Another tool that is available to governments is outcomes-based funding. This is a tool that can allow non-profits to gain access to investment capital that wouldn't otherwise be available. It can be used to improve outcomes across a range of social issue areas.
Our second recommendation is to establish one or more dedicated outcomes payment funds. This is something that was initiated in the U.K. Their Department for Work and Pensions, for example, has created a fund that identifies a set of youth employment outcomes that the government is willing to pay for. It set maximum prices that the government is willing to pay. This type of model can then allow the market to respond with innovative solutions. We think that has strong potential to be replicated in Canada across a range of different issue areas.
I'll explain this very briefly. I think probably the term “social impact bond” is one the committee is by now familiar with, but outcomes-based financing can take a variety of forms. It can take a more traditional bilateral agreement approach, where you have a pay-for-success contract between government and a service provider, or it can take the form of something like a social impact bond, where investors provide for the cashflow or working capital that non-profits may need in order to implement some type of intervention pending the achievement of outcomes, at which point the government can pay if, and only if, those outcomes are achieved.
Those are the basics of the model. I would just stress that it's a tool, it's not an end in itself. It tends to attract both accolades and criticism, but I think it's one other tool that governments can consider as part of their broader tool kit. It has some obvious attractions because of the ability of governments to shift risk to private investors and the access it can provide to non-profits to be able to attract capital and scale up interventions that have a strong evidence basis.
I'll move on to our third and fourth recommendations from this national advisory board process, which are more about creating an enabling environment for other actors to engage in social enterprise and impact investment activity. I should just note that we're using “impact investment” and “social finance” somewhat interchangeably.
Our third recommendation is for the government to enable charity and non-profit sector social enterprise activity. This is primarily about regulations and guidance that originate from the Income Tax Act, which we would view as being somewhat out of date. They don't take into account the value of these emergent trends of social entrepreneurship and impact investment. It's worth noting that non-profits and charities are key providers of social services, as I'm sure the committee is well aware. They also have a very significant economic impact, with a GDP contribution that is in excess of $100 billion. A number of non-profits and charities for several years have been taking more innovative approaches to generating revenue in order to make their services more sustainable and to grow those that are successful to scale.
One example is Habitat for Humanity's ReStore programs. They use the sale of used or end-of-line building materials as a source of core funding for the organization's charitable activities, which are focused on creating affordable housing for low-income families. Another example is Eva's Phoenix Print Shop here in Toronto, which employs at-risk youth. It uses revenue from the print shop to provide services to those youth, including their salaries.
There's a lot of really interesting activity happening in the sector, but the current legislation and regulations are inhibiting a lot of this activity. They are creating barriers that we don't see any reason for. In particular, we think that charities and a subset of non-profits that have clear public benefit objectives should be allowed to engage in any kind of business activity without fear of penalty. We further think that some of those activities should be tax-exempt and some should be subject to income tax in order to deal with potential concerns about unfair competitive advantage.
Our fourth and final recommendation is to unlock foundation capital for impact investing. This is an important area, because foundations in Canada manage about $45.5 billion in assets and they are only required to put about 3.5% of that per year into their granting activities, while the rest is invested for profit. There is a real opportunity here, and we're seeing a number of foundations increasingly interested in allocating at least a portion of their endowments towards impact investment.
Currently there's a range of different impact investment opportunities available to foundations, but a number of them are off-limits. We don't think there's any reason for this. It's really slowing down the ability of foundations to consider these new types of opportunities. One of these is that foundations currently face barriers to investment in limited partnerships. For private foundations, there's a strict prohibition on carrying on a business, and for other charities there are severe limitations on their ability to do so.
Because of the legal definition of a partnership, a foundation that invests in an LP is considered to be carrying on a business, so this is setting up what we would see as an unintended barrier to impact investment. It's important from the perspective of building Canada's impact investment marketplace, because a lot of these opportunities, in particular funds and in some cases social impact bonds, are structured as LPs.
The other element of this recommendation is that we think foundations should be allowed to invest, where there's alignment with their charitable objectives, at below-market rates in any kind of organization. It's important to recognize that a lot of impact investments could be considered prudent from traditional financial perspectives, but there are impact investments that have significant merit and that may be expected to return something less than market rate. For example, we have seen some interesting cases in which tranched investing has been used in order to leverage more traditional or risk-averse investors on the backs of a foundation or other investors who are willing to take a first-loss position. An example of this is the Gates foundation in the U.S., which has taken first-loss positions in order to leverage in capital from other investors in the areas of early-stage drugs, vaccines, and health technology development. Their objective in doing that is to accelerate the development of innovative solutions to health challenges that are affecting primarily low-income countries.
Just to close that off, I would note that this is the type of investment that can be used to complement granting. It certainly isn't a replacement for it. In many cases, it would also provide a financial return allowing for a recycling of capital into further opportunities that would stimulate social impacts.
I'll conclude by saying that we think the federal government has a potentially very valuable role to play, both in catalyzing the marketplace and in attracting new capital into that marketplace, as well as in creating a more enabling environment for other actors to engage in these types of partnerships. Similar to the case of venture capital for business start-ups, this can provide very necessary financing to test and implement innovative approaches to address a vast array of social challenges the country is facing. It can also be used to put an outcome-focused lens in place to help demonstrate which of these approaches work best.
To round that off, I think as a leader in Canada's impact investment market, the federal government could accelerate its growth, driving the development and implementation of initiatives designed to improve social and economic outcomes for individuals and communities.
I'd be happy to answer any more specific questions you may have about that report or about the marketplace more broadly.