Evidence of meeting #51 for Human Resources, Skills and Social Development and the Status of Persons with Disabilities in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was organizations.
A recording is available from Parliament.
Conservative
The Chair Conservative Phil McColeman
We put a revised proposal to the Liaison Committee. I'm happy to give you a copy of that. It was proportional to the representation on the committee.
Conservative
The Chair Conservative Phil McColeman
We will welcome our next witnesses. We're continuing our study to explore the potential of social financing in Canada.
Joining us now by way of video conference from Toronto and appearing as individuals, we have Ms. Meghan Joy, a doctor of philosophy candidate at Ryerson University; and Dr. John Shields, a full professor in the Department of Politics and Public Administration at Ryerson University.
Thank you for making yourselves available to be witnesses by video conference this afternoon. You will each have up to 10 minutes to present as an individual. If the video conference works appropriately, I'll give you a signal at one minute if you're approaching that 10-minute mark.
Ms. Joy, would you like to begin with your presentation?
Meghan Joy Doctor of Philosophy Candidate, Ryerson University, As an Individual
Absolutely. We're doing a joint presentation, so that works well. Of course, thank you for inviting us to be witnesses here today.
Our research in the area of social finance really focuses in on social impact bonds, or SIBs, which are a financial product or policy tool used to pool private sector investment to support social service projects with the attendant promise of a profit if the project meets pre-arranged outcome targets. I don't know if you've covered this already, but I'll briefly talk about how SIBs work.
Basically it begins with government identifying a social policy field where it would like to pay for particular outcomes. Internationally, SIBs have been popular in a variety of social policy domains. We've seen them in housing, employment, criminal justice, education, child care, and health care. Government then would typically contract an intermediary organization who manages the SIB project and actually prepares the bond instrument. It prepares the desired project results, the costs, the savings, as well as the rate of return to investors should the social project achieve those pre-arranged outcome targets. The intermediary would then issue the bond to private investors, who provide the upfront or the immediate project capital. This is where the social finance element, the impact investing element, comes in.
This capital would then be used by the intermediary to contract with social service agencies, who are then provided with that money up front to deliver a social service project over a relatively long timeframe, let's say three to seven years. If this service project meets the result target—if it's successful—government then pays the intermediary, who repays the bond to investors with the agreed rate of return. That's essentially how they work.
The first SIB project was implemented in the U.K. in 2010 in the area of criminal justice. This was called the Peterborough prison project. You may have heard of it. SIBs are now spreading very quickly across the globe. We're concerned that this is occurring in the absence of any real systematic evidence that SIBs actually save money, encourage socially innovative social projects, as well as enhance the quality of life for vulnerable individuals.
Our research thus far has really focused on or documented several reasons why we do need to be cautious about implementing SIBs or shifting to a wide-scale SIB model. What we'll do here today is just highlight what government should think about and be cautious about. There's more in our paper.
Primarily, and number one, SIBs are actually unlikely to reduce government administration and budgets even though they're claimed to do this. Government will have to pay for short-term overhead costs. That would include retraining for bureaucrats to gain new skills in market definition, program evaluation, partnership building, and payment-by-result or outcome contracting.
SIBs will also require the services of lawyers, accountants, as well as evaluators through project development, implementation, and payout. If not retained in-house, all of these components would be contracted off at an additional cost. There are democratic accountability implications there, as policy knowledge, expertise, and oversight are shifted away from the public sector. There are also concerns that details and cost information about services could be kept secret on the grounds of commercial interest. That's another concern. Governments, of course, are also going to have to pay in the long term for results, should they be achieved, but potentially at higher private sector interest rates than government would normally pay for its own financing. That's also another issue, that with SIBs, government will have to pay for more than just outcomes.
The second challenge is that to cover these extensive costs, financial experts have advised that a SIB contract would have to be worth about $20 million to $40 million to cover the costs. However, a study by Deloitte and MaRS has indicated that private investors in Canada are only willing to invest a total sum of $30 million to $40 million for SIB development, and would prefer a market rate of return between 5% and 15% on their investment. This sort of questions whether the private sector is willing to take on some of these risky socially innovative projects. It also merits further discussion on whether the expectation of a market rate of return should qualify as social finance.
Financial experts have also advised that governments will likely have to offer tax credits and capital guarantees to encourage more private sector investment. I think this is being looked at in the U.K. right now. Again, government will have to take on more risk, or share more risk with the private sector, with this SIB model.
A third challenge is that, given the financial risk associated with the SIB model, there is an incentive to focus on those service types and population groups most likely to succeed, which might not be the more complex cases. So there's a risk that with SIBs we might be ignoring the most vulnerable population groups, which also challenges the assumption that SIBs are about preventing complex kind of wicked policy problems.
A fourth challenge is that SIBs will likely require a new infrastructure of extensive government regulation. So SIBs do open up potential for collusive behaviour between project intermediaries, investors, and service providers. The Economist magazine, in an article in 2012 entitled “Playing with Fire”, claims that SIBs are not really all that different from the risky financial tools that precipitated the 2008 financial crisis. There are similar risks to private investors selling on their investments and sort of repackaging these assets. So we have to watch out for sort of overexposure, risk manufacturing, convolution, and a delay in government regulation and oversight.
These are all challenges, and John's going to continue with a few more.
Prof. John Shields Professor, Ryerson University, Department of Politics and Public Administration, As an Individual
A fifth area has to do with SIBs and program evaluation. The thing around program evaluation with SIBs is that it tends to be quite complex. This involves a lot of costs if it's going to be done right. In addition, there's often no guarantee that the results will be accurate.
Providing a meaningful evidence-based approach to results requires social experimentation methods in which at least 200 participants per year are randomly selected and are matched with an identical control group in order to try to determine what your actual results are and that they're accurate. SIBs required detailed population data on subject groups and control groups. Again, this is quite costly.
It's also difficult to know often whether the results that are attributed to the SIB approach itself are a result of what the SIB has done, whether it's the unique combination of the service interventions that are unique to the SIB, whether it's about more resources that are targeted to that particular service area, or whether it's due to another policy change that has occurred randomly in conjunction with the project.
It's interesting that, in the case of Peterborough Prison in the U.K., it turned out that the sample chosen there was not a random sample; it was actually volunteers. That had the effect of biasing the sample, so that one would expect more positive results from the way the sample was selected. In fact in the mid-term report, in terms of outcomes, what they found was that there had been very modest positive results, but this may have been due to sample bias, in large measure. Interestingly, in another case in the U.K., with a similar program around recidivism in the prison system, they actually came up with negative results. But that was also probably the result of other sorts of factors, because there was a tough-on-crime policy that was implemented around the same time in the U.K., which probably influenced the results of those outcomes. It's hard to sort of decipher what's going on with the results, which makes interpretation of the evaluation often very difficult.
The other thing I think that's worth noting here is that in the case of Peterborough, U.K., which is the first SIB project, as Meghan mentioned, it was cancelled and they moved towards a full sort of privatization model. There was never a full result in the case of that original SIB project, which is unfortunate.
A sixth area of concern is that SIB projects are risky for participating non-service providers to some degree as well. Non-profits do not have exclusive control over results, and a poor outcome could cause them the loss of their reputation. The reputation is the prime asset that a non-profit organization has, and that could cause them considerable problems if the project goes wrong for reasons out of their control. It could actually result in their going out of business and the loss of jobs and the loss of essential services they're providing to the communities they serve.
Non-profits are also at a disadvantage compared to private-sector competitors when bidding for an SIB contract, because they have limited access to capital and lack of financial track records of these kinds, because of some of the rules around their financing. The SIB tool is also quite biased towards the largest non-profits, as well as private social service providers. So probably, in the case of the non-profit sector, only the biggest non-profits could be involved with these. This, in part, is problematic because small non-profits are often the most innovative service providers because of their particularly close relationship to client groups, and especially vulnerable client groups in particular.
SIBs further distance the relationship between government and non-profit organizations because the relationship is now with the SIB intermediary. That limits the opportunity for non-profits to inform public policy based on their own grounded expertise. Some of that disconnect that might operate between SIBs and their connection to government and how it may inform policy and programming is another consideration one would want to take a look at.
In terms of concluding thoughts, SIBs are no panacea and should not be viewed as simply a replacement for public service provisions and grant-based program funding to the non-profit sector. Also, while there are potential advantages to SIBs, including a new emphasis on supporting non-profits design, quality of life outcome measures with their clients, as well as longer-term payments for non-profit service provisions that reduce some of the burden of the reporting requirements, these types of changes could also proceed without the transition to a SIB model. Some of the recommendations that were made by the blue ribbon commission on grants and contributions in 2006 point the way to some reforms here for the non-profit sector that don't involve a SIB model.
The non-profit sector has traditionally been run on principles and values of care that have served Canadians very well overall, and SIBs risk placing further pressure on the non-profit sector to market this type of provision, which as we've suggested has some dangers to it that one would want to be rather cautious with.
As a final comment, this is definitely a case of proceed with caution and let the evidence come in and see what the real costs and benefits of SIBs will be before jumping into it wholesale.
Thank you very much.
Conservative
The Chair Conservative Phil McColeman
Thank you for joining us and sharing your thoughts.
We will move on to our first set of questions, Ms. Ashton.
NDP
Niki Ashton NDP Churchill, MB
Thank you so much for your insightful presentation and for sharing some of the challenges when it comes to developing social finance in Canada, especially based on what's been happening in the U.K.
First, I wonder if you've seen in the U.K. experience that the government's eagerness to move ahead with social financing has been followed by an agenda of making cuts to funding and devolution of responsibility from the federal government.
Professor, Ryerson University, Department of Politics and Public Administration, As an Individual
SIBs were very much part of Big Society in the U.K., which was about downloading responsibilities onto local levels of government, cutting various types of social programs, and then expecting philanthropy, local governments, and non-profit organizations to fill some of those gaps. That was certainly part of the U.K. model, which was part of the SIBs agenda.
Niki Ashton NDP Churchill, MB
That's interesting, given what we've seen in our own country.
I'm quite familiar with the area of violence against women. We've seen record cuts to programming vis-à-vis women, whether for housing or women's shelters or advocacy. Time and time again we hear that certainly people on the front line dealing with violence against women, an issue that very much affects many of us in our country, are crippled by the lack of funding, the lack of long-term stability, and the obvious lack of government support.
Of course, who would invest in something like a women's shelter? Or who would invest in working with indigenous women who are marginalized in our communities? Who would invest in supporting health services for sex workers? We're looking through the lens of marginalized peoples in our society and asking if anybody would invest. Is it not the role of the government to invest and support folks, including those who are working on violence against women, to support survivors of violence as they go forward?
Doctor of Philosophy Candidate, Ryerson University, As an Individual
As I said, I think with the SIB model there is a risk of really focusing on the larger projects rather than on projects that meet niche needs for the most vulnerable populations, so focusing on more lucrative projects that investors can make money off of. I think what you're speaking to is a real risk.
Professor, Ryerson University, Department of Politics and Public Administration, As an Individual
I think as well that some of the challenges that non-profits have in terms of supporting their communities have to do with a lot of the current types of funding models that exist in all provinces and at the federal and local levels. These tend to be short-term types of financing, which very tightly control where spending can go.
All governments, of course, are dealing with budget deficits and challenges like that, but a lot could actually be done with existing dollars if we had better dollars, if the dollars could be more flexibly utilized, even if we didn't have more dollars. There are some ideas about models, like evergreen contracts that could provide longer-term stability into the model so that planning could be done for organizations and they could actually be more effective in terms of using the money that they're currently allocated.
Again, I would return to the blue ribbon panel, which has actually made some, I think, useful and interesting suggestions about those types of ideas.
Conservative
The Chair Conservative Phil McColeman
Thank you very much.
Now we move on to Mr. Butt for five minutes.
Conservative
Brad Butt Conservative Mississauga—Streetsville, ON
I want to thank our witnesses from Toronto for joining us via video conference today.
I was interested in Ms. Ashton's line of questioning. I guess she wasn't listening to the previous witness from The Honourable William G. Davis Centre for Families, who talked extensively about the work they're doing to support victims of domestic violence and about how they're actually collaborating through a very effective social enterprise network to provide direct services to women and children who are affected by domestic violence. I think we do know that there is a lot of excellent work going on across the country to support these women and their children in the very difficult situations they're in.
I have a question for our witnesses.
You've talked about the pros and cons of social impact bonds. Give me an example of one of the positive contributions social impact bonds have made. They can't all be bad. There have to be success stories out there that have worked, so tell me about a success story you're familiar with regarding how social impact bonds have actually benefited social good and social enterprise organizations, and have actually improved services in communities.
Professor, Ryerson University, Department of Politics and Public Administration, As an Individual
I think the reality is that we don't actually know yet, because there hasn't been a social impact bond that has gone through the full process.
The first one was in Peterborough, in the U.K., which was launched in 2010. These tend to be sort of longer-term types of projects, but unfortunately that one was cancelled in early 2014, so we don't actually have in place yet any completed SIBs that we can evaluate in terms of their effectiveness.
Conservative
Brad Butt Conservative Mississauga—Streetsville, ON
Then how do you make the assumption that these don't work?
Professor, Ryerson University, Department of Politics and Public Administration, As an Individual
I think what we're saying is that there are a number of challenges to them that we have to be aware of. We're just suggesting that one has to be I think very cautious in jumping on a bandwagon and saying that these are going to be a model that is going to provide solutions for problems.
I think some experimentation with them is probably warranted. There's a lot of government interest in them, and I think that's good, but we should not see these as being automatically successful. We actually don't know that yet, because we don't have evaluations on them.
Conservative
Brad Butt Conservative Mississauga—Streetsville, ON
Would you support the Government of Canada supporting—if this were one of the recommendations by the committee—a look at some pilot projects and perhaps looking at some way of supporting some of these ideas to see if they actually work? You're not throwing this under the bus and saying that it will never work under all circumstances.
You are supportive of the Government of Canada investigating whether or not these could have a positive impact in certain service delivery areas with certain organizations. Your testimony would be that we should, as the Government of Canada, look at possibly supporting these kinds of initiatives so that we can get that data to find out whether they're effective or not.
Professor, Ryerson University, Department of Politics and Public Administration, As an Individual
Yes, on a limited scale, I don't think that would be a bad thing to do, but again, with the cautions that I think we've pointed out here. I think you need to make the investments into the evaluation tools we're going to use to actually look at what the actual effects shall be.
Doctor of Philosophy Candidate, Ryerson University, As an Individual
Yes. In terms of studying them, I would also add qualitative studies with the service clients as well, to ask them about how this is perhaps improving quality of life and that sort of thing.
Conservative
Brad Butt Conservative Mississauga—Streetsville, ON
Yes, because I really believe that there is this fallacy out there that somehow social enterprise is there to completely replace the whole social safety net system that we have in the country. I don't think anybody at the table is suggesting that at all.
I think what we're looking at is whether there are there some additional new and innovative ways to look at ways.... We've heard from many witnesses who are doing some very extraordinary things, quite frankly, across the country. I don't think we should dampen their enthusiasm to look at other ways in which we can possibly deliver in communities the services that are important for people.
I think it's important in all of this testimony not to suggest that we are replacing the direct provision of government services through social enterprise. Social enterprise adds an additional option, an idea, and perhaps a success story in how we can help people across the country.
Thank you, Mr. Chair.
Conservative
The Chair Conservative Phil McColeman
Thank you very much. That wraps up our available time on that round of questioning.
We'll move on now to Mr. Cuzner.
Liberal
Rodger Cuzner Liberal Cape Breton—Canso, NS
Thanks very much, Mr. Chair.
I thank the witnesses for their presentation.
I want to pick up on a couple of cautionary notes that you shared, and certainly being cautious about governments seeing less upfront costs from program operations. Your comment was on being paid for outcomes and, really, how the government should be paying for more than outcomes as well. But governments have to be careful that they don't see this as being off-loaded, because the bill will come in. The waiter is going to come back to the table and present you with the bill. Do you want to comment on that?
The other thing I took from your testimony is that you believe there is a risk that the SIBs may be used in some program areas but that their ability to address really complex issues might be more limited than it would for some easy or lower-hanging fruit, I would think. Even with that, is there a risk of overcrowding the funding field for those types of initiatives?
Could you comment on those two aspects of what I drew from your testimony?
Doctor of Philosophy Candidate, Ryerson University, As an Individual
Yes. I think part of why governments are interested in SIBs in the first place is this idea, not of getting something for nothing, but that they should only pay for outcomes in the end.
I think the research out there that we've compiled and the literature that exists now show that there are short-term costs associated with creating the infrastructure to develop SIBs, including new skills for bureaucrats and additional costs for lawyers and accountants, as well as evaluation. I think John talked to how important that evaluation component is, because that's what triggers the repayment. Those are all costs that if not retained in-house would need to be contracted out. That's something that's often not talked about.
Also, of course, there are the long-term costs. Government will have to pay over the long term for these outcomes. There are actually two different types of SIB models. One is a frequency scheme, whereby investors would receive a repayment every year based on the results of that year. One is a binary scheme, where investors receive repayment at the end. There's a question as to when government would do that repayment process. Would it be at the end of the project or would it be over the course of the project? Anyway, government will have to pay for those results as well, and then the question is, would that be at higher private sector interest rates than government would normally pay for its own financing?
These are other elements that we need to thing about in terms of the costing.
Liberal
Rodger Cuzner Liberal Cape Breton—Canso, NS
Obviously, it's more suited to larger-scale projects as well, as opposed to....
Professor, Ryerson University, Department of Politics and Public Administration, As an Individual
Yes, absolutely.
