Human Resources Committee on March 26th, 2015

[Dr. John Loxley]

No.

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

Okay.

To conclude, Mr. Loxley, I would like to ask one last question. Do you think that social finance could lead to transparency and accountability problems?

[Dr. John Loxley]

It most certainly could. The key would be to design things up front to minimize that. Those problems could hinge mainly on the indicators that are used. The choice of indicators and the social service agency will always try to take low-hanging fruit, the easier targets. The government might be interested in, and should be interested in, possibly more complex targets, so that would be one area.

In the other areas, the financial area should be reasonably straightforward, but it remains to be seen how these things evolve.

[The Chair, Conservative, Phil McColeman]

Thank you.

Mr. Eglinski.

[Jim Eglinski, Conservative, Yellowhead, AB]

I would like to thank the presenters for coming out today and for their presentations. I would like to start off with Ms. Van Ymeren.

During your presentation you mentioned that there was a need to custom tailor each specific situation. I just want to get that clarified and answered, then I would like to ask Mr. Loxley to follow up.

Are you saying that the funders, government or private, should negotiate each program individually, or can a one-size pattern be used to cover a variety of programs?

[Jamie Van Ymeren]

I think there are two different levels of tailoring that we'd be talking about here. One is that each jurisdiction that undertakes its outcomes models can put in place different types of support models that exist. As we've mentioned, we would link work centres, data labs, and those different support organizations that can exist in the ecosystem.

Secondly, especially for these larger social impact bonds, today each one is negotiated specifically to that issue, so there is a negotiation phase with investor service providers and government to hammer out those deals.

[Jim Eglinski, Conservative, Yellowhead, AB]

Mr. Loxley, do you agree with that? Would that be the proper way of doing it? I personally feel that would be very hard for the government to sit and negotiate with each one.

[Dr. John Loxley]

What we see in the U.K. is that, as it did with public-private sector partnerships, it set up a template. It set up a central agency that provides a template for the service agreements, and that would help smaller institutions in terms of legal fees and so on, but also it would ensure some comparability across the model and would help in the assessment of the model.

They have also recently set up a centralized database on unit costs in different areas in which SIBs are being implemented, so unit cost information on crime, education, skills, employment, fire, health, etc. The idea there is to avoid having to customize each project. You draw on this centralized data and make sure that it's consistent across projects.

At one level, as Jamie was saying, there has to be a certain level of customizing, simply because each situation may be slightly different, but obviously the U.K. approach is to standardize as much as possible.

[Jim Eglinski, Conservative, Yellowhead, AB]

Would that not set us up for accusations of favouritism, one group over another group, regardless of the circumstances?

[Dr. John Loxley]

Yes, there would be that possibility. I think that each project would have to be transparent in the sense that it would have to be published and would have to be justified, and if there are serious departures from the norm or from other projects, that would have to be highlighted and explained.

[Jim Eglinski, Conservative, Yellowhead, AB]

Thank you.

[The Chair, Conservative, Phil McColeman]

Thank you.

That pretty much brings us to the end of this round of questions.

I have a couple.

When we first began the study, we had government officials as our witnesses, and later we had others from the supply side, the Royal Bank and others. You can look at our witness list to understand this. I think it was pretty clear from the start the way many of those individuals from the supply side, not the demand side, viewed this as another option for financing in addition to what governments already do.

I come from a business background, in which you look at the need for working capital to do certain projects. Where does that money come from? I know many organizations in my riding are frustrated because they have no access to working capital from the government. They have a certain allotment to carry out programming. Year after year they find out far too late whether these funds are locked down for them, so they're always scrambling at the end.

In some ways, social financing augments those existing programs, which I think most of our witnesses envisage not stopping, not changing, and not being taken away, because the government is always trying to reduce the cost of delivery, but it is another vehicle.

I'm intricately involved in some organizations in my community that are totally frustrated in trying to get projects, such as housing for intellectually disabled individuals, off the ground.

In that context, can I have your comments on whether you think, going forward, that social financing is a useful vehicle to add to or augment what governments already do?

If the three of you would like to comment on that, we'll wrap up after that.

[Sunil Johal]

I can go first, and then maybe Jamie and Professor Loxley can follow.

Just very briefly, I agree with you. I think access to capital is an important consideration, and I think that's certainly to be promoted. That's something the government should be looking for, especially in fiscally constrained times such as we are in currently.

I would say that the other piece is the opportunity to drive innovation and take lessons from these social finance investors, whether foundations or others, and mainstream those back into government practice and public policy.

I think both of those are opportunities that are very important and that, if designed carefully, could offer significant benefits for the government, for citizens, and for everyone in the ecosystem.

[Jamie Van Ymeren]

I would also argue that they should augment what the government is already doing.

I would also like to point out, in the area of social impact bonds, that I think one of the original ideas was that they would work in areas where government was not already working. They're supposed to be taking areas that are currently not receiving public funding and testing out new interventions to see if they're effective. If they're effective, ideally they should continue through a more simple direct contracting method or through adoption into public policy.

[Dr. John Loxley]

If indeed social impact bonds are allowing for the implementation of projects that would not otherwise be implemented, then you can see an immediate additionality. That's not my reading of the projects that have been implemented so far.

Addressing recidivism is a government function. Reducing recidivism, reducing homelessness, and reducing the number of children in care are ongoing programs. It's difficult to argue for additionality. If the money coming in is from the private sector, it might well be additional. If it's coming in from the McConnell Foundation, it's coming out of another arm of the McConnell Foundation, and that money would have gone into social services one way or another.

So I think the question of additionality needs to be looked at very carefully.

[The Chair, Conservative, Phil McColeman]

Thank you very much for your comments, and thank you for taking the time to be our witnesses in this first hour.

We will take a break while we bring in our second group of witnesses.

[The Chair, Conservative, Phil McColeman]

Welcome back, ladies and gentlemen.

We are continuing our study to explore the potential of social finance in Canada.

Joining us now from Co-operatives and Mutuals Canada, we have Mr. Shawn Murphy, the government relations consultant. Joining us by way of video conference from Calgary, from the Canadian Alliance to End Homelessness, we have Mr. Tim Richter, the president and chief executive officer.

Welcome to you both.

Each of you will have up to 10 minutes. I will give you a one-minute warning if you're coming up to the 10-minute point, and ask you to wrap up.

Why don't we start with Mr. Murphy?

[Shawn Murphy, Government Relations Consultant, Co-operatives and Mutuals Canada]

Thank you very much, Mr. Chair, for the opportunity to be here today.

I will be speaking today on behalf of Co-operatives and Mutuals Canada, or CMC. CMC is the national body for co-ops and mutuals from across Canada. Our members are located in every province and serve urban and rural communities.

I wish to share with you today a few social financing models that co-ops are using and have been using for some time. As well, I want to highlight why we believe that cooperative businesses are the ideal model to promote and encourage social financing across the country. I also hope to build on what has already been discussed during your study on social financing.

Two financing models that I will be focusing on are social investment funds and pay-for-performance contracts.

Let me begin by saying that we believe that cooperatives have been providing social financing in one way or another since they began operating in Canada over a hundred years ago. The cooperative business model naturally lends itself to this sort of approach on a socially responsible level.

As many of you around the table already know, cooperatives are guided by seven internationally accepted principles that help shape their business decisions and governance, therefore setting them apart from other enterprises.

Out of these principles, the principle of member economic participation, is probably the one most closely related to social finance. People come together to form a co-op to fill a need, and they invest into it. It is not from government support or through donations. This is precisely the difference between not-for-profits and cooperatives. Cooperatives are about mutual self-help, unleashing the power of ownership to enable people to help themselves.

Let me give you an example to demonstrate how these principles help foster an environment that promotes social financing.

Let's begin by looking at social investment funds. Currently, we have several funds operating across the country. These funds are designed to serve a particular geographical region or a particular sector in the co-op movement.

[The Chair, Conservative, Phil McColeman]

Could I ask that you slow down just a bit? We have interpreters, and they have a need for less speed.

[Shawn Murphy]

Sure.

[The Chair, Conservative, Phil McColeman]

Thank you.

[Shawn Murphy]

Let me share with you an example of one of these funds. The Arctic Co-operative Development Fund was established in 1986 to provide financial services to cooperatives across Canada's Arctic. This is a self-managed fund of pooled financial resources, owned and controlled by the cooperative businesses accessing the capital. It started with an investment of $10 million and has grown to over $45 million today, and this almost exclusively in Inuit and Dene communities across the north.

Another example is the smaller Tenacity Works worker co-op fund. This is an investment fund whose purpose is to create new, and to expand existing, worker-owned cooperatives in all regions of Canada. The fund is owned and operated by the Canadian Worker Co-op Federation. Funds are used to invest in worker co-ops across Canada.

Both of these funds received financial assistance from the federal government in the beginning, and both have been important to meet the significant needs for financing in their respective sectors. However, these funds are too small and targeted too specifically to come close to meeting all of the needs for social financing in the co-operative movement in Canada. There is an enormous potential in the co-op sector to meet a wide variety of needs facing Canadians today, such as home care; housing, especially for seniors; business succession; renewable energy, and other areas. However, additional co-op-friendly capital is needed for this potential to be realized.

So with this in mind, the cooperative sector made the decision to launch a national cooperative development fund. Financed by the cooperatives and mutual sector, the Canadian Cooperative Investment Fund is designed to help cooperatives access capital they might not find elsewhere. It will be a fund that is knowledgeable about cooperatives and mandated to structure investments appropriate to cooperative principles and the role of capital in cooperatives.

The fund is a loan fund that will provide financing consistent with the co-ops' needs to leverage other financial institutions and government programs to provide the main portion of the capital. The fund will operate in a financially responsible manner that will generate adequate levels of savings and increase member equity over time.

The goal of the fund is not to replace or replicate any of the current financing sources within the co-op sector, or accessible to it. A group of investors made up of Vancity, The Co-operators, Assiniboine Credit Union, Affinity Credit Union, Connect First, Arctic Co-operatives Limited, the Canadian Worker Co-operative Federation, and Desjardins have already pledged $20 million.

The fact that our investors are ready to accept a very low rate of return on their investment to stimulate economic development is a clear indication of its social financing impact. So here we have an example of co-ops coming together to develop a fund to promote cooperative development in Canada that is also promoting social enterprises through a social financing model. These co-ops don't need to do this. And more importantly, these co-ops are not doing this to make a profit, but rather they are doing this guided by their co-operative principles.

I'm sure that many of you around the table will think that the idea of an investment fund that is funded by the co-op sector is a good idea. You are also probably thinking, if this fund is funded by the co-op sector, why should the federal government be involved? We think that the federal government has a role to play in putting capital to work alongside this investment, that neither side should be doing this alone but, rather, partnering to encourage this sort of investment.

The two previous funds are examples of where a modest investment by the government alongside the sector's contribution has established viable, long-lasting investment funds to help the members. We see the same promise with a national fund for all co-op sectors.

This is also the advantage of using the co-op model when leveraging social financing. Co-ops are driven by their members and serve their needs. The members have an invested stake in the co-op whether it is not-for-profit or for-profit. Remember, people coming together for a common reason form co-ops. Often it is because they are looking for a particular service that is not being offered by the private or public sector. That is why co-ops are often talked about as being part of the third sector. The members of the co-op drive the agenda and drive the innovation that creates the environments for social financing. Without your members, there is no need for social financing.

ln our view, the best matrix you could ever have to evaluate the success of a co-op is the members that have become involved and believe in the services provided.

Another social financing model that is currently being used is that of the pay-for-performance contracts. A wonderful example of this sort of model is le coop de services à domicile, or home care co-op model in Quebec. This is a very successful model, and the Quebec provincial government is very pleased with the results. These co-ops offer many services to seniors and people with disabilities, such as home care, house cleaning, personal assistance, aid with medication, and so on.

ln Quebec, the government established in 1997 the financial assistance program for domestic help. The goal of this program is to support the poorest clients. For example, a person with an income of $15,000 or less per year will have the right to assistance of $13 per hour for services rendered, while a person with an income of over $40,000 per year would receive a maximum of $4 per hour for services rendered. The goal is to allow people with less income to have access to quality services.

The home care co-ops are non-profit, multi-stakeholder co-ops. The client, the partners in the community, and the employees are all members, which means they are also shareholders. This approach helps keep the costs much lower than could be provided by the public or private sector.

This particular model benefits the provincial government because it provides cost-effective services across the province, but also because it can collect taxes through jobs that are otherwise often paid under the table.

Because of the flexibility of the cooperative model and the empowerment of the members, this cooperative model has become a leader in social services in Quebec. Here we see another example of how people are coming together to meet their common economic, social, and even cultural needs through a jointly owned and democratically controlled enterprise.

ln closing, I hope and trust that the committee will see the benefits of the cooperative model when considering its report. I have been able to touch only on a few examples today, but there are so many more great stories out there. As I have already said, social financing is not a new idea. Co-ops have been doing it all along. It is in our DNA.

Thank you, Mr. Chair.

[The Chair, Conservative, Phil McColeman]

Thank you, sir.

Now we move to Mr. Richter by video conference.

[Tim Richter, President and Chief Executive Officer, Canadian Alliance to End Homelessness]

Thank you, Mr. Chairman, and good afternoon. Thank you for this opportunity. I apologize that I couldn't join you in person.

I come to this conversation from the housing and homelessness arena and as someone who has been an affordable housing developer that has housed over 4,000 people in a range of housing first programs. I have experience in the private sector and a public company.

I'm a big supporter of both social finance and social enterprise, but would caution that neither are silver bullets. For the purposes of my testimony today, I'm going to focus on social finance and specifically on social impact bonds and social finance opportunities for affordable housing, in a similar vein to what Mr. Murphy just referred to.

I will start with the potential for social impact bonds in reducing homelessness, because these instruments have been the focus of a lot of talk and research in social finance circles. The Government of Canada recently shifted the homelessness partnering strategy to housing first, which I wholeheartedly and enthusiastically support. Housing first is a revolutionary and highly effective response to homelessness and is at the heart of province-wide homelessness reduction here in Alberta.

At first blush, housing first lends itself to social impact bonds. For these bonds to work or to make any financial sense for government, there has to be a cost savings or cost avoidance to share with investors. ln a recent national evaluation of housing first, the Mental Health Commission of Canada concluded that for every $10 invested in housing first, an average of $21.72 was saved. Results in Alberta have demonstrated that housing first participants have 85% fewer days in jail, 67% fewer days in hospital, and 61% fewer interactions with emergency medical services.

I would love social impact bonds to work at scale in Canada, but I am honestly sceptical about their application to homelessness for three reasons.

First, to generate a return, governments have to be prepared to monetize the savings and pay investors back their principal plus a modest return. For the most part, the savings generated in homelessness in most social services, especially in housing first, accrue to the provinces, which doesn't help the federal government, and getting provincial governments to monetize savings will be a challenge.

Second, there have to be capable intermediaries that can monitor performance, that have rigorous data systems in place, that can hold a portfolio of programs to manage risk and be capable of engaging with market investors, and there are very few of these in Canada today. The federal government could develop powerful intermediaries through various homelessness partnering strategies in the community entity structure, but they would have to completely transform and reinforce the role of those bodies and change how the HPS is administered.

Third, you must have skilled and capable agency partners that can deliver the outcome. Achieving the performance needed to achieve the returns is more easily said than done, and the level of accountability for outcome required is fairly new to the non-profit sector. I think it will come, perhaps in the next five years, but I don't think we are at a place where housing first is sufficiently mature to support social impact bonds.

SIBs, in my view, may be best employed for newer or emerging interventions or when an intervention is applied to a government system for the first time and where risk can be transferred to the investor. When it comes to proven interventions like housing first, the government would be better to focus on performance-based contracting, as the other gentleman referred to, where vou can create incentives for exceeding performance targets or penalties for falling short. That way you can drive improved performance and achieve cost savings without private equity at the same price.

To me social impact bonds can be a great tool for sparking innovation, but they aren't as valuable as scalable tools for resolving social issues. So in my mind, the key question for this committee is where can the federal government have the greatest impact? ln the housing and homelessness arena, my view is that you are best to focus on bricks and mortar.

Each year 235,000 Canadians experience homelessness, 35,000 on any given night. An estimated 1.5 million low-income Canadian households live in core housing need, and over 730,000 renter households in extreme housing need.

The rise of modern mass homelessness in Canada traces back to federal withdrawal from housing investment, including a 46% reduction in federal affordable housing investment over the last 25 years, despite a 30% growth in Canada's population. We have a very, very serious housing shortage in Canada. Markets do not create affordable housing, because there's little profit to be had. Further, there's limited market rental construction because there's much greater and faster profitability in home ownership.

There's an important opportunity for the federal government, at limited cost, to draw private equity into non-market and rental housing. This is an area of clear federal jurisdiction where I'd recommend focusing social finance efforts. Social finance opportunities in this space are really only limited to our creativity. Mr. Murphy gave a couple of good examples, but I'm going to give you three ideas.

First, make donations of land and buildings to non-profit or charitable organizations for the purpose of affordable housing tax deductible. We already do this for environmental conservation; we should apply these incentives to affordable housing.

Two, introduce a low-income housing tax credit. Essentially, a low-income housing tax credit is designed to give private equity investors reductions in federal income tax for dollars invested in qualifying affordable housing projects. Unlike most other incentives, the government would set a maximum amount of affordable housing tax credits awarded each year so you know in advance the cost because you've set the amount. The credits would be allocated to the provinces and territories based on CMHC's assessment of core housing need, and a provincial or territorial body would take applications and award them according to set criteria. The low-income housing tax credit has been in place in the United States for three decades and has created thousands of units of housing. We estimate that, with $150 million annual investment in these tax credits, over 4,800 units of housing per year could be created.

Third, I'd consider loan guarantees for non-profit housing bond issues. Today large private rental housing developers can go to market for financing. Large companies can get favourable financing because they're deemed good credit risks. Non-profits don't typically have the cash flow or asset depth to get low-cost financing in the same way that the private sector does. With a guarantee, non-profits could issue bonds and use their existing asset base as equity. This would actually be an excellent tool for redevelopment of old CMHC-funded social housing that is now largely mortgage-free on prime real estate in much of the country. You would also protect that social housing coming out of their federal agreements from being lost to private developers. With this approach to finance and federal guarantees on about $500 million in debt, likely through CMHC, you could create over $1.5 billion in housing investment, equating to about 8,000 units of new affordable housing at no cost to government.

There's a lot of really creative housing finance happening today in the United Kingdom. I'd encourage you, if you get a chance, to have a look at Orbit housing as one very good example. Similarly, the Regent Park redevelopment in Toronto was backed by the City of Toronto, allowing for much lower cost borrowing.

In conclusion, I'm a big fan of social finance and social enterprise, and I'd encourage the committee, when it comes to the housing and homelessness space, to act where the federal government can have the greatest impact in areas of clear federal jurisdiction, and that's in the creation of affordable rental housing.

At the end of the day, social finance alone will not be sufficient to alleviate Canada's housing crisis. Direct federal investment will eventually be required. We're estimating that for about $46 per Canadian, or about $1.7 billion a year in combined and direct investment in social finance strategies, we could virtually eliminate homelessness in Canada in 10 years.

Thank you.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

Now we move to our first round of questions.

Madam Morin.