Dr Pathik Pathak

Higher education heretic, social innovation junkie, Arsenal saddo.

the social investment state: part I

There’s been considerable uncertainty about the ways in which the so-called “Big Society” connects up to a broader political economic stance during the “age of austerity”. There is a simplistic account of the relationship which goes something like this: the government has launched an ideological war on the state, and expects the third sector to do the job of the public sector at a fraction of the cost to taxpayers.

While this is a seductive narrative for the Old Left, and is not entirely inaccurate, it doesn’t capture wider trends in the reconfiguration of the state – trends which predate New Conservatism and extend beyond New Labour to the retraction of welfarism under Thatcher. What is novel is that the social investment state has evolved to a point where the government has become less concerned with supporting specific organisations, or even sectors, but with facilitating specific economic, social and environmental outcomes, regardless of who produces them. These ideas are to some extent crystallised in the RSA’s social productivity framework. 

In these series of posts, I’ll be sketching four key features in the role of the “social investment state”: as a co-investor in social enterprise, as a legislative facilitator of social investment, as an enabler of business practices in the third sector, and as a provider of research and ideas. I focus on the first two here.

The state as a co-investor 

With the advent of Big Society Capital the government has set its stall out very clearly. It will not lend directly to social enterprises or charities, but will do so through intermediaries – Social Investment Finance Intermediaries (SIFIs). The government recognises it has neither the bureaucratic means nor market intelligence to make the sheer volume of investment decisions to grow the social economy, so it has wisely delegated these responsibilities to SIFIs like Triodos Bank, CAFVenturesome, Big Issue Invest, Charity Bank, and others.

Primarily, the government has imagined BSC’s role to be one of a co-investor, able to operate to plug investment gaps by playing the role of a cornerstone (first in) or capstone (last in) investor. It also has other objectives, however: to build the size, scale and diversity of the social investment market through capitalisation to enable SIFIs to leverage private investment and to provide working capital to pilot new investment products for the social economy. Rather than supporting the growth of the social enterprise sector, BSC is focussed on the development of the social investment market, and in particular, on the scope for an injection of patient or ‘soft’ capital in to the market.

This role is vital  given the identification by a number of organisations, from New Philanthropy Capital to the Office of the Third Sector itself, that the social investment market is hindered by a paucity of patient capital able to tolerate sub-market returns over a sustained period of time. BSC’s willingness to go in as a cornerstone and capstone investor (as it already has with ThinkForward Social Impact Ltd and the Community Generation Fund, among others) will be crucial to stimulating investment, as will arrangements which see it taking differentiated returns to offer greater confidence  to other investors, and acting as a guarantor to secure repayments.

Unless the government is willing to send positive market signals through these potentially loss-making or marginal return co-investment practices  it will struggle to grow in size and meet the investment needs of the social economy.

The state as a legislative facilitator

Another area where the state has a pivotal role to play is in regards to legislative measures to facilitate investment. To date this has predominantly taken the form of the Community Investment Tax Relief (CITR).  This gives investors in Community Development Finance Institutions (CDFIs) tax relief to the equivalent of 5% of the amount invested each year, up to a maximum of 5 years. This year, however, the government introduced proposals to cap CITR to #50,000 (or a quarter of income, whichever is higher). While the NCVO has claimed the move will do “untold damage” to the social sector, Big Society Capital has been less concerned. Given that CITR has stimulated less than 10% of the investment in CDFIs over the past 10 years this might not be the blow some commentators have claimed. Despite that, the inclusion of CITR on the cap on tax relief is perplexing given the government’s avowed commitment to social investment and has been the source of dissent within the ranks of the coalition government.

In the next post in this series I will focus on the role of the social investment state in making social ventures investor-ready and building the market through research and the provision of impact evaluation tools.

If you’d like more information or more detailed analysis on all or any of these individual themes, please contact me at P.Pathak@soton.ac.uk.  I am currently available for expert consultancy and media work. Fuller explanations will be made in my next book,  titled Social Investment Made Simple and due for publication in 2013.


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This entry was posted on June 13, 2012 by in social enterprise, social innovation, social investment.