Human Resources Committee on Feb. 24th, 2015

[Michael Toye, Executive Director, Canadian Community Economic Development Network]

Thank you, Mr. Chair.

Honourable members, thanks for the opportunity to present to you today.

I can appreciate that we're in the second week of your study. Social finance is a very big term. It can be hard, perhaps, to wrap your head around it, so I wanted to share my time with one of our members, the Ottawa Community Loan Fund, who are some of the front-line people doing the work on the ground and having a real impact on people's lives. I'm going to talk about some high-level recommendations, and then I'll pass things over to Michael Oster.

My organization, the Canadian Community Economic Development Network, is a national association of community groups like the Ottawa Community Loan Fund working on integrated approaches to economic and social development in their communities. We have several hundred members in every province and territory.

We, like I think everyone on the panel here today, represent the demand side of social finance, not the investors or the suppliers or the intermediaries. We've come on the demand side in your study. We represent the community groups, social enterprises, cooperatives, and others delivering programs and services to improve socio-economic conditions in their communities. We try to cross sectors because we see that economic and social problems are connected and that addressing the symptoms alone isn't sufficient.

Mr. Butt mentioned earlier that we need to focus on the social goal, and we would agree entirely that this is the point.

Our members face many challenges in their daily work, but access to sources of capital tailored to their needs is one of the major obstacles to having more proven practices. Social finance emerged partly as a solution to this demand.

However, outside Quebec, Canada is lagging behind the U.K. and the U.S. We have five recommendations to help us catch up. They are included in the documents we circulated. As Mr. Mayes said earlier, the focus is on the federal government's role. I will also say a few words about each one of them.

First, in terms of stimulating investment, as we have seen with the Government of Ontario and as the experience of the Chantier de l'économie sociale Trust has shown us, if the government is ready to invest venture capital, that could be a lever for private investors, institutions and foundations.

In terms of the regulatory or programmatic changes to support social enterprise, we would urge you to build on what is already working.

As Cathy just said, there are many smaller examples and models that have demonstrated success. One of those is Nova Scotia's Community Economic Development Investment Funds. Over just the last 15 years, 48 CEDIFs have mobilized 7,500 investors—local individuals in their communities who want to put their savings into something of local benefit—and have generated more than $56 million in investments. Numerous other funds could be scaled to extend investment and development opportunities to communities across Canada.

Some of our members would suggest that the new pay-for-success models and performance-based contracts have received some disproportionate attention in the social finance debate to date. You've already heard from witnesses that they can't replace government funding, and that they have somewhat limited application in the broad spectrum of community services. In situations where they're appropriate, they have some tremendous advantages. But they are not a panacea, so in your report I would encourage you to keep them in perspective with respect to the broad range of tools that are available for social finance.

As the supply of social finance capital grows, the capacity of non-profits, charities, and blended value businesses will also need to be bolstered to grow the demand. Stephen Huddart earlier mentioned the lack of available product for investment. Wayne Chiu also mentioned the need to develop the capacity of the social sector.

In particular, non-profit social enterprises and cooperatives should have equal access to existing government-supported business development tools—here, I'm repeating Cathy's very good advice—including business-skilled capacity development opportunities. These are existing programs; they wouldn't cost any more money and would provide very powerful capacity-building supports.

Finally, as my final recommendation with respect to Ms. Sims' earlier question, whatever government undertakes, I would emphasize that the most important element is the way that it's done. It needs to be a collaborative model in partnership with private sector institutions and community groups, because a social finance approach recognizes that no one sector can tackle these challenges on its own.

We would commend Employment and Social Development Canada for having created a round table of stakeholders to do just that and we encourage its continuation as the social finance landscape evolves.

I'll now pass things over to Michael.

[Michael Oster, President, Ottawa Community Loan Fund]

Thank you, Michael.

Mr. Chairman,

Thank you for the opportunity to offer my perspective to the standing committee. I'm very pleased to support CCEDNet, ONN, and other witnesses from the social services sector.

Mike has asked me to spend a few minutes providing successful examples of social finance and to update you on Ontario's social enterprise demonstration fund.

I anticipate that this committee is already familiar with the Canadian task force on social finance hosted at MaRS and their reports from December 2010 and December 2011. I'll merely state my broad support for their recommendations such as: dealing with mission-related investments by foundations; that the federal government, with partners including provinces, should establish the Canada impact investment fund; recommendations dealing with the establishment of a tax working group; and that social enterprise, as Mike has already stated, be made eligible for government-sponsored business development programs for small and medium enterprises.

Using Wikipedia:

Social finance is an approach to managing money which delivers a social dividend and an economic return.... Social finance includes community investing, microfinance—

such as what my organization has done for 15 years,

social impact bonds—

and we provided submissions to the Ontario Securities Commission, to HRSDC, and others.

It also deals with “sustainable business, and social enterprise lending” that we're about to become leaders in.

Social finance also includes:

Outcome-based philanthropic grantmaking and program-related investments, sometimes referred to as venture philanthropy....

My first example of social finance is the dozen or more community loan funds across Canada, including OCLF-FECO, Fonds d'emprunt communautaire d'Ottawa, which I have led since fall 2011 after I retired from the private sector. Established in 2000, OCLF has arranged almost 300 loans and almost $3 million in accessible loan capital to borrowers who cannot secure bank financing but have the character and aspiration that merits our support. With our help, our borrowers have improved their lives, reduced their dependence on social services and the public purse, are employing themselves and others, or have secured improved employment.

These social benefits and others have been measured by the Carleton Centre for Community Innovation, among others.

As a second example, OCLF received an impact investment of $57,000 in 2012 through Community Foundation Ottawa. With leveraged funding from Citizenship and Immigration Canada and the Ontario Trillium Foundation, we launched a new program called immigrant partner programs. We created new credit in Canada workshops, thus contributing to financial literacy in Ottawa. We have delivered the workshop in 13 months to over 700 immigrants. Of those surveyed, 45% have taken one or more tangible steps to improve their credit score and credit behaviour such as paying credit card bills on time, avoiding payday loans, reducing the number of credit cards, and in some cases starting to use a credit card which, when properly used, will establish a credit score to enable a bank loan in the future for an apartment or a home or a car or a business investment.

Already, 26 immigrants have taken loans from OCLF in the last year, and we forecast another 50 such loans in 2015. That $57,000 impact investment is bringing significant social benefits and more and better jobs. It is liberating immigrant talent to address skills shortages, and is improving service levels for our community while reducing the strain on social services. And all of that can be measured.

My third example is one that we're developing under the working title of social finance sustainable capital fund. We envision impact and other investments to build a capital pool of $1 million, with annual injections of $100,000 to fund operations, including occasional loan losses. We have already attracted community investment from Community Foundation of Ottawa, United Way Ottawa and others, matched by the Ontario Office for Social Enterprise, to provide services and financing to startup and early-stage social enterprise.

Due to the success of our immigrant partner programs, we forecast needing additional capital by mid-2015, which a new task force of our board is actively pursuing. One option is a community bond that would reward training partners for enhanced levels of job creation for immigrants and other marginalized residents of Canada and of Ottawa, and federal support would be most welcomed.

The other topic I was asked to speak on is the social enterprise demonstration fund, hosted by the Ontario government's office for social enterprise in the Ministry of Economic Development, Employment and Infrastructure.

[The Chair, Conservative, Phil McColeman]

I'm sorry, sir. You'll have to wrap it up in the next 30 seconds or so, please.

[Michael Oster]

Okay.

Last Thursday, Premier Kathleen Wynne announced the 11 winning projects, including ours, which will share $4 million over two years and attract another $6 million of private investment. We're very pleased to be leading this consortium to support social enterprises which could be for profit, non-profit, and cooperative, consistent with Ontario's strategy.

In closing, thank you again to the committee for your keen interest in social finance and I wish you Godspeed as you craft your recommendations, so vital for increased prosperity across Canada.

Merci bien.

[The Chair, Conservative, Phil McColeman]

Thank you, sir.

Now we have Mr. Charest.

[Jacques Charest, President, CAP Finance, Le Réseau de la finance solidaire et responsable]

Thank you, Mr. Chair.

Thank you for inviting me to testify before the committee.

I am Jacques Charest, president of CAP Finance, the Réseau de la finance solidaire et responsable. This network seeks to promote solidarity finance and development capital in Quebec. In my day job, I am the executive director of the Chantier de l'économie sociale Trust, which is an investment fund created specifically for social economy enterprises. I will tell you about that briefly at the end of my presentation. However, I will try to be as quick as possible so that the members of the committee have time to ask me questions.

What is CAP Finance? CAP Finance was created a few years ago, around 2010. It includes the vast majority of financial institutions and funding agencies providing responsible finance in Quebec.

What is responsible finance? The first thing is to determine what we are talking about when we say social finance, responsible finance, development capital, and so on. For our part, we distinguish between development capital and social finance.

Development capital is when financial institutions provide pure venture capital, but with specific socio-economic goals. They clearly want a return on the investment, but they also want to create jobs and contribute to regional and local development. It is governed by associations. The job creation we are talking about is local.

Let's now talk about solidarity finance, which is the focus of our discussion. Solidarity finance attracts financial institutions, non-profit organizations, financial cooperatives and credit unions that invest almost exclusively in social economy enterprises and in local or community development. Their mandate is to provide, among other things, funding and new investment tools to social economy enterprises.

Our organization includes almost all the players. I will not list them here because it would take too much time, but you can see them in our document.

In 2013, together with Professor Margie Mendell and her team, CAP Finance commissioned a study on the subject because the data were insufficient. We wanted to know what the situation was in Quebec and what all the stakeholders in Quebec had invested in development capital and responsible finance.

Let's look at what we call responsible placement. I am not talking about direct business investment, but the purchase of responsible financial products, responsible funds, ethical funds, and so on. In 2010, responsible placement was at $161 billion. In 2013, it was at $274 billion. Responsible investing was at $13 billion in 2010 and $18 billion in 2013.

Let's now look at the assets of the responsible investment component. In Quebec, development capital investment is $17 billion. In 2013, investment in solidarity-based finance, meaning in social economy enterprises and in local development, was $1.4 billion, which is a 40% increase over 2010.

The market is there and there are investments. However, they must be done right. Work needs to be done on both the supply side and the demand side. Being able to invest to such an extent is the result of working on both supply and demand. You need intermediaries for investment funds. We will later talk about possible solutions for the government in this area. It is important to have stakeholders on the ground to work on the supply side just as much as on the demand side of the financing in order to avoid having very good products but no businesses, or the other way around.

So the situation has really gone from placement to investment in businesses. In terms of social finance, it is important to distinguish between what we could refer to as private businesses and non-profit organizations, or collective businesses. One is not better than the other; it is a choice people make. We chose the collective businesses, social economy enterprises, but it is important to make that distinction because not all of them need the same financial tools.

Those in the private sector are quite present. When we want to connect with social economy enterprises, we need to keep a few differences in mind. We need to see what type of financing is possible. We need to see it as a big picture. This is not about meeting the needs of one or the other, but to consider the needs that are specific to each clientele.

How could the Government of Canada contribute to this? I will talk about its contribution to the trust later.

As was mentioned before, it is important to support the intermediaries in the market, either through specialized or central funds, through a fund that could sustain other funds or through credit enhancement funds. The question is whether we need those subsidies. That is the case in some instances. Are we talking about first losses or loan guarantees? That might be the case, but these are solutions that we need to consider to figure out how to facilitate the development of social finance in Quebec.

In addition, we need to make development capital accessible to our stakeholders, meaning the institutional funds, workers' funds, retirement funds, pension funds or foundations and reduce barriers to investment. Mr. Huddart actually referred to that. On our end, we are working with businesses and funds. However, there are problems and barriers, simply because people cannot invest in a limited partnership. So we must try to get around that.

As Cathy Taylor mentioned earlier, the easiest way is if we consider ourselves businesses and cover all the products and investment support measures intended for private businesses. We often see programs that are for businesses in category 1. Why are they not for NPOs or cooperatives? It's because that's the way things are. There are also programs for the capital and the shares of a company, but since there are none for social economy enterprises, we must find an equivalent.

As I mentioned earlier, in some cases, we should establish mixed structures. We should determine how laws can be amended to include joint ventures. We are talking about either type B businesses or fixed assets. We need to see how a third or a fourth type of business can be included and make sure that we are really talking about social finance and social enterprise. Whether they are for-profit or incorporated, fixed assets must remain with the companies.

There are some solutions I would like to mention. I can share two projects with you accepting that I may be talking about my own businesses. The fact remains that they are a fine example.

The Chantier de l'économie sociale Trust was founded at the beginning of 2007 with the help of a government subsidy. Its capital is at $53 million. Initially, the federal government granted a subsidy of about $20 million, which enabled us to obtain $30 million in investments and loans from workers' funds and the Government of Quebec. With that, since 2007, we have been able to invest $45 million in 127 businesses in Quebec. That has generated nearly 2,500 jobs, 400 entry-level jobs and $265 million in investments. In addition, based on our plan, those numbers will double over 15 years. So we are talking about one subsidy that helped get the movement off the ground and added a great deal to the trust. We have made investments across Quebec.

Finally, as one last example, I will tell you about one of our current projects. We have created a fund for NPOs involved in housing to help with renovations. That is under the federal program. Our project is geared toward those who need help to make it to the end of the first mortgage, but who don't have enough money to afford the cost increases. So we have worked with our partners, private investors and tax-advantaged funds. The goal was to raise $31 million and to loan the money to those people, based on the formula that worked for them.

In this case, the arrangements with CMHC work very well. We need to make sure that these new types of financial products are valid as programs and allow us to invest.

With a $31-million project, we will be able to renovate 1,200 housing units. In this case, one program just needed to be changed. In terms of housing, mortgage is not always the best financing option.

[The Chair, Conservative, Phil McColeman]

Could we have you wrap up, sir? We are over the time.

[Jacques Charest]

Thank you very much.

[The Chair, Conservative, Phil McColeman]

Thank you so much. I thought that might be an appropriate point because you had given us the example.

I'm going to limit the time to three minutes per question. We're probably going to have a chance for just one round.

The votes are at 5:45, so they will be 30-minute bells, not the 15-minute bells that I mentioned.

Madam Morin.

[Marie-Claude Morin, NDP, Saint-Hyacinthe—Bagot, QC]

Thank you, Mr. Chair.

I will break the ice by asking the first question on a technicality. It is for Mrs. Taylor.

For information purposes, what do you mean exactly by the term “hybrid business”.

[Cathy Taylor]

That's an excellent question.

In Ontario and in other jurisdictions there is a sense that we need a new type of organization that's not a non-profit and not a business, but somewhere in the middle, one that provides a social purpose of some sort but can also make a profit. That's called a hybrid. In the United States, they can be called “B corporations”. You might have heard that expression. “Social purpose businesses” is another expression. At the end of the day, they can generate a profit, but they also have a social impact.

Some businesses would like to do that, especially with the new generation of young people wanting to start up businesses, who are interested in having a social purpose as well as making some money. Non-profits are limited as to how much revenue they can generate, so it's sort of in the middle.

[Marie-Claude Morin, NDP, Saint-Hyacinthe—Bagot, QC]

Thank you.

You also talked about the negative impact of the Income Tax Act for you. Can you elaborate on that?

[Cathy Taylor]

The Income Tax Act, especially as it relates to the not-for-profit sector, hasn't been updated in decades. One of the things in the Income Tax Act that the Canada Revenue Agency has been looking at, through a project called the non-profit risk identification project, is that the Income Tax Act doesn't allow non-profits to have any revenue, or profit, or a surplus of any sort.

When they say “any”, they mean none. They mean zero, so it's really difficult as a non-profit. We're of course encouraged to have balanced budgets. We can't generate a profit, but if we have a social enterprise, if we're providing training, for example, for young people with disabilities and there is a fee for that or there are charges for that, and at the end of the year we have extra revenue above what we expended, that should go into the next year's budget to reinvest into the service. There are some technicalities around whether we are allowed to do that or not.

[Marie-Claude Morin, NDP, Saint-Hyacinthe—Bagot, QC]

Thank you very much.

Mrs. Taylor, just like Mr. Charest, you suggested that we allow social economy enterprises to have access to the same programs as small and medium-sized businesses. Are you not afraid that we are overlooking the specificity of a social economy enterprise and that we are treating it as an SME when they are different?

[The Chair, Conservative, Phil McColeman]

Could we have a very quick response from one person only?

[Jacques Charest]

A social economy enterprise or a cooperative can carry out research and development. So why can't it have access to those tax credits? Cooperatives are often for-profit. They are collective property but they are for-profit. Why can't they have access to tax credits? Since they don't have access to them, the only way for them to balance things out is by applying for a grant. We tell them to apply for grants. Their answer is that they want access to this type of tool and that they will use it in the same way the others do. They are businesses.

In terms of the social usefulness and what needs to be addressed, as in the case of start-up businesses, it is a different thing.

I am sorry, but I don't have enough time to say more about that.

[Marie-Claude Morin, NDP, Saint-Hyacinthe—Bagot, QC]

Thank you very much, Mr. Charest.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

Mr. Boughen.

[Ray Boughen, Conservative, Palliser, SK]

Thanks, Chair.

Let me welcome our resource panel and say thanks a lot for being with us this afternoon.

Maybe Michael could handle a couple of questions that I have. One question is, can you walk us through with a little more detail on the social bond issues? The financing of the whole enterprise is of interest to me. As you walk us through that, maybe you can highlight why it is that as an investor you'd want to invest in this particular operation, given the fact that there are tons of different investments in the marketplace. What brings people to the point where they say, “I'm going to invest in social finance here”?

[Michael Toye]

I think in terms of the challenges around social impact bonds or pay-for-performance, my comment earlier about disproportionate attention is that they are a sexy new tool, so they get a lot of attention. But as you heard from earlier witnesses, the areas or the specific kinds of problems where they can be used are fairly limited. Not everything—social services or impacts that community groups do—can have measurable, short-term outcomes. So when we get into the types of interventions in the call groups, and the level of evaluation, the measurement, whether it's randomized, controlled trials that you need to actually demonstrate an impact, there's a huge evaluation cost that can be built in. I think that's one of the advantages in situations where they work.

A social impact bond is just about the only way I can think of that would actually resource the level of evaluation that would actually test the difference. But then, even if it demonstrates success—from what I understand some foundations in the U.S. are questioning—it becomes a recipe for that intervention. It's not always transferable to different environments, to every reality in different jurisdictions.

The other challenge is often the cost savings accrued don't go to one department. They might go to multiple departments, multiple levels of government. So having to bring together a number of investors to create the bond is the work of an intermediary, and it's extremely complicated. From our perspective, there are a lot of smaller-scale, well-established, existing programs that could have a tremendous impact beyond the social impact bonds themselves.

Just to answer your last question quickly, as Mr. Huddart said earlier, there's actually a significant amount of philanthropic capital looking and wanting to do some good. We don't see the issue so much on the demand side. If we give them a safe placement, there's probably an interest. There's really more on the demand than finding the right investments.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

We're going to wrap it up now then because I'm sure the bells are going to start ringing very shortly.

I wanted to thank you all very much for taking your time to be here with us. This is a very exciting field. It's a very exciting time, I think, with some of the innovations we're seeing and some of the suggestions and ideas we're hearing from witnesses like yourselves. Thank you for your expertise here at the table today.

Ladies and gentlemen, we're adjourned.