Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 240 - 255)

TUESDAY 5 JUNE 2007

SIR RONALD COHEN, MR ED MAYO AND MR TOBY ECCLES

  Q240  Mr Mudie: And you have dismissed it.

  Sir Ronald Cohen: We have not dismissed it. What we have been anxious to do is to make sure that this organisation is responsive to the needs of the third sector, not that it reports formally to the third sector. In setting up an organisation that is independently managed and perhaps answerable directly to Parliament you have to try to find the right legal structure, you have to have the right governance for it. We have accepted that it may well have a set of trustees at the top, that you would go through normal public procedures in order to appoint them, that they would be the guardians of the mission of this organisation, that they would pick a board and a CEO going again through public appointments procedures, and then on a yearly basis it may well be that the most appropriate thing to do is for this organisation to report to Parliament. The guidelines which the trustees would follow would be to look at the needs of the third sector and to try to increase the capacity and the effectiveness of the third sector in the relief of disadvantage and the appointment of a board would follow similar guidelines. So it was in that more general sense that we were saying that it should be responsive to the needs, rather than responsible to the third sector.

  Q241  Mr Mudie: You would still find it acceptable to report directly to Parliament, would you?

  Sir Ronald Cohen: Absolutely.

  Q242  Mr Mudie: I am sorry we have taken up a lot of time on technical matters rather than getting to the real issue for yourselves as a commission which you have accepted on your website is how you spend this money. I represent a very poor constituency and your SIB does not fill me with joy. I am counting the days until you come in. I will tell you how I view you. I think the Government has put enormous amounts of money in the direction of my constituency but it has been intercepted by well meaning employed people who are making a good living out of ensuring that my poor constituents lose their poverty. To date, after 10 years, they have failed, but whilst they are in a job they will continue trying whilst my constituents will still be poor. What on earth is this bank going to deliver to east Leeds or at least Newcastle?

  Sir Ronald Cohen: If you want to deal with the problems of poverty today, I think all of us would agree that just giving Government grants is not going to provide the solution. We have a society where wealth is increasing, growth in the economy is up, employment is up, the economy does better, but the gap between rich and poor is getting bigger and bigger. We have a third sector that is powerful in terms of the numbers of people working in it and is very poorly undercapitalised.

  Q243  Mr Mudie: Why do you paint this picture, accepting the poverty of my people, and then suddenly decide that here is this 330 million you are going to take and you are going to put it in to the third sector? That is again a filter between the money and my people.

  Sir Ronald Cohen: I was just going to give an example of it. The sorts of organisations that we are talking about funding, if I may take one example, would be organisations such as the Charity Bank. The Charity Bank is lending money to philanthropic organisations across Britain, many of them working in your areas.

  Q244  Mr Mudie: We have loan sharks in my area.

  Sir Ronald Cohen: This is the answer to loan sharks.

  Q245  Mr Mudie: The Credit Unions are the answer to loan sharks, but we still have loan sharks.

  Sir Ronald Cohen: Perfect. The reason the Credit Unions are not an answer to loan sharks is one thing and one thing only, ie they cannot get the capital.

  Q246  Mr Mudie: I disagree with you. In Leeds we have got one of the biggest Credit Unions and they are well funded. They have over £1 million in the bank. They have plenty of money but very little impact on the estate.

  Sir Ronald Cohen: They should not have £1 million, they should have £100 million. When I started out in venture capital and we were raising a £10 million fund people thought it was a lot of money, there is no more that can be done. Today, as we can read in the papers, you have got billions—

  Q247  Mr Mudie: You are a friend of the Chancellor and I get angry with the Chancellor. For example, today is the final date for Enterprise Funds in Leeds. It has been open a month. Nobody on the estate knows about it. It is a lot of money. It is the Chancellor's view about how to end poverty in my patch and it does not matter. What will end poverty in my patch is people getting jobs and having money in their pockets. Enterprise is something different. You say you are trying to create a market. They will create a market if you put money in their pockets and put them into jobs.

  Sir Ronald Cohen: To create a market you need to create businesses, you need to create jobs.

  Q248  Mr Mudie: Businesses are created when there are customers. When the customers have no money to artificially create businesses it is just a farce.

  Sir Ronald Cohen: Perhaps I could give you just one example. In 2002—and this is what the Social Investment Bank wants to do in part—the Government provided £20 million to Bridges Community Ventures and we raised £20 million from the private sector. The money can only be invested in the poorest 25% of the country according to the Government's index of deprivation. People thought there were no entrepreneurs in that area. Lo and behold we have now invested the best part of £40 million. We have just raised—and perhaps this could stay in this room, an announcement will be made shortly—more than our estimated £50 million and it is all from the private sector. This money will go to people in the poorest areas of the country to create jobs. The role models that have been created in the first fund—

  Q249  Mr Mudie: With the greatest respect, I could create jobs overnight. I did when I was Leader of the Council. I put a fair bit of money in for home helps which are desperately needed in the community by the elderly. A lot of ordinary people, often with no great educational skills, got jobs for the first time in their life. We could create jobs and they in turn create the market by spending money. You are asking for money to create a market and those people have no money.

  Mr Mayo: I do not think our point, with respect, is that you cannot take the approach that you have said. You could put money through public expenditure in the way that you have said. You could put it into people's pockets directly in terms of benefits.

  Q250  Mr Mudie: I have never suggested that. I have said employment. My people want jobs. My youngsters are coming out of schools or higher education thinking they have no future and the Government has put loads of money into the third sector where nice middleclass people are getting jobs and they are looking after my working class people who cannot get jobs.

  Mr Mayo: In terms of employing home helps or using money in order to give people jobs that are funded by the public sector, it is not our argument that that will or will not work. Will the public see that as an effective use of money in terms of tackling poverty?

  Q251  Mr Mudie: I was not confining myself to that. We run a job training scheme that needs funding. We said to working class people who were on the estate and long-term unemployed that if they lasted the course we would guarantee them a job and a lot of those jobs were in the private sector. They were not creative jobs, they were mainstream jobs. With the amount of money Sir Ronald is talking about we could skill people and put them into mainstream jobs, increase the capacity of the economy and everybody would be happy. There is nothing artificial about it. Why are you not suggesting we put the £330 million in to doing something like that?

  Sir Ronald Cohen: Because it is attracting another £700 million and you are investing a billion in building organisations that can fund a multiple of the number of people that you would give jobs to directly.

  Q252  Mr Love: I want to follow up on what George has been saying. As someone who is very supportive of the third sector, whilst I have some sympathy for what George says, it is not only the middle classes that work in the third sector. There are many very dedicated people working in the third sector. I wanted to put to you the criticism that has been made of organisations already in this field, including the Triodos Bank, who you will be very well aware of. There has been, if we are being very honest, limited success with community development finance institutions, they are still very dependent on the Phoenix Fund. The tax relief in deprived communities has not really worked terribly well, as I am sure you are very well aware. Their criticism is that there is not the market out there for the level of funding that you are seeking. I know you have already said that sometimes the money will create the market. Just reassure this Committee that if this money was to be delivered to you, you are confident that you will be able to put it to good use and get a social return for the investment that is made?

  Sir Ronald Cohen: We have had consultation with 1,000 people in the course of our work. There is a huge need for capital. To the extent that you can create an organisation like this, our expectation is that we can attract three or four times the amount of money from the private sector than if you are investing in this institution. It will become self-sustaining, it will play the role that ICFC played after the war in trying to rebuild British industry and it will do this in the most disadvantaged areas. This money is a fraction of what is needed in total. I think if we do this then 10 years from now when we look back upon it we will see that it is a crucial part of funding voluntary organisations in this country to do a job which neither Government nor the private sector can do effectively.

  Q253  Chairman: Sir Ronald, Triodos Bank have argued the case in their submission to us that "the case still needs to be proved for further investment in capacity-building and that the market demand for social equity investment is currently small and met by existing supply. The reason for the small size of the market is that there are "still relatively few organisations with the right business model and the management capacity to work with an equity investor"." Is the market ready for a Social Investment Bank?

  Sir Ronald Cohen: Whenever there is a chicken and egg problem you have to realise that they were both designed at the same time. The chicken and the egg did not come one before the other, they came together. A chicken and egg problem means that you have to work on both dimensions at the same time, you have to work on the supply of capital and you have to work on the capacity of organisations to put it out. When we had no Bridges Community Ventures no money was being invested in venture capital in the poorest parts of the country. Today we have invested £30 million. We will now have more than £100 million to invest in these areas. There is no shortage of entrepreneurs. We are looking at 300-500 business plans from these areas a year now. The supply of money does create its own demand. People go out to get the money if they think it is easy to get it. If they think it is impossible to get it they do not try. Believe me, this is a similar situation. When I started out my first venture capital fund in Britain was a £10 million fund. It was the largest fund in 1981 in the UK and people said we could not invest it. Now hundreds of million of pounds are being invested in early stage businesses every year. The same is true over here. If you can see your way to supporting the creation of a Social Investment Bank you will see that it will transform the flow of capital into these areas. I was giving the example of the Charity Bank. The Charity Bank today needs £10 million of equity to increase its ability to lend to not-for-profit organisations. Do you know how much it could give in loans if it got that £10 million? It could give £130 million. That £10 million will release £130 million of lending to not-for-profit organisations. That is what this is about. This is about taking this money and instead of spraying it over the desert sand and seeing it seep in, creating an organisation that can act as a pump for a voluntary sector which is akin to an engine with all its pieces lying around which you have to bolt together. If you bolt it together and put this pump in it you will get real results. The scale of the problem is huge as we all know. £250 million of unclaimed assets is a Godsend. It would be very difficult to get an allocation from Government for a purpose such as this if the unclaimed assets were not available.

  Q254  Chairman: Ed, you have worked with the voluntary organisations in the third sector for a lot of your working life. Would you not like to leave us with your impressions on this?

  Mr Mayo: With pleasure. I start from my day job as Chief Executive for the National Consumer Council. We are very conscious of the many ways in which the poor and disadvantaged lose out. The poor pay more and get less for a whole range of services and often that is geographically based and so you have high streets that are run down and you do not have businesses and enterprises operating in those areas. You have the State and you have local government but altogether it does not add up to local renewal. What I have seen in my working life over the last 10 to 15 years on issues about poverty is that there is huge potential there. I do not mean to say that it is alone in terms of the third sector and I do not mean to say that everything that happens in the third sector is right or always professional or always better managed. I think the idea that there is creativity, potential talent and social entrepreneurship that can be unlocked in communities that would otherwise be seen as in deficit, in need and disadvantage is undeniable. The third sector organisations are organisations that the public do know and can trust. It may be that the public have greater trust in third sector organisations as names and brands than they may do in Government, certainly more than they may have in banks or indeed perhaps building societies as well. It is about unleashing their potential to make a difference. I have seen third sector organisations that are killed by sudden death contracts, by the insecurity chronic and endemic insecurity of grant funding, not knowing at the start of year whether they are going to have the money there to pay the bills and that is about capital structure in a funny way, it is about the business model, which I think was the point that Michael Fallon was making earlier. What we are exploring in a Social Investment Bank, which I think is different and innovative but needs to be done at the right scale, is changing the way that that effort and that initiative is capitalised and looking to more effective ways to do it. If you talk to managers and people that work in the front line, in communities and community development trusts or social enterprises providing these services, the idea that there could be a stronger capital base to give them security to employ local people to provide services to innovate I think is a key thing. I think this is an opportunity to do something which is terribly difficult to do in Britain. Michael Young, the founder of the National Consumer Council, said to me, "Edward, if you want to do anything new in England you have got to pretend that it's not". It is terribly difficult to do something innovative here often in England and I think what we are doing with this proposal is changing that. I am very confident that the proposal is far more innovative and will be far more of an effective proposal than simply responding to the inexhaustible needs of a myriad of different good causes.

  Q255  Chairman: The same applies in Scotland as well. I chair a regeneration company of public and private interests and it is the grant mentality aspect that we want to eliminate and we want to get the access to finances so that we can generate more in being independent in that. The model itself seems good to me, Sir Ronald, but the practicalities is the issue here. We are very grateful to you and your colleagues for coming along and explaining that to us this morning. Thank you very much.

  Sir Ronald Cohen: Thank you for inviting us.





 
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