Social Impact Bonds and their Role in Canada

Written by Mark Hlady, Finance for Good

We are on the verge of a revolution in social service delivery. Our publically funded system does not have the resources to lead this revolution alone. Social impact bonds (SIBs) allow private sector champions to make profitable investments to enhance our community and save our government money.

Through research, anecdotal observation, and conversations with local government we’ve recognized that government decision makers around the world tend to be caught in a cycle of reactionary spending on social services. Most funding goes towards programs that help individuals only after an issue has arisen: hospitals help individuals who have become ill, prisons incarcerate individuals who have committed a crime, and shelters provide beds to individuals who are homeless. Significant research has shown a more effective social system would focus on preventative measures, identifying the root causes behind social issues. What if we could prevent individuals from ever becoming ill, re-offending, or becoming chronically homeless? Doing this would not only create better lives for our citizens, it would also create significant economic savings for our government.

So, if preventative spending is more effective and cheaper, it’s logical to question why such a system has yet to be adopted. There are two key reasons for this; first, preventative spending inherently caries a degree of uncertainty because funding is provided to help individuals who are not in need of remedial care (e.g., hospitalization or incarceration) and many service organizations do not have the robust data sets required to prove the effectiveness of such programs. Second, rising healthcare and correctional system costs have trapped the government in a cycle of reactionary spending in which all available funds are being dedicated to those immediately in need, and an investment in preventive care is deprioritized. Together, these two broad challenges create the impetus behind social impact bonds.

Social impact bonds (SIBs) use funding from private investors to scale-up innovative social programs. The social benefits of the program are linked to economic results (e.g. reduced healthcare costs, lower prison costs, increased employment) and the effectiveness of the program is monitored and tracked. If the social program is able to achieve its target outcome, the government will pay investors back their initial capital, plus an incremental return. We refer to this structure as “pay-for-success” since the government is only required to pay if the program is proven successful.

The SIB concept began in the UK. In 2010, Social Finance UK raised £5 million which was used to develop a collaborative system of service providers who together help reduce recidivism rates amongst ex-offenders in Peterborough. If the program is effective in reducing recidivism rates by at least 7.5%, the government will use cashable savings resulting from reduced prison costs to repay investors.

Since the initial SIB in Peterborough, the concept has expanded exponentially. More than 20 SIBs have been developed around the world, primarily in the UK, US, and Australia. Additionally, the UK government recently committed £40 million to the development of future projects, while in the US, President Obama has committed $500 million to future projects in his most recent budget. At this point, Canada has not yet raised its first SIB, but interest is growing, particularly in Alberta, Ontario, and Atlantic Canada.

The reason Canada has yet to raise a SIB is because collaboration among all of the necessary stakeholders – government officials, social service providers, and private investors – has proven challenging to facilitate. To overcome this challenge, we started Finance for Good, Canada’s first SIB intermediary. In this role, we develop the necessary tools, networks, and processes to bring SIBs to Canada. Since each stakeholder has different interests and concerns, we build customized, actionable plans to prepare each group for future SIBs, as well as a collaborative process that brings everyone together to make the most important decisions. Our process is based on what was used in the UK, tweaked based our knowledge of local interests within Canada.

Some of our ongoing initiatives include:

  • Working with government officials, primarily in Alberta and Nova Scotia, to educate them on SIBs and effective SIB design processes
  • Engaging with service providers and community organizations in varying capacities to help them to develop and track observable metrics to prove the effectiveness of their programs and link their success to economic variables (we’re helping them become “SIB-ready”)
  • Connecting interested investors to potential projects and building a market for SIBs as investment vehicles

Based on our engagement with stakeholders across all sectors in society, we are confident that SIBs will soon be introduced in Canada to support and expand social programs across the country. We are not yet positive which initiatives will be chosen to scale up with a SIB, but we have identified a number of exciting service providers in Alberta with tremendous potential to create positive impacts on the lives of our province’s most vulnerable groups.

A sample of the Alberta programs we believe in are based on:

  • “Housing-first” principles, which combines affordable housing with necessary support services to break the cycle of chronic homelessness
  • Integrated crisis diversion aimed at helping vulnerable individuals reduce police contact and actively directing them towards social services fitting their needs
  • Innovative counseling techniques aimed at reducing time children spend in foster care

Canada is recognized globally for having a strong social system, however, the system is currently challenged by increasing costs and a cycle of reactionary spending. SIBs are one option to overcome these challenges and expand the funds available to social service organizations. So far we are extremely encouraged by the enthusiasm each of our stakeholder groups is showing toward SIBs. We look forward to continuing our work and bringing SIBs to Canada!

If you are interested in hearing more about our work at Finance for Good, we invite you to view our website at www.financeforgood.ca, or reach out to us directly at info@financeforgood.ca.

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