Public Safety Committee on May 29th, 2014

[Gianni Ciufo]

I do think that would be a fair characterization. In working with public sector clients, I try hard to define value in several ways: value in terms of dollars and cents, value in terms of risk mitigation, value in terms of economic impact, and value in terms of social benefit. When I look at the potential for social finance in general, but specifically at an instrument like social impact bonds, I see elements and I see a system that could, if successfully applied in the Canadian context, generate valuable outcomes to government along all of those facets for taxpayers and for the affected individuals who we're trying to help improve their condition.

So what I would say is that the pay-for-performance element of social impact bonds is very powerful—no performance, no pay. Further, if thresholds are selected responsibly and properly, they can be tailored to the situation, so that you can tailor the value outcome to government. There are some challenges around measurement, but information and measurement are always challenges in transactions of this type and can be overcome, in my view.

[Blake Richards, Conservative, Wild Rose, AB]

Actually, that kind of speaks to my next question to some degree, I think, because I think that's actually one of the criticisms there are of the current model of crime prevention programs. There's a lack of really having any kind of hard metrics to measure the results. Would you see, though, the idea of a social impact bond having a better way to have more definitive results that we could actually measure? I would think that would have to be part of the social impact bond type of model. Obviously, in order to pay for successful outcomes, there must be a way that you can actually measure that there are outcomes that are meeting the results you're seeking. I know you've sort of identified that just briefly in your previous response, but would you see that as being one of the positives here?

[Gianni Ciufo]

I would definitely see it as a positive. I think the service providers in a model like this would maybe be forced to develop better performance measurement, performance metrics, and to transparently report back to the public, or to have measured by an independent evaluator, what their rate of success has been, what they've actually accomplished.

What I would say, too, is that social impact bonds are also meant to be proactive interventions. For example, you can look at the rate of recidivism, which is a pretty clear metric, but you can go back into the system and look at, for example, the contributors to a lower rate of recidivism. Perhaps we would start looking at the level of education or the number of graduates of the education system within the corrections system as a positive indicator and a positive contributor to a lower rate of recidivism. Elements like that could be a very powerful tool in creating the social objective you're aiming for. So I would agree.

[Blake Richards, Conservative, Wild Rose, AB]

How much time have I got—about a minute? Okay, great, it should be just enough time.

One of the things we're hearing, initially, is whether there really would be enough capital available in Canada. I think that you, yourself, and others have kind of made that pretty clear that there do seem to be a lot of investors out there who would have the desire to invest for social good. Is that true? Is there a lot of investor interest in something like this out there? You should know, I'm sure, with your practice.

[Gianni Ciufo]

Yes. Acknowledging that Canada is a very conservative financial country—and we've done well by that, in my view—there is definitely appetite in the broader investor community that I spoke of earlier to invest in opportunities of this type. For example, of the 80 investors we surveyed in our recent market sounding, two of those investors were willing to look at investments exceeding $5 million each, and that's at these initial stages where the market is very young in Canada. I think that is a positive indicator. As well, looking broadly across the investors, their broad response was that they were prepared to invest. I think those 80 investors represented what they would call a potential committed pool of capital of somewhere in the range of $30 million to $40 million, something they were ready to apply in this area. That's just one data point; however, it indicates to me that the answer to your question is yes.

[The Chair, Conservative, Daryl Kramp]

Fine. Thank you very much, Mr. Ciufo, and thank you, Mr. Richards.

Mr. Easter, please, for seven minutes.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you, Mr. Chair.

And thank you, Mr. Ciufo, for your presentation.

Just coming off the last question on the 80 that you contacted, what kind of return in investment are investors looking at for social finance projects ?

[Gianni Ciufo]

That really depends on the specific situation. I think a social impact bond pilot project in Canada that would be viable, sustainable, and well-constructed would have a reasonable rate of return that would reflect the underlying risk of the investment—or the loan, in fact.

I believe Canada has a very well-developed commercial banking market, and we should learn from that. A prudent social impact bond would see investors do their own due diligence on the potential service provider, which would develop a great deal of comfort that these objectives could be met and the thresholds of performance could be met. And by doing this due diligence, it would de-risk the potential investment and would, therefore, require a lower commensurate rate of return appropriate with the investment opportunity.

[Wayne Easter, Liberal, Malpeque, PE]

Do you see this investment going as far as possibly privatizing some of the prison system within Canada?

[Gianni Ciufo]

For me there's no connection between a social impact bond and privatization of public services. That's not the intent of the vehicle.

[Wayne Easter, Liberal, Malpeque, PE]

Could one step not lead to another? We've seen prisons for profit in the United States.

[Gianni Ciufo]

Prisons in the United States were privatized, I would say and submit, long before social impact bonds were on the horizon. I don't associate the two. You can make potential linkages in a variety of ways, but I see them somewhat independently.

I do see your point of view, but I have trouble linking the two.

[Wayne Easter, Liberal, Malpeque, PE]

If the key to this proposal is the performance at the end of the day, that the performance is there, there's the reward of a better return in investment—if I could call it that—what happens if there isn't performance, not only if the government doesn't pay, but if...? My concern in this whole area is that there's a downloading of accountability and responsibility onto the public sector in areas within the criminal justice system that really, ultimately, governments are responsible for.

What happens if there isn't performance, if the performance targets that have been issued aren't met?

[Gianni Ciufo]

The payment mechanism and performance thresholds are established on a transaction-by-transaction basis. But at the highest level, if the thresholds are not met, some lower amount of payment is required by government. I think that's commercially reasonable. I would encourage government to get involved in more performance-based contracts, where when they get what they contracted for, they should and will make full payment. I also believe that the Government of Canada is not in the practice of defaulting on its obligations, so if it did enter into an agreement to receive services and if the performance was met, I think the government would honour the obligation there—and it should.

[Wayne Easter, Liberal, Malpeque, PE]

Are there any examples in Canada that you've been involved in where this type of financing is in place now, and if so, what was the result?

[Gianni Ciufo]

If you look at what is involved at the highest level, you see that private finance is involved. I have been involved in perhaps 50 to 60 government transactions that involve procurement of infrastructure, whether it be transit systems, highways, schools, airports, or the like. It's private financing, and we have this in most provinces in Canada; the federal government is involved in procuring infrastructure with private finance.

[Wayne Easter, Liberal, Malpeque, PE]

That's more in the traditional sense, though, in terms of the economic and physical construction kind of thing, rather than social finance, right?

[Gianni Ciufo]

For social finance, I have been involved in a social impact bond in Canada, in the province of Saskatchewan, that recently reached financial close. Canada doesn't have many examples.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you.

Thank you, Mr. Chair. That's fine.

[The Chair, Conservative, Daryl Kramp]

Thank you very much.

We will now go to Madame Doré Lefebvre, s'il vous plaît.

[Rosane Doré Lefebvre, NDP, Alfred-Pellan, QC]

Thank you, Mr. Chair.

Thank you, Mr. Ciufo, for being with us today. Your presentation was extremely informative.

I had a chance to go over the document on social impact bonds that you sent us. It was quite interesting.

Like my colleague Mr. Garrison, I'm not opposed to social finance, but I wonder about a lot of things. I would say the witnesses we heard from were all over the map on the subject. We heard from Washington that direct government funding would be easier but that it would require private sector support, which would wind up costing more. Other witnesses voiced their concerns about the government backing away from funding. And now Quebec is dealing with a problem stemming from social finance. Concerns were raised about a particular private foundation and its considerable influence over the social policy of the government in power.

So many questions and concerns persist around the approach. Many parts of the world, including the U.K., are running pilot projects. No tangible results are in yet, but I, for one, am very eager to see them.

That said, some witnesses have said that social finance may not be the most appropriate method for certain aspects of public safety.

Do you agree with that?

[Gianni Ciufo]

Those are good questions, but I apologize. For some reason, the translation didn't come forward on the first component of your question. You have my apologies, but I'll answer it to the best of my ability.

Your observation is astute, that at this point in time there is not a great deal of results or data or outcomes to draw full conclusions on, in any area of social financing. In the case of microloans, I would say, absolutely, that those have been around for decades and the outcomes are proven. For social impact bonds, though, your point is quite a good one.

I say that in the absence of perfect information, and these are some of the limitations you were speaking of. I think we have a responsibility to look at a situation and, on balance, with the information we have and with what we know, ask whether it is plausible, whether it is possible, whether we are convinced that we are going to see an outcome that is as positive from a financial perspective as it is from a social perspective, whether it could be achieved in another way, and whether there's a positive business case for it. If you have that positive business case and it's compelling to government, that is evidence and reason on which to rationally decide that perhaps this is something we should try. We should try to ameliorate, in certain groups, the graduation rate or the recidivism rate or the rate of retention of at-risk individuals.

As well, we have a responsibility to objectively study it during and after, so that if the results are not positive, we learn from that and adjust programs, or we learn from that and decide that maybe this isn't a good mechanism for certain services or certain sectors. I think the responsibility is clear for the predictive business case that we should proceed only if it is compelling and strongly positive, and that there should be measurement and follow-up and transparent reporting back to taxpayers about the results.

[Rosane Doré Lefebvre, NDP, Alfred-Pellan, QC]

How does a private investor benefit from putting money into social impact bonds? I assume that, depending on the program, some dividends can be drawn. In other cases, it could cast a positive light on a private company or organization. What are the main benefits to a private investor from this type of investment?

[Gianni Ciufo]

That's a very good question.

The private investor may be looking for only commercial returns. It's possible that a commercial bank could fund such an instrument. But it might—and probably would—get the most value out of the social benefit that occurs: the contribution to community and the improvement of its brand. Organizations normally contribute back to the community from which they draw a profit, and they provide charitable gifts and donations. That's normally the case in corporate Canada.

I think investors who would normally get just a financial return would value and draw benefit from being associated with doing good in their community and the brand and image enhancement, and they would look for those opportunities. I think we're seeing that generally as part of that triple bottom line movement: looking to do social good, looking to help the environment, and looking to be a responsible participant in the Canadian marketplace.

[The Chair, Conservative, Daryl Kramp]

Thank you, Mr. Ciufo.

Mr. Payne, go ahead for five minutes, please.