We all like a bit of variation in our lives, so it seems likely that many readers will by now have become bored with the repeated excuses from social investors that they are unable to invest in social enterprises because these organizations are too small and require investments which are not big enough to justify transaction costs.
Fortunately, it’s a brand new year, and some of the major intermediaries are now brightening our lives with a new, improved excuse for their irrelevance: that the amounts of money social enterprises require are TOO BIG for social investors to be able meet their needs.
The latest iteration of intermediaries innovative ‘have your cake and leave it to go mouldy in a cupboard’ approach has recently seen them offer no help whatsoever to existing social enterprises seeking to enter emerging market for outsourced probation services created by the Ministry of Justice (MoJ)’s Transforming Rehabilitation Strategy.
The likely size and suggested structure of contracts for Transforming Rehabilitation (TR) means that, though still controversial, TR offers better potential opportunities for charities and social enterprises to become Tier 1 providers (the equivalent ‘prime contractors’) than the previous big government outsourcing programme, the Department for Work & Pensions, Work Programme.
Primed and ready for action
In autumn last year, partnerships interested in bidding to be Tier 1 providers had to complete a Pre Qualification Questionnaire (PQQ) to get through to the next round of bidding.
In order to get through the PQQ, partnerships needed to be able to demonstrate that they would be able to raise the working capital needed to deliver the contract in the event that they won it: “Potential Bidders must demonstrate access to funding equivalent to 50% of the indicative annual contract value of any one lot they wish to bid for.”
Evidence of this access to finance could include: “funding in principle letters, provided by a lender”.
Keen to avoid doubt, the MoJ made clear that: “For the avoidance of doubt, bidders who cannot demonstrate available funding of at least £5.85m (equal to 50% of the indicative annual contract value for the smallest lot within the competition (Norfolk and Suffolk) will be awarded a ‘fail’ and not be invited to proceed to the next stage for any lot or to refresh their lot preferences.”
Given that the contracts themselves are still to be determined the question being put to social investors was effectively ‘in the event that this social enterprise consortium was in a position to (a) win a contract and (b) convince you that the as yet undetermined numbers stacked up, would you in theory be in a position to provide them with a significant proportion of the working capital they need to deliver the contract?’
On that basis, Mike Harvey, chief executive of Northern Inclusion Consortium (NIC), a new company formed by 5 social organisations based in the North with strong track record in supporting people with complex needs, decided to ask some of the UK’s leading social investment intermediaries whether they could provide a letter offering ‘funding in principle’.
The answer was “no”. Or, as Harvey explains: “even where the answer was a tentative ‘possibly yes’, that was caveated with ‘but not at this point in time’ – i.e. when it was actually needed for the PQQ, and this was after the market had supposedly been warmed up months in advance by the MoJ, so is perhaps again indicative about the social investment market’s ability (or inability) to respond at the pace required by most procurement exercises.”
Harvey is right that the social investment market – and its potential social enterprise customers – had been warmed up in advance. In August 2013, social investment wholesale finance institution, Big Society Capital issued this ‘Justice Market Statement’ in which it outlined the options for potential TR bidders noting: “In most cases, BSC recommends contacting the growing range of social investment companies that may advise on and/or provide suitable financial products for the probation service market.”
Bridges to nowhere
Taking BSC at their word, Harvey went down the list. He was particularly baffled by the response from Bridges Ventures, in theory the biggest player in social investment in probation services through their ‘Social Impact Bond Fund’.
After an initial approach, Bridges sent Harvey a questionnaire primarily aimed at mutual organisations looking to spin out of the probation service. Having requested detailed financial projections – all of which are likely to be highly speculative at this stage of the contracting process – Bridges then explained that due to the limited capital available to them, they did not have the resources to consider NIC’s bid fully and therefore were not in position to even meaningfully consider offering a letter of intent.
The underlying problem was that Bridges – the biggest social investor in the field – had a maximum of £3.6million to invest in organisations delivering TR. Given that the overall annual value of contracts is estimated at £450million and Tier 1 organisations need to be able to access funding equivalent to 50% of that, working capital requirements for organisations seeking to enter this market are £225million. In the event that social sector organisations had been in the running to deliver all the contracts, Bridges would have been able to meet a maximum of 1.6% of their working capital requirement.
Have you tried your bank?
Undeterred, Harvey then approached a range of other social investors from the BSC list and beyond. The responses from included (expressed in Harvey’s words):
“reasonably positive but ultimately came back to say they didn’t have a fund available to provide cover, could potentially have a fund in the new year, but it would be capped”
“no funds until spring 2014”
“told us to approach our own banks first, and at best could get to £2m in investment but not in the timeframe”
“understood our issues but were capped at a max investment of £350k”
“said they could invest up to £1m, then said they couldn’t do a covering letter in the necessary timeframe”
At no point was NIC knocked back due to the fact that they lacked ‘investment readiness’, the social investors they approached simply did not have the money (and/or ability to act within the suggested timeframe) to consider their request for investment.
Harvey says that one social investment intermediary, spotting the lack of available capital for organisations entering the TR bidding process, went to BSC with an offer to set up a specific fund but that this offer was turned down.
While not doubting their desire to help, Harvey is bemused at the practical role (or lack of it) of social investors in the TR tendering process. He notes: “Looking at the shortlist of organisations that made it through the PQQ, I would confidently say that the only social primes that have got through using an indication of social investment are the mutuals, and even some of them will have been covered by their partners in the JVs instead – everyone else has used their own balance sheet.”
The irony of this is that while organisations putting up the assets on their own balance sheets as evidence of ‘access to funding’ are being entirely truthful – it is literally possible for them to access the funding should the need and opportunity arise – it seems highly unlikely that anyone at the MoJ seriously believes that charities and social enterprises would ultimately choose to invest the majority of the reserves into setting up a new venture to deliver a Transforming Rehabilitation contract. Maybe the MoJ are confident that the social investment market will wake up a bit this year?
Investing in a ‘social purpose company’
The TR shortlist also reveals that Bridges Ventures have found a way to play significant role in TR after all, as part of Chalk Ventures Ltd – a venture that also includes a proposed staff mutual organisation and controversial outsourcing giants, A4E (formerly a self-styled, ‘social purpose company’).
Harvey wonders what’s going here: “My challenge here is what exactly is Bridges’ role in this partnership, and how is it structured?”
He sees this link-up, combined with social investors’ apparent inability to help existing social enterprises, as possibly opening wider questions about the role and value of social investment explaining: “We previously saw A4E try to reposition themselves as a ‘social purpose’ company, and some social investors including BSC if I remember rightly, argued that a company’s legal structure was potentially less important than its impact – paving the way for social investment in privately held companies – so if Bridges’ are now providing finance for a privately owned company (which previously paid its majority shareholder a £8.6m dividend) to me that raises serious questions about social investment.”
Asheem Singh, director of policy at the charity leaders network, ACEVO, says many of his members have expressed concerns about the shortcomings of social investment in supporting them to enter public service markets: “We’re all keen to make social investment work and we’re delighted that social investment companies are looking at programmes like TR and identifying opportunities for them to invest. But the question has to be asked: how much of this social investment is actually going to voluntary sector organisations and social enterprises that would otherwise be unable to access high street lending?”
He adds: “This is an existential question to be answered by all those who want social investment to succeed. If social investment ends up going to organisations that could, with their purchasing power, have gotten investment elsewhere, what exactly is the point of it?”
You’re all doing great work
Responding to the announcement of the TR shortlist in December, BSC’s chief executive, Nick O’Donohoe, expressed his enthusiasm for the fact so many partnerships including social enterprises and charities got through the PQQ saying: “It is positive to see a high number of socially motivated consortia shortlisted – including well respected charities and probation mutuals, all of whom have a strong track record of working in Criminal Justice.”
While charities and social enterprises may value his enthusiasm, they’ll be hoping that, in 2014, O’Donohoe and the intermediaries he invests in can go one better and actually provide them with some money.