Bye-bye big society – Cameron lets the Treasury kneecap the new bank at the heart of his big idea

by Atul Hatwal

For months now, voices within the Labour party have been cautioning against writing off the big society. Thoughtful voices that look beyond the immediate rough and tumble of partisan politics. It’s been a staple from the emerging blue Labour stable that Cameron was on to something.

With the prime minister’s speech on Monday, we finally got to see some of the detail.

While the lipstick and eyeliner turn the head, underneath the party paint, this is an LRF – a low resolution fox. Looks great at the bar, but up close, things are not so hot.  For all the allure of the pretty words, the raw material is flawed.

The commitment at the heart of the big society that will make the warm fuzziness real is the big society bank. The Tory manifesto was very specific on what this bank would do:

“…provide new finance for neighbourhood groups, charities, social enterprises and other non-governmental bodies. This will provide social enterprises with the start-up funding and the support they need to bid for government contracts”.

As the government has faced-off against the big charities about cuts to grants, the story missed by most of the media is that the big society bank is being set-up specifically not to deliver their manifesto pledge.

The charities aid foundation, a leading sector finance provider, has signalled the danger:

“We are concerned that if the funds are only made available on a commercial basis the interest rates could be too high for many charities and social enterprises…”

The operative words are “on a commercial basis”.

Over the past few years I’ve worked with many charities on their financing arrangements, several that were in the room on Monday, and one thing is crystal clear: a commercial return is impossible to deliver on most public service investments.

The consultation paper is vague on what the rates of return will be, but in the current social investment market, “commercial basis” means a minimum 25% on a typical investment. Factoring in the inherent risk associated with a sector that is feeling the full weight of the cuts and the size and financial track record of the organisations involved, this can easily head north of 40% – that’s if they consider the investment at all.

This means that if a local community group wants to save its post-office or pub, a loan of £250,000 from big society funds will likely mean paying the bank back a something in the region of £100,000 on top of the £250,000 for the loan.

And this won’t be over a 25 year period like a mortgage either – this type of finance will normally look for an exit after a maximum of 4-5 years, if not sooner.

It is unclear which neighbourhood groups ministers had in mind when formulating this policy. Short of striking oil in the allotments and taking a loan to develop Dallas-on-the-Wold, neighbourhood groups can save themselves the bus fare and forget about a trip to see the big society bankers.

It gets even more bizarre when considering the government’s ambitions for the bank to finance social enterprises bidding for government contracts.

The commercial return required by the government’s big society bank means the contract would have to be spectacularly inefficient – 40% of fat is unusual, even by public sector standards.

By the terms of the government’s own efficiency review, it should be impossible for social enterprises with big society investment to win a tender, if they intend to breakeven.

But none of this should be a surprise. This path is well trodden. Politicians’ daydreams about connecting city finance into local communities were first indulged by Gordon Brown when he was chancellor.

Back in 2002 he was instrumental in setting up something called Bridges ventures, combining government and private capital in a new investment fund that was the first of its kind. At £145m, Bridges is about half as the big society bank and has a similar remit for social investment on a commercial basis. In the nine years of its operation, the total number of investments is 34.

At this run rate, seven or eight investments a year funded by the big society bank would make for a pretty small society.

The European Union provides two funding streams in the same space as the big society bank – the snappily titled Joint European REsources for MIcro to Medium Enterprises (JEREMIE) and Joint European Support for Sustainable Investment in City Areas (JESSICA) – which are open to social enterprises as well as SMEs. These two actually charge a below market interest rate and offer longer loan terms.

It doesn’t matter. When it comes to social enterprises and community businesses, they are similarly, spectacularly undersubscribed.

Then there are countless private sector venture funds and angel financiers specifically seeking ethical or social projects for investment.

None of these existing funds has made the blindest bit of difference to the ambitions of the little platoons cited in the Tory manifesto.

Where all of these funds do invest is in ventures with certain business cases that have customers already committed, a commercial management team with decades of experience in their roles and sectors and tangible assets like property for security.

Does that sound like a neighbourhood group?

It’s a triumph of political desperation over common sense to think that the big society bank will reach the parts these other market vehicles haven’t.

There was an opportunity if the bank was going to prioritise social criteria over market measures, had longer payback times and provided intensive support. But it looks like it’s been missed.

The truth is that the treasury has stamped its priorities on the big society bank. As ever, they are concerned about turning on the money taps to finance questionable community projects, incurring bad debts and becoming embroiled in local community disputes.

The treasury acted as the treasury does. It’s in the nature of the beast. The real fault lies with the prime minister and his cabinet office ministers who are either so divorced from the reality of what they are legislating on that they didn’t even notice the big society being knee-capped, or knowingly allowed it for political expediency.

Either way, the net result is a big fat nothing for anyone who had hoped for a new route to realise their community aspirations.

For Labour, there are two lessons to be drawn from this farrago – one on policy and one on politics – and one judgement to be made.

On policy, its time to forget about magic solutions that apply city finance to community ventures. The commercial rates of return aren’t there. Hundreds of millions of pounds of funding currently lie un-invested in social funds, without any prospect of investment any time soon.

On the politics, it’s easy to sketch out big ideas in opposition that have all the right ingredients – commerce, charity and community. There might seem to be a natural fit without any downside. But what looks like a free lunch in opposition probably is, and can quickly turn the stomach in government.

And in terms of judging the big society as an idea, finally, based on the detail of government policy, it is now time to write it off.

Tags: , , ,

2 Responses to “Bye-bye big society – Cameron lets the Treasury kneecap the new bank at the heart of his big idea”

  1. Tacitus says:

    Lat’s face it, the Big Society is essentially no more than a Big Con so Cameron can put into effect his cuts programme .. there is nothing about ‘saving’ communities in this schem. It is oppressive, it will destroy the Third Sector and it should be attacked at every level.

  2. Pelletor says:

    The ‘Big Society’ has been inaccurately portrayed as “we’re cutting your services, so if you still want them, you’ll have to volunteer to do it yourself.”

    What the ‘Big Society’ actually means is “we’re cutting your services, so if you still want them, your easiest option is to pay a private company or social enterprise to come in and deliver them for you.”

    That’s why the money being used to float the big society is not being spent on increasing volunteering – it is being used to launch an armada of service delivery companies.

Leave a Reply