Interest in these models can be seen as part of a broader public sector reform agenda. Governments today are using a range of new tools to transform the delivery of front-line services. The result has been increased focus on directing resources to those programs and services that deliver the most positive social impacts.

You have already heard testimony on changes that could be made to enable investment from private foundations and to allow greater engagement from not-for-profits on the social enterprise and impact investment front. We would echo many of the previous recommendations made by foundations, not-for-profit witnesses, and impact investors drawing from the G-8 task force on social finance reports.

We would like to highlight some of the non-regulatory groundwork that governments must consider as they look at these new models. Social finance and outcomes-based funding models have enormous potential, but there are also risks of failure if they are implemented improperly. There must be a strong commitment to put in place the conditions for success. Three key areas require focus: better evidence, enhanced capacity, and finding the right mix of incentives.

First, governments should invest in better evidence and measurement to support promising opportunities for program innovation and support the long-term development of evidence-based policies. While social finance is often celebrated as a vehicle for promoting innovation and having positive social impact, the reality is that investment hinges on assurances of the achievability of outcomes targets.

To date, the evidence base available to governments, investors, and not-for-profits is patchwork at best. Evidence is stronger in some areas with traditions of rigorous evaluation, such as health, but remains weak in most other areas. A 2010 federal survey found that on average, departments devote just 0.08% of direct program expenditures to evaluation. Clarifying program objectives and gathering baseline data on program performance, communities, and populations is a necessary precondition to introducing these types of models.

This work must be done upfront. Too often, governments introduce impact evaluation at the same time they roll out outcomes-based funding approaches. Even in program areas where rigorous evaluation has taken place, it is not always readily available to all stakeholders who are involved in the process. Without this information, service providers can’t make informed decisions about successful interventions, and investors can’t make prudent financial choices.

Early experiences with social impact bonds and other investment models demonstrate that these new models require significant time and investment upfront, especially in the areas of data-matching, cost-calculations, and outcome metrics. Mining existing administrative systems and working with service providers to collect any additional data required will not only help governments evaluate the potential costs and effectiveness of their work but will also help streamline future negotiations.

I’ll now turn it over to Jamie, who will speak to the other two areas we would like to highlight for you.

Jamie Van Ymeren:
Thank you, Sunil.

Our second recommendation is that governments must invest in the supportive infrastructure needed to build capacity among both public servants and service delivery organizations.

For not-for-profit organizations involved in complex arrangements, like social impact bonds, there is a need to further develop both financial and evaluation literacy and supports to ensure they’re able to participate effectively in these processes. Service providers who have been involved in social impact bonds note that they represent a significant capacity challenge in financial and evaluation skills, but also on organizational resources. Consequently, smaller but more innovative partners in the not-for-profit sector may well have been excluded.

The committee has already heard examples of funds established elsewhere to make organizations impact ready. As well, independent “what works” institutes can play a valuable role in synthesizing and disseminating advice on proven interventions, and similarly, technical assistance labs can offer training, advice, or analytics to support impact evaluation. For example, the U.K. government is currently establishing a network of “what works” centres to offer advice in areas including education, crime reduction, early years intervention, and aging populations.

Governments will also need to examine their internal organizational capacities to enter into and implement outcomes-based funding schemes, developing supports where needed. Shortages of in-house evaluation specialists and lack of independent organizations that can offer advice on evidence-based interventions are challenges that many governments face.

Finally, there is a need to ensure that stakeholder and system incentives are aligned to ensure that models work for the public benefit. These new financing mechanisms involve many moving parts and are attempting to tackle complex, entrenched social issues. New funding models based on outcomes can only be effective if the incentives for all stakeholder groups, government, not-for-profit service delivery partners, investors, and clients are aligned.

For government, these models often engage multiple areas and orders of government and success depends on effective coordination. As a response to this issue, some jurisdictions are developing central outcome funds or joint investment agreements based on particular cases.

Failure to properly negotiate agreements is a significant risk that can lead to over- and underpayment, system-gaming, and non-cooperation among partners. These risks are particularly acute when outcomes models are introduced into poorly coordinated social support systems, where provider capacity is low, trust is lacking, roles poorly defined, and risk is unevenly distributed.

Creating the right conditions for negotiation and having all partners at the table is critical. There is a need to ensure that outcomes’ metrics chosen reward real impact. Indicators that incentivize gaming and short-term outputs that do not serve as long-term proxies for impact are detrimental to the community, investors, providers, and policy-makers.

In conclusion, government has a key role to play in supporting social finance by promoting a strong, enabling environment. This includes establishing quality baseline information, strengthening internal and external stakeholder capacity, and establishing the right mix of incentives. These models are complex and to benefit the public, they must be accompanied by an equally strong commitment to making the changes needed for them to succeed.

Thank you.