Social Impact Bonds: A Good Investment?
Social impact bonds are in Alberta’s future. But is there too much risk in the reward?
by Carissa Halton
As kids in the daycare prepare for their naps, visitors at the Bissell Centre’s drop-in program, located at a building across the street, file in and out of the front door. Some grab a coffee; others grab a fresh pair of socks or ask to see a caseworker. The inner-city agency in Edmonton has been helping people since 1910, but in 2014 hopes to broaden that support and help young, single moms on social assistance find meaningful employment. If the planned program goes ahead, it may be the first of its kind in Canada, not because its aim is revolutionary but because of the way it would be funded. Instead of applying for grants or seeking out a philanthropic donor or tapping an existing government program, the Bissell Centre hopes its proposed program will be the first in Canada funded by a social impact bond.
Social impact bonds (SIBs) aren’t available in Canada yet, but Ontario and B.C. are examining their use, and in March, former Premier Alison Redford announced their imminent arrival in Alberta in the form of the Social Innovation Endowment Fund. The fund will, over a number of years, draw $1 billion from the Heritage Savings Fund as seed money for SIBs. The ensuing conversations for and against SIBs have revealed both the opportunities and risks associated with a new funding instrument that has yet to definitively prove itself in the U.S. and the U.K., where it is now in limited use. Now that Redford has taken the step and introduced the bonds in Alberta, the debate will shift to an even higher gear.
But first, what is a social impact bond? With any SIB, there are at least three partners: government, private investors and a social service agency. Based on the government’s social priorities, like reducing homelessness or recidivism, agencies develop programs that have clear and measurable outcomes, both economic and social. After approving the program, governments issue the social impact bond and investors who buy in essentially become the program funders – though “lenders” may be more accurate. The government pays investors back with interest only if the funded program meets target outcomes.
In an ideal world it can all work beautifully. For instance, homelessness costs the Alberta government roughly $140,000, per person, per year, in social service costs. A hypothetical program funded by SIBs that helps 10 people move into permanent housing at an annual cost of $45,000 per person could save the government almost $1 million a year. It is from these savings that the government would pay back the bond, with interest. On paper, it’s a win-win-win.
Advocates look to such examples as proof that by using private capital, SIBs are an innovative tool to address pressing social problems. But critics say SIBs are more pernicious – that they’re another way for government to cut budgets and download social responsibility to the private sector. Many people stand in the middle, though, uncertain. At the moment, they include some of the investors needed to make the bonds work. “SIBs are on our radar screen but we haven’t aggressively pursued opportunities,” says Sandra Odendahl, director of corporate sustainability with the Royal Bank of Canada, which has several capital pools that could be invested in SIBs. “We are in a ‘watch and see’ mode.” While social impact bonds are too new to judge, Alberta may soon need investors and social service agencies to step up and accept the risk for the sake of social gains.
Social impact bonds were first offered in 2010, in the U.K., through a program that sought to reduce recidivism among former inmates of the HM Prison Peterborough. Last year, an interim government report showed that while national reconviction rates increased by for short-sentence offenders11 per cent between September 2010 and March 2012, that of the inmates in the Peterborough prison program actually dropped by 12 per cent over the same time period. Sixteen other SIBs have since launched in the U.K., aimed at everything from homelessness to developing the workforce to elder and foster care. One employment-based SIB improved the opportunities for youth at risk of unemployment by 183 per cent.
The U.S. has followed the U.K.’s lead. In 2012, New York City introduced the first American SIB, while a second, in Massachusetts, worth $18 million, launched this January. Both of these programs target recidivism, and for both, investment firm Goldman Sachs is a key funder. Organizations like the Laura and John Arnold Foundation, the Boston Foundation and the Kresge Foundation have also invested. There are now SIBs in Australia, while organizations are designing program proposals in Colombia, Israel and India.
Technically speaking, though, SIBs are not bonds; RBC’s Odendahl says the term is a misnomer. “There is no guaranteed coupon, there is no certainty of an annual payment, or agreed upon rate of return,” she says. Odendahl says the investments are best explained as a contract among at least three or four parties. That contract, she says, spells out what the roles will be and what outcomes are being sought. SIBs come with wildly varying guarantees, length of terms and interest rates. For instance, terms on SIBs can be anywhere from three to 10 years. And some have guarantees. In New York State, for example, 75 per cent of Goldman Sachs’ nearly US$10 million investment in curbing recidivism is guaranteed by various partnering levels of government. In the Massachusetts example, investors receive annual interest payments of five per cent, whether the program hits its target or not.
For all the attention, though, no social impact bond has reached maturity, and so there have yet to be any returns – or losses of invested capital. Despite that, investment in the products in the U.K. has already exceeded $100 million. The potential returns could be why. Under the terms of the Peterborough SIB, for example, if the scheme reduces reoffending by 7.5 per cent or more, the government will repay investors from a share of its cost savings. If the program reduces it further, gains are increased incrementally to a maximum of 13 per cent.
Wayne Steer first learned the details of social impact bonds from Finance for Good, an intermediary organization in Calgary that brings social service partners together and provides oversight and support over the life of an SIB. Steer is the director of fund development for Fresh Start, an alcohol and drug addiction treatment centre in Calgary. He invited the social service providers to tour Fresh Start’s 40,000-square-foot addictions recovery facility in the city. Then, in January, Steer found himself among 20 others from the non-profit sector (and one potential investor) in a Calgary conference room. They gathered for a full-day workshop aimed at designing, developing and delivering SIBs. “There were a lot of questions asked, and definite interest that this could be a very powerful tool for doing great work in the community,” Steer says. “There are real savings in getting lives back together. Our focus is on making sure the men get better. Investors’ focus is on us meeting those same targets. We have a common goal.”
Justin Bertagnolli, the chief development officer of Finance for Good, says there is a lot of movement on SIBs in Alberta. Indeed, he says there are about 10 programs that are either in the final design stages or ready to launch. But, despite evidence that SIBs are in the provincial pipe, he won’t comment on his knowledge of the government’s timeline on SIBs. Further, despite Redford’s talk, no SIB was launched in 2013 and no government official was willing to comment for this story on a potential launch in 2014 (but see sidebar “Social impact bonds come to Alberta“, below).
Odendahl predicts that the “first movers” in Alberta will be those who see SIBs as an alternative to philanthropy. The risk is that little new money enters the social services system, as donation dollars are simply converted into investments. But advocates for SIBs feel that risk is low, arguing that charitable and investment dollars come from separate pots.
But there are still other concerns. The most controversial critique is a moral one – the premise that profit shouldn’t be made from other people’s misery, even when the goal is to alleviate that misery. And there are also more pedestrian concerns. “I wonder about transaction fees,” Odendahl says. “Each SIB will take hours, days, weeks of really smart people’s time. Either those organizations are eating those costs (in effect a donation) or someone is donating money to repay the transaction fees. I think this is going to be a challenge.”
The word ‘cannibalize’ comes up a lot when talking about the risks of SIB-funded programs. Critics worry that if the government doesn’t have the money to pay investors when the SIB matures (for instance, if the “savings” got spent elsewhere, or the expected economic measures do not materialize on government balance sheets), then governments will have to take money from established programs to pay. Alternatively, on seeing they are not on track to meet their targets, organizations may feel pressure to draw resources from other programs.
Many in the social services sector worry that this new way of funding will allow government to step away from their current commitments – handing all the risk to non-profits and investors. To this, Mark Holmgren, CEO of the Bissell Centre, says, “I think SIBs are another way to finance, not a replacement way, not a better way.”
Still, SIBs have an allure for the social service sector, too. They could add large pools of revenue, over longer terms than traditional funding contracts, to programs that otherwise might not exist. And because the money is tied to results, Holmgren has more flexibility to change course if the outcomes warrant it. “SIBs are an effective way to provide funding, but they are no panacea,” Bertagnolli says. “They have a place in the social offering, but it is important that we not create a structure that is oversold.”
As with any new idea, the list of uncertainties for SIBs is long: Will agencies have the measurement tools they need? How much profit do investors stand to make? Will the government lose money? Might metrics be changed so programs are “successful”? Will agencies drift from their mission under investor pressure? How many lives will change? A “win-win-win” is definitely not a given. The design of these programs and the evaluation and commitment of all stakeholders will be critical for success. While Holmgren looks forward to a new financial partnership in Alberta, he says initial results should be given latitude. “We understand that the first one might not go as smoothly as the tenth one,” he says, but still thinks they should be given a chance. “SIBs are criticized for trying to reduce everything to a financial measure,” he says. “But they don’t. They aren’t saying, ‘Don’t have any other measures.’ What they’re saying is, within the work you do, isolate the financial measures that you can track. Our organization has lots of other measures that do not relate to economics.”
If Alberta can demonstrably change people’s futures for the better at a relatively small cost, and that cost is carried by investors willing to stake their money in innovative program, Bertagnolli thinks it is worth working to overcome the risks. “It would be unfortunate if we didn’t try creative things because we were held back by fear,” he says.
Social impact bonds come to Alberta
In the speech from the throne in early March, former Premier Alison Redford officially made good on her promise, offered during her 2011 Progressive Conservative Party of Alberta leadership campaign, to introduce social impact bonds. The promise comes in the form of the Savings and Management Act, which by next spring will draw $1 billion from the Heritage Savings Fund to create what’s being called the Social Innovation Endowment Fund. That fund will in turn fund social impact bond programs to the tune of up to $22.5 million in 2015 and $45 million in the years that follow. Finance Minister Doug Horner told the Edmonton Journal that the endowment fund “will be a catalyst for innovation for complex social issues. We hear a lot of ideas for things like social bonds and all sorts of things, [so] let’s engage the not-for-profit community and cultural community and let’s be innovative.”
Justin Bertagnolli, chief development officer for Finance for Good, says that engagement will be critical, as many questions will have to be answered. “There still has to be due diligence done to ensure the tool is used correctly, and that’s the work that’s going to be done to make sure it’s an appropriate tool in Alberta,” Bertagnolli says. “I think there are concerns around the structure of SIBs.” Still, Bertagnolli says most concerns are addressable through good design, and that on the whole, he sees the government’s decision as “definitely a positive opportunity.”