The Office of the Third Sector (OTS) has conceded that some Futurebuilders cash may have been diverted for other uses. This raises questions for any incoming administration of how best to utilise the legacy fund.
When Paul Boateng announced the award of the then £125m fund in December 2003, he noted that, after operating costs, it was the sector’s money. However, the capital sum remained on the government’s balance sheet, moving ever closer to Treasury and away from its original home, the Home Office and its original beneficiary, civil society.
Since its launch in 2004, the Futurebuilders Fund, now administered for OTS by the Social Investment Business (SIB), has courted controversy, but let us now set aside issues of market distortion and the like. Through its various programmes, the Fund has reached several hundred organisations, many of whom had never previously contemplated using a mixture of grant and debt finance to help develop public service delivery. There have been mistakes, yes, but there is also a positive legacy which needs to be built upon if social investment is not to go down as just another good idea.
We are told that the Futurebuilders Fund has now closed to new applicants. Government may consider its job done but perhaps it is only phase one that is drawing to a close. The DHS SEIF and community builders programmes continue but at this stage of their development are largely grant focused.
The risk is that government will divert funds repaid by borrowers into general exchequer needs: hardly surprising given the state of public finances. Part of the loan portfolio is now seasoned. While one can argue that many loan financed public sector contracts may be vulnerable over the next few years, it can also be said that Futurebuilders has taken much of the development risk out of some projects, making them more bankable by an emerging social banking sector. If Futurebuilders has been true to its mission, the portfolio will be of mixed quality with some loans readily capable of being refinanced while others may require every pound of the implicit state guarantee that stands behind the Fund (all current and future losses are born by government presently).
If government takes back any sums raised by refinancing it defeats the purpose not only of the fund as being of the sector for the sector, but also of an action research programme designed to explore whether private finance could move into the space. If it allows OTS to retain the funds for further lending then the SIB can once again open an albeit limited application window.
But perhaps there are other ways of making the legacy go further.
The portfolio could be used to leverage further non-government money. The seasoned portfolio could be given as discrete endowments to third sector social finance intermediaries capable of demonstrating how they would leverage the funds. By way of example, a portfolio of £25m is gifted to a social bank. The bank uses its best efforts to ensure the £25m is repaid in full. It takes £15m into its own capital on which it can raise, say, 5 times as much by way of deposits, creating a lending pool of £90m (15+75) where previously there were just £15m. However, because the social bank also has concerns for its depositors it may not be in a position to take all the market development risk that Futurebuilders had hitherto. So, the social bank takes the additional £10m of the £25m gifted to it and creates a risk buffer to guarantee the higher risk end of proposals. With this cushion additional market finance may become available along the risk spectrum.
If the Futurebuilders Fund is a little short of £200m, let’s say £150m (after grants and write-offs) is available for distribution this way. So, this exercise could be repeated, say, another 5 times, at differing levels of leverage depending on the type of vehicle. The residual sum could be left with Social Investment Business to develop a risk fund operating truly at the catalytic end of the market, trying things that may, in time, pass on to the other funds which, through the endowment effect, have themselves become stronger and more capable of delivering larger scale solutions. Note I have not mentioned the wholesale bank. This is about retail finance where resources are most needed.
So, what’s the snag? Well, say £150m has to be written off the government’s balance sheet and credited to the sector. Difficult in such straitened times but not impossible, especially as a case can be made that it shouldn’t be on the government’s balance sheet anyway, and it is all very petty cash in amount. Whoever had the conviction to do it might just get my vote and Futurebuilders phase two would really be about building the future finance of an increasingly important part of the sector.
Malcolm Hayday is chief executive of Charity Bank
