The Alternative Commission on social enterprise investment

The Alternative Commission on Social Investment is an initiative set-up to investigate what’s wrong with the UK social investment market and to make practical suggestions for how the market can be made more accessible and relevant to a wider range of charities, social enterprises and citizens working to bring about positive social change.

In their introduction, they say: this about the current situation where social investment has so far been replication of expensive mainstream solutions:

"While many charities and social enterprises that: (a) want repayable finance at all and (b) can’t get it already from mainstream providers, want relatively small unsecured loans or equity-like products, the majority of the social investment market is still made up of large investments secured against buildings."

This was the position we were in 10 years ago when seeking support. As a company limited by Guarantee, we could not offer shares and took our proposal to the social emterprise community. In 2004 it waa ICOF, SW RDA and Social Entreprise London who were our first contacts. Each in turn said they couldn't help. The following year I wrote to Baroness Thornton, chair of the Social Enterprise Coalition describing this dilemma. That she hasn't replied alomst a decade later should be fair indication of what was to come.

Going back 5 years, P-CED had been drawn to Russia where an economic crisis had occured a year earlier. Our founder described his research into creating an economic resurrection.

After returning to the US, he spent most of the August 1999 reviewing notes and writing them up into a proposal with three key ingredients:

• a community development bank to provide financing to would-be entrepreneurs to create their own business, without need for material collateral because almost no one had that collateral aside from mafia, who just took what they wanted;
• emergency food relief
• assistance to children in or out of orphanages. 

In an interview with a diaspora leader about a follow on project in Crimea, he related the success of what became know as tha Tomsk Regional Initiative: He was asked about the potential of microfinance

"I found only two possibilities in Crimea. One is derived from UN's Crimea Integration and Development Program. The other is a standard EBRD (European Bank for Reconstruction and Development) program administered through commercial banks.

Both options require material collateral, which is by definition non-existent for anyone in poverty. Poverty remained a trap, while the whole point of microcredit programs is to relieve poverty first and foremost. I proposed the same kind of microcredit bank set up in Tomsk. It didn't require any material collateral whatsoever. Several thousand people have taken loans to start small businesses in Tomsk, 99% of businesses survived their first year, 98% of loans are paid back on time."

The community  bank was run by Finca and with 6 million dollars invested had serviced around 14,000 loans to around 10.000 businsesses It became self-sustaining in the second year of operation.

Unsecured lending is costly in terms of repayment rates and in the Crimea proposal he describes how a community funding enterprise will be applied, i.e. a business which operates for profit but applies the profit for social purpose Essentially, the model described in his 1996 position paper.

"The limitation of a bank or credit union is making enough money in the process of lending money to sustain itself. This money is made by charging interest rates, which must be high for micro loans. It requires much more time, work and therefore cost to lend one million dollars among a thousand different people than lending the same amount to one person, for example. As a result, the interest rates for micro loans need to be high in order to cover the operating costs of making these loans. Even with high interest rates – up to 35% in the present case – it remains difficult to earn sufficient profits to be able to make loans across a wide region such as Crimea where potential borrowers are spread out in remote areas across the region. The cost of outreach, training and multiple visits in that process can exceed 35% interest ultimately earned on micro-loans to remote areas.

By combining a community-funding enterprise (CFE) with a micro-credit union, the limitations inherent in each one is greatly diminished. The CFE provides sufficient funding to ensure the operating costs of the credit union, reducing the risk that the credit union will have any need to use its capital to sustain itself. The credit union immediately makes available sufficient loan money to match the needs of the community, thereby eliminating the time needed for the CFE to generate the same amounts of money. Additionally, CFE profits over and above what is needed to help with the operating costs of the credit union can be put directly into the credit union. Over time, the amount of money used to originally fund the creation of the CFE is offset by CFE contributions to the credit union. The credit union is increased so that larger amounts of money become available either to make larger loans or to service more borrowers. Together, the CFE and credit union create an enterprise where the original funding not only remains but also increases with time. They complement and balance each other by addressing the economic goals both have in common and offsetting each other’s limitations."

A Transformational Lending approach was proposed

"These programmes are distinct because they combine access to credit with more comprehensive business assistance services to help microentrepreneurs address the challenges of operating a larger enterprise. The technical assistance may focus on general topics, such as cash flow management, personnel, market development, and production technology. Alternatively, it may focus on the market information and technology needed to develop particular business sectors. "

Two years later UK government introduced a variation on this theme known as a Communty Interest Company yet the matter of funding doesn't seem to have been considered.

In our UK business plan we'd described how this approach of business investing in local community development funds would operate on a region by region basis:

” Fifty percent of annual surplus will remain in each local community where income is derived, by way of deposit into a local community development bank serving that location. In that locales are part of EU and therefore subject to well-developed rule of law, corruption issues should not present insurmountable barriers such as in Crimea.

"Fifty percent of surplus will be retained by P-CED for growth and expansion. Along the way, all employees of P-CED are to be paid at minimum a wage sufficient to guarantee a decent standard of living in accordance with the International Covenant of Economic, Social and Cultural Rights.

"Each community will then have its own Community Benefit Society (Industrial and Provident Society for the benefit of the community), such as P-CED Southwest Regional CBS, P-CED Midlands Regional CBS, and so on. P-CED will create each CBS as a UK legal entity under provisions of UK law. As the number of cells in each region increases and each regional CBS consequently becomes more complex, P-CED will utilize a portion of its 50% share of surplus to fund small offices for each regional CBS."

It was of course "not invented here" which led to our return to Eastern Europe and the 'Marshall Plan' which includes a section on microfinance i 

A decade later however Senscot have come to much the same conclusion, arguing for  a Scottish Community Bank  . 

"Our vision is of an institution that would pool the resources of the third sector in Scotland for investment in our sector. The philosophy will be one of mutuality – that would use the collective impact of our own money to create financial services consistent with the mission and values of our sector and, in so doing, also attract new money.

 

We believe it is time to create a place where savers - the third sector and like-minded people and organisations - can invest community, environmental and social initiatives, inspired by shared values of a sustainable social and human development."

 

That's pretty close to our argument for the 'Marshall Plan'  

"Project funding should be placed as a social-benefit fund under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders.

This program provides for near-term social relief for Ukraine’s neediest citizens, most particularly children who normally have least possible influence and no public voice. Over a few years time, the net cost financially is zero. Every component is designed to become financially solvent, through mechanisms of cost-savings and shared revenue with other components. One component, Internet, provides essential communications infrastructure as well as a cash surplus to be used to offset any lingering costs of other components such as childcare, and otherwise goes to a permanent social benefit fund under oversight of the aforementioned independent, citizens-based non-government board of directors.

Any number of other social enterprises can be created. Furthermore, any number of existing for-profit enterprises are entirely free to contribute any percentage of profits they wish to increase the proposed initial $1.5 billion social investment fund. If for example the total fund comes to $3 billion, that amount would generate at least $300 million per year in a hryvnia deposit accounts at any one of several major Ukrainian banks, to provide ongoing funding to continue to create and expand social enterprises.

This strategy places adequate funding for social benefit under control and management independent of government and the very obvious vicissitudes and conflicts inherent therein.

This is a long-term permanently sustainable program, the basis for "people-centered" economic development. Core focus is always on people and their needs, with neediest people having first priority – as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine's poorest and most desperate citizens, rather than a "top-down" approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first -- not secondarily, along the way or by the way."

Notably neither Senscot not any other support agency could be called on when corporate predators moved in on our work.

Just before this happened in 2010, our founder made what would turn out to be a prescient warning about profit motivation.

“When we get into divvying up financial profits it’s too easy to get sidetracked by a myriad of possibilities along those lines,” Hallman tells Axiom News.

“In that case there is distraction from the primary objective of any given project, the social concerns for people at risk of exclusion, or already excluded, from the opportunity to have a decent, safe, secure life.”

Hallman adds that if “a lot of emphasis is placed on financial returns, the usual suspects can and will get in, figure out to how strip out the social aspects of social businesses and keep all profits to themselves.”

“Think of the corporate raiders on the loose in the U.S. in the 1980s. Same thing. That mindset is the driving force that has created such need for social businesses to begin with.”

Hallman is currently investigating the setup of a multi-million dollar fund offering split financial ROI if needed, that is, a portion to investor(s) and the remainder to P-CED.

The funds will be directed to concluding a project in the Ukraine which involves funding the training of residents to develop social businesses. Included in this work is supporting children who have disabilities, many of whom have been left to die in secretive locations. P-CED is helping to move these children to safety and give them access to modern healthcare."

Every Child Deserves a Loving Family