Feedback on emperor’s outfit

Big Society Capital is not operational yet – but it continues to move away from the social enterprise sector which I understand… The overarching assumption seems to be that social outcomes are measurable and that successful projects should deliver a profit to investors. I think this strategy is both inoperable and objectionable; They are clearly making it up as they go along.

The verdict of Senscot’s Laurence Demarco on this interview with Nick O’Donohoe, chief executive of Big Society Capital(BSC) – the project formerly known as the Big Society Bank. I don’t share Demarco’s view that the strategy outlined by O’Donohoe is objectionable and, at this stage, I think it’s too soon to say that it’s necessarily inoperable, but there’s clearly plenty of under-tested assumptions at the heart of the plan.

In David Ainsworth’s Third Sector interview, it’s suggested that O’Donohoe’s statement: “We’re not interested in grants or soft loans… We are an investment institution” serves to make it “crystal clear that it (BSC) will not be a soft touch“. It may or may not do that but it also revives the question of why the institution needs to exist at all.

I disagree with Demarco’s position that it’s wrong in principle for investors to make a profit on social investments but if BSC’s approach is not going to be at least softer than that of commercial lenders and investors then it’s not abundantly clear what it will offer that is not already available.

Aside from investing in new and existing social investment intermediaries, part of its stated reason to exist is to invest in Social Impact Bonds. For O’Donohoe: “They’re a very good idea – the sort that doesn’t come around too often. But we feel there’s a lot more work to be done. How you price them correctly, for example, is something that hasn’t been explored at all.”

Social Impact Bonds are a political bandwagon as yet unencumbered by evidence. Fortunately for BSC, it’s a political bandwagon that all the mainstream politics parties – all equally desperate to believe in the latest new buy now-pay later miracle – have jumped aboard. Direct investment in Bonds is an interesting variation on the original aim for BSC to operate solely as a wholesale bank but, with government as the ultimate customer for Bond funded projects, it’s probably a fairly safe one.

For in principle supporters of BSC, the biggest danger in terms of the wholesale investment side of things is that there may not be anybody out there who actually wants the money. As David Ainsworth points out: “A key problem… is that relatively few social enterprises and charities are set up to take on investment.

O’Donohoe’s response is that: “Investment readiness does have to be supported… But supply creates demand. Just the fact that we exist is getting people thinking about how they can access the capital. It’s making people more willing to put proposals together. I’ve spent a lot of time talking to people about this, and I’m consistently amazed by the quality of the ideas that I hear.”

Many of us who spend a lot of time talking to social entrepreneurs will agree with O’Donohoe’s position that are many good ideas out there – along with many out there ideas – for new social ventures. What’s less clear is that there’s large numbers of good ideas for social ventures that are likely to generate a profit for investors unless, as with the work funded through Social Impact Bonds, the ultimate customer is the government.

Writing for The Guardian‘s social enterprise network, Jonathan Jenkins, incoming chief executive at the intermediary The Social Investment Business uses a Star Wars-based analogy to separate BSC enthusiasts and sceptics: “If you’re not keen on the trend of private equity City types getting involved in the sector, you will have that sick feeling in the pit of your stomach, as did Princess Leia when she realised The Death Star was also “fully operational” and about to blast all the socially cohesive community-based work the Force had created to bits.

If, however, you believe in the redemption of Darth Vader, his coming in from the Dark Side and overthrowing the morally bankrupt value system that a frighteningly efficient infrastructure had inadvertently created, and the belief that intrinsically all people, yes even those from the City, have core social values they hold dear, you will be cautiously optimistic for the future – a New Hope.

Unfortunately, I haven’t been able to come up with Star Wars-based metaphor for my own view that there’s lots of decent people working in the City who I’m keen to work with to create positive social change if they’re keen to work with me but that this is not an argument either for or against the practical usefulness of BSC.

Jenkins continues that the biggest barrier to the City and the social sectors working together: “… is that of language – both the traditional financial sector and the third/public sectors have their own – inadvertent – verbal barriers to entry, which only serve to reinforce one anothers’ stereotypes. We need to park our preconceptions – on both sides – because we are in it together, and we don’t have time to lose.

It’s clearly true that those language barriers do exist but, in my experience, there’s plenty of people working in the financial sectors who are as baffled as I am as to how the kind of investment supported by BSC will lead to the creation of significant numbers of real businesses selling products and services paid for by anyone other than the government.

The positive news about the launch of BSC is that it might herald the beginning of the end of sector leaders’ celebration of exciting financial instruments and institutions as a good thing in themselves. Both those who were excited and many of us who weren’t will now wish BSC well – and prepare to judge the institution on the basis of the actual positive social change that it helps to make happen.

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4 responses to “Feedback on emperor’s outfit

  1. In’ reminded of an interview my colleague Terry Hallman did last year with Axiom news in Canada, when emphasising the need to protect social the social objective.

    “When we get into divvying up financial profits it’s too easy to get sidetracked by a myriad of possibilities along those lines,” Hallman tells Axiom News.

    “In that case there is distraction from the primary objective of any given project, the social concerns for people at risk of exclusion, or already excluded, from the opportunity to have a decent, safe, secure life.”

    Hallman adds that if “a lot of emphasis is placed on financial returns, the usual suspects can and will get in, figure out to how strip out the social aspects of social businesses and keep all profits to themselves.”

    “Think of the corporate raiders on the loose in the U.S. in the 1980s. Same thing. That mindset is the driving force that has created such need for social businesses to begin with.”

    Now it seems, that mindset is back at the helm, with the same language about the need to rethink capitalism. I leave it for you to decide which is authentic.

    There’s no doubt that making finance available for bottom up economic development changes things. He’d proven it himself in leveraging $6 million investment for a community bank in Russia. At the same time he’s also embarrassed Harvard, the bastion of laissez -faire capitalism who back then didn’t see business having ‘shared value’ at all.

    “Conventional capitalism as an insufficient economic paradigm” he’d asserted.

    http://www.iccrimea.org/scholarly/economicdev.html

    With that same message now on the lips of some of the world’s most wealthy, it’s increasingly apparent that greed has a new dimension

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  2. Hi David – interesting, as ever. I’m just not sure that parts of the sector have been listening to what’s been said about this new institution since the off. It was never going to be about softer investment or grants; it was always going to be about a wholesaler pumping more money through existing social investment intermediaries (and new ones that might emerge). The change of name to Big Society Capital should help clarify this. But I’m not sure why it’s news or surprising that it won’t be a “soft touch” as the article puts it (which is not exactly how I would describe grant-making trusts and foundations, but there you go).

    So yes, for many (most?) social enterprises + third sector orgs, it may not change the landscape significantly. Perhaps more will get investment readiness support, perhaps more will take risks on different forms of social investment; perhaps more models at the business end of the social enterprise spectrum will emerge. We’ll see and, as Jonathan Jenkins puts it, hope.

    And while I share many of Laurence’s views on many different subjects, the thought that they are “making it up as they go along” doesn’t really represent a process that’s been in train for 8 years (!), nor the work in government to get it through state aid, nor the lengthy consultation process, nor the construction of the board of the organisation to represent different views etc etc.

    It’s fine to believe (and express the view) that it’s the wrong institution taking the wrong approach doing the wrong thing with the money; but I don’t think people should criticise it for not being what they would prefer it was or what they thought it was going to be, despite all the information having been to the contrary for nearly a decade.

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  3. This talk of outfitting emperors took me back today to those Russian babushkas who’d been horrified by the need to advertise.
    I’d been in Tesco, confronted by the face of Jamie Oliver, who’d recovered from his attempt to outdo Borat in the hearts and minds of American rednecks. This time around celebrity “social enterprise” was about protecting fish stocks by selling his fish cakes and pies in a half price introductory offer
    .
    “Another fridge load of pollocks”, I said to myself

    Getting back to social impact I’m reminded that back in May, Felix Oldenburg of Ashoka had spoken of the “Dangerous Promise of Impact Investing”

    The Social Investment Task Force had a good idea in CITR which aligned rather well with our own proposal in 2004 for a community reinvestment business strategy to place profit in local CDFIs to seed new social enterprise.. It would have been compatible with subsequent CIC regulations. To this day, it’s difficult to understand why it was so unwelcome, unless it was a matter of stepping on someone’s toes.

    Our target was 5% of the UK broadband market, then about 100m annually for social enterprise investment, perhaps as much as £600m today.

    A considerable boost to current funds, by the look of it. .
    .
    http://www.philanthropyuk.org/news/2011-03-03/social-investment-experts-campaign-retention-critical-tax-relief

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  4. admin

    Nick,

    You’re right that the key people involved in Big Society Capital have been upfront about the intention to create a wholesale bank – to extent of spending the first few years of lobbying actually calling it ‘Social Investment Wholesale Bank’.

    Although, that’s not necessarily the impression people would’ve got from the media beyond the sector publications. This being one of many examples: ‘The money – which is expected to total £300m-£400m – will be deposited in a “wholesale bank” that will be tasked with processing funding requests and handing out grants

    I think the key point is this: “So yes, for many (most?) social enterprises + third sector orgs, it may not change the landscape significantly.”

    I agree with you about that, too but, for a project which isn’t going to change the landscape significantly and isn’t going to replace £billions of lost income, Big Society Bank/Capital has been pretty heavily trailed, pretty regularly, by politicians up to and including the Prime Minister. That’s bound to create expectations, even if many people don’t really know what they’re expecting.

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