Social Enterprises and Third Sector Organisations should be grateful to Robbie Davison and Helen Heap for their excellent Report Can Social Finance Meet Social Need? Hopefully, this will begin a genuine debate on the relevance of Social Investment which should have begun at least 13 years ago.
The Democratic Deficit of Social Investment
After his appointment in April 2000, Ronald Cohen submitted a First Report from his Social Investment Task Force Enterprising Communities: Wealth Beyond Welfare to Gordon Brown MP as Chancellor of the Executive in October 2000. Between then and the submission of his Final Report Social Investment: Ten Years On in April 2010, there was little real discussion about the Social Investment concept it proposed.
The House of Commons Library Briefing on Big Society Bank Wednesday 26 October 2011 describes the evolution of the Social Investment concept. Despite various Government Statements and Consultation Documents, real debate and discussion on its relevance and appropriateness were minimal.
In May 2007, the Treasury issued a Consultation Document on an Unclaimed Assets Distribution Mechanism. On August 8 2007, Social Enterprise London’s Response to the Consultation did not question its fundamentals.
“The Big Lottery Fund will be required to distribute money for social or environmental purposes, with more detailed spending areas being identified by each country for its apportioned share of the money available. For England, the spending areas relate to youth services, financial inclusion, financial capability and Social Investment”
The Act made no mention of a Social Investment Bank.
There was a consultation on a possible Social Investment Wholesale Bank in 2009. The Social Enterprise Coalition’s Consultation Response in October 2009 did not question its fundamentals.
There was a Backbench Business Committee Debate on the Big Society on Monday 28 February 2011. A Big Society Bank was not discussed.
The Parliamentary Administration Select Committee’s Report on the Big Society, December 14 2011, represents the only real Parliamentary discussion about Big Society Capital. Its conclusion on the Big Society Bank on page 30, paragraph 88 says:
“12. Big Society Capital is a genuinely imaginative social innovation, which has enormous potential in the long term. The concept is as yet unproven, and large scale effects will take a decade or more to bear fruit. Furthermore, Big Society Capital will not provide the solution to the ‘funding gap’ for many small, local charities who do not wish to take out loans. The Government must acknowledge that in the short term Big Society Capital is unlikely to resolve the current ‘funding gap’.
The only other Parliamentary airing was a Written Ministerial Statement by Nick Hurd MP on Tuesday 17 April 2012, two weeks after Big Society Capital had already opened:
“The big society bank formally opened its doors to the public on 4 April as Big Society Capital. The new institution has been capitalised with the first tranche of dormant bank accounts and Merlin bank money, and we will thus have met a Coalition priority”
All this shows that from 2000 onwards during the gestation period for the concept of Social Investment and Big Society Capital, there was little examination or discussion of what these might entail, whether they were needed or whether there was any demand for them.
Robbie Davison and Helen Heap’s Can Social Finance Meet Social Need? in June 2013 represents the first real attempt to ask the fundamental questions.
With 98 weeks before the next General Election, especially with a long tail of Social Investment Financial Intermediaries (SIFIs) as stake holders in the existing process, Huckfield hopes that this will stimulate further effort to change the direction of the Social Investment concept which has been developing since April 2000.
The Discussion which Didn’t Take Place
In April 2011, New Philanthropy Capital and NESTA published Understanding the Demand for and Supply of Social Finance with a cautious approach, which encompassed Community Development Finance Institutions, Credit Unions and Housing Associations. Part 2 Summary of Findings on page 6 says:
- “1. The absolute amounts needed from a funder like the BSB (Big Society Bank) total hundreds of millions rather than billions of pounds.
- 2. By far the majority of demand for capital is for soft capital – patient, semi-commercial capital and grants. The BSB should not expect to achieve commercial returns on many of its investments (although there are opportunities for this, set out below). By patient, we mean capital which takes many years to return the principal.
- “4. Building the market is essential, which requires grants or very patient capital. Both markets are ‘underdeveloped’ in many respects; both require investments to help them become more efficient and sustainable.
- “5. The BSB may have to make a trade-off between building the market and maintaining its capital.
- “6. There seems little appetite for a new intermediary entrant offering direct products and services competing with existing intermediaries.“
This essentially cautious approach was maintained by Dan Corry, as Chief Executive of New Philanthropy Capital, when interviewed for Big Society Fund Launches with £600mn to Invest on Radio 4’s Today Programme on Wednesday 04 April 2012:
“It will mask the real problem: Voluntary Organisations who really do need grants and won’t be able to cope with risk capital.”
Mr Corry said that although there were many Social Enterprises that would benefit from the scheme, many charities would not, because they had no revenue stream that could be used to repay the funding.
“A lot of charities who are helping homeless people, for example, they don’t get any revenue from that,” he said. “For most of them, this is really quite irrelevant.”
It’s a great pity that New Philanthropy Capital and others shown below did not continue their analysis of difficulties posed, especially when, with ClearlySo and Big Lottery Fund, it published Investment Readiness in the UK in July 2012, which showed in great detail potential recipient organisations’ unpreparedness for Social Investment.
The Government’s Big Policy is Outsourcing
Despite the hype of Growing the Social Investment Market, the Government’s February 2011 White Paper, and the inclusion of Big Society Bank on page 29 of the Government’s Coalition Agreement May 2010, Social Investment is not the Government’s main policy. The Government’s main policy is outsourcing.
The Seymour Pierce (now Cantor Fitzgerald Europe) estimate of £100mn outsourcing is on page 8 of Can Social Finance Meet Social Need? But Oxford Economics in its Open Access Report for the CBI in September 2012, says on page 7:
“..given the size of the potential prize if similar levels of savings achieved across the areas of public services expenditure which could conceivably be opened up to further independent provision, which the CBI estimates could be up to £278bn. This change will not happen by default. The Government must lead the agenda”.
Cantor Fitzgerald Europe says on Government Spending Plans on page 44 of its Support Services Annual Review January 2013:
“There was a sharp acceleration in public sector spending in the first decade of this century, with TME reaching an all time high of £707.1bn in 2010-2011. This is expected to decline by 4.4% to £676.2bn in 2017-2018.”
Though these are based on different projections, this means that the CBI believes that around 40% of the public spending could be “opened up further to independent provision”.
No wonder that page 52 of Cantor Fitzgerald Europe’s Support Services Annual Review January 2013 mentions:
“In October 2012, we attended a meeting hosted at the Cabinet Office by Francis Maude (Minister for the Cabinet Office) and Stephen Kelly (Chief Operating Officer for the Government). We heard how the Government was now open for business and how it will be looking at becoming a smarter customer. We were told that more services would be open to competitors, that the Government would be more innovative in its approach, more and and more digital when dealing with the private sector”
A Subordinate Role for Social Enterprise?
How Money is Spent To Meet Social Need on page 10 and Figure 1 – What the Money Pays For on page 11 of Can Social Finance Meet Social Need? acknowledge that most ‘bulk provision’ will be delivered by private for profit operators and larger charities. Since much of this will be delivered by private Prime Contractors and under Payment by Results, this means a lesser role for Social Enterprise and Third Sector Organisations. Recognising the difficulties in providing services for “unmet need, market dysfunction and innovation spend”, the Report continues on page 12:
“This does not have to be the case, there should also be an important role for smaller, community-focused Social Enterprises and CVS providers who can develop new models of service delivery that are suited to the new landscape, but it will require a period of experimentation, research and development before these are of sufficient stability and scale to have real impact”.
But this means a subordinate role for Social Enterprise and Third Sector Organisations.
Huckfield recognises the Social Enterprise description on page 16 under 4. What makes a Social Enterprise social in economic terms? and the process description on page 17 in 5. Analysing Social and Financial Value Creation. On page 18, Figure 2 – Social and Financial Value Creation Stages of Company Development – Social and Financial Value Creation seeks to show stages of product development and funding needed.
However, Huckfield believes that for many Social Enterprises, these initial Builder and Finance Grant stages are not easily structured or subdivided and are really one ongoing and evolving stage while moving towards Product Maturity. So for many Social Enterprises, any distinction between Builder and Social Expansion Finance may not be clear cut.
But any amendment or revision of the Figure 2 – Social and Financial Value Creation diagram is not a major issue and does not undermine the case which Can Social Finance Meet Social Need? seeks to make.
Against a background of headlong outsourcing to large prime contractors and payment by results, Huckfield believes that more attention in Can Social Finance Meet Social Need? should be given to:
- an examination of the roles which Social Enterprises might play as private contractors and large charities deliver most provision
- more examination of funding needed by the larger majority of Social Enterprises and Third Sector Organisations which earn income but which do not engage in commissioning and contracting.
Widening “Social Sector Organisation” Boundaries since Little Demand for Social Finance
Big Society Capital Gets Carried Away!
BBC News headlines for Radio 4’s Today Programme on Wednesday 04 April 2012 included Big Society Fund Launches with £600mn to Invest. The story continued:
- “The Fund has already agreed investments worth £3.6mn in five separate schemes..”
From the outset Big Society Capital seems borne aloft by its own rhetoric. The First Billion: A Forecast of Social Investment Demand in September 2012 shows:
- Demand Growth Forecast on page 8
“From around £165mn of Social Investment deals made in 2011, our study shows that demand for Social Investment could rise to £286mn in 2012, then to £750mn in 2015, finally reaching around £1bn by 2016 if trends continue as forecast. This pace of growth, equivalent to 38% annually, is not for the faint of heart”
Despite this excess of optimism, 12 months later the First Annual Report of Big Society Capital 2012 published in April 2013, in Review of the Business on page 38 shows:
“During 2012, £119.4mn of equity capital has been received, £71.7mn from the dormant bank accounts via the Reclaim Fund Limited and £47.7mn from the shareholder banks. In principle commitments of £56.6mn have been made for 20 investments. Of this total, £5.4mn has been drawn down.
For a concept 13 years in the making, this is very slow progress indeed. How much of this £5.4mn funding was for a SIFI rather than final beneficiaries?
Little Demand for Social Investment
Closer to reality, in a detailed, well researched article in Social Enterprise Journal Vol 8 No 2 2012, Peter Sunley and Steven Pinch at the Department of Geography at University of Southampton in Financing Social Enterprise: Social Bricolage or Evolutionary Entrepreneurialism show a minimal demand for Social Investment:
“There was even less interest in equity-type investment and only two of the Social Enterprise had received equity investments, neither of which were from orthodox venture capital investors. Most interviewees were not aware of any social-equity schemes or quasi-equity schemes and dismissed the relevance of equity to their slow growth, small surplus and social value strategies.
“The aversion to loans was not confined to those Social Enterprises who were most dependent upon grant income (although it was most intense in this group) – unstable markets whether from the public or the private sector were also crucial in determining attitudes towards borrowing. Thus, the aversion to borrowing was to be found amongst enterprises of varying size and age.”
What Sort of Intermediaries?
Big Society Capital seems to have ignored much which was said and written about the role of SIFIs.
Growing Social Ventures: The Role of Intermediaries and Investors: Who they are, What they do, and What they Could Become, by NESTA and the Young Foundation in February 2011 poses major questions for intermediaries on page 7:
“Too few intermediaries understand social impact well enough. When asked about their own skills, intermediaries rated themselves least strongly on their understanding of social issues – and rated social ventures most strongly on their understanding of social issues”.
“Pumping more finance into the sector is unlikely in itself to realise growth in the sector, without careful thought on how it is structured. A decade ago it was widely expected that greater supply of capital would increase demand from strong ventures. Instead, despite the relative growth of social finance, many social investors struggle to find investible ventures”.
Financing Social Enterprises in the UK by the Social Investment Consultancy in March 2011 says on pages 3 and 4:
“Across the vast array of social investors, there are only a handful of funding organisations focused on investments between the £50,000 and £200,000 mark. Individual investors often do not have the risk appetite to write cheques at this level, while institutional investors often see this range as being too costly given the necessary due diligence and transaction cost at an average of £5,000.
“Pumping more capital into the sector is unlikely by itself to generate growth, without careful planning on how the investment could be best used”.
Survey Evidence for Scottish Community Bank
Much of this is echoed from a large survey being conducted by Social Entrepreneurs’ Network Scotland, of which Huckfield is a Director, for its proposed Scottish Community Bank. This shows that Social Enterprises and Third Sector Organisations experience most difficulty in finding soft loans without being able to offer recognised guarantees and security. Long repayment profiles, including repayment holidays, possible percentage repayments and “due diligence plus” are needed from lenders.
Most current Third Sector lenders require acceptable security and do not have resources or scope for the local due diligence, mentoring and ‘handholding’ involved. Additional resource is needed for existing intermediaries familiar with Third Sector Governance and structures.
Figure 5 – Capital Shift required to fully develop the Social Investment Market on page 27 of Can Social Finance Meet Social Need? seeks to show structural shifts needed by Big Society Capital and others. But this also means that different roles and different kinds of SIFIs are needed, for which many current SIFIs may not be equipped or suited.
Instead of examining whether its SIFIs sufficiently understand their market or might assist the wide range of Social Enterprise and Third Sector Organisations which believe that Social Investment is inappropriate, Big Society Capital has instead chosen an easier way forward by widening the definition of eligible Social Sector Organisations which might be ultimate beneficiaries.
Wider Definition – Social Sector Organisations
Big Society Capital has encouraged a wider range of organisations as potential investees. The following examples show the consequences of this shift:
For its Big Venture Challenge, UnLtd is bold in proclaiming:
“When selecting who we work with, we are agnostic on legal structure, and open-minded on the use of profits. In each individual case we care passionately and work relentlessly to find the most appropriate revenue model and investment strategy to maximise social impact.”
Rodney Schwartz, ClearlySo’s Chief Executive in Social investment is a Large Tent that is Broadly Defined on Tuesday 09 April 2013 was equally bold:
“However, I believe there is also a practical risk if anyone tries to proscribe and thereby limit what is included. From our perspective at ClearlySo, the biggest problem for Social Investment is not the precision of the definition of the term, or its deviation from some ideal, but rather the small size of the market. Put simply, we need more investment in social everything”.
Big Society Capital itself in its For Profit Social Sector Organisations Governance Agreement offers:
“The Company exists:
- (a) primarily to provide affordable credit and other financial services to
individuals and organisations which are excluded from or are underserved by
mainstream credit and financial services markets; and
- (b) as an equal or subsidiary object, to generate value for shareholders.”
Alongside these proclamations favouring a wider spectrum of Social Sector Organisations, a long tail of SIFIs, especially the 27 for the Investment and Contract Readiness Fund, have been recruited, some with little experience of Third Sector or Charitable Organisations. These are listed on this site under Who will Speak Out against the Financialisation of Social Enterprise? on this site.
Because SIFIs are still being recruited, if the proposals on page 31 of Can Social Finance Meet Social Need? are to be pursued, it should be recognised that some SIFIs don’t really understand their market and are not properly funded to respond to the needs of Social Enterprises and Third Sector Organisations.
The remit and structure of Big Society Capital are not adequate to fund a wider range of Social Investment and other Intermediaries. Page 24 of Can Social Finance Meet Social Need? highlights the problem, quoting from Big Society Capital: Vision, Mission and Activities:
“Any equity, quasi equity, risk/working capital or debt investment by BSC must be shown under rigorous stress testing to generate over time a financial and social return commensurate with the underlying risk assumed. This means that BSC will need to balance the overall levels of financial risk it takes in pursuit of social impact with the need to generate sufficient financial returns to remain operationally viable.”
Though further “Technical Assistance” support comes from the Cabinet Office, much of this resembles a scattergun approach, advancing £10mn “here or there” through these funds and others:
No wonder that Daniela Barone Soares as Chief Executive of Impetus Trust on Pioneer Post TV on Monday 25 February 2013 advocated that the Investment and Contract Readiness should be ten times its current size!
Page 29 of Can Social Finance Meet Social Need? suggests the Big Lottery as a source of additional support funding. Additional support already provided by the Cabinet Office’ ad hoc approach is shown above.
But even with additional funding from the Big Lottery and Cabinet Office, as shown in The Report’s Recommendations below, Huckfield still doubts whether Big Society Capital and its SIFIs are appropriate vehicles to meet the funding needs of most Social Enterprise and Third Sector Organisations.
Another omission from Can Social Finance Meet Social Need? is that any move towards Social Investment means the need for closer and more detailed Impact Measurement. This can mean the measurement of impacts which lenders and investors understand rather than those which are important to deliverers.
Initial studies on the results of Impact Measurement are beginning to appear. The following is taken from a recent Australian description of process towards Results Based Accounting in Organisation Sdueies, Volume 33 (1) pp 97-120 by Keevers, L., Treleaven, L., Sykes, C., and Darcy, M. (2012). “Made to Measure: Taming Practices with Results-based Accountability”:
“A feature of government public policy has been an attempt to manage the community sector (other terms are also used to describe this sector such as ‘third’, ‘charitable’, ‘not-for-profit’, ‘voluntary’ and ‘civil society’) through the introduction of these new planning and accountability approaches linked to economic models for managing funding….”
“In this boundary cut that measures service provision, RBA (Results Based Accountability) excludes from mattering all the practices that cannot be constituted as ‘a service’. Yet, at Southern Youth these practices are identified as crucial in contributing to people’s struggles over recognition, belonging and ‘just’ living”
Many more examples will show the distorting effects of Impact Measurement for Lenders and Investors.
The Report’s Recommendations
On page 31, Can Social Finance Meet Social Need? recommends a reallocation of Big Society Capital’s resources:
- 25% to fund bulk provision of service providing minimum acceptable outputs and preventative spend.
Some of this might be provided through existing SIFIs or may not need additional support
- 50% to fund innovation spend and support community based Social Enterprise development, looking also to lever in philanthropy investment.
This will need intermediaries familiar with Social Enterprise and Third Sector structures and governance and would be more effectively funded outside Big Society Capital’s current structure. Non repayable Technical Assistance for other organisations would be more appropriate.
- 15% for the provision of unmet need by charities via trading activities
It is doubtful whether under Big Society Capital’s remit and structure, many SIFIs with their current Boards and structures will be those appropriate for this. These will also need funding from non repayable Technical Assistance funding. It would be more appropriate if this support was provided through a reallocation of Big Society Capital’s funds to other organisatons not under its remit.
- 10% by The Big Society Foundation to fund grants for charities serving unmet need purely from charitable activities.
Different structures not under the auspices of Big Society Capital would be more appropriate or effective in this role
Huckfield in Big Society Capital’s £600mn – An Alternative Strategy for Supporting Social Enterprises recently advocated the reallocation of Big Society Capital funds to intermediaries not primarily promoting Social Investment.
Once more, Huckfield proposes that some funding allocated to Big Society Capital and its SIFIs should be reallocated to regional and local Social Enterprise Networks for their decision on spending priorities under some of the very worthwhile recommendations in this Report