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Social Enterprise
1.29 pm
Mr. Gareth R. Thomas (Harrow, West): I welcome my hon. Friend the Minister for Small Firms, Trade and Industry to the Front Bench and congratulate him on his promotion. I am delighted that his first duty in the House is to examine the social enterprise sector.
Social enterprises, developed by social entrepreneurs as local responses to problems of neglect, marginalisation or the withdrawal of services, have often developed in the teeth of considerable financial, logistical and institutional barriers. In our first 20 months in office, the Government have instigated a range of measures from the new deal for communities, the creation of the regional development agencies, employment zones, and the coming deregulation of credit unions, to the cross-Government action teams on exclusion. Between them, those initiatives offer an excellent opportunity to break down the barriers inhibiting social enterprise and to promote the active expansion of the sector. Nevertheless, we still need an overarching strategy to tackle the problems of lack of recognition, lack of effective support and inability to access finance that are experienced by far too many social entrepreneurs and successful social enterprises.
Development trusts, co-operatives, neighbourhood projects, credit unions and community businesses are all examples of social enterprises that provide employment and training opportunities, locally needed services or a combination of all three. They operate on a commercial basis, but, rather than seeking a narrow gain for an individual investor, their principal aim is to maximise the social profit for the community in which they are located. Successful social enterprises, therefore, have combined the hard-headed financial skills of the private sector with a strong commitment to their locality and have succeeded in giving many a much stronger stake in their community.
Despite their considerable current contributions, and their potential, we do not yet celebrate in any organised or national manner our most dynamic social entrepreneurs. Neither do we trumpet the achievements of our most successful social enterprises. There is an annual round of rewards for the enterprise or entrepreneur of the year, but there is no similar ceremony to recognise the social entrepreneur of the year, and the sector's success stories are often little known beyond their immediate participants.
The North Kensington amenities development trust, for example, uses its assets under the Westway to generate rental income from more than 90 business tenancies. That income is used to fund leisure facilities, a youth training centre and large rent subsidies for the more than 20 voluntary groups that are located on its site.
The Bromley By Bow centre, in the constituency of my hon. Friend the Member for Poplar and Canning Town (Mr. Fitzpatrick), has grown--since a small church congregation decided to make use of its underused buildings--into a thriving community resource which now provides community care services, education activities, health projects and employment schemes. It was made possible by the local community's full involvement and leadership.
The Speke credit union was established in 1989, in its local community in Liverpool, and has grown considerably since, two years ago, it took over the
building housing the area's last bank. The credit union provides basic financial services to its 1,500 members, and is now funding skills training for jobs in computers, book-keeping and marketing.
Social enterprises have increased skills, confidence and economic activity in the communities in which they operate. However, rigorous analysis and support across Government, the financial services industry and regional and local agencies are absolutely essential if the social enterprise sector is to develop and fulfil its potential for regeneration.
Social enterprises often do not sit comfortably within the boundaries of more traditional definitions. They may have charitable status, yet still operate a range of highly commercial services. They may be a limited company, under whose auspices various not-for-profit services are offered. They often have highly diverse funding streams, ranging from statutory body grant income, members' savings and lottery funding, to commercial bank loans and equity and rental income.
A lack of understanding and awareness of the potential for social enterprise remains a key problem confronting social entrepreneurs seeking finance and support for their ideas. The Conservative party's sustained attack over the past 20 years on local government has led not only to a decline in the finance available for grants and loans to the third sector but, more importantly, to the loss of much of the staffing support for new social enterprises and, hence, access to the mentoring, technical assistance and basic skills training that is required by all social entrepreneurs at one time or another.
The growth of telephone banking, the centralisation of bank lending and the consequent tide of bank branch closures has made capital and support much harder to access for social enterprises, particularly in areas of deprivation. The social enterprise sector has consistently highlighted the reluctance of many mainstream bankers to understand and fund an enterprise, even when hard-headed evidence has been provided of an initiative's profit potential. The inability to access private sector finance is a significant block on development of the social enterprise sector. The Charities Aid Foundation estimates that, in the run-up to the millennium, the sector needs more than £250 million investment over and above current grant-based income.
The problem is not only one of finance. Many training and enterprise councils do not do enough to support social entrepreneurs. One council that I spoke to, for example, has successfully provided support, technical assistance and seed-corn finance to social entrepreneurs. However, it admitted that such help is not standard and was no longer available in most of its area.
In response to the problems faced by the sector, some social entrepreneurs have attempted to develop strategic responses to the lack of finance and support. The New Economics Foundation recently highlighted the growing number of imaginative but relatively small community finance initiatives, which also offer technical assistance for social enterprises ranging from mutual guarantee schemes and reinvestment trusts to community loan funds.
The Aston reinvestment trust, for example, specialises in providing loan finance at commercial rates to small businesses and third sector projects in Birmingham that were unable to secure loans from banks. The projects that it funds are viable, but not bankable. Access, not the cost of the loan, has been the key problem.
Many of the projects were unable to secure loan finance because they lacked a track record or were unable to provide accounts over a sufficiently long period, although they were able to demonstrate their ability to repay a loan. Moreover, many of the loans that the Aston trust has made so far originated with banks bringing projects to the trust for part-financing. The consequent financial package has therefore often included a partnership between the bank and the trust--and sometimes Birmingham city council--to provide the necessary loan finance that the banks felt unable to provide on their own.
Since establishment of the council's social investment fund, in June 1997, £740,000 has been raised from individuals, companies and housing associations. A further £850,000 has been levered in from the banking sector by using the type of joint financing that I mentioned.
Successful community finance initiatives, as in the Aston example, are usually partnerships between the voluntary, private and public sectors--collaborating, for example, with banks for equity and borrowed capital or secondments, and with providers of technical assistance, such as local authority enterprise agencies or business links. They have developed considerable understanding of financing in their specific areas and provide a range of services, from commercial and micro-loans to grants, savings arrangements, assistance with training and help in developing effective business plans.
As research by the New Economics Foundation has highlighted, there is still a considerable gap between the potential of social enterprise and the capacity of current community finance initiatives to respond to it. Only five localities in the United Kingdom, for example, have dedicated local community loan funds. Recent growth in credit unions has been in workplace credit unions and not community credit unions. According to the bodies Industrial Common Ownership Movement--ICOM--and Industrial Common Ownership Finance--ICOF, the number of established co-operative development agencies, which are some of the more established support mechanisms for social enterprises, has declined from over 100 in the mid-1980s to only 30.
Research by Kingston university, which was highlighted by the New Economics Foundation, reveals that over one fifth of the loan funds that it had identified in the early 1990s as being accessible to social enterprise had closed within just 12 months. The majority of current loan funds and mutual guarantee schemes for social enterprises have been established within the past five years.
Fundamental in developing opportunities for social entrepreneurs and supporting development of social enterprises must be further changes in attitudes within the financial services industry. My hon. Friend the Member for Putney (Mr. Colman), in a ten-minute Bill, rightly highlighted the success of America's Community Reinvestment Act--which, with related legislation, has ensured that £300 billion to £400 billion has been allocated by mainstream banks to meet community lending needs. The banks have subsequently found that considerable profits can be made in the process.
Crucial to the legislation's success has been development of effective partnerships between banks and community finance initiatives. Those involved in the initiatives have been able, because of their existing
relationships with potential customers and knowledge of the local economy, to break down the barriers between banks and social enterprises.
The picture in Britain is not entirely bleak. Some parts of the financial services industry are responding to the need to provide investment funding and support for social enterprises, as the example of the Aston trust demonstrates. Unity bank, the Triodos bank and the Co-operative bank have support programmes. One of the major clearing banks, for example, has just announced a package of measures to help credit unions. Although those moves are welcome, the level of support, understanding and access to finance provided by the financial services industry has nowhere near reached its potential. Action is now needed further to stimulate private sector involvement in the social enterprise sector.
The Government, too, have to improve the access of social enterprises to basic help, training and technical aid. Fledgling pure commercial enterprises can turn to training and enterprise councils and business links and, through them, are able to access myriad training schemes and specialist support, as well as ideas for sources of finance. The remit of TECs should be specifically extended to require them to develop and support social entrepreneurs and social enterprises.
The guidance published for the regional development agencies rightly refers to the importance of community businesses and community enterprise. RDAs should be specifically required to draw up strategies to promote social enterprise, to ensure that the range of necessary technical expertise is available and to identify the needs of social enterprises in their regions.
RDAs should be supporting and stimulating the growth of community finance initiatives that are able to fund and provide the development finance for social enterprise. Indeed, RDAs should be the stimulus to partnership between community finance initiatives and the banking sector, using their resources to help to lever in private sector finance.
At macro level, Government action to stimulate social investment is crucial. One model, to which I have referred in other debates in the House, is the tax relief system for green investment funds operating in the Netherlands, which has levered almost £200 million of private finance into environmental projects since the establishment of the funds in 1995.
The funds are offered to the public by banks and are regulated through the Dutch central bank, with projects that are to be funded licensed by the Ministry of Housing, Spatial Planning and the Environment. The interest or dividends generated by the green investment funds are exempt from income tax, which allows the bank to pass on favourable terms to the project being financed. The certificates of the first such funds, to the value of £150 million, were sold out in only nine days. Similar funding streams backed by tax relief have been developed in America and elsewhere.
Social investment funds in this country have already supported social enterprise. Without Government action to stimulate them, however, such funds will remain at comparatively low levels. The evidence from the successful, but small scale, funding initiatives taken by bodies such as ICOM, ICOF or, indeed, the Aston reinvestment trust, is that there is strong latent desire
among the public to be able to invest their savings in social enterprises while still receiving an acceptable rate of return.
The Aston reinvestment trust is keen to begin paying interest to the investors in its social investment fund, which would ensure that they receive some return and would help to attract more investors. A system of carefully regulated tax relief on such investment funds would undoubtedly help to spur that process and lever much larger sums of private finance into the social enterprise sector.
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