If social investment is the answer, what is the question?

At a recent roundtable on social investment, I was reminded of the famous scene from Hitchhikers Guide to the Galaxy when the Ultimate Answer is revealed.

“Is that all you’ve got to show for seven and a half million years’ work?”

“I checked it very thoroughly,” said the computer, “and that quite definitely is the answer. I think the problem, to be quite honest with you, is that you’ve never actually known what the question is.”

Similarly, social investment can occasionally seem like an answer in search of a question.

Given all the time and energy going into growing the social investment market, it may be worth taking another look at the questions that we think it can and can’t answer.

Key questions for policy makers

1.  “How can voluntary organisations play a stronger role in public services?”

Social investment can play a role in supporting organisations to deliver public services – providing working capital and helping manage cash flow issues. But the availability of social investment will not, in itself, enable more voluntary organisations to deliver public services.

Good commissioning is the key to successful public service reform. Crucially, commissioners need to engage with voluntary organisations at the earliest stages of commissioning. Charities are often well-placed to advise on local needs, service design issues, and the added ‘social value’ that it may be possible to achieve through commissioning a service in a certain way. Government will need to take the lead in transforming commissioning – through its Commissioning Academy and giving strong guidance to local authorities, in particular. This goes hand-in-hand with making procurement processes more accessible for voluntary organisations, so they can bid to deliver services.

2. “How can we make payment-by-results work better for voluntary organisations?”

Voluntary organisations understand the idea of payment-by-results, but in practice, many are finding PBR programmes, such as the work programme, difficult to take part in. One of the barriers has been access to finance.

But improving access to finance will not by itself solve the payment-by-results problems.

There are bigger changes required, for example, to defining outcomes, improving sub-contracting arrangements, and supporting proper evaluation.

Government must consider the risks it is passing on, including the financial risks of failure. Voluntary organisations taking on debt, in order to deliver payment-by-results contracts, will be in particularly difficult positions if they cannot report the required results in the right timeframes. With little tolerance for failure, how many will be able to take chances with innovation or go the extra mile to reach those most in need?

In some cases, social impact bonds may be an elegant solution to this knotty problem. Passing the financial risks back on to private investors. Yet Clearly So’s ‘Investor Perspectives’ report provides salutary reading:  investors are also likely to say that “protection of the downside is more important than potentially high upside”.

Again, success will depend on better commissioning.

Key questions for voluntary organisations

1. “How can we increase our services to meet rising need?”

Social investment may be an option to expand your services, but it will depend on knowing where your future income is coming from.

For example, if you have a local authority contract, then it may well be feasible to take out a loan to cover costs in the meantime. However, if you will be relying on trading or donations, a more detailed plan would be needed to be sure that you have sufficient income to make any repayments.

However, social investment will not be suitable for many organisations. Often, voluntary organisations exist to provide services that no one else will pay for – for example, reaching out to the most vulnerable people or promoting good causes like animal welfare. In many cases, grants and donations will be more appropriate sources of funding.

2. “How can we generate more income in the future?”

Social investment could be a good option for a voluntary organisation that wants to invest in an asset or other means of generating future income.

Scope, a national disability charity, has issued a bond that will raise funds to establish their new network of charity shops.  Meanwhile at NCVO, we have taken out a loan to build a fourth storey on our building. The plan is to rent out this office space to other voluntary organisations, thus generating new income and deepening our partnerships.

3. “We’ve lost our grant/contract – where else can we get funding?”

Unfortunately, social investment is unlikely to be a suitable replacement for other funding streams.

Investors usually require an organisation to be in robust financial position. As Clearly So/NPC state in their recent report: “Critical to an organisation’s suitability for receiving investment is its ability to generate sufficient revenue to repay any finance.”

Furthermore, the hole in the sector’s finances is far larger than the size of the social investment market. Voluntary organisations stand to lose £3.3bn as a result of Government spending cuts alone between 2011/12 – 2015/16. Whereas the estimated size of the social investment market is around £200m at present.

NCVO Policy Team’s blog

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Charlotte Ravenscroft was NCVO’s head of policy and public services. Charlotte’s wrote about funding, public service delivery, and strengthening the evidence base for voluntary action. She has also worked at The National Lottery Community Fund and the Department for Education.

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