Toby Johnson
18 April 2014

Designing a sustainable financial ecosystem for social enterprise

Financing social enterprises at every stage of their development – from grants through loans to social ventures and social impact bonds – Toby Johnson reviews the Social Entrepreneurship Network's Warsaw peer review meeting.

SEN returned to its spiritual home in Warsaw last week for the third in its series of peer review meetings – this time on the subject that interests everybody most – finance. The meeting was exceptionally well-attended, with participants this time not only from Hungary but also Slovenia. Another welcome addition was a representative of the Greek employment ministry – who made a surprise invitation to participants to the Presidency conference in Crete on 10th-11th June.

The review was chaired by Malgorzata Lublinska from the renamed Polish Ministry of Infrastructure and Development, and the expert was Karol Sachs from Crédit Coopératif.

Karol’s wide network of contacts, through FEBEA, the European Federation of Ethical and Alternative Banks, gave us access to a wealth of good practices from around Europe to add to the three cases proposed by network members. The group thus had a very wide range of experience to draw from. It also opened up possibilities for transnational collaboration to strengthen finance availability in central European countries.

The meeting’s work was divided into four sessions, dealing with public finance, local ethical investment, social impact financing and future planning. Unusually for finance seminars, the emphasis stayed on how the funds are used to benefit people, not on financial technicalities.

The network’s procurement practice meant that we ate and drank courtesy of social co-ops, with dinner at the Galeria Apteka Sztuki (Pharmacy of Art Gallery) art gallery-cum café. The visit finished with a site visit to EKON. This social enterprise employs 1,200 people, 90% of whom are mentally disabled. It is 60% funded by sales, and 40% by wage subsidies. It estimates that its activity saves the health service around €1.6m a year. Its first line of business, employing 900 people, is as a personnel  agency that hires out permanent workers to businesses such as the Carrefour and Auchan supermarket chains. Its other and more visible activity is sorting and recycling waste. It has a contract for the kerbside collection of waste which is presorted by residents into different coloured sacks. Its 300 workers – affectionately known as ‘ants’ (mrówki) – collect some 300 tons a month. It has chosen to focus on the Ursynów district, which has a population of 180,000, because it has a concentration of high-rise flats, for which EKON’s system is well suited. Surprisingly, its contract is not exclusive and it has to compete for waste with other utility companies (see the presentation of EKON >).

1. Using the Structural Funds

1.1 Start-up grants

The first case presented was the use of global grants to support social enterprise start-ups in the Czech Republic. Petra Francová of P3 gave a very well-considered presentation, which brought out some cautionary tales about designing start-up grants. (see the case study >)

At first, the application process was unsuitable since, being based only on expenditure and not income generated, it allowed no way to evaluate a social enterprise’s business plan. It thus gave beneficiaries no incentive to build a successful business. This was remedied. The second major misstep was that the business support services originally planned were never implemented.

Despite these teething troubles, the scheme went on to allocate €20m of grants to 157 enterprises, which has resulted in the creation of 827 jobs at an average cost of €22,000. For 2014-2020 an enlarged scheme is on the stocks. However the need is also evident for support to social enterprise advisers such as P3.

1.2 Loans

In Poland, TISE was presented by Joanna Wardzińska. This financial institution was originally set up in 1991, and in 2008 was taken over by the French co-operative bank Crédit Coopératif. It manages €32m in assets, and has loans outstanding to 320 social enterprises in Poland, Hungary, Romania, Slovakia and Slovenia (see the case study >)

It has won all five of the regional tenders to administer a €6m pilot loan fund for social enterprises being set up by the public bank BGK Its targets are to make 250 loans by 2015, to deliver 4,000 hours of advice, and thus to create over 50 jobs. The maximum loan is of €25,000. Things are going well: so far, it has made 115 loans, and used up 40% of its fund.

There are interesting possibility for international co-operation between TISE and social finance organisations in neighbouring countries.

Michał Radziwiłł described CoopEst a fund for the development of co-operatives in central and eastern Europe, which was created in 2006 and has €40m in assets. Supported by the EIF, it makes long-term loans and currently has 40 borrowers in 10 countries – many of them in microfinance. He emphasised the complementary nature of grants and loans: for many of CoopEst's clients, their equity comes from grants, and their working capital from loans. So you can’t say that one is more important than the other (see the presentation >)

1.3 Working capital

A short presentation came from Tamara Trento on Lombardy’s innovative JEREMIE ESF scheme, which matches ESF with private capital to make loans to co-operative members, which they invest in the shares of their co-operative, thus building up their working capital. The scheme has invested €31m in 7,800 people (4,000 of whom are disadvantaged) belonging to 507 co-operatives.

1.4. Discussion

Karol Sachs commented that public investment in social enterprises represents not an expense but a saving: in France it costs €12,000 a year to maintain someone out of work, whereas each euro invested in social enterprises returns €1-09 in the very next year.

Karol also mentioned the new French scheme of épargne salariale solidaire, under which pension funds that invest between 5% and 10% of their assets in the social economy can brand themselves as solidarity funds. This scheme effortlessly raises €160m a year.

It was oft repeated that “everyone prefers grants”, but for the best rate of success, different types of finance and consultancy support should always be combined. Certainly for most associations opening up an enterprise activity, grant finance is necessary in the start-up phase. However long-term reliance on grants can be self-deluding.

Taking a loan demands hard-headed thinking and discipline in researching, compiling and then implementing a business plan. This different mindset is crucial to business success.

In discussion it emerged that a number of countries are investigating ‘one stop shop’ grant + loan + support combinations, and that REVES is preparing a proposal to set up a tutoring system covering 11 countries.

2. Programming the Structural  Funds

The question on everybody’s minds, and the purpose of SEN’s existence, is to improve the performance of the Structural Funds in supporting social enterprise. Piotr Stronkowski, ex-deputy director of the Polish ESF department, presented his study analysing how Poland’s Managing Authorities should plan their work. He estimates that about half of Poland’s 2,500 NGOs (with turnovers above €2,500), co-ops and social enterprises have held back on investments because they could not raise funds – the average gap being €27,000. However they don’t like to borrow – it is only the 10% of larger, older organisations that take out loans. At the same time financial institutions are not interested in this sector. Banks and clients live in two separate worlds – there is a market failure. The investment that hasn’t happened totals somewhere between €12m and €160m.

The proposed design of the ESF and ERDF operational programmes is therefore as follows:

For start-ups:

grants + supplementary loans (ESF)

For businesses over 1 year old:

loans (ESF)

For investments with a high social impact:           

grants (ERDF) – e.g. up to €375,000 over 7 years at 2.75% interest

For job creation:

a hybrid instrument – e.g. a loan of €7,500 over 4 years per job created

The scheme would be nationally managed, but with regional intermediaries who can offer high-quality advice. Guarantees and equity investment should also be considered.

3. Gearing up local ethical funds

A good case of the public sector gearing up a local fund comes from Göteborg in Sweden, which is the first use of the REVES Financial Programme. Here the existing Mikrofonden Väst scheme is to receive an unprecedented €1.1m injection from the city council. The REVES approach links local energy with external expertise from other regions of Europe (see the case study >)

In some – but not all – countries, mature social enterprises are perfectly capable of financing their own expansion. Italy’s movement has established several mutual funds to do this. We heard from Gianluca Laurini of Coopfond, set up in 1992 by the country’s largest co-op federation, Legacoop. For fundraising, it relies on a legally mandated 3% share of profits which all co-ops must pay.

As the Lega has 11,000 members with a combined turnover of €55 bn, this brings in €21m a year. The fund currently stands at €430m. It invests equity and loans in new and expanding co-operatives as a form of ‘external solidarity’. Over the last two decades it has invested €420m in 537 co-operatives, which have created 800 jobs. Coopfond is more flexible than  public funds, and can also make small grants.

Bernard Horenbeek described the workings of Crédal, a co-operative of 2,000 members that  operates a €25m fund in Wallonia and Brussels. It makes 1,000 loans a year, of several different types – 80% social economy and 20% microfinance (see the presentation >)

4. Raising large-scale private finance

Moving up the size scale, for me the most controversial case is that of the British Social Impact Bonds. These are financial instrument that allow a public authority to try out an innovation without taking any financial risk. It hands the operation over to a private or social enterprise to carry out, then only pays out if certain social impacts are achieved.

The peer review heard from Dharmendra Kanani of the Big Lottery Fund about the world’s first SIB, at Peterborough Prison. Under this scheme, a number of funds have invested £5m (€6m) in a consortium of voluntary organisations, who aim to reduce the number of prisoners who reoffend. If they succeed in cutting reoffending by 7.5%, then the investors will be paid a return which could go as high as 13% a year. Over the 5-year term of the bond, this would mean they make an 84% gain. Why would the public sector wish to pay out this profit to investors? Because it calculates that it would save much more than this by having to look after fewer prisoners. In effect it is contracting to share its savings with the innovators.

The Peterborough scheme stated in 2010, and its evaluation results are just coming in. meanwhile several dozen SIBs have been launched in areas such as housing and care.

Among the factors that made it suitable for SIBs are that the historical nature of the problem was understood, the impacts could be accurately tracked (the prisoners are easily traceable), and the partners were trusted.

One criticism of SIBs is that they are only made necessary by the implicit assumption that the public sector is itself incapable of investing in innovation. And this is a function of spending restrictions imposed by government.

It may sadly be true in practice that public authorities generally lack capacity to innovate – but at the same time the SIB brand is closely connected in many minds with the push to privatise public services (see the case study >)

5. Impact measurement

In the workshops, one thing that surprised me was the amount of opposition there is to the idea of measuring impact. Some people see it as an imposition which is not required of conventional firms. It may be that it has been discredit by over-elaborate consultant-heavy systems like SROI. To my mind though, it is the counterpart to preferential treatment by government. For use by EaSI and EuSEFs, the GECES working group on impact measurement is proposing a proportionate system, based on indicators chosen by the enterprise, which on the face of it sounds workable.

To round off the first day, Gerhard Bräunling outlined how EU funds other than the Structural Funds are playing a role in the financial ecosystem. He raced  through COSME, Erasmus, Erasmus for Young Entrepreneurs, EaSI, Horizon 2020 and LIFE (see the presentation >).

Key points

The peer review benefited from a wealth of experience and examples. It was evident that it generated a lot of learning from one country to another. The main lessons that emerged for me are:

  • Structural Fund programmes should combine loans, grants and business support
  • public authorities that are not confident to manage loans should seek out partners
  • each area doesn’t need to set up its own fund. So long as there is a partner with local knowledge, a fund can be based elsewhere. National funds should have regional access points.
  • use the power of the matching offer
  • there is significant scope for transnational collaboration in social finance – perhaps supported by new EaSI programme
  • the ESF should be used to support intermediate organisations a strategic partners
  • social enterprises should not be afraid of impact measurement, so long as it is well-designed, proportionate and uses qualitative criteria
  • the improved legal certainty introduced by the new public procurement directive will improve things for social enterprises, if it is well implemented nationally
  • an often overlooked source is local citizens, who are often keen to invest in social and environmental projects (crowdfunding)

Toby Johnson