Social Investment

Susan Elan Jones Excerpts

Wednesday 15th June 2016 Westminster Hall

[Susan Elan Jones (Clwyd South) (Lab)]

I beg to move,

That this House has considered support for social investment.

It is a great pleasure to serve under your chairmanship, Mr Chope. I think it was the former New York governor Mario Cuomo who liked to repeat this quote:

“You campaign in poetry; you govern in prose.”

I apologise in advance because many of the practicalities relating to social investment and social enterprises are technical by their very nature, so most of my speech will be in prose, and pretty dry prose at that, but just for a moment I want a word of poetry, or at least a word of vision, to remind us what social investment and social enterprises are all about. As Social Enterprise UK, the national body for social enterprises, puts it:

“Social enterprises trade to tackle social problems”

and

“improve communities, people’s life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community. And so when they profit, society profits.”

As a Labour Member of Parliament, I was interested to learn that it was the great social activist and researcher the late Lord Michael Young, author of my party’s 1945 manifesto, who 53 years later, in 1998, founded the School for Social Entrepreneurs. That perhaps reflects the fact that some of the best ideas for social improvement today come from the social enterprise sector.

Social enterprises are everywhere and can do almost anything. They are coffee shops, cinemas, pubs, banks and bus companies, to give but a few examples. Allow me, Mr Chope, to use the example of a social enterprise in my constituency: Splash Community Trust, which runs Splash Magic. That social enterprise was formed to reopen Plas Madoc leisure centre after Wrexham County Borough Council decided to close it in April 2014. The local community came together to save the facility, which the Splash Community Trust now runs for the benefit of the community. Splash Magic provides not only swimming and leisure facilities for the local community, but employment for local people, tackling health, employment and social problems. It is a great success story. This debate is about Splash Magic and every other social enterprise in our country, and how best we can support them.

[Jim Shannon (Strangford) (DUP)]

I thank the hon. Lady for raising this very important issue. She has outlined one example of how social enterprises can make a difference. Some 2 million people have been employed through social investment, and it contributes £55 billion to the economy and has helped many social ventures. Does the hon. Lady agree that more community groups and small charities need to be aware of the help that there is in accessing funds, such as the Big Lottery Fund and other charitable funds, and that they should not be put off by long, complex forms and in-depth requirements, and be left feeling unable even to apply for community-changing grants?

--- Later in debate ---

[Susan Elan Jones]

I agree totally with what the hon. Gentleman says and the importance that he attaches to social investment—but now back to the prose. In 2012, according to ICF GHK’s report, “Growing the Social Investment Market”, which was commissioned by the Government, there were 68,000 social enterprises in the UK and they contributed at least £24 billion to the economy. Subsequent estimates suggest that the economic contribution could be far higher than that.

Social investment is of course the enabler of social enterprise. It is the use of finance to achieve a social as well as a financial return. The social investment market assists voluntary, community and social enterprises to raise capital that they may not be able to secure from conventional investment sources. It also helps investors to find organisations that will deliver for them a social as well as a financial return. The Charities (Protection and Social Investment) Act 2016, with which the Minister will be very familiar, gave charities the power to make social investments. I welcome that.

As it is often difficult for social enterprises to secure conventional bank loans, social investment is often a more suitable way for social enterprises to finance their activities. A significant reduction in grant funding in the voluntary sector and a move towards a dominance of contracts are two reasons for the increase in the popularity of social investment. Although social investors do expect a financial return, that often decreases in inverse proportion to the level of social return that investors wish to see. As a report for the Big Lottery Fund found, that means that social investors are often willing to accept lower financial returns if the social impact is greater.

Last year, a significant report was published. The “State of Social Enterprise Survey 2015”, supported by Santander, is the most comprehensive research undertaken into the state of the sector. It told of some great successes, such as how the proportion of social enterprises that grew their turnover in the 12 months prior to the report was 52%, well above the comparative figure of 40% for small and medium-sized enterprises. It also revealed that 31% of social enterprises are working in the top 20% most deprived communities in the UK. That is in itself an interesting figure and a sign of the social enterprises’ success.

However, the same research also stated that 39% of social enterprises believe that the lack of availability of funding or finance is a barrier to their sustainability, and although there was widespread support for the Public Services (Social Value) Act 2012, there was concern about its practical implementation. Both points need careful consideration and action.

I am sure that the Minister will want to praise Big Society Capital Ltd, which came about because people such as Martyn Jones, my predecessor as MP, campaigned on dormant bank accounts. Big Society Capital Ltd was set up under the Dormant Bank and Building Society Accounts Act 2008, which defined Big Society Capital as an organisation that exists

“to…enable other bodies to give financial or other support to third sector organisations”.

It was established by the Cabinet Office and launched as an independent organisation with a £600 million investment fund in April 2012. The investment fund comes from dormant bank accounts via the independent Reclaim Fund and four leading UK high street banks. Both my party and the Minister’s are rightly proud of Big Society Capital.

As co-chair of the all-party parliamentary group on charities and volunteering, I was privileged to chair a meeting recently on social investments. An interesting range of opinions were expressed, many by practitioners who deal with social investments and individuals who run social investment funds. There were many excellent contributions at the meeting. I pay particular tribute to John Smart of the transport industry social enterprise HCT Group, with whom I discussed some ideas in greater depth. In the light of the ideas raised at the all-party parliamentary group meeting, I will make the following proposals, and I would be grateful if the Minister responded to them in turn. First, I would be grateful if the Minister considered a change in accounting regulations to allow quasi-equity to be disclosed as equity rather than debt. It is often inappropriate and/or difficult for a social enterprise to take out loans. That is particularly true during their start-up phase, when they need capital for growth.

Under Charity Commission regulations, charities are unable to raise equity—that is, sell shares—or distribute reserves by way of dividend. That poses the question of how a social enterprise or charity can raise money for its development or growth. Quasi-equity investment allows an investor to benefit from the future revenues of an organisation. Under a quasi-equity agreement, an investor would receive a percentage of a social enterprise’s future earnings, which means that if the organisation performs well, the investor receives a good return. Conversely, if the organisation does not do well, the investor will receive little or no return.

In a typical social loan, the investor is investing in the organisation to help it to grow, taking the risk that the growth will occur. That is similar to a conventional equity investment, but the organisation does not issue shares. However, under current regulations, quasi-equity must be disclosed as debt on an organisation’s balance sheet. That can lead to the balance sheet looking over-geared, which is a particular problem when bidding for contracts, especially as commercial organisations tend to raise equity to fund expansion, and so do not face the same issues with their balance sheets.

A change in accounting regulations to allow quasi-equity to be disclosed as equity rather than debt would improve the social investment market. The change would be of great help to social enterprises that work with local authorities. When the social enterprise has the opportunity for open dialogue with commissioning authorities, it can explain its position and balance sheet. However, online portals are increasingly used as the method of bidding for local authority contracts, which provides no opportunity to explain the balance sheet position. Allowing quasi-equity to be disclosed as equity would go some way towards creating a level playing field between social enterprises and their mainstream commercial competitors. It would also be beneficial if contracting authorities could recognise that social enterprises, as not-for-profit entities, have different balance sheets from their commercial competitors.

Secondly, will the Minister consider an increase in the level of social investment tax relief? Individuals making an eligible investment can deduct 30% of the cost of their investment from their income tax liability, but only up to about £290,000 over three years. I know that there are many technical and legal issues, but change would attract more inward investment to the sector and allow social enterprises to expand and build on the good work that they are already doing to benefit society.

Thirdly, will the Minister further discuss the role of social impact bonds? There is clearly a wide range of different views on the subject, and I suspect that the Minister has heard many of them. The National Council for Voluntary Organisations, for example, is concerned about the fact that such a high proportion of the Cabinet Office’s spending—somewhere between £80 million and £105 million, I believe—is being committed to social impact bonds, which it sees as largely untested and as having a costly commissioning model. Although the organisation welcomes opportunities to learn more about how that model could be used to deliver social outcomes, it questioned whether SIBs should be such a high priority for the Cabinet Office, at the expense of other projects, until there is a better evidence base for their efficacy.

Some of us see social impact bonds as an effective way of de-risking contracts for the delivering social enterprise and the commissioning body, and as a good way for social enterprises to tap into available funds and have a social impact without the cost and commitment of loan or quasi-equity structures.

I am delighted to have had the opportunity to make my points today, and I look forward to hearing the Minister’s response.

--- Later in debate ---

[Mr Wilson]

The Big Lottery Fund has some £700 million of grants at its disposal each year, and it is an important part of the funding landscape in this country. It does an awful lot of great work, and I encourage organisations that perhaps have not made funding proposals to the Big Lottery Fund in the past to do so now. The Big Lottery Fund is trying to do a lot to make it easier for organisations to get hold of grants and to ensure that it is focusing on some of the more disadvantaged areas across the United Kingdom.

Returning to my previous comments, I want the leadership that the Government have shown on social investment to continue. The Government are therefore supporting social impact bonds, as the hon. Member for Clwyd South said, and so far we have created 32 social impact bonds, which is more than the rest of the world put together. We have enormous experience of social impact bonds and the social impact bond market. SIBs work on the principle that the Government pay only for the outcomes that we want to see and that we agree should be delivered. Social investors provide the up-front investment to scale up innovative services and are repaid by the Government based on the outcomes delivered.

SIBs are being deployed to get to the heart of some of the biggest challenges that we face as a country. They often focus on things such as early intervention, which will help us to contain the ever-expanding demands on our public services. I recently visited the AIMS—accommodation, intense mentoring, skills—project of the Local Solutions organisation in Liverpool, which is supporting young homeless people into accommodation, training and employment. The programme allocates a trusted mentor to each young person to provide a single contact point, delivering personalised support across multiple services. The programme is financed via a SIB and is a great example of how commissioning for outcomes can give social sector organisations the freedom to do what is needed, when it is needed. SIBs help to foster genuine partnership between the Government, social sector organisations and social investors, supporting organisations that can innovate in ways that big government finds difficult. Perhaps most importantly, SIBs focus on delivering meaningful outcomes for people, and there is more to come.

As the hon. Lady will probably have picked up, the Prime Minister recently announced our new £80 million life chances fund, which is an important next step on the journey and will show how social investment can transform local public services. The fund is a down payment on a social impact bond market that I hope and expect to be worth £1 billion by the end of this Parliament. I want to see more social impact bonds and to support those who want to use this innovative source of capital, which is why we are working with the University of Oxford to create a new centre for excellence that will develop world-leading research in social impact bonds and innovative Government commissioning and will provide the practical support that local commissioners need as part of that process, but there is more to the market than social impact bonds.

[Susan Elan Jones]

The Minister is making some interesting points about SIBs, and the debate will clearly continue among organisations, but may I draw him on to the issues of quasi-equity and of equity and debt, please?

[Mr Wilson]

The hon. Lady made three specific proposals. The first was a change to the accounting rules, which she believes will help social investment by disclosing equity, rather than debt. I understand that, and I am happy to look at it. The second was an increase in the level of tax relief. Obviously I will need to discuss that with Treasury colleagues. Again, I am happy to look at it, but I cannot give her any commitments. Thirdly, she wanted to discuss further the whole investment in SIBs, which I have been trying to address.

I will talk about some other issues, too. Alongside charities and conventional social enterprises, new kinds of businesses are committed to making a social impact through their business without having constraints on how they distribute profits. Such businesses are part of the UK’s already diverse and growing social economy, and an independent review is currently considering how to increase the economic and social impact of mission-led businesses in the UK.

The hon. Lady mentioned dormant assets, which is another area that offers real opportunity. I believe there is a host of such assets that belong, in aggregate, to the public and should therefore be used to benefit society, not specific firms that may be sitting, unwittingly or not, on these stores of potential public value. I have set up an independent commission on dormant assets to explore what additional assets could be released to good causes, potentially transforming the way we support the sector.

We have done, and are doing, a lot to support social investment, but I do not plan to be complacent. There is more that we can do, and I will continue to drive the agenda forward. The breadth and innovation of our social sector in the UK is truly inspiring, as the hon. Lady will have witnessed. We are surrounded by incredible organisations that deliver life-changing services and reach all corners of our society. For example, I visited the social enterprise Clarity, which has been providing employment for blind and disabled people for 160 years. Employment in manufacturing a range of beauty and household products enables Clarity’s staff to develop their independence, build their confidence and play a full part in society. Such organisations demonstrate exactly why I am so committed to the sector, which is why I am determined to build their resilience and sustainability so that they can thrive and grow.

Again, that is where social investment comes in. I want to make it easier for anyone to be a social investor, from individuals to foundations to corporate organisations. I want to help investors to connect, through their investments, with the causes that matter the most to them. I would like to see pension providers offer products in which a percentage of their members’ money goes to social investments. We are seeing that work successfully in the French pension system, in which billions of euros have been channelled to social impact investments. Product providers in this country have so far made limited progress on developing social investment offerings for retail investors, so that area has real potential.

Some organisations are pioneering retail products. Threadneedle, for example, has a UK social bond fund with tens of millions of pounds under management that can be accessed by individual investors. That is just the tip of the iceberg for retail fund offerings. Millennials will be the beneficiaries of the largest intergenerational wealth transfer in our history, and in the future successful investment managers and product providers will need to cater for their preferences. They are more interested in values-based lifestyles than previous generations, which includes consumption choices but also the way they want to invest. The Government want to back those people in the choices they want to make, as well as supporting the incredible social enterprises and mission-led businesses we have in the UK to grow in scale to make an even bigger impact on the lives of beneficiaries and communities that they are changing every day.

I am delighted to have had the opportunity to discuss social investment in Westminster Hall today. Social investment is important because it is part of the long-term future of civil society in this country. We have a truly inspiring social sector here in the UK that contributes not only to the lives of our citizens but to the economy at large. We have all seen at first hand the impact that such organisations are having and the difference that they make to people who need them the most. We all want to ensure that the sector can thrive, which is why I am focused on delivering a sector that is more independent, more resilient and more sustainable over the long term. We can see that social investment is working. There is demand from social enterprises and investors alike, which is why I know that social investment is here to stay and will continue to grow and drive this vital sector.

Question put and agreed to.