Councils to tap into £10bn through Big Society Bank

Councils are preparing to tap into £10bn in private investment planned to be available within a decade, if the Big Society Bank succeeds. Approved by ministers last month, the Big Society Bank is charged with injecting new funds into social enterprise and is encouraging private investors to do the same. Ministers say this investment will strengthen the capacity of social ventures, including charities and community groups, to tackle "stubborn and expensive" social issues. From next month, an investment committee at the bank will meet to make decisions on affordable loans for social ventures vying to provide public services. It will also fund the development of new financial products – allowing councils to harness private money for public good. A number of local authorities are already working with intermediaries to investigate the feasibility of using these social investments to maintain existing services, or to provide new, difficult to fund services. The National Council for Voluntary Organisations (NCVO) believes the bank could attract £10bn social investment a year within a decade, up from £190m in 2010. This compares to a £5.7bn cut in annual local government grant by 2014/15. The bank's interim committee will operate until the it receives EU state aid approval and will start with £60m-£100m of capital this year drawn from dormant bank accounts in the UK. Negotiations are on-going with commercial banks on when a promised contribution of £200m will be released. The government claims the bank will mean social ventures are less dependent on public money. Yet local authorities have an opportunity to steer this investment, according to Nick O'Donohoe, independent advisor on the Big Society Bank. O'Donohoe expects the bank to "work with local authorities to create social impact bonds and other investments that will enable social ventures to provide services addressing social issues". A number of authorities have started work on developing social impact bonds with Social Finance, a social investment market driver, under which investors would pay social ventures to prevent social problems occurring. Local authorities would give investors a financial return only if this work is successful. Ministers believe these bonds and other results-based investments will enjoy strong growth. Social Finance estimates that bonds worth £300m will have be issued by 2013. Yet despite paying for the preventative work that councils have found so difficult to fund, progress has been slow. Councils and Social Finance believe that the Big Society Bank can change this. The institution could provide affordable lending to cover the cost of developing bonds, and it could invest in them too. Essex county council is considering whether a social impact bond could pay for early intervention work with families in order to reduce the number of children put into care. The authority is mindful of both the impact on children's life chances, and the £60,000 cost of care for each child. "We've less funding, but the same appetite to deliver outcomes for our communities. It's easier for private investors than the public sector to invest money that will only receive a return a few years down the line," said Richard Puleston, the county council's assistant chief executive. "I hope that the Big Society Bank can make investments in social outcomes easier to pull off. By putting money into investment vehicles like this, the bank could make social investment more attractive and help us to diversify our income." The bank would, in effect, act as a venture capitalist with a social mission – the approved outline proposal states it will make investments with below-market returns. The calls on its capital will, however, be many and varied. Each proposal will have to demonstrate both social impact and financial returns. Birmingham City Council is exploring the potential for a public health social impact bond. Unlike Essex's proposal, this would replace grant funding for an existing project. Under Birmingham's "BeActive" scheme, the primary care trust and city council are providing £2.5m this year for free gym access, swimming and other fitness activities for 300,000 residents. Funding could end as early as next March. "We're exploring whether the Big Society Bank could make private investment in our scheme possible," said Karen Jerwood, Birmingham's project leader for BeActive. "We want to overcome stop-start public funding and invest over the long-term in improved health outcomes. But the fact that improved health outcomes can take 20 years to achieve could be a challenge. Are private investors prepared to wait for long-term returns?" Labour says it is unclear how and where the bank will prioritise its investment, or how it will measure social impact. Some calls on its capital like public health bonds will be local authority-wide. Others, such as the payment-by-results fund to lend up to £0.5m to social ventures to reduce long-term unemployment proposed by Big Issue Invest, would be more targeted. Ian Briggs, senior fellow at the Institute of Local Government Studies, said not all areas in need were in a position to benefit from social investment. "You haven't got social enterprises operating everywhere, and you won't get investment everywhere. It will be down to chance whether this approach to funding services can support the most deprived areas." A social investment vehicle will only work if there is a suitable organisation to carry out the early intervention or preventative work in an area. Briggs believes councils could overcome "by promoting social enterprise in areas of deprivation". But social ventures are already suffering from a reduction in public funding. In 2009, a Social Enterprise Coalition study revealed 40% of social enterprises received the majority of their income from the public purse. Peter Holbrook, the chief executive of the Social Enterprise Coalition, wants more action to ensure this market grows more rapidly – and for councils to play their part. "Local authorities have billions of pounds invested, money that could be working for our communities. Or they can carry on looking for the highest and often riskiest financial returns," he said. "We applaud ministers' ambition, but it will take many, many years to reach £10bn in social investment and we need funding now." This content was brought to you by Guardian Professional. Join the local government network for more like this direct to your inbox.