PART II: Demand, supply and the role of intermediaries
Part II of this report examines the main arguments from the
demand and supply sides of the social economy in relation to the development of
a robust capital market for social economy organisations. It then proceeds to
examine the role of intermediaries to bring financial institutions and social
economy organisations together.
Chapter 3 explores the needs and barriers to obtaining
finance within the social economy, with an emphasis on the need to create a
diversity of financial options and products for the broad spectrum of
organisations in the sector. The chapter focuses on the need to develop the
capacity of social economy organisations and ensure that organisations are
'investment ready' in order to engage with a capital market. The application of
the Standard Chart of Accounts (SCOA) is discussed and the role of
intermediaries, organisational forms and a measurement framework are briefly
explored as a pre-cursor to subsequent chapters.
Chapter 4 discusses the current supply of capital to the
social economy and the scope to expand the sources of investment available to
social economy organisations. Methods of accessing capital from sources previously
untapped by the sector are explored, with a particular emphasis on accessing
funds from the investment corpuses of philanthropic bodies and attracting
investment from institutional investors such as superannuation funds. The social
investment role of financial intermediaries, mainstream financial institutions,
the corporate sector, retail and community investors and government are also
Chapter 5 discusses the development of intermediaries in the
social capital market. Intermediaries play a key role in ensuring that the
amount of capital available develops in parallel with organisations equipped to
manage the finance. The development of a strong intermediary market will
balance the supply of capital and a diverse range of financial products with investment
ready organisations. Financial intermediaries are explored in detail and
different forms of non-financial intermediaries are also discussed with an
emphasis on the role of intermediaries to develop the capacity of the sector.
Needs and barriers to obtaining finance within the social economy
This chapter explores the demand among social economy organisations for
the development of a robust capital market in Australia.
The recent Productivity Commission (PC) report on the contribution of
the not-for-profit (NFP) sector distinguished between funding and finance.
Where funding refers to income that has no obligation to be repaid such as
untied grants and philanthropy, finance refers to either debt or equity capital
which is provided on the understanding that the investor will be compensated
for the use of capital.
Many social economy organisations have difficulty accessing the capital
they require. Some of the key impediments to finance for social economy
organisations are the lack of collateral to guarantee loans, the lack of a
reliable revenue stream to service debt, the large transaction costs relative
to the capital required and the lack of a suitable organisational structure to
allow the organisation to raise equity capital.
Social Ventures Australia (SVA) informed the committee:
Over the last eight years SVA has worked with over 100 social
ventures with proven track records in tackling the issues behind social disadvantage.
By partnering with these innovative, entrepreneurial ventures we know that
traditional avenues for capital raising are not available to them. There is limited
funding available to the social sector to help grow proven ventures,
particularly to support the building of quality organisations though the
provision of appropriate infrastructure funding.
The capital market for the social economy in Australia is 'at an early
stage of evolution' and there is much to be done to meet the financial services
and product needs of the sector.
Social economy organisations need access to capital and labour, and good
relationships with their stakeholders, including government.
To meet these needs, the market requires a change in mindset from funders,
investors and social economy organisations to move the sector from grant
dependency towards social investment.
The PC report Contribution of the Not-for-Profit Sector acknowledged
the diversity of the sector and the varying needs for capital across the broad
spectrum of organisations. The PC noted however, that the capital needs for
smaller NFPs were particularly pertinent. The PC made a submission to this
inquiry in which it summarised the capital needs of the sector as follows:
...access to capital varied considerably across the
not-for-profit (NFP) sector. Large NFPs providing services to their members,
largely on a fee for service basis, did not appear to face any significant
constraints on their access to capital. For large NFPs providing human
services, often with substantial funding support from governments, access to
capital was also not considered a major problem. In the main this was because
of the substantial assets of these organisations that could be used as
collateral. In addition, some large faith-based organisations operate an
internal capital market for their members. However, for smaller NFPs providing
social services, often on a partly government funded basis, capital for
start-up, and to invest in new capacity or trial innovative approaches to
service delivery, was difficult to access.
Submitters to the inquiry agreed with the PC report's findings, and
argued that smaller social economy organisations suffered greater exclusion
from capital markets than their larger counterparts.
Foresters Community Finance (Foresters) noted that smaller organisations were
predominantly grant reliant, and those that have a local focus or were located
in rural and remote areas were typically the most excluded. By contrast, very
large organisations with diverse revenue streams with a state or national focus
and based in urban areas were the least excluded from capital markets.
Foresters argued that 'there is a growing sense that small and medium sized
organisations can, particularly if they are locality based, have a deep impact
on addressing social and economic exclusion'.
The joint submission (departments' submission) from the Department of
Education, Employment and Workplace Relations (DEEWR) and the Department of the
Prime Minister and Cabinet (PM&C) noted the following as the key mechanisms
and options for the development of a capital market for the social economy:
capacity and investment readiness;
product development and innovation;
the role of intermediaries and networks;
risk, measurement and metrics; and
organisational forms and structures.
The relationship between these factors is not linear, but
This chapter explores these interrelated issues and concludes with a discussion
on the sector's relationship with government.
The Community Council for Australia (CCA) acknowledged in its submission
to this inquiry that access to finance is only one requisite for the social
economy, and that it is interrelated with a range of additional components:
...the access to finance issue is one of several critical
issues the not-for-profit sector (NFP sector) is currently struggling to
address. Even if it were possible to instantly provide a broader range of
financing products and increase investment and engagement in the NFP sector,
there are a number of critical issues relating to workforce, evaluation and
measurement, accreditation, regulation, contracting and compliance,
relationship with government and community, governance and technology that all
remain central to the future of the not-for-profit sector. Many of these areas
are also the subject of review and reform creating a challenging environment
for the sector.
Capacity and investment readiness
'Capacity' can refer to the quality of various market enablers within an
organisation including leadership, skills and skill development and fluency in
the language used by other disciplines. To build demand, the market will need
investment ready social economy organisations with a range of skills and
capabilities to effectively access capital markets to develop business plans,
financial accounts and sound investment opportunities to comply with mainstream
financial market requirements in a language that investors can understand.
The majority of submitters agreed that social economy
organisations need to develop skills and expertise for business and financial
Social Firms Australia noted that a lack of commercial management experience is
a significant barrier to expansion and is 'inhibiting a confident proactive
approach to business development'.
Whilst lack of capacity may not differ significantly from the challenges faced
by other small to medium enterprises in other sectors, capacity limitations for
social economy organisations can be magnified by a focus on social purpose,
less direct revenue, lack of working capital and the complexity of identifying
suitable finance options.
Social Ventures Australia (SVA) suggested that the sector could not compete
with the commercial sector to attract and retain quality staff:
We are a non-profit organisation, so we live and breathe the
challenge of maintaining our own funding capacity. I can assure you, with my
kind of midlife reincarnation as a social entrepreneur, some of the biggest
lessons for me are about the challenges of building a sustained funding base, getting
quality people on board and finding the capacity funding to do that.
A related issue raised by submitters is the tendency for many boards of
social organisations to be risk averse and reluctant to take on debt or other
The CCA describes this as a cultural barrier and a belief that fulfilling a
civic responsibility requires adopting a conservative approach
to financial risk management.
The Fundraising Institute Australia (FIA) ties the resistance to non-grant
capital to fluctuating income streams:
... uncertain income means there is naturally a strong
resistance to taking any financial risks by both management and boards. Better
business planning by charities can only come about when a critical level of
income is assured.
PM&C noted that the area of investment readiness was of key concern,
although some progress was being made across the sector:
Senator STEPHENS: ...One of the underpinning questions,
really, is: are not-for-profit organisations investment ready? Do you see that
as an issue in our sector?
Mr Ronalds: I certainly think it is a significant issue on
the demand side. I think the number and sophistication of not-for-profits that
are able to engage in capital markets is pretty limited. I think it is rapidly
changing. We are seeing more sophisticated management either growing up within
the not-for-profit sector or moving to the sector from other places that have
those sorts of skills. We are slowly seeing boards of directors of
not-for-profits grow in terms of appetite for risk in this. I think we still
have a long way to go both from a management perspective and from a governance
perspective. So things that we can do to help that, I think, are well worth
The Centre for Social Impact conducted a study on behalf of the
Australian Institute of Company Directors, The Directors Social Impact
Study. The report was released in October 2011 and followed an online
survey of 1 912 directors operating in the for-profit and NFP sectors and a
number of interviews with survey respondents. The survey results indicated that
half of the respondents with experience in both sectors felt that the quality
of governance for NFPs was equal to, or greater than for-profit organisations.
The report suggests that 'due to the sheer volume of directors who are now
operating across both sectors, an improvement in governance [for NFPs] has
Foresters argued that solutions for sustainability and capitalisation of
the sector should be addressed by building on the existing strengths of an
organisation and that simplistic formulas based solely on training are not the
Foresters suggest a model whereby finance is contingent on adequate financial
management skills and offer three models:
capital only model: non-grant capital could be accessed only
after enterprises have developed sufficient capacity to manage it, or
conditionally based on meeting certain capacity-building objectives;
capital plus model: enterprises access capital through a capacity
building process where, for example, they are guided through a business
planning process which at completion, if the plan is deemed to be viable, they
are eligible for the capital; and
capacity-building only model: capacity building alone will lead
to the development of skills needed to access capital more effectively from
mainstream or specialist institutions.
The departments' submission noted that capacity for social economy
organisations should be developed with an understanding of a social context,
and capacity building should not be mistaken as a requirement for organisations
to become more 'business-like':
This requires the capacity to obtain and make good strategic
use of finance in a context where profit is not the driver of the business
model. Demonstrating business capabilities promotes trust, legitimacy and
accountability. This challenge should not be confused with making social
economy organisations more ‘business-like’.
Further, capacity building does not lie solely with not-for-profit
organisations; financial institutions and intermediaries must be included in
the equation 'in order to ensure that the role of capital in all its forms is
fully appreciated within the sector'.
3.1 The R. E. Ross Trust has published a document Inviting
Investment in Social Enterprise which provides 'a step by step introduction
for social enterprises to inform experienced business investors as to why there
is value in making a financial contribution to their enterprise'.
Our Community and Westpac have also developed 'The Community Financial Centre'
and offer a range of financial literacy resources to build the capacity of
Anomalies in financial statements
The PC report discussed the need for social economy organisations to
develop business plans and accounts that meet mainstream standards.
As a Community Development Finance Institution (CDFI), Foresters has
experienced first-hand the challenge of determining the viability of a social
enterprise to repay debt or generate investment based on its financial records.
Many financial statements include irregular items or are missing information
that would typically be found on the statements of a small business or
charitable organisation. Inclusion of line items such as 'sweat capital', or
not specifying where grant or certain income is restricted, or not showing
where costs were covered in-kind are all issues that can lead to
misunderstandings by a financial institution assessing financial statements.
Foresters argued that both enterprises and financial institutions need
to work together to create financial statements that accurately reflect the
work of social enterprises:
For social enterprises this may mean finding ways to
structure their financial accounts in ways that demonstrate more clearly what
is restricted income, what impact costs are incurred, what portion of their
surplus is operational, and what part of their net assets or equity is actually
available (either as a reserve or for business development).
For financial institutions this may mean approaching the
social enterprise much more relationally than is now the case with business
lending. This is necessary to really understand the nature of the enterprise
and to enable the financiers to gain a fuller picture of the financial realities
of the enterprises than that which evident from a cursory and objective
assessment of their financial statements.
Standard Chart of Accounts
The Council of Australian Governments (COAG) agreed in December 2009 to
adopt a Standard Chart of Accounts (SCOA) for NFP organisations receiving
government grants. The Australian Centre for Philanthropy and Nonprofit Studies
(ACPNS) at the Queensland University of Technology developed the SCOA which was
formally approved by COAG for implementation on 1 July 2010. Federal and state
governments adopted the SCOA and agreed to an implementation plan to develop a
nationally consistent approach to fundraising regulation in order to reduce
regulatory burdens and improve public confidence in the sector.
The ACPNS explained that the SCOA provides a common approach to
accounting by social economy organisations, government agencies and other
interested parties. It is intended to 'remedy a lack of consistency in
accounting categories and terms required by government departments'
which fund social economy organisations:
It is a tool designed primarily for small to medium
nonprofits which typically do not have an accounting department or a
sophisticated accounting system. Larger nonprofits have adopted the data
dictionary component of the standard chart of accounts aligning their systems
to comply with a consistency across the sector.
It was put to the committee that government departments have
requirements of social economy organisations that do not align with the SCOA.
Both Matrix on Board and Our Community argued that the governments' take up of
SCOA is lagging:
Ms Nettelbeck: I wish I was seeing it more from government
departments, as in I wish more of them were taking it up sooner, but still in
some parts of the country nonprofit organisations are told they have to acquit
and they have to give these lines which are different to the standard chart of
Senator STEPHENS: Still?
Ms Nettelbeck: Still. So, we go out there and say,
‘Actually, why don’t you tell them about the COAG agreement’, and send it back
up the line. I think a lot has changed and a lot has moved and a lot of
nonprofits have taken it up. I think it is probably going to take another four
or five years for it go through the whole system, but it is one of the most
significant changes that we have been able to make—or that everyone has made—to
help reduce red tape, and it has been well received and it works well when
everyone does it.
Mr Moriarty: ...following on from what Ms Nettelbeck says,
the standard chart of accounts is probably the best thing that has happened in
such a long time in the not-for-profit sector. Governments, state and federal,
are still incredibly slow in doing it. When they are putting up their grant
applications they are still asking community groups to put it into an old
format rather than following the new standard.
The committee urges Australian governments, through COAG, to issue a
reminder to all departments and agencies about the agreement to implement the
Standard Chart of Accounts in funding agreements with the not-for-profit
Product development and innovation
Social economy organisations need the right type of financial product
for the relevant phase of growth and development. The current difficulty,
however, is the limited number of financial products available to them.
They need access to finance from a range of sources including government, philanthropic
and commercial lenders and each type of investor needs to offer innovative
products to meet the specific needs of the sector. JBWere emphasised the
importance of using the appropriate mechanism of finance and that '[p]oor decisions
or choices could result in severe consequences for the Not for Profit entity
and investors alike'.
The need for funding diversity
One of this inquiry's terms of reference relates to the types of finance
and credit options available for social economy organisations. The social
economy comprises small, medium and large enterprises residing in both the for-profit
and NFP sectors. There is no single legal entity that applies to social economy
organisations. Moreover, social economy organisations will enlist hybrid models
to achieve their social objectives. It is not surprising therefore that the
sector calls for diversity in funding options.
Social economy organisations are often significantly undercapitalised
and struggle to access mainstream sources of capital, particularly non-grant
and non-gift capital.
While grants and gift capital to the social economy sector can help stabilise
cash flows and provide a revenue diversification tool,
a number of submitters to the inquiry argued that growing grant and gift
capital has been the focus within the sector and that this has resulted in a lack
of coordinated discussion about viable capital alternatives for the sector.
New approaches to capital are required to shift the culture 'away from a
culture of philanthropy, paternalism and dependence towards one of empowerment,
entrepreneurship and initiative'.
A Harvard Business School Social Enterprise Initiative forum noted that 'in
order to garner the capital necessary to foot the bill for social change,
not-for-profits need to think less about traditional grants and more in terms
of innovation, and so do the organisations that fund them'.
The departments' submission highlighted the need for capital within the
sector, and noted the PC report's findings 'that it can be difficult for
not-for-profit organisations to plan beyond short term funding cycles and much
time and resources are invested in securing grants'.
A common concern raised by submitters is that the immediate priority for most
social economy organisations is the programs and services they provide to their
communities, meaning that there is often little focus on planning for the long
term and financial stability, and even less focus on developing innovative
approaches to financing. Any surplus income is spent immediately to improve
service provision, redirected to other urgent services, or held short-term in
reserve as liquid assets for future program enhancement.
The FIA elaborated:
A continuing dilemma for the charity sector is the
uncertainty of their income stream which is largely reliant on donations and
government funding. This factor, coupled with the driving force for charities –
that is, to better meet the needs of the communities they serve, inevitably
places limits on planning for the long term.
In addition, many social economy organisations are of the belief that
should they accumulative wealth or assets, they will no longer be deemed in
need of philanthropic or government support. Dr Ingrid Burkett of Knode Pty Ltd
Unfortunately, there is still a hand-to-mouth culture in many
places and a fear of actually owning assets and building up equity in an
organisation that that will turn funders away. I think, in fact, the opposite
is true; we should reward organisations who demonstrate their long-term
commitment to achieving impact by building organisational capacity to respond
innovatively. We are not talking here about building fat-cat organisations, but
building strong, interdependent organisations who are able to link impact and
financial sustainability. I would really like to see a bit more activism from
within the not-for-profit sector around sustainability rather than just
increasing grant revenue.
Forms of capital
A number of innovative financial products are currently being explored
within the sector in Australia. These include:
alternate ways of structuring grant capital to encourage long
term viability and sustainability in the sector (see chapter 8);
utilising patient finance, or long-term loans in recognition that
social economy organisations do not yield high profit margins;
debt capital with 'soft-terms'; and
equity capital with reduced financial returns, or equity-like
investments structured as subordinated debt or a performance based loan.
Mr Glen Saunders from Triodos Bank told the committee that 'patient'
equity investments are a central part of Triodos' lending strategy in
supporting the social economy in Europe:
...where we invest in entities like SEFA, Prometheus Ethical
Finance in New Zealand or New Resource Bank in the US, we expect there is a
reasonable financial return for the risk we are taking, but we have taken the
stance that we will be a patient investor. We look for a return over something
like 10 to 15 years. That should be, to set a benchmark, something like a 10
per cent return over that period. It is very low at the beginning, and as the organisation
builds up its resources and so on it becomes correspondingly higher. That is
what I would call a soft return from our point of view. We do not try to force
the initiatives into that level of return, but that is what we think they
should be trying to achieve.
Foresters warned that patient finance and other 'soft-terms' of finance
should not be considered 'a grant dressed up as a loan':
...any changes in conditions of loans should not in any way
diminish the rigour and seriousness of due diligence, nor in any way give
enterprises the impression that the debts are forgivable or are merely grants
in the form of debt. Reducing rigour will only serve to reduce the
effectiveness of offering debt into this sector over time.
Hepburn Wind Park discussed the challenges associated with accessing
debt finance for its venture. In the case of some cooperatives, debt finance
for both construction and operation typically comes from a mainstream bank and
has priority over member's equity. The debt funding was given prescriptive
terms in order for the lender to guard against the perceived risks of an
inexperienced management team and a single asset project. Eligibility for the
debt finance required projected income from the venture and the projected percentage
of debt to the total cost. Due to the calculated risk of the project's incompletion,
a higher interest rate was offered and if the project were to default, the
lender could dispose of the assets to recoup their funds or take over the project
and complete or sell it. As Hepburn Wind Park noted it its submission '...the
banks are reluctant to participate unless the community can demonstrate
significant levels of equity or demonstrate that it has access to additional
sources of funding, as an example, government grants or third party guarantees'.
Hepburn Wind Park was offered operational debt finance consisting of a
medium term of 5 to 10 years to be repaid in the form of interest and principal.
It relies on the venture producing revenue to cover operational and loan
expenses. As a project with an unproven track record, lenders looked for a Debt
Service Cover Ratio (DSCR) of 1.5, which is revenue after tax of 1.5 times the
annual principal and interest repayments. In addition to a viable DSCR, the
venture needed to offer an acceptable debt to equity ratio, or in the case of
community co-operatives show 'how much "skin in the game" the
Financial institutions face significant challenges to address social economy
organisations' needs (such as overdrafts for fluctuating cash flows) while
taking into account the possibility of limited capacity to safely hold capital.
Foresters suggests a number of options to address this tension:
no interest loans which require rigorous structures and some
subsidisation of administration costs;
low interest loans often undertaken by a mainstream financial
institution in partnership with a capacity building intermediary;
commercial interest loans with special conditions offered within
the legal and regulatory frameworks governing credit and lending practices—flexible
conditions may be included such as unsecured loans, repayment holidays, or
built-in capacity building; and
above market interest loans with patient conditions often
undertaken by CDFIs who need to obtain financial sustainability in their own
right—whilst the market rates may be higher, the loan would be based on a
long-term relationship and flexible payment plans whilst targeting the specific
needs of social enterprises and facilitating access to debt capital.
Mr Saunders from Triodos Bank raised concerns with the provision of debt
capital for social organisations and projects at sub-commercial interest rates.
He told the committee that such provision of debt products runs the risk of
creating 'a sort of ghetto of low interest returns. If a project cannot manage
a reasonable commercial interest rate, the project is probably not strong
enough anyway to be invested in'.
A social economy organisation can raise equity capital by offering
investors to buy and hold shares in it. The investor in turn receives income
and capital gains from the equity investment.
Foresters, after surveying a number of social enterprises, found there
was little understanding or appetite for equity capital within the sector, and
that relatively few of the enterprises would be attractive for equity investors
looking beyond a social return:
When asked about equity capital only one of the longest standing
enterprises indicated that they had knowledge of the opportunities this
provided. There was a decided lack of knowledge about equity or its functions
and an even greater level of suspicion and fear of this sort of capital than
there was around debt capital. In addition, an examination of the financial
statements of the enterprises over their lifetimes suggested that, even if they
had legal structures that could accommodate traditional equity investments,
none of the enterprises would currently look attractive from a traditional
investors perspective. Though equity-like instruments may present some
possibilities, there are very few current options available and a high degree
of education and awareness-raising would need to take place in order for demand
for such products to materialize.
Many Rivers Microfinance argued that 'a well designed and run equity
product would leverage and allow significant loan capital to flow into the
sector from current financial markets'.
The CCA noted that accumulation of assets is rare in the sector. Only 10 per
cent of NFPs engage in economic activity and have 'considerable potential to
both leverage investment and attract new sources of financing'.
Foresters argued that to develop the market, education on equity investment
is required for both enterprises and investors alike (particularly when legal
structures do not accommodate enterprises to hold true equity). A marketplace,
or intermediaries, to connect equity investors and enterprises would need to be
established, as well as a consistent and comparable means of reporting social
returns across the sector.
Some innovation for equity capital in the sector includes:
quasi-equity or equity-like investments where the legal structure
is that of subordinated debt, or a performance based loan—rather than dividend
repayments, there could be royalty payments when the enterprise reaches
particular revenue goals—they are generally coupon based and demonstrate longer
term returns than standard debt products;
patient equity structured as subordinated debt with an
expectation of some level of financial return with the rise of revenue for the
enterprise, but with an emphasis on the social return—this may be accompanied
by capacity building within the enterprise; and
social enterprise equity, or real equity investments, would
require the enterprise to have a legal structure of a company limited by shares,
or be a cooperative with shares—it may be structured with reduced financial
returns for investors, this approach would allow an enterprise to raise capital
at any stage of its development.
SVA expanded on the concept of quasi-equity investments, and how it
would overcome some of the hurdles that social enterprises have in relation to
The majority of social enterprises in Australia cannot accept
equity investments due to their legal form preventing them from disbursing
dividends. It is estimated that 50 per cent are incorporated associations and
25 per cent are companies limited by guarantee. Additionally there is some concern
of social enterprise management around the loss of control of their
organisations. A more appropriate alternative is a quasi-equity investment
whereby the financial return is dependent on the operating success of the enterprise.
SVA believes that over time, these forms of financing will close the funding
gap that exists in the social investment continuum between grants and
Patient finance can be either in the form of debt or equity, and as the
name suggests, it is a long-term investment. Returns, sometimes including
retained capital, are contingent on a positive financial performance of the
enterprise. The finance is constructed on 'soft-terms' and may allow for
capital or interest payment holidays, and deferments.
Social Traders agreed that patient capital is required in recognition that
social enterprises typically do not yield high profit margins, yet still have
The life-cycle of capital needs for
social economy organisations
Foresters conducted a study into the different capital needs of a social
enterprise at different stages of its life-cycle, including the start-up phase,
and maturity phase.
The study underscored the need for funding diversity and various forms of
fixed asset capital for acquiring initial assets that are small
and essential, replacing poor quality equipment, or purchasing equipment that
will build the enterprises viability and sustainability;
working capital in the form of overdrafts or standby facilities
to smooth lumpy cash flows without resorting to an enterprise accessing
growth and development capital for asset development, the
attraction, training and retention of staff and acquisition of equipment; and
sustainability and consolidation capital to build asset purchases
and the balance sheets of enterprises, thereby supporting the development of financial sustainability.
Start-up capital and seed capital
The FASES report noted that the first five years in the development of a
social economy organisation holds extensive capital needs including debt
finance, philanthropic grants, and contributions from individual members.
Social Traders argued that the start-up phase holds the biggest gap in finance
availability for a social enterprise.
Foresters' research indicates that organisations have cited the importance of
loans from friends, family and the founders themselves. A number of organisations
also suggested that pro-bono contributions from people with particular skills
were crucial, as was a workspace or premises to operate from.
Hepburn Wind Park argued that capital availability can create time
delays in the progress of a social infrastructure project due to the need for
available capital before contracts are signed with developers. Without an
excess of capital in the early stages of the project, co-operatives cannot
guarantee to fulfil contractual obligations, nor can they offer advanced
payments that are often required.
Foresters offered a lender's perspective on providing start-up capital
to social economy organisations:
...lending at such an early stage of an enterprises’ development
involved very high levels of risk for the financial institution or funder. Unless
there are provisions to work alongside the enterprise to build capacity and offer
technical assistance, then the failure rates of loans can be extremely high. Seed
capital grants are also not readily available, probably for similar reasons. However
there may be creative ways in which grants could be developed that may help to
bring some greater ‘discipline’ into the process and prepare enterprises for other
forms of capital by offering the opportunity to develop a financial
Foresters suggested two approaches to develop financial discipline
within the start-up phase for social enterprises; matched funds and planned
loans. The former would require the enterprise to raise an amount of money as
seed capital which the financial institution would then match. The latter would
involve the development of a business plan, with finance contingent on the plan
being analysed and supported by an independent panel. The financial institution
would then maintain a connection with the enterprise to develop the business
plan over time.
The role of intermediaries and networks
Social economy organisations often require the assistance of
intermediary organisations in order to attract finance and become investment
ready. Financial intermediaries play a key role in linking suppliers of capital
with social investment opportunities,
and offer a diverse range of finance products to social organisations.
CDFIs for example, are a form of specialised financial intermediary that tailor
their activities to assist social economy organisations to gain access to
capital. CDFIs actively build capacity within organisations through each step
of the financing process (see paragraph 3.16).
Non-financial intermediaries influence a range of areas within the
social economy including through capacity building, developing the frameworks
for the market, fostering innovation, encouraging collaboration and monitoring
and reporting on the work of the sector. Intermediaries play a valuable role in
offering advice relating to legal and business structures that create avenues
to appropriate types of investment and capital for an organisation at various
stages of its growth.
Specialist intermediary organisations, including financial advisors,
analysts and brokers and industry associations with a genuine understanding of
the social economy are required to support the social economy. At this stage,
'the scale and scope of specialist support for social economy organisations in
Australia remains limited'.
This was reflected in the evidence from a number of submitters to the inquiry that
suggested that the intermediary sector needs to be further developed in order to
provide expert advice on the most appropriate form of finance for each stage of
a social venture.
It is becoming more evident that well-resourced commercial
intermediaries need to be established and encouraged if we are to develop a
robust social capital market in Australia. These organisations need to be
staffed by professionals who understand both the needs of all clients they are
trying to serve as well as having the ability and authority to modify or tailor
existing commercial offerings for the specific needs of Not for Profit
The work of intermediaries and CDFIs is discussed further in chapter 5.
Risk, measurement and metrics
Internationally, there has been a growing recognition of the need to
move beyond economic indicators to develop more holistic measures that include
social and environmental progress. The departments' submission acknowledged that
the efficacy and success of a social economy organisation cannot be measured in
purely economic terms, and must include social measures.
The sector needs common terminology and metrics systems for measuring
social impacts in order to facilitate analysis and performance comparison, establish
track records and offer potential investors an assessment of the risks and
returns related to different investments.
Social Traders commented:
It's easy to say that social enterprise makes a difference,
but it's much harder to prove it. Anyone running a business or program needs to
know if they are achieving their mission and objectives. This is an issue that
affects the whole not-for-profit sector but as social enterprise increasingly
attracts grants and support from philanthropy and government, there is a need
to understand its real benefits.
The challenges associated with measuring social outcomes, however, are a
significant barrier to greater and more effective investment in social economy
organisations. The financial costs of reporting and measuring may place undue
burdens on social economy organisations and thereby impact on the quality of
service they are able to provide their clients.
In addition, focussing on milestones or achievements, rather than on the
quality of the service provided when measuring success may provide a skewed
Creating a standard or uniform set of measurements presents a significant
challenge given the varied work of the sector. Triodos Bank, which invests in a
wide variety of projects, has experienced this challenge first hand. The bank
initially used internal qualitative assessments for each project. As the bank
has grown, however, these assessments became untenable:
We are [now] looking for limited forms of measurement. We
invest in a huge range of projects. How do you measure social return on an
ecological and affordable housing project alongside a renewable energy project?
We think it is inherently impossible to do that. What we are trying to do at
the moment, with our intensive project internally, is to develop simple
measures that give reassurance that we are really doing what we say we are
doing. We think that there is a lot of academic interest in this area, and we
are sceptical that you can turn qualitative matters into quantitative measures
on a credible basis.
Social impact measurement can be critical to the structure of certain
financial products. In the case of performance based loans for example, it
would be advantageous to develop consistent and comparable means of reporting
social returns. Social impact bonds (SIBs) require a baseline outcome and set
targets to measure the achievement of outcomes and impacts (see chapter 6).
The PC report recommended that Australian governments implement a reform
agenda for reporting and evaluation requirements for organisations in the
delivery of government funded services based on a common measurement framework.
In consideration of the diversity of the sector, the PC recommends that the
framework 'embody the principles of proportionality, transparency, robustness,
flexibility, and relevance'.
A more detailed discussion on this issue is in chapter 7.
Organisational forms and structures
The lack of access to equity capital for the vast majority of social
economy organisations has been cited as a considerable barrier to accessing
Social economy organisations in Australia take a variety of legal forms
including co-operatives, community associations, companies limited by guarantee
and proprietary limited companies. A legal form defines the parameters by which
an organisation can raise and service different forms of equity and debt
finance. It also determines the governance of an organisation, and directs the compliance
duties of a chief executive officer or board.
In its submission, Foresters outlined the challenges presented by social
enterprise legal structures as twofold:
the legal impositions surrounding the types of capital that can
be accessed (whether that be market capital or grant capital); and
the imprint a legal structure can make on the cultural and
governance legacies of an enterprise that in turn can influence what types of
capital they seek to access.
The legal form chosen by an organisation can also affect tax concession
In relation to legal forms, the PC report noted that the only social
economy organisations that can access equity capital are cooperatives, a small
number of not-for-profits which are companies limited by shares, and
incorporated associations in Queensland.
A number of new legal forms have been established internationally that
aim to introduce greater flexibility for social economy organisations and
investors. Some of these bring a greater focus on the social purpose of an
organisation, while others open up access to equity and other forms of capital.
These new models are discussed further in chapters 8 and 9. In the Australian
context, the PC considered that addressing organisational structures which
allow equity raising is less important than developing a sustainable market for
Given the extent of the impact a legal structure can have on the
operations of a venture, organisations should be given assistance at the start-up
phase of a venture to make an informed decision about an appropriate legal
structure. The role of intermediary organisations such as Our Community and
PilchConnect, which links not-for-profits with pro bono legal services, is vital
in this area.
Relationship with government
Following the development of the National Compact: working together
(see chapter 1), there has been considerable discussion in the sector on how
the compact will be applied within the sector. Submitters argued that government
should build relationships, rather than contacts, when engaging with social
economy organisations, as a bureaucratic approach can lead to compliance
burdens and dysfunctional contractual relationships. Concerns were raised
relating to the shifting of social service delivery costs to the sector and the
planning limitations created by short-term contracts, both of which constrain
financial innovation and sustainability in the sector and exacerbate difficulties
surrounding staff recruitment and retention and infrastructure development.
Father Brian Lucas of the Catholic Bishops Conference and Mr Trevor
Ruthenberg of the Lutheran Church commented on the limitations of short-term
Father Lucas: ...a funder has to make the prudential
decision: if you are going to lend money over a five-year, 10-year or 15-year
payback horizon, will the cash flow support that? If you are at the mercy of
some change of government fashion then prudentially that is impossible. So,
much of the welfare sector, as Harry Herbert has said, is at the mercy of
tender processes, short-term contracts and consistent changes of approach in
that sector according to the whims of government policy.
Mr Ruthenberg: When you get on the ground and you
start delivering a service, irrespective of whether it is in town or in a
remote Aboriginal community, it takes time to develop reputation and trust and
connections. To be looking over your shoulder consistently to determine whether
you are going to have funding next year is incredibly debilitating, especially
when you are looking for quality staff and the people who care.
The government's National Compact: working together (see chapter
1) to work with social economy organisations to strengthen the capacity of the
sector and 'collaborate on workforce strategies to improve attraction,
retention, development and recognition of paid workers and volunteers in the
The committee notes the PC's recommendation that compacts between the
government and the sector should be supported by well documented plans of
Chapter 9 discusses these themes further, along with the role of government
as an investor, regulator and an advocate for change.
The development of a robust capital market for social economy
organisations goes beyond a sole focus on the creation of financial products.
The interdependence between capacity, the role of intermediaries, product
development, measurement, regulation and the sector's relationship with
government illustrate the need for broad sweeping policy initiatives to support
the sector and catalyse a capital market.
This chapter has examined the demand side of the equation with calls
from social economy organisations for innovative financial products, further
development and support of intermediaries, tools for measuring social return
and improvements to the regulatory environment. These issues will be discussed
in further detail in subsequent chapters. The supply side of the sector will be
addressed in chapter 4.
A recurring argument presented to the committee was the need for social
economy organisations to build their capacity and become investment ready. The
committee recognises that an increased flow of capital to the sector needs to be
matched by capacity growth in social economy organisations. Without
improvements in financial management and planning, the resources invested into
the sector are at risk of mismanagement. Further, the inappropriate allocation
of various forms of capital could result in dire consequences for investors and
social economy organisations and in turn the communities they serve.
The committee concludes that the proposed Social Finance Taskforce (see chapter
2) would play a key role in managing this emerging capital market and the
interdependence of building capacity, supplying suitable financial products and
encouraging intermediaries to flourish in the sector (see chapter 5). The
taskforce would also align the current regulatory reforms with the social
investment agenda, and ensure that legal forms are also considered in social
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