Social investment could help councils to develop innovative and more efficient methods of service delivery. But only a few councils have so far taken advantage of this approach
Few in local government are likely to have missed the interest, excitement and occasional controversy surrounding the announcement of the first local authority social impact bonds in August.
Hailed as an exciting potential funding solution for tackling intractable social challenges, such as re-offending, problem families and obesity, social impact bonds provide a new source of investment in preventative interventions, which should deliver better outcomes and savings to the public purse.
While social impact bonds are undoubtedly full of potential, new research from BDO, in association with Solace, has found that they are just one reason why local government should be interested in the growing, and increasingly high-profile social investment market. Defined as investment for social as well as financial return, it can offer new sources of funding to local services, as well as support new models of service delivery by organisations such as social enterprises.
With local authorities facing unprecedented budget cuts and mounting political pressure to open up public services, social investment could help them navigate the constraints. However, our research found that, beyond a small number of leading councils, much of local government has not yet considered its role in harnessing social investment for local benefit.
In its most simple form, this could mean councils supporting the development of local social enterprises which could, in turn, access social investment in order to play a bigger role in service delivery. Of course local authorities have been supporting the social sector in various ways for a long time. However, councils could re-visit a number of their existing initiatives to ensure they are effective.
For example, they might design new criteria for the awarding of seed funding for new community enterprises to ensure that they will become self-sufficient in the long term. Barnet’s Big Society Innovation Bank sits alongside existing third sector grant funding, but seeks to grow a new sustainable, innovative and bottom-up community enterprise sector.
Councils might also review procurement procedures in order to create a more level playing field for social enterprises that can bring a wider set of benefits to an area, and find ways to help social enterprises to become ready to attract and use social investment. Leeds has been using its understanding and knowledge of the different sectors and organisations within the city to link up social enterprises with local private sector firms that can provide business support, often as part of their own corporate responsibility programmes.
Councils can also act as a ‘hub’, or intermediary, working with social enterprises to lever social investment as well as fresh thinking into an area, and helping them design services which are relevant to local needs. The Association of Greater Manchester Authorities’ support for the FranchisingWorks pilot, which gives local unemployed people help and finance to set up franchise businesses, is a good example of this. Local government partners were crucial in identifying partners who would help the scheme work, helping to design a pilot that was suitable for local circumstances and also providing some funding to help get the project off the ground.
In turn, local authorities gained external expertise in tackling unemployment by establishing new franchise businesses, as well as funding for individuals who could not normally access loans.
The future could see the development of more radical models of social investment, with local people and councils themselves becoming social investors. Community investment – whereby communities raise the money from within to fund a local project, such as a shop, pub or renewable energy scheme – could become something that councils actively seek and support.
Bristol is planning to explore whether local government could become the ‘platform’ for investment by local people, rather than the ‘vendor’ that passes on funding, arguing in its NESTA/LGG ‘Creative Councils’ application that ‘public finance alone is no longer sufficient to allow councils to deliver on [our] mandate for local leadership’. While not without its potential challenges, community investment not only enables significant amounts of money to be raised from small individual investments, but also allows local people to see the social benefits that their investment helps achieve.
Councils might also consider how their own funds can be used to generate both a social and financial return. It might be possible for local authorities to set up their own local social investment funds, for example using reserves, so that social benefits are captured within the local area. In a less high-profile and risky version of this, local authorities could also set up vehicles in which they can invest for both a social and financial return, such as a Community Interest Company (CIC).
Some councils are already beginning to look at such models. The Westminster Hub, a CIC set up by the London Borough of Westminster with two external investors, provides workspace and learning and investment opportunities for new social enterprises. The CIC is predicted to generate a financial surplus, which in turn the council and its partners in the CIC are planning to use to establish an Impact Venture Trust. This will enable them to target further investment in the borough’s most deprived communities.
There is no doubt that such activities require local authorities to embrace new and entrepreneurial ways of working, as well be creative and open-minded about how, and where, they seek the means of achieving the best outcomes for their community. It means drawing on a wide range of resources – from the local community, investors, the social sector – as well as their own financial and intellectual reserves. None of this will be easy, especially at a time of great financial pressure.
However, our research demonstrates that some councils are already doing just this. And with the government making its support for the growth of the social investment market clear, and Big Society Capital coming onstream, it is apparent that social investment can offer new ways of funding local projects, services and enterprises, whether delivered, commissioned or simply supported by local authorities.
With councils on the search for new ways to improve local outcomes and overcome the financial constraints, social investment must be part of the answer.
Andy Mahon is head of local government advisory at BDO. New finance for a new world: how local government can harness social investment for social goals is available on BDO’s website
