Today’s launch of Big Society Capital could provide some urgently needed loan funding for charities and social enterprises. They need to know how to access it though
Today is an exciting day for the social sector because it marks the launch of the long awaited Big Society Capital. Not a bank, as once mooted, but a source of risk capital for those who find it hard to get it from conventional suppliers. At NPC we welcome its birth and wish it very good luck indeed.
But we do need to exercise some caution, and not get too over-excited or expect too much too soon. The sector faces many problems: very significant cuts to funding filtering through; new types of contracts that threaten, as they have with the Work Programme, to cause chaos for charities; and a massive increase in needs as the state withdraws from great swathes of activity. Yes, BSC has some serious money—£600m—but compared to the size of these problems it is not much. It is also not all going to come on stream at once and is only relevant to a some organisations in the social sector.
The Big Society Bank itself does not lend direct. It passes money on to various financial intermediaries to do the lending for it — so those are the organisations that charities and social enterprises will need to engage with. And these intermediaries themselves face a few stumbling blocks — they need to find enough ‘investment-ready’ charities that can benefit from BSC money, decide on their terms, and think about how they measure success.
The last point is crucial for this whole agenda: how do you know if the social return that you expect to make (in return for a lower-than-market financial return) has actually been achieved? There are answers to many of these questions and NPC is at the forefront of helping solve them, working across the social investment marketplace.
So who exactly is going to benefit from BSC? To be clear on this, we need to be clear about who can benefit from social investment more generally. Charities have been falling over themselves to see if they can be beneficiaries of BSC largesse. But our work with charities suggests a lot have not totally understood that what is on offer is loan finance. In short, to benefit from BSC or any kind of social investment, charities need a solid revenue stream (or valuable secured asset).
For some charities this is fine—especially if they have shops or other services that the public pay for directly which generate an income. But it is a more complex issue for most. Some, who rely on government contracts, think social investment initiatives, like BSC, could help them deal with the increasing fashion for payment by results. Since in these contracts payments only come after the successful delivery of outcomes, most charities need to get someone else to put up cash at the start—this is one of the motivations for the much-heralded Social Impact Bonds.
But this market is growing very slowly, with only one live SIB so far, and it is unclear how big the market will turn out to be. In any case, social investment cannot make up for the fact that there is simply less money around for public sector contracts of any type.
Perhaps those most eager about BSC will be social enterprises, since by definition, although driven by a social purpose, they are out to make profit and so are suitable places to put risk capital. Scalable social enterprises — like bus company HTC or leisure centre operator GLL — may see the biggest benefits from BSC funding.
BSC is a triumph of perseverance by many people but first amongst them has to be Sir Ronald Cohen. Over the past decade he has been a consistent, unshakeable, but always polite advocate of getting more money into social investment, following on from the groundbreaking work of the Social Investment Task Force set up in the early New Labour years at the request of the Treasury. It took time, but a potential pot of funds was uncovered in the many dormant bank accounts in the UK. After a lot more wrangling, which continued until the time of the coalition government, and the addition to the pot of £200m from the banks (under a lot of moral and government pressure) the pieces were all in place to get BSC going.
Much time since then has been spent in getting state aids permission from the EU, setting up BSC with the recruitment of Nick O’Donoghue as CEO, and carrying out all the leg work involved in getting ready to launch a new organisation.
So we should celebrate April 4 as a day when the sector moved into new territory. We’ll be watching the development of BSC with great interest and helping wherever we can —but we wouldn’t encourage anyone to give up the day job just yet.
This post first appeared on the website of New Philanthropy Capital