A. What is Social Finance?

In brief, social finance is said to be “the use of private capital in financial markets for social good.”[2] The Committee heard that the terms “social finance” and “impact investment” are often used interchangeably to refer to a type of investing that seeks to generate both financial and social returns. Stated another way, “social finance” describes an approach to mobilizing repayable capital in ways that seek to create positive social impacts.

Representatives from Employment and Social Development Canada (ESDC) outlined the concept of social finance in the following terms:

Simply put, social finance is using money in ways that generate both social and financial returns. It’s an approach that mobilizes multiple sources of capital to deliver a positive, measurable social outcome and an economic dividend.

Social finance provides opportunities to leverage additional investments and increase available dollars to develop, deliver, and scale up proven approaches that seek to address social and economic challenges in our communities. It includes new approaches to investing. It’s often known as “impact investment.”[3]

Social finance is not a new idea, but has been expanding in popularity around the world in recent years as a means to support the social economy and social sector organizations, and develop new approaches to address complex social problems. The Committee heard that the United Kingdom (U.K.) has led this recent revival internationally, having developed its social finance sector over the past 15 years and used its recent presidency of the G-8 to establish a taskforce on social impact investment.[4] In addition, under the auspices of that effort, national advisory boards were established in G-8 member countries, including Canada, to contribute research into the domestic policy agenda. The final report of Canada’s National Advisory Board to the Social Impact Investment Taskforce was released in September 2014.[5]

As Kieron Boyle of the U.K. Government noted, the concept of social finance is necessarily broad because of the range of stakeholders and perspectives that are engaged:

Definitions are everything here. Essentially, within the U.K. there seems to be two broad definitions that sit around the world of social finance. The first one seems to be social finance being about repayable capital that helps social organizations increase their impact. That's very much from the investee's perspective. There's a broader one that we used in the G-8 task force that was talking about social investment being investment that intentionally seeks and measures financial returns and social returns.

I think they're both right. It just pulls out the fact that there's a breadth to this. So much of this field depends on where you sit.[6]

Jeffrey Cyr from the National Association of Friendship Centres echoed a recurring theme amongst witnesses that social finance has the potential to serve as an additional social policy instrument in Canada that drives social innovation and complements, enhances or extends the scope of existing social programs in order to deliver an even greater social impact, rather than a means of replacing existing social programs. Many witnesses, including Mr. Cyr, described social finance as a policy tool with potential to better address specific, complex social challenges in new and innovative ways.

Let’s jump into social finance, which I see as part of a suite of mechanisms and structures required to facilitate social innovation. Of course social innovation is, at heart, about catalyzing and creating systems change.

For us, one thing is clear. The complexity of the problems around us, most acutely in the lives of urban indigenous people in this country, will not be solved by traditional ways of acting. The systems of today, frankly, are not built to handle the problems of today.…

Social innovation and social finance represent tremendous tools with which to build on these strategic relationships to develop new or, just as importantly, to scale up and scale out existing initiatives so they can have broader impact.[7]

Witnesses appearing before the Committee approached social finance from a variety of perspectives and, as will be described below, highlighted a variety of tools and business models that fall under this broad concept. However, the Committee heard that social finance models share a key feature that is different from traditional funding models: whereas grants or donations provide a “one-off” source of funding, social finance attempts to achieve something “more sustainable and more long-lasting.”[8]

The Committee heard that the social finance market, like any financial market, is a combination of demand (for capital to finance initiatives), supply (of investment capital), and intermediaries (connecting demand and supply sides of the market). As Siobhan Harty of ESDC explained:

As with other capital markets, the social finance marketplace is made up of three broad components. There is the supply side that provides the capital. There are a number of players that are active in this area, including foundations, financial institutions, and private investors, to name a few. There is the demand side that comes from a range of both non-profit and for-profit organizations that includes charities, non-profit organizations, social enterprises, cooperatives, and social purpose businesses. In the middle there are intermediaries, those agents that try to bring together the two sides of the market: supply and demand. These intermediaries work to facilitate deals by providing expertise for the development of the supply and demand side, and to enable the efficient growth of the overall market.[9]

The Committee heard that interest in social finance is being driven by both the supply and demand sides of the market. From the supply side of the social finance market (e.g., governments, foundations, financial institutions), the Committee heard that investors are increasingly interested in using their resources in ways that offer both a return on investment and positive social impacts. As Ms. Harty noted:

We’re seeing a different spirit, if I can use that term in the financing world, in people who want to make an investment and not achieve just a financial return. These individuals – call them social impact investors or people who want to support social enterprise – are really bringing a different expectation to that market and to this area of policy in asking how they can use their money to achieve a social good.[10]

From the demand side of the social finance market (e.g., charities, non-profit organizations, social enterprises), the Committee heard about a need for new approaches to address the difficult social and economic challenges that have resisted change through traditional means of funding. Carole Gagnon of United Way Ottawa spoke of this dynamic in the following terms:

Traditional ways in which we have been funding social issues are experiencing tremendous transformation. Many factors will continue to pressure government funding in the area of social service spending.

…

We certainly view private capital investment as an opportunity for new conversations with our long-time donors, many of whom we already speak to in investment terms. The potential to attract new stakeholders to our work is there as well and will require greater engagement of all sectors.[11]

The Committee also heard from several intermediaries operating in Canada’s social finance marketplace. These include organizations that work with investors and assist in generating capital for social finance, work to improve the capacity of demand-side actors to participate in the social finance market, and generate research and data to support the measurement and evaluation of social finance initiatives. Tim Jackson of the MaRS Discovery District, a registered charity that works to promote social finance in both the demand and supply sides of the market, also described the potential of social finance to introduce new funds to address important social issues:

In simple terms, the challenges we face as [a] society need a new approach. You as parliamentarians are dealing with budget constraints particularly around things like health care and social services. I think you would acknowledge the innovative approach we have taken as a country toward things like our entrepreneurial approach to business, our entrepreneurial approach to innovation, requires that same type of approach to deal with some of these large social issues, whether we're talking about homelessness or poverty reduction. We think it requires a new, innovative approach and it requires us to access some funds that are not currently available in the space.[12]

While broad consensus existed among witnesses about the need for new approaches to address persistent social and economic challenges through new partnerships and sources of financing, the particular form that social finance initiatives should take to meet this challenge varied. The next section of this chapter will describe the main types of social finance instruments raised by witnesses, and summarize the discussion regarding the potential role of social finance in Canada’s social service sector.

B. Social Finance Tools and Business Models

Social finance is linked to the broader policy goal of improving social outcomes. This objective distinguishes social finance from traditional funding models for social programs (which focus on shorter term outputs), and other types of investments (which seek to maximize profits). Private capital may be used to further the goal of improving social outcomes in multiple ways, and the following section will discuss the three types of social finance tools and business models most commonly raised in the evidence: social impact bonds (SIBs), social investment funds, and social enterprises.

1. Social Impact Bonds

One approach to social finance – known as “outcomes-based finance” or “pay-for-performance” – directly links the provision of program funding to the achievement of measurable, proven social outcomes. Options under this approach include an instrument known as a “social impact bond” (SIB), which ESDC has defined as:

… an instrument for funding projects where a prearranged amount of money is paid out if performance results are achieved. SIBs combine a pay-for-performance element with an investment-based approach: private investors provide up-front capital to fund interventions, and can expect to get back their principal investments and a financial return if the results are achieved.[13]

Although structures for specific instruments vary, SIBs are generally contractual arrangements through which investors provide multi-year funding to service providers to deliver a program or service, and government agrees to repay the investors’ capital plus an agreed-upon return if the program achieves its stated social outcome goals. As Meghan Joy of Ryerson University explained:

Basically it begins with government identifying a social policy field where it would like to pay for particular outcomes.… Government then would typically contract an intermediary organization who manages the SIB project and actually prepares the bond instrument. It prepares the desired project results, the costs, the savings, as well as the rate of return to investors should the social project achieve those pre-arranged outcome targets. The intermediary would then issue the bond to private investors, who provide the upfront or the immediate project capital. This is where the social finance element, the impact investing element, comes in.[14]

The Committee heard that SIBs have the potential to improve the funding and delivery of social programs by finding efficiencies, spurring private sector innovation, and transferring the risk of funding social innovation to the private sector. However, as will be discussed below, several witnesses advanced critiques of SIBs and their potential to improve on existing funding and delivery models.

Lars Boggild of Finance for Good told the Committee that there are currently 44 SIBs live globally.[15] The first SIB was launched in 2010 in Peterborough, U.K., for a project aimed at reducing the recidivism rates of short-sentence male offenders. Originally envisioned as a seven-year initiative, the Committee heard that the pilot project was cancelled partway through as the prison system moved toward greater privatization of rehabilitation services, and the full results of the SIB were never evaluated.[16] As John Loxley of the University of Manitoba stated, “the whole thing was wrapped up far too early for it to be called a success.”[17]

Kieron Boyle indicated that the U.K. has launched a total of 31 SIBs in five policy areas: “health, reoffending, youth unemployment, children at risk and … adoption.” Mr. Boyle told the Committee that the full results of these pilot projects are not yet available and, if they are deemed successful, there remains some question as to whether, at this early stage, their success could be fully attributed to the SIB model:

All the early indications from the social impact bonds are that they are achieving better outcomes than the counterfactual, what would have happened anyway. What we don't know yet is whether that is something that would happen if it were replicated wider or whether this is some sort of pilot halo effect because there's a degree of attention and focus upon them.[18]

The Committee heard that Canada’s first SIB was launched in Saskatchewan last year, to establish a home to provide mothers and their children with safe and affordable accommodation. As Donald Meikle of the Saskatoon Downtown Youth Centre (which is implementing the project) explained, his organization looked to SIBs as an alternative source of project funding:

The options for us to fund this home were to wait for up to a year and a half to get into the funding cycle with still no promises, to try to raise the needed dollars with an organization that already needs to raise about $100,000 per year to keep our doors open, or to go with a new and innovative way of funding called the social impact bond that bases funding on outcomes.[19]

Dale McFee, Deputy Minister of Correctional Services with the Government of Saskatchewan, told the Committee that this SIB is valued at a relatively low $1 million and did not involve an intermediary.[20] Investors on the project include a housing development corporation and a credit union.[21]

The Committee heard that ESDC is currently involved in a pilot project incorporating the SIB model in the area of adult literacy and essential skills. Ms. Harty explained that this pilot project:

… will run for 18 months, approximately. It has two populations: one of employed Canadians and one of non-employed Canadians. In both cases, interventions are applied to increase their literacy and essential skills levels, with the objective of their having stronger labour market attachment. These are en route. They're currently being finalized in terms of the partnerships and the negotiations.[22]

Jean-Pierre Voyer of the Social Research and Demonstration Corporation, which was retained as the independent evaluator on the pilot project, noted that one aspect of the pilot proposes to enrol unemployed Canadians in an essential skills training program, and is “testing what would be considered a true social impact bond model in which private investors will recover their initial investment plus a financial return of up to 15%, if the training is successful.” The other part of the pilot addresses skills training for those who are already employed, in which private sector employers will be reimbursed for up to 50% of training costs, if this training achieves target outcomes. Mr. Voyer further explained that this aspect of the pilot is “a departure from a formal SIB, because the investor is not motivated by return on capital investment per se but by the prospect of economic returns from a better-trained and more productive workforce as well as reimbursement of training expenses.”[23]

While governments have begun to experiment with the SIB model in Canada, to date no evaluations have been completed to demonstrate the actual potential of the SIB model in Canada or elsewhere. The Committee heard from witnesses who were involved in the development of SIB instruments and expressed interest in contributing to their use in Canada.[24] However, as will be described below, the Committee also heard from witnesses who advanced critiques of the SIB model and urged the federal government to apply this model with caution, if at all. Looking at the currently available evidence on the model and the experience of SIBs internationally, these witnesses expressed scepticism about the potential of SIBs to become a viable funding model for social programs in Canada.

First, some witnesses argued that the SIB model is unlikely to make programs more efficient or reduce government costs or budgets, but rather bring different financial and administrative costs to government. These include short-term overhead costs associated with developing in-house skills and expertise in the social finance market, and costs to retain the necessary professional services from lawyers, accountants and evaluators. Barret Weber from the Parkland Institute described social impact bonds as “cumbersome, expensive, requir[ing] a lot of upfront capital, and whose results are speculative at best.”[25]

In addition, as witnesses such as Andrew McNeill of the National Union of Public and General Employees noted, rates of return also vary by contract, and can sometimes represent a significant financial cost to government:

… social impact bonds are an expensive way to borrow money. For example, the first social impact bond project in Peterborough, England, to reduce recidivism is expected to provide a rate of return of between 7.5% and 13% per year. Based on a survey by the MaRS Discovery District and Deloitte Canada, expectations of potential investors in social impact bonds here in Canada are very similar. By contrast, the federal government was paying an average of 2.37% to borrow money in 2013-14, which is roughly a third of the minimum amount Peterborough social impact investors are likely to receive.[26]

Second, some witnesses argued that, given the potential financial risks associated with the SIB model to investors if the program fails to achieve the outcomes established by the government, investors will likely gravitate toward proven programs, and populations that are the least vulnerable and therefore most likely to succeed and generate positive outcomes (also referred to as “cherry-picking” or “cream-skimming”).[27] In addition, according to David Juppe of the Maryland Department of Legislative Services, SIBs for more vulnerable populations or more innovative types of programs will be more expensive, as “[i]nvestors are going to demand a higher rate of return because there’s higher risk.”[28]

The third main critique of the SIB model advanced by witnesses involved challenges associated with program evaluation. In particular, as John Shields of Ryerson University noted, an evidence-based approach would require rigorous evaluation methods involving comparisons between randomly selected subject groups and control groups from the wider population. He noted that early evaluations of the Peterborough SIB, while generally positive, did not involve “a random sample; it was actually volunteers. That had the effect of biasing the sample, so that one would expect more positive results from the way the sample was selected.”[29] However, the issue of outcome measurement and appropriate data collection is best left to the intermediaries and is outside the scope of government.

Beyond these technical critiques of SIBs, witnesses also remarked on challenges surrounding the complexity of the model,[30] and noted that SIBs may distract from other forms of social finance requiring the attention of the federal government.[31]

2. Social Investment Funds

Many witnesses also discussed social investment funds, a type of social finance tool that pools capital from various sources and makes this capital available to demand-side actors, such as service delivery organizations and social enterprises. The Committee heard that such funds provide access to capital to organizations that may not otherwise be able to obtain funds from traditional loans.

While broadly linked to the goal of improved social outcomes, social investment funds differ from SIBs in that funding for these initiatives is not contingent on the proven achievement of outcomes. Rather, these tools resemble more traditional debt and equity financing instruments, but with a heightened social purpose and less emphasis on generating market-rate returns. For example, Andy Broderick of Vancity Credit Union spoke about its Resilient Capital program, a partnership with the Vancouver Foundation, which raised $15 million from a variety of public and private sources to make loans to organizations with a social purpose. He stated:

Resilient is one of a number of funds across Canada—there aren't very many, probably eight or 10—that are attempting to provide capital to social enterprises, non-profits, businesses that are working to improve the environment. They could be for-profits as long as they have a mission base to them.… In Canada it's about a $500-million market, probably a little under that. In the western economic world, it's about $50 billion and growing considerably.[32]

The Committee was also told about the Chantier de l’économie sociale Trust in Québec – a social investment fund created for the purpose of supporting social economy enterprises.[33] This fund can provide loans of up to $3.5 million, and was capitalized in part by the federal government and contributions from labour-sponsored funds.[34]

Colette Harvey of the Caisse d'économie solidaire Desjardins described the social finance activities of her financial institution, noting that it “makes up more than 40% of the total volume of social financing” in Quebec, and is “a very active member of Cap finance, the Réseau de la finance solidaire et responsable.” She further noted that the assets of the Caisse have doubled to $737 million over the last 10 years, “and its loans to social businesses have increased by 122% over the same period,” which are generally underwritten “to support the activities and development of social projects.”[35]

Sandra Odendahl of the Royal Bank of Canada (RBC) informed the Committee that, in 2012, RBC launched a social finance initiative involving, in part, the use of $10 million from the RBC Foundation to “invest in early-stage companies with a social or an environmental mission.”[36]

In addition, Shawn Murphy of Cooperatives and Mutuals Canada told the Committee that member-owned cooperatives have several social investment funds operating across the country, which are “designed to serve a particular geographical region or a particular sector in the co-op movement.” By way of example, he highlighted the Arctic Co-operative Development Fund, which was “established in 1986 to provide financial services to cooperatives across Canada's Arctic,” and which has grown from an initial $10 million investment into a $45 million investment fund.[37]

3. Support for Social Enterprises

Many witnesses also discussed various forms of social enterprise business models. A social enterprise is, generally, an “organization or business that uses the market-oriented production and sale of goods and/or services to pursue a public benefit mission.”[38] It could take the form of a charity, a non-profit organization, a for-profit corporation, a co-operative, or a hybrid corporation (where legislation creating such hybrid corporations has been enacted).[39]

While not strictly a form of impact investment, social enterprises are closely related as vehicles through which social finance tools can operate. For example, financial support for social enterprises can involve providing loans and other financing at below-market rates to help these enterprises pursue their social objectives.

The Committee heard from witnesses engaged in social enterprises that have leveraged funding from both public and private sources to generate positive social impacts within their communities. For example, Steve Cordes of Youth Opportunities Unlimited, an organization created in order to help youth with limited education and no work experience, noted in particular how this social enterprise leverages public funding:

With earned revenues, for every dollar that’s invested from public funds, the organization is actually earning $2 in addition to that. The federal funding right now represents about a third of the investments coming into our social enterprises.[40]

The Committee heard about the important impacts that social enterprises can have in communities. Courtney Bain, a client of Youth Opportunities Unlimited (YOU), shared her experience with the Committee :

I’m Courtney. I’m 24, and I’ve been involved with YOU since I was 18. The journey has been a long road and it wasn’t always successful, but YOU didn’t give up on me. I started doing the skills training program this September, and I finished in February. Through this time, they gave me the skills that I needed. I had never worked in a kitchen before, and I am leaving this kitchen to manage my own. I am now managing my own local restaurant.

Without YOU, I would probably still be homeless and on social assistance. They gave me the skills that I needed.

…

It’s giving me great opportunities. If it could do this much for me, think about how many other people it could help out as well.[41]

The Committee heard from organizations either interested in or already involved in social enterprise, including the Peel Multicultural Council, ABC Life Literacy, and Crossing All Bridges Learning Centre.[42] Some of these organizations expressed a need for greater access to private funding sources. For example, the Committee heard that ABC Life Literacy has been funded by private, public and donated dollars throughout its 25-year history, and is now turning to social entrepreneurship to fill a gap in funding. ABC Life Literacy’s UP project, which provides essential skills training in the workplace, operates under a social enterprise business model. ABC Life Literacy expressed a need for “patient capital” in order to cover for expenses incurred before the project starts generating revenues.[43] Crossing All Bridges Learning Centre also indicated that they are in need of start-up funding in order to get a social enterprise project off the ground.[44]

C. Role of Social Finance in Canada

As described above, social finance is an approach to mobilizing multiple sources of capital that has the potential to deliver sustainable social outcomes and economic returns, by developing multi-stakeholder partnerships and leveraging expertise in the social and financial spheres. While many witnesses expressed interest in participating in the development and implementation of social finance tools, many also indicated that they are not necessarily appropriate for all social challenges or target populations. As will be summarized below, testimony heard by the Committee included some current and planned initiatives at the provincial and federal levels, as well as a broader discussion of the appropriate role of social finance in providing funds for the social services sector.

Departmental officials described the current social finance market in Canada as “nascent” but with potential for growth. The size of the social finance market in Canada is currently estimated to be $2.2 billion,[45] but could, according to ESDC, grow in the range of $30 billion in 10 years, “if all parts of the market move forward together in an optimal situation.”[46]

Siobhan Harty discussed the Department’s May 2013 report which followed a national call for concepts for social finance initiatives:

[J]ust over 150 concepts were received over several months from across the country. What we did in the report is just profile some of them. None of them were funded. We were interested in getting a sense of whether Canadians had a familiarity with social finance and whether they had some ideas about innovative approaches that could be used in the context of social and labour market interventions at the local level.[47]

In addition to the pilot project outlined previously, the Department noted its involvement “in a micro-loan project to look at helping recent immigrants achieve foreign credential recognition so that they can engage in their professional activity in Canada and be part of the labour market.”[48] Ms. Harty also noted the recent announcement in Budget 2015 of a “social finance accelerator initiative” to be led by the Department,[49] and which is “expected to involve advisory services, mentorship, brokering, and investor introductions to help fast-track promising social finance ventures to a greater stage of investment readiness.”[50]

Witnesses also offered examples of government-supported social finance initiatives that are or may soon be taking place across Canada. In addition to Saskatchewan’s SIB, other noted examples included the Government of Nova Scotia’s consideration of an equity tax credit and the establishment of Community Economic Development Investment Funds,[51] and the Government of British Columbia’s introduction of the “community contribution company” – a hybrid corporation that, according to the department, “has tried to find a way in between traditional business and traditional charities.”[52]

Though the social finance market in Canada is currently small, many witnesses discussed the potential of social finance to represent a new and growing source of funding for social programs and services. This discussion included the role of social finance vis-à-vis government funding, and the types of initiatives potentially best suited to social finance interventions. It also included a discussion of the potential effects of social finance on the role and functions of service delivery organizations.

Some witnesses expressed concern that relationships with investors could affect the ability of social service organizations to preserve their missions and retain their independence in their operations.[53] Others noted that the degree of organizational autonomy would depend on the source of capital and how the social finance instrument is structured. As Norm Tasevski of Purpose Capital stated:

As an example, one of the groups that we work with is the angel investment community. By angel investors, I'm referring to individuals who would finance or take the highest risk associated with a particular investment. In some cases, I've seen angel investors who are completely passive with regard to an investment. They just put their capital in, and let the entrepreneur be the entrepreneur.

In fact, with some models, there's more autonomy for that type of investor than you would ever get with a government funded granting program or a charitable program … but in a lot of ways, the level of involvement that's needed in order to satisfy the conditions of a grant can often create barriers to autonomy for a lot of groups[54]

Siobhan Harty noted that the experience with social finance instruments internationally is that preserving the mission of the organization is a fundamental consideration:

I'm looking to other countries that are more advanced than Canada in using social finance models … I guess it depends on the mission of the organization, but everything I've heard is about how to allow these kinds of organizations to preserve their mission. It's so fundamental, so how do you do that? That question of mission is fundamental to everything that we're looking at. I've never heard that social finance as a form of financing in and of itself would have a detrimental effect on the ability of an organization to retain control of its mission.[55]

The Committee heard testimony from many witnesses indicating that social finance is intended as a complementary or additional source of funding for social programs. Viewed in this way, social finance provides a means to “leverage different sources of funding to address complex social challenges.”[56] As Adam Spence of Social Venture Connection (SVX) stated: “Social finance does not replace good public policy, good public investments, or good philanthropy, but it is a necessary complement to these approaches.”[57]

Some witnesses emphasized the potential for social finance to lessen the financial burden on government, with the perspective of being able to do more with available public funds. As Stanley Hartt of Norton Rose Fulbright Canada observed:

I agree that this is not intended at all to replace government funding for certain non-governmental organizations’ charitable activities or public welfare activities, but in fact it certainly does take some of the burden off government if, alongside government, there can be private sector entities that are investing in social ventures with predictable, measurable outcomes, and they are doing this using private sector funding.

…

When you mobilize private capital for public good, you reduce the pressure on government and enable them to do, perhaps, more with their available funds. There is no part of this that recommends government do less.[58]

Similarly, Kieron Boyle echoed the notion that social finance can have a role in the social sector by increasing the number of stakeholders interested in achieving social impacts:

At its core, one of the things that I believe social investment has the potential and capacity to do is to broaden the sense of partnership over who is trying to achieve social impact. I think that is a laudable aim and I think that can be achieved.[59]

In addition, Sunil Johal of the Mowat Centre highlighted the primary role that governments play in the social finance context:

… I think it's very important to recognize that governments still play the primus inter pares, the first among equals, role in terms of setting direction and deciding what those difficult social problems are. Governments should still be very heavily involved in this. I don't think this is an area we want to outsource, solving difficult problems, to the private sector.[60]

Others cautioned that widening the responsibility for social services into the private sector could lead to the replacement of federal funding or service delivery in some circumstances. Acknowledging the financial pressures on the social services sectors everywhere, Jean-Pierre Voyer noted:

The instruments of social enterprise, social finance, social impact bonds all fulfill different objectives, but in general if the thinking is to use them to replace an established government program whose specific objective is to serve the population I think that's the wrong point to start with. But if these tools are used to trigger innovation in social policy … and if they trigger more efficient service delivery … government or even non-profit organizations are not always a model of efficient service delivery.

If we can find ways to improve that without depriving them of funding, but if they're funded differently, so be it. The literature isn't conclusive. That doesn't mean that it's a bad way to go. We just have to go there with caution….[61]

The Committee also heard that social finance presents the advantage of offering longer term funding, which is well-suited to preventative approaches.[62] Indeed, a cited advantage of social finance is its ability to offer long-term funding, potentially allowing service providers to step away from yearly renewals which can be difficult when outcomes are not immediately apparent:

It’s true that a lot of organizations speak to the fact that short-term contracts are very difficult to manage and the financing that comes with them is not stable. They have to apply on a pretty frequent basis to get access to new grants or new funding. In fact, social finance wants to address that head on. Social finance wants to be able to move away from those short-term contracts.[63]

Some witnesses noted that social finance can be used to encourage and support social innovation. For example, Bruce Dewar of LIFT Philanthropy Partners stated that: “[s]ocial finance has an enormous potential to encourage social innovation in our country, by creating new opportunities for investors and social purpose organizations, or SPOs, to partner in innovative projects and take their great ideas to scale at a new level across this country.”[64]

In addition, Tim Richter of the Canadian Alliance to End Homelessness highlighted the potential of SIBs in particular to fund “newer or emerging interventions or when an intervention is applied to a government system for the first time and where risk can be transferred to the investor.”[65] Similarly, Kieron Boyle noted that, in the experience of the U.K. Government, SIBs had been used as “a way of bringing innovation into the system, of essentially testing out ideas that they have a broad sense might work but not an absolute sense” and as “a way of financing upfront interventions paid for by savings down the line, and essentially see this as the tool to enable them to do early intervention.”[66]

Notwithstanding its potential benefits, some witnesses expressed scepticism about the potential of social finance instruments to fund social innovation in all circumstances. For example, commenting on outcomes-based financing models in particular, David Juppe noted that incentives built in to the model might actually discourage innovation:

Because of this concept of a performance-based return on investment, I think rather than encouraging innovation, social impact bonds or pay for success will actually encourage a flight to quality. Investors are going to want to see programs that work and programs that are successful.[67]

Concern was also expressed by Marie-France Kenny of the Fédération des communautés francophones et acadienne du Canada, who noted that private capital may not as effectively take into account the needs of minority communities, and that “[m]inority francophone and Acadian communities don’t have access to as large of a funding pool as majority communities.”[68]