Public Safety Committee on June 5th, 2014

[David Butler]

I think any government that agrees to such a deal needs to rehire some new accountants and lawyers. It should not. No one should undertake this arrangement in which the government ends up losing money, right?

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

Thank you.

[The Chair, Conservative, Daryl Kramp]

Thank you.

On behalf of the committee, to our guests, we thank you very much for your time and your contributions here today. The chair certainly thanks you for accommodating the timelines of the chair and making the chair's job a little easier to control. Thank you.

As I say, we are deeply appreciative of your taking the time and making the effort to come up here. Welcome to the wonderful hospitality of your northern neighbour. Thank you very kindly.

We'll suspend briefly for the next witnesses.

[The Chair, Conservative, Daryl Kramp]

We will resume.

For the second hour of our study on social financing, we are very pleased to have with us here two guests. From the MaRS Discovery District, we have Adam Jagelewski, the associate director. We also have Sarah Doyle, the senior policy adviser.

Obviously you know our scenario here. You will have up to 10 minutes each, or you can use your time as you would like, cumulatively or separately. After that particular point, we will open the floor to questions.

You have the floor.

[Adam Jagelewski, Associate Director, MaRS Discovery District]

Thank you, Chair and committee, for having my colleague Sarah and me here.

We represent MaRS Discovery District in Toronto. Our centre focuses on the marketplace for impact investing, predominantly in Canada.

We engage in numerous activities that research, build awareness for, or help develop this relatively new type of investment model that blends financial and social objectives. Our clients range from governments to investors, but most of our work is geared around social enterprises that are looking for new ways to raise money for the work they do.

I will mention that since 2010 we've published several reports on impact investing that might be of interest to you. I will make these publicly available, and I'll also provide a brief, following this appearance, for the purpose of this study if it is something you're looking for.

An innovation centre like MaRS is involved in impact investing for a few main reasons.

First, particularly in the current fiscal environment, government budgets have significant constraints. Notably, the ability of government to meet demands on social services from an aging population is inadequate, and importantly, the ability for government to focus on and pay for prevention across a range of policy areas is limited. More than ever, government requires a partnership approach to harness the assets of other sectors to improve social outcomes of communities across Canada.

Second, governments and philanthropic donors alike are increasingly focused on shifting performance standards away from reporting on programs and towards outcomes. Appropriate metrics measuring social change are being prioritized yet still remain elusive. Many consumers and individual donors are requesting transparency regarding organizations' social and environmental practices, yet there are challenges related to standardizing how these are reported.

Fortunately, there are new tools, new players, and new thinking about how we can tackle social issues using market-based approaches. There is a new breed of investor who sees complementary investment channels with the potential to augment more traditional philanthropic approaches to tackle these social issues. Opportunities that generate social improvements in addition to financial returns are appealing to them.

We are optimistic that, with some dedicated intermediation between demand and supply functions and constructive awareness-building about the opportunities and the risk, new investment opportunities could emerge that will move the needle on many social policy challenges in Canada, including crime prevention.

Our centre has a comprehensive strategy for exploring impact investing in Canada. We have very practical initiatives, such as the SVX, that connect social ventures looking for capital with investors who have the capital. We certify ventures that agree to measure and report their performance against social benchmarks. We advise on the development of new financial products, including social impact bonds, which I understand to be of keen interest to this study. We also develop policy advice and connect to global policy development conversations through a G-8-endorsed social impact investment task force.

I've already mentioned that we produce a significant amount of research and thought leadership, which is available for public consumption.

An important finding in our early days as a centre was that there is no one approach to solving the capital problem that non-profit and for-profit social enterprises face. We support a range of initiatives that channel efforts towards increasing the amount of capital available for social purposes as well as measurable intentional social impact.

One way we are doing this is through a dedicated effort to analyze the use of social impact bonds. Until it is proven otherwise, I think it is fair to say that this tool could have utility in prevention areas where there is a potential to save money or improve service delivery. Non-profit organizations are interested in exploring social impact bonds with us because they offer a revenue model to pay for operational growth or to sustain service delivery, and impact investors are attracted to the dynamism of connecting outcomes and a financial return.

Our centre has an accelerator program that seeks to determine the feasibility of using this tool in specific issue areas. It analyzes interventions that could improve outcomes in these issue areas, and if the conditions are met, helps develop the multi-sectoral partnership agreement required to get these off the ground.

While our centre is issue-agnostic, meaning all positive social and environmental impact is viewed favourably, the social impact bonds we are currently working on are in three project domains: diabetes, hypertension, and supportive housing for homeless individuals facing mental health challenges.

We have not proved or disproved the model in any of these areas yet, and quite frankly, the model globally is too new to make any definitive or general conclusions. However, we are motivated to learn whether a social impact bond could be used as a tool to support growth where government does not have the resources to scale an impactful intervention, as a tool to help government transition from paying for activities to commissioning outcomes, as a tool to help break down existing silos between government agencies that are seeking similar outcomes for a similar population group, and as a tool to reward non-profit organizations that are generating positive social outcomes.

We are not, however, blind to the real or perceived challenges that exist with impact investing and the SIB approach. In an ideal scenario, government would have enough scale capital to adequately fund prevention and what is working in particular issue areas. In the case of social impact bonds, it's often a more expensive, or certainly a more complex way to fund a service provider than a direct grant or donation. But bringing it back to our fiscal constraints, the tool could be used where government resources are not available to test, scale, or replicate innovative programs. It could also be used as an alternative accountability framework, which we may find is more conducive to achieving results.

I now will turn over the floor to my colleague to describe some of the potential benefits more fully.

[Sarah Doyle, Senior Policy Adviser, MaRS Discovery District]

Thank you.

Thank you for having us appear before you today.

Adam has given a broad overview of the social finance space and our work in it as the MaRS Centre for Impact Investing. I will just briefly describe the benefits that these tools could offer from a government perspective.

Social finance, as I'm sure you've heard a million times by now, is essentially a simple concept. It's an approach to managing money that targets a social or environmental impact alongside some form of financial return, which could be the return of the capital invested or could be in addition to a nominal return on top of that.

There's a broad range of partnerships and tools that fall into this space, and social impact bonds are only one of these. Some require government to enable or catalyze relationships, which then essentially can take place between the impact investor and a social enterprise. Social enterprises can take the form of non-profits, for-profits, or cooperatives.

From the government perspective, these relationships can drive private capital into social services and ventures that contribute to improving social and economic outcomes for individuals and for their communities. As we know from the business world, good ideas need capital to scale, and this is no different in the social sector.

In the area of crime prevention, these good ideas could be found in areas ranging from a job training initiative that helps connect ex-offenders into the labour force, a mental health facility that helps address some of the root causes of crime, early childhood education that's designed around the principle of teaching. These are just a few scattered examples, but I think there's a lot of possibility.

Many really excellent service providers are out there with effective programs that are already receiving government funds as well as philanthropic dollars. This is great. This should continue. But impact investing can offer an additional source of funding, which can help to test new ideas, encourage innovation, and it can also help scale up the most effective among these approaches.

Social impact bonds, as we've mentioned, is one tool among this wider group. I'll spend a little bit more time talking about its particular benefits, given that it's the model in which government is more directly involved as a funder.

There are three main benefits from the government perspective. The first is that the social impact bond involves payment on the basis of outcomes. This is a bit different from the way in which government grants are typically organized. So for payment for results, while it can take other forms, it's only in the case of a social impact bond that smaller service providers are able to be in the picture. Large service providers have the resources to enter into these types of contracts without investors to cover their cashflow needs, but for a small service provider, the investment money is required up front.

This focus on outcomes incents collaboration between service providers and helps to fill service gaps. It also necessitates rigorous evaluation and data collection, and helps us learn what works. So social impact bonds by design involve data capture on the basis of outcomes.

The unique incentive and accountability structure involves three parties that are all holding one another to account, and all seeking to target the outcomes that were agreed upon in the contract at the beginning of the agreement. In some cases, the outcomes that are being targeted could be associated with net savings to government, although this is not necessarily the case.

The second major benefit is that social impact bonds provide access to working capital for non-profit service providers over a much longer period of time. This can provide service providers room to innovate and adjust during the course of the agreement on the basis of new information as they receive it. This, again, is a bit different from the norm in government funding arrangements, where regular reporting requirements on outputs rather than outcomes and a high bar for adapting to new information can stifle innovation.

The third reason I would point out is that, under a social impact bond, financial risk is effectively transferred to the investors and away from government. Social impact bonds can be used to test untried innovative approaches or, which has more often been the case so far, to scale up or replicate an approach that has evidence of success. But even in those cases, there is some risk to that replication, that scaling up, and that risk can be transferred to the investors allowing the government to pay only if the outcomes are achieved.

One final note I would make is that I think the jury is still out on whether social impact bonds are a tool for testing new innovations, which would then, if successful, flip into a direct funding model, or whether the social impact bond, in and of itself, because of this unique accountability and incentive structure, is able to provide better outcomes. I think we don't yet know which of those two worlds we're in.

We do know that social impact bonds are not appropriate for every issue, and should be entered into with open eyes. They're new, and as Adam pointed out, they're as yet unproved. In our view, though, they have potential and warrant exploration.

Within the broader social finance space, there's a lot of activity that is not new and has been generating innovative partnerships and helping to improve the well-being of communities for quite some time.

The government could pursue initiatives designed to further enable this activity, and could help to direct private capital towards such priorities as crime prevention, where it would like to see additional activity take place. I can speak to this in more detail, if there's interest, but this could take the form of reducing red tape and creating a more enabling environment. It could take the form of catalyzing private capital similar to the actions that have been taken in the venture capital space, through impact investment funds or credit enhancement-style measures.

I'll leave it there and respond to questions.

[The Chair, Conservative, Daryl Kramp]

Thank you.

Thanks very much to both of you for your presentations.

We'll now go to the first round of questions.

Mr. Norlock, please, you have seven minutes.

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

Thank you very much, Mr. Chair.

Through you to the witnesses, thank you for attending today.

I'm grateful that you mentioned the risk aversion that governments have—and have for good reason. Number one, taxpayer dollars are very valuable to us. We care very much about what we're doing with them. We want to make sure that anything we do has positive outcomes. The second reason, of course, is rather obvious, because we're separated in the aisle. If we don't make good investments, we have an official opposition to put our feet to the fire, which in a democracy is not a bad thing.

That's why I think social impact bonds are a good thing, and for two reasons. Number one is that the government's not risking any of its own money, if the outcomes aren't appropriate, so there's someone else bearing the risk but also bearing the benefits. Tell me if you think I'm mistaken, but in the end, the real benefactors are the taxpayers, because not only are they not paying for a failed program or a program that's somewhat successful but they're also living in a better world. In other words, in our case, our study is social financing as it relates to crime prevention in Canada, so if we can reduce crime, we reduce....

A previous witness, who I think was an opposition witness, basically said that you need to measure more than just your outcomes; you need to measure basically the social impact. It's not just about reducing crime. It's about making your neighbourhood safer and better to live in, and therefore the quality of life of Canadians.

Would you say that's a correct statement? If you feel that you would like to expand on it, would you do so?

[Sarah Doyle]

Yes, I think that is a correct statement. I think one of the things that appeal about social impact bonds and social finance tools more broadly is their focus on outcomes.

When we say “outcomes”, I think that's not to be narrowly interpreted. When we look at, for instance, the supportive housing study that we're working on in the area of social impact bond feasibility, we're looking at the impact that an intervention at the level of providing housing and wraparound services could have in terms of a person's life. That could be labour market attachment outcomes. That could be reduction in crime. That could be improved health outcomes. A variety of different positive outcomes could result from a particular intervention.

When we're looking at these tools, I think the point is that we need to holistically consider all of those impacts. Frequently, I think, part of the rationale for governments in looking at social impact bonds is, as you say, to reduce costs. That means looking downstream at what an intervention now will mean in terms of reduced health care costs or in terms of lower numbers of people in prison, that kind of thing.

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

Thank you very much for that.

If I told you the reason why, on this side, the government's looking at things like social financing.... It's not necessarily just social impact bonds but the whole of social financing. The reason we're doing so is that we know that governments have limited amounts of money. We know that we're probably going to be spending more on health care. We're probably going to be spending more on other things.

So we look at one of our big-ticket items...and when I say “big-ticket”, I mean a big cost to the economy, such as the cost of crime. I'm talking about the cost of crime, not just criminal activity, but the total cost of crime, the whole social impact of that. In terms of using those precious dollars, we don't want to increase that budget—we know that other budgets will increase whether we like it or not—and we want to continue down the road of reducing crime.

I'm going to give you this, although I hate to say how old it is. When I was a young police officer, we were more interested in catching the bad guys, but when I looked at it, I was left thinking—that may shock some people—

[Voices]

Oh, oh!

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

—that I was looking at it from the standpoint of reducing the cost to society.

I want to ask you, Mr. Butler, if you can recall how back in the eighties we looked at the Bronx in New York, which was a terrible place to live; a terrible place to live. What was happening was that with “the projects”, as their social housing was called, including in the Bronx, the City of New York wanted to do something about it. At the same time, of course, their crime rate was skyrocketing. They looked at what caused criminality, and there were three things: literacy; that people who commit crimes don't own property; and that criminals who commit bigger crimes commit little crimes, even jaywalk. That's when, as you'll recall, they were picking up jaywalkers. That was a terrible thing, but they were actually solving a lot of crime because of it.

So they educated people. They gave them a trade. With the trade, they helped them buy their apartments. When they bought their apartments, they really looked down on their neighbours who tried to damage those apartments, because now they owned them. You had a reduction in crime, and now, in some areas of the Bronx, there are good places to live.

I wonder if you could translate that into what you would perceive as an impact bond in, let's say, some of the social housing areas of Canada, where we know, especially in the GTA, that a lot of crime exists.

[Adam Jagelewski]

Thank you for that New York example.

One of the things we're looking at in terms of the social impact bond is its ability to tackle an issue in a very holistic way. You listed literacy. You listed the transient nature of these individuals being in the community. Then you listed their ability to get jobs. In the traditional way that things like this are funded, typically there is a very siloed approach. Under a social impact bond methodology, the organizations you're working with have the ability to provide each one of those supports in a customized way, if it's designed appropriately. That in itself is a benefit as a model compared to traditional forms of funding.

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

Now, this is the crucial part. I was going to say, what's in this for you? Because people just don't come and offer services for nothing. What you're saying is that, properly designed.... Am I right that you're the kind of people who would design it? The government would come to you and say it has a big problem here in...I hate to mention the neighbourhood in Toronto, so I'll—

[The Chair, Conservative, Daryl Kramp]

Mr. Norlock—

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

It starts with an “S” and ends with a “borough”. We would go to you with that problem and you would come up with a solution that benefits everybody.

[Adam Jagelewski]

Well, I'm not here to self-endorse our organization. I think the social impact bond or social finance mechanisms could be deployed by a range of different actors. What I'm saying is that if there's an actor that can act as an intermediary and that does that holistic wraparound support, they should be considered as an intermediary to do this.

What it does require is new skill sets. It does require an ability to negotiate these new outcomes and to come up with one that makes sense on the basis of repayment. It does require some new financial modelling. It does require an understanding of the target population that an individual organization may not have. It does require some accountability measures and the ability to track and measure performance over time. Those are the types of things that an intermediary organization could help with in this issue.

[The Chair, Conservative, Daryl Kramp]

Thank you, Mr. Norlock.

Thank you, Mr. Jagelewski.

Mr. Rousseau, s'il vous plaît....

[Jean Rousseau, NDP, Compton—Stanstead, QC]

Thank you very much, Mr. Chair.

I would like to thank Ms. Doyle and Mr. Jagelewski for being here today.

I represent a rural region located along the Canada-United States border. There is a broad range of crime there. There is human trafficking, contraband cigarette trafficking, weapons trafficking, forgery, and so on. Those are the kinds of crime committed in my region. However, there are also all the other kinds of crime that you find in large urban centres, including crime by small gangs, theft and all kinds of things like that.

One of the crime prevention programs, which was intended mainly for adolescents, worked well. The school drop out rate was a real problem in the rural communities. We saw that with fairly early prevention, young people were of course less likely to turn to crime, to different kinds of substance abuse and problems like that.

You just mentioned a holistic approach. What kinds of investment could be profitable for all partners, philanthropic investment funds, and so on? What types of partnership could be encouraged to deal with various kinds of crime?

The problems in rural areas are not the same as in the Greater Toronto Area, for example.

[Sarah Doyle]

I think, just to reiterate, that there are a number of different tools, and no tool is a silver bullet. So I think it's important to start with the problem and then identify the tools that are appropriate to solve it, rather than starting with the hammer and looking for a nail to hit. Depending on the type of challenge and the types of interventions that are available to address it, I think a social impact bond is certainly an interesting tool to facilitate the kinds of partnerships and the sort of holistic approach that I think you are speaking to.

An example might help, and I'm sure you've heard about the Peterborough social impact bond, designed to reduce recidivism in the U.K. I think one of the most interesting things about that model, and something that was commented on in the RAND report earlier this year, was that having Social Finance in the U.K. act in that intermediary-style position allowed it to bring together between five and 10 different service provider organizations that had different mandates. Some of them did mental health related work. Some were “meet you at the gate” programs. Some were organizations designed to help connect ex-offenders with jobs. Some were focused on housing. None of them formerly had shared data or been able to say that they were working with the same client, or the same person.

So under the social impact bond model you had Social Finance helping to create information-sharing and data-sharing agreements and platforms between all of these organizations, identifying where there were gaps in service delivery that nobody had formerly known about and allowing them to focus on the key interventions that were required for each client. So it became a client-focused intervention. They would see a prisoner while he or she was still in prison, meet at the gate, and they would know that person was talking to this service provider about housing, talking to that service provider about jobs, and so on. The service provisions and the outcomes were much improved as a result.

So that kind of holistic approach with a variety of partners and a community, I think, is something that is facilitated, or can be, through a social impact bond model.

[Jean Rousseau, NDP, Compton—Stanstead, QC]

Do you think it would be applicable in small communities?

My riding contains municipalities of 500 to 3,000 residents. Of course, there are regional groups, but those are very small communities.Undoubtedly because of the nearby border, people in those municipalities are quite involved in all kinds of crimes. There is even theft of information by computer.

[Adam Jagelewski]

At MaRS we've been working on social impact bonds, or social finance models, for a few years now. I think what fascinates me the most is that this conversation about this tool has created a conversation about new forms of partnerships. So we get a range of different types of people asking questions, from very small organizations to very large organizations to rural areas to urban areas. I think we're less focused on the actual tool and the financial mechanism to make this work and more interested in the multi-sectoral partnerships that are working together to achieve those very rural outcomes that you're talking about.

So in your community—I grew up in a very small community—you may have an employer who has an affiliation to youth at risk and you may have this employer who's willing to mobilize some resources for the benefit of a non-profit or an organization. So you have this strategic partnership that is now forged to improve the outcomes in that community, and yes, they might have thought about this through the lens of a social impact bond. Did it create a social impact bond? Well probably not, but maybe down the road.

I think this tool has created this mindset change in a lot of people's heads to think through how they can align interests—it might be an investor, a non-profit organization, or a corporate entity—and just appeal to that in a more advanced way.

[Jean Rousseau, NDP, Compton—Stanstead, QC]

How much time do I have left, Mr. Chair?

[The Chair, Conservative, Daryl Kramp]

You have two minutes left.

[Jean Rousseau, NDP, Compton—Stanstead, QC]

Okay.

Is that when you intervene? On the ground, do you work with the various organizations that provide crime prevention services to solve the problems and to make investments, of course?