Invested interests & Email Exchange

Invested interests & Email Exchange
David Floyd & Laurence Demarco

It’s always worth reading Laurence Demarco’s weekly Senscot social enterprise e-mail bulletin. One of many reasons for that is Laurence is one of the few voices in the UK social enterprise support sector to offer anything remotely resembling clear position on social investment.

This week the Bulletin includes a link to Senscot’s discussion paper on Social Investment in Scotland which merits wider consideration by those of us working in the rest of the UK and beyond. The paper explores the role of the UK’s government’s social investment wholesale finance institution, Big Society Capital, points out why its approach is ‘fundamentally flawed’ and suggests a ‘Scottish Community Bank’ as an alternative.

Roughly speaking there’s three broad positions you can take on the UK government’s version of social investment right now:

1. The Senscot position – social investment (as put forward by the UK ministers and Big Society Capital) is a flawed plan to marketise the third sector.

2. The Big Society Capital position – social investment is a new way of investing positive social change within a market system

3. The position held by many leading figures in the UK social enterprise movement – social investment is a vehicle for profitable social enterprises to scale up and compete with the private sector.

Bizarrely (or perhaps not) the two positions at opposite ends of the political argument – 1 & 2 – are actually based on very similar (and entirely correct) readings of what’s happening. The difference is that Senscot think it’s a bad thing and Big Society Capital think it’s a good thing/the reason that their organisation exists.

Senscot discussion paper offers five points of objections to Big Society Capital, which are neatly split between two good points about the lack of demand – at least at the near market levels of return that Big Society Capital have been ordered to generate – from social enterprises and socially enterprising charities, and three points worth of the kind of tedious third sector self-congratulation that (unfortunately) helps many in social enterprise lobby movement down south justify the fact that they’re ignoring points 1 and 2.

As points 2.1 and 2.2 make clear, most social ventures ‘operate in the wake of market failure’ and are disproportionately likely be the kind of business that do a lot of good while just about keeping going. Big Society Capital, due to the terms imposed on it by its investors – the government through dormant accounts and the ‘Merlin’ banks – has to make investments through intermediaries that will enable it to get its money bank with significant interest.

While the growth of social impact bonds – which Big Society Capital is supporting – does offer potential opportunities for larger service delivery charities and social enterprises to benefit from social investment cash without needing repay investments with interest, they’re no use to the smaller hand-to-mouth social ventures that Senscot is talking about.

Point 2.2 claims that:  ”When BSC realises too few third sector organisations are willing, or able, to use investment on the terms it offers – it will widen its definition of what it calls the ‘social sector’”  but the next sentence: “CEO Mike (Nick) O’Donohoe asked recently whether a Tesco branch – offering employment in a deprived area – could be considered a social enterprise (unfortunately, he wasn’t joking)“ makes clear that everyone knows that process has already begun.

And for many involved with Big Society Capital that was always the intention. Big Society Capital’s chair, Sir Ronald Cohen, has long been a proponent of social investment as an asset class. While social impact bonds – where social ventures get money to achieve social outcomes and investors get a return (or not) based on their successes – are part of that, another part of that is investment in private businesses that offer social returns as well as financial ones.

Unfortunately, Senscot’s alternative vision is based around statements such as: ”Do we want a society where everything is for sale or are there certain moral and civic goods that markets don’t honour – and money can’t buy? Many would argue that much third sector activity falls into this category.”

The po-faced moralising aspect of this line is annoying – because it risks closing down the discussion to people who don’t think business is evil – but the bigger problem is that by asserting a fundamental disconnect between the third sector/social enterprise movement and business, these arguments play into the hands of right-wing commentators who say that real businesses make money and the public sector and third sector partners (including social enterprises) spend it.

You can (and I do) agree with Senscot on the fact that very few social enterprises are ever likely to offer lucrative investment opportunities to capital markets without making the leap to say – more or less – that social enterprises are fluffy vehicles for the imparting of goodness that somehow exist outside the money system.

Operating ‘in the wake of market failure’ is not the same as operating outside markets. Money can (and does) buy the combination of products and/or person time needed to deliver social good. The problem is that, when it’s coming from a combination of poor people, grant funders and the state, it usually doesn’t buy them for a price that enables local providers to make a significant profit.

For that reason, Senscot are right that Big Society Capital is not the right vehicle for supporting the activities of most new and existing social ventures in the UK and they’re equally correct to stress the need to look for alternative approaches to support that activity.

They’re less correct to claim that Big Society Capital is (entirely) about “marketising’ social intervention”. All social interventions take place in markets, the difference in the case of Big Society Capital and its vision of social investment is to generate positive social change in markets where there’s significant levels of profit to be made.

I’ve been very critical of them. Partly because I’m yet to hear a case for what they’re trying to do that justifies putting £600 million from dormant accounts into trying to do it and partly because the UK government has promoted Big Society Capital as a vehicle for growing the existing social sectors in a way that is, at best, misleading and, at worst, cynically dishonest. But it’s too soon to say whether this approach to social investment is going to deliver positive change that wouldn’t otherwise have been delivered.

Unfortunately, the people left done up like a kipper by the natural course of events moving forward are those in the UK social enterprise movement who believed that the arrival of Big Society Capital would herald the emergence of social investment market that would prove they were right all along about there being loads of social enterprises that would become really big businesses if only they got some investment. As both Senscot and Big Society Capital – despite their differing agendas – understand, that’s not how it’s going to work out.

Email Exchange
On 28 Aug 2012, at 08:57, Laurence Demarco wrote:


Thanks for linking your blog this week to Senscot’s discussion paper on social investment. If you’ve no objection – we’ll circulate your critique on Friday; you’re free to post this email; just trying to get some much needed debate going. I would enjoy a couple of hours blethering with you on these issues – maybe that can happen some time?
My sense is that you are more comfortable than myself with the way market values are crowding out non market norms – in almost every aspect of life. I don’t agree that ‘all social interventions take place in markets’; the majority occur between families, friends, neighbours, communities – society’s core operating system.
The para in Senscot’s paper which you call ‘po-faced moralising’ – is a straight lift from the last para in Michael Sandal’s recent book ‘What Money Can’t Buy’, He argues that society needs to decide – if there are certain human and civil functions which need protection from markets. Which, of course, is the core of what this debate is about – you and I just happen to disagree.
Your blog endures and provokes.
Best wishes,

On 28 Aug 2012, at 11:40, David Floyd wrote:

Hi Laurence,
Fine to circulate. Thanks. Should I put the email up as comment to the blog?
It would definitely be good to have a chat on some point.
Maybe on the phone – unless we’re both going a social enterprise event at some point.
I think we definitely disagree on some points but maybe not a fundamentally as it might appear.
What I think is ‘po-faced’ about 2.3, 2.4, 2.5 – in my original draft I was quoting all of them but it made the post a bit long – is the idea that the third sector, by virtue of its social mission, stands apart from (or above) the battle for resources.
Or that private sector values necessarily involve ignoring social responsibilities.
There are lots of things that money can’t buy but what I mean by ‘social interventions’ are social goods that money (or other limited resources) can buy.
Big Society Capital and the proposed Scottish Community Bank are different approaches to supporting those social interventions.
Lots more to say on this.
Thanks for your response and for getting the debate going in the first place.
David Floyd
Managing Director
Social Spider