Catalysing Australia’s social enterprise sector

By Sam Johnson

Sam represented the UNSW Co-op Scholar program at the 2016 Y20 Summit in China. He is currently studying a Bachelor of Engineering and has worked with Engineers Without Borders. Sam was Australia’s representative for the Poverty Elimination and Joint Development discussions at the Y20.

Abstract

This paper discusses key policy recommendations to further allow the Australian social enterprise sector to grow and prosper.  Social enterprise is gaining legitimacy as an approach to better solve problems that traditional market based and government approaches have been unable to tackle effectively.  However, despite Australia’s strong potential to be a leader in this area, the Australian social enterprise sector is comparatively undervalued and underdeveloped.  This paper makes two sets of recommendations to strengthen the sector. Firstly, all levels of government need to further incorporate the principles of social procurement into their procurement processes. The paper discusses approaches to this including the inclusion of social benefit causes in traditional contracts and the adoption of legislation similar to the UK Public Services Social Value Act. The second set of recommendations centre on the responsibility of federal government to facilitate access to finance and investment-readying resources for social enterprises through the legislation of a new community company legal form and the creation of an investment fund to catalyse the development of the investment readiness intermediary sector.

Recommendations

1. All levels of government to further incorporate the principles of social procurement into their procurement processes to emphasise consideration of social impact

a) Embedding social benefit clauses in traditional contracts

b) Negotiating tendering with social benefit providers

2. Facilitate access to finance and investment-readying resources appropriate for small and medium social enterprise

a) Create a new community company legal form specific to social enterprise

b) Create a stronger investment readiness program

Introduction

Social enterprises have the potential to drive effective solutions to social challenges. This has been recognised at the highest levels of economic governance recently, with an Impact Investment Forum at the 2013 G8 Summit and a strong social impact investment message from Turkish President Erdogan at the 2015 G20 Summit.

The federal government’s Ideas Boom push makes 2016 an exciting time for new business developments and entrepreneurship in Australia (Department of Prime Minister and Cabinet, 2015). Social enterprise should reap benefits from this push in the same way that the broader private sector is set to do. Momentum is building around the world. Canada, the United States, Senegal, the UK and others are playing a proactive role in developing a positive policy environment for social enterprise. The Australian social enterprise sector is commonly regarded to be 10 years behind the United Kingdom, the well respected international leader in the field (Kerlin, 2010; Nicholls, 2012; Tomkinson, 2013). The success of the UK social enterprise sector, where small and medium sized social enterprises are outperforming their mainstream for-profit counterparts in almost every area of business, can be largely related to a long established, supportive policy environment (Villeneuvre-Smith, 2015). As a policy environment it its infancy, there are many possible recommendations that could be made to all levels of Australian government to propel the sector into further growth. Widespread introduction of social procurement policy is recognised as a key recommendation for its ability to simultaneously increase the business opportunities for social enterprises and improve cost effectiveness in achieving government social outcomes. The blockage in the pipeline of social enterprises going to scale could also be improved by the introduction of a new business form and funding to catalyse a comprehensive investment readiness intermediary market.

Social Procurement

Social procurement is the intentional generation of social value through the process of acquiring goods, services and works (McNeill, 2016). Social procurement is about improving value for money outcomes by aligning multiple strategic objectives. It is an extremely cost effective way of addressing social problems which over time will in turn reduce government spending on employment and welfare problems. There is a vast marketplace opportunity for social enterprises to deliver goods and services, with $27 billion in goods and services being procured through government in NSW alone (Burkett, 2010).  Despite this potential, social enterprises across Australia consistently cite a lack of social procurement policy implementation as one of their biggest issues to growth (Barraket, 2015). Development of standards and norms through legislation as the legitimisation of best practice play a considerable role in the adoption of social procurement across all sectors.

Embedding community benefit clauses into traditional contracts

When a government department need to procure goods or services, it should be putting clauses in the contract that specify that the service provider must provide that good or service in a way that generates social benefit to the public within the government’s area of jurisdiction. To government procurement officers, this might seem to add unnecessary additional cost to the bid when looking at procurement through the dominant lens of quality and cost of work being weighed far more than all other parameters. The clauses make logical sense when looking through the lens of the large social change outcomes that government is required to deliver on. If this change was made, the nature of the social enterprise business approach would likely allow social enterprises to claim a larger market share of government contracts and nudge for-profit companies to make changes to their own business practices (Barraket et. al, 2015). Social benefit clauses have already been used with success by local governments in Victoria and New South Wales, but the potential of uptake by other government departments is still a very large opportunity (McNeill, 2016).

Negotiating tendering with social benefit providers

Governments have a greater access to community data and analysis that they have gained through evaluation, which gives them a good understanding of the social policy needed. They often have a clear picture of the outcomes they would like to achieve but are less well placed to decide how to go about achieving these outcomes (Blackburn-Wright, 2015). There is currently the situation where social enterprises feel caught as they are having to bid to deliver a contract that they know won't achieve the desired outcomes due to a misaligned theory of change set by government (Barraket, 2015). For projects that governments know will have a strong social enterprise interest, government should engage with enterprises early to share ideas about what is likely to work best. There are successful examples of social tendering in Australia already. In Victoria, a local council and a large social service provider teamed up and introduced variations to typical procurement process to establish a street sweeping enterprise that both met the quality needs of the council and was a source of employment for disadvantaged resident in the area that the street sweeping took place (Barraket, 2015).

To help legitimise these social procurement policies, the federal government should seek to adopt a form of the Social Value Act which was introduced in the UK and has been widely supported by the social sector (Ward, 2016). The Act directs public authorities procuring goods or services to consider how their decision might improve the economic, social and environmental wellbeing of the community (Tomkinson, 2013). Australia should seek to implement a similar version of the Act, strengthening the requirement from consider to have regard for, which would allow for a more defined commitment whilst not going too far to make the process mandatory as recommended in the 2015 review of the Act (Cabinet Office, 2015).

Funding and Support to grow

A new social enterprise legal form

It is important that Australia creates a new legal business form that suits the unique requirements of social enterprise. Social enterprises currently make the choice to either adopt a not-for-profit or for-profit legal structure, and there are advantages and disadvantages to both of these choices. A preferred business form would be one which takes the best of both, enabling social enterprises to access the donations available to the not-for profit sector as well as the private equity, which is often favoured in the private sector (Cooper, 2016).

Social enterprises that take the for-profit route have a dilemma. The structure of for profit businesses legally require directors to seek to maximise shareholder value, which brings the problem that directors can only consider environmental and social considerations to the extent that they do not inhibit the company’s financial performance (Justice Connect, 2014). Corporate law states that if a company’s directors do not actively maximize profit to their best capacity, then they leave themselves open to shareholder criticism and could face legal ramifications (Caneva, 2015; Crews, 2012). This legal uncertainty that directors are forced to confront is restricting the capacity of social enterprises to grow and innovate.

As a solution to this dilemma, new legal business forms were created in the United States and the UK to support the desire of companies who wish to allow trustees to consider social, environmental and economics returns on their investments as part of their legal responsibilities. The Benefit Corporation, or community interest company legislation has proven very successful with widespread adoption of the legislation across US states and approximately 20% of all social enterprises in the UK adopting the form (Villeneuve-Smith, 2015). The Benefit Corporation form is particularly valued at the equity investment stage of a social enterprises lifecycle, as investors have reassurance that mission drift cannot occur.

An Australian Working Group was formed in February 2016 to develop an Australian model of this successful business form (Morrissy, 2016). State governments should work in partnership with the working group to facilitate this important regulatory change.

A stronger investment readiness program

The federal government took a significant step in the right direction in 2012 towards catalysing the social impact investment market when it created the Social Enterprise Development and Investment Funds (SEDIF) (Department of Employment, 2016). Through a combination of government seeding and private investment the fund raised $40 million to be managed by three social impact fund managers (Burkett, 2013). However despite the availability of funds, SEDIF has only managed to commit $4.3 million of the $40 million to social enterprises (Department of Employment, 2016). Despite 595 enquiries by social enterprises in the first 12 months of operation, SEDIF was only able to take on ten investments that were investment ready for the financial products that SEDIF offers. SEDIF's role is to offer financial products suitable for social enterprises at the growth phase of their lifecycle, and it is the case that the vast majority of social enterprises are not at the level of development where this type of funding is suitable. Investment readiness capacity building is needed for social enterprises in the startup and development phase. This will better allow them to do the due diligence to take on SEDIF products. This is regarded by many in the social enterprise sector as the single biggest blockage in the social enterprise pipeline (Burkett, 2013; Barraket, 2015). The areas of greatest need for capacity building support for social enterprises identified by fund managers has been in financial viability, business planning, operations and governance (Social Impact Investing Taskforce, 2015; Burkett, 2010).

Learning from international experience, this type of capacity building is best suited to investment readiness intermediaries (Tomkinson, 2013).. This role is currently being fulfilled by organisations like Social Traders and Social Enterprises Sydney but these organisations don't have the capacity to provide for the demand for services coming from small and medium social enterprise (Burkett, 2013). There is a need for a larger market of specialised intermediaries who social enterprises are able to go to for specific capacity building that they need at that point in their lifecycle. In the same way as the SEDIF catalysed a market for impact investment fund managers, a new fund is required to catalyse the investment readiness provider market.

The UK is again the leader in this area. The £10 million Investment and Contract Readiness Fund established in 2012 by the Office of Civil Society to provide grants between£50,000 and £150,000 to social enterprises to work with an approved investment readiness intermediary (Social Investment Business, 2016).

In 2015 the NAB Impact Investment Readiness Fund was established providing A$1 million of grants for social enterprises to purchase this type of capacity building services (Impact Investing Australia, 2015). The federal government would be better placed to establish its own Investment Readiness Fund to make for stronger alignment with its SEDIF program and also in its ability to give more assurance of commitment than the NAB Fund in order to bring in more philanthropic investors.

Conclusion

The Australian social enterprise policy environment is moving in the right direction. Governments of all levels have a role to play in the development of the sector. Governments can provide a larger market for social enterprises to provide goods and services by adopting social procurement policies inspired by the UK Social Value Act. Beyond this, the creation of a new Benefit Corporation legal form would allow social enterprises to legally lock in their social mission and seek large sums of funding from impact investors, where in the past impact investors have not wanted to provide that funding given the lack of guarantee that the social enterprise wouldn’t change its mission. Finally, the federal government should create a fund to kick-start the investment readiness intermediary sector so that intermediaries can meet the current build up of social enterprises needing investment readiness support before they will be ready to apply for funding from investors like the federal government’s SEDIF program.  These are all important policies that have been advocated for by Australian social enterprise business and academic leaders and are policies that the social enterprise sector can be expected to respond very positively to. With the support of these policies, the social enterprise sector in Australia can continue to grow and redefine the provision of social value in Australia.

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