Human Resources Committee on March 26th, 2015

[The Chair, Conservative, Phil McColeman]

Good afternoon, ladies and gentlemen, and welcome to the 49th meeting of the Standing Committee on Human Resources, Skills and Social Development and the Status of Persons with Disabilities. We're here today to continue our current study exploring the potential of social finance in Canada.

We're pleased to be joined by Mr. Sunil Johal, policy director of the Mowat Centre with the University of Toronto, and Ms. Jamie Van Ymeren, policy associate at the Mowat Centre, who are here to provide testimony in our first hour. Also joining us by way of video conference from Winnipeg, we have Mr. John Loxley, a professor in the department of economics at the University of Manitoba.

Welcome, everyone.

Each of the witnesses will have up to 10 minutes for a presentation. I will give a warning at approximately one minute left in the presentation.

Let's begin with our guests from the Mowat Centre.

[Sunil Johal, Policy Director, University of Toronto, Mowat Centre]

Good afternoon. My name is Sunil Johal and I am the policy director at the Mowat Centre in the School of Public Policy and Governance at the University of Toronto. Jamie Van Ymeren, a policy associate with Mowat's not-for-profit research hub, is with me. We'll be sharing our speaking allocation. We'd like to thank the committee for the opportunity to participate in today's meeting.

The Mowat Centre has conducted research on the challenges governments face in extending the use of outcomes-based funding and programming to complex delivery areas as well as social impact bonds and the experiences of the first wave of not-for-profit service providers who have been involved in them. Our remarks today will focus primarily on the enabling environment and supportive infrastructure that governments can have a key role in establishing to increase the likelihood of success for these initiatives.

As you’ve previously heard, the range of activities that fall under the umbrella of social finance is large and is often linked to the broader trend of outcomes-based funding and evaluation. While social finance initiatives seek to generate both social and financial returns, outcomes-based funding refers to contracting arrangements in which governments financially reward service providers or private investors for having a positive and sustained impact on the lives of service users.

Outcomes-based funding models can take a variety of forms, including payment by results contracts, social impact bonds, performance-based contracting, and performance incentive contracting, amongst others.

Interest in these models can be seen as part of a broader public sector reform agenda. Governments today are using a range of new tools to transform the delivery of front-line services. The result has been increased focus on directing resources to those programs and services that deliver the most positive social impacts.

You have already heard testimony on changes that could be made to enable investment from private foundations and to allow greater engagement from not-for-profits on the social enterprise and impact investment front. We would echo many of the previous recommendations made by foundations, not-for-profit witnesses, and impact investors drawing from the G-8 task force on social finance reports.

We would like to highlight some of the non-regulatory groundwork that governments must consider as they look at these new models. Social finance and outcomes-based funding models have enormous potential, but there are also risks of failure if they are implemented improperly. There must be a strong commitment to put in place the conditions for success. Three key areas require focus: better evidence, enhanced capacity, and finding the right mix of incentives.

First, governments should invest in better evidence and measurement to support promising opportunities for program innovation and support the long-term development of evidence-based policies. While social finance is often celebrated as a vehicle for promoting innovation and having positive social impact, the reality is that investment hinges on assurances of the achievability of outcomes targets.

To date, the evidence base available to governments, investors, and not-for-profits is patchwork at best. Evidence is stronger in some areas with traditions of rigorous evaluation, such as health, but remains weak in most other areas. A 2010 federal survey found that on average, departments devote just 0.08% of direct program expenditures to evaluation. Clarifying program objectives and gathering baseline data on program performance, communities, and populations is a necessary precondition to introducing these types of models.

This work must be done upfront. Too often, governments introduce impact evaluation at the same time they roll out outcomes-based funding approaches. Even in program areas where rigorous evaluation has taken place, it is not always readily available to all stakeholders who are involved in the process. Without this information, service providers can’t make informed decisions about successful interventions, and investors can’t make prudent financial choices.

Early experiences with social impact bonds and other investment models demonstrate that these new models require significant time and investment upfront, especially in the areas of data-matching, cost-calculations, and outcome metrics. Mining existing administrative systems and working with service providers to collect any additional data required will not only help governments evaluate the potential costs and effectiveness of their work but will also help streamline future negotiations.

I'll now turn it over to Jamie, who will speak to the other two areas we would like to highlight for you.

[Jamie Van Ymeren, Policy Associate, Mowat Centre]

Thank you, Sunil.

Our second recommendation is that governments must invest in the supportive infrastructure needed to build capacity among both public servants and service delivery organizations.

For not-for-profit organizations involved in complex arrangements, like social impact bonds, there is a need to further develop both financial and evaluation literacy and supports to ensure they're able to participate effectively in these processes. Service providers who have been involved in social impact bonds note that they represent a significant capacity challenge in financial and evaluation skills, but also on organizational resources. Consequently, smaller but more innovative partners in the not-for-profit sector may well have been excluded.

The committee has already heard examples of funds established elsewhere to make organizations impact ready. As well, independent “what works” institutes can play a valuable role in synthesizing and disseminating advice on proven interventions, and similarly, technical assistance labs can offer training, advice, or analytics to support impact evaluation. For example, the U.K. government is currently establishing a network of “what works” centres to offer advice in areas including education, crime reduction, early years intervention, and aging populations.

Governments will also need to examine their internal organizational capacities to enter into and implement outcomes-based funding schemes, developing supports where needed. Shortages of in-house evaluation specialists and lack of independent organizations that can offer advice on evidence-based interventions are challenges that many governments face.

Finally, there is a need to ensure that stakeholder and system incentives are aligned to ensure that models work for the public benefit. These new financing mechanisms involve many moving parts and are attempting to tackle complex, entrenched social issues. New funding models based on outcomes can only be effective if the incentives for all stakeholder groups, government, not-for-profit service delivery partners, investors, and clients are aligned.

For government, these models often engage multiple areas and orders of government and success depends on effective coordination. As a response to this issue, some jurisdictions are developing central outcome funds or joint investment agreements based on particular cases.

Failure to properly negotiate agreements is a significant risk that can lead to over- and underpayment, system-gaming, and non-cooperation among partners. These risks are particularly acute when outcomes models are introduced into poorly coordinated social support systems, where provider capacity is low, trust is lacking, roles poorly defined, and risk is unevenly distributed.

Creating the right conditions for negotiation and having all partners at the table is critical. There is a need to ensure that outcomes' metrics chosen reward real impact. Indicators that incentivize gaming and short-term outputs that do not serve as long-term proxies for impact are detrimental to the community, investors, providers, and policy-makers.

In conclusion, government has a key role to play in supporting social finance by promoting a strong, enabling environment. This includes establishing quality baseline information, strengthening internal and external stakeholder capacity, and establishing the right mix of incentives. These models are complex and to benefit the public, they must be accompanied by an equally strong commitment to making the changes needed for them to succeed.

Thank you.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

Now we move to Mr. Loxley by video conference. Sir, please give us your remarks.

[Dr. John Loxley, Professor, Department of Economics, University of Manitoba]

Thank you very much. I'm at a slight disadvantage in that I'm not fully aware of what you've covered in past hearings, but I will try to build on what I've heard.

My interest is in social impact bonds and their rationale. I think the appeal of social impact bonds is fairly straightforward for service delivery agencies, which if they're fortunate enough to participate, could have fairly guaranteed funding for the length of time of the so-called bond. There's also an appeal to the financing agencies because, if deliverables are met, then there is a rate of return to those financing agencies, whether they be social or private.

The key to government interest, I think, comes from a number of directions. One is that with fiscal austerity, governments are looking for alternative sources of funding. In the longer term, however, if social impact bonds are successful, the government will be on the hook to pay for five or seven years of services, so there are fiscal implications in providing that upfront. These have not yet been worked out in any great detail, to my knowledge, so there may be fiscal constraints in even entering into these agreements.

The real question to me is why government would not require performance of all the services it delivers, and why we need to enter into these fairly complicated arrangements, as we've heard, to achieve those savings and improvements in efficiency. My own approach is somewhat skeptical. I can see the attraction, especially to social service agencies. In terms of charitable foundations that are simply moving money from one approach to service delivery to another approach to service delivery, I don't believe there's any net increase in resources from doing that.

I think there are serious questions, as we've heard earlier today, about how you lay out the requirements for performance and get that right in terms of the incentive. I think that's probably the most important and difficult area, because savings can take many forms. They can take the form of additional revenue or they can take the form of reduced costs, and costs could be operating or overhead costs. These can be quite difficult to deal with.

I think the people who are skeptical of social impact bonds often argue that they could be used to undermine public sector employment and public sector wages, and they're quite cautious about that.

There's been a fairly slow start to the launch of the bonds. There may be between 30 and 60 globally; it is difficult to know how many. The last data I had put them at about 30 at the end of last year, with 30 in the works. That slow start, I think, points to a number of difficulties in terms of risks of financing and in terms of governments being able to successfully negotiate performance indicators.

So my conclusion would be that they make promises that are very attractive, especially to social service agencies, if they do deliver. They could be attractive to government. Many of those claims are made anyway by regular government spending. If you put money into early childhood intervention and you're successful, you save many times the money you've invested, whether or not you've used social impact bonds.

I would argue that the first priority should be improving the funding and delivery of services in and by the public sector, and that should be a priority over pursuing and creating enabling environments for social impact bonds.

Thank you.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

We'll move on to our questioning rounds and start with Madame Groguhé.

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

Thank you, Mr. Chair.

I would also like to thank the witnesses for being here this afternoon.

My first question is for Mr. Loxley.

In a 2013 study published by the Canadian Centre for Policy Alternatives, you identified the high cost of borrowing for the public sector as one of the risks of using social finance.

Do you think the financial risk related to using social impact bonds is assumed mainly by the public sector?

[Dr. John Loxley]

I think that in the early stages of social impact bonds, governments will be reluctant to see them fail. We've seen this in different parts of the world. There are guarantees in some cases, but not in all. But I think the model has so much backing in places like the United Kingdom that failure to meet bond requirements would be approached in a fairly delicate way. My suspicion is that supports would be put in place to make the model a success.

It's difficult to evaluate what's happened so far. There's some evidence of some success, but in cases like Peterborough, the first one, the whole thing was wrapped up far too early for it to be called a success.

Don't [Inaudible--Editor] if you don't make the target. You don't get paid, nominally, but I think that is a very simplistic way of looking at an experiment. Governments would tend to make them work.

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

Okay.

But, Mr. Loxley, how do you explain the high cost of public sector loans? Are there indicators that would allow us to know whether the cost of the loan will eventually be higher? How do you think we can set the parameters to determine these issues? And is it possible to do so?

[Dr. John Loxley]

They are being set. They vary from project to project and from funder to funder. Charitable foundations tend to require lower rates if they're successful—5% per annum to maybe 13%. The private sector funders—and in the U.S. you get several of these, and in Europe some of the more recent funders are private—the expectation is that they will be looking at much higher rates. The range of 20 to 30 is mentioned, but I have no direct evidence of that size of payment.

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

Right.

I have another question, and it's for Mr. Johal or Ms. Van Ymeren.

You said that the government should put in place an enabling environment. What does that mean exactly? Can you give us some recommendations on that?

[Sunil Johal]

In terms of a successful environment for these types of initiatives to take hold and prosper, which Professor Loxley has alluded to already, we're talking about impact investing and about governments wanting to invest in proven winners and scale those up. However, we need to know what we are doing currently. How much money are we spending? What are we spending that money on? What are the effects of that spending? If a new intervention is put in place, what are the effects of that new intervention? What are the outcomes of current initiatives? Can we measure the outcomes of these new initiatives that are important? We need that kind of data-gathering evidence. The second key part is building the capacity of all those involved in these initiatives. If we know that a certain initiative is successful at getting people back to work or reducing rates of recidivism, we want to make sure that information is shared with all service providers across the country so they can all take that intervention and implement it themselves. We don't want pockets of success that aren't connected across the country.

For us it's two simple things: one, it's better evidence of data; and two, it's sharing that information effectively.

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

You spoke about a new initiative. That is where we hope to go with social finance. However, there are still many questions that we, apparently, don't yet have answers to. How do we find those answers? The question to ask is whether we will get into social finance or not. You can answer my question later.

[The Chair, Conservative, Phil McColeman]

Time is up on that round. Perhaps you could answer that in subsequent rounds, if the opportunity presents itself.

We'll move on to Mr. Armstrong.

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

Thank you, Mr. Chair.

I want to thank our witnesses for being here.

Sunil and Jamie, in your 2014 report, you talk about how social impact bonds might not be appropriate for all of the different organizations delivering some of these social impacts. Can you drill down on that and say what type of organizations they are appropriate for and what ones you'd be a little more sceptical of?

[Jamie Van Ymeren]

As a caveat right upfront, each jurisdiction that has developed a SIB model has adapted it very much to their local circumstance. In that case, it's a little difficult to generalize about the outcomes of all of them at the same time.

To date, we've seen that, in general, contracts have been more successful with larger, more established not-for-profits. They're usually not-for-profits that have in-house evaluation and research teams or have the resources that they can bring to the financial or consultant capacity that they need to pursue the bond. The smaller organizations that have been successful in pursuing them have had a lot of help from intermediary organizations—those that have had a strong relationship with an intermediary organization, who can help beef up maybe their evaluation capacity, or whatever areas that they're short on going in, and those that have done a strong sweep of their strengths and weaknesses before going in.

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

From a federal perspective, if we were going to move in this direction, one of the recommendations you would probably support would be to make sure we have some baseline data testing so we can actually do a proper evaluation. But also we want the evaluation to probably be done in-house by the organization delivering this, because it's the one that is going to have the data. We have to provide some sort of training or some sort of profile that it can engage in before it actually starts to deliver some of these services.

[Jamie Van Ymeren]

Because these are often negotiated up front, one of the big challenges is making sure that the negotiation capacities are there in the first place. One of the recommendations we made in our paper was to provide resources to service delivery partners once the negotiation phase begins, to ensure that the providers are able to negotiate effectively and they're able to advocate for outcome metrics that work, not only for the organization, but also for investors and the government as well, making sure they work together.

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

Thank you.

Dr. Loxley, the Canadian Centre for Policy Alternatives published a paper in 2013 which identified that the elevated cost of borrowing for the public sector is a potential issue with social impact bonds. Just how would leveraging new sources of capital to fund social programs ultimately be more expensive for the government?

[Dr. John Loxley]

The way the bonds work is that, if they are successful, the government pays a premium. It pays a return anywhere between 5% and 30%. So in terms of ordinary costs of borrowing, clearly this would be higher than that. The rationale is that the government would be saving much more than that. My argument is that this should apply to most government programming anyway. I believe that this does add an extra cost to government, and it's one that could and should be avoided, if possible.

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

But if you're getting better outcomes and you're getting better delivery of service, wouldn't that indicate you should probably have to pay for that? Wouldn't it be cheaper for the government in the long run, if you were getting a better bang for your buck?

[Dr. John Loxley]

Yes, if that were in fact the case and if it couldn't be achieved in normal delivery of services, and I believe it can be.

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

What are the barriers to that actually happening now? What is the problem with the public sector delivering these when we're not getting the outcomes and we believe we can do better when we actually go for some sort of social finance?

[Dr. John Loxley]

I think there's a general presumption that things can be improved, without a great deal of evidence of that. Second, government often delivers through social service agencies anyway, and often very efficiently, but there's no baseline evidence of that. The general assumption and presumption behind social impact bonds is that there is incompetence and inefficiencies that can be improved, and this is the way to do it. I would challenge that.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

Mr. Cuzner, you have five minutes.