Financing our future: the potential of Social Impact Investment to address the growing service gap in Australian health and aged care

By Sabina Lim

Sabina represented the University of Melbourne Faculty of Business and Economics at the 2016 OECD Forum in Paris.  


As Australia enters a new economic era defined by the end of the mining boom, the Australian government must grapple with the challenges of ‘an ageing population, a challenging budget repair task and ever-increasing expectations around social expenditure’ (Fraser, 2015). Critically, a key issue for government will be finding sustainable methods of financing to meet current and rapidly expanding obligations in health and aged care services. The need for new, innovative financing models is increasingly relevant in today’s economic setting.

Social Impact Investing (SII, or impact investing) is one field that has been gaining traction in recent years and whose potential has been recognised by bodies such as the Organisation for Economic Co-operation and Development (OECD) and members of the G8 Taskforce for Social Impact Investment, established in 2013. Social impact investments are made into organisations, projects or funds with the intention of generating positive social and environmental outcomes, alongside a financial return. Impact investments in the United Kingdom and United States have already demonstrated potential to address service gaps in health and aged care sectors.

With the Australian impact investing market still in its nascent stages, the government is in a unique position to play a significant role in fostering its development. Targeting health and ageing as a priority area, supporting the establishment of an independent market intermediary, breaking down regulatory barriers to investment, and providing direct leadership and engagement are all critical to harness its potential and help unlock capital in a market estimated to reach A$32 billion domestically over the next decade (Addis, McCutchan & Munro, 2015).

Policy Recommendations

1.     Federal government engagement directly with the sector to develop government capacity and send positive signals to the market

2.     Target health and ageing as a priority area for social impact investment to guide market soundings and transactions

3.     Federal government support for the establishment of an independent market intermediary, that can drive the market towards impact at scale by acting both as a market builder and an investor

4.     Review existing policies around fiduciary duty and program and mission related investment to break down regulatory barriers and facilitate growth


As Australia transitions into a new economic era defined by the end of the mining boom, it is faced with significant challenges in health and aged care services. A rapidly aging population is placing strain on services, in addition to increasing expectations on government around social expenditure. Coupled with a poor fiscal position and increasingly constrained resources, it is clear that the government must act to address these issues now.

Social Impact Investing (SII, or impact investing) has been identified as having the potential to create leverage and mobilise capital to help tackle the world’s most pressing problems (Social Impact Investment Taskforce, 2014). Examples across other jurisdictions have already shown how impact driven, innovative financing can be successful in filling service gaps in health and aged care. With the right support, the impact investing market is predicted to reach A$32 billion domestically and US$1 trillion globally over the next decade (Addis, McLeod, & Raine, 2013).

This policy brief will explore the challenges Australia’s health and aged care services face, and argue that SII has the potential to address those challenges. It will then examine the current state of the Australian impact investing market and make policy recommendations to help foster its development and unlock its potential to facilitate health and aged care impact investments on a large scale.

The State of Australia’s Health and Aged Care Services

Ageing populations, demand for healthcare and increasing costs of service delivery are placing fiscal pressure on governments in Australia and other OECD countries.

Australia’s ageing society is poised to place a significant burden on government expenditure. The ratio of working Australians supporting those over 65 years old is predicted to almost halve, from 4.3 in 2012 to 2.5 by 2050 (“OECD Health Statistics 2013”, 2013). These changing demographics suggest demand for aged care and related health services will increase substantially relative to the working-age population, hence placing pressure on the government’s ability to fund necessary services. Since 1975, Australian government expenditure on aged care has nearly quadrupled (Treasury, 2015), and is expected to rise from 0.8 percent of GDP in 2011-12 to 2.6 percent in 2059-60 (Productivity Commission, 2013). Moreover, health conditions associated with ageing such as dementia also add to the burden on government expenditure. By 2060 Australian health spending on dementia is expected to reach A$83 billion (2006-07 prices) and represent approximately 11% of all health and residential aged care sector spending (Access Economics, 2009). In particular, the 2013 G8 Taskforce identified dementia as a serious public health priority (RDD/10495, 2013) and has been investigating the role SII can play in addressing it (Wilson & Silva, 2015).

Even when excluding increased use of health services due to ageing, Australians are accessing more health services, and more frequently, at a greater cost to government (Productivity Commission, 2016). Health expenditure is projected to increase from 4.1 to 7.0 percent of GDP from 2011-12 to 2059-60 (Productivity Commission, 2013). Critically, the government faces pressure points particularly in the delivery of services to address chronic health conditions such as cardiovascular diseases, Type 2 diabetes, oral diseases, chronic kidney disease, respiratory diseases and certain cancers. These are forecast to account for 80 percent of the disease burden in Australia by 2020 (Australian Institute of Health and Welfare, 2014).

Combined with increasing expectations around social expenditure, these existing pressures are projected to build in the future, resulting in a deteriorated fiscal position for Australia. The gap between demand for services, and what government can provide, is estimated to reach US$54 billion, or 3 percent of GDP by 2025 (Accenture & Oxford Economics, 2013). This will require governments to run increasing deficits to fund expenditure, thereby increasing the risk of a permanent fiscal imbalance (Productivity Commission, 2013). As the largest provider of health and aged care services, the federal government is under significant pressure. Innovation in the financing and service delivery in the health and aged care sectors is needed.

What is Social Impact Investing?

Social impact investments are investments made into organisations, companies or funds with the intention of targeting specific social objectives along with a financial return, and measuring the achievement of both (Social Impact Investment: Building the Evidence Base, 2015; Social Impact Investment Taskforce, 2014).

What sets impact investing apart is that the goal of financial return is unequivocally pursued within the context of setting impact objectives and measuring their achievements (Social Impact Investment Taskforce, 2014). Impact investments can be found across all existing financial product types, with the third dimension of impact considered in addition to conventional dimensions of risk and return, which are employed in investment decision making (Addis, McCutchan & Munro, 2015).

SII covers a broad range of outcome areas including mental health and wellbeing; family, communities and inclusion; early childhood and education; ageing and aged care; conservation, environment and agriculture; arts, culture and sport; income and financial inclusion; housing and local amenities; and physical health and disability.

How can impact investing help address the service gap in health and aged care?

Against a backdrop of growing fiscal pressure on government’s ability to provide services, impact investment can help expand the toolbox for approaches in health and aged care. Government can use impact investment to mobilise and direct private capital to pressure points such as dementia and chronic disease, where innovative approaches are increasingly needed. A number of successful impact investment models in health and aged care services have the potential to be implemented in Australia.

Oomph! is a UK based social enterprise illustrating the impact social enterprises can have in using preventative mechanisms to tackle pressing health and aged care issues. It aims to use exercise programs to transform the health and quality of life of older people, especially those with dementia, in aged care homes, as well as ease the long-term burden on the health system. By engaging older people in social, physical activities, research has shown that depression, which affects more than over half of aged care residents (Australian Institute of Health and Welfare, 2012) can be prevented (De Moor, Boomsma, Stubbe, Willemsen, & de Geus, 2008). Moreover, dementia is estimated to cost the UK £26.3 billion a year (Prince et al, 2014), and a study by the University of Lisbon (2012) found that regular exercise can lead to a 40 percent reduced risk of vascular-related dementia and 60 percent reduced risk of cognitive impairment. To date, Oomph! has trained 1080 care workers in over 1200 aged care homes with more than 530,000 participants per year (“Oomph! Wellness”, 2016), demonstrating the increasing role social enterprises can play to help meet service gaps in aged care.

The Ways to Wellness Social Impact Bond (SIB) illustrates how innovative financing can facilitate models tackling root causes in health and how collaboration between stakeholders can enable a large-scale health initiative which would have been too risky without seed funding from social investors (Ronicle & Stanworth, 2015). The Newcastle Gateshead Clinical Commissioning Group (CCG) will pay £8.2m to service providers, contingent on the achievement of their outcomes. The SIB has two aims: to improve the health of over 11,000 sufferers of long term health conditions (LTCs) such as diabetes, asthma and heart disease over seven years and to save money for the National Health Service (NHS) in treating them. Approximately 70 percent of national NHS is spent on patients with those conditions. (Ways to Wellness – Bridges Ventures, 2016). Newcastle Gateshead CCG anticipates that the intervention can save them £10.8m in secondary care costs and a further £13.6m on other public services (Ronicle & Stanworth, 2015).  

The Healthy Futures Fund (HFF) demonstrates how impact investing encourages social innovation by integrating infrastructure and service layers across multiple outcome areas. Formed by the Local Initiatives Support Corporation (LISC), Morgan Stanley and the Kresge Foundation, the HFF is a US$200m initiative aiming to connect healthcare with affordable housing in response to the association between poverty and health. The fund uses a unique financing structure that leverages New Market Tax Credits, Low Income Housing Tax Credits, grants and loans as well as seeded capital from its founding investors. To date, HFF has supported the development of 5 federally qualified health centres in disadvantaged neighbourhoods that service over 96,000 patients and 450 units of affordable housing (Healthy Futures Fund, 2016).

These examples reflect a wide range of approaches to addressing health and aged care service gaps across other jurisdictions. The right government support for the domestic SII market can help innovative approaches to addressing health and aged care services be adopted and successful in Australia.

Growing the Impact Investing Market: Sectors, not just Firms

SII is growing quickly. Globally, the amount invested by the world’s 146 leading impact investors is expected to grow by 16 percent this year (J.P. Morgan & Global Impact Investing Network, 2015), and within a decade the market is forecast to reach US$1 trillion (Addis, McLeod, & Raine, 2013).

The OECD argues governments have an important role in facilitating the impact investment market. In Australia, the Financial System Inquiry (FSI) noted that government ‘can play a catalytic role both in facilitating the functioning of the ecosystem and targeting actions to trigger its further development’ (Treasury, 2014, p.262; supported by the Productivity Commission, Senate Economics References Committee, the Australian Advisory Board and the Joint Standing Committee on Foreign Affairs, Defence and Trade as cited in Impact Investing Australia, 2016).

Australia has the strong foundations to grow the SII market. A dynamic and diverse not-for-profit sector contributed 3.8 percent to Australia’s GDP and comprised 9.3 percent of the employed workforce in 2012-13 (Addis, McCutchan & Munro, 2015). Furthermore, Prime Minister Turnbull’s National Innovation and Science Agenda has signalled a focus on ‘opening up new sources of finance [and] embracing risk by taking on innovative ideas’ and committed the government to ‘leading by example’ ("Agenda | National Innovation and Science Agenda", 2016). Moreover, a recent survey of 123 Australian investors responsible for over A$333b funds under management indicated more than 70 percent believed SII will become a significant part of the investing landscape of the next five years. On average, those active in the market expected to increase their impact investments by three fold, translating to an estimated investor demand of A$18b for those respondents over the next five years (Dembek, Madhavan, Michaux, & Potter, 2016).

However, the impact investing market in Australia is at a critical point of inflection. Whilst there have been a handful of impact investments that have been successful, the market now needs scale to unlock its full potential.

‘Instead of cherry-picking investments in individual enterprises that will yield high return and high social impact, we need to commit to “priming the pump” to encourage growth of new industry sectors.’ (Bannick & Goldman, 2012)

The policy recommendations in this paper will focus both on how to mobilise impact investment in health and aged care services, as well as support and scale the Australian SII market as a whole.

Policy Recommendations: Financing Our Future

The Impact Investing Australia 2015 report, ‘Blueprint to Market’ and the March 2016 ‘Submission to the Working Group on Affordable Housing’ identify a number of policy measures needed to develop the impact investment market and will be presented as follows:

1. Federal government engagement directly with the sector to develop government capacity and send positive signals to the market.

The federal government should focus on building relationships and increasing direct engagement with the SII sector. This signals to the market in Australia and other participating countries an openness to collaboration with the private sector, and a willingness to better understand the market. Furthermore, government engagement is an important step towards directing a focus on using SII’s potential to address health and aged care issues in Australia.

Australia is the only member of the Social Impact Investment Taskforce that has not had both sector and federal government engagement in the ongoing dialogue and discussion. IIA has extended an invitation for the Australian government to nominate an ‘appropriately qualified observer’ to the Global Social Impact Steering Group and the Australian Advisory Board (Impact Investing Australia, 2016). Accepting this invitation would be a straightforward step to increasing government leadership in the sector.

Furthermore, the federal government can take other low cost measures to increasing its engagement with impact investing: Firstly, it should ensure that innovation policy considers aspects of social innovation as well. Secondly, by nominating designated Ministers (who are ideally supported by central agencies and Treasuries), the government can help lead engagement with a variety of stakeholders. This can encourage collaboration and champion the development of the impact investing market. Finally, the federal government should encourage other jurisdictions to follow New South Wales’ (NSW) lead by establishing an Office of Social Impact & Investment. This would provide a centre to drive public sector capacity to engage with the private sector and market for a more effective and efficient allocation of resources.

The UK Government has been a leader in engaging with the SII market, having created 31 SIBs in 2015 alone, nominated a Minister for Civil Society and recently released their 2016 strategy to grow and support the social investment sector in the UK (HM Government, 2016).

2. Target health and ageing as a priority area for SII to guide market soundings and transactions

Further to engaging directly with the SII sector, the federal government should indicate health and ageing as a priority area. Doing so can help guide market soundings around the most appropriate and efficient impact investment transactions needed in health and aged care services. Furthermore, a targeted approach sends important signals to the SII market about government commitment, that can help galvanise both supply of and demand for capital towards investments that address key issues in health and ageing.

The NSW Office of Social Impact recently outlined managing chronic health conditions and mental health hospitalisations as priority areas which SII has the potential to address (NSW Office of Social Impact, 2015). As part of targeting these priority areas, the NSW government indicated a commitment to delivering two new SII transactions to market each year in collaboration with the private sector (NSW Office of Social Impact, 2015). By following NSW’s lead, the federal government has the ability to facilitate and encourage SII in health and ageing on a national scale.

3. Federal government support for the establishment of an independent market intermediary, that can drive the market towards impact at scale by acting both as a market builder and an investor

A key issue is the lack of an existing organisation able to invest at scale, support other intermediaries and encourage market infrastructure. The federal government should prioritise the establishment of a market intermediary that can bridge the gap and bring together investors seeking impact and the organisations capable of delivering it (Social Impact Investment Taskforce, 2014). Doing so paves the way for a greater number of impact investments in health and aged care to take place, and critically, achieve scale in the long term.

A new, independent intermediary, such as the proposed Impact Capital Australia (Addis, McCutchan & Munro, 2015) can play a unique role as both an investor and market champion. As an investor, the intermediary can encourage and support existing intermediaries to scale, make targeted investments in new transactions that otherwise would not get done, benchmark informed and fair risk adjusted return for transactions and utilise its mandate to bring momentum and confidence to transactions and the market. As a market champion, the intermediary can act as a leading voice in the sector, correct for current market asymmetries and create conditions for growth, unlock new capital and encourage talent and expertise in the market and spearhead establishment of necessary market infrastructure (Addis, McCutchan & Munro, 2015).

Big Society Capital (BSC) in the UK is a prime example of how an effective market intermediary can drive the market towards scale. Since 2012, BSC has invested £261m, matched by a further £326m from their co-investors across 48 different investors (“Big Society Capital KPIs”, 2016).

4. Review existing policies around fiduciary duty and program and mission related investment to break down regulatory barriers and facilitate growth

A supportive regulatory environment is critical to encouraging more impact investments in health and aged care services, and broader outcome areas. The government can pursue several low cost options.

The government should focus on encouraging additional guidance from the APRA to fully clarify how impact can be considered in addition to dimensions of risk and return by fiduciary decision makers (Impact Investing Australia, 2016). The existing regulation can lead to a narrower interpretation of these duties, and the APRA acknowledged a ‘lack of clarity’ was perceived as an ‘unnecessary barrier to additional social impact investment’ (Australian Prudential Regulation Authority, 2014, p.21). Additional guidance can contribute to mobilising and leveraging a significant amount of capital held by philanthropic and superannuation trusts, directing it towards SII. Recent guidance issued by the US Department of Labor regarding ‘economically targeted’ investments under the Employee Retired Income Security Act (US Department of Labor, 2015) and the UK Charities (Protection and Social Investment) Law ("Charities (Protection and Social Investment) Act 2016 — UK Parliament", 2016) indicate international recognition of the role clarifying fiduciary duty plays in encouraging impact investment.

To reduce market constraints, the federal government should also review policies to clarify the ability of foundations and philanthropic trusts to use a proportion of their mission aligned investment capital, even at below market rates of risk adjusted return. Impact Investing Australia (2016) proposes the discount on market rate could be attributed to grant making requirements. Current practices by the Australian Taxation Office allow trusts to make leased premises available at a market discount, treating the difference as part of their grant funding (Impact Investing Australia, 2016). A policy to allow similar treatment of below market return investment capital would be consistent with these practices, and similar approaches have been adopted in the US and UK (Impact Investing Australia, 2016). This would unlock a greater flow of capital by helping fill the funding gaps between commercial capital and grants, as well as encourage philanthropy to play an important role in attracting more capital for social impact.


The federal government has an important role to play in developing the SII market. Examples from other jurisdictions demonstrate SII has the potential to address the service gap in health and aged care services. In Australia, the impact investing market is at a critical point of development. A growing, dynamic social sector has laid the foundation for diverse and innovative approaches in tackling the challenges facing Australian society. However, the market needs support to build scale, allowing it to be truly effective rather than fragmented and with narrow impact. Acting on the proposed policy recommendations cements Australia’s position in a promising market, and unlocks its potential to invest in health and aged care services at scale. The time for action is now.

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