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Commentators on one side of the political spectrum attribute this failure to the lack of resources available to the state and to the state’s reluctance or inability to act appropriately. Commentators on the other side attribute government’s shortcomings to the inherent inefficiency of the state itself. The truth is that the political process, which focuses on short-term gains, does not favor long-term, preventative investment of the type required to address major social problems.

The social sector, which is also called the voluntary, non-profit or third sector, has done its best, with the support of philanthropic donations and government, to address the social problems that fall through the gaps in government provision.

Some argue that the social sector’s problem is that it is significantly under-resourced. Others argue that the insufficiency of resources is in part a consequence of the sector’s reliance upon philanthropy — from foundations and from individual donors — that can be unpredictable. Both critiques may be correct: the social sector has a problem in accessing capital, often because of a lack of a reliable revenue stream, and, as a consequence, it is inefficient, especially in respect of building sustainable organizations, securing funding and utilizing assets to support large-scale activity.

Recent moves to make the social sector more efficient, by focusing on improvements to the management of both the donors and the recipients of grants, are an important development. The Bill & Melinda Gates Foundation applies rigorous criteria to the assessment of the performance of organizations in receipt of its grant funding. Michael Dell’s philanthropic work is similarly rigorous. Their goal, according to Harvard professors Robert Kaplan and Allen Grossman, is, essentially, “to find and fund the Microsofts and Dells of the non-profit sector.”

In fact, such moves are more necessary than ever, as deficit-ridden governments seek to pass greater responsibility onto the shoulders of the social sector. An example of this is the UK Coalition Government’s strategic objective to foster the “Big Society.” In essence, the Big Society agenda seeks to pass a significant portion of responsibility for social cohesion back to the community via the voluntary sector, and, at the same time, to confer greater legitimacy upon such community work and to provide incentives and support for it. However, the social sector as currently constituted is unlikely to be able to address the scale of the social need; or, to put it another way, to meet the scale of the social challenge.

This is where social entrepreneurs come in. We know that entrepreneurs create jobs and foster innovation. In that sense, they already make a substantial social contribution. But entrepreneurs have special qualities that could make a significant beneficial impact were they to be applied to social issues. The entrepreneurial mindset embraces leadership, vision, the ability to attract talented people, drive, focus, perseverance, self-confidence, optimism, competitiveness and ambition. To these one might add an appetite for taking informed risks, an unwavering focus on results, a willingness to take responsibility, a grounded sense of realism, astute judgment of opportunities and people, and a fascination with the field of enterprise in question. The engagement of entrepreneurs in the social sector, bringing in their wake high expectations of performance, accountability and innovation, could lead to significantly increased social impact.

Could the social sector be transformed to allow the emergence of entrepreneurs from within its own ranks and attract social entrepreneurs and capital on a large scale? The answer is yes, provided that we can create an effective system to support social entrepreneurship, by linking the social sector to the capital markets and introducing new financial instruments that enable entrepreneurs to make beneficial social impact while also making adequate financial returns for investors. Given these conditions, it is possible that social entrepreneurs and impact investors will significantly fill the gap between social need and current government and social-sector provision. Indeed, were social enterprise to achieve significant scale, it would transform the social sector and lead to a new contract between government, the capital markets and citizens.

In this process, charitable, institutional and private investors, attracted by the combination of social as well as financial returns, would bring into being a new asset class: impact investment. In a recent report, JP Morgan came to the conclusion that impact investments already constitute an emerging asset class: “In a world where government resources and charitable donations are insufficient to address the world’s social problems, impact investing offers a new alternative for channeling large-scale private capital for social benefit. With increasing numbers of investors rejecting the notion that they face a binary choice between investing for maximum risk-adjusted returns or donating for social purpose, the impact investment market is now at a significant turning point as it enters the mainstream… We argue that impact investments are emerging as an alternative asset class.”

This new asset class requires a specific set of investment and risk-management skills; it demands organizational structures to accommodate these skills; it must be serviced by industry organizations and associations; and it must encourage the development of standardized metrics, benchmarks and even ratings. As has been observed by the impact-investment firm Bridges Ventures in the UK, such an asset class should provide welcome diversification for capital markets: at times of economic stress, price-sensitive business models appropriate to lower income neighborhoods can prove more resilient and also find wider applications in the mainstream market as both margins and consumer spending power are squeezed.

Not surprisingly, politicians as well as academics, entrepreneurs and investors are paying increasingly close attention to these developments. In the US and in the UK, and now also in Canada and Australia, steps are being taken to provide social entrepreneurs with access to the same kinds of resources as business entrepreneurs. The USA’s Social Innovation Fund ($173 million) and the Investing in Innovation Fund ($644 million) are notable examples; as is the proposed creation of the UK’s Big Society Bank. In Canada, the Federal Government recently received the report of the Canadian Task Force on Social Finance, whose recommendations include requiring public and private foundations to devote a proportion of their funds to mission-related investments; clarifying fiduciary obligations so that pension funds and others can invest in social programs; introducing new financial instruments for social enterprise; and marshalling government support for social enterprise, directly through seed investment and business support services and indirectly through fiscal engineering.

How likely is it that such steps will succeed? In answering this question, we would do well to consider that the global economy faced a similar moment of challenge and opportunity in the 1970s and 1980s, when many of the most familiar names in the post-war corporate world started to decline and shed jobs, among them General Motors, American Motors, Courtaulds, ICI, Smith Corona, Olivetti, US Steel, Bethlehem Steel, Kodak and International Harvester. The question then was: what would take their place?

What took their place was a new wave of business enterprise helped by venture investing, mostly focused on high-tech industries. This is the wave that brought us Intel, Cisco, Oracle, Microsoft, Apple, Sun Microsystems and Genentech. The hi-tech wave has since swept the world, taking us into the embrace of Google, Wikipedia and Facebook and ushering in a communications and information revolution based on global access to information from multiple sources. It has thereby profoundly changed global culture.

Just as hi-tech business enterprise and venture capital, working in tandem, have attracted increasing numbers of talented risk-takers since the 1970s, so social enterprise and impact investment are now attracting a new generation of talented and committed innovators seeking to combine new approaches to achieving social returns. Social enterprise and impact investing, in short, look like the wave of the future.

About Sir Ronald Cohen Sir Ronald Cohen is chairman of Bridges Ventures and The Portland Trust. He chaired the UK’s Social Investment Task Force and the Commission on Unclaimed Assets and he is a founder-director of Social Finance. Until 2005, he was executive chairman of Apax Partners Worldwide LLP, which he co-founded in 1972.

"We received 225 proposals for $18 million in funding, and we had $6 million to hand out this time," said Jeffrey Dale, chair of United Way Ottawa's investment committee. "We knew we had to make hard choices

The new social economy Segueing into his lecture, "The Promise and Peril of the New Social Economy," Reich promptly informed his audience that his talk would not be about Facebook or Twitter or other social media.

"Same name, different guy," he said. "For the political junkies among you, you will know what I mean when I say that while I am lesser in stature, I am greater in height."

After a short performance by the a cappella group Everyday People, some welcoming remarks by Howard Wolf, president of the alumni association, and an introduction by Provost John Etchemendy, Reich stepped to the lectern. He prefaced his lecture by offering his apology to anyone who thought they were going to hear a talk by "the other" Robert Reich, the diminutive Secretary of Labor in the Clinton administration.

"The exciting fact about the world that you graduates are about to enter is that there are many novel and innovative ways for people to do good." Rattling off some of the buzzwords associated with the new approaches, such as "impact investing," "venture capitalism" and "social return on investment," Reich acknowledged the enormous innovation and ferment that has been taking place. "This innovation brings along with it great promise," he said, "but also, I hope to show you, some real peril." Historically, he said, a flourishing democratic society is composed of three distinct sectors: the business or for-profit sector; the government or public sector; and the social or nonprofit and philanthropic sector, this last constituting the social economy.

"By 'new social economy,' I mean the broad new landscape of organizations that seek to produce social benefits," he said.

Blurring the lines But innovations of the past 20 years have broadened the social economy far beyond the world of nonprofit organizations and foundations, and the new social economy is full of hybrid organizations and philosophies.

In the for-profit sector there have been innovations such as "corporate social responsibility," in which corporations assume responsibility for the social impact of their actions.

And there is socially responsible investing, in which investment funds avoid industries embroiled in moral controversy, such as tobacco companies, or purposely invest in companies that produce social returns. Such funds barely existed 15 years ago, but now constitute more than 10 percent of professionally managed investment funds. There are nonprofit organizations that seek to create operations that earn revenue in addition to accepting donations, and "philanthrocapitalism," as The Economist dubbed it, in which philanthropists purposely employ business strategies in their grant-making efforts.

Government also acting

Even government is getting into the act, Reich said, with the creation of the White House Office of Social Innovation, which seeks to create new types of partnerships between government and the private sector, and between government and the public sector. The "Investing in Innovation Fund" of the Department of Education involved 12 foundations, including the Gates and Hewlett foundations, which contributed $500 million to the department to unlock $650 million in federal funds. "Now there's a genuinely novel idea," Reich said. "Foundations making grants to the federal government." Because of this blurring of boundaries between the traditional three sectors, the new social economy offers today's graduates a host of choices in "doing good." "If you aim to do good and pursue a social cause, you can be sector agnostic: It doesn't matter what sector – public, private, civil society – one enters," he said. "That is an amazing new world and quite possibly a brave new world."

Will it work? But innovation can also be perilous, as there is no guarantee that all innovations lead to positive social change, Reich pointed out. Hybrid organizations like social enterprises might seem great in theory, but in practice they must cope with a deep tension between the profit impulse and the social mission impulse. "Will profit overwhelm principle?" he asked. Reich said the 20th-century regulatory framework governing the old three-sector society will eventually prove inadequate for the cross-sector collaborations that are increasingly popular in the 21st. So, he queried, what does this brave new social economy mean for those about to graduate from Stanford? Citing the purpose of the university as set forth by Jane and Leland Stanford, "to promote the public welfare by exercising an influence in behalf of humanity and civilization," Reich called it "a beautiful, honorable and worthy mission." "As you commence the next stages of your life, remember this: Your education here has not been frivolous," Reich said. "It has qualified you for personal success, yes. But – not to put too much pressure on you – we adults are counting on you to solve the global financial crisis, to figure out the war on terror and to come up with the governance structure of the new social economy."

He was inspired after watching Toronto’s Centre for Social Innovation (CSI) purchase and retrofit a building using $2 million it had raised selling community bonds at $10,000 apiece. The bonds, which could be purchased by anyone, offered a 4 per cent annual rate of return over five years and were RRSP-eligible.

If the banks wouldn’t lend the money to a not-for-profit organization like CSI, then individuals who support the organization’s mandate just might. Tapping into CSI’s “social asset” proved a good gamble, as the community was quick to scoop up the bonds.

“This told me that the whole community bond thing was for real,” say Bida, convinced he could adapt the approach to support renewable-energy projects.

Their approach represents a low-risk investment for people who want to support “green” community projects and make some money, but who don’t want to spend thousands of dollars putting solar PV systems on their own rooftops.

Electricity from the plant will be sold into the grid under the province’s feed-in-tariff program, while waste heat could end up being pumped into a nearby greenhouse, potentially used to grow bamboo for the new pandas expected to arrive in 2014.

About 70 per cent of the project, or roughly $3.5 million, will be funded through the sale of community bonds that, like the CSI bonds, could be purchased through a self-directed RRSP. ZooShare hopes to offer bonds with a seven-year term and up to a 7 per cent annual return on investment.

For existing zoo members and those living within one kilometre of the zoo, the bonds will be sold in $500 units. Everyone else can pick them up for $5,000 each, unless they want to purchase a zoo membership. “We’re hoping this will sell more memberships for the zoo as a result,” says Bida, whose company ReGenerate Biogas is managing the project.

ZooShare is just one of several co-op ventures going the community bond route to raise capital for renewably-energy projects. Others include Options for Green Energy, SolarShare and WaterShare.

The zoo executives liked the idea and several months later Bida helped form the ZooShare Biogas Co-operative, a not-for-profit community co-op that plans to build a 500-kilowatt biogas plant at the zoo for about $5 million

t also offers a way for those without property, such as renters, or without the proper land or rooftop exposure, to participate in the feed-in-tariff program. Community bonds, in essence, make the FIT program more inclusive and get the broader population directly invested in their energy future, be it solar, wind, biogas or hydro.

“This idea of massive public involvement in the ownership and economic benefit of these projects is what we’ve all been working towards for the past 15 years,” says Deb Doncaster, executive director of the Community Power Fund, which supports community co-op projects with grants and low-interest bridge financing.

“All it will take is for one or two of these projects to be successful and the approach will take off.” Social media will certainly play a role. Facebook, Twitter and other social networking applications make it much easier for community co-ops to reach out to supporters. Spreading the word to the right people has become almost effortless. Still, a couple of barriers need to be overcome before you or I can purchase such bonds. For one, RRSP-eligible community bonds must be approved and registered with the Financial Services Commission of Ontario before they can be sold. Some say the commission is dragging it feet. SolarShare, for example, wants to issue community bonds in $1,000 increments that would offer a 5-per-cent return annually and be redeemable after five years. The funds raised from the bond issue will support construction of solar PV projects across southern Ontario. It’s all new territory for the financial services commission, which has proved a major bottleneck. “They’re tight on the resources needed to deal with this new landscape,” says Matt Zipchen, who as project manager for the Toronto Renewable Energy Co-operative is overseeing development of SolarShare. Zipchen says another roadblock is the banks. “These community bonds may be RRSP-eligible, but whether or not your bank will let you hold them is another question,” he says. “Banks are finicky about them. We’re just starting the process with the banks to see which ones will hold these bonds and which won’t.” It will all get sorted out over time. Indeed, all it will likely take is for one big bank to break from the pack before others start to follow. If demand for community bonds is high enough, that will likely happen. That’s what SolarShare, ZooShare and others are counting on. Tyler Hamilton, author of the upcoming book Mad Like Tesla, writes weekly about green energy and clean technologies. Reach him at tyler@cleanbreak.ca

While the Big Society Bank will offer capital to help social enterprises scale, it may not provide the right kind of capital for new, potentially ground breaking, ideas. Ambitious start-up ventures require investment to test their models and start paying their way. The Big Society Bank will not be issuing grants so it looks unlikely that intermediaries will, in turn, be able to offer the kind of "soft capital" required to new social enterprises. Largely avoiding the world of social investment, the successful graduate teaching programme, Teach First, secured its founding investments from businesses, government agencies and charitable foundations. This diverse range of sympathetic supporters sacrificed financial return to give the untested vision of Teach First a chance. Other successful start-ups continue to cobble together the finance they need rather than waiting for social investors to meet their needs.

To attract investment to scale, an enterprise needs a clear strategy, a robust model for generating revenue, and economics that scale (or, as the enterprise grows it will simply become bigger, and not better). This is tough; entrepreneurs often need support from some of the 100-plus organisations – identified in the NESTA-commissioned report, Growing Social Ventures – that are dedicated to supporting Britain's 65,000 social enterprises improve, expand or become more resilient. For example, Scottish social enterprise Working Rite was supported by the Young Foundation to develop a financially sustainable business model before it could attract capital to its apprenticeship-style work preparation programme, even though it had achieved better results for youngsters from tough backgrounds than its larger, commercial competitors.

While we welcome the Big Society Bank, the government needs to level the playing field in the ever-tighter fight for government contacts. Shrewd social entrepreneurs – like those behind Enabling Enterprise, Teach First and Working Rite – will need to continue to scrape around for risk capital, and scramble to build robust business models under innovative services. From on high the government declares that social enterprise is critical to the success of the big society, yet on the ground it can feel like "soft privatisation".

Some specific observations:  No such thing as the Big Society? – considering that at one stage this was supposed to give policy substance to the Big Society, it is striking how absent the Big Society is from the White Paper. That’s one cut it didn’t make.  I did a control search and only came across one Big Society reference in the whole report, and this was not to the idea but to the Big Society bank. So this leaves an obvious question about how central the Big Society now will be to the Government? One practical effect of there being no Big Society strand is that the tenor of the White Paper is much more consumerist, gone appears to be the emphasis on social citizenship and responsibility.  This leaves a big gap because, as our Commission on 2020 Public Services argued, the big challenges of the future will need to be met through citizens and the state working together to create better social outcomes.  Very few concrete proposals – This is about direction of travel, rather than specific proposals. In fact, there are very few concrete proposals. Instead this is much more like a Green Paper in which general propositions are put out for consultation, with the question being what specific policy changes would these require? This is clearly a long way from what some of the Big Society evangelists had originally wanted to see.  No short term wins for the voluntary sector – Earlier in the year there had been speculation that the White Paper might contain some specific guarantees for the voluntary sector to help offset the consequences of Council grant cuts.  But, whilst there are warm words for the role of the voluntary sector, and some new development money and support to help develop social social enterprises, there is no specific commitment to, for example, a quota of Council services to be subject to voluntary sector right to bid.   Diversity of provision – the boldest statement in the White Paper is that there is no case for monopoly state provision of services, except for the special cases of defence, criminal justice and policing.  The case is made for all public services to be run on the basis of autonomous institutions such as Academies and Foundation Trusts, which could be run by businesses, mutuals or social enterprises.  However, there are no specific proposals to apply this to any particular service area.  Local government is the big winner – this is the most pro-local government policy paper to have been published by the Coalition.  Whereas, the distinct impression in previous policy developments on public service reform has been that local government was being sidestepped, now it is much more central to the Coalition’s plans for decentralisation.  The principle of decentralisation which is set out in the white paper bears some similarity with the subsidiarity principle developed in the 1990s by the European Union, under which decisions should be devolved to the lowest possible level of government.  The new twist to this is the emphasis in the white paper on establishing neighbourhood councils in urban areas to mirror parishes and to be responsible for the same types of very local, community and public space services.  But the White Paper also makes the case for more powers and greater financial autonomy for local authorities and, in one of its few specific proposals, also recommends that skills funding should pass to some Councils, something which cities like Manchester have been strongly pushing for.

As Nick Timmins noted in the FT today, there are a number of tensions within the White Paper, which are not even acknowledged, let alone resolved.  He cited the principle of promoting diversity whilst at the same time needing to guard against failure, a weakness of successive health reforms and a particularly current concern given the collapse of Southern Cross.   But this isn’t the half of it. Other questions which the White Paper doesn’t confront, but which a credible reform plan would have to resolve, include:  Service integration vs institutional autonomy – how can local government integrate services in the way that the white paper suggests, whilst at the same time vertical service silos are being strengthened through the promotion of institutional autonomy in schools, hospitals, and now in every other service?  Consumerism vs social citizenship – how can a consumerist approach to public services help strengthen the co-productive relationship which there will need to be between citizens and services to meet the social challenges of 2020 and beyond?  Ideas vs practice – how can the Coalition move from exhortation to implementation? The White Paper may contain a framework of principles but it does not set out a convincing strategy as to how reforms based on these could be implemented.  Over the coming weeks we at 2020 will be analysing the Coalition’s reform agenda in more detail and looking to see where the opportunities exist for developing better social productivity practice.  Please let us have your comments and ideas.  Ben Lucas