Human Resources Committee on Feb. 17th, 2015

[The Chair, Conservative, Phil McColeman]

Good afternoon, ladies and gentlemen. Committee members, welcome.

This is meeting number 42 of the Standing Committee on Human Resources, Skills and Social Development and the Status of Persons with Disabilities. Today we are embarking on a new study entitled “Exploring the Potential of Social Finance in Canada”.

To help us kick off our study, we are joined today by departmental officials. From the Department of Employment and Social Development, we have, first of all, Ms. Siobhan Harty, director general of the social policy directorate, strategic policy and research branch; and Mr. Blair McMurren, director of social innovation, strategic policy and research branch.

Thank you both for being here, Ms. Harty and Mr. McMurren.

We are quite flexible today. We've tentatively scheduled a one-hour meeting; however, I'm going to be flexible with the time and then we'll move into questioning.

I have one other note. We have to deal with a very short budget issue at the end of our meeting. When we've exhausted our questions, we'll move into that session.

Ms. Harty, please proceed.

[Siobhan Harty, Director General, Social Policy Directorate, Strategic Policy and Research Branch, Department of Employment and Social Development]

Thank you very much. It's a pleasure to be here this afternoon.

We distributed a PowerPoint presentation to you in both official languages. What I propose to do is to take you through it at a high level. I won't go through every slide. Then we can cover off some more topics in the question and answer period.

I'd like to start on slide 2 and provide you with a definition of social finance. This is particularly appropriate as you embark upon your study. Simply put, social finance is using money in ways that generate both social and financial returns. It's an approach that mobilizes multiple sources of capital to deliver a positive, measurable social outcome and an economic dividend.

Social finance provides opportunities to leverage additional investments and increase available dollars to develop, deliver, and scale up proven approaches that seek to address social and economic challenges in our communities. It includes new approaches to investing. It's often known as “impact investment”, so if you hear the term “social impact investment”, it is quite interchangeable with “social finance”. Impact investing has been described as actively placing capital in businesses and funds that generate social and/or environmental good, and at least a nominal principle to the investor.

Let me turn now to slide 3 and look at the question: why social finance? Why are countries like Canada, the U.K., the U.S., Australia, and others embarking upon social finance? In Canada the momentum to explore social finance came largely from the non-profit sector, and it was aided by the launch of the non-governmental Canadian Task Force on Social Finance, which published a report in 2010 and a subsequent follow-up report in 2011.

Despite Canada's strong safety net and community-specific programs, some groups continue to face complex social and economic challenges. Governments, community organizations, and private sector investors have come to recognize that they can't tackle these challenges alone. There is a desire to find new ways to do so through partnerships that address social challenges and that have proven resistant to traditional forms of social intervention.

A mature social finance marketplace—and we're seeing that develop in the U.K. and the U.S.—would unlock new sources of capital for community organizations. These are primarily from private foundations, and we have large ones in Canada and other sources. They provide a new avenue for socially conscious investing by the private sector—I also include foundations in the private sector—and realized savings for governments by efficiently allocating resources to complex social challenges.

In addition, social finance also requires rigorous use of metrics and evaluation to determine if expected outcomes have been met, thereby ensuring effective use of resources and accountability for the use of public funds.

Turning to slide 4, one thing to note about the marketplace for social finance or social impact investment is that it's a marketplace like any other marketplace. It will seem familiar to you if we can lay it out in those terms. In practice, the way markets work varies from country to country and sometimes, as we know in Canada, from region to region. Some players will have more than one role, or they are active in more than one side of the market.

As with other capital markets, the social finance marketplace is made up of three broad components. There is the supply side that provides the capital. There are a number of players that are active in this area, including foundations, financial institutions, and private investors, to name a few. There is the demand side that comes from a range of both non-profit and for-profit organizations that includes charities, non-profit organizations, social enterprises, cooperatives, and social purpose businesses. In the middle there are intermediaries, those agents that try to bring together the two sides of the market: supply and demand. These intermediaries work to facilitate deals by providing expertise for the development of the supply and demand side, and to enable the efficient growth of the overall market.

Some examples of intermediaries are presented in the PowerPoint presentation. Down at the bottom, I'd like to note that, as in any other market, you need to have a tax and regulatory environment—the role of government in shaping the overall market.

The size of the market in Canada is currently estimated to be approximately $2.2 billion. Some projections that were done by the MaRS Centre for Impact Investing suggest that it could grow to the range of $30 billion in approximately 10 years, if all parts of the market move forward together in an optimal situation.

Let us move to slide 5.

Here are some examples of organizations that supply capital for social finance. They are generally large investors, banks or other financial institutions and foundations.

Some of those organizations are looking to help grow the supply side for social finance in general or are using social finance investments in a specific social mission, such as aboriginal community development.

Slide 6 shows some examples of intermediaries that are fairly active on the Canadian scene. As noted before, these try to bring together the two sides of the market, but because the market is pretty small in Canada, as I noted earlier, some players play on all sides of the market right now. You find that some organizations, such as MaRS or Trico, are intermediaries, but Trico is a good example of one that also provides grants through a foundation.

Page 7 provides a few examples of organizations that need social funding to develop and expand innovative interventions or use social finance mechanisms to further their social mission. These are generally non-profit social enterprises or charity organizations.

Here we have examples of organizations operating on the demand side.

I'd like to turn now to slide 8 to take that image of the market with supply, demand, and the intermediaries and then just highlight for you some of the actions that are being taken by governments across the country. We have broken it down into two general areas of activity: rules and regulations—if you recall, I talked about that foundational piece that governments can provide by creating an enabling environment—and direct investment.

To highlight some areas of activity on the supply side, the Government of Saskatchewan is considering crowdfunding legislation. Crowdfunding is something that is quite common not only in Canada but in other countries. Saskatchewan is looking at whether the government has a role to play in regulating that kind of activity. We know that this can be a source of incredible funding, and it can be done very quickly to achieve different social missions.

As well, looking at the next column, “Directing Capital”, the Government of Nova Scotia has been looking at introducing an equity tax credit. On the demand side, the Government of British Columbia has introduced a community contribution company in the form of legislation. Recognizing that some of our traditional categories of corporations don't permit us to move forward in this area, it has tried to find a way in between traditional business and traditional charities.

Looking at direct investment, we already have a number of vehicles that supply social finance. A strong, well-established example in the province of Quebec is the Fiducie du Chantier de l’économie sociale; it is a big player. Also, to speak about my own department, we have been involved in a micro-loan project to look at helping recent immigrants achieve foreign credential recognition so that they can engage in their professional activity in Canada and be part of the labour market.

As well, for directing capital, I go back to the Province of Saskatchewan. They are noteworthy because they launched the first social impact bond in Canada. It's on a small scale, approximately $1 million, but it started that part of the market.

Finally, looking at capacity building, I will just note that in Canada there is a rich tapestry, I would say, of organizations at the local level that are already engaged in social purpose activities and mission-based activities. We name a few there.

Turning to slide 9, I said earlier that the market is starting to grow in Canada. It is nascent, but one important point to note as it moves forward is that it is not designed to replace government funding at all. It is very much complementary to government funding; it is additional to government funding. One of the purposes I noted earlier is to be able to leverage different sources of funding to address complex social challenges.

There's an assumption that by bringing new ideas and new sources of funding to the table, governments with their partners would be better placed to address complex social and economic challenges, but as they do so, some issues in the market would need to be looked at again. As with any other market, when you're trying to grow a venture capital market or another kind of market, you sometimes need to have various interventions, whether on the supply or the demand side, to grow it. We know that from other countries as well.

I will conclude concerning this slide by noting that social finance isn't necessarily suitable for every social issue or for every target population. As countries embark on this, they are looking to their vulnerable populations on various issues and to their partners in those spaces, asking whether an area is an appropriate one in which to consider social finance. The one advantage of social finance is that it allows you to take a more preventative approach, because it is something that needs to take place over the long term, and often with short-term funding you can't address things using a preventative approach.

Turning to slide 10, I've mentioned a few times that other countries are engaged in social finance. The leader among countries currently engaged is definitely the United Kingdom. They have taken a very active role in pioneering social finance domestically, but they didn't stop there. In 2013 they decided to use their presidency of the G-8, as it was at the time, to launch an international social impact investment task force made up of G-7 member states. I had the privilege of sitting on it as the Government of Canada representative, along with Tim Jackson from the MaRS Centre for Impact Investing.

We spent a year going around most G-7 countries and speaking with all the players in the market. Then we produced a report, which was published in September 2014. Actually, there is a series of reports. Canada as well published its own domestic report, as did other G-7 countries. All of those are available on a website.

So the U.K. is the leader, with the U.S. not far behind in doing different kinds of pay-for-performance schemes, as well as social impact bonds. Australia has launched social impact bonds. Other countries are looking at their legal and regulatory environments and asking whether there are some things they can do to finance the flow of different forms of capital into the market.

Let me conclude by recapping that this is a phenomenon that has emerged internationally. I would say it's another tool in the tool kit that governments can use to look at addressing social and economic challenges. But it's important that you take a partnership principle, because it's not governments acting alone: you have to engage with different sectors of society to be able to leverage innovation and new sources of capital. The federal government has started looking at the potential for social finance, but so have some provinces, Saskatchewan, B.C., Ontario, and Nova Scotia in particular. As we in the federal government look at various opportunities to move forward, we'll be taking our cue from what happens internationally and from the lessons learned from other countries.

Thank you.

[The Chair, Conservative, Phil McColeman]

Thank you, Ms. Harty. You might provide us with—I'm not sure they're in the documents we have—the link to the website for the reports of the panel which you mentioned during your remarks.

[Siobhan Harty]

Yes, absolutely.

[The Chair, Conservative, Phil McColeman]

I think it would be important for us to get access to those.

Our first round will be a seven-minute round. We'll start with Madam Groguhé.

[Sadia Groguhé, NDP, Saint-Lambert, QC]

Thank you, Mr. Chair.

I want to begin by thanking the witnesses for coming here to enlighten us on social finance.

I must admit that social finance is a new topic for me. When I did my research—my homework, if you will—I realized that there was still a lot of questioning about this new program. More specifically, I came across a Carleton University study where 150 Canadian community groups were surveyed. Three main conclusions emerged from this study, and I will share them with you.

First, community groups don't want to use social finance instruments because they do not have the required expertise or resources to do so.

Second, problems inherent to short-term contracts constitute barriers to the development of their activities.

Third, their activities develop better when they receive stable funding instead of project-based funding.

This study also states that, to attract investors, interest rates have to be provided. I would like to ask you a few questions about those rates, especially since the Rotterdam pilot project, which is mentioned in the Library of Parliament document, provides a 12% interest rate.

When it comes to projects funded in this way, I would like to know what percentage of the money is used to cover administration fees and interest rates.

[Siobhan Harty]

I'll start with the study from Carleton that you mentioned.

I found it interesting because there were three conclusions. One is that the groups weren't interested in social finance instruments per se because of the challenges of understanding them. That is valid. Other countries have set up capability funds. A good example is both the U.K. and the U.S. recognizing that this is a change and that to bring organizations along they would need to be able to provide them with assistance to understand this new market, but also how they can position themselves to function in this new market. The U.K. in particular has set up very generous funds, both through the government and through public foundations, to be able to provide that expertise to charities and not-for-profit organizations.

I think one reason that's important addresses the second and the third points from the study that you cited. It's true that a lot of organizations speak to the fact that short-term contracts are very difficult to manage and the financing that comes with them is not stable. They have to apply on a pretty frequent basis to get access to new grants or new funding. In fact, social finance wants to address that head on. Social finance wants to be able to move away from those short-term contracts. If you recall, in my presentation I said that one advantage is that you can deal in a preventative mould with issues, so you take a much longer perspective.

The first social impact bond that was launched in the U.K., the Peterborough pilot, is a seven-year project. It takes a much longer view. It's moving away from short-term contracts. At the same time, opening it up to other sources of funding it is designed to provide more financial stability for organizations. We know that in the charitable and not-for-profit sector they want to have more stable sources of financing. To apply for grants on an annual basis is very challenging, and you never know if you're going to get one. If you have an investor that's willing to provide you with patient capital to do something over a three-year, five-year, or seven-year horizon, that really helps an organization's business model, because it knows it's going to have multi-year funding as opposed to just annual funding. It's important to be able to get across that message because we hear the same thing from organizations.

[Sadia Groguhé, NDP, Saint-Lambert, QC]

If I have understood correctly, you feel that social finance addresses the very issue of long-term funding.

[Siobhan Harty]

Yes.

Your second point was about the interest rate and what percentage is devoted to administration and what is devoted to the actual rate of return. In the Rotterdam one, it was 12%. In the Peterborough one, I think it was 11% or 12%, and Blair can check. I think it was double digit.

What we see across different projects is that the rate varies. I'm afraid I couldn't tell you what part of it goes to the administration of the project. In most cases, that information might not be available publicly because it's in a contract, but we can certainly go back and look to see whether that was the case.

The rate of return varies. It varies depending on the risk associated with the project. If you're dealing with a risky population, an investor might want to say that the rate of return should be higher. If you're dealing with a proven intervention that has worked in multiple locations and now it's being scaled up, the rate of return might be lower because the risk is lower. But fundamentally what's important is that for each of these projects, that is something that needs to be negotiated among the partners.

[Sadia Groguhé, NDP, Saint-Lambert, QC]

If my understanding is correct, market forces are specifically applied to the social involvement of a non-profit organization or a company whose goal is to solve social issues.

Is that right?

[Siobhan Harty]

I would say, to a certain extent, because social interventions that are accomplished by non-profit organizations or charities don't have a market value. They don't have a market value. Part of it is looking at proven innovations and then asking what it would take for an organization that has a proven intervention, that has worked at a local level, say, in a community in Montreal, to scale that up to other parts of Montreal, or to use it in another part of the country, if that was appropriate. Often those not-for-profit organizations don't have the resources to be able to scale up or export a model they know has worked in a certain local situation because they don't have access to that kind of capital and they don't have access to that kind of grant.

If you have something that has worked for a small cohort, what would it take for it to work for a larger cohort and be able to address challenges on a broader scale?

[The Chair, Conservative, Phil McColeman]

Thank you.

Mr. Armstrong, you have seven minutes.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

I want to thank you for that high-level discussion as an introduction. I think that was very worthwhile. I'd like to try to bring it down now to a more ground-level look at this so that people on the committee can wrap their heads around this and what we're going to be seeing when we talk to other proponents who come forward over the next few weeks.

Maybe you can start with social impact bonds. Let's say that we have a social problem, for example, childhood obesity or literacy on first nations reserves. These are issues that have been resistant to projects that have tried to solve these problems. How could an organization that has been successful on one of those pilot projects use social impact bonds and social financing to try to solve that social issue on a much broader scale? What would they actually do as an organization using this method?

[Siobhan Harty]

It gets back a bit to what I was saying. An organization like that wants to be able to scale up its proven intervention but doesn't have the resources to do so. What we know from talking to charities and not-for-profits is that they don't have access to traditional forms of capital through going to a bank. It is not available because their social enterprise business model is not one that the traditional banking community necessarily understands, and so they are left with very few options. Grants are the usual ones.

Social finance provides an alternative form of funding. As I mentioned earlier, that funding can come from a private foundation. Some of the foundations that are engaged in looking at this in Canada are considering whether there are possibilities for them to make a loan, for instance, to that kind of organization. That is one form of social finance.

Another form that you mentioned is the social impact bond, which has an investment component. An organization—it could be a private foundation, or some financial institution such as RBC or TD that is more actively engaged in this space—would make an investment in that proven intervention, and they would get their money back from the market, if that intervention achieved predetermined outcomes.

What is important in any case and in the one you mentioned is that all the partners decide on what outcome is to be achieved. That changes things in the conversation, because currently we don't focus on outcomes all that much. We tend to focus on outputs or activities and don't often ask the question whether our programs are achieving certain outcomes. These could be, for instance, reducing high school drop-out rates, or they could be increasing literacy and essential skill levels, things that we know are going to help Canadians stay in the labour market or achieve a certain level of well-being.

Once those outcomes are decided, they become the target. Then, in the case of the social impact bond, which has a supply of capital and an intermediary managing the project, if the outcome is achieved by the service provider, the investor would get their capital back plus a certain risk premium.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Okay. If you were one of these operating organizations and had a program that you thought worked and that you wanted to ramp up, you would meet with your proponent from whom you are asking for money to be invested and would say that you believe you can improve, let's say, school readiness by having students enter at such and such a higher literacy score before they enter primary school.

We'll say it is RBC and that you are approaching them for an investment. Let's say that RBC invests a certain amount of money, and in five years, which is the length of the project, the goal is actually achieved and the literacy rate is raised by the targeted amount. How does RBC gain that money back? Can you explain that to everyone?

[Siobhan Harty]

The vehicle would have been the contract, which would have set out the terms among all the parties. If the outcome is achieved, then RBC would get back its capital, as I said, with the rate of return.

How do you know whether that outcome has been achieved? What we see in other social impact bonds is that there is a role for a third party evaluator to go in and do some measurement of it. We do evaluations right now, but we often don't do them for outcomes. In these cases, it's important to have an independent third party assess whether the outcome has been achieved. But along the way, there has to be data collection as well. As I said in the presentation, this is a very data rich environment. It's one that seeks to develop appropriate measures to see whether an intervention has met its target for outcomes, and it seeks a way to be able to evaluate whether that's the case. The advantage is that if you achieve the outcomes, but also if you don't, you have an evidence base that will allow you to determine whether to go forward with another similar project.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

From the government's perspective, it has seen a project that actually achieves the goal they contracted for, and in the long run it is going to save the taxpayers money because they're not going to make future interventions that are much more costly in that particular scenario and example. RBC is able to glean the money back that they have invested in the social project that has achieved its goal. The organization that coordinates this probably has an opportunity to implement its project on an even bigger scale, because now it has proven it has worked on a much broader target.

It's a win-win-win if they achieve their goal, and it's all based on the evaluation metrics you set up at the front end of the project. You can see why it would actually encourage private sector proponents to invest in these types of projects.

Am I right on that?

[Siobhan Harty]

Sorry, I didn't catch your last point.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

I'm saying it's a win-win-win. If other private sector investors can see that they're gaining this benefit from their social investments, you can see this actually growing. That's what we've seen in the U.K., and Australia in particular, is it not?

[Siobhan Harty]

Yes, it is.

That is correct in terms of the savings. I think that for a lot of the projects that are out there, we'll have to wait and see what the savings are. But this is something where the savings accrue over the medium to long term because you are making important investments in individuals. That's where that notion of patient capital comes in. But if you get it right, then you're not dealing with remedial social and labour market programs down the road.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Thank you.

[The Chair, Conservative, Phil McColeman]

Mr. Hsu, for seven minutes.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Thanks to our witnesses for coming in today.

I want to understand a little bit better some of the challenges in implementing social finance. In particular, you mentioned, Ms. Harty, that we need to have rigorous use of metrics and data collection, and that's the sort of thing that helps to provide the guarantees that we're getting real outcomes. I guess there's work involved in designing the metrics, but also in collecting the data, and having the capacity to collect and evaluate the data.

Are there challenges in our capacity to collect data and to rigorously evaluate metrics? Do we need to develop things? Is there a gap between Canada and other countries in that respect that we would need to fill in?

[Siobhan Harty]

I can't comment on the gap; I'm not a program evaluator. I don't really know what systems exist across different countries, so I can't comment on that. But the data collection does need to take place. In many cases we do it already.

A good example from my department is the homelessness partnering strategy where, in the context of moving to the current iteration of the program, we have worked with communities across the country to be able to collect data on the homeless population. It's something that we have put in place. It is really important for being able to understand whether we're hitting the mark in terms of being able to help the homeless population. I think that's a really strong example of how it can be done. When you recognize that there is a gap and you're trying to have an effective program intervention, you set up the process to be able to evaluate whether you are having that effective program intervention or not.

I think this is a trend we're seeing across many countries. In part, it's because we have the IT systems to do it now. Those capacities are there. It's something that we can do in partnership with other organizations. We already asked them to collect information. There are rich sources of information that are already available at the community level that are collected by the not-for-profit sector in the context of doing social interventions. It's a matter of working with them to be able to ensure that data is available in the right format to be able to evaluate.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Who pays for the data collection then? Is that part of the contract on the demand side that would provide...or maybe it's a third party that does the data collection.