Charity sector is ‘in danger of being seduced by attractions of social finance’

Charity sector is ‘in danger of being seduced by attractions of social finance’ 
Civil Society, by Andrew Hind

"The voluntary sector prostituted itself to the government in 1997, became too dependent on statutory funding, and is now facing the consequences," claimed professor Paul Palmer in a hard-hitting critique of social finance and social enterprise at Cass Business School last night.


On the day that the Prime Minister launched Big Society Capital, professor Palmer questioned whether the sector is about to make the same mistake all over again and be “seduced” by the current government’s enthusiasm for social finance as a major new source of funding for charities.


Professor Palmer, who is associate dean at the business school, with responsibility for ethics and sustainability, argued that the charity sector currently benefits from being extremely lowly-geared:


"The mess we are in as a country today is due to over-lending by the banks, and over-borrowing by both businesses and individuals," he said. 


"Lloyds bank was romanced by Gordon Brown into buying a pup when it agreed to acquire HBOS in 2008; is the sector now being seduced into buying a pup as charities are encouraged to take on borrowings in the form of social impact bonds (SIBs) and the like?"


“We need an analysis of the real agenda,” claimed Palmer, who expressed disappointment that the Prime Minister wasn’t pressed on this issue by sector leaders attending yesterday’s Big Society Capital launch. 


Painting a picture of a more volatile future for many charities, Palmer highlighted the “donation displacement” risk that he believes will also come with the introduction of SIBs and similar products.


“Let’s imagine a high-net-worth individual with £100,000 to donate to charity,” he said. 


“Following the tax-relief cap introduced in the Budget, that person will now only donate £50,000 and is highly likely to put the remaining £50,000 into a SIB. The first £50,000 will be philanthropy, the second is just a private equity transaction by another name, where the investor expects his or her capital back, with interest, in a few years’ time.


“I don’t remember the Good Samaritan saying ‘I’ll give you £100, but I want it back with 15 per cent interest in three years’.”


Palmer emphasised that he is not against social impact bonds in principle, noting that the charity courses at Cass actually teach how to establish an SIB and construct a business plan to obtain such funding. His concern, however, is that this form of finance is appropriate for some charities, but not all, and social impact bonds must not be seen as a replacement for donations.


These concerns about the longer-term implications of current developments in charity financing led professor Palmer to question the way the reputation of social entrepreneurs will develop in the future: “The social entrepreneur is currently seen as a heroic figure, much like the British soldier,” he said. “But history teaches us that in the long-run we often treat our soldiers poorly; I think the same may happen to social entrepreneurs.”