CHAPTER SIX WHAT CAN WE LEARN FROM ELSEWHERE?
Introduction
6.1 This section discusses current approaches across the UK to investing in the social economy. The discussion is designed to inform thinking on the design of any successor funding programme in Scotland.
New Directions in Funding
A Shift in Thinking
6.2 There is widespread recognition that some grant-making systems do not always fulfil their intended purpose. The way that some grants are made, their restricted purpose, and the conditions attached can weaken rather than strengthen the organisations that they are intended to support.
6.3 A growing dissatisfaction with traditional approaches to grant-making has encouraged UK funders to examine new ways of using funds. This search for new directions in funding has drawn heavily on experience from the US.
6.4 The debate and experimentation over recent years has led to three main and linked shifts in funding practice. These are described below.
Going Beyond Grants
6.5 The first main shift in grant-making practice is for funders to increasingly concentrate grants where they are the only, or clearly the most appropriate, option and to use other types of funding wherever possible.
6.6 This recognises the diversity of other financing possibilities that social economy organisations can benefit from, for different purposes and at different stages of their development. These options include, loans (short or medium-term, interest free or low interest), equity-like investments, patient recoverable capital, and the use of underwriting agreements.
6.7 The shift in funding practice has not been straightforward. For funders, lending is often regarded as risky as it depends on the ability of organisations to repay, although many are recognising that grant aid is itself inherently risky (once a grant is paid over it has gone). Moreover, the cultural aversion to risk and debt within the sector has meant that the take-up of alternative forms of financing has been slow.
Becoming More Engaged
6.8 The second main shift in funding practice is towards a more 'engaged' or active approach by funders. The assertion here is that the relationship between the funder and beneficiary should be about more than just a financial transaction.
6.9 Funders have identified the opportunity to add value beyond the money that they provide. Advocates argue that by helping to strengthen the organisational capacity of funded organisations, the prospects for successful project delivery will also be strengthened.
6.10 These developments have been largely funder-driven and have sometimes been received with some mixed responses by assisted organisations. Some have questioned the added value or expertise of funders, and expressed worries that greater funder involvement leads to greater funder control, thus threatening their independence.
Investing in Outcomes
6.11 The third shift is towards an outcome-based approach to funding. This shift has been driven by funders who want to know if their grants are helping to deliver quality activities, and who recognise that clarity about planned outcomes and effective performance measurement are key features of good management practices.
6.12 The basic premise here is that the outcomes of what is to be funded must be clearly defined and understood by both the funder and the awardee. They must also be adequately measured.
6.13 As funders have become more interested in the outcomes and impact of the work they support, this has posed some major challenges for them and the organisations they support. This requires a change in the funding relationship and requires new or improved systems to measure impact.
Emerging Funding Practice in the UK
6.14 Over the course of the last five years a number of new funding initiatives have embraced the new approaches discussed above. These new initiatives combine funds and technical support. They usually also combine grants with loans and other forms of patient capital. Most are able to provide funding 'in advance of need' to enable organisations to become 'investment ready'.
6.15 The UK government has been at the forefront of these moves. South of the Border, Futurebuilders England (see below) is the largest and most visible of this new breed of funds.
Futurebuilders England |
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Futurebuilders England is a £150m Fund to improve public service delivery through long-term investment in the third sector in England. Since its launch in 2004, it has offered over £109.5m million of investments in 231 organisations. The Fund is delivered independently of Government. It is managed by a consortium of organisations led by the Charity Bank, as a formally constituted entity in its own right. It invests only in projects that involve the delivery of public services (where at least 51% of the income required to sustain the service will come from the public purse). It invests in organisations delivering services in five defined public sector markets and works actively with public purchasers to broker investments. It deliberately provides investment where others do not. It aims to strengthen organisations to a point that they become bankable, encouraging mainstream lenders to make investments that may previously have seemed too 'risky'. All applications are referred to Charity Bank and Unity Trust Bank for initial review. This can often result in full investment by one of the banks. Several investments have been co-investments with other banks. It offers an individually tailored package of investment (loans, equity-like investments, and patient capital), grants, and professional support. A loan is always the largest part of every full investment, but grants are often used to provide support while the new project is being set up, or to strengthen the organisation's capacity. It is an 'engaged' rather than arms-length funder. This manifests itself in proactive and hands-on support for investees through technical advice, training, and organisational development support. |
6.16 The Adventure Capital Fund represents another prominent example of publicly funded programme of investment in the social economy.
The Adventure Capital Fund |
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The ACF was set up in December 2002 to invest in community organisations. It has invested over £5m through two funding rounds. A third round of funding has been launched, and the Fund is now to operate on a long-term basis. Originally supported by the Home Office, other government departments, and a number of Regional Development Agencies, the ACF has been delivered through a partnership of leading players in social and economic regeneration. Development grants or bursaries are available to bring projects to a state of 'investment readiness'. Full investments have been made through patient loans (up to 10 years), equity-like agreements (shared profit schemes), and gift capital (outcome-based grants). Financial packages are tailored to investee needs. In order to build the organisational capacity and sustainability of investees, an agreed level of technical support is provided by ACF advisors pre-application, post-offer, and post-investment. Source: www.adventurecapitalfund.org.uk |
6.17 Grant making trusts and foundations such as the Esmé Fairbairn Foundation and Northern Rock are increasingly working in the space between investments made solely to generate financial return, and philanthropic investments by way of grants.
6.18 Some foundations have provided investment to the sector through specialist intermediaries. Such intermediaries are often regarded as better placed to take on the direct investor role and, at the same time, provide the technical advice and support that is likely to be beyond the competence of trusts and foundations. Venturesome represents one such approach.
Venturesome |
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Venturesome was established in 2002 by the Charities Aid Foundation ( CAF) as a social investment intermediary. It aims to increase the financing options available to the social economy and to help build a social investment market. Venturesome provides tailored loans and investment support that bridges the gap between grants and bank loans to assist with bridging finance, working capital, and development capital. Up to March 2006 it had offered £6.5m of support to more than 100 organisations, of which £5m has been taken up and about £2.5m has already been recycled. It aims to reduce financial risk, through: high engagement with the investee; providing ongoing advice and support; using a variety of financial products as appropriate; creating links to professional and funding networks; and providing faster access to funding than traditional grants. Investments are made through an informal, tailored process rather than formal application process. Source: www.cafonline.org/default.aspx?page=6903 |
6.19 These new approaches are beginning to influence the practice of some leading funders. For example, the Big Lottery Fund has committed itself to becoming an investor funder, and to taking a more engaged role in funding relationships, as evidenced in the Growing Community Assets programme.
The Growing Community Assets Funding Programme |
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The Growing Community Assets funding schemes is a flagship programme from the Big Lottery. Over three years it will provide funding of up to £50m to help communities acquire and develop local assets, allowing them to provide quality services and amenities that are financially sustainable and will create income and employment in target communities. The Programme is managed on behalf of the Big Lottery by a consortium of social economy intermediary and support organisations, led by Highlands and Islands Enterprise ( HIE). The consortium assists applicants develop their applications, supports them through the application process and in the event of a successful application, provides ongoing monitoring and aftercare support. |
Messages from Funders Elsewhere
6.20 Representatives from Futurebuilders England and others at the forefront of these new investor funder approaches have conveyed a number of valuable lessons. Based on their experience, they have reported that:
- loan funding can be a viable option assuming there is potential for asset development and/or full cost recovery within public contracts;
- the loan offer must be explicit and prominent, to stave off ineligible applications, and to avoid the possibility of grant subsidy diluting the pricing of services or undermining the valuation of assets;
- the combination of grant and loans is vital as a method of funding, with grants used to build investment readiness;
- the 'market' is currently confused by imprecisely worded financial products and if it is to be inspired and enthused, the sector requires clarity about the various forms of financing available;
- funders, like potential investees, need to do more to examine creative and imaginative ways in which their funding might be used to create new or greater beneficial outcomes;
- the public procurement market, which often justifies the sector's caution about risk and debt, poses hard challenges to funders who must 'educate' purchasers;
- potential partners in investments (especially public purchasers) need to be involved in proposals at the outset, with some funders now initiating investment ideas before seeking out potential providers;
- there is value in gathering together investees to share experience, and to sharpen up performance of the investor and investee;
- objective business development assistance and board development support is essential for investee organisations in order to build confidence and investment readiness;
- the linear funding process (outline application, business plan, funder negotiation etc.) is overly sequential, drawn out, and expensive;
- investments must be made in light of the overall development needs and potential of an organisation, not just one-off or short-term project funding requirements; and
- the reporting of both social impact and financial impact is crucial, although both have proved challenging to measure and attribute.
Key Points
6.21 Among the main points arising from this section are:
- there has been much recent debate and experimentation around outcome measurement, the role of the investor funder, and the concept of venture philanthropy;
- a small but growing number of funders are adopting such practices and breaking new ground, including UK Government-backed funds such as Futurebuilders England;
- the experience of these funds points to the potential to offer tailored packages of investment in the sector that integrate grants with loans, and direct investment with capacity building support;
- successful investment in the social economy will require ongoing work to bring about a shift in the mindset of funders and public sector purchasers, as well as the sector itself; and
- there is the opportunity for further experimentation in the use of various investment models and techniques as part of any successor fund(s) to Futurebuilders Scotland.