Will charities be like businesses?

There are growing pressures for the third sector to finance itself through loans and equity. Mathew Little reports.

Sir Ronald Cohen, apostle of private equity and friend of Gordon Brown, had a message for the third sector last week. Interviewed in The Observer, the Egypt-born venture capitalist claimed that real social change would come "if you could manage to connect the private sector way of doing things and access to capital markets with the social challenges that communities are facing everywhere".

Cohen's words were not so much friendly advice as a statement of intent. As the Brown-appointed chairman of the Commission on Unclaimed Assets, which recommends the distribution of millions of pounds from dormant accounts to the wider third sector, Cohen's vision of a marriage between commercial techniques and charitable aims could have a real effect on the not-for-profit sector.

The Cohen world view is clearly evident in the commission's proposal to create a social investment bank. Claiming the sector is "fragmented, under-capitalised and unable to invest in sustainable growth and development", it advocates a variety of private sector-style financial tools, such as equity investments (for organisations capable of generating significant returns by investing high-risk capital in disadvantaged communities), quasi-equity (for groups achieving social impact and lesser financial returns) and loans and bonds.

The commission's recent report on the proposed social investment bank also suggested encouraging private investment in the sector through widening community investment tax relief.

The emphasis on equity finance was criticised as too narrow by the NCVO, and there is a wider sense of disquiet in some parts of the sector - a concern that the private sector way of doing things through loans and return-seeking investment could alter the DNA of voluntary organisations. One sceptic described it as "a grand scheme that will distract charities from their reason for being".

The plans for a social investment bank suggest that Whitehall believes the sector is not entrepreneurial enough and needs to be prodded into a change of mindset. Other evidence of this is that the Treasury-created loan fund Futurebuilders seems likely to be given the capital to extend its lifespan until at least 2011, and the Home Office-backed Adventure Capital Fund recently announced an intention to triple its investment capacity.

Chris Harris, finance director at Action for Blind People, believes that the pressure and inducements for charities to embrace entrepreneurialism could have grave implications.

"It's likely that they will become more commercial in their outlook and lose their charity distinctiveness," he argues. "They will become like businesses and will no longer have time for not-for-profit issues such as donations or activities that do not recover their full cost and a margin. They will focus on activities that are well paid and will withdraw from those that are not."

The result, in Harris's eyes, will be more revenue for the Exchequer but also a fatal erosion of public trust in charities. The Directory of Social Change has also warned that voluntary organisations that take on loans could cross a threshold beyond which their imperative will shift to maintaining their own existence, rather than serving their beneficiaries. The DSC says grants, not investment, are what most charities need.

The 'privatisation' of the sector could well be under way, with one senior charity figure claiming that venture capital firms are bidding to buy the trading subsidiaries and assets of successful service-providing charities that make profits on contracts.

But not everyone shares this fear of commercialisation. Richard Gutch, chief executive of Futurebuilders, argues that the proposals emerging from the commission are not the imposition of alien mechanisms and values but a "meeting of minds of people from the third sector, such as former Scarman Trust director Matthew Pike, former Charities Commission chair Geraldine Peacock and people from the world of commercial finance, such as Cohen. It's not a case of one foisting it on the other, but a realisation that this is an approach to financing whose time has come."

Gutch also maintains that embracing loans and other new forms of investment does not mean voluntary organisations will have to discard activities that do not generate income. "The fact that you are expanding the level of investment finance in the sector does not mean you've got to reduce the amount of grants and voluntary donations," he says.

"Grant funding and voluntary donations and legacies are absolutely essential to the sector's development. But I support completely the idea of increasing the amount of investment capital. It's a waste of charities' time if they are continually having to raise money for services that really are capable of generating an income."

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