Public Safety Committee on May 29th, 2014

[The Chair, Conservative, Daryl Kramp]

You have another minute.

[Rick Norlock, Conservative, Northumberland—Quinte West, ON]

Okay, in a minute or so, why would governments want to deviate from the old, traditional way of trying to reduce crime, and why would we get involved in social finance anyway?

That's your business right now. That's what your interest is. Do a sales job on us. Tell us how you do that—as succinctly as you can.

[Denise Hearn]

First of all I would just mention that in no way do we think that social finance or SIBs will inherently replace the existing structure. They are simply meant to be an additional source of capital influx into the system, and they're a way to test new, innovative projects and ideas. If there's a service agency that already has a clear and consistent proven track record that is already funded primarily by the government, continue to do that. We in no way think it would be appropriate to insert a social impact bond there. If that particular organization that already has a proven track record is interested in scaling up their program, if they're interested in doing something new, innovative, slightly risky that they haven't tried before, where it's a more difficult population that they're entering into, working with, that is the space in which a social impact bond can be a great tool to take the risk away from government as they look to finance a new and innovative program.

[The Chair, Conservative, Daryl Kramp]

Thank you very much. Time is up.

Now Mr. Garrison, please, for seven minutes.

[Randall Garrison, NDP, Esquimalt—Juan de Fuca, BC]

Thank you, Mr. Chair.

Thank you to the witnesses for being here today. Again, I know you were in the room when I did my presentation on the priorities of this committee, and I still have.... Mr. Norlock likes to accuse this side of being ideological. Sometimes I feel that we have a sense that everything the government's doing in crime prevention is somehow a failure, when we have a dropping crime rate. And we will have some witnesses in next week, when we'll talk about the national crime prevention strategy and some of its successes. So I was very happy to hear you say that what you're looking to do is a supplement to what's already going on, and I think that's an important perspective to keep on the record.

My questions are about governance and accountability, and I'll tell you why with an example from my own community.

We just had a youth employment program that had been run for a long time by a group called Spectrum, which is a community non-profit, non-sectarian organization. They had to bid again for their contract, and they lost the bid to a faith-based organization, which is now providing services. We've already had questions in the community, because it's a faith-based organization that is not open to all members of the community.

I think that same thing applies when we come to the idea of social impact bonds that are done essentially by private—even if they're philanthropic—interests. What is the guarantee that they'll actually be open to serve all members of the community?

[Lars Boggild]

Part of that, certainly, is the public commissioning process. The social impact bond can't proceed without an agreement by a public commissioner to pay for outcomes. So there is that final check, at least, at some stage of accountability, in engaging the public sector.

But I think it's equally important to think about these tools, the social finance space, as being oriented very broadly to the efficient allocation of social investment toward impact. In the same way that the traditional capital markets are very good at efficiently allocating toward risk, this is thinking about effectiveness toward impact. So for given investors, say a foundation, that are interested perhaps in crime reduction, for their ability to actually use tools like social impact bonds, it's part of a portfolio across their operations that actually allows them to learn, to develop, and to create much more rigorous knowledge as to whether or not those interventions work, and if they ultimately do work, to actually recycle that capital back into things that actually work because of the outcome payments that occur. So it allows much more of a revolving activity toward what are more effective interventions.

[Denise Hearn]

Perhaps I could just add to that. I think one of the concerns people have is that the investors will have some sort of capability or jurisdiction over the actual implementation of programs such that they could influence with their personal preferences the delivery of these services.

That's not the case at all. We actually see one of our primary functions as an intermediary organization is to be the neutral party that is facilitating the agreements between those three stakeholder groups—the organization, the investors themselves, and the government. So because of the way the actual governance structure is set up, I think it would be difficult for private interests to influence the actual delivery of the services.

[Randall Garrison, NDP, Esquimalt—Juan de Fuca, BC]

But if you go back to the example I used from my community, we have programs that have moved to a space that is normally regarded as hostile by half the youth clients, because of their sexual orientation or other personal characteristics. So it's the very fact that the program had moved to a private space—even though I am not at all criticizing the operators of this new program yet, and they have made pledges that it would be open to all. But it doesn't appear open to all the clients because of the move to a private space from what was essentially a public space.

The other one we've had in our community is an organization that was largely first nations-run, which again did not have its funding renewed and the contract went to a private group to offer the same service. Their problem was that we've had years of working in the first nations community from a first nations perspective. I think the contract was shifted for an outcomes reason, saying they are looking for better outcomes, but what they are saying is being lost is the cultural sensitivity to the aboriginal programming that is not present in the private organization.

[Lars Boggild]

To briefly respond to that, what I would initially say is, when you think about that notion like a movement to a private space that is less inclusive, that ultimately that would likely result, in fact, in worse outcomes for at least some subset of the population, perhaps for those who didn't participate in this sort of programming.

So what tools like social impact bonds can do, if well designed—and that's a caveat, an “if”—is ensure that the measurement architecture, which is how things are evaluated for outcomes, take note of those factors. As an example, when we think about things like crime reduction, it is important to note the difference between high-frequency offenders—people who offend quite frequently—and those who may just have had their first offence. If something is done just on the basis of a binary measure—whether they committed crimes or not—you might just choose to work with those easiest-to-work-with offenders. That is the sort of cherry-picking concern. But if you can design it such that we actually address the frequency of offence, then we might actually have an incentive to drive outcomes toward those who are the hardest-to-treat populations.

Equally, as we think about issues of cultural sensitivity, that may be a driving factor in the lack of performance of these new funded programs. So having that orientation toward outcomes, performance, and effectiveness and actually learning frankly whether or not that is true—perhaps cultural sensitivity matters an incredible amount to your committee in particular—might be a tool, and social impact bonds might actually be a tool to develop that knowledge base in a very rigorous, credible way.

[The Chair, Conservative, Daryl Kramp]

You have half a minute.

[Randall Garrison, NDP, Esquimalt—Juan de Fuca, BC]

In the example I was just talking about, with the aboriginals, what the organization is saying, of course, is that they have worse outcomes because they deal with a more highly challenged population, with a history of residential schools and alcohol and drug abuse. They say they've been compared with all the other people who are operating and who are dealing with much less high-risk and much less difficult populations. That comes back to the concern, which you did address, about taking the low-hanging fruit or cherry-picking the easiest-served parts of the population so that you can more easily reduce your risk and increase success.

[The Chair, Conservative, Daryl Kramp]

Thank you very much, Mr. Garrison.

We will now go to Mrs. James, please, for seven minutes.

[Roxanne James, Conservative, Scarborough Centre, ON]

Thank you, Mr. Chair.

Thank you to both of our witnesses for appearing this afternoon.

I wanted to go back to something you talked about in your opening remarks. You clearly indicated that, based on certain performance outcomes, the government will pay a specific amount. I wanted to ask a question with regard to that. Could social impact bonds, for example, or any other type of finance, be scaled to the level of performance outcome? For example, a contract could be based on a certain percentage of crime prevention or reduced recidivism, but then, as you get better results, you actually would have a better return on investment. Is that something that's frequently used?

[Lars Boggild]

We see models where that is used and those where it's not. Generally speaking, the notion of having multiple thresholds, or even a kind of continuous form of performance payment, such that for each x%, you have x% of return, can be and have been used. So the short answer is yes. There are examples of that. There are also examples of where there is just a simple threshold. There are both and, as well, there are reasons to use both. Particularly when there might be very challenging populations, it may make sense to just have one defined threshold so that you can do due diligence against that.

[Roxanne James, Conservative, Scarborough Centre, ON]

So the return on investment could be based on the certain risk to a certain project or a group. Okay.

In your opening remarks, you also talked about your role as an intermediary, in that you engage with the non-profits to help them determine measurements that can be used for investors to take a look at. We talk about targets and making sure that we have desired results and so on. How do you, in your role, come up with tangible measurements for various projects? How do you determine what would be a successful project or not? Is it that there has to be some sort of an evidence-based history to this or is it something that you magically pull out of the hat?

[Lars Boggild]

It's certainly a balance of evidence. What we look at are cases where there tends to be a body of evidence—and ideally one that is growing—and an organization that has a culture of continuous performance improvement. However, that broader question around feasibility is something that we were actually very happy to address. We've produced documents on feasibility frameworks for social impact bonds in particular, and although we didn't actually bring them, I'd be happy to share them with the committee.

The idea is that the framework provides a lens through which we can assess the feasibility of these interventions and programs as potential social impact bonds, such that we know that the risk taken by an organization in going through this developmental effort—because it is risky for the social service sector as well—is worthwhile. We look for cases where there is that sort of culture. We also look for cases where there is a cost structure in place in the broader domain, such as crime prevention, frankly, where the positive individual and social outcomes—things like not reoffending—also align very strongly with a positive economic outcome and a lower cost to things like rehabilitation, as opposed to incarceration.

[Roxanne James, Conservative, Scarborough Centre, ON]

Thank you.

Another witness, I believe at our last committee on Tuesday, said that crime prevention should not be the sole responsibility of any government or RCMP or local police. Do you agree with that statement and the philosophy that crime prevention is more of a community-based thing that we can all help with?

[Denise Hearn]

I absolutely believe that it has to be a collaborative effort at all levels of society. Obviously when we're talking about social impact bonds as they relate to crime prevention, we are talking about very easily measurable indicators of a reduction in crime, as in a reduction of recidivism. Obviously, however, many of the community efforts will contribute to a reduction in crime. For example, we look at the emancipation of children from foster care who are coming out at 18 and 19 years old. The stats are abysmal when you look at the lack of support they have coming out of that system and then their interactions with justice and the likelihood of becoming homeless.

As we are looking at not only social impact bonds, but social finance initiatives and all other kinds of community initiatives in this area, I think it is important to be developing as many partnerships within the community as possible to help address some of these very complex social issues.

[Roxanne James, Conservative, Scarborough Centre, ON]

I have time left, correct, Chair?

There's been some concern about investors perhaps looking at, as you said, low-hanging fruit or areas where more funding or capital might be available, and larger cities as opposed to rural or remote communities, or even areas of lower income, let's say, with different levels of demographics and so forth.

But in reality social financing is not simply the government saying we're doing social financing and then everybody just goes haywire. The government can set parameters as to the areas of a country, the demographics of a country, or even the parameters of the projects that would probably fit the bill for what we're looking for.

Correct me if I'm wrong, but then it would be the role of the intermediary to find the non-profit organizations that can deliver the services, and then you go out and find the capital investors to make it all happen.

Because this is something that hasn't come out really, that government still has some say as to where this is all going to happen. I just want to make sure that we're not implying that communities where there's not a lot of wealth, where community organizations don't have a lot of money, are going to be left behind.

We also heard actually from the first witness who said he had 80 partners from within the financial area that are willing partners and are eager to get involved with these sorts of things. A lot of those financial institutions are not actually located solely in a big city. They're right across Canada.

Maybe you could just comment on that.

[Lars Boggild]

What I would mention is that there are certainly cases where a social impact bond can be service-provider-initiated, where a non-profit can recognize that this is something it really wants to do and may contact as.

Equally though, and in many cases, social impact bonds are something that is publicly led, in processes such as requests for proposals that actually delineate exactly these parameters: which population, where, which communities, and why that's a policy priority.

We've seen both processes at work. The more formal RFP is more common so far in the United States than it has been in Canada, thus far.

[The Chair, Conservative, Daryl Kramp]

Thank you very much.

Now, Madame Doré Lefebvre, seven minutes.

[Rosane Doré Lefebvre, NDP, Alfred-Pellan, QC]

Thank you, Mr. Chair.

Thank you, Ms. Hearn and Mr. Boggild, for joining us today. It's very kind of you to describe your social finance work for us.

I'm not sure whether you can really give us any detailed information on this, Mr. Boggild, but at the beginning of your presentation, you said you were carrying out a project in Saskatchewan. Is that right?

[Lars Boggild]

There is a social impact bond [Inaudible-Editor] in Saskatchewan, but it is not our social impact bond.

[Rosane Doré Lefebvre, NDP, Alfred-Pellan, QC]

Very well.

In terms of the social impact bonds you are involved in, I'd like to know how the funding structure works and what benefits investors draw from it. I asked the previous witness the same question, and you probably heard his answer. Regardless, I'd really like to know how you operate.

What do investors derive from this type of funding? Financial benefits, dividends or, rather, positive exposure?

[Lars Boggild]

The investors in the financing models with whom we've interacted in the development of social impact bonds across Canada are predominantly socially motivated investors. These are high net worth individuals who are very concerned about issues in their community; they are also foundations; and in some cases they are commercial businesses or commercial financial institutions as well.

Within that, broadly speaking, they are also receiving a financial return that is generally commensurate in compensating for the risks they're taking in potentially losing all the money they're investing on the basis of performance. If outcomes aren't met, then all the investment they've made would be lost.

However, we are also seeing that because these are socially motivated investors—and this is very true of international social impact bonds as well—the expected rate of return relative to the risk that's being taken is actually what would be called in the financial community “concessionary”. People are accepting less return than would normally be seen within a fully commercial marketplace, because they recognize the value of the social good, but equally also, that these are scenarios in which the public sector, the government itself, is also capturing a significant amount of benefit.