June/July 2013: Social Enterprises

Social Enterprises: The sector’s beating heart

Andrew Holt analyses the many key initiatives and developments that are contributing to a flourishing social enterprise sector. But also strikes some notes of caution

The UK social enterprise sector is in a healthy state. The vast range of social enterprises in a wide variety of communities up and down the country is truly impressive. It includes a large proportion of start-ups and high expectations of growth. As a crucial segment of the Third Sector it is hungry for finance. And certain policies are contributing to this, including the Open Public Services White Paper and the Public Services (Social Value) Act. In turn, the Localism Act, in theory, makes it easier for communities to purchase assets and provide local services; and by the mutualisation agenda particularly for health and social care service providers.

For political reasons, social enterprises are often of interest as they frequently thrive in deprived communities and the sector is home to lots of young entrepreneurs, at a time when employment, and especially youth unemployment, is worryingly high. In this way, the UK Government created the world’s first ever legal model designed especially for social enterprises, as well as the world’s first ever social investment bank, Big Society Capital, created in 2012.

Big Society Capital and the Big Lottery Fund are now developing a £50 million Community Assets Fund which will provide a blend of grants and loans to help communities through the phases of local ownership. This is part of a longer term commitment from Big Society Capital and the Big Lottery Fund to provide a quarter of a billion pounds of finance over the rest of this decade to help communities with ambitions to own local assets.

Though Professor Fergus Lyon, who leads the social enterprise stream at the Third Sector Research Centre and from Middlesex University Business School, offers a few words of caution. “Loans are not for every organisation and they require a really strong business to allow a surplus to be made and to repay the loan. No-one wants to see loans being pushed onto those who cannot afford them.”

The political will to support social enterprises is much in evident at all levels of government. Minister for Civil Society Nick Hurd observed: “We have the opportunity to transform the funding environment for social enterprises and ambitious charities. Social investment is the opportunity to move away from hand to-mouth funding and access long-term affordable finance. It can support much needed growth and social innovation. It is early days and it is not for everyone, but the opportunity is an important one.”

Social justice
To help move away from this hand-to mouth funding as well as assist in a social enterprise boost, in his spring budget 2013, the Chancellor George Osborne announced a new tax relief would be created to incentivise investment into social enterprises, in recognition that: “Social enterprises play an important role in growing the economy, reforming public services and promoting social justice”. This support from the Treasury is currently under consultation with the sector. It has been predicted that this relief could potentially generate an extra half a billion pounds in social investments over the next five years. This is a solid slice of dosh for social enterprises if it comes to fruition.

The Government’s initiatives do not stop there. At the world’s first G8 conference on social impact investing, Prime Minister David Cameron recently reinforced the UK’s commitment in growing the global social investment market. The PM noted that social impact investment strengthens society by providing finance to social enterprises, charities and community groups enabling them to expand their services and develop better solutions to entrenched social problems such as supporting troubled families, providing job and training opportunities for young people or simply enabling people to invest in community projects.

Two new major initiatives will also help. The UK is already home to the world’s first social impact bond at HMP Peterborough, and later this year we will see the launch of the London Social Stock Exchange, which has been backed by the Rockefeller Foundation. The Exchange is an online portal that will become the first information platform to showcase publicly listed social impact businesses.

Working, like most exchanges, it is a shop window for investors and ventures – helping them find investment and make it easier for people to consider the social as well as the financial impacts of their investments meaning more investment, more growth and more impact in communities.

The second important initiative is from Investing for Good, the social finance intermediary that arranged the highly innovative bond for the disability charity Scope in 2012, which is to launch a new Social Bond Issuance Platform for social enterprises, charities and other social purpose organisations to simplify the process of raising investment. It will act as a vehicle to help charities and social enterprises issue bonds.

The platform will enable multiple charities and social enterprises to access the capital markets in a time and cost efficient manner. It will also address the significant shortage in quality social investment propositions that offer a financial return whilst generating measurable social impact. The investment raised by the first organisation to access the new platform will strengthen youth programmes tackling crime and substance misuse and support adults with learning disabilities.

Bryn Jones, fund manager at Rathbone Unit Trust Management, notes: “The bond issued by Scope in 2013 met the social and ethical criteria that our clients are looking for in the Rathbone Ethical Bond Fund. We are optimistic this latest development in the social investment market will offer many more opportunities for our clients to invest for both social and financial returns.”

Social Enterprise UK for one have noted that social investments create a ‘blended return’ for investors – one that combines a social return as well as financial one and can help social enterprises and charities raise capital that they might find difficult to secure from traditional investment sources.

Business orientated
Assessing social enterprises in a wider sector perception context is also important. For example, looking at the attitudes to social enterprises among UK charities has not always met with a positive response, with some in the sector seeing social enterprises as more business orientated than charity focused.

But a report by Social Enterprise UK has noted how this is shifting. The findings showed an ‘overwhelmingly positive’ response among UK charities. This also reveals a range of data that has implications for social enterprises and the wider sector: in terms of an effective business model.

Currently 45 per cent of registered charities identify themselves as social enterprises and more than half of the voluntary sector’s income is earned through trading (selling goods and services) and delivering government contracts, rather than donations or grants. Ninety two per cent said they would like to increase their income from trading and government contracts in the next three years. When asked how they feel when they hear about social enterprise 52 per cent chose ‘excited’, 29 per cent chose ‘interested and want to know more’, 12 per cent chose ‘confused’ and only 7 per cent chose ‘nervous’.

But the crucial part was how charities felt held back by a lack of business skills, poor access to finance and trustee scepticism. When asked what are the barriers to their charity becoming more socially enterprising: 49 per cent chose ‘lack of appropriate business skills or experience among workforce’, 45 per cent chose ‘lack of access to investments/loans’, 42 per cent chose ‘lack of knowledge about social enterprise and where to start’.

But one in five (18 per cent) identified ‘scepticism from trustees’. The majority of those surveyed (90 per cent) said they are concerned that traditional voluntary and grant funding will become more difficult to secure in the coming years. And three quarters (74 per cent) of respondents said there is not enough support available to help charities make the transition from voluntary to trading income, and two thirds (63 per cent) said more government support was needed.

Appraising the overall findings, Social Enterprise UK’s chief executive, Peter Holbrook, comments: “Charities are generally very positive about social enterprise and keen to trade to generate income. Social enterprise is gaining real traction and is better understood by the voluntary sector.” Then he adds: “It isn’t at all unusual for charities to be very business-minded now.” In short, the sector must adapt to a new, quickly developing environment.

Working this theme, Holbrook warns that charities wholly reliant on donations and grants can be vulnerable to external forces out of their control. “We have seen legacies tied-up in a slowing housing market and while the jury is out on whether or not giving is down, austere times are here to stay and we’ve already witnessed some charities closing. The changing landscape is forcing charities to adapt.”

There can be no doubt that as public sector markets are opened up to competition, third sector organisations have to be business-savvy to bid for and win contracts, and be able to prove their social impact. “This is a new way of operating for many,” observes Holbrook.

And he adds: “But the hard-won Public Services (Social Value) Act that came into force this year provides a critically important tool for charities when selling their services to commissioners.” Here, the very idea of enterprise is now at the beating heart of the sector.

Supporting these concepts, Karl Wilding, head of policy and research at NCVO, says: “Enterprise in one form or another is a core part of what many charities do. NCVO’s research shows that the proportion of income the sector as a whole earns overtook the amount it receives in donations around ten years ago, and has continued to grow since. We’re finding that our members are asking us more and more about commercial skills and strategy.”

Social Enterprise UK highlights that charities don’t have to change their legal structure; many social enterprises remain as registered charities. For some charities, a social enterprise will be just one part of their activities that will enable them to make a surplus so they can grow and invest. Many large and well-established charities have set-up trading arms to enable them to increase their income from social enterprise.

Lyon adds comment from the TSRC findings: “We have found that social enterprise are scaling up their impact in different ways. Some are growing their organisations while others are sharing their good ideas to allow others replicate. Many are using their own innovation and growth to start advisory services for others and this way creating a big social impact and having new sources of income.”

Indeed, some charities have successfully changed the way they operate to be more business-like: such as London Early Years Foundation – winner at the National Business Awards 2013 for turning a vulnerable charity into a financially secure social enterprise.

London Early Years Foundation (LEYF) CEO June O’Sullivan says: “Ensuring we had a sustainable model to allow us to support London’s children for decades to come was our top priority. The staff and management team at LEYF have been able to create a structure and culture that will enable us to secure the organisation’s future.”

Another is Auto22, a social enterprise car servicing and repair business, part of the national charity Catch22. It provides servicing and repairs to the public on all makes of cars and light vans whilst offering young people the chance to gain real work experience in a professional working environment.

And St Mungo’s runs a number of social enterprises including the painting and decorating service ReVive. This began in 2009, offering clients who had completed the charity’s painting and decorating programme the chance to work on live contracts, gain professional qualifications, and volunteer on a range of projects.

During its first year of operating, ReVive completed nine contracts, worth £43,000 and trained 13 homeless people in the skills needed to work on-site on live projects. And as the social enterprise arm of the charity Age UK, Age Concern Enterprises offers financial products and services to over one million customers. 100 per cent of any surplus made is Gift Aided back to the charity, and in 2009/10 it returned more than £21million.

No panacea
Again, Lyon offers a level of vigilance within the debate. “We have to realise that this new world of enterprise is both exciting and risky. Organisations may want to move away from a reliance on grants but contracts and other forms of earned income can also make you vulnerable. Charities and social enterprises need good advice both to guide them in developing a business, and honesty when a business proposition just does not stack up. Social enterprise is not a panacea.”

The challenge for social enterprises, adds Lyon, is to make sure those buying services realise they are buying a number of social outcomes. “Social enterprises therefore have to find ways of measuring and demonstrating this social impact in a way that their customers will understand it.”

Looking at this picture in its widest canvas, Graham Lindsay, group director, responsible business at Lloyds Banking Group, says the success of social enterprises is very much a product of our time: tough decisions are being made across the length and breadth of the UK and within the sector to be more cost effective.

“On the one hand the transfer of power from central government to local communities forces the application of a more local lens upon community issues. In addition, the ongoing economic turmoil is responsible for many very talented and capable people losing their job.

“Many of these people have been deeply affected by the economic situation and the impact this is having upon both the UK and, as importantly, within their communities. This has galvanised them and using their experience they are actively seeking ways to make a tangible difference within their own community. They are passionate, committed and they have everything to play for.” On this basis, the best from the social enterprise sector may be yet to come.

Andrew Holt is editor of Charity Times

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