Social projects ‘must consolidate’
By Nick Loney
Community development finance institutions will not attract significant amounts of private investment for their projects until they offer commercial rates of return, an official report has warned.
Last week’s report for the Government’s Small Business Service warns that CDFIs will fail to achieve their goal of stimulating social enterprise in poor neighbourhoods unless they are able to persuade investors that there are sound financial, as well as ethical, reasons for backing them.
It warns that CDFIs will have to work more closely together and become more focused in their approach to have a greater impact.
CDFIs exist to fund enterprises that struggle to borrow cash from mainstream financial institutions or are reluctant to do so. The number of CDFIs has mushroomed over the last few years, but industry experts fear that unless they are able to attract much larger amounts of private investment they will have a limited impact.
The report from Marcia Harris, chief executive of Islington Enterprise Agency, recommends the establishment of a £200 million government bond to help social enterprises and small businesses in deprived areas so they can offer market-competitive terms in order to attract large-scale investment.
It suggests extending community investment tax relief (CITR), a tax break introduced in 2003 to attract investment in CDFIs, to the bond to make it even more competitive with similar-sized commercial investment vehicles.
The report says CITR has so far attracted only ‘relatively small scale’ investment in poor areas because CDFIs have largely failed to persuade potential investors that there are returns to be made that would make the tax break worthwhile. To overcome this, it urges that CDFIs consolidate their activities under larger holding companies to focus their activities in higher-growth areas and on handling larger inputs of capital.
Ranis said: ‘There are two main problems facing CDFIs. One is that investors don’t want to invest in them, the other is that there aren’t enough enterprises capable of taking on that investment. CDFIs need to focus more on where there is growth potential to get the returns that will attract investors.’
The report says the heritage and creative sectors have the biggest growth potential for CDFIs, with schemes such as the Snow Hill Project in Wolverhampton, having the potential to ‘spur regeneration and foster social enterprise’.
‘Show Me the Money’ is available from www.regen.net/doc
Source: Regeneration magazine