As time ticks on, here’s what the UK’s social sector needs now from social investment

Pioneers Post, by Niamh Goggin, Helen Heap and Richard Litchfield
15th April 2020

With many social sector organisations unable to benefit from either government aid or the new emergency loan offer, there’s never been a better time for social investors to rewrite their rulebooks. Niamh Goggin, Helen Heap and Richard Litchfield suggest three ways they could start.

When the going gets tough, charities, voluntary organisations, community groups and social enterprises get going. For example:

  • The National Emergencies Trust, recently established, serves as a single point of appeal to raise funds for distribution during national emergencies. At the time of writing £25m has been raised quickly through its Coronavirus Appeal (with another £20m provided by the government), with £12.5m distributed so far. The donations are providing emergency funding to charities and community groups supporting those most vulnerable to Covid-19.
  • St John Ambulance volunteers are working at the NHS Nightingale Hospital in south London and there are plans to send hundreds more volunteers to emergency hospitals across the country. The charity also supports the NHS through 100 ambulances which are deployed to help coronavirus patients.
  • Lewisham Covid-19 Mutual Aid group is an example of the many local groups that have quickly formed to enable neighbours and community members to look out for each other, to help contain the spread of the virus and support those most at risk. Help can include offering and delivering essential items, making calls, or just offering a friendly voice on the phone if people are lonely. In the past month, 3,000 volunteer-run groups have been launched across the country, from Thurso in Scotland to Penzance in Cornwall.

All of those organisations, from the largest national charities to the smallest volunteer group of local residents, need advice, support and funding. The needs range from funding to keep staff active and employed to advice and support on safeguarding to keeping your workers and volunteers as safe as possible from the virus.

 

The problem: nose-diving income

Yet, just when they are most needed, charities and social enterprises are facing collapse. As demand for services and support soars, income has nose-dived. NCVO, the national organisation representing the sector, has estimated that charities will lose at least £4.3bn of income over 12 weeks. Netting off the £750m of government funding recently announced means that the sector is set to lose £3.55bn in very short order. Charity shops have closed, fundraising events and activity has been cancelled, and many more will have to close in the next few months. Social Enterprise UK has found that social enterprises have been forced to close, even when they work with vulnerable groups who need their services more than ever. And as Karl Wilding, CEO of NCVO, says, “Many organisations have very little emergency cash to tide them over, and even those that do will run out in a matter of weeks”.

Even large organisations providing vital services are under threat. Take for instance St John Ambulance, which requires £1.6m a week to deliver Covid-19 operations, according to CEO Martin Houghton-Brown. The organisation has lost income from its training and events businesses to the tune of £1.5m a week. Thankfully, they will now be supported within the government scheme – but many others will not.

 

What’s not the solution

“We feel your pain”. Social sector organisations have been snowed under by emails and social media ‘reach-outs’ offering moral support and sign-posting. Government agencies, service providers, banks, membership organisations are contacting charities and social enterprises to say that they are “here for you during these difficult times”. They are sharing and resharing the same guidance.

The government’s Coronavirus Job Retention Scheme reimburses 80% of workers’ wage costs, but on condition that those in the scheme stop working. Charity employees cannot even volunteer in their own organisations, without losing their own income.

For organisations that did not have strong enough balance sheets to take on debt before Covid-19, loans – even if they come with favourable terms – will not be suitable

In the case of not-for-profit organisations, large or small, the income they lose will never be regained. More importantly, if these organisations are forced to close for good because they run out of funding, we lose their energy and commitment, their skills and experience, their networks and contacts, at a time when we need them most.

For organisations that did not have strong enough balance sheets to take on debt before Covid-19, loans – even if they come with favourable terms – will not be a suitable way to get cash support to them during or after the crisis. The sudden loss of income will mean that such reserves as were available previously will be rapidly disappearing, if they haven’t already, and that means that balance sheets are now considerably weaker than they were before. This is both a liquidity and a solvency crisis for many social organisations.

 

Real solutions

NCVO’s Karl Wilding has led a broad coalition of organisations researching and making the case for solutions that address the existential crisis for these vital organisations. As a result, the government agreed last week to a £750m charity package for frontline charities and volunteers supporting the response to the Covid-19 crisis, especially where they are alleviating pressures on the health service or providing support to people suffering from the economic and social impact of coronavirus. While we await the details, what we know so far is:

  • £360m will be allocated to charities providing key services and supporting vulnerable people during the crisis, with hospices receiving £200m.
  • £370m will be allocated by The National Lottery Community Fund to small and medium-sized charities who are making a difference to the Covid-19 response in local communities.
  • A minimum of £20m for the National Emergencies Trust (as mentioned above).

This is an unprecedented intervention at scale and will help many organisations. But, given the size of the sector (there are around 200,000 registered charities in the UK, not to mention many more types of organisation), it will only reach a minority of charities and social enterprises. For this reason, it has divided opinion. As Caron Bradshaw, CEO of Charity Finance Group summed it up in a recent blog: “I am delighted with what has been given. I am disappointed at what has not.”

The government package understandably targets organisations on the frontline… but means that many parts of the sector will remain under-supported

This is a package that perhaps understandably targets organisations on the frontline of the Covid-19 response – but because of this differentiation it means that many parts of the sector will remain under-supported. The early signs are that community business and community newspapers, leisure and cultural trusts, social enterprises (not registered as charities) and medium-sized charities (excluding hospices) will be most at risk. David Floyd has put the potential loss at “10s of 1000s of organisations”.

 

How should social investors respond?

Within this rapidly-evolving environment, social investment now needs to find its place and make its contribution. Big Society Capital, as the largest supplier of investment capital, is pivotal in setting the horizons of the ambition. It has been fast to craft its response, using its significant resources and balance sheet (value £558m), in order to:

  1. Produce materials and a guide to navigate funding during Covid-19.
  2. Announce the Resilience and Recovery Loan Fund, with £100m of capital, which will extend the government’s interruption loan fund for the social sector. This will be managed by Social Investment Business and distributed by Social and Sustainable Capital, Big Issue Invest and Charity Bank.
  3. In conjunction with the Access Foundation, waive all interest on the Growth Fund programme for six months and extend its life to give flexibility for capital and interest holidays ‘where appropriate’.

These efforts are speedy and significant, and yet in these unusual times they feel somehow hollow and leave the nagging question of whether they are anywhere near enough to meet the scale of the problem. After all, do social enterprises and charities in crisis really have an appetite to take on debt (even if the first 12 months are interest and fee-free) in order to rebuild?

Entrepreneurial social sector organisations, due to diversifying and reducing grant dependency, now suffer from not having a benefactor to turn towards

Unfortunately, it appears that due to the design of the government support programmes, the axe will fall disproportionately on entrepreneurial social sector organisations, many of whom are served by social investors. These organisations have missed out on government schemes and, due to diversifying and reducing their grant dependency, they now suffer from not having a benefactor to turn towards.

This is summed up by Vidhya Alakeson, CEO of Power to Change, the foundation for community businesses. Most community businesses, she told us, may miss out on charity and business packages “and won’t be able to service debt even at preferential rates”.

Three recommendations for social investment

In light of the unprecedented threat to the social sector, and especially social enterprises and community businesses, we make these recommendations for what is needed from social investment:

  1. An emergency fund to provide equity and core grant funding in order to strengthen the balance sheets of social investment firms.
  2. A significant income support fund to provide very soft / patient capital to charities and social enterprises who have seen their trading income halt but who cannot access government schemes. This would complement the emergency Resilience and Recovery Loan Fund and should be in the order of £100m and managed by social investment finance intermediaries.
  3. Business support in the form of £20-30m of grants for recovery and rebuilding activities. A post-investment support programme of this type could be channelled through an existing initiative, such as Access’ Reach Fund, but needs to have a wide scope, made available to all existing borrowers, not just the Growth Fund portfolios (Big Society Capital has invested in 1,209 organisations, according to its website) and cover the long tail of this economic crisis which is likely to be at least 18 months.

Big Society Capital’s money is constrained by Treasury rules but there has never been more opportunity to rewrite the rulebooks

It behoves all funders including trusts, foundations, philanthropists and social investors to play a generous leadership role at this time. In this light, Big Society Capital has never more been needed. We have been told for many years now that their capital is constrained by Treasury rules but there has never been more opportunity to rewrite the rulebooks.

Big Society Capital currently exemplifies Maslow’s hammer; “if all you have is a hammer, everything looks like a nail”. If your solution to the collapse of social sector income from the crisis is debt, you need to think again.

  • Niamh Goggin is the founder of Small Change; Helen Heap is founder and CEO at Seebohm Hill Ltd; Richard Litchfield is CEO at Eastside Primetimers.