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Social Impact Bonds:
Potential Applicability for Canada
Tim Draimin, Robin Cory, Adam Jagelewski
Prepared for Human Resources and Skills Development Canada (HRSDC)
Spring 2010
Social Innovation Generation | http://sigeneration.ca
Social Impact Bonds: Potential Applicability for Canada |1
Produced by:
Social Innovation Generation
101 College Street, Suite 100
Toronto, ON
M5G 1L7
For inquiries contact:
Adam Jagelewski
Adam@sigeneration.ca
+1.647.260.7846
History:
Draft Version - March 17, 2010
Draft Version – March 31, 2010
Draft Version – April 12th, 2010
Draft version – June 10th, 2010
Latest version – July 2, 2010
Appreciation:
With thanks to Social Finance UK for sharing their thinking and advice with us. Information on
Social Finance UK is found on page 13.
Contents
1| Introduction ........................................................................................................................ 4
2| The Social Impact Bond ....................................................................................................... 6
3| Examining the Criteria and Risks ....................................................................................... 10
SIB Criteria ......................................................................................................................... 10
SIB Risks ............................................................................................................................. 10
4| Evolution of the SIB in the United Kingdom ..................................................................... 12
The First SIB: Peterborough Prison Pilot............................................................................ 12
History of the SIB in the United Kingdom .......................................................................... 12
Antecedents of the SIB Model ........................................................................................... 13
5| Insights from the Initial Development of SIBs .................................................................. 16
Insights for Government: .................................................................................................. 16
Insights for Service Providers: ........................................................................................... 17
Insights for Funders/Investors:.......................................................................................... 17
6| Opportunities for the SIB in Canada ................................................................................. 18
7| Conclusions and Next Steps .............................................................................................. 21
Critical Issues to Address ................................................................................................... 21
Building the Enabling Ecosystem for Social Impact Bonds ........................................................... 21
Scenario for Piloting the First Social Impact Bond ........................................................................ 22
Acknowledgments......................................................................................................................... 24
Appendix A: Creating an Enabling Environment ........................................................................... 25
Appendix B: Introduction to Social Finance .................................................................................. 28
The Current State of Social Finance in Canada ................................................................. 29
Appendix C: Social Metrics: An Indispensible Ingredient of SIB’s ................................................ 30
Appendix D: Glossary .................................................................................................................... 32
Social Impact Bonds: Potential Applicability for Canada |3
Social Impact Bonds (SIBs) are a financial tool being developed in the UK to provide a new
way to invest money in social outcomes. Under the model, government agrees to pay for
measurable outcomes of social projects, and this prospective income can then be used to
raise bond financing from commercial, public or social investors. This is possible where
outcomes are measurable and lead to tangible public financial savings.“
- The Young Foundation Definition of Social Impact Bond
1 | Introduction
This paper provides a practical overview of The large multi-year deficits and heavy debt
the Social Impact Bond (SIB) model. This loads facing most governments in the wake
new tool can be used to marshal resources of the recent global economic crisis, and
to tackle the root causes of social long-term trends such as an aging
problems. The SIB is a financial vehicle that demographic profile, serve to increase the
brings in private, non-government demands on all players to address these
investment to pay for services, which, if challenges.
successful, deliver both social value and
public sector cost savings1. At the same time, the non-profit and
private sectors, governments, and the
Discussion of the SIB model comes at an academic community in Canada and
opportune time in Canada. Trends are internationally have been working
converging that will change long standing productively in recent years toward the
assumptions about the roles of government development of innovative approaches to
and its service provider partners to manage more effectively address persistent
deeply rooted social ills. Social challenges community problems and needs. One area
and unmet community needs in areas like of focus has been on new ways for social
poverty, social marginalization, purpose organizations to attract and access
homelessness, inadequate labour market more capital. The SIB is an example of a
skills, environmental degradation, physical financial vehicle that could serve this
and mental disabilities, and crime tend to mandate.
be serious, complex, pervasive, and
persistent. This vehicle is significantly different from
the ways governments currently tackle
social problems. Specifically, the SIB:
1
Social Finance, (2010): Towards a new social Focuses on measureable results and
economy
Social Impact Bonds: Potential Applicability for Canada |4
government’s role in commissioning This paper describes:
verifiable outcomes What a Social Impact Bond is, how it
works.
Shares the risks and rewards among
change partners Why it is gaining attention globally as a
social investment vehicle
Encourages competition and diversity
amongst service providers, rewarding The UK experience in developing the
the most effective concept and moving to implementation
Aligns reward incentives with results The Canadian context to the Social
Impact Bond reviewing policy
Applies a problem-solving approach implications, criteria for adoption.
involving a range of community actors
and resources collaborating together
across sectors (government, non-profit, Outlines a scenario of next steps for
business) developing Social Impact Bonds in
Canada.
Fosters an open environment of
collaboration and learning
Leverages private and philanthropic We welcome your feedback on the paper
capital, and importantly and the ideas it illustrates.
Is a catalyst for fresh thinking to
overcome the root causes of complex,
multifaceted problems
This paper introduces a new and, as yet,
untested idea. It is not a detailed blueprint
for implementation of a Social Impact
Bond. Rather it profiles the opportunity to
employ new thinking, explains how an SIB
might work, identifies issue areas where it
might be applicable, and situates it in the
context of the broader challenge of
stimulating an enabling ecosystem.
Social Impact Bonds: Potential Applicability for Canada |5
The success of social innovations is based on their ability to create value for society. In turn, a
dramatic social innovation often disrupts the existing marketplace or environment in which it
takes root. Referred to by Austrian economist Joseph Shumpeter as ‘creative destruction’,
innovation creates new ventures and a state where existing products, services and business
models are obsolete.
- Roger Martin and Sally Osberg,
“Social Entrepreneurship: The case for definition”
Stanford Social Innovation Review, (2007)
2 | The Social Impact Bond
In Social Finance: Towards a new social economy (2010): - Social Finance UK defines the SIB as a
financial vehicle that brings in non-government investment to pay for services which, if
successful, deliver both social value and public sector cost savings.
Figure 1: Based on illustration from Social Finance (2009) Social
Impact Bonds: Rethinking finance for
social outcome
There is an inherent assumption that social outcomes will be enhanced through increased
funding for prevention and early intervention around targeted social problems that lead to cost
savings for government. Rather than finding room in increasingly tight budgets, government
pays only when cost savings and outcomes occur. Rather than capitalizing the entire project
upfront, government shares in the risk of alternative approaches to outside investors.
The mechanism is depicted at a high level in
Social Impact Bonds: Potential Applicability for Canada |6
Figure 1 below.
A Social Impact Bond is structured around a set of well-defined outcomes between the three
main parties involved: government, the service provider and the investor. It is facilitated by an
intermediary, which acts on behalf of the group.
An investor may be:
A foundation;
A collaboration of foundations and grant-making trusts;
Socially-oriented individual investors or financial organizations;
Public institutions, municipalities, etc.
It is useful to point out that the tool has been termed a bond yet does not follow conventional
bond investment properties.
By standard definition, a bond offers a fixed return to investors over a period of time. SIBs act
more like an equity product in terms of associated risk. With an SIB, the bondholder (or
investor) will receive a payment if outcomes are achieved, while the investor risks not receiving
a return if the intervention does not meet its performance targets. The contract between
government and the investor will form the terms of the bond. The existence of a contract
obligation from government to pay for outcomes enables the bond creators to more easily
access investors.
At the outset,
appropriate outcomes
and success metrics
are negotiated and
agreed upon between
the contracting
parties. The investors
take the risk
associated with the
type of programs and
receive a pre-
determined or scaled Figure 2: From Social Finance (2009): Towards a new social economy
return proportional to
the related reduction in
government spending from baseline measures.
Social Impact Bonds: Potential Applicability for Canada |7
The investment is used to fund or expand
organizations with the expertise to effectively
manage the intervention programs. Reliable and Social Metrics: An
adequate funding will foster an innovative
Indispensible Ingredient
environment and enable service providers to explore
new processes based on validated pilots to serve the for SIBs
target population. Service organizations are defined
Detailed social impact
by competency to achieve the task at hand and could measurement is needed to create
include non-profits, for-profits, government and apply stakeholder contracts in
departments or agencies (municipal, provincial, the development of a bond
federal), and educational institutions. agreement. Performance
measurement is complex,
especially in the social sector.
All stakeholders rely on the accuracy and availability Explaining measurement
of measures that adequately reflect the performance approaches is not the paper’s
of the initiative, usually against benchmark purpose, but a brief overview is
comparisons. Investors are looking for provided because of the
significance of the concept to the
demonstrated value, efficiency and cost savings to
model.
satisfy Government endorsers. Bond dividends only
occur if these criteria are satisfied. The challenge is that a robust
social investment marketplace
Social/environmental change determinants must be requires reliable social impact
measurements to motivate
well understood for the target population and be
investors to explore new financing
represented in a simple and measureable outcome mechanisms. Historically, there
metric. In some cases (i.e. recidivism) the metrics are has been no consistent approach
easier to identify and relatively easy to measure and to using social impact metrics
track. however, this may be changing.
This sidebar continues in:
However, it is understood that as the model is Appendix C: Social Metrics
explored further in more complicated socio-
economic issues, there will likely be more effort
required to design the measurement framework.
Regardless, careful consideration must be given to:
The use of comparison control groups to identify the influence of exogenous factors and bias
Baseline measures that articulate the current status quo from a social and financial
perspective for simple comparison
Proper measurement systems to provide transparent data for third party review or audit.
SIBs as an Innovation
SIBs represent an important innovation in how society tackles persistent, complex social
Social Impact Bonds: Potential Applicability for Canada |8
problems that cannot be handled by any one sector or institution. The SIB model:
Has constructed a way to involve the three sectors while both separating out the required
activities and assigning them to the appropriate player.
Helps manage risk while generating innovation.
Clarifies government’s role in paying only for results backed by performance
measurements.
The box on page 22 Building the Enabling Ecosystem for SIBs, and Appendix A on page 25
Creating an Enabling Environment both offer more background on how government policy can
strengthen the enabling ecosystems for social finance and social innovation .
Social Impact Bonds: Potential Applicability for Canada |9
3 | Examining the Criteria and Risks
SIB Criteria
When considering where best to apply the SIB data provides a benchmark by which to
there are specific conditions that increase the measure success. Metrics align to
likelihood for successful implementation: outcomes based on objective criteria and
can be computed. There is a high degree
Strong social need – the area is of certainty and trust in the data;
recognized by funders, service providers
and the general public to be a priority Known intervention environment – a
area for reform; control group is available to track the
impact of exogenous factors that could
Tackles root causes of social or affect the desired outcomes;
environmental ills – the intervention
benefits the public by reducing or Reasonable timescales – both outcome
avoiding downstream costs and achievement and investment payout
enhances the lives of program occur within a realistic timeline;
participants;
Increased innovation - leverages
High public cost – the social need learning and adapts to meet the needs of
warrants substantial investment. The the social sector. The model promotes
potential return based on cost savings to systems-changing initiatives to tackle the
government justify the risks inherent to most entrenched social problems.
the intervention;
SIB Risks
Reduces or avoids government costs –
Potential benefits reduce demand on In developing an SIB, the approach needs to
public sector budgets. Cost savings are carefully address some key inherent risks.
clear, measurable, and attributable to
the initiative. If cross- sector or cross- Political risks:
departmental savings are achieved, the Could be viewed as government off-
breakdown of savings is clearly outlined; loading responsibility for social services
or only stepping in when traditional
markets fail. It could be perceived that
Clear value proposition for stakeholders government is abandoning historic fiscal
– there is a tangible value proposition for obligations
investors, demonstrated benefits to the
target population, and support from the Could be perceived that government is
spectrum of elected officials; more concerned about investor benefits
rather than public benefit
Available data – there is a way to obtain
clear and accurate measurement. The
Social Impact Bonds: Potential Applicability for Canada |10
Loss of direct public control for delivering Investor risks:
public benefit services The risk-reward ratio for potential
investors may be too high to attract
Could be opposed by organized adequate investment
workforce associations if their members
have not been engaged. Insufficient investment to achieve
desired efficiencies or economies of
Implementation risks: scale
Declining participation by stakeholders
over time
Model does not deliver on outcomes
Model does not appropriately forecast
social benefits or cost savings
Speed of implementation is slower than
planned
Externalities risk:
Potential for new model to displace or
negatively impact current services to
target populations
Measurement risks:
The metrics are not easily obtainable or
accurate enough to record performance
outcomes
The population or sample is not large
enough to control for variation
Exogenous factors influence the
outcomes or have biases that generate
positive outcomes, triggering
undeserved performance payments
Key stakeholders lack confidence in the
metrics
Social Impact Bonds: Potential Applicability for Canada |11
“The creation of Social Impact Bonds to fund preventative work like ours is a ‘win, win, win’
situation. Society wins as there are fewer victims of crime, the tax payer wins as less
money is spent on prisons and clients win because they
have the chance to turn their lives around”
- Rob Owen, Chief Executive, St. Giles Trust
4 | Evolution of the SIB in the United Kingdom
There is significant learning to draw from that works to reduce crime and social
the UK experience contributing to the exclusion has proven that its preventative
launch of the first social impact bond. Their approach (counseling, training, employment
work began three years ago and the profile services, etc.) reduces the re-offending rate
they have built around this new vehicle for by 10% and successfully reintroduces this
improved social outcomes has aroused population back in the community.
curiousity of governments and investors
globally. This section will provide an The pilot will provide support to 3,000
overview of their pilot and provide the short-term prisoners over a six-year period
historical context for its launch. through experienced social sector providers
such as St. Giles Trust. The upfront
The First SIB: Peterborough Prison investment will be up to £5m from private
Pilot investors. If this reduces re-offending by
7.5% or more, investors will receive from
On March 18th, 2010, the UK announced the Government a share of the long-term
launch of a Social Impact Bond pilot. The savings up to a maximum of 13%. It is
UK entity, Social Finance, is acting as the SIB calculated that for every £1 invested in St.
delivery agency. It facilitated a contract with Giles Trust, the state will save over £10.
the Ministry of Justice to reduce re-
offending rates at the Peterborough prison. History of the SIB in the United
Kingdom
Re-offending costs the state a minimum of (Adapted from Council on Social Actions: CoSA
£143,000 per offender, per year, not papers: Community Links, 2008; Loder, John et al.
including the cost to victims of the crime.2 It “Financing social value: implementing Social Impact
Bonds: Winter 2009; Interviews)
is estimated that at least 60% of adults on
short term sentences will re-offend within a Politically, much of the success of the
year of being released, costing taxpayers at concept development of the SIB was
least £85.8m for every 1000 prisoners. attributable to the involvement of the UK
However, St. Giles Trust, an organization Prime Minster and a council he formed.
2 In 2007, Prime Minister Gordon Brown
From CoSA white paper: Commentary on year one.
2008. announced the creation of the Council on
Social Impact Bonds: Potential Applicability for Canada |12
Social Actions (CoSA) through two year IFFIm.3
funding from the Office of the Third Sector.
The group of 14 leaders, practitioners, civil The appeal of the model was clear for CoSA.
servants and business people served as an If outside investment could be used for
independent advisory group. Their task was preventative services, then funds would be
to generate ideas and initiatives through more reliable and predictable over the long
which the government and other key term. Government could endorse the risk
stakeholders could catalyze, develop and of paying for future benefits and use the
celebrate social action. CoSA was set up to cost savings to compensate investors. The
serve as a symbol of the power of ideas and leverage opportunity was clear, focusing on
to play an important role in the effort to enhanced social benefits.
build the good society.
The Prime Minster challenged CoSA to focus
on cross-sector collaboration opportunities
to fund prevention and early intervention.
One recommendation, originating with a
City Leaders group and building on the
concept of a “contingent revenue bond”
developed by Arthur Wood, was the Social
Impact Bond.
Preventative and/or early intervention
service funding from government can be
contentious because a government benefits
if the concept works out but government
look fiscally irresponsible if it does not. This
makes risk-taking and innovation
challenging.
Antecedents of the SIB Model
One of the first models of exploration with
linkages to a Social Impact Bond model was
the International Finance Facility for
Immunization bond (IFFIm). IFFIm raises
funds/capital by issuing bonds in the capital
markets and so converts the long-term
government pledges into immediately
available cash resources. The long-term
government pledges will be used to repay
the IFFIm bonds. The World Bank acts as
financial adviser and treasury manager to
3
http://www.iffimmunisation.org/01_about_iffim.html
Social Impact Bonds: Potential Applicability for Canada |13
CoSA and Social Finance UK (see box) then
began to examine areas where expensive
services predominately deal with
consequences of social issues rather than
looking at their root cause. Examples
include criminal justice, health care, mental
health, schooling, and foster care. As the
model relies on multiple stakeholders for
implementation, a significant amount of
effort was made to consult and collaborate
with Treasury, investment managers, senior
civil servants, and third sector organization
leaders to advance the concept.
The SIB work done to date is gaining profile, About Social Finance UK
awareness and momentum in the UK. With
Social Finance UK is a London-based
the recent announcement of the first pilot, organization created in 2007 by Sir Ronald
Social Finance is looking to take advantage Cohen with the express aim of developing
of the support from political parties4, the an effective social investment market in
Third Sector, and the Social Enterprise the UK.
Coalition among other stakeholders. SIB use
The organization provides access to capital
is being examined in the following areas: advice to investors and social sector
entities interested in delivering significant
Health Impact Contracts social impact.
The Department for Communities and
Social Finance was founded after the
Local Government Commission on Unclaimed Assets
Local authorities, in areas such as health demonstrated the pressing need for long-
care and criminal justice term capital and financial innovation in
support of the UK social sector. Chaired by
The following page illustrates the history of Sir Ronald Cohen, the Commission
recommended that a Social Investment
the SIBs’ development in the UK. Bank be established with a base of £250
million and additional receipts of £20
million pa for four years. The
Commission’s aim was to maximize the
social impact of releasing capital from
dormant accounts.
A subsidiary of Social Finance will be
responsible for the facilitation and
negotiation of Social Impact Bonds acting
as an intermediary between government,
4 investors and service organizations.
Social Finance’s work was recognized in the
announcement of pilot endorsements in
government’s “Smarter Government” white paper in http://www.socialfinance.org.uk/
December 2009. The Labour government confirmed
its endorsement in the 2010 budget.
Social Impact Bonds: Potential Applicability for Canada |14
Social Impact Bonds: Potential Applicability for Canada |15
5 | Insights from the Initial Development of SIBs
Although the SIB is in its early stages of Government can highlight the value of
development, the promise of the concepts specific improved social outcomes
underpinning the model will create against the status quo. Returns or
widespread appeal. Shared insights to date dividends benchmarked on success can
can help advance community, provincial, or be based on specific targets met
national SIB-related initiatives, and help
understand and mitigate risks. Government bodies, whether provincial
or federal, need to be internally
Insights for Government: organized to develop a bond
Government plays an important mechanism. For example, detailed
enabling role in the implementation of agreements must be made between
the model (i.e. encouraging discussion governments/departments on baseline
and collaboration, providing service data and measurement approaches,
providers access to target populations, outcome targets, outcome payments
leading pilots, etc.) and the delegation of departmental
responsibility for performance
Successful pilots, administered and payments
carried out by cross-sector partnerships
in targeted areas will create the The SIB can be structured to align
necessary track record to stimulate incentives between government
scaled implementation departments in addition to the
standard model with other
Government can employ early stakeholders
incentives to help encourage SIB
participation by a variety of Partnerships with foundations can
stakeholders (e.g. upfront risk sharing allow government to test new ideas,
by government). Over time, tax growing the R&D environment (an
incentives can lead to increased important foundation role). Such
investment partnerships have the ability to engage
Social Impact Bonds: Potential Applicability for Canada |16
new players and raise the profile of Insights for Funders/Investors:
change initiatives The model assumes that there is a
surplus value to be realized with the
To best succeed, an SIB approach implementation of an intervention
requires champions in all sectors to be program. If outcome-based reward
open and supportive of crossing levels are sufficiently attractive, a range
traditional boundaries to solve social of private investors could be persuaded
challenges to take on implementation risks that
have previously been borne by
Insights for Service Providers: government
A bond will allow service providers to
gain access to multi-year income over Local community or municipal funds
operating costs, allowing resources to could be used to support local SIB
be allocated to their own in-house initiatives
research and development and
innovation capabilities Foundations (private, community,
corporate) could be particularly
The SIB is a creative idea that could interested with this shared investment
lead to discussion of other outcomes- model and enter into cross-sector
based funding models or incentive partnerships
systems (i.e. social venture financing,
tackling root-causes, innovation Foundations’ encouragement of early
exploration, building organizational stage innovation supports a ‘fail-safe’
capacity by reorienting learning and environment for organizations to
education, etc.) explore solutions
Innovation risks associated with an SIB Government and foundations can
may outstrip individual organizations leverage grant-making dollars in the
but partnerships may reduce risks to a form of ‘first-loss’ or high risk capital to
manageable and feasible level and encourage private investment
encourage greater shared innovation participation by lowering risk to them.
learning
Social Impact Bonds: Potential Applicability for Canada |17
“There is scarcely an area of social or health care policy where prevention or
early intervention isn't both cost effective and socially desirable.”
David Hutchison
Chief Executive
Social Finance
6 | Opportunities for the SIB in Canada
In Canada the model has utility in a and disease prevention as part of the
spectrum of fields. Examples of policy areas national lung health action plan. 5 The
where the SIB could be explored are: outcome could be a reduction in the
number of people affected by lung disease,
Healthcare which is currently 1 in every 5, and a
Childcare reduction in the associated health care
Fostercare costs pegged at $154 billion.6 A portion of
Elderly care the long-term savings to government could
Home care for the chronically sick be used to provide a return to investors
Single room occupancy (SRO) housing based on outcomes achieved.
programs
Youth employment Because lung disease encompasses illnesses
stemming from a variety of systemic
The following are a few examples that could factors, attempts to reduce its impact
have significant implications for Canadian require coordination of many levels of
policy: government, agencies and private sector
players. An SIB could provide a framework
Reducing Respiratory Disease Through for shared accountability and shared
Prevention outcomes.
An SIB could be designed with Health
Canada and the Lung Association to reduce 5
the number of people affected by For more information regarding the framework,
please see http://www.lung.ca/about-
respiratory disease.
propos/framework-cadre_e.php
6
According to the Lung Association, it is estimated
Private capital could be raised to support that respiratory disease costs the Canadian economy
and expand the promotion of lung health $154 billion per year.
Social Impact Bonds: Potential Applicability for Canada |18
Tackling the Root of Mental Health and The most effective mental health and
Addictions addiction prevention efforts use multiple
An SIB could be designed by Health Canada government policy levers. This approach
and CAMH (Center for Mental Health and would have inter-related policy implications
Addiction) to target a reduction in the in areas of criminal justice, social housing,
number of people suffering from mental job readiness and employment and poverty
health and addiction-related diseases. reduction.
Private capital could be raised to support Improving the Socioeconomic
and expand programs and services that Conditions of Canada’s Aboriginal
provide youth health promotion Peoples
interventions. The outcome would be a An SIB could be designed with Indian and
reduction in the number of mental health or Northern Affairs Canada (INAC) and the
addiction related cases and/or early Post-Secondary Student Support Program
identification of addiction symptoms. Cost (PSSSP) to target improvements to
savings to CAMH and government could be education opportunities for Aboriginals.
used to provide a return to investors based
on outcome targets met. Private capital could be raised to support
and expand programs and services that
Health promotion and prevention play a promote and provide better education
central role in mental health and addiction opportunities. The outcome could be a
strategy but are implicated by income reduction in Aboriginal unemployment,
inequality and poverty, lack of affordable improved socioeconomic conditions, and a
housing and weak labor force attachment. reduction of support payments from
There is strong evidence that locally government. Cost savings related to
available mental health services that Government’s $314 million annual
provide early identification of problems for contribution could be used to provide a
children and youth are effective return to investors.
interventions. 7 One program, called
Strengthening Families for the Future, a Existing federal dollars and new Economic
collaborative program between CAMH, the Action Plan stimulus dollars have been used
City of Toronto and other community to fund two Aboriginal employment
partners has successfully proven that early programs, the ASEP (Aboriginal Skills and
intervention can reduce the likeliness of Employment Partnerships) and ASTSIF
substance abuse, depression, violence, (Aboriginal Skills and Training Strategic
delinquency and school failure in children. Investment Fund). After six years and $465
An SIB could provide the necessary capital million in funding the programs have
upfront to scale this program, which is reported 4,841 interventions and 2125
considered a Canadian best practice. jobs8. The cost per job placement in the
8
According to Treasury Board of Canada (2007-
2009). Statistics for the ASEP program. For more
7
Chief Justice Roy McMurtry. Roots of Youth info, see http://www.tbs-sct.gc.ca/hidb-
Violence Report (2008) bdih/initiative-eng.aspx?Hi=37
Social Impact Bonds: Potential Applicability for Canada |19
ASEP program is $20,141 and per changing approach to Aboriginal
intervention is $8,490. employment includes reducing the financial
and social barriers to formal education
Despite this intervention, however, the completion.14
Aboriginal population still suffers from
higher unemployment, lower levels of Opportunities in the disabilities sector
education, below average income and many
An SIB could be formed with Community
other indicators of limited socioeconomic
Living British Columbia (CLBC) and
circumstance compared to the rest of the
disabilities service providers in British
Canadian population:9
Columbia.
The unemployment rate of Aboriginals is
CLBC is a crown agency responsible for the
14.8% compared to 6.3% for the rest of
delivery of funding, supports and services
Canada10
for adults with developmental disabilities.
They are planning for a future service
In Ontario and British Columbia, levels of delivery environment characterized by
unemployment are 2.4 and 2.6 times growing social needs and funding pressures
that of the general population; in and are exploring financial innovation and
Manitoba and Saskatchewan it is over 3 setting a strategy that focuses on sector
times higher. 11 sustainability. Broadly, they are looking to:
The 1996 Royal Commission on Better leverage funding committed to
Aboriginal Peoples estimates the annual attract additional financial partners
expenditure and foregone revenue due
to the depressed employment status of Better integrate government funded
Aboriginals is $4.6 B to government and
programs with the community,
$2.9 B to Aboriginals. These figures are
philanthropic and business sectors
expected to rise to $11 B by 2016 due to
demographic reasons alone12
Move from “charity” models providing
social service supports, to a social
There is ample evidence that educational
investment model that requires
attainment leads to greater opportunities of
demonstration of success
employment and income.13 A systems
This approach intends to expand the
9
Mendelson, Michael (2006). Aboriginal Peoples and
services to the community while becoming
Post Secondary Education in Canada. Ottawa: more self-sustaining.
Caledon Institute on Social Policy
10
As calculated by HRSDC, (2009)
11
Mendelson, Michael op. cit.
12 14
Canada (1996). Royal Commission on Aboriginal In 2006, the high school completion rate of
Peoples. People to people, nation to nation: Aboriginals compared to non Aboriginals was 56.3%
Highlights from the report of the RCAP. to 76.9% (Vital Signs 2009). Barriers are both
13
Hull, J. (2005). Post-secondary Education and financial (costs) and social (community and family
Labour Market Outcomes Canada, 2001. Winnipeg: expectations, mistrust of education, discrimination,
Prologica Research Inc. cultural insensitivity). (Mendelson, 2006).
Social Impact Bonds: Potential Applicability for Canada |20
7 | Conclusions and Next Steps
The development of Social Impact Bonds in Building a Cross-sector Support System
Canada will be both a stimulus for the Introduction of the SIB concept to key
continuing expansion of the country’s stakeholder constituencies in ways that;
innovation and social finance ecosystem a. Builds knowledgeable interest in
and will be dependent on that ecosystem. how the SIB and its underlining
concepts could contribute to solving
Given the nascent nature in Canada of both serious social issues
social finance and cross-sector innovation b. Connects sectors and stakeholders in
collaboration, the first SIB initiative will take ways that could lay the groundwork
significant leadership, lead-time, and effort for subsequent collaboration on
to get underway successfully. implementation
c. Enhances knowledge within each
The areas of next-step-initiatives outlined sector of their respective roles,
below, and in the 2 following boxes, are assets, and current weaknesses in
more informed by social finance and being effective SIB partners
innovation expertise than detailed d. Cultivates the interest of potential
knowledge of internal government social investors
processes.
Building a National Community of
Practice
Critical Issues to Address This community should be networked
Any strategy on next steps needs to address into global SIB leadership institutions
the following issues: developing core knowledge, lessons
learned, and best practices
Researching SIB opportunities
Identification of the best opportunities Supporting Canada’s Innovation Eco-
to apply the SIB in Canada system
Support the building of Canada’s
Catalyzing leadership across all sectors: innovation eco-system, and its ability to
public, private and non-profit. promote community innovation and
Identification and support for a cross-sector solution generation. (See
leadership institution or civic partnership Building the Enabling Ecosystem for
capable of convening and coordinating Social Impact Bonds on Page 22.)
the key stakeholders for implementation
of an inaugural SIB On the next two pages, this report
concludes with suggestions for how
Creating an infrastructure for the SIB government policy can strengthen the
Tasking and supporting appropriate enabling ecosystem for SIBs and suggests a
institutions and partnerships with the possible multi-stage scenario for how an SIB
creation of the core instruments to be could develop a focus, initiate a partnership
brought together to implement the SIB framework, be convened, implemented,
and evaluated.
Social Impact Bonds: Potential Applicability for Canada |21
Building the Enabling Ecosystem for Social Impact Bonds
Invest time, resources and policy development to enable social innovation
Government can play a critical role in Pilot an Innovation Lab outside government
speeding the development of innovation in a aligned non-governmental agency (e.g. at
and social finance in a variety of ways: an innovation hub) that overcomes the
“innovator’s dilemma” and permits greater
risk-taking
Participate in the existing innovation and
social finance networks that support
communities of practice Participate in cross-sectoral learning tables
on innovation and innovation processes in
partnership with business, charitable, non-
Remove barriers to non-profit innovation by
profit, academic and social enterprise
a) modernizing the four heads of charitable
organizations
purpose (e.g. borrowing the expansion of
charitable purposes from the UK), b)
introducing a “destination test” for non- Expand, support, and align incentives for
profit earned income (i.e. making it more governmental innovation activity and
flexible for charities to pursue earned income knowledge building; consider creating
activities as long as surpluses are earmarked positions of “social entrepreneur in
for mission, using a proven UK policy residence” who could coach and mentor
framework), and c) broadening foundation departmental intrapreneurs leading
endowments’ use of program related innovation initiatives
investments (PRIs)
Guide the evolution of existing government
Enable new hybrid structures and tax supported business development programs
incentives for organizations like a to include clients working on innovative non-
“Community Enterprise Company” profit social enterprises and for-profit social
venture businesses
Create a government office of innovation, to
work across departments to incubate, new Encourage the expansion of financial
policy towards effective innovation and a intermediaries serving the social finance or
social finance ecosystem impact investing capital users (e.g. a “non-
profit finance fund” providing working capital
to non-profits, mutual funds holding non-
Expand funding for innovation initiatives,
profit or affordable housing mortgages, etc)
pilots, multi-funder consortia, exploring new
funding models and new ways to collaborate
with private and public foundations, Endow a specialized innovation program
promoting cross sector partnerships and embedded in an existing institution (e.g.
collaborations, incubating models for Public Policy Forum) that would allow for
collective action and coordinating activity cross-sector experimentation around
organized around responding to priority innovative public policy solutions
needs (e.g. aging, overcoming employment
barriers, etc.) Develop cross-departmental initiatives that
help overcome silos and build an inside-of-
Support development of business school government community of practice
based “Partnership Centres” to provide
training.
Social Impact Bonds: Potential Applicability for Canada |22
Scenario for Piloting the First Social Impact Bond
STAGE ONE STAGE TWO STAGE THREE STAGE FOUR
Task a consultant to develop Bring the consultant report back Commission an institution to The SIB has completed its mandate
potential SIB issue areas for a first into the department for review convene and support a multi- and the contract is fulfilled with
pilot; this process would include and for short-listing most likely sectoral SIB partnership, develop government’s payment for results;
research and focus groups on the areas to proceed to feasibility the needed components of an SIB government could continue to
applicable SIB domains identifying stage; Lleverage knowledge ranging from developing the support an SIB model, decide to
opportunities and challenges for gained for outreach to other opportunity intervention, drafting fund the intervention itself or do
implementation, identifying government departments; the contract with government, both
potential next steps, and developing the contracted metrics
researching and identifying the In parallel, work to identify and for performance outcomes that The developmental evaluation is
outside-of-government build relationships with likely provide the incentives needed to used to guide incorporation of
institutions capable of supporting private sector, non-profits and encourage investors for the model, lessons learned for future
the different phases of SIB foundations or other levels of etc. generations of SIBs and/or help
development, implementation government that potentially could with the expanded adaptation of
and monitoring; review how the be partners on the bond; Link an ongoing developmental the underlining concepts of an SIB
underlining SIB concepts have Ministerial participation would be evaluation of the SIB to support for into other forms of commissioning
already been used in necessary to successfully convene the national community of practice outcomes by government
departmental funding programs an all-sector knowledge-and on SIB’s. Innovations are by their
and how they could be expanded relationship-building Roundtable very nature iterative. A companion
on the SIB; an alternative to a one- developmental evaluation
In parallel, develop an informed time Roundtable would be the throughout the SIB process (as
constituency inside the appointment of a Ministerial opposed to an end-of-pipeline
appropriate department about Expert All-Sector Advisory Group evaluation) would strengthen its
the SIB and its potential through to help map a multi-step process implementation and track insights
educational forums and invited leading up to the first SIB and lessons relevant for future
15
speakers adaptation
In parallel, help coordinate
government program and policy
support for the longer term SIB
market infrastructure
15
For more on developmental evaluations see Jamie A.A. Gamble, A Developmental Evaluation Primer, The J.W. McConnell Family Foundation, 2008.
Downloadable at: http://www.mcconnellfoundation.ca/en/about/library
Social Impact Bonds: Potential Applicability for Canada |23
Acknowledgments
Many people and institutions have generously shared their time and expertise contributing to
our knowledge used in preparing this paper. They include: Toby Eccles and Emily Bolton of
Social Finance UK; Tim Brodhead, Al Etmanski, Frances Westley, Allyson Hewitt, Stephen
Huddart and Cheryl Rose of Social Innovation Generation; Charmian Love of Volans; The Young
Foundation; Arthur Wood; Antony Bugg-Levine at The Rockefeller Foundation; Nora Sobolov;
Karim Harji and Bill Young at Social Capital Partners; draft reviewers at HRSDC and Stacey
Corriveau; and our colleagues at Causeway. Any errors are the responsibility of the authors.
Social Impact Bonds: Potential Applicability for Canada |24
Appendix A: Creating an Enabling Environment
Social innovation continues to gain Specifically, some of the factors impeding
international recognition as a means to innovation are:
solve the most complex social challenges. It
is used either because traditional FUNDING – Chronic underfunding erodes
approaches have been ineffective, or key strategic assets including R+D
because changed circumstances call for new budgets and spending
understandings or approaches.16
KNOWLEDGE – Lack of knowledge on
Given the current economic downturn and how to develop, pilot and scale new
the prospect of increasing public sector innovation; lack of governance familiarity
deficits and budgetary cutbacks, Canadian with managing innovation risk
non-profit organizations are compelled to
find new and more sustainable sources of CAPITAL – Lack of seed capital for
capital to fund their innovative practices. innovative social entrepreneurs
Government is well positioned to support
these initiatives through policy, increased CAPACITY BUILDING – Lack of access of
funding for innovative ideas and through non-profit organizations to business
fostering more public-private partnerships. support programs or hubs17
Innovation can expand and deepen an Social problems are increasingly complex
enabling environment in various ways: and outstrip the capability of any one
organization or single sector to address.
Creating a new financial mechanism to Successful innovation in the social realm
increase the speed and scale of relies on broad-based civic alliances to
initiatives by leveraging external generate, build and implement solutions.
resources The most transformative innovations tackle
systems and mobilize all four sectors –
Exploring ideas through collaborative business, government, non-profits, and
partnerships; encouraging action households. Success depends heavily on
through multi-sector engagement grass root, community-led initiatives that
are then taken to scale using a phased
Building out a supportive ecosystem approach and cross-sector collaboration.
Mitigating the risk of unproven initiatives Figure 3 describes a bottom-up, phased
by partnering with new stakeholders approach to scaling innovation.
Leveraging cost savings
17
Two exceptions are the advisory services available
16
Brodhead, Tim “On not letting a crisis go to waste: through Toronto’s MaRS Discovery District and a
an innovation agenda for Canada’s community different model of services available through
sector”, The Philanthropist: Volume 23, 2010. Waterloo’s Accelerator Centre.
Social Impact Bonds: Potential Applicability for Canada |25
The Vital Role of Non-profit Organi- services outstrips supply and organizations
zations in our Economy are continually expected to ‘do more with
less’. 18 Earned revenue, the sale of
Non-profit organizations recognize that products, memberships, and fee-for-service
they have a growing set of options to meet offerings are growing as a percentage of
their financial needs – government support, core non-profit revenue19 but organizations
foundation contributions, personal remain constricted by limited funding
donations or by creating an enterprising options. As demographics change and
arm of business to generate revenues. government deficits force grant reductions,
Notwithstanding, demand for non-profit there is a need for more or better access to
Figure 3: Financing Social Innovation – A Phased Approach
18
A Nonprofit Finance Fund survey of non-profit
groups found that 80% expect demand for services
to increase while 65% have reported a decline in
funding over recession period
19
According to Imagine Canada, core non-profit
services earn 43% of their revenues, while 36%
comes from grants and contributions, with another
11% from individual donors
Social Impact Bonds: Potential Applicability for Canada |26
different capital sources to support new Prominent examples in the US include the
Civic society will have a crucial role in this third generation of public service as social
enterprises and not-for-profit providers so often ensure that public service meets people’s
needs, especially those of hard to reach communities
- Gordon Brown
Prime Minister, United Kingdom
and evolving business models. Nonprofit Finance Fund21 and Calvert
Foundation’s Community Investment
Some social sector organizations have the Note.22 Both models have successful
equivalent of for-profit seed capital through financial track records while also build the
philanthropic support and grants, but organizational capacity of non-profit
almost no working capital or venture organizations. In Canada, the Canadian
financing.20 Alternative Investment Cooperative23 has
been financing charities and non-profits for
A market-based investment approach to almost three decades.
non-profit capitalization has been studied
and tested in varying contexts globally for Investment tools and vehicles are emerging
many decades. that have multiple goals: combining
financial dividends with measurable social
outcomes.
21
See http://nonprofitfinancefund.org for more
information
22
See http://calvertfoundation.org for more
information
20 23
Brodhead, Tim, op cit See http://caic.ca for more information
Social Impact Bonds: Potential Applicability for Canada |27
Appendix B: Introduction to Social Finance
Traditional investment capital is being A bridge loan to a non-profit
repurposed and a new investor class is
emerging; individuals, institutions, privately A financial asset raised from private
held organizations and commercial investors with repayments distributed
investors are exploring the realm of social based on social impacts and cost savings
finance. By definition, a social finance
approach is a sustainable means of The myriad of financial vehicles with a social
managing money that takes into account motivation noted above have subtle
social and environmental considerations in differences but the takeaway is the same: a
addition to the financial bottom line. The growing amount of investment capital is
approach contemplates the investment being repurposed to achieve blended value
actions of investors/funders (social returns.
investors) as well as blended value
enterprise (BVE)24. BVEs include both for- In each of these models, blending the value
profit social purpose business and non- of social, environmental and financial
profits or charities. returns will create a holistic calculation of
return on investment, sometimes referred
Broadly, social finance includes a continuum to as social return on investment (SROI).
of finance mechanisms: This type of return (double or triple bottom
line) has become increasingly important for
A grant to cover program costs and a investors seeking to invest in organizations
loan to cover operational costs for a that provide the best opportunity for
charity positive outcomes in addition to a financial
return. One result, non-profit organizations
Start-up venture capital from an impact are expected to demonstrate their value in
investor for a budding social ways that they have not been asked to
entrepreneur/enterprise before. These forces are moving social
capital in a competitive direction,
Equity or quasi-equity program-related resembling the dynamics of a traditional
investment (PRI) by a foundation for a market.
social enterprise
What returns can social investors
Microfinance (small loans) for a expect?
community partnership
Similar to traditional investment
Community development investment methodologies, investors will choose an
from a socially responsible investment investment strategy that satisfies their
(SRI) fund capital return expectations within their risk
parameters. The key difference is that
social investors will factor in social
24 outcomes as part of their anticipated
Adapted from Love, C et al. “Building the Case for
Social Finance in Canada”: Causeway, (2009). return.
Social Impact Bonds: Potential Applicability for Canada |28
Figure 4: Expected Return by Finance Vehicle
The financial return in a social investment The Current State of Social Finance
context could be market rate return, in Canada
charitable or zero return, or a mix between
the two25. Figure 4 offers an illustration of Canada’s social finance market is nascent.27
the spectrum of investments and expected Efforts to expand capital for blended value
returns. purposes remains uncoordinated28 but
there are pioneering examples, such as
As competition for investment dollars Fiducie du Chantier de l’economie sociale in
becomes increasingly tight, the differences Quebec, Edmonton Social Enterprise Fund,
between non-profit and for-profit and Vancity Credit Union in British
organizations become more relevant. The Columbia, that are paving the way for
tension between the two sectors is largely expansion. The development of new
due to a lack of level playing field. models and financial vehicles are
Significant barriers - legal, tax and fiscal contributing to the emergence of this
policies, and organizational and societal market.29
cultures - currently work together to
emphasize the differences between non-
profit, for-profit, philanthropy, and
government.26 It is largely understood that
the unfavourable economics surrounding
non-profits force their hand in relying on
grants and non-repayable contributions.
Social finance does not seek to displace
grant funding or to imply that all
organizations should move beyond grants.
The management of some non-profits are
not conducive to an enterprising approach
to revenue generation.
25 27
Golden, K et. al. Social Entrepreneurship: Part 1: Love, Charmian. Op cit
28
Social Venture Finance. MaRS Whitepaper Series, Monitor Impact Investing Report (2009)
29
2009 For an overview of the current social finance
26
Bishop, M et al. “The Capital Curve for a Better discussion, see socialfinance.ca, the thought
World”. Innovations: MIT Press, January 2010. leadership platform in Canada
Social Impact Bonds: Potential Applicability for Canada |29
New methods and approaches are disruptive. If we believe we face short-term strains, we will
respond in traditional ways, tightening belts, and getting on with it; but if we believe we are
now in a world of constant, accelerating change, we must become leaders in making Canada
and Canadians more resilient, adaptable, and creative in finding sustainable solutions to long-
standing social challenges.
Tim Brodhead
President
McConnell Family Foundation
Appendix C: Social Metrics: An Indispensible Ingredient of SIBs
Detailed social impact measurement is Foundation Center project30, an initial scan
needed to create and apply stakeholder found over one hundred and fifty
contracts in the development of a bond approaches to measuring and analyzing
agreement. Measurement is complex, social impact for programs and investment.
especially in the social sector. Explaining A matrix depicting some of the popular
measurement approaches is not the paper’s measurement toolkits and standards used
purpose, but a brief overview is provided globally is found in the figure below. It is
because of the significance of the concept important to note that measurement
to the model. approaches to date are heavily biased
towards quantitative metrics.
In a broad, socio-economic context,
measurement approaches have been Historically, there has been no consistent
developed to fit the needs of individual approach to using social impact metrics.
initiatives or themes. For example, REDF’s There has been incremental advancement
(formally Roberts Enterprise Development in the field but there is demand for systemic
Fund) pioneering work on Social Return on change. A common argument against social
Investment (SROI) was initially conceived to impact measurement is that the resources
measure the benefits of employment needed to track and measure initiatives
programs. SROI is a way to measure non- outweigh the benefits; particularly in cases
financial value and communicate the where social impact is challenging to
analysis to relevant stakeholders. quantify.
Depending on the availability of funds and
time constraints, organizations have either
adapted the SROI methodology to meet
their needs or they have developed their
own measurement models altogether.
According to TRASI (Tools and Resources for
Assessing Social Impact) a McKinsey and
30
For more information on TRASI and each of the
toolkits in the diagram, see
http://trasi.foundationcenter.org/
Social Impact Bonds: Potential Applicability for Canada |30
Figure 5: Matrix comparing common measurement toolkits in use today
The challenge is that a robust social The goal is to build on sector-specific efforts
investment marketplace, one that will to create a common language that will
motivate investors to explore new social allow comparison and communication
finance mechanisms like Social Impact across the breadth of organizations that
Bonds, requires reliable social impact have social or environmental impact as a
measurements. To address this need, a primary driver.31 Like all previous
dedicated, high profile initiative has been approaches, it is recognized that the
rolled out called IRIS (Impact Reporting and ultimate success of the measurement
Investment Standards) to mirror the quality initiative will depend on the endorsement
of standards in traditional, fully functioning of a critical mass of organizations in
capital marketplaces. addition to these early adopters.
IRIS stems from the initial efforts of the
Rockefeller Foundation and is now
supported by a host of partners in the
United States including Pricewaterhouse-
Coopers, Deloitte, and B Lab. It is a shared
framework for defining, tracking and
reporting on the performance of impact
capital in a standardized way. 31
IRIS is endorsed by major private institutions and
investors such as The Bill and Melinda Gates
Foundation, Acumen Fund, and The Global Impact
Investment Network
Social Impact Bonds: Potential Applicability for Canada |31
Appendix D: Glossary
Blended Value: refers to a business model that combines a revenue-generating business with a
component which generates social-value. The term is usually attributed to Jed Emerson, and
sometimes used interchangeably with triple bottom line and social enterprise.
Community Enterprise Company: typically defined as a specialized form of community-based
organization that has both commercial and social aims and objectives.
Social Impact Bond: a financial vehicle that attracts non-government investment to pay for
services which, if successful, deliver both social value and public sector savings. Investors
receive a financial return from a portion of the cost savings delivered.
Social finance: the deliberate, intentional application of tools, instruments, and strategies to
enable capital to achieve a blended value return (i.e. social dividends and an economic return).
Social innovation: the successful application of new ideas in ways that produce positive social,
environmental, and cultural outcomes.
Social Investor: an individual, private funder or financial institution that actively deploys capital
seeking social and/or environmental benefits.
Social Return on Investment (SROI): the total social, environmental, and economic value of an
activity undertaken by a non profit organization or business.
Office of the Third Sector: housed within the UK Cabinet Office, the Office of the Third Sector
(OTS) leads work across Britain’s government to support the environment for thriving voluntary
and community groups, social enterprises, charities, cooperatives and mutuals.
Program Related Investments (PRI): an investment made by a foundation to further its exempt
activities, in which the production of income is not a significant purpose.
Recidivism: relapsing into delinquent or an undesired behaviour.
Root Cause: term used to describe the depth in the causal chain at which an intervention could
reasonably be implemented in order to change performance and prevent an undesirable
outcome.
Social Impact Bonds: Potential Applicability for Canada |32
