Social Finance

Is your organization ready for the upcoming
revolution in social policy?

Joint CMA/CGA/FMI Conference
February 27, 2013
What is social finance?

Social finance is an approach to managing money that
delivers social and/or environmental benefits, and in most
cases, a financial return.

- SocialFinance.ca

1 © Deloitte LLP and affiliated entities.
The worldwide pool of impact investment capital is
currently estimated at US$500 billion

$1 Trillion Impact investing: $500 billion

Charitable giving (US): $307 billion

Civil society (UK): $230 billion

The Giving Pledge: $169 billion

Clinton Global Initiative pledges: $69 billion since inception
Gates Foundation: $26 billion since inception
B corporations: $2.9 billion

2 © Deloitte LLP and affiliated entities.
Pay for performance defined

• Method of performance contracting – a concept fairly well understood.
• A pay for performance contact is different from a standard contract in
two ways:
– It involves outcomes, not outputs or inputs
– Shift for governments from open book and prescription
• Why now? The demand for social services continues to grow.
Innovation is required to meet today’s fiscal challenges.

3 © Deloitte LLP and affiliated entities.
Five critical success factors
Contract fundamentals
• Outcomes must be defined, measurable, understood and agreed by all
parties.
• Measurement must be transparent and understandable.
• Capturing and disseminating best practices from the private sector to the
public sector should be required to ensure improved standards across all
similar programs – especially in early pilot years.

4 © Deloitte LLP and affiliated entities.
Five critical success factors
Payment and performance
• Success needs to be rewarded with payment structures that incentivise
appropriate behaviour and reflect desired risk allocation.
• Implementing appropriate pricing structures for outcomes is extremely
complex and is typically a public sector responsibility.
• Structures will vary across programmes and assign different weightings
across a complex performance matrix.
• Metrics have to adapt over the life of the contract as the completion of
desirable outcomes change.

5 © Deloitte LLP and affiliated entities.
Five critical success factors
Providers and lenders
• The growth of contracting for outcomes indicates commensurate
development in new and adapted funding and financing models.
• Contracting for outcomes is unlikely to happen on any large scale
without lending industry and/or funding policy changes to support it.

6 © Deloitte LLP and affiliated entities.
Five critical success factors
Overlap in multiple programs
• The way public services are organized around traditional departmental
boundaries can be problematic in establishing pay for performance
contracts.
• It has to be a priority for departments to come together to identify
“issues” that should be collectively addressed to drive maximum benefit.

7 © Deloitte LLP and affiliated entities.
Five critical success factors
Unintended consequences
• Flexibility and freedom of method is essential in pay for performance
arrangements. Prescriptions stifle innovation.
• However, there has to be appropriate tension between government
accountability and freedom to innovate.
• Consideration should be given to potential political and policy changes
over long span contracts.

8 © Deloitte LLP and affiliated entities.
So where do
we see pay for
performance
contracts in the
Canadian
market place?

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Social Benefit Investment

There are a range of interpretations and terms for this general social
financing model, but the broad concept is focused on:

• A contract between the government and another outside
organization(s) related to a certain social issue, where the
government only pays a pre-determined amount to the external
organization(s) if specified social outcomes are measured and
achieved.

10 © Deloitte LLP and affiliated entities.
Different names and interpretations for the same broad
social financing model

The idea of a Social Benefit Investment is referred to by different terms,
but all have the same general concept basis:
• Community Benefit Investment (CBI)
• Social Impact Bond
• Social Innovation Financing
• Pay for Success Contracts
• Social Benefit Bond

11 © Deloitte LLP and affiliated entities.
Social Benefit Investments are just one of many
alternative service delivery approaches that can be taken

Government Program/ Outsourced Outcomes- Grants and Social
delivery of service program/ based contributions Benefit
programs delivery by service contracting & Investment
and services junior orders delivery public private
of gov’t partnerships

12 © Deloitte LLP and affiliated entities.
The Social Benefit Investment landscape in Canada

BC Social Innovation
Council
Ontario budget
(under Minister of Social
announces plans for
Centre for Impact Development) recommends
outcomes-based
Investing launched in Social Impact Bonds in its
procurement pilots
Canada Action Plan report
December 2011 March 2012

December 2010 February 2012 March 2012 November 2012
Canadian Task Force on Drummond Report Federal budget HRSDC launches
Social Finance Report calls for use of Social mentions SIB as a National Call for
identifies Social Impact Impact Bonds future tool of Concepts on Social
Bonds as opportunity financing, with Finance
announcement from
HRSDC to come

13 © Deloitte LLP and affiliated entities.
How Social Benefit
Investments are structured

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How Social Benefit Investments are structured

4. Based on the degree to which the social
outcome is achieved (as determined by an Government 1. A contract is negotiated where the government
agrees to pay a rate of return on invested capital
independent evaluator), government pays Department or for improved social outcomes
investors as negotiated in contract
Agency
Independent
Evaluator

Intermediary

3. The social service delivery $$$ $$$ 2. Based on the contract, the intermediary
organization(s) receive(s) the raises upfront investment from socially-
funds to address social issue minded investors and foundations

Service $$$
Delivery Investors
Organization(s)

15 © Deloitte LLP and affiliated entities.
The benefits of Social Benefit Investments for…

Governments Service Delivery Providers Investors

• New funding stream • Steady revenue stream • Socially-minded
for preventative • Longer planning horizon capital deployment
measures • Potential for blended
• Bring innovative
• Payment for outcomes approaches financial and social
(not activity) returns
• Clearly demonstrate • Innovative
results to citizens philanthropy

Social Benefit Investments allow each participating organization to
bring their best expertise to the table to deliver social services with
more innovation and flexibility

16 © Deloitte LLP and affiliated entities.
Key success factors

Quantifiable savings (or avoided costs)
attributable to government

Clearly defined outcome metrics

Controls to mitigate external factors

Appropriate timeframe

17 © Deloitte LLP and affiliated entities.
Applications: First major implementations in UK & USA
HMP Peterborough, United Kingdom, Rikers Island Prison, New York City,
September 2010 August 2012

UK Ministry of New York City
Justice & Big Department of
Lottery Fund Correction
QinetiQ and the
Vera Institute of
University of Social impact bond Pay for Success bond
Justice
Leicester
Independent evaluation Social Finance Independent evaluation
MDRC
UK

Steady funding £5M paid Steady funding
over 6=year upfront over 4=year US$9.6M loan
term term

St. Giles Trust & Coalition of Osborne
Orminston Up to 13% return investors Association & Up to 22% return
Goldman Sachs
Children & (charities and Friends of Island
Families Trust foundations) Academy
US$7.2M loan guarantee from
Bloomberg Philanthropies

• Aim to reduce recidivism by 7.5% among short-term • Aim to reduce recidivism by 10% among adolescent
male offenders. offenders aged 16-18 years.
• “Through the gate” support to offenders for drug and • Adolescent Behavioral Learning Experience (ABLE)
alcohol addiction, mental health, educational and job Program interventions focused on developing
skills training, and post-release accommodation. personal responsibility and decision-making skills
• Resettlement planning with families of offenders. through in-class instruction, recreation, and
• Formative evaluation released May 2011. community building.
© Deloitte LLP and affiliated entities.
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Applications: Further projects are emerging globally
Allia & Essex County Council, Out-of-Home-Care Bond*, New South
United Kingdom, November 2012 Wales (NSW), Australia, March 2012

Essex County New South Wales
Council Treasury

To be To be
Social impact bond Social benefit bond
determined determined

Independent evaluation Social Finance £3.1M originally raised from Independent evaluation To be determined.
coalition. Will scale back to AU$10M
UK accommodate up to £1M in up front
funds from Allia bond as
needed.
5-year 5-year
term 8-12% return. Coalition of investors term
Consortium of
No guarantee of (socially minded investment
Action for Children any return for investors
firms & bank, charities,
UK providing Coalition.
Benevolent Not yet determined (Westpac,
foundations, individual)
Multi-Systemic Society Commonwealth Bank,
Guarantee of 100%
Therapy investment return for Allia Future for Benevolent Society)
Allia retail investors + Children Bond
other potential returns

• Aims to keep 100 vulnerable 11-16 year olds from • Aims to reduce number of days children spend in
unnecessarily entering residential care through providing foster care through support of 550 families.
380 youth with an intensive prevention therapy program. • Proposed opportunity for retail investors to invest, with
• First public offering combining low-risk ethical investment expectation of layering the debt into different levels of
to provide repayment of principal with a high-risk risk with corresponding levels of return.
investment in the SIB (and potential for additional return). • Still in Joint Development Phase and details are
• Evaluation of reduction of days spent in care, improved subject to change.
school outcomes, wellbeing and decrease in re-offenses. *This is one of two NSW out-of-home-care bonds being developed.
© Deloitte LLP and affiliated entities.
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Other applications in social services

The following examples are being tracked by Deloitte:

Jurisdiction Social Issue & Description Status
Department
UK Disadvantaged  The DWP Innovation Fund awarded two social impact bonds Awarded in
youth totaling £7 million. With these social impact bond October 2012
unemployment investments, the aim is to work with approximately 2,500
disadvantaged or at-risk youth aged 14-15 to help enhance
Department of employability. The contracts will support programming
Work and delivered by two organizations: Adviza and Teens & Toddlers.
Pensions
(DWP) via the
Innovation
Fund
US: Chronic • Massachusetts was the first state in the US to issue a Selected two
Massachusetts Homelessness, Request for Response for “Pay for Success” contracts groups of nonprofit
Juvenile justice designed to encourage innovation solutions to social social service
problems, improvement performance of government and providers in August
Executive save taxpayer money. 2012; currently in
Office for • Two sets of Request for Responses were issued – one negotiation
Administration focused on youth, the other on homelessness. Each involved
and Finance two RPR’s: one targeted towards service providers, the other
towards intermediaries.

20 © Deloitte LLP and affiliated entities.
Implementation considerations
for governments in
commissioning Social Benefit
Investments

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A checklist for success for governments commissioning
Social Benefit Investments

 Has a suitable social issue for the concept been selected?
• Policy framework defining what social issues the department will consider eligible for a social
benefit investment arrangement
• Defined target group, problem statement, success definition, and measurable outcomes
• Solid understanding of cost of current program/service delivery
 How culturally-ready is your department for commissioning this model?
• Letting go of control
• Appropriate skill sets in negotiation, contracting, monitoring, and social impact measurement
• Education and communication with the general public and relevant stakeholders / public
engagement strategy
 Has the ground been prepared with partners?
• Policy exemption from traditional procurement policies and processes
• Proactive vs reactive strategy for selecting partners
• Due diligence of intermediary conducted by government
• Due diligence of investors and service delivery providers conducted by intermediary
 How can a pilot be implemented to help ensure future success?
• Strategy to capture and apply lessons learned
• Stakeholder and public communication on pilot innovation

22 © Deloitte LLP and affiliated entities.
A checklist for success for governments commissioning
Social Benefit Investments

 What is your strategy for pricing and commissioning the social benefit investment?
• A business case with a net positive benefit calculation, even after the payment at the high end of
the variable return range
• Legal, administrative, or jurisdictional barriers
• Agreement with Finance on treatment of contingent liabilities

 Have all of the elements of the contract been negotiated with the intermediary?
• Dates
• Identification of and roles of each party
• Definition of population cohorts and cohort size
• Definition of possible outcomes
• Definition of outcomes triggering outcome payments
• Definition of a financial “floor” (if desirable)
• Ability of intermediary to select service delivery providers
• Identification of independent evaluator and definition of evaluation process
• Issues resolution process (including appointment of arbiter)
• Reporting requirements including: identification of major investors, monthly progress reports,
public engagement arrangements
• Contingency arrangements including: termination of SIB by government, termination of SIB by
intermediary, emergency action
23 © Deloitte LLP and affiliated entities.
Looking ahead

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How can Deloitte help?

• Deloitte provides advisory services to
relevant industries including public
sector, investment banking, and the not-
for-profit sector

• We have a dedicated team of public
sector practitioners across Canada who
have helped governments structure
public finance and payment-for-
outcomes deals

25 © Deloitte LLP and affiliated entities.
Where specifically can Deloitte provide assistance?
Performance Establish policy
standards
Cash flow and
Independent
business
Government evaluation
modeling
Financial, Legal &
Department or Technical Advisors Monitoring Structure and
Agency payout

Due Diligence
Independent Benchmarking

Evaluator Payout
coordination Transaction
advisory
Financial, Legal & Business case
Intermediary Technical Advisors Feasibility and
market sounding

$$$ $$$

Service $$$ Financial, Legal &
Delivery Investors Technical Advisors
Organization(s)

Deloitte services can evolve over the lifecycle of a social benefit investment.
© Deloitte LLP and affiliated entities.
26
Gianni Ciufo
Leader, Canadian Social Finance 
Practice

Telephone:
(416) 775‐7443

Email:
gciufo@deloitte.ca

27 © Deloitte LLP and affiliated entities.