Social Finance

A4 Who is this guidance for? Trustees and those who make decisions on behalf of trustees about a charity's investments and assets should use this guidance as a tool to help them make confident, informed decisions and publicly to report on those decisions.

It’s getting off to a slow start, but the Big Society Bank looks set to mark a new dawn for social investment, bringing a potential £400m into the market. But before this, in 2007, a new-style social lender entered the market with a relatively modest £15m, before growing into one of the largest social investors in the country.

The organisation started off as the Adventure Capital Fund, which then became known as Futurebuilders – generating the organisation's biggest fund to date, finally settling on Social Investment Business – a clear catchall to describe the organisation, and a nod to its ambitions to run the Big Society Bank, a concept known as the social investment wholesale bank under the Labour government.

Despite its positive effect in financing the charity world, some have criticised it for growing so large so quickly – it has managed a number of funds on behalf of the government and is worth around £400m. Lewis makes no apology:

Its outgoing and first chief executive, Jonathan Lewis, says he is most proud that Social Investment Business has shown that social investment works:

Lewis is also proud that the write-off rate of loans with Futurebuilders was so low, especially since it funds organisations which can’t access traditional finance.

“Through Futurebuilders, we lent £120m to organisations which couldn’t get bank finance, and the culminative write-off rate on that money over six years is less than 4 per cent. I’m extremely proud of this fact.”

“With Futurebuilders (the £215m fund managed by Social Investment Business on behalf of the Office for Civil Society) we were supposed to help charities win something like 300 contracts. In fact they won over 800, which shows that if you give them a bit of appropriate help they can win lots of contracts by providing innovative and transformative services.”

“Though it was slightly unpopular to grow this quickly, I think creating a large social investor moves the market on a little bit, and the market is going to be moved on again by the Big Society Bank.”

Lewis’ time at Social Investment Business could be viewed as the frontier of social investment. His new role follows a similar pattern. Lewis leaves to head the staff-run NHS social enterprise spin-off Bromley Healthcare, one of many public service providers deciding to become a mutual under minister for the Cabinet Office Francis Maude’s new "right to provide" agenda. Maude is leading a drive to support employees of public services to set up mutuals.  Bromley Healthcare is a staff-run healthcare provider organisation rather than a commissioning one. Lewis joins it as chief executive in August.

In the interim, nonprofits seeking to grow their operations have been stuck in a state of arrested development.

Elizabeth Berger, president of the Downtown Alliance, which supports economic development in lower Manhattan, welcomed the mayor's announcement as a necessary step in enabling nonprofits to play their part in promoting the city's economic vitality.

According to the mayor's office, more than 13 organizations have gone to out-of-state funding sources for assistance in financing capital projects totaling more than $337 million since June 2009. The administration also estimates nonprofits have at least 20 shovel-ready capital projects stuck in the development pipeline with a combined price tag of more than $400 million.

While the city's nonprofits don't enjoy quite the same cachet in terms of revenue-generating potential as either financial services or leisure and hospitality, the group exceeds both sectors with respect to employment. While the other sectors employ approximately 434,000 and 320,000, respectively, the more than 42,000 health, human services and cultural nonprofit (HHSC) organizations throughout the five boroughs support approximately 470,000 employees, according to the mayor's office. That sector is the largest private employer in city—employing more than 15% of New York's non-governmental work force.

“New York City is home to tens of thousands of nonprofits that are looking to expand, create jobs or move into new facilities, but for the past few years they have faced more expensive financing costs, while some have had to forgo expansion altogether,” Mr. Bloomberg said, in a statement. “This new entity will make it easier and more inexpensive for our critical nonprofit sector to grow and expand.”

“At a time when many not-for-profits are struggling to make ends meet amid the nation's fiscal woes, this new issuer will serve to strengthen and support an increasingly important sector in our city's economy,” Ms. Berger said in the mayor's office statement. “In lower Manhattan, not-for-profits represent a vital and growing sector, and this action recognizes their value.”

Capital projects and investment in expansion and facilities upgrades have been curtailed as the volatile economy takes a toll on nonprofits struggling to make up for reductions in funding support. “For over three years, nonprofits like ours have faced far too many obstacles in obtaining financing to grow and expand,” Sisi Kamal, chief financial and operating officer at the Friends Seminary School, said in the statement. “The ability to locally access necessary financing in an efficient and cost-effective manner would be a significant investment in the future of our organization and that of many others serving the residents of New York City.”The administration said the new entity, a local development corporation, will open in the next four to six months and that financing requests will be based on board approval. The five borough presidents, in conjunction with the comptroller, will be charged with nominating directors to serve on the board.

They would be overseen by a social finance regulator that would operate within the proposed Financial Conduct Authority, the successor to the Financial Services Authority.

The framework would create new legal categories of 'social investment' and 'social investor'. The two organisations hope to persuade the government to make it into law.

The National Endowment for Science, Technology and the Arts and the law firm Bates Wells & Braithwaite have proposed a new regulatory framework for social finance aimed at making it easier to invest in voluntary sector organisations.

"At the moment, it's easier to give £100 to charity than to lend £100 to charity," said Luke Fletcher, an associate at Bates Wells & Braithwaite and author of the report.

The new framework, he said, would make it easy for charities and social enterprises to create a financial prospectus for a bond or share offer, without the need to offer the tight protections for investors that are currently required.

"The main target for this would be the mass affluent, who are not currently considered sophisticated investors," Fletcher said. "Charities would like to create offers targeting these people, but they find the legal restrictions too onerous."

Fletcher said there were already exemptions for community benefit societies, formerly known as industrial and provident societies, and he wanted to extend these to all third sector organisations. "I think there's a chance of getting this into law now," he said. "There's a real window of opportunity. The reform of the Financial Services Authority is already under way, there's big interest from government in social investment and there's a drive to reduce red tape for the sector." The Cabinet Office has expressed support for the idea of a new regulatory framework in its strategy paper Growing the Social Investment Market, in which it said it would "seek further evidence on the impact of the regulatory framework on social and community investment to assess whether it is proportionate". One of the six key recommendations in Lord Hodgson's report on red tape in the third sector, Unshackling Good Neighbours, was the creation of a class of "social investors" who could invest under less strict guidelines because they understood they were receiving both a social and financial return.

Charities like the Beat Bullying, which has helped countless children and young people deeply affected by bullying, and ICENI, which treats and tackles addiction in Ipswich and Suffolk, are using the money to modernise. This will help them make the most of more opportunities for them to deliver public services and new sources of finance, such as capital investment from the Big Society Bank, which the Government is developing as part of its drive to support a Big Society.

Francis Maude said: "We all want a bigger, stronger society where people get involved and do their bit.

"This isn't new - there are already loads of people right across Britain taking responsibility and making our communities better places to live.

"What is new is that this Government is making it easier for people to do more: giving people power to improve public service, putting communities in control, and supporting people to help others."

Nick Hurd said: "The Transition Fund is part of a much wider package of support for charities and voluntary groups and social enterprises. "The Cabinet Office will invest around £470million in direct support over four years. "We are opening up new opportunities for charities to deliver public services, cutting red tape and developing new sources of finance such as the Big Society Bank." The Transition Fund was announced in the Spending Review, October 2010. The Fund closed to applications on 21 January 2011. £94million has now been committed and final awards will be announced later this summer.

Social business - the 3rd way money. Unlike traditional business, social business operates for the benefit of addressing social needs that enable societies to function more efficiently. Social business provides a necessary framework for tackling social issues by combining business know-how with the desire to improve quality of life. Therefore instead of being self-focused social business is all about others. Prof. Yunus has already shown the effectiveness of this new type of business: his clear focus on eradicating extreme poverty combined with his condition of economic sustainability has created numerous models with incredible growth potential.   Social business follows seven principles.

It will be an entirely new kind of business. Until now running a business has always been self-focused, founded for the purpose of making

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

"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

He told MPs that the matter could take “some months before it is completed”, but added that there was an agreement with the Big Lottery Fund to make investments in its place in the meantime.

Chair of the PASC, Bernard Jenkin MP, asked if the situation was frustrating. Sir Ronald said he had gone through the same issue when he set up the social investment company Bridges Ventures. He added: I am confident that we will get state aid exemption for the Big Society Bank from the EU and that, in fact, the EU will turn out to be a big proponent of social investment.”

During the meeting, Sir Ronald also addressed the ongoing negotiations between the big four high street banks and the government on the proposed  £200m investment in the Big Society Bank, after Conservative MP Charlie Elphicke said a discussion with the Royal Bank of Scotland’s Sandy Crombie had revealed he had reservations.

Sir Ronald said there was more room for agreement between the banks and government and stated that an announcement was expected in the next few weeks.

He added that the £200m investment, which will be on commercial terms, would not be at normal market rates and would not necessarily be a typical loan.

At the meeting, Sir Ronald also said it was projected that the Big Society Bank would be cash-positive in seven years. After Jenkins asked if there would be enough deal-flow, he said he was confident that the supply of money would create demand.

However, Sir Ronald admitted it was a challenge to galvanise local engagement after MPs asked whether smaller charities would find it difficult to engage with the Bank.

Sir Ronald also said the Big Society Bank may have to change its name as it wasn’t a bank.

To date £97.5m has been committed from the Transition Fund to more than 900 charities. Final awards will be announced later this summer.

The Transition Fund aims to help charities make the most of more opportunities to deliver public services and new sources of finance, such as capital investment from the Big Society Bank

Nick Hurd, minister for civil society, said: “All the charities receiving transition funds have a plan to overcome current challenges and emerge stronger. We recognise the hugely important contribution charities make to our society and we are committed to supporting them."