Thank you for this opportunity.
I believe that the speakers in prior sessions have talked about social finance at large, social enterprise, social impact bonds, and how to unlock capital for foundations, and so forth. All those topics are very important and are very promising, but I will perhaps take the discussion in a slightly different direction.
At Social Capital Partners, we often ask ourselves how we can engage the mainstream, the private sector, in social finance and social impact. What are some win-win scenarios and models that would motivate scaled private sector players to improve our society while not compromising their financial return? The answers to these questions might unlock the biggest opportunity for scaled impact and return on taxpayer dollars.
I will tell you about a concrete model from a practitioner's perspective that we've been working on, but the point that I want to make is that we believe that there are many more opportunities to engage with the private sector if we think creatively about this emerging field of social finance.
But first, I will tell you briefly about Social Capital Partners. We are a non-profit started by philanthropist Bill Young, who was a member of the Canadian social finance task force that has been referenced in prior sessions. We have been immersed in the social finance field for about 14 years and we started off investing in and helping to start social enterprises.
After five years we learned that social enterprises can have a real social impact while mostly financed by earned revenue, but they are difficult to scale, because start-ups are hard and even harder with this double bottom-line focus of financial return and social impact.
We realized that we could only do one deal a year, since we had to dig into the business model and ensure that there was a sustainable revenue model. That is the point at which we turned our attention towards the private sector and already-scaled business models. We provided attractive financing to entrepreneurs who wanted to buy or grow a franchise location like a Mr. Lube or Boston Pizza. In return for receiving our money, the entrepreneur committed to hiring a portion of its staff from community service providers like YMCA and Goodwill, etc.
We tied our financial return to our social impact, so for every hire they made, the interest rates on the loan went down by x percentage. Today we have an investment portfolio of about 80 businesses and, on average, 25% of the total staff in each business are employees who are hired through our program. These employees might have a disability or be new to the country or are youth at risk.
We play the intermediary role between the entrepreneurs and organizations like YMCA to make sure that job seeker matches are successful from the perspective of both parties. A couple of the original hires we helped place have now risen through the ranks and we think that they will soon be in a position to open their own franchise. We would, of course, be delighted to provide the financing.
We proved this model works from an impact perspective but also financially. Our portfolio yields return rates of 7% and our default rate is 2.4%. We asked ourselves, now what? How do we grow our portfolio from 80 loans to 10,000 loans? We said, imagine if the banks would provide this social finance product in all of their branches. Imagine if the banks would offer their standard loan product of, for example, prime plus 2% but customers have the opportunity to lower that interest rate by half a percentage per hire they make through a community hiring program. You might ask who is covering the cost of the interest rate reduction? I will answer that in a second.
We did some modelling together with Deloitte, and if you take someone off social assistance or some other government support, depending on the population groups and the support systems, and put them into employment, on average the government has saved about $6,000 per person after six months of employment.
Compare that to the cost of lowering the interest rate half a percentage on a typical $200,000 loan, a cost of about $3,000. We believe that there is a clear business case for government to cover the cost of the interest rate reduction of half a percentage per hire when the savings are twice the amount compared to the cost. The interest rate reduction will only take effect once the hire has has been employed for six months, so there is very little risk involved for the government. It's a straight pay-for-outcome model, leveraging components of a social impact bond—which I know you've had presentations on in the past—but minimizes the complexity that comes with the structure of a social impact bond.
We presented this to the Ontario Ministry of Economic Development, Employment and Infrastructure and they want to pilot this. We have engaged the banks over the last few months, and we actually had a design workshop yesterday for what the pilot could look like with three banks that have shown interest in being part of this. We're doing the same with credit unions in a couple of weeks.
Looking at the opportunity—and I'm not here to pitch this, but to make a point—with 10,000 loans, Deloitte estimates net savings to the government of about $140 million, 40,000 roles being filled by vulnerable persons, up to 2% interest rate reduction for employees, and the hiring support provided by community agencies and selected financial institutions being able to provide lower interest rate loans compared to its competitors to help drive social impact. We believe this is a compelling picture, but the point that I want to make is that, when you start to engage the private sector players in win-win scenarios, you can get to scaled social impact quickly.
I think there are a number of exciting trends and models emerging and, when they intersect and converge, we could see some very interesting results. The models that I'm thinking of are social finance, shared value promoted by Michael Porter, collective impact, innovation labs, nudge, and behavioural insight theories. In fact I think the White House announced last week a nudge unit similar to the nudge unit in the U.K. government.
We don't have time to go into all this, but to me the bottom line is that it is all about changing behaviour, encouraging new ways of working, and involving new players. In our experience we are changing the behaviour of employers to hire people with disabilities, new Canadians, at risk youth, etc. through providing a fairly inexpensive nudge in the form of an interest rate reduction and through leveraging the distribution channels of the banks and credit unions to go from engaging 80 employers to 10,000 employers.
Lastly, along these lines we think it would be very, very interesting to explore already existing government programs aimed at the private sector and add a social twist to it. One example is the Canada small business financing program. The government is essentially guaranteeing up to 80% of the loan provided by financial institutions to small and medium-sized organizations that the banks wouldn't necessarily otherwise provide loans to because they're too risky. Imagine if on top of that we add a social twist, whether it's hiring, it's environmental solar panels on the roof of the businesses, or what have you, we think that could be a very interesting model. There are many similar models like that and, again, looking into who they are and what that could look like would be very interesting.
Thank you.