was developed based on the comparative assessment table devised at the end of the initial selection process. The second streamlining feature was the inclusion of a supplementary selection process briefing session. This provided an opportunity to share the lessons learned through the initial selection process with prospective applicants. A secondary benefit to this briefing session was that prospective applicants were provided with an opportunity to develop networks some of which have continued beyond the SEDIF process. Importantly, both of these products enabled a robust comparison and assessment of diverse proposals from funds with different financial structures. Things to consider It is important to ensure that the project team is adequately resourced and is able to tap into specialist skills and advice to support the development of Guidelines and the subsequent assessment and selection processes. It is also important to give consideration to a future evaluation of the initiative and to ensure that the program objectives are clear, realistic and measurable. It may be helpful to collect some baseline measures to support any future evaluation at this stage as well. The timing and length of the application period for seeking fund managers should be commensurate with the requirements of the application process. This is particularly important where the social issue is complex, or where it is expected that organisations will need to form consortia to raise the necessary capital or establish new cross-sector relationships. Key Questions Are the objectives of the initiative clearly articulated and has the evaluation of these objectives been considered? Are the Guideline s requirements in relation to selection criteria and additional implementation material sufficient to allow for a robust assessment of applicants capacity to deliver? How will a value for money assessment be made across a range of applications? Has an appropriate balance been met between flexibility for applicants in fund design and the ability to comparatively assess diverse proposals? What tools can be used to streamline this process? 19

20 Phase 5 - Assessing proposals What we did The project team conducted a two-stage assessment process that included an initial first stage relative assessment process against the selection criteria to determine the strongest applicants for shortlisting. The second stage of the assessment process provided an opportunity for the project team to seek clarification on points within shortlisted applications and to allow the organisations the opportunity to expand and clarify their vision and implementation plans for the fund. During both stages of the initial and supplementary selection processes financial and investment professionals were contracted to provide expert analysis of the applicant s financial models and investment strategies. This expertise provided critical support to the project team to support robust assessments of applications. The SEDIF Advisory Committee also provided expert advice on aspects of applicants proposals through a series of meetings throughout the assessment process. It was particularly useful to draw on the Committee s expertise in relation to fund structures and legal issues, approach to social enterprise capacity building, approach to measuring the impact of the funds, quality of the proposed investment strategies and the potential of each proposal to support the growth of the social investment market in Australia. The assessment process was supported by thorough financial and organisational due diligence conducted by the Department s financial viability assessment team. This was a challenging process because of the unusual nature of the consortium arrangements, the participation of organisations based internationally and the sensitivities of finance sector organisations to providing commercial information to the Department. The project team managed this process by working as a liaison between applicants and the financial viability assessment team, ensuring information flow and timely responses to requests for additional information. In the final stages of the assessment process, the project team, with assistance from legal advisors, designed a bespoke concept draft of the funding agreement which used precedents from the investment and funds management industry and then incorporated the essential accountabilities that government needed in the agreements. Taking account of the fact that the SEDIF initiative asked investment fund managers to operate at arm s length from Government, the legal advisors based the other provisions of the agreements on what a commercial cornerstone investor would reasonably expect in a similar type of agreement. Using this approach, the agreement met all the accountability requirements for spending public funds coupled with the commercial reality of a funds management arrangement. A concept draft funding agreement was provided to the applicants in the final stages of the assessment process so that they would aware of what they would ultimately need to sign up to, including the accountability framework for spending public money, when participating in the negotiating process. Being clear with the applicants on the parameters of the agreement helped to test that there would be no showstopper issues before final selection. This included ensuring that applicants had the necessary approvals from their boards and investors. 20

21 What worked best An important feature of the assessment process was allowing the shortlisted applicants to clarify and refine elements of their proposal. This is uncommon in a competitive grants process but proved effective in that it allowed the project team to fully understand the proposals and built trust with applicants which helped during the negotiations of the funding agreements. Feedback from the applicants indicated that this helped all parties to develop a clear, shared understanding of the proposals. The project team was able to maximise the value of the Advisory Committee s expertise by preparing extensive analysis of the applications, developing comparative materials and allowing sufficient time for the Committee to review the papers ahead of the meetings. This meant significant additional work for the project team, but this was rewarded by quality and timely advice from the Committee. The project team undertook thorough and ongoing risk management processes but applied a risk tolerant approach, with appropriate accountabilities, in consultation with probity advisers. This approach was suitable for the complexity and innovative nature of the initiative. For SEDIF, the factors that increased risk tolerance included clear plans for how the assessment and selection would be conducted including the process for managing conflicts; regular consultation with advisers on managing probity issues; documenting all decisions and processes; and the protection of not having to fund any proposal if a minimum standard was not met. The requirement to provide rigorous application material such as projected cashflow statements, implementation plans, and indicative investment commitments allowed the project team to make a comparative assessment of a number of very different proposals. The key elements of each of the proposals were distilled into a comparative table, including with the help of financial analysis professionals in relation to financial statements, which allowed the assessment team to make a value for money decision despite the differences in approach across the various proposals. The lessons from the initial SEDIF assessment phase were built in to the design of the supplementary selection process. The project team took the opportunity to reflect on the initial process, draw on the skills the project team acquired during the first process and make some refinements to refine and streamline the experience for applicants, as discussed in the previous section. Based on the comparative value for money assessment table that had been developed in the initial process, an expression of interest template was developed for the supplementary selection process. Consistent with the approach taken in the initial process, a staged assessment approach was conducted, which included allowing for refining of proposals in the second stage. Things to consider During an assessment process of this kind it is important to recognise the strengths and gaps in expertise in the project team and consider contracting external experts. This will lend credibility and robustness to the assessment process and help to mitigate risk. Allowing time for refinement of shortlisted proposals before a final assessment can achieve higher quality proposals and build relationships with applicants that are important for a smooth funding agreement negotiation process. Feedback from the SEDIF applicants was that this was a helpful feature of the process and a constructive way of working with Government. It is particularly important to allow enough time for a thorough assessment process. 21