How do we build markets when customers don’t pay?

Despite its popularity with politicians (or perhaps partly because of it) public service marketization is rarely discussed in a practical useful way…. ” – the first in a new monthly series of blogs I’m writing for Pioneers Post on social innovation and public service reform. Next two are on: ‘Who pays when the state can’t?’ and ‘Do all public services have to be delivered by professionals?’

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Social investment explained

There’s no shortage of exciting rhetoric about social investment in the UK but what does the market actually offer to charities and social enterprises? What questions do you need to ask before you decide whether to look for social investment at all or to help you decide which forms of investment might be relevant to your organisation?

Over recent months, I’ve been working with Social Enterprise UK – Nick Temple in particular but also Dan Gregory and other members of the team – to write Social Investment Explained, a new guide commissioned by Big Lottery Fund, that hopefully provides an accessible introduction to social investment in the UK. It would be great to here what you think of it.

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Social Enterprise: What’s love got to do with it?

Is love an essential requirement for a successful social enterprise? Or is it actually a by-product, the mechanism or even the result of one?

In recent months, my social enterprise, Social Spider CIC, has been working with Intentionality CIC on Social Enterprise: What’s love got to do with it? – a report on the role of love in social enterprise. The report is available to download here. It would be great to hear what you think.

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Sustainable business models: Avoiding an ‘annual cycle of finger-crossing’

Popular grant funding body, Big Lottery Fund, have set up a website, Your Voice Our Vision, to stimulate discussion about how they’re going to spend £4billion between 2015 and 2021. They’ve been asking various people to chip in with blog posts on how they view the current and future funding situation for civil society/the voluntary sector/VCSEs (delete or replace entirely according to preference). Here’s my contribution:

… As Managing Director of a small social enterprise and, until recently, vice chair of my local CVS, I’ve observed many different attempts to answer the question of what to do when the money runs out. Understandably given the pressure of the situation, many of them aren’t very well thought through...” – full blog here.

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Time to get the builders in?

There’s no shortage of challenges for leading figures in UK social investment and even the good news isn’t always quite as good as seems. For example, those investors and intermediaries who hope the social investment market will (at some point) be catapulted to relevance by a massive increase in the numbers of social ventures delivering public services will have been delighted by last week’s credulity-busting claims*, in research from Northampton University, that social ventures have been less likely to ‘cease operating’ over the past 30 years than PLCs listed in the FTSE100.

Unfortunately, even if you’re prepared to swallow the ideas that: (a) this is true and (b) this revelation will somehow make public sector commissioners more keen to give contracts to charities and social enterprises, the researchers also expect you to stomach the idea (see page 24) that the 100th biggest ‘Third Sector Organisation’ in the UK in terms of trading income is an organisation, Oasis Charitable Trust, that’s currently doing just £234,000 worth of business.

Given that, as we’ve been told, the model of social investment supported by wholesale finance institution, Big Society Capital, only works without subsidy for deals worth £250,000 or more, and (unless you’re a dot com start-up) you generally need to be doing a lot more than £234,000 worth of trading to take on a £250,000 investment, this would suggest there’s far fewer than 100 organisations in the UK currently in a position to take on unsubsidised social investment.

That’s fewer than 100 organisations that are literally big enough to take on these investments. That’s before you even begin to consider whether they’re actually profitable businesses that would be able to repay an investment. By the end of 2013, Big Society Capital’s cash had been drawn down by 57 frontline organisations with only £13.1million of a projected £600million pot spent in the process.

The situation can’t really be quite that bad (can it???). I’m pretty sure there are more than 100 charities and social enterprises in the UK with a trading income of more than £234,000 – I’d be amazed if there weren’t at least 500 – but there clearly aren’t so many more that University of Northampton’s finest were able to identify them. Even if my anecdote and gut feeling based optimism is correct, that’s still nowhere near 1% of all UK social ventures/third sector organisations/VCSEs/social sector organisations (delete according to taste).

Against this backdrop of staggering mismatches between what 99%+ of charities and social enterprises need, and what (the most prominent element of) the UK social investment is able to offer, Robbie Davison and Helen Heap’s work on developing the idea of ‘Builder Capital’ is particularly timely.

Davison, of Liverpool-based social enterprise, Can Cook, has been a long-term critic of ‘Social Finance’ in the UK and published ‘Does Social Finance Understand Social Need?‘ (the answer was ‘no’) in January 2013 before teaming up with Heap, then working for charity, Tomorrow’s People, to publish ‘Can Social Finance Meet Social Need?‘ in June 2013.

Once again, the answer was ‘no’ and in their new book, The Investable Social Entrepreneur, Davison and Heap, reiterate their critique of the current ‘social finance’ market: “Social Finance, as it is currently arranged, is mostly about not losing money – avoidance of risk in order to protect existing assets. It is nothing more than debt finance and debt finance alone will not address social need anytime soon; it’s the wrong type of short-term money trying to attach itself to problems that take a long time to solve.

They then outline their solution, a new form of social investment known as ‘Builder Capital’. Builder Capital basically involves a social investor putting between £250,000 and £2million into a social enterprise on the basis that they’ll receive no financial return at all for the first seven years. From then on, assuming the business succeeds, they receive a set percentage of the enterprise’s revenues every year until year 20 – resulting in anything from simple repayment of capital to a 5% annual return (depending on the percentage agreed).

The plus side of this approach is that it’s a model for social investment that genuinely offers social enterprises something that isn’t on offer from either grant funders or mainstream finance providers. Grant funders might offer social enterprises money that doesn’t need to be paid back but they’re unlikely to give them 7-years’ worth to spend on developing a business – rather than delivering a monitored set of outcomes. Mainstream finance providers (and most providers in the current social investment market) might offer a social enterprise a mortgage or other forms of loan finance but only if the enterprise can begin to repay the money immediately at commercial rates, which makes it very difficult to both build a sustainable enterprise and meet social needs not already met by mainstream business or the public sector in the process.

The obvious downside to Builder Capital is that it doesn’t currently exist, with an apparent lack of investors keen to put large amounts of money into social enterprises on the basis that they may get it back, eventually, over a 20-year period, being the biggest problem. Davison and Heap are clearly aware of this problem and are planning to do something about it. They’re running a series of events to discuss how to make Builder Capital a reality, starting with this one in London on July 10th. After these discussions, the plan is to establish a ‘Builder Capital Hub’ that will bring together investors, entrepreneurs, customers and beneficiaries with the ultimate aim of ‘developing and growing a market for Builder Capital that we estimate could soon reach a size of around £50million per year‘.

Given that the latest available figures (albeit, figures from a couple of years ago) tell us that the entire market for all social investments other than secured loans was worth £19.8million per year, this seems relatively ambitious but whether or not they achieve that target, Davison and Heap’s work on Builder Capital is an important step towards to making social investment more relevant to ambitious charities and social enterprises with the potential to grow into sustainable businesses meeting social needs.

 

*The claims are true, as long as you’re prepared to accept that a PLCs merging with another company is the same as ceasing to exist. 50 companies from the 1984 FTSE are not in the 2014 because they’ve been acquired. Examples include popular pharmacy group, Boots, which is now part of Alliance Boots. Alliance Boots had a total turnover of £25.7Billion in 2013/14. Only 3 companies that were in the 1984 FTSE100 have gone bankrupt.

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Revving the trust engines?

In a period where social sector policy ideas increasingly seem as disposable as the managers of struggling premiership football teams, many more casual observers of developments in social enterprise wonkery may have entirely missed ‘Trust Engines’.

In August 2013, social entrepreneur support organisation, Unltd, was plugging the concept of these ‘mechanisms that allow social entrepreneurs to articulate, evidence and then protect the social value and social purpose of their organisations’ with zeal and purpose.  

Unfortunately, a read through Pushing Boundaries, the organisation’s recent publication on ‘Why some social entrepreneurs are using a for-profit form and how they are embedding their social mission’ suggests that it’s all gone wrong ‘Trust Engines’. The idea is as prominently featured as David Moyes in next year’s Manchester United team photo. 

On reflection, ditching ‘Trust Engines’ may have been a mistake. It is a silly name but the things that it’s a silly name for, the mechanisms for articulating social value, are potentially interesting enough to write a 48-page report about.

Unfortunately, the vast majority of Pushing Boundaries is not about that. The starting point for the research is that ‘A growing number of social entrepreneurs are choosing for-profit legal for their social ventures‘.

Based on that starting point, there’s at least three interesting angles worth exploring:

(i) to ask whether an increase in numbers of for-profit social ventures is a good thing – why it might be and why it might not be

(ii) to look at why there’s an increase in numbers of for-profit social ventures – is it because markets are changing? is it because funding is changing? is because attitudes are changing? is it because different people are starting social ventures?

(iii) to explain how for-profit social ventures are combining meeting the needs of shareholders with delivering a social mission

Pushing Boundaries deliberately avoids (i) and attempts to cover (ii) and (iii) solely by asking 25 (mostly early stage) social entrepreneurs who use a Company Limited By Shares (CLS) structure what they think.

As someone who spends a considerable part of their professional life asking social entrepreneurs what they think and turning it into blog posts and publications, I’m a big supporter of the practice but it’s difficult to learn much from anyone’s personal opinions about anything unless you put them in some sort of context.

The lack of context in Pushing Boundaries isn’t a mistake, it’s a position of principle, as the conclusion explains: ‘The key focus of this research has been on social entrepreneurs’ voices rather than on external assumptions about how organisations should act‘.

The problem is that unless you engage with the ‘external’ arguments about why you didn’t chose some other structure that someone else might want you to, or the particular market or funding situations that have motivated your decision, there’s nothing very interesting you can say about ‘motivations for choosing a CLS’ (which is the focus for section 1).

With the exception of one entrepreneur who made the choice based on a principled belief in demonstrating that profit and social purpose can go together, all the others apparently chose the form either based on it being simple and/or the best structure for taking on investment. Fair enough.

The section on ‘Attitudes to securing social mission’ doesn’t deliver many surprises either. Some of the entrepreneurs think legal locks and guarantees don’t matter because it’s what you do that counts, others worry about ‘further down the line’ when ‘suddenly people start rubbing their hands together’ and prioritising profit over social mission. Fair enough. Maybe we could compare some examples of where for-profit social ventures have scaled up and protected their mission and where they’ve been unable to do so?

The section on ‘Embedding Social Mission in Practice’ is the only section that amounts anything other than ‘this is what some entrepreneurs think about their business’.

It outlines some of the approaches interviewees have used to embed their social mission:

  • structure-based approaches – such as putting the social mission in your articles of association
  • legal models such as golden shares held by charities
  • publishing evidence of social impact
  • commitments to profit distribution

A table at the end of the section shows some of the interviewed organisations are using two or more of these approaches while others aren’t explicitly using any of them but may be amongst those believing that social impact is ‘in our DNA’.

In the final section, ‘Experiences of Being a CLS’, ‘external assumptions’ get a look in on the basis that they might have a negative impact on an organisation’s ability to get grants or generate sales. At one point, one entrepreneur reflects: “It would have been a lot easier to set this up as a charity with no commercial purposes – there’s just something in the word ‘charity’ that makes people very comfortable. And I think that’s fallacious – that’s just a matter a perception.

Believing that it’s better to buy from a charity is a matter of perception but it’s a perception based on a legal registration process and an ongoing system of regulation, and possibly on that customer’s beliefs about what it means to do social good.

Pushing Boundaries primarily consists of Unltd getting some social entrepreneurs to tell their customers and wider society (at great length) that the way they structure their organisations is none of anybody else’s business. Not many of those customers or members of wider society were interested anyway. The message to anyone with any ‘external assumptions’ is sod off.

 

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Silver bullet may work but existence of werewolves unproven

… maintaining the PbR element of the scheme at Peterborough until 2017 for the third and final cohort is not possible, as the majority of prisoners within that group will already be receiving 12 months supervision and rehabilitation as a result of the wider reforms to probation.

The above quote is the part of the recent Ministry of Justice (MoJ) press release which, as an aside, mentions the end of the UK’s highest profile social investment pilot, the Peterborough Social Impact Bond (SIB).

The perfunctory end of the Peterborough SIB contrasts markedly with the launch in 2010, when the then Prisons Minister, Crispin Blunt, visited HMP Peterborough to launch the scheme explaining: “This payment by results pilot is both innovative and imaginative. I am delighted to be launching it at HMP Peterborough today.

The Peterborough SIB involves social investors paying for charities and social enterprises to deliver a series of interventions designed to reduce re-offending, and managed by social investment intermediary, Social Finance, through a structure called, One Service. The MoJ then pays the investors based on the extent to which these interventions succeed in reducing re-offending. If the services work, the investors make a profit (the original plan was that they could end up with up to £8million based on an initial investment of £5million) and if services don’t work, the investors lose their money.

The Peterborough SIB is not ending early because it hasn’t worked, it’s ending because the government is privatising the probation service through a programme called Transforming Rehabilitation and, from mid-2015, the activity currently delivered by One Service will be the responsibility of whichever consortium wins the contract for the region that Peterborough is part of.

The evidence so far suggests that, understood on its own terms, the Peterborough SIB is working well. As Toby Eccles of Social Finance explains, the interventions funded through the scheme are reducing re-offending by 11%, compared to an increase of 10% nationally.

Eccles rejects suggestions that the curtailing of the pilot means the end for SIBs claiming: “Peterborough was not designed to be a test case for a national payment-by-results programme, but to enable innovation, to demonstrate the value of flexibility and focusing on outcomes, to bring greater rigour, and most importantly to shine a light on the woeful situation this country has with short sentence offenders. Against these objectives it has been and remains an iconic success, and a cause for celebration.

It’s perfectly reasonable for Eccles and the team at Social Finance to be proud of they work they’ve done and to draw attention to the positive social benefit delivered as a result but the overall impact of the Peterborough SIB’s existence and looming non-existence extends significantly beyond yet.

It wasn’t primarily a pilot for a way of delivering probation services, it was a pilot for a way of funding and measuring the delivery of probation services. The total investment in the Peterborough SIB was £5 million. The investors were mainly charitable trusts including: Barrow Cadbury Charitable Trust, the Esmée Fairbairn Foundation, Friends Provident Foundation, The Henry Smith Charity, Johansson Family Foundation, LankellyChase Foundation, The Monument Trust, Panahpur Charitable Trust, Paul Hamlyn Foundation and the Tudor Trust.

In addition to the money from investors, The Big Lottery Fund (BIG) provided £6.25 million to support the pilot, as part of an £11.25 million package to support the development of Social Impact Bonds with BIG’s then chief executive, Peter Wanless saying: “At a time of tight public finances, Social Impact Bonds represent a new and innovative way of attracting investment from outside the public sector and by funding Social Finance’s work we are hoping to pave the way for many more similar projects across the UK.

The Cabinet Office is also showed its support by launching its own Centre for Social Impact Bonds claiming that: “Social impact bonds (SIBs) are a new tool that unlock private finance and public investment so that organisations which are best placed to tackle social problems can do so on a payment by results basis.

So, does the Peterborough experience prove whether SIBs work? Not only do we not know the answer is or whose job it is to provide it, it’s not even clear whose job it is to ask the question.

The independent report on the (current) second phase of the Peterborough SIB, commissioned by the MoJ, is a useful exploration of the pros and cons of tackling re-offending through a range of interventions brought together by an outside agency, with ultimate payments based on results achieved rather than a series of units of activity, delivered by an agreed set of providers, specified in the contract.

It doesn’t tell us anything much about whether SIBs are the best mechanisms for delivering that kind of contract.As the report notes in its conclusion: “The absence of restrictions on how SIB funding could be spent was reported by interviewees to have facilitated the commissioning of new providers during the life of the pilot as well as joint funding of services with other local agencies. It is worth noting that, in principle, other funding mechanisms than SIBs could also benefit from this flexibility.

The Peterborough SIB didn’t raise any significant ‘private finance’ so beyond ‘not this’ we’re no closer to knowing what sort of offer might attract commercial investors to invest in a SIB, particularly one not subsidised with a £6.25 million grant.

Whether or not it’s appropriate or useful to have more SIBs funded by charitable trusts is – both before Peterborough and after it – primarily an opinion-based policy position. One view is that it’s wrong for trusts to risk their money potentially subsidising the unsuccessful delivery of public service contract. Another view is that trusts often give grants to projects that may ultimately become public services if they work, so SIBs are a more structured version of that, with the bonus that they may get their money back and could make a profit on their investment.

Over in the US, SIBs have been getting a kicking at a US Senate budget hearing. Nonprofit Quarterly quotes  Mark Fisher, of the Maryland House of Delegates, telling the hearing that: “SIBs do not produce cost savings when outcomes are achieved, even under highly optimistic assumptions. SIBs could effectively exclude new providers and program types that do not have a well established record of success with investors seeking to minimize risk.

Warming to his theme, Fisher adds: “In conclusion, SIBs are well intended, but they unnecessarily blow bureaucracies. Moreover, they have the potential of leading to crony capitalism. And as the Maryland Department of Legislative Services concluded, they do not save money.

Fisher’s colleague Kyle McKay is not keen either noting: “Proponents argue that social impact bonds will result in decreased expenditures, and thus, cost savings to the state. There’s a basic mathematical problem with this claim, though. Pilot programs do not operate at a scale large enough to produce significant cost savings to the government.

Amongst the Senators themselves, Rhode Island Democrat, Sheldon Whitehouse, seemed optimistic: “I think that there is at least the prospect of a real opportunity here, when new theories of ways to save money can meet the standard of a private investor.

On the other hand, Angus King, the Independent Senator from Maine, thought: “This just strikes me as…it’s a fancy way of contracting out.

Angus King is right but ‘a fancy way of contracting out’ might also be a socially useful one and it’s not clear that US SIBs-bashers’ criticisms are any more applicable to SIBs than they are to Payment by Results contracts in a general sense.

Nothing much is really being proved, these opinions are just some opinions but if your business model is based – as the Social Finance SIBs development business model is – primarily on getting high level policy makers to support your initiatives, changing directions in the tide of political and policy opinion are least as important as anything that actually happens.

That’s why the end of the Peterborough SIB is really significant because, as Dan Gregory notes here: “Social impact bonds were once the future; in fact, they were the future even just a few weeks ago” and now the announcement of the end of the UK’s flagship SIB is in paragraph 9 of the MoJ’s press release.

Initiatives that depend on political buy-in are inherently disposable. Ask Your Square Mile and the leaders of other Big Society projects. Politicians like SIBs because they like the idea of working with ‘private investors’ (even when there aren’t actually any involved). They like announcing things. They like having their picture taken with Sir Ronald Cohen.

Once you take those things away, and also take away the grant subsidies for the set-up process, you’re left with people commissioning local public services having to decide whether they want to commission some of those services in a complicated, expensive way on the basis that the innovative results may potentially save them some money in the future (or won’t maybe ever save them any money but may just be better).

After Peterborough, the chances of that happening on a significant scale are a small as they ever were and it’s no clearer whose interest it would be in if it did. The present government likes SIBs but not enough to even attempt to do anything that might cause them to be widely adopted at a local level.

None of this means the end for SIBs. Nick Clegg recently launched loads more and the idea still has enough political momentum to sustain plenty more nationally-supported subsidised pilots. After that, maybe SIBs will find what Dan Gregory calls: ‘a tiny niche as occasional PbR pilots‘ or maybe the model will evolve into something cheaper to administer that works for large numbers of commercial investors and public sector agencies. It’s not impossible but, based on what we’ve seen so far, it doesn’t seem likely.

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