Piloting social impact bonds in Ontario: the development path and lessons learned

Executive summary

The Government of Ontario is actively engaged in exploring innovative approaches to achieving improved outcomes for Ontarians in need. A key expression of this engagement is the Government of Ontario’s dedication “to developing new and innovative social finance tools, including committing to pilot one or more Social Impact Bonds (SIB) in the province” – 2016 Ontario Budget.

A SIB is an innovative social finance tool based on pay-for-performance contracting that enables government to work collaboratively with service providers and private investors to pilot novel, innovative, prevention-oriented service delivery initiatives to achieve target outcomes.

This report provides a basic introduction to the SIB model and an overview of Ontario’s SIB development process, including lessons learned.

The Ministry of Economic Development, Employment and Infrastructure (the Ministry) — through the Social Enterprise Branch — launched a public Call for SIB Ideas in March 2014. The ideas spanned three themes: youth-at-risk, housing and homelessness, and improving employment opportunities for persons facing barriers. Through the Call for SIB Ideas, the Ministry received 83 ideas from 79 organizations. All organizations were invited to an informational webinar and Capacity Building Workshop that provided information and support on the application process. After the Capacity Building Workshop, candidates wishing to continue in the application process were required to submit additional information in response to a questionnaire. Following the submission and evaluation of the questionnaire responses, several organizations were shortlisted and invited to deliver an oral presentation to a panel of judges. These presentations informed the selection of four high potential ideas to proceed to business case development:

• Confederation College: The SIB idea proposed by Confederation College aims to provide coordinated training, education and employment support to assist individuals facing barriers to employment in Northwestern Ontario in securing and maintaining employment. Where possible, the project would leverage employment opportunities from the proposed Ring of Fire mining development in Northern Ontario. The program would focus on young people aged 18-29 who are considered at-risk, First Nations peoples and people experiencing barriers to employment.
• Mainstay Housing: The SIB idea proposed by Mainstay Housing aims to provide stable housing and intensive support to 100 chronically homeless individuals. The program would focus on individuals struggling with mental illness who have been homeless for five years or more. To help tenants stabilize and transition from intensive site support to moderate support, while retaining their tenancy rights, the proposed program would involve two years of intensive, customized, on-site support followed by a one-year period helping participants move to a more sustainable level of care within the community.
• The Raft: The SIB idea proposed by the Raft aims to improve housing stability and high school retention/graduation rates for over 900 at-risk youth, primarily in underserved rural areas surrounding Haldimand-Norfolk County, Niagara Region and Hamilton. With the support of community partners, the proposed program would focus on helping young people make healthy lifestyle choices, while acquiring the necessary social, emotional and educational skills they need to become independent and self-sufficient members of the community.
• YOUCAN: The SIB idea proposed by YOUCAN aims to decrease future days of incarceration by up to 50% for more than 500 participating young adults in Ottawa that have recently been imprisoned, or are currently in closed custody. The proposed program would be conducted over five years and would focus on education, employment and development of life skills.

Business case development for the four selected ideas began in January 2015 and concluded in October 2015. This phase was intended to more rigorously establish and understand the details of the SIB ideas in order to assess financial and operational feasibility. Each business case included a financial model which considered the financial costs / benefits and outcomes estimated to be associated with delivering the SIB. The development of the business cases provided an opportunity for a collaborative approach that included the SIB candidates and representatives from over ten Government of Ontario ministries, along with input from other key stakeholders identified in the process.

A discussion of key benefits and challenges that have emerged from the SIB process provides an opportunity for continuous improvement and may inform similar processes in the future. Key benefits gained from the process include:

• Increased knowledge and capacity of service delivery organizations
• Increased opportunities for strategic collaboration
• Opportunity to gauge interest in social finance
• Increased capacity for, and understanding of, data collection and analysis
• Opportunity to demonstrate commitment to social finance

Nevertheless, the SIB Call for Ideas process has not been without its challenges. These include:

• High levels of complexity
• Data accessibility and availability

Significant progress has been made. A series of milestones remain on the path to implementing a SIB, including completing market sounding to gain current market insight on SIBs in Ontario and testing the two frontrunner SIB ideas (Mainstay and Raft) that emerged from the business case development and government consultation process.

To help test the viability of these two frontrunner SIB ideas as potential pilot projects, government has selected R.A. Malatest & Associates Ltd to provide Independent Evaluation Services for Ontario’s Social Impact Bond Initiative though and open and competitive procurement process.

Over the course of the coming months, R.A. Malatest & Associates Ltd will be working with MEDEI, partner ministries, Mainstay and Raft to assess the proposed SIB idea, which will include reviewing the results and process of the current interventions to validate impact and ability to scale the interventions using a SIB tool.

The Ministry wishes to acknowledge Deloitte who partnered with MEDEI to develop this report.

What are Social Impact Bonds?

Introduction to Social Impact Bonds

A Social Impact Bond (SIB) is a form of pay-for-performance contract in which a government agrees to pay for an improved social outcome(s). This social outcome(s) is achieved through an intervention delivered by a service delivery organization. To fund the service provider, investment is raised up front from one or more investors. Investors can include foundations, banks, pension funds or individual investors, among others.

If the intervention is successful and achieves the contracted social outcomes, the investors are repaid, plus a pre-negotiated financial return. Typically, the investors receive a financial return if — and only if — the specified social outcomes are achieved. In this way, SIBs allow governments to shift the risk of financing innovation from taxpayers to investors, while ideally leading to better social outcomes for clients.

Though variations on the model have emerged, the most common participants in a SIB are: a government department or agency, service delivery organization(s), investor(s), and an independent evaluator. The SIB model may also include an intermediary role.

Common Social Impact Bond model

In the common Social Impact Bond model, there are four steps:

• Step 1: A contract is negotiated: In the contract, a government agrees to pay a rate of return on invested capital for improved social outcomes.
• Step 2: The investor(s) fund the service — often but not always — through an intermediary: Based on the contract, an upfront investment is raised, of which the majority will be used to fund the service delivery work.
• Step 3: The social service delivery organization(s) receive(s) the funds to address the social issue: Providers work with beneficiary population to deliver a program and report progress.
• Step 4: An independent evaluator determines if outcomes are achieved: Based on the degree to which the social outcome is achieved, government pays for outcomes as specified in the contract.

Global overview of Social Impact Bonds

The first SIB was issued in the United Kingdom in 2010 and focused on Her Majesty’s Prison Peterborough. The target outcome of the Peterborough SIB was to reduce recidivism of previous short-term offenders by 10% per cohort or 7.5% across all of the targeted cohorts combined, as measured against a control group of released offenders.

Since 2010, SIBs have been issued in multiple jurisdictions around the world. In 2012, the United States’ first SIB was implemented at Riker’s Island Prison in New York with the social objective of reducing recidivism. In 2013, Australia implemented its first SIB which focused on youth-in-care (i.e. foster care). Canada’s first SIB was implemented in May 2014 in Saskatchewan with the goal of providing better support to at-risk single mothers. As of October 2015, over 40 SIBs have been implemented globally, with many more in development.¹

The existing SIBs are quite diverse — reflecting a range of policy areas, intended social outcomes, structures, scales, investor profiles and financial returns. Understanding the profile of these SIBs has been critical in informing the design and development of an Ontario SIB.

Active Social Impact Bonds

Over 40 Social Impact Bonds have been implemented globally².

United States

• There are at least eight active Social Impact Bonds in the United States
• These Social Impact Bonds focus on a number of issues, including recidivism, children and education and housing and homelessness

Canada

• There is one active Social Impact Bonds in Canada
• The focus of this Social Impact Bond is single mothers and children in care

United Kingdom

• There are at least 30 active Social Impact Bonds in the United Kingdom
• These Social Impact Bonds focus on a number of issues, including recidivism, employment and education for youth, children in care, homelessness and long term health conditions

Netherlands

• There are at least two active Social Impact Bonds in the Netherlands
• These Social Impact Bonds focus on employment and education for youth

Belgium

• There are at least two active Social Impact Bonds in Belgium
• These Social Impact Bonds focus on employment and education for migrants

Germany

• There is at least one active Social Impact Bonds in Germany
• The focus of this Social Impact Bond is employment and education for youth

Portugal

• There is at least one active Social Impact Bonds in Portugal
• The focus of this Social Impact Bond is education

Australia

• There are at least two active Social Impact Bonds in Australia
• These Social Impact Bonds focus on children in care

Social Impact Bonds in Ontario

Our government is committed to finding and nurturing innovative financing tools, including piloting Social Impact Bonds, to improve social service delivery and secure new sources of investment across the province. I’m pleased that we are already making significant progress towards implementing a Social Impact Bond, and we look forward to piloting one or more so that we can garner the highest potential for success by bettering our society and increasing our competitiveness.

Brad Duguid, Minister of Economic Development, Employment and Infrastructure

The path to date

The path to developing the first Government of Ontario SIB began in 2012 with the release of the Commission on the Reform of Ontario’s Public Services’ (the “Drummond Commission”) report, Public Services for Ontarians: A Path to Sustainability and Excellence, which recommended that Ontario pilot new social finance tools to transform social service delivery and achieve better outcomes.³ In September 2013, the Government of Ontario launched Impact – A Social Enterprise Strategy for Ontario, which built on this recommendation through the inclusion of a commitment to pilot one or more Social Impact Bonds. This was subsequently reiterated in Ontario’s 2014-2019 Poverty Reduction Strategy which made “a commitment to work with private-sector investors to pilot one or more SIBs.”

Call for Social Impact Bond ideas process

The Ministry of Economic Development, Employment and Infrastructure (the Ministry) — through the Social Enterprise Branch — launched a public Call for SIB Ideas in March 2014. The ideas spanned three themes:

• Housing: Improving access to affordable, suitable and adequate housing for individuals and families in need.
• Youth-at-Risk: Supporting children and youth with overcoming mental health challenges, escaping poverty, avoiding conflict with the law, leaving care and other specific challenges facing children and youth at risk, including unemployment.
• Employment: Improving opportunities for persons facing barriers to employment, including persons with disabilities.

The Call for SIB Ideas closed in early May 2014 and attracted 83 ideas from 79 organizations. During Summer 2014, the Ministry focused on knowledge development, providing executive training to 30 senior staff from all three levels of government and the heads of not-for-profit social service organizations on SIB implementation. The Ministry also partnered with the Mowat Centre to develop the report From Investment to Impact: The NFP Experience with Social Impact Bonds, and engaged with stakeholders on SIB implementation.

Figure 1: Main themes of submitted Social Impact Bond ideas

Source: Deloitte.
© Deloitte LLP and affiliated entities

Capacity building and evaluation

At the end of Summer 2014, the Ministry engaged Deloitte to assist with the capacity building and evaluation process. Specifically, Deloitte’s role in this process included delivering an informational webinar and Capacity Building Workshop, implementing a questionnaire process, supporting the evaluation of the SIB ideas, and developing business cases for four high potential SIB ideas.

In Fall 2014, all applicants were invited to an informational webinar and a full-day Capacity Building Workshop. The webinar provided a SIB overview and outlined the current process and next steps, including the submission of a questionnaire providing more detailed information on the idea and organization. The subsequent Capacity Building Workshop provided further information to support applicants in effectively completing the questionnaire and developing an enhanced understanding of a SIB and its requirements. The Capacity Building Workshop also represented an opportunity to bring together a range of service delivery organizations from across the theme sectors for an engaging and interactive day of sharing ideas, approaches and challenges.

Applicants who wished to continue in the Call for SIB Ideas process were required to submit the questionnaire on September 30, 2014. As they developed their responses, applicants had the opportunity to submit any outstanding questions on the Call for SIB Ideas process. The answers to these questions were distributed to all applicants.

Following the submission and evaluation of the questionnaire responses, several organizations were shortlisted and invited to deliver an oral presentation to a panel of judges, which included individuals with expertise in SIBs as well as each of the themes. These presentations provided an opportunity for the panel to ask questions about each of the ideas and informed the selection of four high potential SIB ideas to proceed to business case development for further analysis.

The four Social Impact Bond ideas selected for business case development

The organizations leading the development of the SIB ideas selected for business case development differ in size, structure, area of expertise, and regional scope. Similarly, there is significant variation in the SIB ideas presented.

Confederation College

• The SIB idea proposed by Confederation College aims to provide coordinated training, education and employment support to assist individuals facing barriers to employment in Northwestern Ontario in securing and maintaining employment. Where possible, the project would leverage employment opportunities from the proposed Ring of Fire mining development in Northern Ontario. The program would focus on young people aged 18-29 who are considered at-risk, First Nations peoples and people experiencing barriers to employment.

Mainstay Housing

• The SIB idea proposed by Mainstay Housing aims to provide stable housing and intensive support to 100 chronically homeless individuals in the Greater Toronto Area. The program would focus on individuals struggling with mental illness who have been homeless for five years or more. To help tenants stabilize and transition from intensive site support to moderate support, while retaining their tenancy rights, the proposed program would involve two years of intensive, customized, on-site support followed by a one-year period helping participants move to a more sustainable level of care within the community.

The Raft

• The SIB idea proposed by the Raft aims to improve housing stability and high school retention/graduation rates for over 900 at-risk youth, primarily in underserved rural areas surrounding Haldimand-Norfolk County, Niagara Region and Hamilton. With the support of community partners, the proposed program would focus on helping young people make healthy lifestyle choices, while acquiring the necessary social, emotional and educational skills they need to become independent and self-sufficient members of the community.

YOUCAN

• The SIB idea proposed by YOUCAN aims to decrease future days of incarceration by up to 50% for more than 500 participating young adults in Ottawa that have recently been imprisoned, or are currently in closed custody. The proposed program would be conducted over five years and would focus on education, employment and development of life skills.

Business case development

The business case development phase was designed to inform the decision-making process concerning SIB implementation. The business cases are intended to be used as a tool to more rigorously establish and understand the details of the SIB ideas in order to assess financial and operational feasibility. Working alongside Deloitte, the Ministry structured the business cases to examine the ideas both qualitatively (e.g. social benefits to a community or individual) and quantitatively (e.g. financial cost-benefit analysis).

Each business case includes a robust financial model customized for the four unique SIB ideas. The model considers the estimated financial costs (e.g. program costs, evaluation costs) and benefits (e.g. cost savings, cost avoidance) associated with delivering the SIB. The information used to inform the model comes from Government of Ontario data, the candidates, and research.

The business cases outline:

• General information on SIBs
• Business case objectives, scope, methodology, assumptions and limitations
• SIB candidate overview information
• SIB idea overview information, including target performance outcome, scale, target population, target geography
• Performance outcomes and measurement
• Qualitative considerations, including highlighting the social need, current relevant social services, expected social benefits, alignment with government areas of focus, innovation, and opportunity to scale
• Quantitative analysis, referencing the methods and results of the financial modelling
• Risk assessment

The development of the business cases provided an opportunity for a collaborative approach that included the SIB candidates and representatives from over ten Government of Ontario ministries. Over the course of several months, Deloitte worked with the relevant stakeholders to identify and confirm information, proxies and data sources.

Government of Ontario ministries actively contributed to the business cases through extensive engagement and consultation process. Relevant ministries identified representatives as a main point of contact and provided significant input and information.

The development of a business case was a critical step in understanding the effectiveness and feasibility of the proposed SIB ideas.

Key learnings

A discussion of key benefits and challenges that have emerged from the SIBs process provides an opportunity for continuous improvement and may inform similar processes in the future.

Key benefits gained from the process include:

• Increased knowledge and capacity of service delivery organizations: The integration of capacity building activities into the Call for SIB Ideas process facilitated increased understanding of SIBs, provided an overview of the Ministry’s approach to social finance, and created opportunities for service delivery organizations to obtain feedback on their ideas.
• Increased opportunities for strategic collaboration: Within the broader public sector, the Call for SIB Ideas process provided a number of opportunities for collaboration. An internal Government of Ontario working group stimulated inter-ministry communication and knowledge building, the business case development phase canvassed input from across ministries and fact-finding requirements facilitated connections with other levels of the public service, such as municipal housing services. From the perspective of service delivery organizations, the Capacity Building Workshop provided an opportunity to meet with organizations from different sectors to share ideas and connect on similar interests.
• Opportunity to gauge interest in social finance: The Call for SIB Ideas process provided an important opportunity for the Government of Ontario to understand the range of organizations that are interested in social finance and establish relationships with these stakeholders.
• Increased capacity for, and understanding of, data collection and analysis: The SIBs process enabled the Ministry and service delivery organizations to look at collecting and communicating data in new ways. Both parties were pushed to evaluate data in a more holistic manner and to think creatively about how and where to access data sources. The Ministry had to identify data sets across the Government of Ontario and consider the best ways of compiling and sharing that information. Service delivery organizations were asked to think critically about the qualitative and quantitative benefits of their program, outline a clear outcome, and provide evidence for their proposed intervention.
• Opportunity to demonstrate commitment to social finance: The Call for SIB Ideas process allowed the Ministry to pursue innovation and demonstrate action in this emerging field. It represented a step towards exploring and piloting an innovative approach to outcomes-focused interventions and provided an opportunity to engage Ontario’s social finance community.

Nevertheless, the SIB Call for Ideas process has not been without its challenges. These include:

• High levels of complexity: A SIB is a complex social finance tool. Due to a lack of familiarity and/or limited capacity, many organizations found it challenging to develop a feasible SIB idea.
• Data accessibility and availability: A significant amount of information was required in order to understand the impact of the potential SIB ideas. This necessitated the compilation of the right information from multiple data systems.

Next steps

Significant progress has been made. A series of milestones remain on the path to implementing an SIB, including:

• completing market testing to gain investor insight on SIBs in Ontario
• testing the 2 frontrunner SIB ideas (Mainstay and Raft) that emerged from the business case development and government consultation process

To help test the viability of these two frontrunner SIB ideas as potential pilot projects, government has selected R.A. Malatest & Associates Ltd to provide independent evaluation services for Ontario’s Social Impact Bond Initiative through an open and competitive procurement process.

Over the course of the coming months, R.A. Malatest & Associates Ltd, an independently owned and operated research and evaluation firm, will be working with the government, Mainstay and Raft to assess the proposed SIB ideas. This will include reviewing the Mainstay and Raft proposals to determine if they can be implemented as SIB pilot projects.

Reflections on the Social Impact Bonds process: in their own words

Participation in the SIB process has given our organization a more comprehensive understanding of the whole social finance model, and has identified a number of other sources of social finance, including impact investors, development bonds, corporate venture capital, crowd funding, foundations and global innovation funds.

Confederation College, SIB Candidate

The SIBs process has provided a deeper understanding of social finance as a vital tool that, if applied correctly, can play an integral role in helping to advance social interventions.

Mainstay Housing, SIB Candidate

This process has continued to reinforce the positive ideas we had regarding Social Impact Bonds and its benefits for agencies, participants, communities and investors.

The Raft, SIB Candidate

The MEDEI Social Impact Bond process has advanced our perspective that social finance tools like Social Impact Bonds can really advance social impact in our Canadian Provinces. Issues such as poverty and social justice are complex and our current systems approach to lifting our society out of poverty or dealing with social justice issues is not always effective. Participating in this process has helped us understand Social Finance better and the collaboration that is needed between the Province, various Ministries, academics and innovative models to create positive change for lasting impact.

YOUCAN, SIB Candidate

Relevant resources

As experience with SIB implementation advances, so too does the available information. There are a multitude of resources available on different topics relating to impact investing and SIBs.

Reports on impact investing

• Impact Investment: The Invisible Heart Of Markets
• Mobilizing Private Capital for Public Good: Priorities for Canada
• State of the Nation: Impact Investing in Canada
• MaRS Centre for Impact Investing

Reports on Social Impact Bonds

• From Investment To Impact: The NFP Experience With Social Impact Bonds
• Government Performance Lab: Harvard Kennedy School
• United Kingdom Cabinet Office: Centre For Social Impact Bonds
• Social Impact Bonds In Canada: Investor Insights
• Paying For Outcomes: Solving Complex Societal Issues Through Social Impact Bonds