Huckfield offers these comments on Big Society Capital’s First Annual Report , which finally appeared on Friday 10 May 2013.
In a previous posting on this site, Big Society Capital’s £600mn – An Alternative Strategy for Supporting Social Enterprises , has already been suggested.
Thirteen Years to Spend £5mn
These are highlights from a chronology of events leading to the First Annual Report of Big Society Capital (BSC):
- October 18 2000 – Sir Ronald Cohen submits to Gordon Brown as Chancellor of Exchequer his First Report of the Social Investment Task Force: Enterprising Communities: Wealth Beyond Welfare
- Monday 17 July 2006 – Sir Ronald Cohen becomes Chair of the Independent Commission for Unclaimed Assets. This was initiated by the Scarman Trust, with support from Charitable Foundations, including Rowntree and Carnegie.
- November 26 2008 – New Labour’s Dormant Bank and Building Society Accounts Act receives Royal Assent.
- May 2011 – Sir Ronald Cohen and Nick O’Donoghoe submit their Big Society Bank Outline Proposal to Government, with details of its management and organisation structure, including policies and procedures, financial modelling and interim arrangements
- January 2012 – BSC signs a Subscription Agreement with its shareholder banks
- March 2012 – BSC obtains Financial Services Authority authorisation
Though the concept, legislative framework and detailed proposals have been developing since the Millennium, in its first year of operation, BSC invested only £5.4mn – and some of that in Bridges Trust, where Sir Ronald Cohen Chairs its Advisory Board.
Big Society Capital roles
In describing its roles, the BSC Annual Report raises important issues:
- The Social Investment Market Maker. BSC’s dual role as Investor and Social Investment Champion is described on page 13 of its Report. But BSC is also a well heeled market maker, spending public money to make a Social Investment market.
- How much real Social Investment? Unclaimed Bank Assets are really public money. BSC’s ‘Founding Principles’ on page 13 include Independence (with Big Society Trust’s owning 60% BSC’s shares) and Transparency. Despite receiving £119.4mn equity capital during the year, only £5.4mn has actually been drawn down. And we still don’t know how little has yet been received by ultimate investees. £5.4mn represents investment in intermediaries, not final beneficiaries.
- No benchmarks or comparators. Operating in a political and economic context without benchmarks or evaluation standards, it is not easy to reflect accurately BSC’s performance. BSC handles large amounts of public money without any UK or international precedent or comparator. In their absence, it is very difficult to judge BSC’s efficiency, productivity or effectiveness. If, as claimed in September 2012 in The First Billion Report by Big Society Capital and Boston Consulting, there is demand for £750mn Social Investment by 2015 and for £1bn in 2016, how much BSC spending activity is really additional and how much is just deadweight? Is there a need to spend so much public money on creating a Social Investment Market?
- Operating in an environment without questions. Other factors mitigate against effective measurement and analysis of BSC’s performance. BSC operates in an environment where the Cabinet Office and Government are supinely supportive. Beyond its immediate operations there is minimal political understanding and, as shown below, unwavering and uncritical support from London Third Sector Organisations.
BSC’s Friends, the London Third Sector Organisations
The BSC Annual Report showers praise on London Third Sector organisations:
- “We appreciate the help and encouragement that we have received from ACEVO, NCVO, Social Enterprise UK and a host of established Social Investment Finance Intermediaries and frontline organisations. We are grateful to all of them. This collaboration is critical to our long term success”. (page 11)
- “Many of these (policy) initiatives have been undertaken in collaboration with partners such as NCVO, Social Enterprise UK and the City of London Corporation”. (page 32)
Directors of the Big Society Trust – with an 80% controlling vote in Big Society Capital – include Stephen Bubb (ACEVO) and Peter Holbrook (SEUK ).
Though Non Executive Directors’ fees are not ascribed or apportioned to BSC or the Big Society Trust, they receive £7,000 annually, plus £3,000 annually if Chair of a Committee and £1,500 annually for being a Committee Member. Non Executive Director’s fees in 2012 were £45,000. (page 37).
“Principles for Non Executive Remuneration” on page 37 says “Non Executive Directors will be paid an equivalent sum paid by other comparable not-for-profit and public bodies such as housing associations and primary care trusts to Non Executive Directors”.
What has Big Society Capital done during its First Year?
Nick O’Donoghoe’s CEO Statement:
“Since our launch in April, Big Society Capital has used its capital to cornerstone ten social investment funds. These funds have diverse objectives” (page 8)
“By the end of 2012 we had committed £56mn to 20 different intermediaries, £19mn firmly committed and £37mn subject to matching finance being raised.”(page 10)
Throughout the CEO’s Statement, though BSC operates in entirely uncharted waters, there is little contextual analysis or description of any processes used. Regrettably, there is no further analysis in the Performance Review shown below.
Key Performance Indicators and Market Diversification
Despite an ongoing series of high profile media stories, this is the first time many of these figures have been released by BSC. A major problem is that much information in the Report is provided without context, without a description of criteria used or comparisons elsewhere. Page 16 shows:
- £19.4mn for 15 “investments signed”
- £37.2mn for 5 “in principle investment commitments”
- £19.7mn “matching finance” for BSC investments made”
- 13 Social Investment Financial Intermediaries with £48.2mn investment commitments
- 23 “frontline organisations” receiving investment commitments so far
Without further details or external comparators, it is difficult to construct valid yardsticks for progress or form judgement on what all this means. On pages 16 and 17 BSC analysis poses more questions than answers through using graphics and percentages rather than actual titles or figures. For example, in which Social Investment Financial Intermediaries in the Northwest does it invest? Actual amounts may be one investment in an organisation represented on one of BSC’s boards.
Review of the Business features on page 38:
“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. Total revenue for the year was £1.9mn principally from treasury management returns. Expenses were £3.0mn with average headcount of 18.”
So, despite drawing nearly £120mn equity capital during its first year, £462,471 of BSC’s income of £1.9mn was a Government Grant. Page 39 shows that the company made a loss of £1.1mn. Most small to medium Social Enterprises would need to manage cash flow better than this!
Sums for Specialised Funds, General Funds and Operating Intermediaries are very large. There is little justification provided on pages 20 and 21 for chosen intermediaries or the amounts BSC invested in them. These questions are surely relevant:
- Since all this is very new market, how were bids or submissions for these investments assessed or prioritised? Which potential Social Investment Financial Intermediaries were invited by BSC to make submissions?
- Significant investments were made in organisations represented on BSC’s various boards. Big investees are well represented, including by Chief Executives, either as BSC Directors, Big Society Trust Directors or Advisory Board members. While not suggesting any impropriety, at each stage Sir Ronald Cohen sits on boards throughout the investment processs – Big Society Trust, Big Society Capital and Bridges Trust Advisory Board (Bridges received £10mn for Social Impact Bonds)
- What assessment criteria or ranking were used before investing, for example, £950,000 in Big Issue Invest (on BSC Advisory Board) and £8mn in NESTA (on Advisory Board and BSC main board)? (page 20.)
- What criteria were used to determine that NESTA should receive £8mn and Impact Ventures UK £10mn, whether this represented “value for money” or the best investments which could be made by BSC? Do NESTA or Impact Ventures have staff to provide required information and to evaluate and appraise their own investments?
- To become an “Operating Intermediary”, what kind of Business Plan did ClearlySo (on Advisory Board) submit? For its £1mn, does ClearlySo have appropriate staff to provide investment support required by BSC?
None of this is suggesting any impropriety or wrongdoing. However, against a similar background of close relationships, Civil Society on Tuesday 19 March 2013 reported Questions are raised over Social Action Fund grant to Big Society Network. Complaints were made to the Office for Civil Society and Social Investment Business about Big Society Network, which received £200,000 in Round Two of the Social Action Fund, concerning the way in which the grant was processed.
What Remit for Policy Changes?
BSC has sought to fashion various national and EU policies. Since it uses public money, where is BSC’s remit, or where has it sought policy guidance for shaping significant policy changes outlined on page 32? These include:
- Furtherance of Payment by Results
- Seeking tax relief for investors
- Seeking to widen scope for Charities’ investments
- Making submissions in response to the Government’s Red Tap Challenge Consultation (which includes dilution or removal of some sensitive business names, including “cooperatives”) and
- Influencing policy under the EU Social Business Initiative.
Through the influence of BSC and others, policy headings for the EU Social Business Initiative have been steered from Social Enterprise towards Social Investment. The Outline of the EU Guide to Social Innovation February 2013 summarises actions which may be undertaken by either For Profit or Not for Profit Organisations in a deliberately ‘sector blind’ approach.
The EU’s Social Business Initiative is now less concerned with governance arrangements of funding recipients so that funding for Social Innovation may be received by public, private and Third Sector Organisations.
Social Investment in the Education Sector
Page 33 shows that a Report on Opportunities for Social Investment in the Education Sector, partnered with the Private Equity Foundation, is expected in Spring 2013. The incursion of For Profit Academies into Secondary Education and For Profit Universities into Higher Education are already highly controversial. Almost politically unnoticed, BIS Alternative Providers Draft Guidance in April 2013 permits For Profit HE providers’ access to the English Student Loan System. They will also remain outside HEFCE Controls on Student Numbers until 2014-2015.
Who gave BSC policy advice to encourage more “Alternative Providers” in Higher Education? Since BSC is increasingly sector blind in its approach, all this will increase fears that in an already highly politically charged arena, further For Profit and private equity expansion in English Higher Education could be disguised as “social”.
Financial Statements and Auditors’ Report
Page 61 “Note 17 – Valuation of Financial Investments” says:
“Where a regular Net Asset Valuation is available for the investment, the company will assess this for reasonableness and consider whether the investment can be valued on the basis of the underlying Fair Value of its assets, rather than its earnings. If this is considered appropriate the company will apply the Adjusted Net Asset Valuation method.”
“If future cash flows can be reasonably estimated, and it is felt that the risks, due to the high level of subjectivity, involved in applying the Discounted Cash Flow method do not render the method insufficiently reliable, this will be applied.
“If industry benchmarks can be applied to the investment to derive a fair value, these will be applied. The company may decide to use a combination of the mentioned methods, or other methods that are considered more appropriate to derive the fair value of its investments.
“Given that all investments have been made recently, the company has used Price of Recent Investment, unless a more accurate valuation is available. The company has considered whether there is any evidence to indicate that the Price of Recent Investment is no longer relevant, where this is the case a fair value adjustment has been made.
It is not being suggested here that any of these valuations are irregular or unethical. However, most of BSC’s operations are in areas without market assessment of asset and investment values. Are the “fair value” criteria chosen above those which are most appropriate in the circumstances? Since BSC uses public finance, will any comment be made by the Financial Conduct Authority or other regulator?
The detail in Note 17 shows that BCS is aware that much of this is unfamiliar investment territory. It would be more helpful if the Performance Review below showed an awareness of this.
The BSC “Performance Review” has been trailed heavily by Pioneers Post and other media. James Perry – a director of Cook, a family run frozen meals business – writes as a “co investor”. But there is nothing which shows that he is also a member of the BSC Advisory Board (page 35 of the Annual Report). Since this ‘Review’ appeared before publication of the BSC First Annual Report, its writer will obviously have seen the Report’s contents. This is hardly an independent performance review!
Despite raising several important issues, the “Performance Review” offers no real analysis. As an example, James Perry writes:
“There is a fundamental mismatch between BSC’s supply of capital and the demand side. One way to address this mismatch is for BSC to focus on fewer, bigger deals with established market participants, such as Ecology Building Society and Charity Bank”.
Though he offers no analysis, is Perry is really confirming that most BSC investments so far have followed this strategy?
Page 33 of the BSC Annual Report shows that finding investees has been hard going. ‘Seeking Opportunities and Ideas for Social Investment’ says:
“Our “Market Update and Call for Ideas” of October 2012 detailing our view of the market’s development, and setting out the areas where we see demand side potential but fewer investment proposals. The call for ideas placed a particular emphasis on health and social care markets, on community assets, and on more PbR opportunities.
“An active ideas co-development programme – since late 2012 we have run four programmes to co develop investment ideas with potential partners in a range of target areas such as social housing and community assets”.
Though this seems to show that BSC is finding progress is difficult in these areas, none of this is really analysed further by Perry.
On BSC’s “Creating a New Culture”, Perry writes:
“Engaging with Social Investment is a bruising experience for the social sector, as it comes to terms with new expectations. If BSC cannot bring the social sector with it, then it will have to move into a bunker. The recently advertised social sector leader role at BSC is perhaps a recognition of the need to strengthen this area. It is crucial that this role is seen as strategically core to BSC and allowed to infuse every nook and cranny of BSC’s organisational culture, from top to bottom.”
What a pity James Perry didn’t enlarge on this – which is surely BSC’s core problem – that Social Investment is neither sought, needed nor appropriate for most Social Enterprise and Third Sector Organisations.
Throughout this Pioneers’ Post Performance Review Perry selectively refers to the “social sector”, “Social Investment” and “social transformation”. As they scan the horizons for real investees, BSC and its Social Investment Financial Intermediaries are becoming less concerned about any distinction between For Profit and Not for Profit entities and their governance. They are increasingly sector blind. As long as a “social sector” company proclaims a “social mission”, that seems to be acceptable.
As Huckfield has written before, surely there must be more effective ways of spending £400mn of Unclaimed Bank Assets, £200mn from Merlin Banks and up to £1bn when the contribution from the Cabinet Office is added?
Big Society Capital’s £600mn – An Alternative Strategy for Supporting Social Enterprises has already been suggested.