It’s now nearly a year since the prime minister, David Cameron, signalled a move away from “the stop-start, hand-to-mouth way the sector’s been funded” as he launched social investment wholesale finance institution, Big Society Capital (BSC).
It’s a year in which many charities and social enterprises have successfully moved from ‘stop-start’ to ‘stop’, while others have solved the hand-to-mouth problem by virtue of the fact that they can no longer get anything into their hands in the first place. Happy Birthday.
But this grim reality doesn’t really tell us anything much about whether BSC is being successful. As Civil Society‘s Vibeka Mair pointed out last week in this thoughtful overview of the current points of departure within the sector: “Big Society Capital’s remit is not to fund the charity and social enterprise sector, it is to grow the social investment market – this is very different.”
As regular readers may have observed, I didn’t support the creation of BSC primarily because I didn’t (and don’t) believe that a strong social or commercial case for a specialist social investment market in the UK had (or has subsequently) been made.
Social enterprises and charities (and for-profit social businesses, too) do need investment but there is not currently any clear evidence that their financial needs coalesce under the banner ‘social investment’ in a way that can usefully be supported by a single institution or a distinct market of product and services.
Rather than setting up BSC, I would have preferred the government to:
(i) devote some extra resources (on a regional basis) to supporting the development and growth of social ventures that might have a high social impact but are never likely to be viable to the extent that they can take on fully repayable finance
and (ii) devote some resources to providing the capital for a social element to a state-backed business bank – that would provide repayable finance for businesses (including charities and social enterprises) that could realistically hope to repay it but couldn’t get finance on the high street.
This didn’t happen and BSC was launched. Since then, it’s been mostly trying to stimulate a market of intermediaries to deliver a version of (ii) while hoping that the demand for (i) will just go away*. Unsurprisingly, it’s struggling to generate trust and affection amongst charities and social enterprises.
Now one year on, Scotland-based blogger, Leslie Huckfield is arguing that BSC should be wound up and the money should be allocated elsewhere. Following a run through the current discourse within the sector he explains: “It is proposed that £400mn Dormant and Unclaimed Bank and Building Society Accounts, together with a further £200mn investment under the Merlin Agreement from four major banks – previously allocated to Big Society Capital and its intermediaries for development of a Social Investment Market – should now be reallocated to regional Social Enterprise Networks for their decision on spending priorities.”
It’s not likely to happen, or even to be seriously considered, but either way, the suggestion that BSC should be dismantled at this stage is wrong. This is particularly well illustrated by the fact that none of the suggestions in Huckfield’s ‘Alternative Strategy to Support Social Enterprises’ – his mostly sensible ideas for replacement activities – either need or would significantly benefit from ditching BSC now that it’s in place.
Huckfield argues for a future for social enterprise development based on the options:
A) ‘Supporting Social Enterprise Regional/Local Networks’
B) ‘Public Social Partnerships And Change Funds’ – involving social enterprises working with public sector commissioners to develop new approaches to service delivery
C) ‘Social Enterprise Markets Programme and Social Enterprise Infrastructure Support Fund’
Option A is not primarily a social investment issue. The government could (and should) ensure the re-launch/continued existence of social enterprise networks in the English regions by putting up around £1million a year (about £6,000 per local council) to enable each regional body to have £100,000 or so of core funding to exist and provide a focal point for social enterprises and social entrepreneurs in their area.
Options B and C are both initiatives where BSC in its current form could easily play a significant and useful role. The organisation is not run by bad or stupid people, it’s run by socially committed, intelligent people currently operating under constraints that prevent from making a serious attempt to fulfill its stated aims. Partly due to the £200million investment from Merlin banks, it is not allowed to lose money.
Last year’s Big Lottery-backed report, Investment Readiness in the UK noted that charities and social enterprises looking for repayable investment: “predominantly seek risk capital on sub-commercial terms of between the £10,000 and £100,000 range.” and that “if what is on offer from investors is larger asset-backed capital on near commercial terms, there is a market failure“.
The problem with BSC isn’t that they’re specifically uninterested in the activities that Huckfield suggests: investing organisations based outside London by making large investments in regional organisations, or investing in public service innovation or social enterprise infrastructure. The problem is the terms. The kind of investments most charities and social enterprises want – even those who actually have a preference for repayable investment over grants – are the kind of investments that make public or charitable money work harder but ultimately don’t get repaid at a profit once you factor in the costs of the deal.
If we are going to have a (socially useful) social investment market in the UK it will need to find ways of supporting intermediaries to support social ventures that aren’t fully commercial propositions. BSC chief executive, Nick O’Donohoe’s starting point: “We’re not interested in grants or soft loans” is unsustainable if he genuinely wants his organisation to gain the confidence of the social sectors.
BSC don’t necessarily need to make grants themselves but, at the very least, they need to develop partnerships with intermediaries who will provide grants as part of their investment packages. And they need to be able to make investments soft enough for intermediaries to respond to the demand that’s actually there while also covering their costs.
There’s no logical basis for an organisation making a £600million intervention in a £165million market to dismiss any possible approach on the basis that it will lead to ‘market distortion‘. The social investment market in the UK is currently around 80% distortion, 20% market. BSC itself is the biggest single distorting factor and grant dependent intermediaries are the second biggest.
In a tweet quoted on Les Huckfield’s blog, Jonathan Jenkins of Social Investment Business quite reasonably asks Huckfield to offer an alternative to BSC that would meet the conditions of being sustainable. It may be that if BSC is to modify its approach to grants and soft loans, part of the trade-off could be that a portion of its resources could be used for potentially more profitable investments in intermediaries investing in ‘for-profit’ businesses that generate a measurable social return – genuine ‘for-profits’ rather than the current fudge.
While worth considering, this suggestion is (a) controversial within the social sectors and (b) clearly not magic bullet solution that would miraculously generated huge profits to cross-subsidize losses from investments in less commercial ventures. It might be part of the way forward but there’s no easy way to square the circle.
Ultimately, large scale social investment that’s specialist enough to need specialist social investors will only work if someone, somewhere is prepared to lose (at least some) money. As the biggest player in the market, one way or another and with the government’s active support, BSC has to develop a model that allows it to do that.
*I’m not ignoring Social Impact Bonds but they – whether you support them or not – are another distinct category on their own.