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Big Society Capital (or not)

Big Society Capital (or not)
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Big Society Capital (or not)3

Finance | Gordon Hunter | 23 Apr 2012

Big Society Capital promised a lot, but what does it actually deliver? Gordon Hunter queries.

David Cameron officially launched Big Society Capital at the London Stock Exchange on 4 April 2012.

It’s the culmination of six years of hot air leaked originally from the “Commission on Unclaimed Assets”. At first we were told that the cobwebbed vaults held £2bn worth of dormant funds (bank accounts, insurance policies, pension funds).  The Commission, in its July 2007 report, claimed £250m.

What we’ve actually got is £600m (one-third of it equity from the banks, the Merlin Agreement - abracadabra… Pooooof!).

The Lincolnshire Community Foundation urged the Commission to allocate its £250m to area pots, in permanent endowment, giving the interest to small charities. That way, Lincolnshire would have held £4m and generated about £200,000 every year in grants.  Instead, Big Society Capital has emerged - yet another layer of staffing and offices, lending (not giving) wholesale to another layer of lenders (community development finance institutions like Triodos, Charity Bank and Big Issue Invest) who in turn lend to charities. 

Obviously the money goes to big, mainstream charities, often with capital projects, delivering public services at lower cost. It doesn’t go to the thousands of small, volunteer-led groups that form the safety net of civil society and that we, as a Foundation, are dedicated to nurturing.

What would some 16th century benefactor make of it? He’s left £10,000 in his will to buy clogs for Lincolnshire workers.  By the 20th century, the Trust is “frustrated”:  there’s no-one to give the money to, there are no trustees still alive, the money sits, frozen, on the bank’s bottom line.

Instead of unlocking that cash and making general grants, the money goes to Big Society Capital where, let’s say, 20 per cent contributes to core costs. £8,000 is lent to a social financier. Fifty per cent (a figure derived from actual examples) goes to marketing the financier’s product (say, a social investment bond) and another 20 per cent towards core costs. Finally £2,400 gets lent to MegaCharity Inc.  Interest rates along the chain are 4 per cent to 6 per cent.

I’m not sure it’s philanthropy as originally intended.
And the commercial banks own 40 per cent of Big Society Capital!

As Professor Paul Palmer, associate dean at the Cass Business School, said: “I don’t remember the Good Samaritan saying ‘I’ll give you £100, but I want it back with 15 per cent interest in three years’.”

This piece had previously incorrectly stated that banks were providing a commercial repayable loan to Big Society Capital. They are not. They are investing permanent equity.

Gordon Hunter
Director
Lincolnshire Community Foundation
24 Apr 2012

Whoops: my achilles heal (the decimal point) is playing me up again!
Thanks for the correction, Gareth. It's definitely £600 (six hundred) million [£200 million plus interest to be repaid to the Merlin banks].

Incidentally does anyone else find these verification codes very difficult to read - or am I lacking in humanity?

Gareth Zahir-Bill
Investment Manager
UnLtd
23 Apr 2012

First quick comment, hoping you can re-edit this piece, BSC have a bit more than the £60m under management that paragraph three states.

Thank goodness they don't have any more than £600m (providing £2bn would have been pointless), getting the right dealflow for the institutions that BSC will provide capital to is going to be a pretty tall order. BSC is there to hopefully help prove that social finance intermediaries can be financially sustainable in the medium term, not provide cheap or free capital. There is scant evidence to prove that there are a mass of intermediaries that can be financiallly sustainable, lets hope the BSC team can start to provide this evidence.

James Murphy
Projects Manager
23 Apr 2012
Response to [Gareth Zahir-Bill]

Hey Gareth,

Forgive me, because I am genuinely interested in your comment and its lineage. I'm game for a spirited and frank exchange of views if you are?

Are you suggesting that BSC intentionally does not have the capacity to meet the necessary requirement? You will note that I did not use the word "demand" because that would be just silly of me wouldn't it?...kinda like describing the ocean as an "unsecured, transient, essencial asset"....to a fish.

Alternatively, are you suggesting that scope creep is to blame for the current incarnation of the BSC? (shudders)

May I humbly offer a prediction, read you the the "Tea Leaves" of BSC if you will.

It's scope will diminish year on year in line with it's failure to deliver progressive change. Why? Because trying to effect the privatisation of social necessity is a little like placing toddlers in a sweet shop and telling them,

"make sure you only take one sweet children. We dont want to spoil our dinner now do we!"

Once your back is turned they will be cramming down the Strawberry Creams and hiding the Turkish Delight down the back of the sofa. Eventually there will be a short but rowdy conversation with "Merv" on the big white telephone.

3 years....max. If im wrong I promise I'll buy you a 20% of a pint :)

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