A New Year’s Resolution for our Politicians?
In terms of quantity of money spent for social purpose, government swamps the rest. Charitable and business contributions are important, but ultimately they pale in comparison to Government spending.
So if it is to ever achieve any significant change, the emerging world of Social Investment must work with government, this dominant funder, for social outcomes.
2011 has been encouraging for evidence of a cross-party appetite amongst politicians to make this happen. Excellent work over many years by both parties, culminating in the establishment of Big Society Capital, and universal support for the concept of the Social Impact Bond and emerging potential of ‘Payment-by-Results’ have transcended the political divides. This gives investors like us confidence. Politicians appear to have collectively reached the logical conclusion that the state will be hampered in its ability to spend for social outcomes for the foreseeable future, and so it is in the interests of society to see others step up to fill the gap left behind.
Call it the Big Society or the Good Society, it is about getting other players to invest for social outcomes. And these social investors will only operate in any material way if they can do so in collaboration with government. Competing with, or operating in isolation of, state spending would be futile given a context where government – to a considerable extent – is the market. Or at least the customer.
Yet any investor – whether they be a social or a purely financial investor – can only invest where there is a reliable counter-party. If the counter-party looks or smells unreliable, then investors cannot invest – they have a fiduciary duty not to.
Government has, since 1945, operated as a monopoly interest. It has been the dominant funder and has therefore called the shots. So it has been free to change its mind or move the goalposts ‘for the greater good’. This has led to an entrenched culture and set of behavioural norms.
Markets – whether they be financial or social investment – cannot tolerate such behaviour. It introduces uncertainty and risk, two bad words for investors. For example, by behaving in a way that the High Court said yesterday was ‘legally flawed’ – and, by doing so, causing certain social investors to potentially lose their shirts – government risks destroying the ability of social investors to participate in anything where it may be a counter-party. In doing so, it points a gushing hose with one hand at the flickering flame of an emerging market onto which it enthusiastically pours fuel with the other.
Politicians have rightly been declaring – as Adam Smith did in the Theory of Moral Sentiments – that markets must serve society or else risk losing legitimacy. They are urging, and forcing where possible, behaviour and culture change in the City.
Yet if they are serious about wanting social investors to turn up in the embryonic social investment marketplace, they must also set their own house in order. They must urge and force behaviour and culture change in government.
Perhaps a goal for 2012, a New Years resolution for politicians might be to embrace this need. A good start would be to act lawfully, as a reliable counter-party aligning with investors who respond to their own initiatives to boost social or environmental good.
Liberty for Safety?
They that can give up essential liberty
to obtain a little temporary safety
deserve neither liberty nor safety
- Benjamin Franklin, Historical Review of Pennsylvania (1759)
So the most revealing week of the Eurozone crisis ends, on Armistice Day of all days.
The ‘Greater Europe’ project is as old as the hills. Ironically it was the Greeks who had the first proper go, followed by the Italians (aka Romans) and then a Belgian (Charlemagne, was born near modern day Liege).
Hitler was an Austrian opportunist who took advantage of fertile ground in post-Weimar Germany to pursue his personal and well supported Greater Europe project – which latterly became inseparable from his toxic anti-Semitism and general insanity.
Whatever the original motives of the current European Union, it has in the last few weeks become (whether by accident or design) the Greater Europe project of our time. The way in which a Eurocrat (albeit a ‘Greek’) has been installed in Athens by Brussels has stirred memories of Herod and Quisling. There is a similar process underway in Italy, where like in Greece there is absolute intolerance of any suggestion that the electorate might be consulted.
If a Greater Europe is to be finally established, where European countries are managed by a federal government operated out of Brussels (instead of Athens, Rome, The Vatican or Berlin), then Brussels needs German financial firepower.
Britain, along with the rest of the world, is encouraging the Germans – with their stacks of cash – to cough up and give Brussels what it wants. From the perspective of the economic realist, simply take the Euro to its inevitable and logical conclusion. And as one investing into a distress situation, write your own terms. What’s not to like?
Doing this is, say the markets, the mother and father of all no-brainers. It is demonstrably in the best economic interests of everyone – be you a creditor nation within the Eurozone, or a trading partner reliant on Eurozone economic health (and debt repayment). Most of all, it is in the best economic interests of Germans. By saving the Euro, you prop up the value of the money that you are owed, you prevent your own currency from appreciating and so leaving you uncompetitive, and you prevent meltdown in the economies of your key trading partners.
And yet, obstinately, the Germans hold out. Why?
As the only nation within the Eurozone with the firepower to save it, the Germans have a stark choice – cough up or leave.
Coughing up would be to give immense power to Brussels. It goes against all the anti-authoritarian, pacifist, democratic instincts that characterise their magnificent response to the national nervous breakdown of 1945. To do what is demanded would be to collaborate with everything that they now stand against.
But the alternative is to exit the Euro. Were they to choose this alternative, they would sacrifice their killer economic hand and exchange it for bad debts and an appreciated currency in an economic train smash. They would be cutting off their own nose.
Yet in doing so they might, just might, take power directly away from an emerging authoritarianism, and in the same move they may return it directly to the voters of Eurozone countries. Such an option could leave the Brussels emperor with no clothes.
Today, on 11.11.11, could it be Angela Merkel and her discussions in Berlin that stand alone against a global consensus that would sacrifice “essential liberty to obtain a little safety”.
In Britain, today, we took a minutes silence to remember those who gave their lives to stand against the forces of tyranny both in 1914-18 and 1939-45. Perhaps it was a minute for us to consider the way in which the great wheel of history turns.
Pearls of Wisdom
There was an excellent private event hosted by Coutts last night for some of their high capacity philathropists, and they were exploring the topic of Impact Investing. Even versus the very high standards that I’ve experienced in other private banks in this area, this was outstandingly good. One of the speakers, Jamie Cooper-Hohn founded the Childrens Investment Fund Foundation. She gave four pearls of wisdom to philathropists which are worth repeating – they have every bit as much relevance for impact investors as they do for philanthropists:
1. Use evidence
2. Understand the context rather than impose your ideas of what’s needed
3. Think about the exit before you begin – or be willing to fund stuff for a very, very long time
4. Be an engaged funder – do not rely on self-generated data
She concluded with a quote which is a great encouragement to all of us who are trying to engage with outcomes, as opposed to inputs:
“No battle plan ever survives the first contact with the enemy”
We can vouch for that!
Carry On … up St Pauls!
By Andrew Perry, Chairman
O, how enjoyable has been the short, or possibly, long running comedy playing out on the steps of our greatest institutional monument. All “gas and gaiters” – bishops and archbishops, even Prime Ministers and Boris, all getting their four’ penny worth.
The protestors a sort of amateur version of the ancient prophets, who would speak profound truths even though few understood them. But, as truly committed professionals, these prophets would do proper stuff, like marry harlots, dance naked, sit under juniper trees. They shook the establishment by their persistent cries, however inarticulate. The cocked eyebrow of the establishment will not, of course, be impressed by any of this.
And what about the treasury custodians of Church establishment finances? Contrary to what many think, these are ‘good and faithful servants’. Like the Israelite slaves in Egypt who had to make bricks without straw, these men and women have to support a monumental edifice (Church,diocese, stipend,pension and all the rest) with declining (financial) return and zero growth in church attendance.
More to the point is the encouraging sign that many treasury officials are trying with some success to persuade their more conservative colleagues to take a more holistic view of Capital and Investment. The emerging market of Social Investment is a place where the more brutish aspects of capitalism can be changed.
So “What would Jesus do”? He was not one for health and safety and he was used to camping out. He can speak for Himself but I think He might have rather enjoyed watching these “Kings of the Earth” having their bubbles burst. And, being one for whom the future held no terrors, he might have enjoyed the complete uncertainty of what to do next.
As a UK-based foundation looking to use our firepower (capital) more directly for our purpose, the idea of social (or ‘impact’) investment is a natural one for us. Our perspective makes us keen to see more capital able to move into positive social investments, so we are especially interested in investment opportunities that can attract capital at scale.
We were therefore very pleased to invest – along with other UK foundations – in Empower Community, a charity-backed, start-up social enterprise with the mission to accelerate the transition to sustainable low carbon local economies, by bundling portfolios of small energy projects (starting with FIT-backed solar PV for social housing) into portfolios suitable for pension funds. Income from every project is passed back to local community funds to help pay for further initiatives for the benefit of those communities where the project is undertaken.
The first deal was to be (and still could be) a ground-breaking £175m investment by a pension fund based on the Feed-In-Tariff.
The UK government has been strongly encouraging us foundations to engage in social investment – as Francis Maude said, “there are tens of billions of pounds in philanthropic organisations. This should be allowed to be used to generate mixed returns”. The Charity Commission has recently issued excellent new CC14 Investment Guidance to Charitable Trustees to enable more social investment, not least thanks to helpful interventions from the government. The Prime Minister has promised that this government will be the ‘greenest government ever’. We identify closely with the need to protect our planet.
So we were surprised, to say the least, when the government yesterday announced changes to the feed-in-tariff regime, bringing forward a review from the end of March to the 12th December. Without a simple carve-out for social enterprise backed schemes, this effectively scuppers Empower Community.
Panahpur has engaged fully in the emergent field of social investment (as desired by the government) – one such investment being in this innovative scheme to use a government incentive to return excess value to poor communities whilst unlocking capital into green investments.
We understand that there are a number of reasons for the government changing the goalposts on the feed-in-tariff, and that is a debate that we do not wish to comment on. There are strong arguments on both sides.
The point here is that a bigger principle risks becoming collateral damage in this. There is so much more to lose than the small cost of making an accommodation for the few schemes such as Empower Community. Such schemes are robustly parked on the bullseye of so many things that the government is trying to achieve – big society; involving institutional capital-at-scale to engage in social investment; charitable foundations using their balance sheets for their social purpose; greener government; empowering local communities to take action for themselves. They are also relatively small, as yet, in the scheme of things. An exemption for social enterprise schemes taking advantage of the FIT would not cost materially.
It is not too late. The governments consultation period is now underway. I hope that they have the good sense not to undermine so many of their own arguments by allowing such promising green shoots of an emergent social investment industry to be so comprehensively torn up as collateral damage in another debate.
A Sense of Perspective
I have just returned from Bangladesh visiting a business that we co-own, which provides a platform for a number of community interventions – provision of stable employment, adding value through the supply chain, working with the impoverished and so on. The area, Nilphimari in Northern Bangladesh is currently suffering from the Monga, which means ‘the hunger’. There is no shortage of food, but there is 90% unemployment in an area dependent on agriculture and where there is still 6 weeks to go until harvest time. Paid under $1 per day during harvest and planting seasons, the people are expected to save a portion of that income to pay for the months where there is no work. Another name for the Monga is ‘mora kartik’, which means “months of death and disaster”.
Reading the paper on returning to Britain, I read of the very real distress of a couple in Athens, both retired public sector workers who retired in their 50s, whose pension payments had recently been cut from Euro3,500 to Euro2,500 per month. How were they to live? Athens, they say, is not a cheap place to live. They may even need to move house!
Whilst not seeking to diminish the real distress felt by that couple, it did strike me, on my return from Asia, that we in Europe might have developed a grotesque sense of entitlement.
The more that we are able to connect with the realities of life in much of the rest of the world – where over 1 billion people live on less than a dollar a day and where access to quality healthcare, education and justice is an impossible dream – then the more easily we will be able to adjust to the radical changes to our own quality of life that is surely coming.
And the more we will realise that, in the big scheme of things, it could be a lot worse.
Monopolies and ‘Democratisation’
Mo-nop-o-ly (n): The exclusive possession or control of the supply or trade in a commodity or service.
We generally think that monopolies are a bad idea. They tend to result in vested interests serving themselves, without proper accountability.
Odd, then, that from the perspective of capital provision, almost everything in a modern capitalist society is operated as a monopoly.
Whilst there may be competition in the free market for customers, all public businesses are owned by private capital which has aligned together in marketplaces to seek exclusively financial return. Capital operated through markets, aggregated together, acts as a monopoly – it is the exclusive supply of capital-at-scale.
Meanwhile, the state invests for social outcomes. No other capital pays for the delivery of the education service, the NHS, and so on. Therefore, the state operates as a monopoly funder.
So our society has, on the one hand a monopoly funder seeking profit – and on the other hand, a monopoly funder seeking social outcomes. Both of these are desirable things. But by operating in isolation of one other, in silos, it means that neither has more than a passing interest in how it affects the other.
Yet we know that investment capital can leave behind a devalued social landscape, increasing the need for state investment. And we also know that the market distortion caused by state provision excludes almost all private capital from the provision of social services.
What we are starting to grasp is that, by being excluded from a major part of the economy (investing in provision of social services), private capital is forced to sweat the remaining areas of the economy too hard -so hard, in fact, that they collapse under the burden. Rather as the inhabitants of Easter Island did.
And where private capital does contract with government to deliver social services, interests are dis-aligned as the governments seek exclusively social outcomes, whilst the private capital seeks exclusively financial outcomes. PFI.
This black-and-white world of investment and taxation, at odds, avoiding one another where possible and playing cat & mouse when they must is mutually destructive.
The technicolor world of blended capital structures provides the possibility for the state, as asset owner, to democratise ownership of public services. Blended capital structures enable social investors (e.g. communities, interest groups and charitable foundations) and private financial investors to invest alongside the state for social outcomes. By retaining a ‘carried interest’, the state remains a stakeholder and can build in whatever protections (‘investor rights’) that it requires to protect the social mission. This ‘democratisation’ is, therefore, quite unlike ‘privatisation’.
Government currently finds itself surrounded by self-serving, unaccountable vested interests, whether in financial markets or social service monopolies. And this dark place will only get darker in an environment of declining revenues and increasingly hungry and belligerent mouths to feed. The imperative to pay down national debt will add a chill wind.
‘Democratisation’ may just offer government a ladder out of the hole that it finds itself in.
Hope and Joy
Too often, those fighting for a more just world get lost in the abstract. Working to re-interpret notions of Fiduciary Duty, for example, is important, but it can be somewhat dry.
Directly intervening to try to prevent a child from being sold into sex slavery is different. Anger and despair, and profound fulfilment and joy are commonplace.
This film is like a gift from those who are on the front line to those who are not, to encourage us. Anita, a heroine of ours, shares her joy as she returns a child from illegal imprisonment in Bangalore to her family in a village, and the excitement of a successful brothel raid.
We are all on the same side, whether we work to influence capital markets in the West, or to intervene directly in the cities of India. Our common goal is that people may experience the joy of a life free from exploitation and injustice.
(for those who are impatient, the girl being reunited with her family is the final 5 minutes of this remarkable film)
Progress?
Progress, sometimes, has the effect of redefining what went before. It can make us look at it anew, and see it in a suddenly unfavourable light.
This is what happened to the pre-Starbucks cup of coffee, the pre-Pret sandwich, pre-Windows computing and pre-Apple mobile phones.
Seen through the lens of the new, the old looks a bit dusty, crusty and, well, rubbish.
I wonder if free-schools might do something similar. And rather than only doing it just for education, might they do it for state monopolies as a whole?
We all know that private capital, if let loose on state provided services such as education, will be motivated to minimise cost and extract as much value as possible and deliver it to shareholders. It is not aligned with the social goals of state provision. Therefore, quite rightly, there is a consensus against the idea of privatising core services provided by the state.
However, by agreeing on this, we have made an assumption that no other external capital might join with the state’s capital to provide these services, such as education or healthcare.
In doing so, we have condemned state intervention to operate as a monopoly, or ‘closed shop’.
This is not permitted in any other part of the economy. Rightly, it is seen as leading to unresponsive monoliths operating for their own vested interests, rather than for the benefit of citizens.
Perversely, we have inadvertently created an environment where this is the only way that state or social services can be provided. Whilst these monopolies are theoretically answerable to the electorate through their representatives, we all know what happens when one tries to question them – positively Tunisian-quality institutional stonewalling.
In practice, it seems that the education, health and other social services in the UK are more like a series of Soviet command economies – run on manifesto-commitment driven, centrally determined five year plans.
The introduction of aligned and alternative capital (‘social investment’) to these services might have a number of significant effects:
- It may enable the citizen (or community) to establish some meaningful sense of ownership of, and participation in, the services already theoretically owned by him or her, and provided for his or her benefit.
- It would certainly give the citizen-or-community-as-investor a platform to scrutinise how these services are to be operated and run.
- It may introduce some level of competition, so that citizens and communities are able to make choices about the public services they want – the kind of education they want for their children, the ideas that underpin the medical treatment that they trust in, and so on.
Politicians of all parties are starting to realise that change along these lines is unavoidable. The information revolution means that young people will no longer accept what’s on offer – paternalistic provision from a monopoly provider who has no truly functioning accountability and is run by entrenched vested interests operating with undisclosed ideologies.
In the modern communications age, why should they accept choices made on their behalf by such institutions? Why should they not make such decisions for themselves, in light of the evidence and track record?
The world is different now. Free-schools might just catch the imagination of a population disillusioned with the inefficiency and unresponsiveness of monolithic monopolies, and give them a chance to create their own alternatives. If we dare to re-connect our capital with what we really want out of life, we may yet return to being a nation of shopkeepers. Free-schools may offer a glimpse of the future that young people will demand: a society where people, enabled by the state, are free to live as they choose.
I Think We May Have Lost Polly
There was an interesting discussion on the Today Programme this morning between Sir Ronald Cohen and Polly Toynbee. As requested by this blog on July 5th, Polly Toynbee did indeed ‘come back’, though possibly not in the desired manner.
Her fundamental point is that Social Impact Bonds are inefficient. Government has access to cheap finance, and all that his happening here is more expensive private investment is being used to fund stuff that would otherwise be funded by the investors in Social Impact Bonds, and it is getting skimmed on the way through by lawyers and accountants who structure these ‘investment products’ … so a lose/lose.
There are a number of inaccuracies in this point which Sir Ronald Cohen made to her:
- Government does not have access to cheap finance. It should not be necessary to point out that governments have lost their creditworthiness. The borrowing that has underpinned the relentless growth of the social sector in our welfare societies over the last 50 years is no longer possible because national debts have reached unsustainable levels. Rather than borrowing more money, governments must now start to consider how to retrench the state in order to start paying this burden back
- Private investment is being raised to fund stuff that would not otherwise be funded. The charities and social sector organisations funded by the Peterborough Social Impact Bond would not otherwise be getting any funding from Panahpur, nor many of the other investors in the bond. If Toynbee doesn’t believe this, she should ask Rob Owen, CEO of the multi-award winning St Giles Trust. This is a new way for charities to access finance – investment capital from our endowment rather giving from our investment income. Pension Funds and Private Investors (including the Child Trust Funds that Toynbee mentioned) have an interest in a functioning society with fewer social problems, so social investment product is potentially a uniquely aligned investment for them. Along with charitable treasuries, this represents trillions of pounds worth of potential new investment for achieving positive social outcomes. This is still a way away, but it is a logical progression if track record is established.
- The state is paying nothing up front. It only pays when agreed outcomes are achieved. It pays from the savings it makes by not having to clear up the consequences of social breakdown. As the Allen Review on Early Intervention (http://www.dwp.gov.uk/docs/early-intervention-next-steps.pdf) so eloquently put it, it is far cheaper to avoid social problems than to clear up the mess from those who go through life creating them. It was not clear whether Toynbee was questioning Cohen’s assertion that the investor gets 1/3rd of the saving whilst the taxpayer keeps 2/3rds. If she is not, it is hard to credit her objection on financial efficiency grounds.
- The objection to professionals fees appears to be based on the assumption that professionals have no value to add to these questions. For example, intermediaries undertaking research, consulting with experts, devising strategies, sourcing delivery partners, contracting with them for the wrap-around services they may provide to really help individuals to turn their lives around – and putting it all into contracts to align interests and clarify roles. Currently costs that are borne by the taxpayer. None of us likes paying money to lawyers to produce reams of impenetrable paperwork. But Toynbee cannot pretend that this is not required by law, and cannot pretend that government doesn’t spend more than its fair share on meeting these obligations in its normal course of business.
Yet of considerably greater significance than all of these inaccuracies is Toynbees underlying assumption that the state is offering an alternative. If it were, then she would be right that this would be no more than a mathematical calculation of the cost-of-finance. But by building her argument on this assumption, she is ignoring the emerging political consensus that the state has now conclusively proven its inability to engage holistically with individuals to assist the process of human transformation necessary to achieve the necessary social outcomes. This is why both the Coalition and the Opposition welcomed today’s announcement of £40m more of Social Impact Bonds through Local Authorities. Toynbees underlying assumption is bogus.
As for Toynbee’s argument that this is just PFI in a new suit, this does not take account of the fundamental differences.
PFI was primarily concerned with financing public service infrastructure, where arguably it is simply a more expensive form of finance and the value-add of private sector methodology is more marginal/debateable, and where interests were not deeply aligned. It is not unreasonable to suggest that PFI was ill-conceived and many of us said so at the time.
By contrast, Payment-by-Results is concerned with financing human and community transformation. This is where the value-add of investment methodology and accountability is potentially significant … especially when the state has shown that it cannot deliver reliably on this level. If it works (and we all agree the jury is still out), it would deliver savings to the taxpayer and improved social conditions for us all. Why would Polly Toynbee object to this?
The fourth estate has a duty to represent the interests of its audience, and not to operate as a mouthpiece for propaganda. By ignoring the facts, Toynbee needs to be careful that she doesn’t stray into the same territory as Fox News.
