POLITICS

Federal government and non-profits inch toward issuing social impact bonds

03/15/2012 03:28 EDT | Updated 05/15/2012 05:12 EDT
OTTAWA - Social impact bonds — a radical approach to funding social programs — are just a step away from becoming a reality in Canada.

But it's a big step.

Non-profit organizations helping the homeless and the poor say they're waiting for a green light from Ottawa to start issuing unique bonds that would see private investors finance their work.

That final step might take a while, however, because it means a revolution in thinking among governments, investors and charities.

"We are working on behalf of Canadians to reach out to innovative organizations, test new approaches that will build upon our current efforts and potentially unlock new sources of capital to address social challenges in our communities," says Alyson Queen, spokeswoman for Human Resources Minister Diane Finley.

"These are early days in our discussions."

Finley gave her first-ever public address on social finance last weekend, calling for unconventional approaches to fixing social problems. She spoke glowingly and at length about the potential for social impact bonds.

"The investors win, the community groups who are successful win, the recipients and users of the service win, and the taxpayers win," she told a conference of Conservatives.

But the minister, the non-profit organizations and experts involved in turning the idea into a reality are quick to recognize the complexity of the task.

The concept is novel. A non-profit service organization proposes a project to help solve a social problem and at the same time demonstrates how the government can save money. Private-sector investors would then fund the project up front through a bond issue backstopped by the government.

The government would pay out premiums based on its expected savings and the success of the program.

But it's difficult to measure how well the service in question is working and how much money the government is saving. Financial regulations would also have to be modified to allow for the new bonds. The private sector would have to be convinced it's not a shell game.

And all three parties would have to think of each other in a new way.

"It challenges the charity model that has dominated much of Canadian social policy since Victorian times," says Toronto-based affordable-housing advocate Michael Shapcott of the Wellesley Institute.

"In this (traditional) paradigm, a top-down philanthropic approach is deemed the only acceptable response to social issues, and certainly nothing that is seen as coming from a private-sector business model."

Social impact bonds have been floated successfully, although on a small scale, in the United Kingdom. The idea is being copied in the United States, Australia and elsewhere.

Ottawa says it, too, is interested, and has some top officials engaged on the problem. But it has not yet made the formal commitment that non-governmental organizations and investors need to take the next step.

"We're at the point now where someone is going to have to put something in the window," said Tim Richter, president of the Calgary Homeless Foundation.

Richter has already spoken to bankers and federal officials about setting up a bond issue that would finance housing for newly released prisoners. He is convinced that preventing homelessness among former prisoners will also prevent recidivism, and save the government considerable money in the long run.

Similarly, in Toronto, Shapcott has a proposal ready that would house homeless people with HIV-AIDS. Research shows that housing significantly reduces emergency room visits by this group of people — again, saving governments money over the long term.

They both say their projects are perfect for social impact bonds. Results can be quantified. Significant government money can be saved. And investors would get a healthy return for buying into a fairly low-risk program that would be backed by the federal government.

What they lack is a formal framework that would allow them to launch.

And they're both leery that once the government sees how successful social financing could be, it will pull out of social programs altogether, dramatically cut funding and leave the charities on their own.

"That's the cautionary note," says Richter. "I wouldn't be holding these things out as a panacea. I think it can augment."

Finley's speech last weekend was not consoling on that front. In contained a few references to former U.S. president Ronald Reagan and former British prime minister Margaret Thatcher — double-speak for many in the non-profit sector for major budget cuts.

Still the government has shown no appetite for taking on social finance on a large scale. Social impact bonds, and other related ideas such as pay-for-performance funding for non-profit agencies, are only some of the options it is considering, Finley said.

And she comes with plenty of skepticism of her own, fearful of creating new bureaucracy.

"When government partners with a small social service agency, does that truly empower that agency and enable it to do 'good work'? Or does the act of partnering simply extend the reach of government and bureaucratic practice further into the volunteer and non-governmental sector, creating dependence rather than empowerment?"