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Session 6

Social Entrepreneurship and Social Innovation. Session 6. Towards A Social Finance Market-Place. Overview. Background Context Landscape Brokerage models Social stock market Case studies: Traidcraft; cafedirect; Compartamos. Background. Role Of Private Sector. Wealth creation

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Session 6

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  1. Social Entrepreneurship and Social Innovation Session 6 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  2. Towards A Social Finance Market-Place SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  3. Overview • Background • Context • Landscape • Brokerage models • Social stock market • Case studies: Traidcraft; cafedirect; Compartamos SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  4. Background SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  5. Role Of Private Sector • Wealth creation • Return on capital • Profit maximisation • Innovation • Market making • Individual rational actor maximising personal utility in one off transactions? SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  6. Role Of Government • Govern for the common good • Democratic mandate and accountability • Authorise • Procedural rights • Coerce • Substantive rights • Responsible for societal equality and fairness • Equality of outcome? • Equality of opportunity? SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  7. Role Of Government • Solve free-rider issues • Regulation for public benefit • Address individual hyperbolic discounting • Ensure economic efficiencies • Utilities • Infrastructures • Welfare goods • Address market failures in public goods SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  8. Government And Finance • Sets the economic context • Regulates via legislation • History of financial markets • Consequences of deregulation • Track record in social finance since 1997 • Non-UK examples SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  9. Role of Third Sector • Value(s) driven • Absence of government • Heterogeneous demand for public goods • Absence of private sector • Non-market goods • Reassurance of non-distribution structure • Complex goods/services • Third party beneficiaries • Unreliable beneficiaries • Pooled input resources (DiMaggio and Anheier, 1990) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  10. Context SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  11. Financial Markets • Cost efficient • Low transaction costs • Information rich • Up-to-date • Value driven allocation of funds • Success is rewarded • Flexible and responsive • High liquidity Meehan et al (2004) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  12. Social Finance Market • Inefficient • High transaction costs • Information poor • Inconsistent or non-existent metrics • Cause driven allocation of funds • Success goes unmeasured and unrewarded • Static and inflexible • Low liquidity, limited resources Meehan et al (2004) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  13. Inefficient Unlike resource allocation in the business world, where investors and companies seek one another out in an information-rich environment, philanthropy is largely a one-way street Meehan et al (2004) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  14. Application Process • Time consuming and inefficient • Different for each cause • Different for each source of funds • Organisation, not mission, focussed SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  15. High Cost • Raising funds: • For-profit capital market: $2-4 per $100 • Legal • Marketing • Admin • Not-for-profit capital market: $10-24 per $100 • Buying donor lists • Direct mail/Telephone calls • Not-for-profit CEOs spend 30-60% of time on fund-raising Meehan et al (2004) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  16. High Cost • Allocating funds: • Foundations: $12-19 per $100 • General overhead • Reviewing applications • Intermediary groups (eg. United Way): $13 per $100 • Total cost: $22-43 per $100 Meehan et al (2004) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  17. Information Poor • Only 38% US charities filed a ‘Form 990’ IRS return (2002) • Hard to obtain • Of these, 15% included serious errors • No uniform not-for-profit accounting standards • No single regulatory authority • Very fragmented market Meehan et al (2004) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  18. Resource Allocation • Distorted by: • Cause/mission focus • History of institutional loyalty • Lack of performance driven resource allocation Meehan et al (2004) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  19. Static Market • Financial contributions are largely final and irreversible • Grant not investment • Cannot be withdrawn easily • Lack information to judge subsequent funding Meehan et al (2004) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  20. Landscape of Social Finance SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  21. Drivers Behind Social Finance SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  22. Social Finance The system of finance supply and distribution to support socially entrepreneurial approaches to public and environmental challenges. Social finance, therefore, is more than just the flow of money into social or environmental projects. It is conceived as an ethos about the way money is used…social finance can be seen as the discourse around such flows that is developing in concrete terms in the new institutions of supply, intermediation, and demand. This is a discourse in flux with competing perspectives driving the debate Nicholls with Pharoah (2008) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  23. Social Investment Options • Not-for-profit/charity that generates exclusively social value • Non-market rate • Social enterprise that is profit-making but also has a clear social/environmental purpose • Sub-market/market rate • Commercial opportunities in deprived areas • Market rate • ‘Social firms’ that employ disenfranchised members of the community • Sub-market/market rate SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  24. Spectrum of Financial Return SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  25. Spectrum Of Social Finance SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  26. Demandside • Charities • 168,000 • Total income of £40bn • Social enterprises • 55,000 • Total income of £27bn • Community Interest Companies (CICs) • 2,000 since 2005 • No information on income • Co-ops SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  27. Charity Finance SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  28. Supplyside SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  29. Structured Finance SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  30. The Investor Universe - 100% - 15% 0% + 8% ? Grant-makers Capital-protected Market-rate return SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  31. Structured Finance SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  32. Supply And Demand SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  33. Credit Unions Micro-Finance Institutions ETHEX Banks Government Dedicated Intermediaries Charities Philanthropists Social Enterprises Co-ops Tax-Payers Members Micro-Entrepreneurs VP Funds SIB Ethical Investors Social Firms Market Transactions Foundations N-F-P Social Entrepreneurs Commercial Investors Landscape of Social Finance INTERMEDIARIES CDFIs SUPPLY DEMAND SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  34. Brokerage Models SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  35. Policy and Social Enterprise • The formation of a Social Enterprise Unit within DTI (2002), now incorporated within the Office of the Third Sector • The establishment of an Office of the Third Sector within the Cabinet Office with its own Minister (2006) • Key objectives: • To better understand the sector and its impacts • To provide an ‘enabling environment’ for it to flourish • Tory policy too now! SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  36. Policy and Social Enterprise • To find solutions to some of societies’ most entrenched social problems • Over half social enterprises surveyed in 2005 were located in the 40% most deprived areas • To support the growth in ethical markets • Between 1999 and 2004 the sale of Fair Trade marked food grew by more than 640% • To support the development of a social finance marketplace SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  37. Policy and Social Enterprise • SEs improve public services • Social enterprises are active in many public sector markets – particularly health and social care • At their best they offer a high level of engagement with users and a capacity to build trust • SEs increase overall levels of enterprise • 55,000 social enterprises generate £8.4bn to GDP pa • The social enterprise model appears to be more attractive to women and certain ethnic minority groups than conventional business models SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  38. Policy and Social Enterprise • Not to create social entrepreneurs but to create the environment in which they can succeed • That means government can act as • Catalyst – government can help to overcome address market failures or barriers to growth • Customer – government can purchase services from SEs • Champion – government can help to overcome information failures SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  39. Policy and Social Investment • Social Investment Task Force (2002) • Phoenix Fund (2002) to capitalise CDFIs • Bridges Community Ventures Ltd (2002) to provide investment specifically for small businesses in deprived areas • Founded by Sir Ronald Cohen (Apax Partners, 3I) and Tom Singh (New Look) • Initially raised £20 million from the private sector and £20 million in government matching investment • Started investing a second fund in 2006 SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  40. Policy and Social Investment • Adventure Capital Fund (2002), worth £15 million, to offer longer-term financial and development investment to support community enterprise growth • Community Asset Transfer fund of £30 million to support local authority asset transfers into community ownership (2002) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  41. Policy and Social Investment • Community Investment Tax Relief (2003) to provide investors with an income tax break on investment in social purpose organisations in deprived areas • CITR has attracted around £40 million of investment in the sector • Longer term contracting between government and social enterprises (DTI, 2003) SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  42. Policy and Social Investment • Futurebuilders (2005) fund worth £215 million to offer investment packages of grants/loans/technical support for organisations to bid for government service-delivery contracts • Two pilot funds (2006), worth £200k, for innovation in encouraging private sector investment in social enterprise • £10 million fund for social enterprise (2006) in recognition of the need to stimulate growth • Social Investment Bank? SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  43. Landscape Of Social Finance SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  44. Government Banks Private Sector Social Investment Bank National and regional intermediaries • CDFIs • Venturesome • Charity Bank • CAF bank • Credit Unions • Princes Trust • Bridges • Futurebuilders • Social Investment Scotland • Ulster CIT • Big Invest • Triodos • Unity Bank Third Sector Social investment will be greatly increased by the SIB if private sector capital is brought to the market by intelligently blending it with incentives and expertise. Social Investment Bank SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  45. Social Investment Bank • Four initial activities that should attract significant additional finance into the sector: • Capitalise present financial intermediaries and fill gaps in the marketplace • Develop the provision of advice, support and higher -risk investment so as to accelerate the growth of demand for repayable finance • Develop programmes of sustained investment in specific markets such as community regeneration and financial inclusion • Support existing and new intermediaries in their efforts to raise private capital SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  46. Market Building Activities • Bond issues supporting community finance • Opportunity for an SIB to support structural reform of the social fund (currently a government delivered soft loan fund) • Opportunity to raise capital from bond issues that would then be lent on through credit unions and CDFIs • Funds could also be lent on through new direct banking services SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  47. Private Brokerage Models • Xigi • www.xigi.net • GEXSI • New Philanthropy Capital SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  48. Founders: • Bain & Company • Deutsche Bank • Foursome Investments • GTZ-Deutsche Gesellschaft für Technische Zusammenarbeit • Open Society Institute • Schwab Foundation for Social Entrepreneurship • PricewaterhouseCoopers SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  49. Social investment aims: • Quality: by way of greater social investment effectiveness in the finance and social entrepreneurship sectors • Quantity: by way of financial ‘additionality’, enlarging globally the revenue pool available for social investment • Operational 2004 http://www.gexsi.org/index.html SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

  50. Development deals • Support civil society projects and programs • Bring together private and public social investors with social entrepreneurs and social purpose organizations • Created in tandem with ACCESS (Keystone) • Ratings agency designed to give SEs recognition under a common, global profiling system SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP

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