Keeping social finance on the straight and narrow

Last week I interviewed Nick O’Donohoe, chief executive of Big Society Capital, about his targets for the new £600m social lender.

What was really interesting was his view of the sector – one that was predicated on the idea that social enterprises and charities should be delivering more services.

O’Donohoe’s starting point is one that the majority of workers in the sector, I think, would agree with: the charity sector is better than other sectors at supporting vulnerable and disadvantaged people. If you accept that premise, it leads to several conclusions which make sense, but don’t necessarily make charity workers very happy.

First is that to provide that support, you need someone to pay you to do it, and the majority of that, inevitably, will come from government. Government wants to provide that cash in the form of contracts.

If you want to compete with private sector organisations for that income, you need the same resources they have: a hefty balance sheet and plenty of working capital. In short, you need sector organisations with the sort of scale so they can bully Serco.

It’s hard to grow in scale through any of the existing funding methods: grants, donations, or building your working capital. Nor can you do it just through loans and bonds, which load too much risk on the charity. You need a lot of money quickly, and you need to repay it only if you’re successful.

This type of “risk capital” is traditionally provided for the private sector through selling shares – equity. But since social enterprises cannot usually take equity, there needs to be a set of alternatives. However, developing these is complicated, and needs a full-scale finance market. And Big Society Capital exists to facilitate this.

All of this makes sense. The trouble is it leads us into a place many people don’t like.

One reason people don’t like it is that once you get into the financial legerdemain a complex financial market implies, you can easily find that a lot of cash makes its way into the pockets of consultants and bankers. After all, the Merlin banks, who’ve put £200m into BSC, are going to make a four to five per cent return on their money. A lot of money men are going to draw handsome salaries, too, for setting up social finance funds.

In addition, once the sector itself starts to focus on finance, scale and winning contracts, it could well lose sight of the grass roots, and the people it’s trying to help.

In particular, if you try to get large, you lose your connection with the community, and you have a series of large, Tesco-like charities, blundering around stamping on the people they’re supposed to help.

Beyond that, this process actually ends up turning vulnerable people into commodities. Rather than helping those who need help, you end up focusing on which of them provide the best return.

All of these are pretty worrying and reasonably plausible eventualities. If the world of social finance loses its way, any of them could happen.

But the current system certainly isn’t working. Charities are being forced to work at slave-labour prices for private contractors, or living hand-to-mouth on local authority grants. Brilliant ideas which help vulnerable people in one town never get transferred to another, and too few people are even working to identify what the best ideas really are.

All of this suggests that the thing to do is not to dismiss social finance as a tool the sector doesn’t need, but to use it and keep a watchful eye to ensure that it continues to get used in a way which helps vulnerable and disadvantaged people.