After struggling to grow as a charity, Charity Bank changed structure and last week sold £15m in shares to Big Society Capital. David Ainsworth argues that until charities can find an equivalent to share capital, they’ll struggle to get the scale to win large government contracts.

Let’s start by saying charities should be delivering more public services. I’m aware this is a contentious statement, but let’s just accept it for now.

Then let’s look at the barriers to doing so. Why, if charities should be delivering services, have they continually lost out, in a major way, to the Sercos and A4es of this world?

There are a number of problems, but the biggest barrier seems to be scale – charities just aren’t big enough to win the contracts they need to.

So why are charities too small?

Overwhelmingly, the main barrier seems to be that they can’t get hold of the money to spend on getting big.

So why can’t they get that money?

Commercial companies get the money to become big by selling shares. And charities can’t sell shares. And that, basically, is the problem.

Share capital is the most effective way to get your hands on an enormous pile of cash. It can be expensive down the line – you have to give money to your investors forever, and they get a vote in what your company does next, also forever.

But in the short term, it’s the perfect tool for winning a big contract, because it’s the ultimate buy-now-pay-later deal. All the cash arrives upfront, and you can spend it on whatever you want, or just leave it sitting on your balance sheet, attracting interest and making commissioners happy.

The reason I’m writing this blog today is because of Charity Bank, which stopped being a charity last year, and which last week sold almost £15m of shares to Big Society Capital. Charity Bank is planning to grow like billy-o.

It is aiming have a balance sheet of £300m and a loan book of £250m by 2018 – effectively quadrupling in size. I’m pretty sure it aims to be at least twice that size in ten years’ time. Share capital is the tool to kickstart that process.

Elsewhere, you can almost taste the frustration from other sector leaders bidding for government contracts, who are struggling to raise the cash to do so.

Chris Wright of youth charity Catch 22 told me last month that if his charity could issue shares, you’d already have read about the first offer (you can read the full interview in the May edition of Charity Finance).

Martyn Oliver, chief executive of specialist bidding consortium 3SC, told me three years ago that his inability to get his hands on equity-like capital was his single biggest barrier to growth.

Dai Powell of HCT, a social enterprise bus company, set up a “social loan” – a turnover-based loan designed to mimic share capital investment – and has used it to grow hugely. I wouldn’t be at all surprised if he went back to borrow more under similar terms, and he’s said he’s surprised no other charity had used a similar model.

In short, charities are competing in the same market as private companies, but they’re doing it with one hand tied behind their back, because commercial companies can raise money to get big, and charities can’t.

Many people are extremely sceptical about social investment, and to be honest, I can see why. But in my opinion, it is this scenario, more than any other, that social investment is needed for.

Unless somebody develops an equivalent to equity for the charity sector, or unless there’s a revolution in government commissioning practices, charities are going to continue to be out-competed by private companies which are bidding for the same contracts. They will continue to be down-at-heel, second-rate subcontractors, handed the scraps that Serco doesn’t want.