A new financial landscape
Stephen Bubb looks into the origins and objectives of the new Big Society Bank
KEY POINTS
- Charities forced to seek new sources of funding
- Social investment models continueto evolve
- Big Society Bank is not a retail bank and needs the right intermediaries
- Starting funds from dormant accounts now around £60m to £80m
- It needs careful nurturing to take off
We’re only months away from the realisation of a Social Investment Bank. As the third sector faces incredible funding challenges it’s more important than ever that ministers follow through on this promise and deliver an innovative and energising body that can really have an impact on social investment in this country – bringing it once and for all from the margins well into the mainstream of British finance.
Capacity gaps
For too long the third sector has been funded on a piecemeal basis, forcing it to think more reactively than strategically. Charities, community groups and social enterprises have historically operated with a small strategic financial platform with limited balance sheets and reserves. Increased capital flows are critical for ensuring the long term sustainability, efficacy and independence of the sector as well as making sure it is able to take on more of a role in delivering vital services to our most vulnerable citizens as the public sector scales back.
The establishing of a Social Investment Bank, with government backing and (initially) government funds could be the catalyst for moving the social investment market into its next stage of development and thus creating reliable, sustainable sources of capital on the scale we need to transform the sector.
Development of the social investment market
The social investment market is really still in its infancy. Roughly speaking I would characterise phase one as being related to developing models of community investment – Phoneix Fund, CITR, Bridges and so on. Phase two saw the range of government funds such as Futurebuilders, the Third Sector Campaigning Fund and Change Up managed by The Social Investment Business and our peers such as BIG, the Community Development Foundation and Capacitybuilders. We are currently in a third phase – one that has seen the development of third sector consortia models, funding via results based contracts and the elevation of social impact bonds to the national policy debate (and at least one launched already).1
The Social Investment Bank will support real progress and for those of us deeply committed to social investment it’s an opportunity to speculate about whether a future phase where social investment ceases to be understood only by sector specialists and think tank wonks and goes mainstream might one day be realised: where we have public recognition, understanding and demand for social investment as an asset class, where high-net-worth individuals, foundations and pension funds are excited about the ability to make money and do a lot of social good at the same time.
A long time coming
Eighteen months ago I wrote here about my hopes for the establishment of a Social Investment Bank.2 Between then and now we have had a change of government, the popularisation (among some!) of the phrase ‘Big Society’, efforts to reform banking in this country and the announcement of the scale of government spending cuts we are going to have to cope with over the next five years. Back then I stressed the importance of making serious amounts of investment capital available to third sector organisations – quickly – and the need for the new bank to be well capitalised for the long-term (£250m to start off, with a £20m per year revenue stream from then on) independent of government and not afraid to take risks. At the start of 2011 what we now know will be called the Big Society Bank is almost with us (Nick Hurd has hinted at a soft launch in the Spring) and we know that it’s to have a wholesale rather than retail (and therefore FSA regulated) function.
With 9 February’s very welcome announcement of an additional £200m from the banks to add to the £60-80m from dormant accounts, it looks like the government has succeeded in delivering healthy looking coffers for the bank to start trading with. And that’s good news because the need for the bank to be able to have a big, bold, radical impact has never been more urgent.
Unprecedented demands for finance
Cuts from both central and local government are hitting third sector organisations up and down the country hard. At the same time the tougher economic climate is driving up demand for services delivered by these same organisations, in particular in areas such as children’s services, support for the disabled and their carers and services for the homeless. Add a rise in VAT which could cost the sector nearly £150m a year and the end of transitional relief on Gift Aid which amounts to £100m a year and you can see that the pressure to get it right on the Big Society Bank is huge.
For the sector to be able to fulfil its potential in delivering quality services to local people and fulfil the role envisaged for it in the government’s push for greater localism and community empowerment, it needs access to capital on a level which is simply not currently available. We need a bank that supports growth and development of this marketplace. In having a wholesale function only, it will have to engage the services of intermediary fund managers to distribute and manage the direct investments into organisations.
The government’s right that this retail function doesn’t need to be done by the bank, but it does need to be done well in order to build business nous in the sector and drive it towards greater financial sustainability. Having that retail function carried out by various different bodies offers the opportunity for innovation and specialism within those intermediary organisations. It’s also a smart way to use already existing networks, customer bases and expert workforces within the social investment sector without the bank wasting money duplicating what already exists.
Beyond grants and fundraising
We must move away from the assumption that grants are the only form of investment charities can handle, or that charities are best funded by philanthropy or rattling tins outside supermarkets. Recognition of many third sector organisations as well managed businesses (where the objective is financial sustainability and social good rather than profit for shareholders) isa very welcome move. Not to mention that increasing the volume of loan funding increases the longevity and impact of the money committed – as unlike grants, loans are repaid and the cash can be reinvested over and over again.
This Big Society Bank has been over five years in the making (see Figure 1) and with its virtual doors due to open soon although some important details have become clear there are still a lot of questions left to answer.
Modus operandi
As it’s not going to be a retail bank how will the Big Society Bank package its funds up for tender to intermediary fund managers? Existing social funders (or newcomers to the market) will have to manage the relationships with the investees and it’s important that criteria for funds focus on outcomes organisations can deliver for the public rather than the needs of the third sector itself. What financial products will it offer? It needs to be innovative, pioneering and market leading. But clearly different financial products have varying levels of risk associated with them. Leveraging money from the private sector is a huge priority so will public and private funds be used differently if it’s difficult to entice private money to back products at the riskier end of the spectrum? Banks are refusing to lend to established SMEs at the moment, it doesn’t look likely that they are about to jump into funding loans to third sector organisations that they currently class as unviable and unbankable.
From our eight years of experience of social investing at The Social Investment Business we know that even in the co-operative, pre-recession days there were always some deals which were viable, with the right support, but not bankable – especially around start-ups, or expansions into new service areas for instance – and there needs to be a solid foundation of social investment capital to fund those projects.
Non-government capital
Mobilising non-government capital won’t be straightforward. The concept of social investment is largely foreign to people who don’t work with it already. If the initial £280m is to be rapidly topped up with private funds – firstly from commercial lenders and in later phases from individual investors – a huge education and marketing exercise is required. Getting a financial return on your money while funding the delivery of social good is something people like the sound of once they understand it – but they’re not going to commit the millions they have tucked away in traditional bonds, savings accounts and stock portfolios until they have all their questions and concerns addressed.
Leverage
Another issue that arises with leverage, especially thinking years ahead to the days when individual private investors are more involved, is that people like named projects – they prefer to put their money into the specific rather than the general.
Putting money into the pot for the Social Investment Bank might feel too much like putting it into a black hole or that cash could end up funding things that the government should be paying for. There’s a reason that charities give donors a shopping list: £10 for a goat, £20 to sponsor a child or £50 to provide a bed in a shelter is more appealing than asking for “cash for our general activities”. But if funds are developed with an eye to bringing in investors, will investees from less fashionable or appealing sectors miss out?
It’s easy to imagine a Big Society Bank fund for pre-school provision being able to pull in more private donors than a fund whose remit covered support for sex offender rehabilitation or work with asylum seekers.
And if investors want to fund projects close to their own communities the south-east could reap the benefit of having residents with deeper pockets than those in the north-west.
Transformation
This isn’t just a bank that’s being created – the hope is that it will be a champion for the idea of social investment and kick start transformative growth in the social investment market. But as many politicians who have tried to forecast and control the power of markets in recent memory have found – they are difficult to predict! The government’s plans are encouraging and their commitment to finding significant funds for its creation is welcome indeed.
To be a successful catalyst for more social investment this single institution needs to be set up and run in such a way that it is nimble, flexible and quick to adapt to the interests and demands of investors and borrowers in its early days. Set the remit too tight, be slow to bring on new products or accept ideas for new ways of working and it will lose out as investors take their money elsewhere and organisations looking for funding write it off as another gimmick that didn’t live up to its hype.
Get it right, and it could alter the financial landscape forever.
1. See also Philip Kirkpatrick’s and Sarah Canning’s article ‘Sources of finance – a culture change’ on page 25 of this issue
2. See ‘Funding the Future’ in Caritas, issue 24, November 2009, page 28
Author: Stephen Bubb
Sir Stephen Bubb is chief executive of the Association of Chief Executives of Voluntary Organisations and chair of The Social Investment Business.
In 2007 he became secretary general of EUCLID, the European Third Sector Leaders Network.
He has had major national roles in the TGWU, NUT and the AMA (Association of Metropolitan Authorities), as well as being a founding director of the National Lottery Charities Board
www.thesocialinvestmentbusiness.org
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