General context (definition, recognition)
There are currently estimated to be around 70,000 social enterprises in the UK, contributing over £24 billion to the UK economy and employing around 973,700 people. The social enterprise sector’s economic and social contribution is also increasingly recognised by government, business and individuals alike – from the Treasury’s announcement of a tax incentive for investment into social enterprise to the increasing procurement of social enterprise in private sector supply chains.
Summary of the July 2013 survey findings conducted by Social Enterprise UK:
- The social enterprise sector in the UK is thriving, with a huge proportion of start-ups and high expectations of growth. It is hungry for finance of all forms (e.g. grants, loans, equity, etc). Social enterprises are attracting more female leaders and more leaders from Black and Minority Ethnic communities than mainstream businesses.
- Common indicators of business success – growth, optimism and innovation are very healthy among social enterprises compared with mainstream businesses. Social enterprises are more likely than SMEs to report that their turnover has grown in the last year.
- The sector is not, of course, immune to the country’s economic problems. These survey results show an overall reduction in the sector’s median turnover in the last two years.
- One important barrier to growth and sustainability that is commonly cited by social enterprises is public procurement policy: in this year’s survey the number of social enterprises citing it as a principal barrier has increased markedly.
• The proportion of start-ups in the social enterprise sector is extraordinary. Close to a third of all social enterprises are three years old or younger, with three times the start-up proportion of traditional SMEs. This is a trend that has increased since our 2011 survey.
• 11% of social enterprises export or licence abroad – and the newer start-up social enterprises are more likely to export than established social enterprises.
• Social enterprises are very heavily concentrated in the UK’s most deprived communities. 38% of all social enterprises work in the most deprived 20% of communities in the UK.
• Social enterprises are far more likely to be led by women than mainstream businesses. 38% of social enterprises have a female leader, compared with 19% of SMEs and 3% of FTSE 100 companies. 91% of social enterprises have at least one woman on their leadership team. 49% of mainstream SMEs have all-male directors.
• 56% of social enterprises developed a new product or service in the last 12 months compared to 43% of SMEs. New product or service development is often used as a proxy-indicator of business innovation.
• 15% of social enterprise leaders are from Black, Asian and Minority Ethnic (BAME) communities, the same proportion as the population in general. 28% of social enterprise leadership teams have BAME directors. Only 12% of SMEs report having directors from a BAME background .
• Business optimism has improved since our 2011 survey, with 63% of respondents expecting their turnover to increase in the next two to three years – compared to 57% two years ago. Only 37% of SMEs expect their turnover to grow.
• 38% of social enterprises saw an increase in turnover compared with 29% of SMEs, in the last year. This means that proportionally, almost a third more social enterprises grew based on turnover last year than SMEs.
• 22% of social enterprises experienced a decrease in turnover in the last year compared with 31% of SMEs.
• The median amount of finance sought by social enterprise was £58,000 – below the minimum thresholds of many specialist social investment vehicles.
Barriers for sustainability
The survey also sought to explore what is currently holding organisations back – we asked what the three most significant barriers were to the organisation's sustainability and/or growth. The results are:
- Lack of, or poor access to, finance or funding 39%
- Economic climate/recession 32%
- Prohibitive commissioning/procurement with public services 18%
- Cash flow 17%
- Time pressures 10%
- Lack of marketing expertise 10%
- Affordability of finance 9%
- Regulatory issues 7%
- Understanding/awareness of social enterprise among general public/customers 6%
- Government policy/change 6%
There is a huge range of different types of social enterprises in UK from cooperatives via charities to a specific form of community interest companies. Public support for social enterprises does not privilege any sectors above others.
The United Kingdom is a home of many private and social initiatives providing bussines support for social enterprises - both starting and developing. One of the most important are sectorial, like Social Enterprises UK. But there are also differnet local and national-wide organizations like UnLtd, which identify the promising social enterprises, train them and help them to acces to the investments. The models of acces, services provided, fees etc highly vary depending the initiative.
The very important role on that field is also played by the public authorities. The vast majority of the upcoming ESF funding (2014-2020) in England will be allocated to Local Enterprise Partnerships (LEPs). LEPs are partnerships between local authorities and businesses. They decide what the priorities should be for investment in local areas. In 2010, the Government decided to promote LEPs and replace the regional administration that used to manage structural and investment funds in the past. Therefore, unlike previous ESF Programmes, which were managed primarily at national or regional level, what happens under the 2014-2020 programme will depend on what LEPs propose in their strategies. The Government’s Supplementary Guidance to LEPs (July 2013) gave them considerable freedom to decide how they want to write their Strategies. Social entrepreneurship and social investments models are among the activities suggested in the Guidance, specifically:
- helping grow the social investment market to support social enterprises and the social economy,
- developing the capacity of social entrepreneurs to address the needs of their local communities,
- encouraging Social Investment models by providing (matched) outcome funding that enables payment by results programmes to be established in support the Government’s agenda on Social Justice and encourage innovative delivery models within local communities.
It’s the last type of activities that become particularly relevant to the subject of this paper, especially due to its innovative nature. The focus of these activities will be on disadvantaged individuals and families, in areas such as NEETs (young people Not in Employment, Education or Training), employment and training, drug addiction and other issues which are usually part of the cycle of deprivation. Therefore, these actions will be targeting the typical ESF participants. Department for Work and Pensions (DWP) is particularly interested in exploring how this might work with LEPs covering the most deprived areas.
Such thinking opened opportunities for cross-departmental co-operation between DWP and Cabinet Office who are leading on a number of social investment initiatives. Both Government departments are deeply interested in collaboration with the newly established Local Enterprise Partnerships.
The financial eco-system
The UK is a pioneer when it comes to social enterprise and the social investment that helps finance it, attracting the interest of international practitioners and policymakers alike.
According to a recent report produced by SEUK, based on a survey of their members, social enterprises are generally thriving in the UK, but, the same report highlights a number of issues that are holding respondent organisations back, the top three being ‘Lack of, or poor access to, finance or funding’ (39%).
At some levels, significant action is already underway to address the first issue, most notably the activity of Big Society Capital in starting to deploy its £600m of wholesale funds to social investment finance institutions (SIFI’s) and the use of Regional Growth Fund (via the Community Development Finance Association) by some operating in this space. However, despite these interventions, it is apparent from a number of research reports and through engagement with stakeholders that there is a prevailing gap around the provision of small amounts of ‘risk’ finance to develop and grow new enterprising activity.
Growing the Social Investment Market: The Landscape & Economic Impact (July 2013), focuses almost completely on the active SIFI’s and found in 2011/12 a profound concentration of capital within the market, with four banks providing 82% of the total funds invested in the market, but only supporting 30% of the total number of investments, suggesting a low number of high value investments being made.
By contrast, the 9 largest investors outside of the banks provided 15% of the total funds, but accounted for 57% of the total number of deals, suggesting higher volumes to more clients. It also found that secured lending accounts for 90% of all deals by value (£182m) and only 5% is unsecured (at £10m). Predictably the report argues that there is a need to support unsecured lenders: ‘in the absence of sufficient identified high risk unsecured social investment, grants are in effect playing this role and without an investment mindset.’ a gap still appears to exist in this market place.
The Social Enterprise UK report mentioned earlier identified that the median amount sought is £58,000 which is ‘below minimum threshold of many specialist social investment vehicles’. It also reports that 52% are looking for development capital, 25% applied for between £10,000 and £50,000 and that of those applying, almost a third have been established for three years or less, all of which make the finance options open to them incredibly narrow. This is compounded by the fact that 61% have a turnover under £250,000 per annum, with 41% having turnover under £100,000 making their ability to service debt in the medium term, even at less than the median of £58,000, very doubtful. Perhaps unsurprisingly, the report calls for more finance and the increased offer of ‘soft investment’.
Investment Readiness in the UK (July 2012) estimated that based on current demand figures obtained from their research, that possibly 70,000 to 140,000 VCSE organisations will require investment support in the next five years, which even with a 1 in 5 success rate (which is the current ratio), will mean that SIFI’s will require .75bn of funding. Their survey of VCSE organisations found that 57% had engaged or wanted to engage with social investment (15% were in process) and that the majority are looking for long term finance under £100,000 to enable growth, with the majority looking for around £80k. It also found that ‘higher risk capital is hard to secure, is in much shorter supply and is concentrated in the hands of fewer investors, when compared to the provision of asset backed finance to the sector’.
This market failure seriously challenges VCSE organisations attempting to make the transition from grant dependency to trading models. It therefore presents a major barrier to the goal of developing the social investment market in a way that supports VCSE organisations to become more sustainable and grow to better serve those most in need. As such, Big Lottery Fund, Big Society Capital and Cabinet Office are working together to understand the roots of the market failure related to lower value ‘risk’ funding and to test out emerging ideas for how to address these, including hybrid models (using mixed grant and debt). As part of this, wider consultation has been carried out with a range of stakeholders, including a number of SIFIs and the main barriers preventing this kind of investment activity have been identified as:
• A lack of appropriate funding (particularly grants)
• High transactions costs
• Detachment of many SIFI’s in geographic terms
Similarly, the third issue identified by the Social Enterprise UK report remains a significant challenge, particularly when the direction of travel for public sector service delivery is towards payment by results models, including Social Impact Bonds, which are often more complex. The HMP Peterborough SIB being a good example. In order to enable organisations to engage in this area, the Big Lottery Fund have developed the Commissioning Better Outcomes Fund.
Commissioning Better Outcomes, is a £40m fund established with the aim of growing the market in Social Impact Bonds (SIBs) and other outcomes based investment instruments. The fund offers finance of up to £150k to support the development of propositions (which are often complex), as well as top-ups for outcomes payments (up to 20%). Social Finance and the Local Government Association have been contracted to provide a programme of awareness raising and engagement, as well as support to clients in the early stages of developing applications. The fund is aligned with the Cabinet Office’s Social Outcomes Fund to create a total pot of £60m.
Social impact bonds are new and innovative financing mechanisms for social programs in which government agencies pay only for real, measurable social outcomes—after those results have been achieved. These tools effectively invert traditional government financing for preventive social services: In a social impact bond agreement, the government pays for realized outcomes at the conclusion of a contract, rather than paying upfront for programs or activities that may or may not have their anticipated effects .
SIBs can enable innovation and improve outcomes in some of the most complex areas, including social exclusions, while generating significant savings. 13 SIBs are now in operation tackling issues including NEETs, children in care and adoption, homelessness, employment, drug addiction and social care.
The Government pledges to increase the amount of money available for social investment, increase the demand for social investment, create an environment that encourages social investment opportunities.
The Government aims at removing rules and regulations that stop social investment through the Red Tape Challenge and increase the number of social investment opportunities for social entrepreneurs through: the Social Incubator Fund, Big Society Capital, the Investment Readiness Programme, the Centre for Social Impact Bonds, the Social Outcomes Fund. A social investment tax relief has been introduced to give investors in qualifying social organisations a reduction in their income tax bill.
The government is working to make the UK a global hub for the social investment market. The government is working to put the UK on the map as the global centre of the social investment market by: 1) mobilising stakeholders and promoting the UK’s social investment offer, by capitalising on the UK’s G8 2013 presidency through a conference focusing on catalysing the global social investment market - the G8 Social Impact Investment Forum; 2) and working with UKTI to promote the UK offer abroad.
Identity and visibility of social enterprises
In the recent three years, there have been a number of significant developments in the sector. 2012 saw the launch of Big Society Capital (BSC), established to develop and shape a sustainable social investment market in the UK. BSC aims to give organisations tackling major social issues access to new sources of finance to help them thrive and grow. Also in 2012, the Public Services (Social Value) Act received Royal Assent – it is a law calling for all public sector commissioning to factor in social value. All these developments were set up in a challenging economic climate and a public service delivery environment characterised by both austerity and reform. Recent data (The People’s Business), shows that “the social enterprise sector in the UK is thriving, with a huge proportion of start-ups and high expectations of growth. Social enterprises are attracting more female leaders and more leaders from Black, Asian and Minority Ethnic communities than mainstream businesses. Common indicators of business success – growth, optimism and innovation – are very healthy among social enterprises compared with mainstream businesses. Social enterprises are more likely than SMEs (small and medium-sized enterprises) to report that their turnover has grown in the last year.” According to the 2013 SEM Annual Review: Social enterprises contributed £5,4 billion to the economy http://www.socialenterprisemark.org.uk/social-enterprise-mark-publishes-...
Still, there is a common understanding between the sector the government and funders that visibility can be increased. Several recent initiatives can be listed:
1. Social Value Hub, funded by Social Enteprise UK (as described in the article: http://socialeconomy.pl/node/156)
2. Impact Investment report, and the work of its Taskforce
3. https://socialinvestmentawards.org.uk organised by Cabinet Office
England is the cruddle for the social economy mark. What is now the Mark came out of extensive testing of different visual models and builds on the pilot in the South West, designed by Rise (social enterprise based in Bristol). In 2008 research conducted by COI on behalf of the Office of the Third Sector found that even when pitching the concept of (and words) ‘social enterprise’ to sympathetic sections of the population, there was little recognition of the term and even some scepticism by the public that combining business practice with delivering social good was possible. Research had suggested that a way to raise awareness would be through a ‘social enterprise identifier’ or ‘a social enterprise brand’.
The Social Enterprise Mark was launched in early 2010 and had been awarded to 462 organisations in January 2012. It had been registered as a community trademark in the EU in January 2012. The primary objective of the Mark is to provide a guarantee when a business genuinely operates as a social enterprise. The Mark develops knowledge and understanding of social enterprises by establishing a social enterprise definition and independent certification to represent businesses trading for people and planet. The second objective of the Mark is to create a network of social enterprises. Having the Mark will give a social enterprise access to a network that connects them not only with each other, but with consumers and other businesses for trading opportunities. The Social Enterprise Mark had been awarded to 462 organisations in January 2012. It had been registered as a community trademark in the EU in January 2012. It is available internationally, being the only international, independent, certification authority that guarantees when a business operates as a social enterprise, using profits or surpluses to improve society and protect the environment, rather than making profits for shareholders or owners. The Social Enterprise Mark Company had become independent after the closure of its owner, the regional social enterprise umbrella body Rise.
Social Revenue Of Investment (SROI) and Social Accountancy and Audit are widely used mesurments tools in England.
Customers may use the e-commerce platform ‘Just buy’ for searching social enterprises to provide services or goods. Social Firms UK also offers a telephone helpline. There are also several local initiatives, i.e. Birmingham City Council developed a website called Find it in Birmingham that promotes social values and local contractors. http://www.finditinbirmingham.com/.
This outline is based on the papers produced for SEN peer reviews by the British partners