Public Safety Committee on June 10th, 2014

[The Chair, Conservative, Daryl Kramp]

Colleagues, we will call this meeting to order.

This is meeting 29 of the Standing Committee on Public Safety and National Security. Today we are following up on our study of social financing as it relates to crime prevention in Canada. We've had a number of meetings on this, and we welcome further witnesses today.

For this first hour we have two witnesses, and then we have another witness for the second hour.

In the first hour as witnesses we have Mr. Andy Broderick, the vice-president of community investment from the Vancity Credit Union. We also have, by way of video conference from Seattle, Washington, Mr. James Tansey, the executive director of the ISIS Research Centre, Sauder School of Business, University of British Columbia.

Gentlemen, we will give each of you up to 10 minutes for a presentation and then we will open the floor to questions from the members.

In the order on the agenda, we will start with Mr. Broderick for an opening statement, and he'll be followed by Mr. Tansey.

Mr. Broderick, the floor is yours, sir.

[Andy Broderick, Vice-President, Community Investment, Vancity Credit Union, As an Individual]

Mr. Chairman, committee members, I would like to thank you for this opportunity to appear before the committee to discuss using private and institutional financing as part of the strategy to improve social outcomes and strengthen communities across Canada.

I have served as vice-president of community investment at Vancity since September 2010. Vancity has over $18 billion in assets and half a million members. It's based in B.C. and is the largest credit union in Canada.

It was founded 68 years ago to provide financing to community markets that had been denied traditional access to capital, in this case, potential homebuyers who could not get loans on the east side of Main Street, in Vancouver. As a cooperatively owned financial institution that views itself as a social enterprise, Vancity continues to take the role we play in community investment very seriously. There are not many credit unions that have a VP of community investment, let alone one with a staff of 30. I'm quite pleased to be doing this work.

Currently the community investment team is working, on many levels, to increase access to capital for our members' communities in B.C., with a focus on affordable housing, local food, energy efficiency, renewable energy, and social finance and social venture.

Three years ago, with the support of the Province of B.C., and with the leadership of such people as Gordie Hogg, whom you will hear from shortly, we, with the help of the Vancouver Foundation, launched a resilient capital program to provide social enterprises and blended value businesses with access to capital, in the form of equity investments in loans. We participate and help guide the multi-sectoral B.C. partners for social innovation, which I'm sure Mr. Hogg will speak to. We are playing a role as a participant on the national advisory task force for the G-8 and G-7 on social finance, and are co-convening a national social finance investment funds table, with a particular focus on existing funds and supporting the existing social impact fund infrastructure.

Prior to coming to Canada, I also served as CEO and president of Housing Vermont. It included the Green Mountain housing equity fund, and Vermont Rural Ventures. This was a non-profit investment fund. It managed assets of over $350 million of private and institutional capital, which was in the service of community investment goals. Again, these were social needs being met in connection with federal and state incentives that were created to encourage the private sector to invest in community.

Social bonds offer some promise, but based on my experience in B.C. and the United States, I remain skeptical of the current enthusiasm for the deployment of social impact bonds as a financial instrument to address intransigent social problems in Canada. My first concern is the general lack of clarity about what is meant by social impact bond. Most of what people are considering is not really in the form of a bond. I'm much more comfortable with pay for performance, or pay for success, but even those terms tend to have a jingoistic quality of a slogan.

From an investment point of view, we're talking about contracted payment schemes. Again, these can make for very successful investment structures, but I think we should call them what they are.

The second problem comes from the current fiscal environment with the focus on reducing government outlays. In such an environment, it's particularly likely that SIBs, social impact bonds, could be used as a way to disrupt or otherwise reduce the provision of critical government services rather than proven delivery and effectiveness. I know this committee is focused on delivery and effectiveness, but it is a tough environment to be discussing these sorts of new and innovative approaches.

Finally, the entire field of social finance in Canada, and this is probably my main point, is just beginning to get organized. There is very limited capacity in the community to respond with the sophistication and service delivery infrastructure necessary to deliver on pay for performance schemes and then scale such programs once they're successful.

There are a lot of consultants out there who will offer to do this work for you, but that will not be the path to a successful program. I would encourage cautious investigation of such programs, while working diligently to develop the community finance infrastructure in Canada.

This work needs to begin with the CRA and changing the regulatory regime that currently makes the merging of private investment and charitable goals exceedingly difficult, from such things as making it clear that charities and foundations may invest in limited partnerships, to removing any direct or indirect prohibitions on non-profits creating and holding revenues. We need to build balance sheets in the community sector if you're going to try to move towards a social impact bond regime.

In the U.S. this work began in the 1980s and picked up speed in the 1990s. In Great Britain it began in the early 1990s and has involved a great deal of government support and focus. In both Great Britain and the United States there is great latitude for non-profits and charities to engage in work with private capital. This is the enabling environment that needs to be created if this type of innovation—the innovation potentially offered by pay for performance—can be successfully pursued.

Another important enabling tool would be to create a regulatory environment that tracks and reports publicly on investments made by federally regulated financial institutions. Just tracking and reporting on the activity, not requiring that it be made in any particular vehicle, would have the effect of elevating access to that capital within a community. Creating a regulatory environment that encourages financial corporations to serve more than a single bottom line is, in our experience, critical to the success of this kind of program.

That said, there are a number of interesting social impact bond-like innovations and initiatives ongoing in British Columbia and elsewhere. For example, I've been part of a group that is working to structure a bond for the Aboriginal Mother Centre in Vancouver. There's the Saskatchewan Sweet Dreams project, which most of you have heard about, and the BC Association of Aboriginal Friendship Centres, which I believe Mr. Hogg will speak to. The B.C. government is exploring a number of other potential involvements around employment of people with disabilities. Since most of these issues impact funding streams from various levels of government, it's going to be critical for collaboration and coordination between levels of government.

Finally, there's a critical role for intermediaries such as Vancity, New Market Funds, the Community Forward Fund. There are a number of existing, what I'd call intermediaries, in Canada that need to be strengthened and supported if this work is going to be successful.

Governments should focus on creating an enabling policy environment. It has had big returns in Great Britain and the United States.

Thank you.

[The Chair, Conservative, Daryl Kramp]

Thank you very much, Mr. Broderick.

Now we will open the floor to Mr. Tansey.

You have up to 10 minutes, sir.

[Professor James Tansey, Executive Director, ISIS Research Centre, Sauder School of Business, University of British Columbia, As an Individual]

Thank you very much.

Can you hear me clearly?

[The Chair, Conservative, Daryl Kramp]

Yes, you're loud and clear. Thank you very much.

You're looking swell, too.

[Prof. James Tansey]

Excellent. Thank you.

Just to provide a quick introduction, I'm an associate professor at the Sauder School of Business and am responsible for running an initiative called ISIS, which focuses on social innovation and social finance in British Columbia in Canada. We act as an incubator and research centre focused on applied research in the domain of social innovation in general.

I was involved in the British Columbia committee looking at social entrepreneurship and social innovation, and social impact bonds were one of the recommendations at least for exploration to that committee. We recently authored papers looking at green financing bonds as well, which is a similar kind of mechanism, as well as the field of impact investing in Canada and North America.

I would like to start by echoing some of my colleague Andy Broderick's not so much concerns, but caveats about the potential for social impact bonds. In the first instance I'd say the focus in much of the early discussion, and rhetoric and enthusiasm for impact bonds I think is on the wrong aspect of the program, whether they are pay for performance or social impact bonds. The real enthusiasm in the early days was about mobilizing private sector capital and philanthropic capital on a performance basis to address intractable social problems.

My view is that in the first instance, we need to focus primarily on the effectiveness of the programs rather than on the ability to mobilize new capital. With that in mind, I'd like to provide a few comments about pay for performance or social impact bonds in the context of the criminal justice system.

As I'm sure as a committee you have already learned, the flagship example, the point of reference is the Peterborough program in the U.K., which focused on 3,000 short-term prisoners serving sentences of less than a year. The very positive result from that program was that the intervention of the St Giles Trust reduced reoffending rates by over 65% and saved something in the region of £4.7 million.

There's demonstration there of very high levels of effectiveness and a quality of service in terms of the rehabilitation of prisoners that went far beyond what was being delivered by conventional social services. There were very positive results in the context of that initiative.

I'd like to highlight some of the reasons that I think the criminal justice system, in theory at least, is well suited to this form of intervention, whether that's pay for performance or some form of bond.

One of them is this is genuinely an intractable problem in almost every developed country. The failure rate of the conventional system is very high, and if the goal is rehabilitation, then the room for success in this particular area is also very high. If the reoffending rate is 75%, even a 25% reduction in reoffending is a dramatic success compared to the status quo.

The second reason I think programs in this area are a good starting point is that the core metrics are relatively easy to track and are unambiguous at the level of that prisoner population. You know pretty clearly when someone has been intercepted again by the criminal justice system, and it's relatively easy to measure that.

The third reason is that unlike health interventions, which is another area where people have spoken about pay for performance because you're investing in prevention, the results can appear relatively quickly since the key period for reoffending is within the first one to two years, so the savings and the proof of concept for government could be relatively immediate.

The fourth reason is there are and historically have been very well-established models of small-scale interventions by non-governmental organizations and community organizations that have proved highly effective at the small scale.

Those are the reasons that I think exploring pay for performance and impact bonds in this area is a positive idea.

I think some of the risks worth noting are that since, by definition, the interventions involve working with convicted criminals, there are reputation risks and other forms of risk associated with the success and failure of the program.

The second reason is that criminal justice in general as a public policy issue is highly polarized, with very strong positions on either side of the debate about rehabilitation versus punishment. What this means is that any initiative launched even on a pilot basis will be closely scrutinized by very vocal organizations.

The third reason is there are in Canada and particularly in the U.S. very strong private sector interests associated with the current system, and in Canada and the U.K., there are public sector interests and union interests associated with maintaining the status quo that may challenge the success of this.

The final two points really relate to the public policy context in general. What I believe is necessary to test social impact bonds or pay for performance is some form of prototyping and bounded experimentation. Historically, government programs have not been tolerant of the kind of experimentation that we allow for and see in the community sector and also in the private sector through the activity of entrepreneurs and social entrepreneurs. I think any attempt to explore this further will have to involve a higher degree of tolerance for experimentation and failure than is typical of government programs.

Finally, since within the criminal justice system there is a disproportionately high number of aboriginal citizens who are intercepted by that system, I think we need to be profoundly sensitive to the historic treatment of first nations by criminal justice and the residential schools programs.

My comments about the likely sources of capital really focus on a reality check about what private investors in particular might look for from this kind of program. In the early stages, I don't believe the private sector would mobilize quickly in response as an intermediary to providing capital to scale this up. My view is that if there is a desire to test this and prototype and pilot these kinds of projects, it will require government funding to underwrite it, with stakeholders from the philanthropic sector and potentially from local governments for it to work.

The reason the private sector, I think, will hold back is that typically for institutional capital investments, they would require investments of $25 million or more to address the transaction costs involved. I don't see an intervention on the scale of $25 million being realistic initially for a prototype or for a pilot study. In contrast, public sector and philanthropic capital is likely to be more appropriate in the early stages. Community organizations and philanthropic institutions having a stake in the investment I think is important because it ensures a level of accountability and engagement with the success of the program.

With those caveats, my view is that to proceed with this on any scale would require a commitment to a design approach and a prototyping and piloting effort. Any program in this area would genuinely have to provide autonomy to the community organizations involved. The expectations with respect to financial return would have to be reduced, with an emphasis instead on the effectiveness of the programs, at least during the early stages. You would have to evaluate partner organizations, such as the St Giles institute, to demonstrate that they have the capacity to scale sufficiently so that it isn't just a one-off example with no capacity to go to scale.

There would have to be a commitment to iterative learning by all partners from the experience, and a recognition that for many community organizations it's a real challenge to shift from a conventional community approach to the delivery of programs, an NGO approach, to the more business style of delivery, one that's metrics driven, that's required for these initiatives. I would argue that it's non-trivial for most community organizations to shift to those kinds of management metrics. There's a risk that the shift to a more managerial approach could undermine the effectiveness of the program.

My view is that one should avoid overstating the potential for these projects to attract private financial capital. In the short run the emphasis should be on effectiveness rather than on financial efficiency. If the federal or provincial governments sought to pursue this, they should recognize it's going to cost more money in the short term because reductions in reoffending rates don't translate into savings unless you're able to reduce the prison infrastructure. It's going to cost more money initially to try this with the goal of reducing the fiscal burden in the longer term. It would require real independence and independent investment to ensure there's sufficient room to try a pilot and experiment with these kinds of initiatives.

Those are my main comments.

[The Chair, Conservative, Daryl Kramp]

That's fine.

Mr. Broderick and Mr. Tansey, thank you very kindly for your candid and informative presentations.

We will now go to our rounds of questioning.

For the first seven minutes, we have the parliamentary secretary, Ms. James, please.

[Roxanne James, Conservative, Scarborough Centre, ON]

Thank you, Mr. Chair.

Welcome to both our witnesses.

I will have, hopefully, a few questions for both our witnesses, but I will start with Mr. Broderick who is here in the committee room.

You said social finance in Canada is just beginning to get organized. I think that's one of the reasons this committee is studying social finance: to learn a little more, to hear about some success stories, and maybe not success stories, from other countries.

You've mentioned a number of projects, and I wrote one down, the Aboriginal Mother Centre Society. Is that in B.C.?

[Andy Broderick]

It is. It's in the downtown eastside of Vancouver.

[Roxanne James, Conservative, Scarborough Centre, ON]

Okay. Is this financed through social finance?

[Andy Broderick]

No, it is not. They are looking to expand their program, financed through a social impact bond structure.

[Roxanne James, Conservative, Scarborough Centre, ON]

Okay. I think we've had other witnesses who indicated that the aboriginal community, sometimes youth at risk, and so forth, might benefit specifically from this type of social impact bonds, pay for performance, and so on.

I'm wondering what your comments are with regard to youth at risk, maybe focusing on the aboriginal community.

[Andy Broderick]

Again, my speciality is finance and real estate finance around social impact, around affordable housing, and social purpose real estate. That said, I'll have an opinion on this kind of intervention into indigenous communities.

The challenges around that population have been so profound, much like prisons, the opportunity for improvement...it's a great temptation to try a new approach. We see a lot of indigenous-led initiatives, including the BC Association of Aboriginal Friendship Centres, which I also mentioned.

I think the problem around youth at risk is it's a third rail in provincial politics. It can be a very difficult issue to talk about with any directness. I feel it's unlikely you'll see a major move in that area until the efficacy of social finance as a way to help solve some of these problems is proven, and then the comfort level will go up among those who are responsible for that very difficult portfolio.

[Roxanne James, Conservative, Scarborough Centre, ON]

Thank you.

Do you feel there are investors out there who are willing to invest capital to help, whether it be youth at risk or whatever communities across this country?

[Andy Broderick]

Yes, but I would agree with James that it's likely to be philanthropic capital, foundation funds.

[Roxanne James, Conservative, Scarborough Centre, ON]

You also mentioned something about social—I believe it was you, and I apologize if I have the wrong witness—that it's not necessarily the answer to everything. I'm not sure if those are the exact words you used. We've heard from other witnesses, and I agree it's not the only tool in the tool box, but it's something which I think that we as a government should be looking at.

Do you agree that it could be used as another tool in the tool box? I'm not saying the government is going to drop all our current funding for crime prevention. That's certainly not the idea here. We want to bring in new capital to expand on what we're already delivering on proven projects that are successful.

[Andy Broderick]

I would say fundamental to that is allowing the community providers who work in this sector the latitude to build their balance sheet and create the capital that will allow them, to use James's terms, the managerial approach, but will allow them to be comfortable managing capital for other people.

[Roxanne James, Conservative, Scarborough Centre, ON]

In your remarks—I was trying to write everything down—you talked about being cautious, and you were talking about Canada Revenue Agency and regulatory changes. Could you elaborate on that and explain exactly what you were talking about?

[Andy Broderick]

Yes. There is actually some paper being done for the G-8 meeting that I'd be happy to forward to you. It has a summary.

The two issues that are most obvious are, one, it's not clear that foundations can invest in limited partnerships, and many foundations that are the first actors in this area—again, to quote James, and I would agree—are stymied by that. Two, there is some ambiguity about whether non-profits can really build a balance sheet without suffering some additional scrutiny and tension with the CRA.

[Roxanne James, Conservative, Scarborough Centre, ON]

I'm going to direct my question to Dr. Tansey.

You were talking about the Peterborough program in the U.K. and the costs associated with that, and also the high success rate of that program. Could you explain that program a bit better to us, if you have that information on hand?

[Prof. James Tansey]

Yes, certainly.

[Roxanne James, Conservative, Scarborough Centre, ON]

Did they use pay for performance or an impact bond? How was social finance involved in that project?

[Prof. James Tansey]

It was called a social impact bond, but in many ways, as Andy said, it's more like a pay for performance model. Let me pull up my notes on that particular project.

It was an experiment that was started under the Labour government, and it's been running for a number of years. The focus of it was on supporting the St Giles Trust, which was already working in that space, and incentivizing them on a performance basis to reduce the reoffending rates.

The process started with support officers working with young offenders who were in prison for less than 12 months, and while they were still in prison, helping them to plan and to adjust to the time they'd be spending outside the prison: transitioning to housing once they left; getting engaged with the workforce; having coaching, support, and mentorship during that period. It's the younger end of the age spectrum of prisoners who are first-time offenders who have the highest chance of rehabilitation.

In terms of the costing, for that demographic typically the reoffending rate has been 75%, but for that younger demographic it had been as high as 90%. They worked with about 3,000 prisoners and were able to reduce that reoffending rate from 75% down to closer to 10%. The program officer cost around £49,000 a year. The prisoners who were in prison were costing the public purse £143,000 a year. So the 65% saving resulted in £4.7 million of savings in the course of the program.

[Roxanne James, Conservative, Scarborough Centre, ON]

Thank you very much for clarifying that. I had written down 65%, and I think you said £3.7 million in your opening remarks, but you said £4.7 million.

[Prof. James Tansey]

Yes, it's £4.7 million.