Seb Elsworth: Government must support social enterprises to make a compelling contribution to levelling up

We know how to drive more capital towards the social economy – but someone has to pay for it

The government’s eagerly awaited white paper on levelling up will provide important detail of the Prime Minister’s flagship policy. 

While some elements of levelling up are relatively clear, for example a focus on infrastructure in parts of the country that lack connectivity, whether Michael Gove and his colleagues will prioritise investing in social infrastructure remains to be seen.

We must hope they do – and the presence of advocates for our sector close to Gove, such as Danny Kruger and Andy Haldane, is encouraging. 

The offer our sector can make is a compelling one. Social enterprises and trading charities are job-creating machines in precisely the places that most need levelling up, where many other businesses are unable to reach. 

According to Social Enterprise UK, the UK’s 100,000 social enterprises already employ two million people and contribute £60bn to the UK economy.

They create three jobs for every £100,000 of turnover, compared to two thirds of a job in the private sector. A fifth of social enterprises operate in the most deprived 10 per cent of places, helping to keep money circulating in those economies. 

One of the tools that is helping to fuel the growth of those local social enterprises is social investment. Like the organisations it exists to support, social investment is increasingly focused on the most deprived communities. 

For example, the Growth Fund, delivered through 14 social investors around England over the last five years, has made more than 600 investments, totalling more than £40m.

These are heavily distributed towards the most deprived communities: nearly a quarter of the fund has gone to organisations based in the most deprived 10 per cent of places in England. 

Take Key Fund’s investment in Toranj Tuition, based in Hull, one of the top 10 per cent most deprived wards in the country. It delivers training in English, employability, maths, citizenship and IT for forced and low-paid economic migrants.

Key Fund’s investment allowed them to purchase a new building to expand their activities, as a result of the growth in demand owing to the impact of the pandemic.

Key Fund has more than 20 years of history supporting similar organisations, with more than 70 per cent of its capital going to organisations based in the 30 per cent most deprived communities. 

But no one in the social investment sector is resting on their laurels. Driving more capital towards the social economy, in particular in the most deprived communities, continues to be our collective focus. 

The commitments made in BSC’s new strategy are another good example. This is not easy work, but we have built an understanding of how it can be done. 

The business models of social enterprises and trading charities working in such communities are, by definition, fragile.

The excess costs of operating in places with weak infrastructure, perhaps employing people far from the labour market, plus the revenue challenges of building a customer base within less-affluent communities all mean that making any kind of margin is tough. 

One criticism levelled at social investment is that it will struggle to serve the most deprived communities because the requirement for capital to seek a return will be at odds with the ability of those enterprises to create sufficient margin. 

However, this challenge has clear and proved solutions.

Smart use of subsidies changes the behaviour of investment capital and allows it to be shaped to meet the economic reality of left behind places. 

This is how the Growth Fund has reached so many organisations in the most deprived parts of England.

The social investors have been subsidised with grants from the National Lottery Community Fund, allowing them to take much greater risks because it is assumed they will not get all their money back. 

New applications of this blended finance approach through partners of Access’s Flexible Finance Programme are increasing the flow of longer term, flexible and patient investment to charities and social enterprises.

This will be more suitable for organisations on a long slow growth trajectory and with very tight margins. 

The models aim to use scarce grants efficiently, leveraging in far more capital to support the sector than philanthropy can do alone, and doing so in a way that meets the needs of social enterprises and trading charities. 

For budding social enterprises in the most left-behind communities, who are not yet ready for any form of repayable finance, a new wave of enterprise grant-making, such as match trading, is helping to grow new models. 

So if we know how to drive more capital towards the social economy and contribute to levelling up, what is the barrier? Well, someone has to pay for it.

This is often the point at which critics of social investment go quiet. That subsidy has to come from somewhere, and every use of grants has an opportunity cost. 

Some foundations are increasingly considering the role that they can play in this ecosystem. But the role of government will be key.

It is encouraging to see that DCMS is currently commissioning a review of blended finance approaches. 

The Levelling Up agenda presents a major opportunity to capitalise the social enterprises and trading charities who are already transforming communities. Funders, both grant makers and social investors, should unite around that opportunity. 

Seb Elsworth is chief executive of Access, a foundation that helps to widen access to social investment for charities and social enterprises

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