HUCKFIELD offers sincere apologies that a previous posting with the same title was withdrawn earlier this week on account of technical problems. Though some of these are still being resolved, this narrative and contents represent the updated and final version.

As a Board Member of the Social Entrepreneurs’ Network Scotland, HUCKFIELD once more declares an interest. Senscot promotes its own definition of Social Enterprise. These are the details of the Voluntary Code of Practice for Social Enterprise in Scotland – the Senscot Code

This posting provides details on these issues:

  • Massive Public Spending Cuts. Central Government Departments and Local Councils face massive expenditure cuts. As shown below, before 2020, many Local Councils will be forced to decommission many mainstream services.
  • ISAs Fund Public Services Delivery. Alongside all this, a central plank in the UK Government’s policies is clearly set out in the Growing the Social Investment Market White Paper in February 2011. Page 7 says: “Our vision could eventually see individuals and families choose some Social Investments as part of their ISAs or pension fund. And it could help unlock a slice of the £95bn of UK charitable income and endowment assets for social investment.”
  • Financialisation of Social Enterprise. To stimulate the Government’s vision of a Social Investment Market, up to £1bn funding is being made available through the Cabinet Office, Big Lottery, Big Society Capital and other agencies.
  • Loose and conflicting definitions of Social Enterprise. Many Social Investment Funding intermediaries have loose and conflicting definitions of those organisations eligible for funding to build a Social Investment Market – so that Companies Limited by Shares and private shareholders and companies could be beneficiaries.

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The Size and Scale of Public Spending Cuts

The following represent examples of the size and scale of public spending cuts which are imminent:

The Local Government Association Response to the Chancellor’s Autumn Statement on Wednesday 05 December 2012 summarised the situation as follows:

  • “Local government has borne the brunt of cuts to public spending so far and, while it is pleasing our campaigning has resulted in councils being protected from additional cuts next year, the extra two per cent cut in 2014/15 is unsustainable.
  • “Local authorities already face a possible £1bn cut to funding for 2013/14 on top of the 28% reduction set out in the spending review and the further 2% now announced for 2014/15.
  • “It is generally recognised that councils have managed the cuts so far by maximising efficiencies and redesigning services. With further cuts on the horizon, this will be impossible to repeat and impacts on the local frontline services that residents rely on and value are very likely”.

London Borough of Barnet’s ‘Graph of Doom’

    The Institute of Local Government Studies at the University of Birmingham on Wednesday 23 May 2012 provided a handy summary to accompany this Graph:

    “Barnet Council estimates that over the four-year Spending Review period it will lose roughly 30% of its income, requiring matching reductions in spending. The bar chart plots the predicted spending on adult social care and on children’s and family services over the coming decade – showing that, without significant changes in the way these services are provided and/or in councils’ funding, the increasing numbers it will be supporting mean that by 2022-23 it would be providing only social services, there being no money left for anything else”.

City of Birmingham’s ‘Jaws of Doom’

    The Birmingham Mail of Sunday 13 January 2013 summarised the situation “Birmingham City Council’s ‘Jaws of Doom’ Budget Gap is Widening:

    “The ‘jaws of doom’ budget gap surrounding Birmingham City Council’s finances have widened to £625mn, the Labour Leader Sir Albert Bore has revealed. Sir Albert said that the city is now facing a budget gap £20mn higher than first thought following recent Government funding announcements.

    “It means that Council services, including libraries and leisure centres, community support services and parks could all be under threat of either being shut or contracted out. Last October the Council Leader announced that they had to make £605mn of savings over six years from 2011 to 2017 – of which only £275mn have been achieved to date.

    “Appearing before a Council Scrutiny Committee he said that a root and branch review of council services is now underway and that consultation on major cuts, including the decommissioning of services, will begin in the summer.”

Continuing Cuts to Scottish Departmental Expenditure Limit Settlement

Chapter One of the Strategic Context for (Scottish Government) Draft Budget 2013-14 on page 3 shows that Scotland is not exempt from these spending reductions:

“The Chancellor indicated in this year’s UK Budget that significant reductions in public spending are likely to continue beyond this Spending Review period (ie after 2014-15), which would mean that real-terms spending power in Scotland is again limited by decisions made in London. Scottish total DEL for 2016-17 would be 17% lower in real terms than that for 2010-11. As highlighted in Figure 1 above, given that 2012-13 DEL is 7% lower than 2010-11, we are currently not yet half way through the budget cuts indicated by the UK Government”.

These examples above show the size and scale of public spending cuts now taking place. These represent the disappearance of public services on which people depend.

Alongside this, the following Section shows that the UK Coalition Government will be spending up to £1bn to stimulate the creation of a Social Investment Market. Even if all outputs and projections offered by the Cabinet Office and various agencies were realised, they cannot replace the public realm which will disappear.

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Social Investment Funding from the Cabinet Office

The Social Outcomes Fund, launched by the Cabinet Office on Friday 23 November 2012, is managed directly by that Department for promotion of Social Impact Bonds through helping charities to win Payment by Results contracts.

The Expression of Interest Form for the Social Outcomes Fund for Social Impact Bonds summarises its purpose:

    “The Social Outcomes Fund is an innovative new top-up fund that will create many more Social Impact Bonds that make a difference to people’s lives. It will attract new money by bringing in investment to help finance early, preventative programmes on some of the most complex and expensive social problems. The fund will be used to provide a ‘top-up’ contribution to PbR (Payments by Results) or SIB (Social Impact Bonds) contracts that are designed to deal with complex and expensive social issues. ….The Fund will only top up a minority proportion of outcomes payments, and the average across the Fund is expected to be 20% of the total outcomes payments. The aim of the Fund is to support 10 – 20 new PbR/SIB contracts. It aims to leverage at least £60mn of social investment.”

Main applicants to the Fund, which operates only in England, will be Government Departments, Local Councils and other Commissioning Bodies, like Police Forces or Clinical Commissioning Groups.

On eligibility, page 4 of the Expression of Interest Form shows:

    “1.5 Who Can Apply?
    “..It will preference propositions that catalyse new and innovative service provision, encourage active engagement from the Voluntary Community and Social Enterprise (VCSE) sector and enable service redesign. Expressions of Interest may therefore be submitted by any interested party such as a commissioner, service provider, intermediary or investor”.

There is nothing elsewhere in the Guidance which defines eligibility for specific types of “Voluntary, Community or Social Enterprise” or what structural requirements these should have. Huckfield is among others asking what kind or organisations might ultimately benefit from this funding. Without requirements for profit distribution and an asset lock, these might be Companies Limited by Shares.

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Social Investment Funding from Big Society Capital

Big Society Capital has £600mn at its disposal to stimulate the Social Investment Market. Big Society Capital on Monday 14 January 2013 set out its targets:

    “Big Society Capital (BSC), the world’s first Social Investment Bank, has today set a target of investing between £75m and £100m in new projects during 2013 after committing £56m in its first nine months.

    “Since it was formally launched in April 2012, BSC has committed investment to 20 Social Investment projects totalling £56mn. This has included supporting six Social Impact Bonds, and being the cornerstone investor in an array of Social Enterprise funds. In addition BSC has helped develop the Social Investment market in the UK, investing in the development of a social stock exchange; providing funding to support the growth of ClearlySo, a firm dedicated to helping social organisations raise capital; and collaborating with 14 Social Investment Intermediaries to publish best practice guidelines on evidencing social outcomes.”

Big Society Capital’s Definition of Social Sector Organisations includes for profit companies. The requirements for funding ‘For Profit Social Sector Organisations (SSO)’ are described in Big Society Capital’s Governance Agreement.

    “Section 1.2.2
    “…have a policy in relation to the distribution of profit after tax that ensures surpluses are principally used to achieve social objectives. Practically this means that the payout of cumulative profit after tax to shareholders will be capped at 50% over time, and therefore ensures that any surpluses generated over time will be mainly:

    • reinvested in the business
    • applied in advancement of its Social Objects or
    • distributed or donated to other social sector organisations

    “Section 1.2.3
    “have a constitutional or contractual lock on its Social Objects, dividend and surplus distribution policy and ensure the disposal of assets is compatible with the Social Objects embedded in its constitutional documents”

Huckfield is surely among many others asking whether for profit organisations should feature among Big Society Capital’s investees.

But there is a further difficulty in this definition of eligibility. Since Big Society Capital only invests in Social Investment Intermediaries, this does not always correspond with the definitions of Social Enterprise required by its investees – as shown below by the example of ClearlySo.

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Social Investment Funding from ClearlySo

In April 2012, ClearlySo published its Guide for the Ambitious Social Entrepreneur. Page 7, Chapter 3 The Social Enterprise Sector, says:

    “The common characteristics of a Social Enterprise are:
    “It is a business that trades with the aim of tackling social problems by improving communities, people’s life chances and/or our environment; it has a clear sense of its mission and how its activity addresses a particular need.

    “It differs from straightforward Charity because it is run as a business, earning money from trade and making surpluses which in part are used to finance further activities which generate social benefit”.

The Big Society Social Sector Definition says:

    “The statute which governs the establishment of BSC defines them as organisations that “exist wholly or mainly to provide benefits for society or the environment” This definition includes regulated social sector organisations such as charities, Community Interest Companies or Community Benefit Societies”.

As an investee, how does ClearlySo reconcile this looser definition when deploying Big Society Capital investment which is governed by different rules of eligibility? As shown below, even when there are tighter structural definitions for organisations, there is still a risk that these may be bought out by the private sector.

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Social Investment Funding from Big Venture Challenge

Big Lottery Fund has given a £15.5m boost to fund social enterprises. UnLtd will receive just over £8.5m to run the next phase of the Big Venture Challenge. Following an earlier pilot, in January 2013 Unltd, ClearlySo and theShaftesbury Partnership launched the Big Venture Challenge with the following invitations:

  • “For Entrepreneurs
    The Big Venture Challenge is an intensive 12 month programme that is designed to help you raise external investment (debt or equity) of between £50,000 to £250,000. This means working with you to build a compelling growth story, finding investors, making strategic connections and supporting you as an entrepreneur during the journey”.
  • “For Investors
    We are looking for investors – private individuals (angels), foundations, family offices, institutions and corporations – interested in investing £50,000 – £250,000 in some of the most exciting early-stage social ventures in England.
  • “For Supporters
    We are building a network of supporters – individuals and organisations– who can help 30 of England’s most ambitious social entrepreneurs to reach scale.

The Big Venture Challenge Application Guidance Notes show on page 4:

    “Social entrepreneurs with ventures of any legal incorporation form may apply – that includes charities, not-for-profit Companies Limited by Guarantee, Community Interest Companies or for-profit Companies Limited by Shares”.

This gets more complicated when the Social Investment Business which “will support Big Venture Challenge winners by managing the match-funding process”, refers inquirers to KnowHowNonProfit, part of NCVO, which includes another definition of ‘Social Enterprise’:

    Diagram Two - A Spectrum of Organisational Models

    Diagram Two – A Spectrum of Organisational Models

    “There is a greyed-out box cover circles 2-6. This is labelled ‘Grey area in which organisation are often loosely referred to as Social Enterprises’.

Conclusion from this Section. The example of Big Venture Challenge and others above demonstrate that often the Government, the Social Investment Intermediary and the final beneficiary may each have a different definition of ‘Social Enterprise’.

HUCKFIELD therefore asks who is keeping track of these significant sums of funding in a wide range of funding programmes – and there are many more – and who knows what kind of organisations are the final beneficiaries?

There is surely a possibility that many beneficiaries claiming a “social purpose” may be Companies Limited by Shares owned by private shareholders or companies?

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Does Social Enterprise need Social Investment?

The following research shows that Social Enterprise is neither ready nor asking for Social Investment.

Investment Readiness in the UK July 2012 by ClearlySo and New Philanthopy Capital represents one of the largest surveys into investment readiness by those organisations for which a Social Investment Market is being designed. The survey’s Research Methodology on page iv shows:

    “As part of this research, we surveyed 7,420 VCSE organisations from the Big Lottery Fund’s grantee database and ClearlySo’s membership database; 1,255 organisations completed the survey, which equates to a response rate of 17%. We also carried out a literature review and over 40 interviews with investors, intermediaries and support providers across the four countries of the UK.”

Other Sections of the Report show that there is no big demand for Social Investment:

    Is there an Investment Problem? on page 9 shows:
    “Successive governments have spent (or “invested”) significant sums in the last decade – over £400mn in Community Builders, Future Builders, the Social Enterprise Investment Fund and other mixed grant/loan funds to support organisations towards investment. But while these programmes have no doubt supported a number of individual organisations, at a systemic level the investment readiness of the sector as a whole is still perceived to be lacking.

    “….Conversion rates among social investors, (not including government-backed soft loan and grant funds) appear to sit between 5% and 15%. At one extreme, Community Builders had 4000 enquiries leading to 200 applications and 37 investees – equivalent to less than a 1% conversion rate and thus a significant mismatch of perceptions between investors and applicants.”

    Not Interested in Social Investment on page 32 shows:
    “Just under half of those surveyed are not interested in investment. Those in this category are largely strongly against taking on finance that needs to be repaid to support their plans — only 8% agree that they would consider it. Three quarters feel that charitable money should be spent on delivery, not on repaying loans”.

Cabinet Office/IPSOS Mori National Survey of Charities and Social Enterprises National Results in December 2010, showed that many organisations were not ready for Social Investment:

  • Page 16 shows shows that in 2010, Access to Loan Finance for your Organisation was Not Applicable for 59%, with only 3% Fairly Satisfied
  • Page 18 shows that in 2010 only 9% showed that Income from Investments was most important for the Organisation’s Success

‘Lighting the Touchpaper’ by the Boston Consulting Group and Young Foundation. November 2011 showed on page 12, Exhibit 5 “Share of Social Investments Made in 2010 by Type”:

    “The Social Investment Market is therefore far from the vision of risk taking social investors with equity stakes in ambitious Social Enterprises. In fact, equity and quasi equity investments together account for just 5% of the total market, less than £10mn in total.”

None of this seems to show any great enthusiasm for the investment products offered from Social Investment intermediaries above.

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Definitions of Social Enterprise, Restrictions on Distribution of Profits and Asset Locks are Important

The following are recent examples where either employee ownership or an asset lock under a Community Interest Company still may prevent private sector acquisition.

The Saga of EAGA
As shown in Construction Inquirer, February 28 2011, EAGA was bought by Carillion for £306mn despite strong protests of more than half its workforce. The story continued:

    “The Eaga Partnership Trust holds 37% of the company on behalf of the staff in a similar ownership structure to John Lewis.

    “But the Eaga trust’s board has voted to forgo cash payment following the sale and transfer its holding into Carillion shares without consulting staff”.

Ealing Community Transport
In June 2008, ECT Recycling was bought by the for-profit May Gurney construction company for £15mn. Other divisions of ECT were disposed of, or separated from the parent group, leaving ECT to focus on its core transport operations. This restructuring meant that assets held for the interest of the community were transferred into private hands, despite ECT’s being registered as a Community Interest Company.

Rory Ridley Duff and Mike Bull on page 219 of Understanding Social Enterprise: Theory and Practice (Sage 2011) analysed what took place.

    “In ECT’s case, the Regulator confirmed that ECT operated within its own rules (Gosling 2008) and that money raised from the sale of subsidiaries enabled ECT to service debts in its parent business. The events surrounding ECT, however, highlight two things about CICs and income streams: firstly, income can be generated for Social Enterprises by selling CIC assets to the private sector: secondly, the ‘asset lock’ does not effectively prevent CISs from transferring their income streams to organisations outside the Social Economy.

All this shows that even with strict definitions of ownership, profit distribution and an asset lock, it is still possible for assets held for employees or the community may still pass into private ownership.

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Private and Corporate Sectors Watch and Wait

Examples above show that without strict definitions and monitoring of structures which restrict distribution of profits and insist on an asset lock, some organisations which claim a “social purpose” may be “fattened up for the market”. Social Enterprise UK has produced an excellent Shadow State: A Report about Outsourcing of Public Services. December 2012, which shows:

    “Introduction on page 9:
    “Consider the latest numbers: the Probation Services are commissioning £600mn worth of their work a year (this amounts to 60% of their annual spend); Atos is now in receipt of £3bn worth of Government contracts; the estimated value of NHS contracts, since the passage of the Health and Social Care Act is £20bn; the Welfare Reform Bill, passed in March 2012, is expected to yield another tranche of contracts worth between £300mn and £5bn”

    “Children’s Social Care on page 31:
    “Advanced Childcare was England’s biggest operator, with 143 homes and 1,400 staff; it was bought in 2011 by American private equity house, GI partners, having previously been owned by Bowmark Capital. Advanced Childcare went on to purchase Continuum Care and Education, which was previously owned by 3i. Castlecare, in Northamptonshire, runs 40 children’s homes; it was bought by Baird Capital Partners Europe for £9mn in 2004. The company has expanded by buying two smaller childcare companies, Quantum Care and Sovereign Care, for £1mn and £1.3mn respectively.”

These “real world” examples of public service delivery highlight the context and environment in which a Social Investment Market is being stimulated. Above all, these show the need for strict controls and monitoring to ensure that Social Investment does not become a precursor to takesovers by private equity and the corporate sector.

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In this posting Huckfield has sought to provide a basis for these conclusions:

  • These examples above show that against a background of massive public spending cuts, even if Social Investment Market intermediaries exceeded all their targets, these efforts cannot repair or replace the damage being caused to public services. As Local Councils are forced to decommission mainstream services, Social Impact Bonds and Payment by Results are not a dependable replacement.
  • Under a gradual Financialisation of Social Enterprise, ISAs, private savings and individual Social Investment through private philanthropy, through seeking a return on investment, should not become the basis of mainstream delivery of public services on which people depend.
  • Loose and conflicting definitions of structures eligible for accessing Social Investment funding may mean that ultimate beneficiaries are Companies Limited by Shares and private shareholders through dividends.
  • Even with controls over profit distribution and asset locks, there is still a risk that some of these structures may fall prey to take overs and buy outs by private equity and the corporate sector.

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