IOU

The concept of Big Society, which has sparked such widespread debate, has proved to be remarkably difficult to define. To some it is an ideological smokescreen providing a mandate to those on the right of the political spectrum to roll back the state in reaction to the previous administration's 'Big Government'. To others, it represents a fig leaf for the cuts announced as part of the comprehensive spending review (CSR), which may see the government's current £12.8bn contribution to the sector fall by as much as £5bn.

The government, however, tells us that Big Society is about affecting a cultural shift towards community empowerment, civic engagement and a new era of philanthropy. While there is a real opportunity to shift the tectonic plates dividing the markets, state and civil society in a post-banking crash environment, it remains to be seen if this will deliver greater choice regarding how our public services are delivered at the local level as the government would promise.

The discretionary nature of sector funding has meant that income streams have always been fragile and so it is perhaps an opportune moment to review what innovations or developments are being proposed to pick up the slack of the CSR cuts '“ in short, how will the Big Society be funded?

Private piggy banks

Private funding encompasses donations, philanthropy, corporate social responsibility and volunteering. Recent data indicates that the recession significantly impacted on philanthropy equating to a £700m drop in the total amount donated to charitable causes; fewer people are giving and those that do give are giving less.

It is therefore more important than ever to maximise the impact of those donations. For example, the Charities Aid Foundation estimates that £750m is lost to the sector in unclaimed gift aid, causing many to lobby for an opt-out rather than an opt-in system as is currently the case. Another proposal which has been taken up by Cancer Research UK is to introduce a new gift aid composite rate of 30p for every £1 donated but this proposal would require higher-rate taxpayers to forfeit their right to claim any personal tax relief on their donations.

The government is also once again reviewing proposals to introduce lifetime legacies, also known as split interest trusts, which would allow donors to make tax-deductible gifts during their lifetime (for example, a property) while retaining the benefit of the income (for example, rent) for the remainder of their life. The lifetime legacy has long featured in the toolbox of philanthropy tax planners in the USA but has thus far failed to take hold in the UK because of problems connected with gifts with reservations rules and HMRC's concerns about abuse and about valuation of assets.

Charities have also sought to persuade the UK Treasury to expand the available tax deductions to encompass gifts of arts, antiques and other tangible personal property which again is widely used in the US and would help, in particular, to compensate arts and heritage organisations for the cuts that part of sector is facing.

Volunteering

The concept of Big Society places much emphasis on localism and the desire toincentivise citizens to play a greater role in their local community. The levels of volunteering have not greatly increased since the 1980s and indeed there is evidence that it has fallen in 2009/10. To combat this, the government is backing charity-led initiatives like the Big Society Network's Your Square Mile project which will offer a one-stop shop of local information and resources that will better enable community projects to get off the ground.

Elsewhere, two councils are taking a Nectar scheme approach by offering Big Society reward points in exchange for volunteering services which can be redeemed in shops and restaurants in exchange for good deeds. Compulsory volunteering will also be a feature of the government's universal credit welfare proposals for the long-term unemployed with jobseekers being placed on four-week community placements to help people find a route back to work.

Corporate social responsibility initiatives are also now being taken seriously by companies who are willing to donate the time and expertise of their employees through intermediaries like National Talent Bank. We are also seeing a resurgence of cooperatives and mutuals, withthe Cabinet Office throwing weight and funding behind community-led programmes to operate or deliver local public services.

Public purse

Leaving the implications of the CSR to one side, the problems associated with commissioning and procurement for small not-for-profit organisations are well documented. There are mixed signals emerging in relation to how the government will improve the commissioning process, not least of which is that the new 'compact' (the pledge agreement between the government and the voluntary sector about procurement) contains fewer commitments than the original.

Furthermore, the commission for the compact, which is the independent body charged with safeguarding this relationship, was a victim of the recent bonfire of the quangos and is to be scrapped.

In contrast to this, the Cabinet Office has indicated that new legislation is on the way designed to help level the playing field and enable a whole new mix of providers to participate in public service delivery. Nick Hurd has said that this new legislation will represent a change in direction and will help overcome the overwhelming bureaucracy of the existing framework where tendering costs approach 20 per cent of the cost of the service as a whole which means that only very large providers can immediately participate.

Big business

Given the impact of the CSR, it appears private sector funding solutions will be needed but there are limited options available. Retail banks will generally not lend to civil society organisations because of low returns, the insecurity of contract-based work and the perceived absence of professionalism in the sector. This puts greater responsibility on specialist lending sources such as Charity Bank and the Co-operative Bank, but even these types of specialist institutions have expressed concerns about the risk profile of the sector in the years ahead.

The proposal to establish the 'Big Society Bank' which will provide finance to charities, social enterprises and community groups from the estimated £400m sitting in dormant bank accounts has already encountered difficulties. The problems associated with tracking down owners of dormant accounts means that the bank is now expected to begin with reserves of as little as £60m, which will not be enough to cover the spending gap. However, it now appears that the contributing banks might be persuaded to be much more generous if an 'understanding' is reached in relation to banker bonuses.

As a consequence of these lending difficulties, there is a new emphasis on social enterprise investment and it has been encouraging to see a multitude of funds appear over the last ten years specialising in this area, perhaps the most notable of which is the Bridges Ventures Fund which has provided over £120m of private sector investment in social enterprises since 2002.

There are also new innovations being implemented and piloted such as social impact bonds which enable the investor to receive a return in the event that a positive social outcome is achieved; community bonds which yield modest interest but enable people to support charitable causes in the knowledge that their money will be returned at the end of the investment period; and ideas like the Social Stock Exchange through which social businesses could raise equity finance from City investors.

A key challenge in this area will be educating investors about the social enterprise market which does not have a single set of characteristics and therefore will be difficult to define as an asset class. This may require the development of a new taxonomy around the metrics of social return which potentially only relatively sophisticated investors will understand.

Charity coffers

Grant-making charities are still recovering from the devastating impact of the recession on their investment portfolios and the continuation of low interest rates continues to inhibit grant making.

While charities can make social investments (investments not clearly driven by profit) generally speaking this is only permitted if the investment directly advances a primary purpose objective.

Indeed, this type of programme-related investment is not an investment in a conventional sense and therefore the charity law principle that returns should be maximised does not apply. However, this primary purpose restriction does significantly restrict charities from investing in this space and the Charity Commission is clarifying its CC14 guidance on investments with a view to encouraging charitable foundations to consider social investments as part of their overall portfolio.

It appears that the policy agenda is creating specific legislative and non-legislative powers to capitalise a cultural shift towards the Big Society but it is undoubtedly true that the impact of the CSR has made income streams more precarious than ever.

The optimism of the Big Society policy initiatives now being announced therefore appear to be at odds with the pessimistic reality of a radically shrinking funding pool which is placing the sector under enormous stress. This will create enormous challenges for social enterprises and charities making it difficult for them to take advantage of opportunities arising in this new environment.