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Is social investment relevant when the voluntary sector could face a future £4.6bn hole in its finances?
NCVO recently published their final report on their Financial Sustainability Review of the Voluntary Sector – it paints a bleak picture of the financial challenges facing the sector and that are set to continue.
The sector trends analysis shows that with projected continued reductions in government income (particularly grants), limited increases in income from individuals (particularly fees for services) and inflation impacting costs, the sector will have a £4.6bn funding gap by 2018/19 if it is to maintain its current levels of activity. This is at a time when demand for services is increasing.
This report is important – social investors need to understand the context in which the sector is now operating. Social investment cannot be viable for the sector unless it has sustainable sources of income. We’re supportive of the calls to government to help address this – in July my colleague Christine Chang gave evidence to the Work and Pensions Select Committee inquiry on welfare-to-work programmes, highlighting the need to adequately fund programmes to support the “hardest to help” if charities and social enterprises are to successfully play any role in future payments by results contracts in this area.
Clearly repayable investment can’t replace a £4.6bn funding gap - I often hear of the challenges outlined in this report and how this makes getting to grips with social investment more difficult. But over the past couple of years I’ve seen some fantastic organisations, working hard to maintain services and develop new ideas to deliver impact – and who are using social investment as a tool to help them innovate, increase their sustainability, and grow, in the face of these challenges.
Are more organisations using social investment?
The report states that there is not yet evidence of a significant increase in charities taking on social investment. Social investment will only have been used by a small % of the 160,000 charities in the UK, and will never be relevant to many. However, we do know that social finance providers who have been working in the sector for a long time have seen significant increases in demand in recent years. Loan applications to Charity Bank doubled to £155m in 2014 compared to the previous year, and Big Issue Invest has invested £4m from their Social Enterprise Investment Fund since December 2014, whereas it took 4 years to invest the first £4.5m of this fund. Research and surveys such as CAF Venturesome’s In Demand report, and ACEVO’s poll of Chief Executives last year indicates that more charity leaders expect to take on social investment in the next few years, and think it could benefit their organisation even if they haven’t yet done so.
So how could social investment help address the challenges in this report?
1) Using investment to scale up sources of non-statutory income
Charities are increasingly looking to increase income from trading and non-statutory sources to increase their resilience. For example, in 2012 the disability charity Scope raised £2m investment to help grow income from individuals and charity shops more quickly. Having led on the development of the bond programme as Scope’s FD, I was pleased to see that they have recently repaid their 3 year social investment bond issue, having recruited 100,000 additional donors and opened 20 new shops in that time.
The NCVO report raises the possibility that raising fee income from individuals could conflict with their mission. In some models, often scalable through investment, this conflict doesn’t arise. For example the London Early Years Foundation use a cross subsidy model, providing free child care nursery places in quality nurseries to families who need it, funded through fees paid by families who can afford to do so, and are now funding the set up of new nurseries with social investment.
2) Helping to shift government spend to deliver better outcomes
Social investment models can help increase commissioning of preventative services whilst cuts to government budgets continue. Social impact bond (SIB) models, where investors provide upfront capital to fund services which aim to deliver better outcomes and long term savings, are one route to doing this. These models involve services commissioned on a payments-by-results basis, with the investors taking the financial risk that expected outcomes may not be achieved.
Despite capacity constraints for both charities and commissioners, the proposals that are bidding for development grants from the Big Lottery Fund Commissioning Better Outcomes Fund show that there are some really interesting ideas being developed in partnership between charities and commissioners – with applications ranging from prevention of diabetes to Catch 22’s intervention to reduce incidents of gang violence. Several of these ideas involve partnerships between several charities – combining resources and expertise should strengthen charities’ position with commissioners and deliver greater impact.
3) Foundations making use of all their assets
The report highlights that foundations may need to reconsider their approach as funders given the challenges for the sector – their grant income is an increasingly important income stream and a growing number are now involved in social investment, as they look to deploy more of their resources for creating impact. We’ve seen how a number of grant making foundations are reshaping their role – for example St John’s Hospital in Bath setting up a local social investment fund, alongside education around social enterprise and investment, or the City Bridge Trust Stepping Stones grant programme, which recognises that charities may need transition support to pilot and move from a grant model to a trading & investment model. Others such as Esmee Fairbairn, recognise the critical importance of core funding to the sector, and continue to offer grants for core costs, alongside other support and connections as well as social investment.
4) Supporting smaller charities
There are likely to be growing opportunities for smaller charities to access social investment. For example, the Social Investment Tax Relief (SITR) was introduced a year ago, and incentivises individuals to invest in charities and social enterprises – charities such as FareShare South West have been able to access smaller levels of investment at more affordable interest rates as a result of the relief.
However smaller charities in particular will need more than investment products. The report reflects what many charities will be feeling day to day – with pressures to cut support costs, the “capacity crunch” is worse for smaller organisations who have experienced staffing reductions of 10% (medium)-25% (small and micro). If a charity management team don’t have the bandwidth to plan for a long term strategy, it’s even less likely that they will have space to consider using social investment. Building charities’ capacity to adapt their operations to the current environment will strengthen their ability to access investment if appropriate.
There are investment readiness programmes that can help here - for example Big Potential Breakthrough is a Big Lottery Fund grant programme to fund business support and advice for charities who are considering using social investment. As a panel member, I’ve seen great examples of how small voluntary organisations are responding to the current challenges – for example local law centres who are setting up low cost paid for services in response cuts to legal aid, smaller care charities developing new advocacy and support services for vulnerable people with personalised budgets, and local organisations seeking to provide employment opportunities for vulnerable people through food production.
The NCVO report calls for funding models to be deployed which build the long term capacity of organisations – the new Access Foundation for social investment could have an important role to play here. Access has two roles – one, to fund capacity building programmes for the sector from 2016 (currently collating sector views in their consultation) and secondly, to increase availability of unsecured loans (to be distributed via social finance providers) to help meet the needs of smaller organisations through their “growth fund” programme. Already the first proposals from social finance providers to Access include ideas to build in support alongside loan finance as part of their offer for the sector, including through partnerships with local infrastructure organisations. You can get the latest on the progress of both the capacity building and the growth fund by visiting the Access team’s blog.
5) Making best use of reserves
The report notes that many organisations are using reserves to fund operational costs, and that for many, their reserves position is likely to continue to weaken in future. Repayable investment is unlikely to be a viable solution for a charity like Kids’ Company in an emergency situation that has run out of reserves and has no realistic prospect of sustainable income. However, there are charities that have experienced financial challenges with reduced reserves, but having adjusted their operating model, and with a clear future financial plan, have accessed social investment to support their cash flow needs during a recovery phase.
At this time, it is even less likely that charities will have significant surplus cash to invest in new activities. Retaining precious cash reserves for emergencies or for investing in activities that can’t use repayable finance (such as campaigning), and using investment for funding new projects that will generate future income, may be a suitable approach for some.
If it wasn’t clear before, this report shows that continuing as usual is unlikely to be an option for many charities. As they plan for the future, and how to ensure their financial sustainability, an increasing number of organisations should be considering whether social investment could be part of their future financial strategy, and whether it could open up new opportunities.