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He was inspired after watching Toronto’s Centre for Social Innovation (CSI) purchase and retrofit a building using $2 million it had raised selling community bonds at $10,000 apiece. The bonds, which could be purchased by anyone, offered a 4 per cent annual rate of return over five years and were RRSP-eligible.

If the banks wouldn’t lend the money to a not-for-profit organization like CSI, then individuals who support the organization’s mandate just might. Tapping into CSI’s “social asset” proved a good gamble, as the community was quick to scoop up the bonds.

“This told me that the whole community bond thing was for real,” say Bida, convinced he could adapt the approach to support renewable-energy projects.

Their approach represents a low-risk investment for people who want to support “green” community projects and make some money, but who don’t want to spend thousands of dollars putting solar PV systems on their own rooftops.

Electricity from the plant will be sold into the grid under the province’s feed-in-tariff program, while waste heat could end up being pumped into a nearby greenhouse, potentially used to grow bamboo for the new pandas expected to arrive in 2014.

About 70 per cent of the project, or roughly $3.5 million, will be funded through the sale of community bonds that, like the CSI bonds, could be purchased through a self-directed RRSP. ZooShare hopes to offer bonds with a seven-year term and up to a 7 per cent annual return on investment.

For existing zoo members and those living within one kilometre of the zoo, the bonds will be sold in $500 units. Everyone else can pick them up for $5,000 each, unless they want to purchase a zoo membership. “We’re hoping this will sell more memberships for the zoo as a result,” says Bida, whose company ReGenerate Biogas is managing the project.

ZooShare is just one of several co-op ventures going the community bond route to raise capital for renewably-energy projects. Others include Options for Green Energy, SolarShare and WaterShare.

The zoo executives liked the idea and several months later Bida helped form the ZooShare Biogas Co-operative, a not-for-profit community co-op that plans to build a 500-kilowatt biogas plant at the zoo for about $5 million

t also offers a way for those without property, such as renters, or without the proper land or rooftop exposure, to participate in the feed-in-tariff program. Community bonds, in essence, make the FIT program more inclusive and get the broader population directly invested in their energy future, be it solar, wind, biogas or hydro.

“This idea of massive public involvement in the ownership and economic benefit of these projects is what we’ve all been working towards for the past 15 years,” says Deb Doncaster, executive director of the Community Power Fund, which supports community co-op projects with grants and low-interest bridge financing.

“All it will take is for one or two of these projects to be successful and the approach will take off.” Social media will certainly play a role. Facebook, Twitter and other social networking applications make it much easier for community co-ops to reach out to supporters. Spreading the word to the right people has become almost effortless. Still, a couple of barriers need to be overcome before you or I can purchase such bonds. For one, RRSP-eligible community bonds must be approved and registered with the Financial Services Commission of Ontario before they can be sold. Some say the commission is dragging it feet. SolarShare, for example, wants to issue community bonds in $1,000 increments that would offer a 5-per-cent return annually and be redeemable after five years. The funds raised from the bond issue will support construction of solar PV projects across southern Ontario. It’s all new territory for the financial services commission, which has proved a major bottleneck. “They’re tight on the resources needed to deal with this new landscape,” says Matt Zipchen, who as project manager for the Toronto Renewable Energy Co-operative is overseeing development of SolarShare. Zipchen says another roadblock is the banks. “These community bonds may be RRSP-eligible, but whether or not your bank will let you hold them is another question,” he says. “Banks are finicky about them. We’re just starting the process with the banks to see which ones will hold these bonds and which won’t.” It will all get sorted out over time. Indeed, all it will likely take is for one big bank to break from the pack before others start to follow. If demand for community bonds is high enough, that will likely happen. That’s what SolarShare, ZooShare and others are counting on. Tyler Hamilton, author of the upcoming book Mad Like Tesla, writes weekly about green energy and clean technologies. Reach him at tyler@cleanbreak.ca

Another potential barrier to this pay-for-success approach is that the funding to pay investors their return ultimately comes from government. These investments are not necessarily creating a new pot of money. Rather, they’re transferring the risk from taxpayers to private investors. In the past, government funding for social projects would pay for everything upfront, regardless of outcomes. Now, under impact bonds, they will only pay for results from non-profits after they have been achieved. So, are pay-for-success bonds a truly revolutionary way to fund charitable work, or is it just government funding repackaged?

espite potential shortcomings, these pay-for-success bonds are forcing people to rethink how the not-for-profit sector operates and funds its work. Applying private sector principles to charities is not necessarily a bad thing – many non-profits can benefit from working more efficiently and measuring their results. But whether these new bonds are the mechanism that will transform philanthropy remains to be seen.

In the interim, nonprofits seeking to grow their operations have been stuck in a state of arrested development.

Elizabeth Berger, president of the Downtown Alliance, which supports economic development in lower Manhattan, welcomed the mayor's announcement as a necessary step in enabling nonprofits to play their part in promoting the city's economic vitality.

“New York City is home to tens of thousands of nonprofits that are looking to expand, create jobs or move into new facilities, but for the past few years they have faced more expensive financing costs, while some have had to forgo expansion altogether,” Mr. Bloomberg said, in a statement. “This new entity will make it easier and more inexpensive for our critical nonprofit sector to grow and expand.”

While the city's nonprofits don't enjoy quite the same cachet in terms of revenue-generating potential as either financial services or leisure and hospitality, the group exceeds both sectors with respect to employment. While the other sectors employ approximately 434,000 and 320,000, respectively, the more than 42,000 health, human services and cultural nonprofit (HHSC) organizations throughout the five boroughs support approximately 470,000 employees, according to the mayor's office. That sector is the largest private employer in city—employing more than 15% of New York's non-governmental work force.

According to the mayor's office, more than 13 organizations have gone to out-of-state funding sources for assistance in financing capital projects totaling more than $337 million since June 2009. The administration also estimates nonprofits have at least 20 shovel-ready capital projects stuck in the development pipeline with a combined price tag of more than $400 million.

“At a time when many not-for-profits are struggling to make ends meet amid the nation's fiscal woes, this new issuer will serve to strengthen and support an increasingly important sector in our city's economy,” Ms. Berger said in the mayor's office statement. “In lower Manhattan, not-for-profits represent a vital and growing sector, and this action recognizes their value.”

Capital projects and investment in expansion and facilities upgrades have been curtailed as the volatile economy takes a toll on nonprofits struggling to make up for reductions in funding support. “For over three years, nonprofits like ours have faced far too many obstacles in obtaining financing to grow and expand,” Sisi Kamal, chief financial and operating officer at the Friends Seminary School, said in the statement. “The ability to locally access necessary financing in an efficient and cost-effective manner would be a significant investment in the future of our organization and that of many others serving the residents of New York City.”The administration said the new entity, a local development corporation, will open in the next four to six months and that financing requests will be based on board approval. The five borough presidents, in conjunction with the comptroller, will be charged with nominating directors to serve on the board.

They would be overseen by a social finance regulator that would operate within the proposed Financial Conduct Authority, the successor to the Financial Services Authority.

The framework would create new legal categories of 'social investment' and 'social investor'. The two organisations hope to persuade the government to make it into law.

The National Endowment for Science, Technology and the Arts and the law firm Bates Wells & Braithwaite have proposed a new regulatory framework for social finance aimed at making it easier to invest in voluntary sector organisations.

"At the moment, it's easier to give £100 to charity than to lend £100 to charity," said Luke Fletcher, an associate at Bates Wells & Braithwaite and author of the report.

The new framework, he said, would make it easy for charities and social enterprises to create a financial prospectus for a bond or share offer, without the need to offer the tight protections for investors that are currently required.

"The main target for this would be the mass affluent, who are not currently considered sophisticated investors," Fletcher said. "Charities would like to create offers targeting these people, but they find the legal restrictions too onerous."

Fletcher said there were already exemptions for community benefit societies, formerly known as industrial and provident societies, and he wanted to extend these to all third sector organisations. "I think there's a chance of getting this into law now," he said. "There's a real window of opportunity. The reform of the Financial Services Authority is already under way, there's big interest from government in social investment and there's a drive to reduce red tape for the sector." The Cabinet Office has expressed support for the idea of a new regulatory framework in its strategy paper Growing the Social Investment Market, in which it said it would "seek further evidence on the impact of the regulatory framework on social and community investment to assess whether it is proportionate". One of the six key recommendations in Lord Hodgson's report on red tape in the third sector, Unshackling Good Neighbours, was the creation of a class of "social investors" who could invest under less strict guidelines because they understood they were receiving both a social and financial return.

The full transcript of the proceedings can be viewed online and provides a very helpful update on all the key issues surrounding Social Impact Bonds and Big Society Bank.[i]

Background to Big Society bank

Stephen Bubb’s comprehensive article ‘A new financial landscape’ in Caritas, March 2011  sets out the gestation and remit of what has been a long-awaited social investment bank and a useful summary can be found in the chapter 5 (page 37) of the Cabinet Office’s report, Growing the Social Investment market: A vision and strategy.[ii]

State aid legislation and other hold-ups

Cohen told the PASC that the Big Society Bank’s opening target of July 2011 would be missed “by a matter of some months” because of delays from the Cabinet Office in steering it through the complexities of EU state aid in financing public service provision legislation (in place to prevent the warping of the rules of competition between member countries). He said he encountered exactly the same thing with Bridges Ventures, his own organisation, and that he was confident that not only would the necessary permissions be given but that “the EU will turn out to be a big proponent of social investment.”

He also explained that the other complications was that the government had no agreement with UK banks the £200m of funding they had agreed on as part of the Project Merlin settlement, and that these details were still being sorted out.

In the meantime and agreement has been signed with Big Lottery so that it could fund some of the projects that Big Society Bank would eventually take over.

Long-term delivery  

When he was reminded that nine out of ten new enterprises end in failure, he countered with the response that everything ‘involves a risk’ and that failure in social enterprise was a form of philanthropy anyway. However, Cohen is a seasoned venture financier who does not set out to lose money. He added: “we see our objective as getting the social sector going. We have to preserve the value of our capital in doing it but we don’t have to maximise its value – we would like to be proactive.”   Cohen was confident of the Social Enterprise Bank’s long-term viability, explaining that real success could take ten or 20 years to materialise with cash positivity projected in seven years’ time.