Human Resources Committee on March 12th, 2015

[The Chair, Conservative, Phil McColeman]

Welcome, ladies and gentlemen.

Before we move on to a continuation of our study and the witnesses today—we're still waiting for two witnesses to arrive but I do want to start the meeting on time—I'd like to inform the committee on a couple of fronts.

First of all, our travel proposal was presented to the liaison committee earlier this week and turned down by liaison. That's the bad news. The good news is that they asked if I could re-present with a less expensive version, which we had prepared, if you recall. Our clerk had provided us with an all-committee-members travel proposal that the committee voted to present and that I presented on behalf of the committee, but there was also a lesser version that would mean fewer committee members attending and a smaller budget. The feedback given to me at liaison was that I should come back with a lesser proposal and it might be looked upon differently.

So it will be the committee's decision, as to the direction they wish me to take on this. We will need to deal with this, along with three other items.

You may have heard that committees are going to be required to go paperless. We will have approximately 30 days with which to comply with that, so we need to have a discussion and prepare for that as a committee.

Secondly, I believe there are four motions from committee members that I'm aware of that we should deal with in committee business, and we also have to deal with the eternal flame project again. It's coming up for our discussion, our direction for that.

So those things said, I'm presenting them more for information at the start of today's meeting to let you know that those are the things that we will fit into the schedule on March 24, which is our first meeting back. I've asked our support people here to structure the meeting in such a way that we have a panel of witnesses and then ample time, perhaps up to an hour, to do our committee business.

Committee members, is there anyone here who would want to handle this differently than I'm proposing? Seeing none, then we'll proceed on that basis.

Again, good afternoon, ladies and gentlemen. Welcome to meeting 47 of the Standing Committee on Human Resources, Skills and Social Development and the Status of Persons with Disabilities. We're continuing today with our study entitled exploring the potential of social finance in Canada.

Today we have another split panel of expert witnesses to provide their testimony. In the first hour, from the Canadian Union of Public Employees, we have their national president. No, I've just been told he could not make it, so the national president will not be here, but we do have Ms. Margot Young, the senior research officer. I'm not sure I have the name of the second witness but I will get that shortly.

We also have appearing in person Mr. Andrew McNeill who is the national representative of the National Union of Public and General Employees, and moving back to the Canadian Union of Public Employees, the president's designate today is Ms. Rampure. Thanks very much.

Witnesses, each organization has up to 10 minutes to provide testimony.

So Mr. McNeill, please start us off, and then we'll move into questioning.

[Andrew McNeill, National Representative, National Union of Public and General Employees]

Thank you very much for the opportunity to speak to the committee today.

The National Union of Public and General Employees is a family of 11 component unions in every province except Quebec. NUPGE represents 340,000 people in nine provinces. Our members work in the public sector, the non-profit sector, and private sectors. The work our members do includes delivering public services of every kind to citizens in their home provinces.

We recognize that social finance has a very important role to play in investing in social enterprises and providing loans for community economic development. In fact, the labour movement has been engaged in social finance in the past. We also feel that social finance can be a much more effective tool for creating jobs than are many methods traditionally used.

What concerns NUPGE is the use of social finance to fund public services. While the intentions are good, the fear is that in practice it will become another way to privatize public services.

One of the misconceptions we see is that social finance is being viewed as free money, and all too often when we hear social finance discussed for public services, it's portrayed as a new source of revenue. What is ignored is the fact that while people investing in social finance are willing to accept a lower rate of return to accomplish social objectives, they still do expect some return on their investment, and the ways to use social finance to fund public services, such as social impact bonds, will add new costs to the delivery of public services.

Social impact bonds are the highest-profile method that's been suggested for using social finance to fund public services, so it’s worth looking at how they are likely to affect costs, quality, and accountability.

The first thing is that social impact bonds are an expensive way to borrow money. For example, the first social impact bond project in Peterborough, England, to reduce recidivism is expected to provide a rate of return of between 7.5% and 13% per year. Based on a survey by the MaRS Centre for Impact Investing and Deloitte Canada, expectations of potential investors in social impact bonds here in Canada are very similar. By contrast, the federal government was paying an average of 2.37% to borrow money in 2013-14, which is roughly a third of the minimum amount Peterborough social impact investors are likely to receive.

Social impact bonds are also going to require new layers of administration. First, there are the intermediary organizations that are required to find investors and to find an organization or business to deliver the service and oversee the service. The agreements under which social impact bonds operate are a second layer of administration.

A British Ministry of Justice review of the first social impact bond project described the process for setting up as time-consuming and analytically complex. It took 18 months to develop the Peterborough social impact bond. The first social impact bond in Massachusetts took 17 months for negotiations, so there seems to be a pattern.

The final administrative layer is the evaluation required to determine how the project has performed against the agreed-upon criteria.

Because many of the details of social impact bond agreements are not released, exact figures for costs are hard to find. There aren't precise costs out there. However, the Maryland Department of Legislative Services did a study a couple of years ago that looked at the cost of social impact bonds. They assumed a project the same size as the one in Peterborough, England, being run in Maryland. They estimated that the additional administrative layers needed for social impact bonds would push up costs by 22%. In other words, for the same service, 22% would be added to the cost by using social impact bonds.

The Maryland study also found that while social impact bonds are supposed to save money by funding programs to prevent social problems from occurring, the savings are far less than the costs. The researcher compared the savings to the costs and found that even in the most optimistic scenario, with the lowest possible level of costs and the highest possible results, costs would exceed savings.

At the same time that social impact bonds are being sold as a means to reduce the demand for public funds, we're also seeing a growing push to subsidize them, which seems contradictory. Among the subsidies that have been proposed are tax credits for people investing in social finance and funding for intermediary organizations running social impact bond projects.

Subsidizing the use of social finance for public services means that, in addition to paying the direct cost of the service, the public are being asked to pay a second time to basically subsidize the investors and to subsidize the organizations running the social impact bond projects. We've even seen instances of charities being asked to subsidize social impact bond projects in the United States.

Goldman Sachs, as has been widely reported, invested in social impact bond projects in the city of New York and the state of Utah. In both cases its investments were guaranteed by charities. In other words, if Goldman Sachs did not make a profit, it would be reimbursed by charities using money raised from charitable donations, which obviously would get a tax break. Goldman Sachs in 2013 reported net earnings of $8 billion. For charities to be guaranteeing the rate of return for a business earning $8 billion a year seems a little odd.

Another concern is the loss of accountability. Contracts for services funded through social impact bonds are rarely made public. In fact, as far as I know there has not been a single contract made public. The public cannot find out the details of the services being provided or the details of the costs. This means that the public has no way of knowing whether they are receiving the services they’re paying for.

There is also concern about the fact that the public could be paying out no matter what happens with the social impact bond project. In theory, under the social impact bonds governments are only supposed to be paying for services when the project meets the agreed-upon goals and achieves some reduction in problems or costs for the government. For several reasons, this is wildly optimistic.

The first one is that even if the service does achieve the agreed-upon outcomes, it is very likely that the savings will be less than the cost. Even if social impact bonds aren't as successful, governments are still likely to end up paying. Investors are only going to put money into projects when there is a good chance of making money. I don't think that's rocket science for anybody here. If the bar for success is set high, no one is going to invest, but if the bar for success isn't set high, then governments are going to be paying for projects in which very little has been achieved.

Minimizing risk also means that investors are going to be unwilling to fund innovations in service delivery. Under the model for social impact bonds, if the agreed-upon outcomes aren't achieved, investors lose their original investment. Again, it would be hard to find anybody who is willing to put money into a project if they feel it's likely that they're going to lose their original investment.

Contract negotiations also provide an opportunity to ensure that the project will be judged a success regardless of the outcome. For example, in the Peterborough social impact bond project, participants were self-selecting, which obviously is an advantage for project to cut recidivism.

A final concern is that profitability, not need, is going to determine who will get help. The first priority for social impact bond projects has to be making a profit. If the service does not appear profitable, investors won't be willing to fund it. The danger is that new or expanded public services, if they're dependent on investors willing to put in money, will exclude some of the most vulnerable people in our society.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

Now we'll move on to our second presenters.

Please proceed, for up to 10 minutes.

[Margot Young, Senior Research Officer, Canadian Union of Public Employees]

Hi, my name is Margot Young. I'm representing CUPE today, the Canadian Union of Public Employees. We have more than 630,000 members in the broader public sector. We have been following this issue as it started to emerge. That's why we are happy to share with you what we've learned so far.

From the stats we've done—and we have worked carefully with NUPGE, so you will probably see some similarities— social finance is like applying a venture capitalist model in the area of social, health, and educational service delivery. Unlike the case with bonds, there is a significant performance risk attached to the model. When and if projects fail on pre-agreed outcomes, investors stand to lose their initial investment. As Andrew pointed out, often those investors are the charities that have guaranteed them.

The government's role is effectively reduced to paying the cost when the contract terms are fulfilled. The model effectively outsources not only the service delivery but also key elements of policy development, implementation, and assessment. Even the measuring of what the objective is becomes outsourced. The financing of child care in the Utah case, for example, is tied to future performance of children in school and to reduced incarceration rates. That's how they say what the success is. But you can see that if you outsource the defining of what success is....

There has been a ton of literature to show you the importance of women's participation in the labour force and to show that it's good for labour, is good for the economy, and is a good anti-poverty measure for child care as well. But that is lost, if all you're measuring is a lower cost of education and lower incarceration rates.

Large private financers such as Goldman Sachs are excited by social finance. In a way, Goldman Sachs and the consulting companies have, I think, finally found a formula for making a profit out of public services.

Efficiency and profit generated out of social finance initiatives seem to be smoke and mirrors. The enterprises are set up at the beginning to skim off the people who are easier to treat and leave those who take more than minimal input to get help from the government; i.e., they cherry-pick their clients, the ones who are more likely to be successful. In the end, the government pays either way, because they are paying premiums for the company to do these outcomes for this group of people, but the government still has to serve the hard-to-serve people in the end. So, if you have a system of public services in which the government is providing the services, we would argue to keep it, because it works.

We are also very critical of the companies that are promoting it. The fact that financialization of public human services will make matters worse on the ground results in people making money on public programs that are supposed to be helping the most disadvantaged in society.

We find that the worst part of the social finance initiative is what is called the social impact bond. It was set up in 2008, during the recession, to get governments to delay paying for needed social services until some time in the future. It's a kind of cynical marriage of financial investor opportunism and governments that want to push the costs of the current year off the books.

Social impact bonds leverage private sector money to invest in social services with the promise that the government will pay them back in four or five years with a substantial return on their investment. These returns are up to 12%. There is one, the Newpin bond in Australia, that is paying 12% annually.

This tortured logic tries to tie up outdated and debunked notions that the private sector has something to offer in finding more efficient ways of delivering needed services. In fact, we would argue that there is a lot of innovation in the public sector and that the formula they are using to measure the success of the outcome actually curtails innovation, because they're using methods based on studies that have already been done that say if this happens, x will happen. They're tying that in as the measure.

These schemes aren't that innovative and they end up with the financialization of existing not-for-profit services. In Ontario in 2007 they did a study where they studied pay for performance. They used a municipal government and compared it with a private company service called JobsNow. In the study they made JobsNow use the same level-of-need clients as they did for the municipal services. All they found out in the end was that they had the exact same outcomes as municipal services, except it cost more. That's the pay-for-performance model and it does cost more.

We think this is like trying to apply this so-called innovative model to this, but there isn't a sexy way to deliver these much needed services. There might be more ways of innovating and of getting ideas, such as talking to the service participants, people who deliver the services, and policy-makers about those new ways, but applying this venture capital method to it is probably not the best way.

There are ways to include public service delivery, but this isn't it. Those marketing the social impact bonds routinely make the argument that only the private sector is innovative, but it's never documented. Those promoting SIBs base their arguments on a belief that market-driven decision-making is inherently superior to other approaches. By presenting the truth of these ideas as self-evident, and in the absence of supportive evidence, the case for SIBs becomes a faith-based exercise driven by ideology.

Our position is simple. Social finance will lead to fewer resources available for social and human services, a more fractured environment, and a reduced quality of services for the public.

Thank you.

[The Chair, Conservative, Phil McColeman]

Thank you for your testimony.

Now we'll move on to our first round of questioning, and we'll begin with Madam Groguhé.

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

Thank you, Mr. Chair.

First of all, I would like to welcome our witnesses and thank them for joining us today. Their remarks are very interesting although they are going in the opposite direction to what we have heard so far.

The witnesses seem to agree that social finance is not a cure-all in itself and that it is not the solution to all the social needs and challenges.

My first question is for Mr. McNeill.

The other witnesses who appeared before us said that the goal of social finance was not to replace public funding. Can you explain why you think social finance is a privatization of social programs and public services?

[Andrew McNeill]

Where social impact bonds have been proposed is in areas where there have been significant cuts to public funding. Public services are closed down and then social impact bonds are put forward to take their place. You see private finance replacing publicly offered services.

The first social impact bond in Saskatoon was for support for single mothers. Very similar services were offered by the Saskatoon Family Support Centre, which had been forced to close due to funding cuts.

The federal government is talking about using social finance for skills training. That comes after cuts to transfers to provinces for skills training.

In the U.K. cuts for vulnerable families were followed by proposals for social impact bonds.

Where those who say that social impact bonds don't replace public funding are completely correct is that the amount of money put into services under social impact bonds is a fraction of what is provided through public funding.

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

Okay, very well.

Furthermore, in your view, the presupposition that only the private sector can innovate is false. You also said that social finance reduces innovation capacity.

Could you tell me why?

[Andrew McNeill]

Essentially it's the fact that the people investing in social finance do need to make a profit. They need to meet targets to get payment on their investment. With that in mind, it's understandable that even if you're willing to accept a lower rate of return, you do have to make some profit. Social investors are going to choose projects that give them a good chance of making a profit. That's been the case. None of the social impact bond projects that have come forward so far have involved anything radically new that hasn't been tried elsewhere.

The other faulty assumption is that the government's been throwing money at problems, which is a phrase you also hear sometimes in various forms. In fact, the government's been clawing it back. If you look at the history of social transfers over the last 25 years, there have been drastic cuts to federal funding for social services.

To use one small example, in 1996, cuts introduced then removed $4 billion from social services in Canada. Some of the problems we're seeing today aren't the result of throwing money at problems; they're the result of clawing it back.

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

Clearly, in the topics and issues we have discussed in the committee, we have talked a great deal about accountability and transparency. You are saying that using social finance to fund social programs and public services could lead to transparency and accountability problems.

Could you elaborate on that?

[Andrew McNeill]

Certainly. The experience for our members, when other privatization schemes have been introduced, is that they don't know what level of service the private contractor is necessarily meant to be providing without the contract being made public. We also don't know how much we're paying for it. With that in mind, we don't know if we're getting value for money.

A few years ago the Ontario Health Coalition and a number of unions representing public health care workers, including not just the Ontario component OPSEU, were forced to take the Ontario government to court after it refused to release information about the William Osler Health Centre public-privatization partnership. What was found out in that court case, which had previously been kept secret, was that using a P3, or public-privatization scheme, cost over $300 million more than using public procurement would have. In other words, that was $300 million we didn't know about until we went to court to find out about it. Unfortunately, getting that information cost $100,000 in legal costs, which is why we haven't done it more often and why it's prohibitive for the individual citizen to get that information.

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

Thank you.

[The Chair, Conservative, Phil McColeman]

Before I move to Mr. Armstrong, I just want to remind committee members we're talking about social finance, which is completely different from P3s or other subject areas. Let's try to stay on topic when we ask questions.

Mr. Armstrong.

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

A comment, Mr. Chair—

[The Chair, Conservative, Phil McColeman]

Is it a point of order?

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

Yes.

[The Chair, Conservative, Phil McColeman]

Go ahead.

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

Mr. Chair, let me go back to what you said.

You mentioned private finance. The fact that we are bringing up the issue and that we are drawing a parallel to the public private partnerships seems to me to be completely in line with the topic we are discussing today. It allows us to better understand and shed some light on public finance and on where private capital is used. I think we need to draw the parallel. In this case, it is helping me better understand. If there is a difference, we will be better able to deal with it.

[The Chair, Conservative, Phil McColeman]

I am going to allow a lot of latitude in the questioning, and I did not stop you during your questioning. I'm reminding members that there are two different subject areas that have come forward here in the questioning so far, and I would like to stay with social finance because that's what our study's about. It's not about other types of financing of public services. I will stop members if I feel they go too far.

Mr. Armstrong.

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

Thank you, Mr. Chair. I want to thank our witnesses for being here today.

Mr. McNeill, you talked about the impact of private sector investment on social finance, and how somehow that damages the public sector side of things. You mentioned skills development money the provinces use to implement skills training, and I know some social finance projects talked about investing in skills training, supported by the private sector. You said there have been cuts by the federal government to the provinces. Our government, since 2006, has invested more and more money, particularly in skills training, particularly over the last couple of years.

I just wonder what you were referring to in your comments there.

[Andrew McNeill]

I was very specific, and that is that your government chose to redirect the funds, as governments can choose to do. It meant that some of the money was taken out of funding that had been given to provincial governments.

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

Can you be specific on that because that's not my understanding of the budgets of the last couple of years. Could you be specific on which federal transfer dollars have been redirected that were being transferred to the provinces?

[Andrew McNeill]

I did not bring the exact details because I took it to be universally understood. However, I think we're arguing about interpretation. I'd be happy to provide the information through the clerk, but I seem to recall some dispute between the provinces and the federal government over skills training money that was being redirected.

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

I think you may be referring to the negotiations that took place last year over the labour market agreement money, which was about a $500-million fund that flowed to the provinces for skills training. That money has been agreed on by both the provinces and the federal government and is still targeted to skills training. In fact, it's now referred to as the Canada job grant, which not only has that much money coming from the federal government to the provinces, it actually leverages private sector investment as well and it's all focused on skills training. In fact that fund you're referring to is still there. The provinces are still administering all those dollars, and in fact now those dollars are also being used to leverage more private sector investment. It's actually growing the pool of dollars.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

Mr. Chair, if you're going to rein in the NDP on following suit here, this isn't about—