Canada’s non-profit sector plays a vital role in the health of individuals and the entire community (see, for instance, the Wellesley Institute paper Reducing Disparities and Improving Population Health: The role of a vibrant community sector), so there is a great deal of interest in the role of social finance, including social impact bonds, in strengthening non-profits and improving their effectiveness in delivering services. The news that RBC has donated $1 million over five years to MaRS Centre for Impact Investing to help build its social finance capacity, along with the growing interest by the federal government in social finance, has added to the excitement. There are a growing number of social finance projects in Canada, from the community bonds used to finance Toronto’s Centre for Social Innovation to VanCity’s Resilient Capital program – and a great many initiatives underway in the UK and the United States.
Social finance is not a magic solution for every non-profit and all social issues. Virtually all social finance experts warn that social finance (including social impact bonds, community bonds, tax-exempt bonds and other innovative financial tools) are not a substitute for government social investments. Ongoing government investments in health, housing, education and social programs are critical for the health and well-being of individuals and for the population health of the entire country. Social finance should not be used as a back-door to privatize or downgrade necessary public services. Canadians will continue to expect, and rely on, vital public services delivered through public programs.
The non-profit sector has been battered in recent years by uncertainty and funding cuts from the government and from charitable donors, and this has had a real impact on the ability of the sector to deliver necessary services – especially since 2008 as the recession has forced an increase in demand for many services delivered by non-profits. Our research over the years has demonstrated the growing financial and regulatory burden on non-profits (We Can’t Afford to Do Business this Way and Canada’s Non-Profit Maze). The sector is being forced to rely more and more on ‘earned income’, everything from fees and services charged to the clients to social enterprise and other forms of revenues. There is a limit to the ability of non-profits to support their work through earned income. In addition, governments tend to favour short-term project-based funding (pilot projects) versus sustainable long-term funding for necessary social initiatives.
Non-profit and community-based organizations that provide health, housing and social services play a vital role in the health of individuals and the entire community – and make an important impact in terms of the economy and employment. For instance,Stats Canada’s analysis for the non-profit sector shows that non-profits contribute almost ten times more to the national GDP than motor vehicle manufacturing.
Social finance can provide some financial certainty and stability to the operations of non-profits and help them to achieve greater effectiveness and impact and deserves serious attention. In the US and UK, in particular, there have been a growing number of social finance pilot projects that have generated capital or operating income to non-profits by raising private capital. Often, the rate of return for the investor is based on a social outcome (for instance, the social impact bond in the UK for Peterborough prison will pay investors a higher rate of return if the recidivism rate amongst the men leaving the jail is lowered to certain set targets). There are a variety of social finance tools – social finance bonds, tax-exempt bonds, community bonds, and other forms of ‘impact investing’. A common theme is what is called ‘pay for success’ – ie. a contract is made between the potential investor and a financial intermediary that a certain social outcome will generate a particular rate of return.
There are plenty of social policy areas where a social impact bond or other social financing makes sense. However, government social investments and public services are required as a critical components of a healthy and civilized society.