Social Impact Bonds May be Coming To Ontario: Celebration and Cautions

The Commission on the Reform of Ontario’s Public Services, also known as the Drummond Report, has landed at Queen’s Park with a considerable thud, and not only because it is 6 cm thick. The report calls for significant cuts and changes to the Ontario government as we know it.

On the constructive side and particularly relevant to social finance, the Report recommends that the Ontario government implement social impact bonds (SIBs).

Simply put, these are contractual partnerships between government, investors and social service organizations whereby social outcome targets are set, programs are funded by new private capital, and if – and only if – targets are achieved, government pays out a return to investors, derived from cost savings due to reduced need for other social services. For example, if a senior is able to stay out of hospitals because of effective home health care services, a percentage of the cost savings to government are paid to the private investor that funded the original service.

Without a doubt, this recommendation is good news. Social impact bonds are an opportunity increase critically needed funding available to the social service sector, driving towards impact, creating social good, and providing a platform for private sector participation. As the Task Force on Social Finance report puts it “… long-term financial backing for SIBs will enable organizations with effective solutions to highly-targeted problems to scale their impact, leading to a virtuous cycle of taxpayer savings, greater private investment in prevention, and progress toward our social, health and environmental goals.”

That being said, as we move forward there are a few key questions about the details and the big picture that need be resolved.

The Drummond Report is thin on specifics regarding SIBs, neglecting to make any pronouncements on some key issues: What kinds of government-provided social services is this approach appropriate for? The most famous social impact bond pilot comes from the UK where criminal recidivism is being tackled. Happily, social impact bonds lend themselves to pro-active and preventative strategies. Can the model be stretched to challenges where the benefits to government spending are harder to measure, or longer term, such as high school dropout prevention?

Related to this, is there any risk that this model skews the activities of the not for profit sector, leading them to inappropriately scale interventions that have worked in a certain context but cannot simply be done more. Further, does the importance of metrics and evaluation exclude smaller organizations and local-scale projects?

In order to attract new capital, are there any incentives the government might need to offer? In the traditional model, the private investor assumes all the risk and their investment is lost if the desired social change is not achieved. Should the Ontario government or others such as foundations or individual philanthropists, sweeten the pot by putting up some first-loss capital?

For a deeper dive, Adam Jagelewski has written an excellent paper analyzing the potential for social impact bonds in Canada [PDF] and some specifics that need to be considered.

And finally, looking at the bigger picture, while social impact bonds represent collaboration between government, capital and social service organizations, who is in charge? The increasingly squeezed not-for-profit sector has long worried about how far it sometimes goes to chase foundation grants and government funding. How can social impact bonds be implemented in a way that neither compromises the wisdom and leadership of the not-for-profit sector, nor diminishes the fundamental responsibility of government to define social policy and support residents?

This is not an argument against social impact bonds, simply a caution that in this environment of scarcity and opportunity, new capital will be powerful. We must move forward in a balanced manner – and answering the questions above is the first step.

Photo credit: http://www.flickr.com/photos/cabbit/469423718/

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