UK: Funding The Big Society

Last Updated: 4 August 2011
Article by Jonathan Brinsden

Jonathan Brinsden wonders precisely where the money to fund the Big Society project is intended to come from and takes a look at the various alternative investment initiatives that are being suggested for this purpose.

Whilst the concept of the Big Society has sparked widespread debate and interest amongst the media, policymakers and the general public, it has proved to be remarkably difficult to define. To some it is an ideological smokescreen providing a mandate to those on the right of the political spectrum to roll back the state in reaction to the previous administration's 'Big Government' approach. To others, it represents a fig leaf for the colossal cuts announced as part of the Comprehensive Spending Review (CSR), which may see the government's current £12.8bn contribution to the sector fall by as much as £5bn. The new coalition government, however, would tell us that the purpose of the Big Society is to effect a cultural shift towards community empowerment, civic engagement and a new era of philanthropy. It is perhaps fair to say that, in this post banking crash environment, a genuine appetite exists for a shift in the tectonic plates which divide the markets, state and civil society.

Whilst it feels that we are being bombarded by Big Society policy initiatives, these pale into insignificance in comparison to the implications arising out of the radically changing funding landscape and the enormous stress which this is placing on the sector. The discretionary nature of sector funding has meant that income streams have always been fragile and so it is perhaps important to review what innovations or developments are being proposed to pick up the slack of the CSR cuts – in short, how will the Big Society be funded?

Private funding

Private funding encompasses donations, philanthropy, CSR and volunteering. Recent data indicates that the recession has significantly impacted on philanthropy, equating to a £700m drop in the total amount donated to charitable causes; as Martin Brookes notes, fewer people are giving and those are giving less. It is therefore more important than ever to maximise the impact of those donations. For example, the Charities Aid Foundation estimates that £70m is lost to the sector in unclaimed gift aid, causing many in the sector to lobby for an 'opt-out' rather than an 'opt-in' system as is currently the case. Another proposal which has been taken up by Cancer Research UK is to introduce a new gift aid composite rate of 30p for every £1 donated but this proposal would require higher rate taxpayers to lose their right to claim any personal tax relief on their donations.

As noted already in this bulletin, the government is said to be reviewing proposals to introduce lifetime legacies, which have long featured in the talk of philanthropy tax planners in the USA but has thus far failed to take hold in the UK because of problems connected with gifts with reservation rules and HMRC's concerns about abuse and about valuation of assets. The principle of tax deductions in relation to gifts of arts, antiques and other tangible personal property, again is widely used in the US and would help compensate the arts and heritage sector, for the cuts that sector is facing, but the Government is only looking to consult on a very limited form of relief here.

Volunteering

The concept of the Big Society places a great emphasis on localism and incentivises citizens to play a greater role in their local community. The levels of volunteering have not greatly increased since the 1980s and there is evidence that it has fallen in 2009/10. To combat this, the government is backing charity-led initiatives like the Big Society Network's 'Your Square Mile' project which will offer a one-stop shop of local information and resources that will better enable community projects to get off the ground. Two councils are taking a Nectar scheme approach by offering Big Society reward points in exchange for volunteering which can be redeemed in shops and restaurants in exchange for good deeds. Compulsory volunteering will also be a feature of welfare proposals for the long-term unemployed with jobseekers being placed on four week community placements to help people find a route back to work. CSR initiatives are now being taken seriously by companies who are willing to donate the time and expertise of their employees through intermediaries like National Talent Bank. We are also seeing a resurgence of co-operatives and mutuals, with the Cabinet Office throwing weight behind community-led programmes to operate or deliver local public services.

Government funding

Leaving the implications of the comprehensive spending review to one side, the problems associated with commissioning and procurement for small not for profit organisations are well documented. There are mixed signals emerging in relation to how the government will improve the commissioning process going forward, not least of which is that the new Compact (i.e. the agreement between the government and the voluntary sector) contains fewer commitments than the original. Furthermore, the Commission for the Compact which is the independent body charged with safeguarding this relationship was a victim of the recent bonfire of the quangos and is to be scrapped. In contrast to this, the Cabinet Office has indicated that new legislation is on the way designed to help level the playing field and enable the whole mix of providers to participate in public service delivery. Nick Hurd has said that this new legislation will represent a change in direction and will help overcome the overwhelming bureaucracy of the existing framework where tendering costs approach 20% of the cost of the service as a whole, which means that only very large providers can immediately participate. What is not clear is how, if at all, the inequalities of VAT as between public sector and private sector service providers will be addressed.

Commercial sources

Given the impact of the CSR, it would appear that private sector funding solutions will be needed but there are limited options available. Retail banks will not lend to civil society organisations due to generally low returns, the insecurity of contract based work and the perceived absence of professionalism in the sector. This puts greater responsibility on specialist lending sources such as Charity Bank and the Co-Operative Bank but even these types of specialist institutions have expressed concerns about the risk profile of the sector. The proposal to establish the 'Big Society Bank' which will provide finance to charities, social enterprises and community groups from the estimated £400m sitting in dormant bank accounts has already encountered difficulties. The difficulties of tracking down owners of dormant accounts means that the Bank is now expected to begin with reserves of as little as £60m, which will not be enough to cover the spending gap.

As a consequence of these lending difficulties, there is a new emphasis on social enterprise investment and it has been encouraging to see a multitude of specialist funds appear over the last ten years specialising in this area,

perhaps the most notable of which is the Bridges Ventures Fund which has provided over £120m of private sector investment in social enterprises since 2002. There are also new innovations being implemented and piloted such as social impact bonds whereby the investor receives a return in the event that a positive social outcome is achieved; community bonds which yield modest interest but enable people to support charitable causes knowing their money will be returned at the end of the investment period; and ideas like the Social Stock Exchange which will enable social businesses to raise equity finance from City investors. A key challenge in this area will be educating investors about the social enterprise market, which is not straightforward and does not have a single set of characteristics and therefore will be difficult to define as an asset class. This will require development of a new language for and method of assessment of social return which potentially only relatively sophisticated investors will understand.

Charities

Grant-making charities are still recovering from the devastating impact of the recession on their investment portfolios, and the continuation of low interest rates continues to reduce their grant-making capacity. Whilst charities can make social investments, not clearly driven by profit, generally speaking, this is only permitted if the investment directly advances a primary purpose objective. Indeed, this type of programme-related investment is not an investment in a conventional sense. This restriction can significantly inhibit charities from investing in this sector and the Charity Commission has been reviewing its CC14 guidance on investments to encourage charitable foundations to consider social investments as part of their overall portfolio where they have power to do so.

It would appear that the policy agenda is creating specific legislative and non-legislative powers to catalyse a cultural shift towards the Big Society but it is undoubtedly true that the impact of the CSR has made income streams more precarious than ever and has created enormous challenges for social enterprises and charities, which will make it difficult for them to take advantage of opportunities arising in this new environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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