Written evidence submitted by Social Investment Business (LRS0015)

 

Introduction to Social Investment Business

 

Social Investment Business (SIB) provides loans, grants and strategic support to charities and social enterprises to help them improve people’s lives. We specialise in helping organisations become more resilient and sustainable so that they are in the best place to grow and increase their impact.

 

SIB has one of the largest and most mature social investment portfolios in the UK and one of the most significant track records in providing finance and support. Between 2002 and 2018-19:

 

 

Having worked with more than 2,000 organisations over the past 15+ years, we have built an in depth understanding of the financial needs of the social economy – whether that be through grants, loans or blended finance.

 

As a charity that provides finance to create fairer communities, we are interested in developing models of local economic regeneration or levelling upthat channel profits back into the local area, while remaining accountable to the local community. Our data-led approach utilises local economic modelling to target funding where it is needed the most, while ensuring the investment mix reflects the social and economic capacity of an area.

 

Summary

 

 

 

 

 

 

  1. REVIVE: SIB’s Principles for a Fair Recovery

 

1.1.            SIB have developed a set of principles for investing in a fair recovery that should be at the heart of the Government’s levelling up agenda.

 

 

1.2.            Recommendation: adopt a set of principles for an inclusive and fair recovery to inform and guide local, regional and national plans for post-pandemic ‘levelling up’ investment.

 

  1. Targeting funding to address regional inequality

 

2.1.            The importance of place has been brought to the forefront of the public’s mind during Covid-19 and there are opportunities to leverage this focus and push forward with placed-based funding programmes that can feed into the Government’s ‘levelling up’ agenda. Consideration should also be given to those communities that have been most severely impacted by the pandemic – both geographically (e.g. coastal, tourist, and university towns) and to the people that have been badly hit (e.g. BAME communities, people with disabilities).

 

2.2.            When developing place-based strategies, it is also important to ensure that the Government (at both national and local levels) is connecting into existing community infrastructure – avoiding a top-down approach by listening to and representing the voices of local organisations and civil society groups. Any place-based funding also must come with the right kind of support to communities, to ensure this does not just become an exercise in shifting the burden of responsibility down the line.

 

Local economic mapping

 

2.3.            SIB has access to anonymised open banking data on merchant sales and consumer wallet spend at the ward level generated for us by the Impact Information Company (Imfoco). By analysing these flows, we can compare economic activity in the latest week available with the equivalent week last year and assess the scale of the impact of Covid-19 in close to real time. The lockdown measures introduced by the Government caused an unprecedented economic shock, with a collapse in consumer spending from March 2020. We have been analysing impact on local economies across the country – where some towns have experienced a collapse of near -70% in total sales compared with the same week last year.

 

2.4.            Combining this with the British Red Cross Covid-19 Vulnerability index – which brings together datasets that cover both health and wellbeing and socio-economic indicators – we can see that coastal areas are overrepresented in the most vulnerable quintile of places exposed to Covid-19, and have experienced the biggest sales drops due to higher retail, hospitality and tourism sector compositions. Our analysis of the rise in unemployment rates between March – April 2020 shows the disproportionate impact that Covid-19 has had on jobs in coastal areas in particular. Of the 20 towns with the highest increases in unemployment, 18 were coastal, and all the towns that experienced a 3% or higher increase were coastal.

 

Table 1 - 20 towns with the highest increase in unemployment (March – April 2020)

 

Town (Travel to Work Area)

Place type

Reduction in spending[1]

Unemployment (percentage point change)[2]

Wadebridge

Coastal

-73%

4.34%

Penzance

Coastal

-57%

4.31%

Bude

Coastal

-31%

3.48%

Torquay and Paignton

Coastal

-35%

3.47%

St Austell and Newquay

Coastal

-29%

3.43%

Blackpool

Coastal

-36%

3.24%

Kingsbridge and Dartmouth

Coastal

-50%

3.20%

Scarborough

Coastal

-54%

3.18%

Clacton

Coastal

-27%

3.16%

Barnstaple

Coastal

-42%

3.12%

Bridlington

Coastal

-33%

3.03%

Margate and Ramsgate

Coastal

-33%

2.99%

Bideford

Coastal

-50%

2.97%

Corby

Ex-industrial

-13%

2.88%

Liskeard

Market town

-32%

2.88%

Redruth and Truro

Coastal

-49%

2.82%

Whitby

Coastal

-57%

2.80%

Liverpool

Estuary/Coastal

-18%

2.77%

Folkestone and Dover

Coastal

-25%

2.64%

Hastings

Coastal

-37%

2.64%

Source: Social Economy Data Lab & Department for Work and Pensions

2.5.            The Government’s pre-coronavirus policy agenda focusing on towns and high streets that have previously been overlooked is needed now more than ever. However, in light of recent events we cannot see a return to business-as-usual. This is an opportunity to be ambitious: to rethink how we invest in places and, importantly, who benefits from that investment. Coronavirus has exacerbated inequalities between and within communities. Those places that were most economically at-risk – due to levels of deprivation, job insecurity, or low wages – will struggle to bounce back without additional support.

 

2.6.            Recommendation: draw on existing evidence and use data to target resources and support to communities which need it most both geographical areas and demographic populations.

 

  1. Local growth and jobs: ‘shovel ready’ vs long-term investment

 

3.1.            Much of the levelling up investment (including money allocated to the Towns Fund) will be given preferential allocation to ‘shovel ready’ capital projects aimed at developing the local asset base. However, this kind of regeneration approach often fails to account for the varying local economic context of different places. For example. a commercial investment vehicle for a relatively affluent town – with high levels of employment, a robust network of local businesses and strong local purchasing power – will not be appropriate in a ‘left behind’ town with high vacancy rates and a stunted local economy. Levelling up different parts of the country will require a nuanced understanding of the variation between local economies, especially in areas of greatest need.

 

3.2.            Deprived areas have acute structural limitations within their local economic network that will inhibit the regeneration process. These include high unemployment, restricted spending power, poor connectivity, lower than average living standards and a lack of civic assets. It is only by understanding these specific conditions and flexing the investment mix accordingly that we can begin to build the capacity within the local economy for regenerative purposes.

 

3.3.            Traditionally investment will be targeted towards developing the local asset base (e.g. new housing, transport infrastructure, shopping centres) and capturing the uplift in land value from the regeneration – most of which will go towards private investors and shareholders with little benefit going to the local community. It is hard to see a similar model being viable in a highly deprived area with multiple forms of deprivation. Certainly, there is no evidence in SIB’s loan book that would suggest that capital gain is likely in these areas. There is also a risk that too much emphasis on creating a quick gain in the property market may skew investment away from developing social infrastructure, supporting local business growth and long-term job creation that lead to a steady levelling up of left behind areas.

 

3.4.            Without a functioning local economy, the impact of the regeneration funding will be limited. Investment should therefore be aimed at enhancing the profitability of local (and social) businesses. This might include subsidising or incubating new businesses to kickstart the local economy and provide good employment for local people. This kind of capital needs to be patient and affordable; the investment vehicle will therefore require a higher proportion of patient, long-term investment. The key point is that levelling up certain places will require targeted funding towards developing the social and economic capacity of the local area, before focusing on land valuation and developing the asset base.

 

3.5.            Recommendation: Those engaged in place-based work, whether national funders, local authorities or community-based partnerships, should be factoring in patient and long-term social investment as part of their renewal and regeneration strategies.

 

  1. Sustainable local economies

 

4.1.            For the purposes of ‘levelling up’ places that have been ‘left behind’, we believe the primary focus should be on creating sustainable local economies through:

 

 

The value of social infrastructure

 

4.2.            Social infrastructure consists of the spaces, facilities and networks that are crucial to the development and maintenance of social connections within a community. It builds public trust and promotes sociality. More than just fulfilling an instrumental need, it provides space to counter social isolation, improves physical and mental wellbeing and creates inclusive environments – regardless of age, race, gender, sexuality or income.[3] Buildings, facilities and the built environment can make up social infrastructure – this includes libraries, museums, parks, pubs and cafes: as too can local services and organisations, such as those that work in mental health, skills and training, social care or youth services. These are the fundamental components of community building, developing trust and achieving cooperation.

 

4.3.            Many of the most deprived areas of the UK are desperately lacking in vital social infrastructure, including places to meet and access to local services. This impacts upon the life chances of the people living in these areas – a report by Local Trust found that people in ‘left behind’ areas had high unemployment (more than double the national average), high levels of child poverty (double the national average), low household income (£7,000 less than the English average), and significant skills deficits.[4] These are places where the private sector does not (and likely will not) invest in due to poor returns; meanwhile councils are cash strapped and increasingly unable to provide the array of local services that meet the needs to the local community. This leads to a spiral of decline in these communities: people and businesses move out, homes and retail units become vacant, unemployment rises.

 

4.4.            in this context, levelling up via investment ‘shovel ready’ capital projects without addressing these underlying issues will not be appropriate. Instead, the part of the levelling up process must include developing the social and economy capacity of these deprived areas by investing in social infrastructure that is both accessible and inclusive. The social economy, with its explicit commitment to putting people first, will be essential in creating and maintaining this infrastructure – filling some of the gaps left by the private and public sectors and building community trust and wellbeing.

 

Good jobs and secure incomes

 

4.5.            The pandemic looks set to result in an enduring jobs crisis and has brought to light the stark failures of a labour market that had large numbers of people in atypical, low paid or insecure work. That is why the recovery must not simply focus on employment growth, but on ensuring that people have access to good, secure jobs with decent pay and working conditions. Based on research by Social Enterprise UK, the social economy creates good jobs, is more likely to pay the living wage and invest in their employees than SMEs, and works more often in areas of greatest need.[5]

 

4.6.            Evidence from the Futurebuilders England Fund[6] – a £142m Government-backed social investment fund, which ran between 2004 – 2008, with loan book management services by SIB continuing to the presentshows that patient and flexible investment into the social economy can work efficiently to generate jobs and grow incomes. The data shows that three years after receiving Futurebuilders investment organisations increased their employment figures by 16%, and wages increased alongside business growth. Our analysis of available data found Futurebuilders’ investees had created over 1,500 jobs three years after receiving investment. A new social investment fund like Futurebuilders, with similar scale and ambition could play a vital role in getting people back into work during the recovery period.

 

The case for social investment

 

4.7.            Our analysis of the Futurebuilders portfolio shows that social investment improved the financial performance of charities and social enterprises, whilst at the same time generating a tangible financial return for investors: of the £116.6 million repayable investment, £98m has been paid back – and there is still a minimum of 16 years to go until fund closure.

 

4.8.            Social investment needs subsidy to be most effective. While the internal rate of return on the loan was 1.2%, after considering subsidy – including the blended grant portion alongside long-term business support and portfolio management – the internal rate of return (IRR) was -8.06%. However, it is important to recognise (i) the substantial non-financial returns such as employment growth, organisational resilience and social impact; and (ii) the use of subsidy allows for significant leverage and more effective use of scarce resources – the majority of the loan portion has been repaid which allows this funding to be recycled and repurposed for further public benefit.

 

4.9.            Social investment allows public money to go further. A new Government-backed fund like Futurebuilders could be improved upon using our learnings and insight for example, it could be delivered in partnership with some of the repaid funds retained by local communities for recycling and future investment.

 

4.10.        We recommend that a proportion of ‘levelling up’ investment should therefore be directed towards social businesses: providing them with patient, flexible capital to expand operations and employment opportunities for local people, as well as offering business support to build resilience and help them to adapt to the new post-coronavirus context. The social economy provides a mutually reinforcing solution to the key issues facing ‘left behind’ areas high unemployment, vulnerable local economies with low local purchasing power, persistent deprivation and skills deficits. Social businesses provide good jobs, they invest in their employees and their local area, and they often provide vital services to hard-to-reach or marginalised groups to help them back into work. An expanded social economy can also help to develop and embed the social infrastructure that enables these communities to prosper.

 

4.11.        Recommendation: Government departments should consider both ringfencing dedicated portions of existing (grant, UK Shared Prosperity) funds for (longer-term) social investment and also creating dedicated social investment funds – which are proven to strengthen local economies, support better employment practices, and build social infrastructure

 

Supporting a thriving social economy

 

4.12.        We believe there are three key elements that help charities and social enterprises deliver sustainable impact: (i) finance, (ii) support, and (iii) markets. SIB’s mission is to provide the first two, but if the third of these – markets – is underdeveloped, then the effectiveness of our work is diminished.

 

4.13.        We therefore recognise the vital importance of a functioning market – including public sector markets – for the social businesses that we work with and support. Placing social value at the heart of public commissioning and procurement is an essential means of ensuring that this market exists and is accessible to the social economy.

 

4.14.        We responded to the Government’s consultation on social value in public procurement, and broadly supported the suggested changes to put clear frameworks in place to account for social value in all public procurement. We are still waiting for the official response to this consultation process. Our hope is that the Government make these changes toward creating a genuine culture of purpose-driven commissioning and procurement that accounts for the long-term social, environmental and economic value of public spending. This has the potential to provide additional income sources for the social economy to expand operations and generate new jobs.

 

4.15.        Nevertheless, there will be inherent limits to approaches based around public sector procurement. These markets are only available to specific types of businesses, whose financial sustainability is often tied to winning and maintaining these contracts. The most successful social and community enterprises are those that can connect into the wider local economy. They have diverse income streams; for example, by trading with local people or businesses, renting out community space, or providing public services. Supporting these supply chains alongside strengthening social value is crucial to helping wealth circulate within local and regional economies – and ensuring they are more resilient and sustainable.

 

4.16.        The private sector, therefore, has a role to play as well, we would like to see a wider group of businesses aiming to spend with social enterprises. Social Enterprise UK has been advancing this agenda, in partnership with DCMS, with the Buy Social Corporate Challenge[7] – encouraging a group of high-profile business to collectively spend £1bn with social enterprises. The Government should actively introduce similar cross-sector initiatives for the social economy that facilitate access to public and private markets – for example through a new accelerator programme that brings together corporate and public partners to deepen connections with charities and social enterprises and build broader social supply chains.

 

4.17.        Recommendation: Government should implement the Social Value Act proposals and support efforts to strengthen local social supply chains.

 

 

 

We are grateful for the opportunity to comment on this inquiry and would be pleased to provide any further information, evidence or clarification as required.

 

www.sibgroup.org.uk

 

August 2020


[1] Percentage change in all sales compared to the same week last year (week ending 28th April 2020)

[2] This is the percentage point change in proportion of people receiving benefits payable to people who are unemployed receiving either Jobseekers Allowance (JSA) or Universal Credit for those who are out of work between March and April 2020

[3] https://onlinelibrary.wiley.com/doi/full/10.1111/gec3.12444

[4] https://localtrust.org.uk/wp-content/uploads/2019/08/local_trust_ocsi_left_behind_research_august_2019.pdf

[5] https://www.socialenterprise.org.uk/wp-content/uploads/2019/10/Capitalism-in-Crisis-State-of-Social-Enterprise-Report-2019-1.pdf

[6] SIB have been working with the Government Inclusive Economy Unit (DCMS) on a three-year research project to provide in-depth analysis and learning of the Futurebuilders England Fund to build a robust picture of what makes social investment work. The full data pack, along with extensive analysis and learnings can be viewed here.

[7] https://www.socialenterprise.org.uk/corporate-challenge/