Councils everywhere are on a strict financial diet. But judicious social investment can make restricted resources go further, creating new jobs, services and homes
Local authorities are bearing the brunt of fiscal tightening. When budgets shrink, local politicians and officials find themselves in the unenviable situation of fighting to maintain the same local services, often for those who need them most, with less and less resources. The proliferation of local authority ‘graphs of doom’ show that this is not a sustainable approach in the long run. The need for alternative approaches has never been greater.
This is a difficult environment in which to innovate, but working with the charity and social enterprise sectors presents some significant opportunities for local authorities, both in terms of delivering economic growth and regeneration to deprived communities, and in the way that those services are delivered. There are two major reasons for this.
First, social investment can help build a range of providers who will deliver services in new and innovative ways. From environmental services to personalised adult social care, charities and social enterprises already play a very significant role in delivering services for local authorities. The push for more diverse provision from central government remains strong; and there is a growing evidence base that the sector brings innovation and outstanding value, by involving service users in the design and delivery of services, and by striving to keep people out of acute care.
Second, the social sector is a major and growing economic force. Nationally we employ more people than the financial services industry and turn over more than the car industry. Social enterprises employ more people relative to their turnover than mainstream SMEs and are three times as likely to be based in areas of deprivation.
However, one of the most significant barriers to the sector growing its role is its lack of access to finance. The growing social investment market is attempting to address this problem. Social investment (also commonly known as impact investing) is about providing finance to socially driven organisations (usually charities and social enterprises, and other organisations that cannot easily access mainstream finance), for the purposes of both a financial and social return.
There are a growing number of local social investment funds growing up around the country, such as those run by the Social Investment Business Group. And there are a variety of roles that authorities can play to help develop them, including creating an enabling environment by investing in social enterprises and charities directly.
2012 was a watershed moment for social investment and this year will see significant growth. We have seen the arrival of the world’s first social investment wholesale bank, Big Society Capital, with £600m of new capital. And new initiatives are underway to support charities and social enterprises take steps to become ‘investment ready’.
There are a wide range of investors (for example, CAF Venturesome, Triodos Bank, Bridges Ventures and Big Issue Invest) motivated by both a social return and a modest financial return. Government is looking at tax incentives for social investors and also addressing regulatory issues.
Social investees are best able to deliver impact when they are working in close partnership with their local authority. That partnership may include a shared strategy around asset development or innovative design and delivery of local public services.
A good example of how local authorities can work successfully with social enterprises is Liverpool City Council’s partnership with the Alt Valley Community Trust. The council transferred a number of assets including a sports centre and a library to the Alt Valley Community Trust and there are now more plans to transfer land for regeneration by building new shops. Over the last ten years, the Trust and the local authority have together attracted social investment in the form of loans and grants from the SIB Group amounting to £4.6 million.
Social investment was key to these transactions. No bank would lend to the Trust, partly because of their lack of a track record, and partly because the banks did not understand the terms of their asset transfer. As an engaged social investor, the SIB Group was able to bring a different understanding of risk because it seeks a social impact return as well as a financial return. This often means including a grant element for feasibility work and complementing this with business support.
There is no doubt that this model has worked. A report published by the think-tank IPPR North concluded: ‘A key factor in the improvement in economic deprivation in Croxteth has been the leadership role and services provided by the social enterprise AVCT and its sister organisations.’
Across Liverpool as a whole the SIB Group has invested in a further 26 organisations with a value of more than £11.5m – six of those 26 organisations provide 276 jobs and services for more than 19,000 users a month. Further afield, in Sheffield, the group has made 27 investments totalling over £8.6m. A small snapshot of the social impact delivered by just five of those investments shows that they have resulted in 131 jobs and services for more than 6,000 users a month.
While revenue dries up for local authorities, capital can still be a useful commodity for investment. Some of the most innovative local authorities are using their assets and very low cost of capital to help create local investment funds. This could happen in a number of ways.
Local authorities can invest money into social investment funds to complement their existing grant programmes, which could then be matched by other investors. Kent County Council, for example, has invested along with others to create the Kent Big Society Fund. Bristol City Council is also working with local residents and organisations to develop a Building a Better Bristol investment fund. If these seem a little ambitious to start with, local authorities can still play a very significant role in attracting further investment by investing just a small amount to lay the groundwork for a fund on a ‘first loss’ basis.
The source of investment may not just be diverted revenue. There are opportunities for local authorities to diversify their own portfolios and invest some of their reserves in a local social investment fund. Local authority pension funds are another potential source of investment in this space. For example, the Greater Manchester Pension Fund is working with the City Council and the Homes and Communities Agency to invest in a £30m development of 224 affordable homes.
Local authorities can play a pivotal role in building thriving local social investment markets. Despite economic constraints, more and more local authorities realise social investment can make money go further for their budgets and their communities, creating more value and more impact.
Caroline Forster is deputy chief executive of the Adventure Capital Fund, parent charity of the Social Investment Business Group