The long awaited launch of Big Society Capital marks a major step forward for social investment in the UK and for the charity and social sectors. It has the potential to lead to significant improvements in social outcomes, innovation, and a greater choice of suppliers and services.
Many charities and social organisations have large ambitions but are held back by an inability to invest to grow. Others recognise the opportunity to increase fund raising if only they could make the necessary upfront investment – rather akin to the way that Scope is using social finance to invest in an expansion of its network of retail shops.
Some see the opportunity to bid for public sector contracts only to find they are unable to finance their short-term cash flow and/or to create the capacity to make serious bids or to match their service offer with procurers’ requirements. For others there is a need to invest in the modernisation of their service base so that they can meet the needs of service users.
Ordinarily, banks and other financial institutions are not prepared to loan capital to charities for such investment. The Labour government introduced programmes such as Future Builders that have demonstrated that charities and other social organisations can take advantage of investment loaned on a patient basis.
Many of the early social investment funds (which were often government rather than private sector financed) – were insufficient to meet demand. Therefore, the coalition government’s launch of Big Society Capital is very welcome, but its initial fund of £600m is very small given the social sector’s ambition.
There could and must be other sources of social finance. High wealth philanthropic investors should be encouraged to invest in social loans schemes in addition to making donations. Banks and other investment businesses have to be encouraged to establish social investment funds and ultimately to create them as a new investment class.
There will be many individual investors willing to invest in, for example, social investment ISAs or specialist funds where their financial return may take some time and be relatively low but where they know that their money is adding social value – and is regarded as a “offsetting” for a lower pecuniary return.
This is a further reason why measuring the social impact of the charity and social sectors is so important. Defined measurable outcomes will be important so that the investors can value the financial and social benefit of their investments.
Social investment of this kind is related to but different from social impact bonds through the use of which the public sector is seeking to reduce long term expenditure and secure better outcomes – e.g. the reduction of re-offending of ex-prisoners or improving social and economic outcomes for households with complex challenges. Inaccurately, all too often one hears commentators, politicians, and practitioners conflate payment by results and social investment.
Social investment of the kind described above could be used to enable a range of developments in third sector public service provision and not only those that are based on form of payment by results contract. Of course, where such payment systems are applied social sector organisations may seek social finance to fund their cash-flow requirements.
Not every charity or social enterprise will wish to use social finance. And such investment capital will not always be appropriate. Social investment is loan that has to be repaid, albeit usually over a longer period than a standard commercial loan and with lower interest charges.
Therefore, the investee has to have a convincing business case of sustainable, long term revenues to repay the loan and interest. It has to have some collateral to provide some guarantee to the lender. It also has to have the necessary managerial capacity and competency; and trustees have to be ready to take on the resultant risks and responsibilities. Many charities and social enterprises can take advantage of social investment.
However, there will be many more charities, especially smaller ones for which social investment may be far less attractive and indeed may well be inappropriate. They may not have the appetite, capacity or the activities that will produce long term revenues on which to secure a loan. Trustees understandably may be worried at the prospect of taking on long term debt and financial liabilities especially if their balance sheets are small; and where putting the organisation at risk could be detrimental to service users.
However, even many small voluntary organisations could benefit from development investment. There is an urgent need to develop models of social investment that will more readily apply to smaller organisations but not to see it as the only source of investment for them or any other organisation.
Experience has shown that organisations seeking social investment finance are not always investment ready. Intermediaries like the Social Investment Business offer business support to assist organisations to be ready. This a key part of their engaged investor approach.
When it comes to social investment the leaders and trustees of charities and social enterprises have to make their own decisions based on their own business needs and models, risk assessments, judgements and above values. Their duty is to sustain their organisations as viable entities that can deliver their mission.
Social investment needs to be deployed when it is right – not because it is the fashion.
At a time of public expenditure cuts and economic challenge it is critical that government and the wider public sector do not see social investment as an alternative to grant funding and full cost payments for contracts (indeed the latter will be needed to ensure that loans are repaid). It is also important that individual and corporate donors do not see this as an alternative to gift aid and other forms of voluntary giving.
Social investment should complement these forms of income and not be a substitute for it. Social finance is capital investment and not an alternative to revenue funding.
In this context it was disturbing to hear Sir Ronnie Cohen, the chair of Big Society Capital, say that the impact of the reduction in tax relief for charitable giving announced in the 2012 Budget could offset the benefits of the social investment capital which he is responsible for.
For many service providing charities and social enterprises, I forecast, social investment will increasingly play a major role. For others it will not. Whilst it should not be regarded as a panacea it should be encouraged and expanded and used where it can add value to investees, their beneficiaries and the wider community. In other words social investment should be only used when it is consistent with charitable and social values and aims.
* John Tizard is an independent strategic advisor and commentator on public policy and public services. He is a non-executive director of The Social Investment Business and a trustee of NAVCA.