Financialisation and the Big Society: what is it, and is it happening?

Professor Peter Wells The Big Society, Localism and Housing Policy: an ESRC Seminar Series

University of St Andrews 13-14 March 2014

Overview • Context • Introduction: towards the great unsettlement • Understanding Financialisation • Policy Rhetoric and Action • Evidence from the Third Sector • Discussion and Conclusion

Context

• My research interests: third sector in service delivery; new forms of funding • Research on which this presentation draws: – Evaluation of Futurebuilders (England) (2005-2010) – Evaluation of Charity Bank in the North (2008-11) • Published papers: – Wells, P. (2013) When the third sector went to market: the problematic use of Market Failure to justify social investment policy .

Voluntary Sector Review

, 4 (1) pp. 77-94(18). – Wells, P. (2012) Understanding social investment policy: evidence from the evaluation of Futurebuilders in England .

Voluntary Sector Review

, 3 (2), pp. 157-178.

• This presentation forms the third in this series

1. Introduction

Towards the Great Unsettlement?

Towards the Great Unsettlement?

• "The third sector is going through turmoil. That vast array of charities, voluntary organisations, informal community groups and social enterprises - so diverse we might worry about calling it a ‘sector’ in the first place - is facing a radical upheaval in its political and economic environment." Macmillan, Rob (2012)

The great unsettlement: lets talk about it.

Third Sector Research Centre

blog

: www.tsrc.ac.uk/Blog/tabid/504/EntryId/29/The-great unsettlement-let-s-talk-about-it.aspx

Towards the Great Unsettlement?

• "We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the [last] century is over; that the rapid improvement in the standard of life is now going to slow down – at any rate in Great Britain; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us" • "I believe that this is a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another." Keynes, J. M. 1930.

Economic Possibilities for Our Grandchildren

, reprinted in The Collected Works of John Maynard Keynes, Vol. IX: Essays in Persuasion, London and Basingstoke, MacMillan and St. Martin’s Press for the Royal Economic Society, 1972.

2000s: the nice decade for the sector?

2. Understanding Financialisation

Financialisation: a starting point

Financialisation of funding seen in:

• Social investment 'markets' and Big Society Capital • Rise of social impact measures (such as SROI) and social impact bonds (as service agreements) • Favouring of organisations able to deliver 'at scale' • Possibility trading of social investments

The Rise of Finance • Financialisation seen at different levels:

– Individuals and households – Organisations (private, public and third sectors) – Nations and international institutions

• But also in the analytical frames used:

– Shareholder value and corporate governance (e.g. Froud, Williams et al.) – Changes to behaviours, norms, values and institutions (e.g. Stockhammer, Watson, Thompson) – Geography (Raco, Pike, Leyshon and Thrift)

Where might the financialisation of the third sector be found?

State

• Policy rhetoric and policy action

Third Sector

• Financing activities • As a logic in third sector discourse?

• As a management practice: the case of SROI

Market

• New financial products • New institutional forms

And it which places and at what scale?

3. Policy Rhetoric and Policy Action

A decade of policy interest in Social Investment

Halcyon Days? New Labour and Social Investment

• Headline initiatives:

– Futurebuilders (England) – Adventure Capital Fund – Social Enterprise Investment Fund (SEIF, DoH) – Commission on Unclaimed Assets

• Assessment:

– State-led instruments – Little alignment or dialogue with private investors

About Futurebuilders: key features

•

An innovative policy designed to support the third sector through venture capital style funding

• Delivered at arms length from government by a Fund Manager (Futurebuilders England Ltd) • Provided predominantly loan funding on a

patient

basis with revenue support (grants and advice) • Focus on organisations delivering public services; initially in five areas: – health and social care – children and young people – education and learning – crime – community cohesion

Futurebuilders: the ministerial launch

"This investment will help voluntary and community organisations play a more central role in service delivery. It will mean improved and expanded services that offer greater choice to local people. What we all want to see is this money out and working in the sector as soon as possible"

(Fiona Mactaggart 17 December 2003). Following the appointment of the delivery consortium

"The Futurebuilders Fund is an innovative undertaking, designed to enable voluntary and community organisations to modernise and enhance their capacity to deliver first class public services, particularly to individuals who are not well served by current state or market provision"

for Futurebuilders

.

(Fiona Mactaggart 26 April 2004). Announcing the launch date

Austerity and the Coalition: Policy Responses to the 'Under Capitalised' Sector "this is not about handouts - it is about encouraging a new, self sustaining market to grow, free of state interference … Change in this market will not take place overnight, but it will be transformative in allowing social ventures to scale up and take on new challenges. We will do all we can to make it happen"

(Frances Maude and Nick Hurd 2011). Foreword to Growing the Social Investment Market

. 'this should be seen as the start of continued in-flow of funds as more dormant account monies are released over time, and as the Big Society Bank leverages in private sector investment to provide a further boost to the social investment market. We believe this is the right approach to growing the amount of additional capital to the sector over time.'

(George Osborne in a letter to Stephen Bubb, on setting up Big Society Capital)

A Particular Vision of the Social Investment Market?

Big Society Capital report:

The First Billion

: growth in UK Social Investment could reach £1 billion by 2016.

Nick O'Donohoe, Chief Executive of Big Society Capital (2012): 'The UK is emerging as a pioneer in the use of private finance to deliver social good' • • • Nick O'Donohoe, Head of Global Research, JP Morgan (2010)

Impact Investments: as emerging asset class

: ...'impact investing offers a new alternative for channelling large scale private capital for social benefit' estimates that 'globally size of this new asset class could be between $400bn and $1trillion' upper estimates of profits put at $648 billion.

The report was published two years after the financial and sub-prime crisis broke. The main asset class was seen as 'urban housing'

4. Evidence from the Third Sector

UK Charity Market for Loan Finance

Creditors due after one year

Major 60% Small 2% Medium 8% Large 30%

Voluntary Income and Long Term Credit in Charities

16 000 14 000 12 000 10 000 8 000 6 000 4 000 2 000 Creditors due after one year Total Vol Income 0 2003/042004/052005/062006/072007/08 100% 90%

Long Term Creditors and Income of Charities

80% 70% 60% 50% 40% 30% 20% 10% 0% Total income Creditors due after one year

Is the interest in social investment in the sector warranted?

• • •

Scale of Loan Funding in UK Charities

, as part of liabilities on balance sheets 1994/95 2001/02 2009/10 £1.16 billion £1.7 billion £3.5 billion ... but, 75% of loans in large charities and loans are dwarfed by total assets of £90.2 billion (source: Civil Society Almanac with additional analysis by NCVO's David Kane) • •

And, what further interest in loans is there?

13,000 of 160,000 are charities dissatisfied with loan funding as it stands remainder are either satisfied or do not see loan funding as relevant to their organisation (source: National Survey of Charities and Social Enterprise, 2010)

But what about the housing sector....

Market returns from third sector investment

Results from the Futurebuilders • Average payback period is 13 years; maximum 27 years • Default rate for 2005-10: 3.3%, but 21% of investments are at risk • Low compared to: – Community Development Finance Institutions' (CDFIs) lending to social enterprise: 4% – CDFIs' lending to micro businesses: 30% – Small Firms Loan Guarantee: 25-46% – US CDFIs: 20-30% • Caveats: – default and bad debt will rise – unknown impact of austerity – stance of social investor unknown (hard and soft loans/grants)

The Rise of Impact Measurement

Growing the Social Investment Market green paper: • "the

Bank

[Big Society Capital] must help prove that putting money into social ventures can generate both social impact and real financial returns. This is vital for building market confidence in what is a new

asset class

. • Externalities are central to the social investment market.... An efficient market would develop a means of pricing and thus internalising externalities.

• Problems hinder [...] pricing in externalities in the social investment market"

Financialisation as a Management Practice: the rise of impact measurement JP Morgan (2010) Impact investments: an emerging asset class: • "Specifically we propose that an emerging asset class ... encourages the development and adoption of standardized metrics, benchmarks, and/or ratings" • "These characteristics are present for such asset classes as hedge funds or emerging markets" • "Increasingly, entrants to the impact investment market believe they need not sacrifice financial return in exchange for social impact. Indeed, many have a regulated, fiduciary duty to generate risk adjusted returns that compete with traditional investments."

The Rise of Impact Measurement

• Some problems – SROI is overly simplistic - conflating outcomes with societal impact – Sector's resources and capacity to value impacts and assets varies considerably – Social investment and giving are not based on societal need: networks, location and above all preferences matter – SROI could become the basis for 'irrational exuberance': only the desired answers are given – Social investors and donors are faced with myriad options which cannot be reconciled – Are all the benefits of the sector measurable?

Evaluation findings

Futurebuilders stimulated part of the market But with high transaction costs And with limited reach into the sector

When placed in context

Financial crisis: banks further withdraw from the VCS market More fundamental issues around bank structure ... but austerity leads to a new appetite to seek new sources of funding

Discussion: is financialisation happening and does it matter?

Different perspectives on financialisation: changing cultural norms and management practices in the sector State

• a consensus around a new mix of funding for social policy • currently in a developmental phase • social investment and SIBs growing

Third Sector

• But ... the extent of take up remains limited to a few in the sector • More interest at national and local levels - scale matters • SROI, done badly, creates perverse incentives and unintended outcomes (measuring what is easy to count)

Market

• Interest appears to be growing amongst a small group of players • Focus on where there are financial returns + social impact • But many market failures are pernicious

Conclusion: debating another great unsettlement

• • • A final word to Keynes, J.M. (1930),

Economic possibilities for our grandchildren

"to judge from the behaviour and the achievements of the wealthy classes today in any quarter of the world, the outlook is very depressing. ... for they most of them have failed disastrously, or so it seems to me those who have an independent income but no associations or duties or ties-to solve the problem that has been sent them" "When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues." "But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not"