The Big Society - Public Administration Committee Contents

4  Funding the voluntary sector

59. Throughout this inquiry, and our earlier examination funding of the voluntary sector, we have received considerable evidence on reductions in grants and local authorities for charities and community groups. It is not easy to find a substantiated, accurate figure for the size of spending cuts to the sector. New Philanthropy Capital has estimated the cuts in state funding to be between £3.2 and £5 billion[114] and Sir Stuart Etherington, Chief Executive of the National Council for Voluntary Organisations, thought that cuts of £3 billion to the sector "was not unlikely".[115] Much evidence appears to be anecdotal. The Minister for Civil Society strongly disputed the estimates we put to him as "a totally speculative number, not based on any evidence at all" but did not offer an alternative figure; arguing instead that while the total would be higher than £100m, it was not possible to produce a definitive figure.[116]

60. While the size of the cuts has been disputed, many witnesses have criticised the pace of the funding reductions. The Bishop of Leicester reported concern that some Ministers had not fully accepted the impact of spending reductions on charities. He said:

[...]the way in which public funding is withdrawn, the speed at which it is withdrawn, the consequences for the most vulnerable and the negative effects on those charities and voluntary organisations that train and mobilise volunteers has not always been taken full account of. [117]

The trade union Unite warned:

The scale and speed of the cuts to the voluntary sector is terrifying, and is hurting society's most marginalised and vulnerable. Ill-conceived and rushed budget decisions have been made at every level, from local councils and authorities, to central government.[118]

61. To understand the changing funding environment, we considered the existing funding streams for charities, and the attempts to bring in new funding mechanisms.

The current funding situation: the 'funding gap'

62. Any consideration of the funding of the voluntary sector at present should first recognise its breadth and diversity. Voluntary bodies vary widely in terms of their objectives, their size, their volume of income, their geographical scope, and their types of activity. Figure 1 below is an illustration of this.

Figure 1 Voluntary sector size and income distribution 2007-08


(Micro = Less than £10k income; Small = £10k to £100k; Medium = £100k to £1m; Large = £1m to £10m; Major = More than £10m)

Source: NCVO, Funding the Future[119]

63. Across the sector, voluntary bodies are funded by a mixture of income from the state, charitable giving and social investment. The Minister for the Cabinet Office has highlighted that the majority of charities—75%—do not receive statutory funding.[120] However, the NCVO estimates that "many of these are small or micro organisations".[121]

64. The 36% of sector income (£12.8bn) from the state[122] can then be sub-divided as follows:

a)   £9.1 billion of the total income from the state (representing 71% of all state income, and 25% of total sectoral income) is from the "payment for the delivery of services under contract."[123] This may be from either national or local government. Polly Toynbee appeared keen that income received for the provision of services commissioned by the state should not be seen as a donation, or a state subsidy for charity, arguing that:

[...] it is not money being given to charity as if it were a charity donation, they are contractors. They are doing a particular job. The local authorities have said, 'We want someone to deal with young offenders', or, 'We want someone to do a day centre for the elderly'.[124]

b)  £6.6 billion (52% of the total state income, representing 18% of total sectoral income) comes from local authorities.[125] Examples of this funding could be payment for contracted services, or local grant programmes, such as Early Intervention Funds, Children's Fund, or those that support volunteers and volunteering infrastructure: such as Voluntary Sector Councils.[126] A further source is central government grants to local authorities. NAVCA cited the use by some local authorities of central government grants such as Area Based Grant and Working Neighbourhoods Fund "to replace their own voluntary and community sector grants programmes".[127] When funding was subsequently withdrawn by central government for these programmes NAVCA reported that it had not been replaced by equivalent funding by local authorities.[128]

65. A proportion of state funding has in the past been derived from programmes such as the Future Jobs Fund, (which closed in June 2010),[129] the Volunteer Brokerage Scheme which ended in November 2010,[130] and FutureBuilders, a £200m scheme which provided loans for third sector organisations delivering, or planning to deliver, public services (it was "effectively shut for business" in June 2010.) These funding streams are no longer available[131]

66. Particular charities receive proportionally more public funding than others. The Third Sector Research Centre found that a greater proportion of charities dealing with people with mental health problems, ex-offenders or victims of crime received public funding compared to charities serving 'the general public or everyone' (60% compared to 28%).[132] Their research also found that "voluntary organisations working in deprived areas are much more likely to be in receipt of public income".[133]

67. We heard of great enthusiasm for the development of new funding streams for charities from social finance. Bernie Morgan, former Chief Executive of the Community Finance Development told the Committee that "we are on the threshold of a new era and paradigm shift" with regards to finance for social enterprises and charities.[134] While a natural caution in approaching such claims is understandable, Sir Ronald Cohen, Chair of Big Society Capital Limited, asked the Committee to put aside its "initial scepticism about whether something that seems so new can actually be effective" suggesting that there were parallels with the growth in venture capitalism in the UK in the 1980s.[135]

68. While the projections for social finance are ambitious the new income streams available cannot at present replace the spending reductions already experienced. Kevin Curley of NAVCA reported that £1.2 billion of funding to charities and voluntary groups had been cut by local authorities, and that the funding from Big Society Capital although "important in the future [...] is small scale" in comparison.[136]

69. There is also a considerable time lag between cuts to local authority grants and spending and the development of new sources of funding.[137] We heard evidence that funding cuts to small charities could undermine the Big Society project. The National Council for Voluntary Youth Services told us that

many organisations who might otherwise have a vital and creative role to play in the Big Society may be lost over the next 18 months due to the suddenness and severity of statutory funding withdrawal, and the lack of viable alternative funding pathways to 'bridge' their survival and adaptation to the new evolving environment.[138]

The charity Community Links concurred:

Cutting too quickly risks destroying groups like Community Links which are perfectly placed to develop the Big Society if given the time to continue adapting and innovating.[139]

70. The NCVO described this funding gap as "the most significant problem" facing charities and voluntary groups.[140] In February 2011, the Prime Minister spoke to reassure such groups:

[...] some people say that the Big Society can't happen because our voluntary bodies are being starved of state money. No area can be immune from cuts, but I'd ask people to look beyond the headlines and see a much bigger structural change in how the voluntary sector can work in future. We are in the process of opening up billions of pounds' worth of government contracts so charities and social enterprises can compete for the first time. The scale of this opportunity dwarfs anything they've ever had before.

But we understand that while the opportunity lies in the future the local authority cuts are happening now. So this week we are launching a transition fund to help charities prepare to bid for these contracts and a big society bank to provide some working capital when they're awarded them.[141]

71. We are concerned that many charitable and voluntary organisations are suffering the immediate effects of reductions in public spending. In some cases their existence is at risk, yet they are the very organisations which may wish to participate in the Government's Big Society policies.

The Transition Fund

72. A £100m Transition Fund for voluntary and community funds facing hardship as a result of spending cuts was announced on 20 October 2010 as part of the Spending Review. Applications were to be submitted by 21 January 2011. Eligible organisations could apply for a grant of up to 50 per cent of the reduction in taxpayer-funded income that they used to deliver public services, with grants available between £12,500 and £500,000. The fund was open for applications from charities which:

  • had turnovers of between £50,000 and £10m;
  • spent at least half their total income on delivering front line public services in seven defined areas including health and social care, education, welfare to work and homelessness;
  • had evidence, or had substantial reason to believe, that between April 2011 and March 2012, they would experience a reduction of at least 30 per cent of the taxpayer-funded income they receive for the delivery of front line public services in England; and
  • had free reserves equal to, or less than, the cost of running their organisation for six months.[142]

73. The Transition Fund has attracted some criticism. New Philanthropy Capital (NPC) was concerned about the way the fund was operated, raising a number of specific points:

  • The application period was only 7½ weeks, which covered the Christmas and New Year holiday period;
  • The application period closed while local authorities were still making decisions regarding spending from April 2011 onwards. Many charities which are eligible for support from the Transition Fund may not have been notified of their funding situation until after the deadline for applications; and
  • Charities which had followed 'best practice' and not relied on one source of funding (in this case from the state) for over half their income had effectively been penalised for this by being rendered ineligible for the fund.[143]

74. The Minister for Civil Society, Nick Hurd, explained that the Transition Fund was designed to "get money out as quickly as possible to organisations that are extremely dependent on public income but have aspirations to deliver more public services. We therefore had to set strict criteria for it."[144] He was clear that the Transition Fund was not intended "to compensate fully, and we have always been quite clear that we can't protect every single charity and voluntary group from a reduction in public expenditure, because the scale of the reduction that we need to make is so great."[145]

75. We welcome the Transition Fund and the intention to sustain the voluntary sector which underlies it. The fund itself can clearly not provide assistance to every charity and voluntary group struggling to bridge the gap between public spending reductions and new sources of social finance income. This funding gap may effectively inhibit some charities from tendering for public service delivery, and thus undermine the Government's efforts to procure from charities and social enterprises, as they may lack the available funds to enter into contracting arrangements. There is also a question about democratic accountability for the allocation of such funds. We urge the Government to bring forward proposals to address this, such as a form of voting system, in order to reflect the aspiration to involve people and communities.

Big Society Capital

76. Speaking at the launch of the Big Society project in Liverpool in July 2010, the Prime Minister recognised that charities and smaller organisations could find it difficult to tender for public service contracts because of difficulties raising working capital. To remedy this, the Prime Minister described "providing finance" as one of the three main areas of policy action necessary to achieve the Big Society project (the others being decentralisation and transparency).[146] The Prime Minister stated that:

we believe in paying public service providers by results. It encourages value for money and innovation at the same time. But the potential problem is that you can lock smaller organisations out, because they don't have access to start-up capital. So government has a crucial role to play in bridging the gap—and indeed, more widely, in connecting private capital to investment in social projects.[147]

77. The Prime Minister provided further details of the Big Society Bank, now renamed Big Society Capital. It would be capitalised by

using every penny of dormant bank and building society account money allocated to England. These unclaimed assets, alongside the private sector investment that we will leverage, will mean that the Big Society Bank will—over time—make available hundreds of millions of pounds of new finance to some of our most dynamic social organisations.[148]

This is estimated to amount to up to £100m from bank and building society accounts which have been untouched for at least 15 years.[149] In addition to these funds, the Bank will be capitalised with £200m as a result of the February 2011 Project Merlin agreement between the Government and the UK's four biggest banks .[150]

78. In February 2011, the Cabinet Office published a strategy paper entitled Growing the Social Investment Market: a vision and strategy which set out how charities and social enterprises would be able to access social investment funds. The strategy describes a considerable opportunity for growing the social investment market, noting that

UK charitable investment and endowment assets alone account for nearly £95 billion. If just 5% of these assets, 0.5% of institutionally managed assets and 5% of retail investments in UK ISAs were attracted to social investment, that would unlock around £10 billion of new finance capacity.[151]

79. The establishment of Big Society Capital has been considerably delayed by the need to secure EU state aid approval for the use of the dormant bank account funds. A formal notification for state aid approval was submitted in October 2011, and the Cabinet Office expects to secure approval by April 2012.[152] Given the already difficult funding environment for charities and community groups, this delay is unhelpful.

80. Delays in setting up Big Society Capital are contributing to the 'funding gap'. In our report 'Change in Government: the agenda for leadership' we reported on the frustration in Government about the "deadweight of inherited policy, not least by the overbearing constraints imposed by the vast body of EU law and regulation". The delay in the operation of Big Society Capital by the need to seek EU state aid approval is a case in point.

81. The mission of Big Society Capital is

to boost significantly the ability of the social sector to deal with social issues. It will do this by supporting the development of a social investment market which is more effective in attracting capital to achieve social impact.[153]

The potential impact on charities and social enterprises is indeed considerable. As Sir Ronald Cohen explained, traditional fundraising measures involve the uncertain procedure of charities and social enterprises approaching a number of donors and philanthropic trusts and requesting large sums for a long period of time. Big Society Capital will bypass this hindrance.[154] Sir Ronald also recognised the need to build capacity in the social investment market, and spoke of the purpose of Big Society Capital as being "proactive" and "with the purpose of getting the social sector going". This would mean that Big Society

[...] is going to be a lot more than just a fund of funds. Part of it is making sure that Social Impact Bonds help those who are capable of being helped by them, where the metrics are there and the organisations can deliver social outcomes and so on.[155]

Claire Dove, Chair of the Social Enterprise Coalition, spoke of the considerable help this would provide social enterprises, citing her own hard-fought battle as a social entrepreneur.[156]

82. Sir Ronald struck a note of caution in warning that Big Society Capital should not be expected to "bring a revolution in the space of five years".[157] Instead, he urged it to be seen as a "10 to 20-year project": a similar growth period to that of business entrepreneurship in the UK in the 1980s.[158]

83. Big Society Capital will be a private sector body independent of Government, and it will be expected to make a sufficient return on its investment to cover operating costs. Under the Dormant Bank and Building Society Accounts Act 2008, it is required to work as a wholesaler: charities and social enterprises will not receive funding directly from Big Society Capital, but instead from intermediary social finance organisations.[159] This point concerned some witnesses. NAVCA warned that, as the social finance intermediaries with which Big Society Capital would be working will be offering loans, and not grants, they did not think that it would be relevant for small and local charities and voluntary groups.[160] Other charities report not being willing to seek loan finance owing to resistance among some trustees to a new, and potentially riskier funding model.[161]

84. Two recent reports have cast doubt on the ambitious forecasts for the take up of social finance by the sector. The Young Foundation and Boston Consulting Group warned that there were too few social finance intermediaries to deliver these funds, meaning that much of the Big Society Capital's money would remain in dormant bank accounts.[162] New Philanthropy Capital claimed that social finance was only relevant to a small proportion of the sector, and could be dangerous to ambitious charities that took on debt they would not be in a position to repay.[163

85. We raised concerns about the rates of return the Project Merlin banks would receive on their investment. The Minister for the Cabinet Office told us that banks would "be entitled to a share of any distributable surplus/profits made by Big Society Capital in proportion to their investment".[164]

86. Sir Ronald Cohen believed that Big Society Capital would not experience the lack of demand for social investment experienced by other social finance funds. Instead he believed that "the supply of money does create its own demand" as the ambitions of social enterprises and charities would increase when they knew that there would be a source of funding for their activities. This would also attract new social entrepreneurs into the market.[165] Claire Dove cited research carried out by the Social Enterprise Coalition which had indicated that one of the biggest barriers to growth of some social enterprises was access to capital.[166]

87. A contrasting view came from NESTA (the National Endowment for Science, Technology and the Arts) which argued that "by far the majority of demand for capital" was for 'soft capital', defined as patient, semi-commercial capital which typically took many years to return the principal. NESTA warned that Big Society Capital "should not expect to achieve commercial returns on many of its investments".[167] NESTA challenged Big Society Capital to be clear whether its role would to help social enterprises and charities access capital to increase social impact, or to deliver financial returns.[168] The National Association for Voluntary and Community Action (NAVCA) urged Big Society Capital to "accept that some investments will not see a return" and instead balance risk across a range of investments.[169]

88. Big Society Capital is a genuinely imaginative social innovation, which has enormous potential in the long term. The concept is as yet unproven, and large scale effects will take a decade or more to bear fruit. Furthermore, Big Society Capital will not provide the solution to the 'funding gap' for many small, local charities who do not wish to take out loans. The Government must acknowledge that in the short term Big Society Capital is unlikely to resolve the current 'funding gap'.

Social impact bonds

89. In September 2010 the Ministry of Justice launched a pilot social impact bond aimed at reducing reoffending by prisoners who served short custodial sentences at HMP Peterborough. The bond raises finance for a Payment by Results contract, whereby the private sector assumes the risk of delivering a public service, and is rewarded by Government based on the outcomes it achieves. The scheme is worth £5m and run jointly by the non-profit organisation Social Finance and the offender rehabilitation charity St Giles Trust. If this pilot project reduces re-offending by 7.5%, or more, investors will receive from Government a share of the long-term savings, up to a maximum of 13%.[170] The first social impact bond was only available to foundations and charitable trusts, not the private sector, but Sir Ronald Cohen envisaged private sector interest further down the line.[171] This is not guaranteed: private investors might have to wait several years to see a return.[172] Third Sector magazine, the trade journal for the charity and voluntary sector, warned that social impact bonds

are considered more likely to appeal in the short-term to philanthropists and then to smaller investment funds and private banks, which are more able to take risks. Among institutional investors, insurance firms are seen as likely takers because they would benefit from reductions in crime and antisocial behaviour. Traditional institutional investors such as pension funds are thought likely to be the last in line.[173]

90. The progress of social impact bonds will also depend on the ability of commissioners to develop metrics for measuring social outcomes. Sir Ronald Cohen recognised that the need to measure success "will rule out certain social issues where it is very difficult to find metrics that are reliable".[174]

91. While witnesses were positive about the development of social impact bonds, concerns were expressed that the limited examples at present were all at very early stages. For example, NAVCA cautioned that the results of the pilot programme at Peterborough Prison would not be clear for around six years.[175] In the meantime policy based on social impact bonds is being formulated in the absence of any evidence of their success.

92. Social impact bonds have the potential to transform the way public services are delivered and financed. Until further evidence of their success, both in achieving social aims and attracting capital, is available, we urge caution in reliance on their growth. We welcome the reviews taking place of the pilot project at HMP Peterborough, and look forward to receiving information on the project's progress.

114   New Philanthropy Capital, Preparing for cuts, (London: 2010), p 2 Back

115   Q 94 Back

116   FVS Q 170, 171, 172 Back

117   Q 370 Back

118   Ev w292 Back

119   The Funding Commission, Funding the Future, (London: 2010), p 8 Back

120   "Battle of the Big Society" The Independent ,13 February 2011, p. 10-11 Back

121   NCVO The State and the Voluntary Sector (London, 2009), p. 11. Back

122   FVS Ev 51 Back

123   FVS Ev 51 Back

124   Q 92 Back

125   FVS Ev 51[The NCVO calculations are based on figures from 2007-08: the most recent figures available].  Back

126   FVS Ev 53 Back

127   Ibid. Back

128   IbidBack

129   Ev w213, FVS Ev 53 Back

130   FVS Ev 53 Back

131   HC Deb, 9 June 2010, col 319 Back

132   Ev w240 Back

133   Ev w240 Back

134   Q 251 Back

135   Q 264 Back

136   Q 434, 436 Back

137   Ev w107 Back

138   Ev w141 Back

139   Ev w108 Back

140   Ev w249 Back

141   'David Cameron: Have no doubt: the Big Society is on its way' The Observer 13 February 2011 Back

142   "Transition Fund" Big Lottery Fund website, 30 November 2010  Back

143   "£100m Transition Fund for charities: tight deadline" New Philanthropy Capital Blog, 11 January 2011,  Back

144   Q 153 Back

145   Q 155 Back

146   Prime Minister's Big Society speech, 19 July 2010  Back

147   Ibid. Back

148   Ibid. Back

149   'Big Society Bank will start with £60 to £100m in unclaimed assets, say government advisers' Third Sector 19 July 2010 Back

150   HC Deb 9 Feb 2011 Col, 312. Back

151   'Growing the Social Investment Market: a vision and strategy' Cabinet Office February 2011 Back

152   Ev 125 Back

153   "The Big Society Bank Outline Proposal", Big Society Capital, May 2011,  Back

154   Q 256 Back

155   Q 315 Back

156   Q 309 Back

157   Q 290 Back

158   Ibid. Back

159   Q 295 Back

160   Ev 126 Back

161   Q 297, BS 50 Back

162   The Young Foundation and Boston Consulting Group, Lighting the Touchpaper: Growing the market for social investment in England, (London: 2011) Back

163   New Philanthropy Capital, Best to Borrow: A charity guide to social investment, (London: 2011) Back

164   Ev 125 Back

165   Q 292, Q 293 Back

166   Q 310 [Claire Dove] Back

167   Ev w295 Back

168   Ev w296 Back

169   Ev 126 Back

170   "Social Finance launches first Social Impact Bond" Social Finance 10 September 2010  Back

171   Q 313 Back

172   "Analysis: Can Social Impact Bonds help create a better society?" Third Sector, 1 November 2011 Back

173   Ibid. Back

174   Q 260 Back

175   Ev 126 Back

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© Parliamentary copyright 2011
Prepared 14 December 2011