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Would you let George Osborne shake your piggy bank? 1

Finance | Robert Ashton | 16 Dec 2011

Robert Ashton has an idea for how to persuade people to invest in their own communities.

Let’s be honest. It’s a bit rich for the government to redefine public funding as funding by the public. Osborne’s latest wheeze is to kickstart our economy by spending £50bn on infrastructure projects.

Back in November he enthusiastically announced the plan. The message is clear. This £50bn will not be added to our national debt; private investors are expected to dig deep so road and house-builders can start digging. But who’s bearing the risk?
 
Our government has a long tradition of being butterfingered with our money. Overspends on public works are common as are delayed completions or even complete abandonment. And of course the South Sea Bubble, which burst so spectacularly in the 18th century, is a sobering reminder that bailing out the government can prove to be a costly mistake. (History does have a habit of repeating itself!)

Yet the fact remains that the only way we’re going to build tomorrow’s Britain is with citizens’ hard-earned savings. Social impact bonds enable us all to buy into social change, albeit at some risk. If a project fails to deliver the agreed social outcomes, the investors lose their cash.

The innovative charity Allia (http://www.allia.org.uk/) enables us to invest in charity bonds; a temptingly safe investment when compared to social impact bonds. The investor gets their money back because 85 per cent of it is placed with a AAA-rated housing association which guarantees the return. Only 15 per cent is invested in the social or charitable venture.

But these initiatives only scratch the surface. We need to enable people to invest in their own communities. Localism is surely all about making it attractive, appealing and not too difficult for ordinary folk to get involved. That involvement for some must surely be as investors. So how can we make it easy for them to do that?

To me there seems to be a fairly obvious answer. Let me explain by taking you for a moment to a similar conundrum already solved. Community enterprise is surely no different from any other start-up or vulnerable business? Those operating the business need investment and probably don’t have the assets themselves to secure bank debt. If you’re a conventional small business, you can avail yourself of the government’s ‘Enterprise Finance Guarantee Scheme’. This simple programme guarantees 75 per cent of the loan your bank would otherwise deem too risky. There’s a cost. You pay the government what is effectively an insurance premium. This equals 2 per cent of the outstanding loan. It’s an annual charge. It’s not cheap, but it has a proven track record, saving businesses and creating jobs.

Now let’s think about a community raising money say to open a shop. They want to borrow say £100,000 over five years from local people via a local community bond issue. Under the Enterprise Finance Guarantee Scheme, they’d pay a hefty £10,000 premium if the debt was all repaid at the end, when the bond matured. But being public-spirited, the investors might not want a return themselves, other than their capital back.

So my question is this: why can’t the underwriting principles of the EFGS scheme be adapted and extended to meet this need? It makes sense to me!

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