Excellent. Thank you very much, Mr. Chair, and thank you to the committee for inviting me to speak on this very important topic.
You've heard from Bill Young, albeit briefly. He's one of the gurus, one of the leaders, of social finance in Canada. I will not attempt to replace what he has to say or to offer, but what I can do is try to focus my remarks more succinctly on the applicability of social finance to crime prevention, or the how-tos. We'll offer some suggested social finance structures that the committee may choose to consider in building social finance into its overall crime prevention strategies.
From a crime prevention perspective, social finance provides a mechanism to redefine the role of all actors, the state, the private sector and the public sector, in how community is built, maintained, and kept in good order. It offers what we call a blended response to crime and its effects, and more powerfully, a blended preventative action that minimizes its occurrence in the first place.
Social finance represents a breaking down of the traditional silos between private gain and public good. Today the private sector invests for the purposes of private gain, and the foundation world and government invests for the purpose of public good. Social finance breaks these silos down. With social finance, private sector actors with the right motivation and intent, and I emphasize motivation and intent, can invest for public good alongside private gain. The role of the foundation world and government also changes. No longer having the burden of acting alone, governments and foundations can now have a true partner, a rich and more genuine partnership than that offered by the traditional public-private partnership model. With social finance tools, governments and foundations can now focus on incentivizing private actors and establishing the conditions by which they can finance public good.
Social finance shifts the discourse around society's response to crime. An outcome of social finance is the creation of a new dynamic in our community. The community bond, as an example, provides average citizens the ability to invest in buildings that matter in their communities. Life leases provide the ability for people in social housing need to invest in their own care and in their own housing.
Crime prevention by its own very nature is a community effort. It is not simply the responsibility of the police or the courts to address crime, nor is it the responsibility solely of the social sector to respond to the negative effects of crime. With social finance, the community and private sector and public institutions can create a new dynamic in our community in which the community itself addresses the root causes and after-effects of crime and prevention in a blended manner.
Social finance provides the tangible mechanisms and structures to facilitate community-based crime prevention. It also creates the ability to build new tools that even 10 years ago were simply not options in the tool kit. I'll offer you three examples that the committee may consider in social finance.
One structure is what we call a catalytic capital fund. Simply put, catalytic capital structures bring together different categories of investors, what we call the social-first investor and finance-first investor, into the same investment opportunity. One investor category invests its capital and agrees to absorb a certain pre-set level of investment loss. In doing so, this investor group reduces the risk associated with the overall investment opportunity. The second investor category then invests its capital, typically at a much larger amount and in the vicinity of 80% to 90% of the total capital invested. Due to the reduced risk, the second investor group receives a return that is more in line with their risk-return expectations, typically the market rate. The first investor therefore acts as a catalyst to stimulate the injection of new, and potentially significantly more, capital than would otherwise be invested in the initiative.
Catalytic capital not only changes the risk profile for different classes of investors, but also firmly embeds social value into the fund and its outcomes, even though some of the investors have different motivations.
My firm, Purpose Capital, has experience building these types of initiatives and profiling how catalytic capital funds in other jurisdictions have created social impact. Though our experience does not directly relate to crime prevention, I am confident that a catalytic fund model can be applied to crime prevention.
A second structure, which Bill Young might have even alluded to, is the social impact bond. SIBs are an innovation to the more traditional PPP model. A simple way of understanding SIBs is as a method for pay-for-performance financing for public good outcomes. It provides a very low risk and in some SIB models actually a risk-free method for governments to support public good initiatives.
The way that a SIB works, a government partners with what is known as an intermediary. The intermediary raises and manages capital from banks, financial institutions, foundations, and private individuals, and it invests those funds in the service providers that then deliver the innovative social programs.
In the delivery of these programs, the service providers reduce or replace the need for government to directly fund or issue transfer payments. As the government partner sees savings materialize, it pays a percentage of those savings back to the investors that initially financed the program.
The SIB model has been applied in other jurisdictions, most notably in the U.K. where the concept first originated in 2010, and governments in Canada have started to research, build, and launch SIBs at home. There was actually an announcement a few days ago in Saskatchewan regarding what we think is the first SIB in Canada.
Should SIBs be a model of interest for the committee, you should bear in mind a few things.
First, one must understand how to place value on the outcome one seeks. Second, there must be a mechanism to determine whether the outcome is actually attributable to the intervention itself. Third, the parties involved in an SIB, most notably the government partner, must be prepared to rethink how interventions are financed and how the intervening parties are held accountable.
This rethink may require a culture shift towards outcome-based financing and different methods of operating that may be fundamentally different from how governments and service providers currently finance and operate.
A third option for the committee to consider is to build a mechanism that directly finances highly innovative social enterprises. I can describe what a social enterprise is. This option plays off the idea of investing in an SIB; however, the investment here is made directly in the intervention itself.
An example that could relate to the committee's work is that of Peacebuilders Canada. Peacebuilders is a charity that has worked for over a decade to provide better youth access to justice. One aspect of their work involves redirecting first-time youth drug offenders from the drug courts into their program, a program that applies the techniques of aboriginal healing circles that work with youth to address the root causes of their drug offence.
Their model has resulted in recidivism rates of under 20% compared to recidivism rates in the court system of 60%, if not higher. The cost of delivering the Peacebuilders programming is also a fraction of the cost associated with prosecuting a youth offender. I believe the numbers are about $120,000 to prosecute a youth offender compared to about $30,000 for Peacebuilders programming per youth.
Peacebuilders is also building innovative social enterprise options. Purpose Capital briefly worked with Peacebuilders to help them develop an enterprise that takes the positive skills young drug offenders learn on the streets, for instance, managing the supply chain of illicit drugs, and applies these skills to the selling of legitimate products in kiosks and stores.
These three social finance options are, in my opinion, the tip of the iceberg. Social finance not only increases the government's tool kit for addressing crime, but also provides a new model for how community can create a blended response that leads to a richer and more effective means of community building.
However, I will end my remarks on a more cautious note. First, social finance is not a panacea. It is but one tool that cannot be expected to replace other interventions in the world of crime prevention. Social finance is premised on the ability to generate financial return, and because of the need for return, this type of tool is appropriate only for some interventions, not for all.
Second, there is much potential for an upside with social finance; however, the magic is not in the what of social finance—in other words, the structures—but in the how, or the implementation. In Canada we are still learning about how to do the how really well, and it is a work in progress. However, I firmly believe Canada will become an important contributor to the global movement toward social finance, and the work of this committee can add one more voice to this choir.
Thank you very much.