Social Impact Bonds: New Winds of Change in Canada

Professor Peter Shergold is the Macquarie Group Foundation Professor at the Centre for Social Impact (CSI) at UNSW and Chancellor of the University of Western Sydney. He was the founding CEO of CSI from 2008 – 2011. This article is from the CSI blog. 

One of my least favourite school exercises (and this is a crowded field) was returning to the classroom after summer vacation and being asked by my teacher to write an essay on “My Holiday”. The pain of sitting behind a desk, and contemplating the Math and Latin lessons to follow, whilst remembering the times of freedom just passed, was almost too much to bear. My commitment to the literary exercise was perfunctory.

I hope that the same mood of reflective disappointment was not evident in my recent “Postcard from Canada”. The great benefit of the trip was that the ideas I was exposed to on social finance innovation continue to resonate now I’m back at CSI. Perhaps that’s the good thing about a ‘thought holiday’. And, better still, the signs of movement I saw across the Pacific seem to be gathering momentum.

I was in Canada as a guest of the Federal government agency, Human Resources and Skills Development and the Public Policy Forum. The keynote speech I gave in Ottawa, “What Governments Can Do to Promote Social Finance and Innovation”, is now available at our website as an annotated Powerpoint.

As I noted in my Postcard, I was afforded the opportunity to enjoy a working dinner with the Federal Human Resources Minister, Diane Finley. It was clear from that meeting that she was well-informed and exceptionally interested in the opportunities to facilitate private capital to achieve social outcomes that could create public savings. Already familiar with the expanding trial of Social Impact Bonds in England, she was keen to find out more about the proposed demonstration project of Social Benefit Bonds in NSW. On that, from my position as Chair of the Social Investment Expert Advisory Group, I will blog more in the near future.

Today’s key message is that Minister Finley has now announced that the Canadian government led by Prime Minister Stephen Harper “can’t do everything” to meet the nation’s social challenges and “is looking at the corporate and not-for-profit sectors to help deliver more services and tangible results”.

At a major Conservative party meeting held last weekend in Ottawa, Finley argued that whilst governments can’t satisfactorily address the growing public expenditure dilemmas on their own they can increasingly “facilitate and empower others to deal with social challenges”.

A key part of that agenda, she suggested, was consideration of social impact bonds as a negotiated contractual arrangement between government, social enterprise and private investors to provide upfront capital to finance the delivery of beneficial social outcomes. The speech received coast-to-coast coverage in Canadian newspapers, from The Globe and Mail to the Vancouver Sun.

Meanwhile, as I noted in my Postcard, I’d been given the opportunity to talk to public servants in the Provincial government of Ontario about the challenges of facilitating social innovation. The Report of the Commission on the Reform of Ontario’s Public Services has now been released.

The Commission’s Report is no-holds-barred, its frankness reflecting the scale of Ontario’s deteriorating economic situation and its declining manufacturing sector. The Province now has the largest deficit relative to GDP of any province (35%) and if no changes were made to government outlays net debt is estimated to increase to C$411 billion (51%) by 2017-18.

It is within this context of austerity that Chapter 8 of the Report, on “Social Programs”, moots the idea of trialling social impact bonds, with the private bondholder receiving a risk-adjusted rate of return from the government based on the extent of public benefits received.

Clearly, in Canada as in Australia, there is increasing willingness to contemplate governments harnessing the creation of a pool of private finance for social impact. The tone of the political discussion has greater urgency. Is all this good news?

There is a clear and evident danger, as one reads government reports and Ministerial speeches that the benefits of government facilitation of social finance can be presented from a narrow perspective. Social impact bonds, for example, do allow governments to transfer risk to the private and not-for-profit sectors, ensure payment is only made on the basis of agreed and measured outcomes and reduce pressures on public expenditure in areas such as prisoner incarceration, out-of-family childcare, social housing or disability care.

These represent real benefits to governments facing pressure to balance their budgets. If that, however, was all there was to say in favour of Social Impact Bonds I wouldn’t be an advocate. From my perspective Bonds are also powerful because they allow social enterprises to grow to scale by attracting socially responsible investment. They provide encouragement to mission-driven organisations to innovate in the delivery of public benefit without being subjected to a burden of bureaucratic red tape. They require governments to audit and measure far more accurately the full social returns on public investment. The negotiation of Bond issuance demands much greater cross-sectoral collaboration and repositions government as a facilitator of reform in which the social enterprise is empowered to co-produce government policy.

The fierce public debate in the UK on the Big Society initiatives are revealing. Sceptics are understandably suspicious that social finance (generally) and Bonds (specifically) are just a smoke-and-mirrors subterfuge to cut public services or reduce expenditure. Minister Finley’s speech sought to reassure: “We’re not relinquishing any of our responsibilities. What we are doing is creating more space and more freedom.” In NSW Treasurer Mike Baird has made similar commitments. But, as so often in public policy, the proof of the pudding will be in the eating.

My own view is that governments need to make haste but slowly. Demonstration projects are vital both to assess the technical complexities of social funding and its political consequences. We need to do but learn from the doing. Evidence-based policy too often underpins a risk-averse approach: instead we need on occasion to take a punt, run a pilot and carefully evaluate the outcomes. It’s called innovation.

In the meantime, for those of you who want to learn more about Social Impact Bonds keep tuning in to CSI. If you haven’t already done so take a look at our research reports and blogs on social finance.