What do railroads, telephones and social enterprise share?

What do railroads, telephones and social enterprise share?

Canada has a long-standing history of developing policy that supports the growth of emerging sectors of its economy. From transportation to health to information, much of our country’s infrastructure is a function of some form of government involvement.

There is also great potential for government to support the development of impact investing infrastructure through smart public policy.

First, a brief history lesson might be helpful.

It is a well-known fact that the breadth and success of Canada’s multibillion-dollar telecommunications (telecom) sector is the result of significant government intervention since the mid-19th century. The sector has undergone major transformations since its beginnings, often driven by public policy.

The early alignment of expansion objectives between telecommunication and railway infrastructure led the Canadian government to amend the Railway Act in 1906, creating a telecommunication policy to provide connectivity, fairness and universal service to Canadian consumers.

The result was expedited industry growth with monopolistic market characteristics, until the early 1990s, when the Telecommunications Act opened the market to more competitive provision of service. This public policy paved the way for one of the highest national penetration rates of telephone service in the world.

Although there are critics of Canada’s telecom providers, the market has catalyzed in a relative short period of time, especially considering the country’s vast size, relatively low population density and harsh climate. According to the 2002 document Regulatory Reform in the Telecommunications Industry (OECD), Canada’s telecom sector is now one of the leading performers in Organisation for Economic Co-operation and Development countries, a credit to regulatory processes and frameworks as well as policy structures.

If you compare the telecom industry to that of the impact sector—social enterprise, social entrepreneurship and impact investing—the impact market would share similar characteristics to the era of radiotelegraphs and long transmission lines: it is a nascent market defined by few market participants (and new entrants), price rationalizing, a lack of competition and limited co-ordination.

In the case of the information and transportation sectors, it was the foresight of leaders who saw the potential for innovation that sparked activity in these areas. Sir John A. Macdonald had a vision to connect Canadian colonies by railway in the 1860s; and on the telecommunications front, Brian Mulroney had an opportunity to revolutionize the sector in the 1990s, with the overarching opportunity and impact similar in both cases: revolutionizing an inclusive market that produced significant social and economic returns to all Canadians.

This type of vision exists today, geared at building a new sector of the economy. A growing number of countries and thought leaders are exploring policy levers that will catalyze an impact investment marketplace, and Canada is at the forefront of these discussions. On June 20, 2012, under the leadership of InSight at Pacific Community Ventures and the Initiative for Responsible Investment (IRI) at Harvard University, the Impact Investing Policy Collaborative (IIPC) was launched.

This collaborative seeks to:

  • Clarify the role for government policy and leadership in growing impact investing
  • Share case studies and insights on global policy precedents
  • Build a network of global policy leaders
  • Fund research and fellows to undertake groundbreaking work

The launch of the IIPC builds from several years of research by InSight and IRI, which culminated in two notable reports. This research offers a framework for how to classify policy opportunity in the field.

  • Supply development: Policies can direct how institutional asset owners can invest capital, setting the regulatory framework that governs investment decisions. Government co-investment can reduce the real or perceived financial risk of investments and is an example of this policy lens.
  • Directing capital: Influence markets primarily through incentives for industries and sectors that meet specific goals. A tax credit issued to investors placing capital in social enterprise is an example of a policy that directs capital.
  • Demand development: Policies that increase investment opportunities through development initiatives. Capacity-building and technical assistance programs (that is, grants or in-kind support) are examples.

Understandably, this framework applies in the Canadian context and follows the recommendations of the Canadian Task Force on Social Finance. The table below may serve useful for those interested in the (short-hand) recommendations put forth in 2010 using this lens.

Notable examples of progress in line with these recommendations are as follows:

  • British Columbia has introduced legislation to enact a hybrid legal entity for social enterprises called the “community contribution company.”
  • Ontario has proposed that pension funds be required to file Statements of Investment Policies and Procedures (SIPPs) and disclose whether their SIPPs address environmental, social or governance factors.
  • Ontario has passed legislation that establishes a “destination of profits” test that allows charities and non-profits to run related and unrelated businesses.

But Canada is only scratching the surface of opportunity. The United States has the Community Development Financial Institutions Fund, which has awarded over US$1.4 billion since its inception in 1994 and has leveraged US$29.5 billion in private sector investments via the New Markets Tax Credit program. And Australia has their new AUD$20 million Social Enterprise Development and Investment Fund initiative.

These, along with other government-seeded options, are missing from current Canadian legislation and policy discourse. If there is a commitment to developing new finance mechanisms and partnership opportunities between private and public sector players (with a spectrum of supports, from enabling to endorsing), new policy exploration is needed, as well as a cohort of champions to drive them.

SocialFinance.ca is committed to facilitating this discussion. In addition to providing a platform for matters of social finance and hosting dialogues like Social Finance Connects, we will be releasing a series of posts on policy examples from global experts. It is our hope that these examples will serve as small case studies, providing insight into the challenges of implementation for Canadian (and other) policymakers to learn from.

The launch of the IIPC signals a reason to be optimistic about Canada’s global participation and leadership in this relatively new field. Just as the Telecommunications Act in 1993 broke down barriers to entry, fostered competition and increased investment in Canadian telecommunication, there is significant opportunity for government to catalyze the impact sector through enabling policy and legislation. And if you’re up for international rivalry, Canada can position itself as a global leader in an emerging market.

Game on.