Financing social enterprise
A social enterprise is a business model designed to deliver services for
the purpose of providing a social benefit, rather than to provide a profit.
As such, earned income is by far the dominant financial input for social
enterprises, and represented 85 per cent of income for social enterprises in
the 2007–08 financial year in a recent sample survey.
However, social enterprises are 'multi-resource organisations' whose inputs
consist of a mix of earned income, grants and bequests, paid staff and
As discussed in chapter 1, the majority of social enterprises
within the sector operate using a not-for-profit legal structure. However, some
enterprises take on a for‑profit trading structure and are often referred
to as social businesses. There has been some discussion that social enterprises
should not be considered part of the third sector but should instead occupy a Fourth
Sector to reflect the cross-over between the private sector and the third sector
(see chapter 1).
Foresters Community Finance (Foresters) acknowledged the excitement and
innovation in the field of social enterprise, but cautioned that it is not the
sole means to 'get off the funding treadmill':
‘Social enterprise’ as a concept has been widely embraced and
there is much excitement around its potential to bring energy and innovation to
the social sectors in Australia. Alongside this excitement, however, is a
degree of hype and a resultant array of fairly unrealistic expectations of what
social enterprise could achieve (often without any real or extended support
systems in place). Social enterprise is not, in our opinion, a magic solution
for addressing wicked social problems, nor is it an alternative pathway for
social sector organisations wishing to find ways to get off the funding
treadmill. Rather, it is an addition to the stable of ways in which we can
address the most pressing issues facing our society today. Social enterprise is
a hard road – it asks us to tread the slippery path between social objectives
and commercial practices. It is not for the fainthearted nor for idealists. It calls
for ‘practical visionaries’.
This chapter begins with a brief overview of social enterprise in Australia
and its three broad categories. It then examines the following issues:
legal structures and compliance;
the Social Enterprise Development and Investment Fund (SEDIF);
the role of community investment and member-owned enterprises.
A balanced approach to finance for social enterprise will be explored and
how to appropriately direct capital to foster sustainability. The importance of
capacity is touched on, building on from discussions in chapter 3. The
challenges associated with legal structures, and bridging the divide between
for-profit and not-for-profit structures is also discussed. The chapter will
then examine some means of generating capital for social enterprises using the SEDIF,
procurement and member-owned enterprises, concluding with recommendations to
improve the role of government as a catalytic investor for social enterprise.
Social Enterprise in Australia
A June 2010 report by the Australian Centre for Philanthropy and
Nonprofit Studies (ACPNS) and Social Traders estimated that there are up to
20 000 social enterprises operating in Australia.
According to the Giving Australia study in
2003–04 over one quarter (29 per cent) of not-for-profits operated as a social
Three main categories of social enterprises have been identified in the
Australian context, as outlined below.
Type A: Social Objectives and Social Outcomes—an
enterprise whose focus and purpose is to address a social issue using
enterprising means. Whilst present across all forms of economic production,
social enterprises operate predominantly within the service economy.
Type B: Employment Creation—an enterprise that seeks to
create employment and integrate people who have been excluded from employment
into the workforce. If such an enterprise focuses on people who have been
excluded from employment because of a disability or health related issues,
these enterprises are referred to as ‘social firms’.
Type C: Social Wealth Generation—an enterprise that
is often linked with a non-profit organisation, that has at its core social
objectives and which generates a financial return for the non-profit
Also, social businesses may be established as subsidiary companies by
charities, usually as proprietary limited companies. These businesses pay a
dividend back to the not for profit for its charitable purposes. Similarly,
social enterprises may exist as a stand-alone commercial entity that provides
funding through donations or dividends to organisations that have a social
There are a number of structures a social enterprises can adopt, all of
which fall within the three broad categories outlined above.
In most cases an organisation will use a hybrid model enlisting a number of
typologies in order to meet a core objective.
The federal government has recently initiated the Social Enterprise
Development and Investment Fund (SEDIF) to improve access to finance and
support for social enterprises. The objective of the SEDIF is to assist the development
of social enterprises and in turn, to increase the impact of their work in
communities. On 9 August 2011, the government committed $16 million
to the initiative and announced that Foresters Community Finance and Social
Enterprise Finance Australia (SEFA) had been selected as the fund managers for
Financing sustainable social enterprise
Challenges facing social enterprise are not dissimilar to those of the
wider sector (see chapter 3). There is a need to develop financial
products that can be applied at each stage of the life-cycle of social enterprises.
In particular there is an acute need for start-up capital for emerging
The capital needs of social enterprises need to be met without
endangering either the social or business purpose of the entity.
It is crucial that tools and structures to finance social enterprise build
sustainability and impact and do not result in liability.
The committee heard that providing finance to a social enterprise could
unintentionally dilute the social impact of an organisation. High costs
associated with raising capital and a focus on profit raising could detract
from a social focus. Christian Super have opted to channel finance through a
CDFI in order to mitigate the risk of unintentionally compelling a profit
There are sectors where the gap between what, as investors,
we desire and the social outcomes that are important for the community are just
too great, and at times we actually run a danger of becoming too profit
focused. If we go into those sectors, we will force those sectors to change in
character, and ultimately that is bad for them and bad for the community. Where
we do see the value is where we can get involved in sectors in a way that
improves the ability of not-for-profits to deliver those services, whether that
is because we have capital that they need or because we can enter in such a
way, as we have done with the SEDIF program, that those not-for-profits can
access money at what is probably a lower rate than they would from a commercial
Foresters conclude that the core motive behind any funding or finance
should be to increase a venture's ability to generate impact and deliver social
Examining the work of social enterprises engaged in employment creation
is a good illustration of where a social enterprise has additional expenses
incurred due to its social mission. Social firms are typically small to medium
sized businesses operating as divisions of larger not-for-profits (NFPs) competing
against commercial operators.
In addition to the challenges facing the NFP sector more generally, social
firms face unique hurdles associated with employing a high proportion of
Although there are a range of supports and subsidies
available to any employer who recruits staff with a disability, the ongoing
demands on a workplace which commits to a high level of staff with complex
needs can affect the business’s ability to maintain high standards and competitive
pricing. This can be particularly challenging if the subsidy has expired but
the support needs of the individual are still significant, particularly in the
case of mental illness where the condition is episodic. This, combined with the
fact that social enterprises will generally have a high number of part time
staff, will need to meet a high standard of HR practice, and unlike many small
businesses where the owner operator may not remunerate themselves at an hourly
rate based on the relevant award, ensure that all staff are paid at a level
commensurate with their skills and experience, can put the commercial viability
of the enterprise at risk.
To offset the additional operating costs generated by the social
mission, Social Firms Australia (SoFA) proposed that a modest but ongoing
subsidy be made available to all employers, including social firms, which
commit to a certain number of employees with a disability or disadvantage.
Social Ventures Australia also highlighted that social enterprises focusing on
employment allocate a greater portion of profit to cover impact costs, and that
government support should target these costs:
Social enterprises that siphon off large chunks of their
profits to meet these employment support costs will be less likely to be able
to repay social investors, hence are stuck in a catch 22 situation. If the government
wishes to encourage employment creation for social enterprises to grow and
scale and investors to fund them, then employment support cost funding should
be required within the current JSA [Job Services Australia] contracts.
This doesn’t need to be new money, just flexible use of current expenditure which
acknowledges the inherent employment support costs working with the excessively
long term unemployed.
Foresters argued that using grants or gifts to cover core operational
costs (as opposed to impact costs) could be detrimental to a social
enterprise's ongoing viability.
A Canadian report on social cooperatives discussed specifically the need to
ensure that a venture is viable in the early stages of its life-cycle:
It is relatively easy to start a co-op if there is
developmental support. Keeping one going requires a lot of hard work. It
requires that the co-op business is essentially viable, and that the co-op
takes care of both the group development and the business side of things. There
is some indication that if funding is too readily available in the beginning
co-ops may be launched without laying a strong enough social or educational
Financial statements of social enterprises should include all the
traditional costs of running a small to medium enterprise (SME), and
additionally take into account the impact costs for the enterprise. Some
enterprises choose to cross-subsidise to ensure that income from operations
will cover operation and impact costs. For other enterprises, impact costs can
be met through support organisations in the form of grants or donations.
Lack of capacity has been cited as one of the major obstacles to capital
for social enterprises.
Data from the Finding Australia's Social Enterprise Sector (FASES)
survey suggests however that social enterprises make good use of strategic
plans, formal business plans, budget forecasts, and regular income/expenditure
...our sample report relatively greater use of most business
planning and performance measurement activities than mainstream business
respondents. For example, 81.5% of our respondents compared with 31.7% of ABS
respondents report using budget forecasting.
The FASES survey showed that the majority of respondents occasionally or
regularly engage with others in the industry for business support. Many of the
respondents report frequent access to external accountants, the Australian
Taxation Office and banks. When compared to mainstream business practice, the
results for accessing external accounting, financial and legal services were
higher. The FASES report acknowledges that this may reflect the regulatory
environment for the sample survey which consisted mostly of organisations
incorporated as not-for-profits.
Despite this evidence, lack of capacity or 'investment readiness' has
been cited as one of the major obstacles to capital for social enterprises
throughout this inquiry.
For example, Foresters interviewed a number of social enterprises; none of the
interviewees had a formal education in financial management. The majority of
respondents rated their current skill levels in financial management around
five out of ten. Key workers within the organisations had identified the need
to improve their skills and knowledge of the financial aspects of their work,
some by learning on the job, others receiving formal training and mentoring.
The committee notes the government funding of $1 million
provided to Social Traders to administer a national business development and
support service for 105 social enterprises that received funding from the
Community Jobs Fund
and the Innovation Fund.
The National Social Enterprise Development Support Project will assist the
ongoing sustainability of the enterprises with tailored business development
utilising coaching, networking and specialist advisory and support services.
This work will be overseen by an Advisory Group from the Australian Social
Innovation, Entrepreneurship and Enterprise Alliance and delivered in
partnership with Job Futures.
Social Traders noted that lack of business acumen stunts the growth of
many enterprises. Social Traders created the Social Enterprise Development Fund
in 2010, and invested $950,000 towards five social enterprises in order to
highlight the needs of the sector. Nine social enterprises were selected to
participate in 'The Crunch' where, over a 5 month period each established a
rigorous and detailed investment business plan. Of these nine, five were
selected to receive finance totalling $702,000 of which $410,000 was repayable
as patient capital at sub-commercial rates of interest.
The second round of 'The Crunch' is currently underway.
The pilot program highlighted that lack of business experience in the
sector exacerbates the risk associated with investment in an enterprise. This
same lack of business acumen translates into reluctance for many smaller enterprises
to take on debt to achieve sustainability and growth.
Limited capacity also affects the ability of social enterprises to
respond to tender opportunities. Social firms, for example, often have limited
resources within the firm to respond to multiple tender opportunities and
compete in the commercial market for large, sometimes multi-million dollar
The Productivity Commission (PC) report acknowledged that government can
play a role in the development of capacity for social economy organisations by
collaborating with peak bodies. The report also recommended expanding the
Enterprise Connect program to include a centre for social enterprise.
The Enterprise Connect program is part of the Department of Innovation,
Industry, Science and Research. It consists of a network of 12 centres across
Australia that provides business improvement services to eligible small and
medium businesses. Eligible businesses are able to request a comprehensive,
confidential and independent business review at no charge, and the program also
offers a number of targeted support programs to address specific business and
regional development needs.
The report on Canadian cooperatives proposed that cooperatives, and non‑profit
enterprises, should be eligible for existing government programs that support
There are many federal government programs to support and
invest in the small business sector -- this in recognition of the net benefit
to the community. It is not recognized as a subsidy, but rather as an
investment. We need more investment in co-ops in recognition of their benefit
Social co-ops could benefit enormously if programs to support
small business start-ups were extended to them. The correspondent argues, “If
you want the benefits of a diversified economy and the benefits of small
business enterprise you should care nought whether the beneficiary has an
individual as the recipient of the growth or whether the community as a whole
is built into the residual benefit through non-profit enterprise
or the co-op model".
The New Enterprise Incentive Scheme (NEIS) is a self employment program
for unemployed people who wish to start their own independent business. NEIS
providers assess the viability of potential business owners' projects and offer
them training and support.
Mr Benny Callaghan, Chief Executive Officer of the School for Social
Entrepreneurs, highlighted that whilst some social entrepreneurs could access
NEIS, it was not the most suitable option for them as it did not offer
expertise in social enterprise:
The NEIS program, the National Enterprise Incentive Scheme,
as you would be familiar with, allows people to bring forward their ideas to
set up commercial businesses by providing them with a small allowance on a
weekly basis for a year while they complete a certificate IV in small business.
This provides them with the skills to set up that business.
While the NEIS program has been highly effective for
commercial business, it has not been effective for social entrepreneurs.
Indeed, we have had people go through that program and then come to us because
they have not found the appropriate support in that program. We have also had
people look at the two programs and choose our program, despite not being able
to get the financial support through it. They choose ours because we have
expertise in social enterprise and social business, whereas the NEIS program
does not, and setting up businesses, organisations or projects in a social
space is inherently more complex in some ways.
Social Traders told the committee that there was anecdotal evidence that
some NEIS trainers have discouraged applicants to the program from pursuing the
social enterprise approach as it will not maximise personal profit making.
The committee is encouraged by the evidence in the FASES report that
some social enterprises are developing their capacity and accessing external
accounting, financial and legal services. However, evidence to this inquiry attests
to an insufficient level of capacity in many small to medium social
enterprises. The committee agrees with the PC recommendation that the
Enterprise Connect program be extended to support social enterprise. The
committee believes that the government has a role in supporting social
enterprises and that relevant government programs which support small and
medium sized business initiatives, such as NEIS, should be adapted to support
Legal structures and compliance
Social enterprises are subject to many of the inconsistencies and
inefficiencies of regulation that the wider not for profit sector experience.
Unique to social enterprises, however, is the additional complexities of
navigating between the for-profit and not-for-profit sectors.
There is no single legal entity that applies to social
and as a result, social enterprises are not regulated by a single body. A
recent sample survey revealed that the majority of social enterprises were
incorporated associations (51.6 per cent) followed by companies limited by
guarantee (24.5 percent).
These structures are associated with limited access to capital through debt
financing, and equity investments are not appropriate for structures prevented
from disbursing dividends.
For-profit social enterprises have expressed frustration with the
limitations of their legal structures in accessing philanthropic and grant
Mt Buffalo Community Enterprise commented on the difficulties of being
recognised as a community venture while having a for-profit structure:
These assumptions are akin to the treatment of the notion of
profit as ‘evil’ in regard to the pursuit of social, community and public good.
It fails to recognise the fact that profit plays a legitimate role as the price
of private capital. By treating ‘not-for-profit’ status and being a socially
motivated organisation as synonymous, this conspires to largely eliminate the
potential for socially motivated organisations to access and raise private
Social Traders argued that although many social enterprises clearly
exist for a social purpose, and not for personal gain, an enterprise's legal
structure can limit the number of capital options available to it:
Many social enterprises, despite achieving significant and
long-term social impacts and having a legal structure that does not allow the distribution
of profits or surpluses for personal gain, are not eligible for Deductable Gift
Recipient status; rendering them unable to attract significant funds from
philanthropy, unable to raise capital from equity and unlikely to be able to
access commercial finance due to a perception of high-risk by commercial lenders
and low profit margins that hamper their ability to service traditional
Other social enterprises, such as many community enterprises,
community banks and co-operatives have a for-profit legal structure and achieve
significant social impact. While there is an opportunity to raise capital from
equity or in the case of co-operatives from members, there is not the
opportunity to access tax-deductable philanthropic capital and many have profit
margins that preclude commercial lending.
Social Traders argued that the lack of a not-for-profit legal structure
'severely constrains the development and growth potential of these
organisations, and forces debt financing in those instances where equity would
be a more suitable form of capital'.
The Fundraising Institute of Australia (FIA) identified that 'Australian
regulation does not differentiate between social enterprises and charities, and
does not address the differences in their operations'.
Overcoming legal structure barriers
Foresters offered the following three potential options to overcome the
barriers created by various legal structures for social enterprise:
the creation of a legal structure specifically for social
the use of hybrid models where organisations incorporate
not-for-profit and for-profit legal entities (for example having one entity
wholly own the other) enabling the social enterprise to receive the benefits of
both forms of structure; and
creating legal structures and entities that are external to the
core of the social enterprise that allow capital raising (such as is the case
with legal structures like the Limited Liability Partnership (LLP) that has
been developed in the UK and is now spreading to other countries).
The Centre for Social Impact (CSI) argued that 'a systematic
investigation into the efficacy and suitability of existing and possible legal
forms for Australian social businesses' needs to be undertaken.
The regulatory regime for social enterprises and NFPs is discussed further in chapter
A new legal structure to support
Social Traders argued that the lack of a not-for-profit legal structure
tailored specifically to social enterprise that allows access to equity capital
'severely constrains the development and growth potential of these
organisations, and forces debt financing in those instances where equity would
be a more suitable form of capital'.
The Fundraising Institute of Australia urged that Australia adapt the UK model
of Community Interest Companies administered by the Regulator of Community
In the UK, a Community Interest Company (CIC) has been specifically
designed to accommodate social enterprises who seek to use their profits for
the public good. The PC report expands on the functions of a CIC:
CICs provide social enterprises with the flexibility of
operating 'commercially' under the company form, but with special features –
asset lock and capped dividend distribution – to ensure they are working for
the benefit of the community without the need for charitable status. From a
financing perspective, the CIC form expands access to finance for social
enterprises as CICs are able to raise capital from issuing shares, albeit a
capped share that restricts the level of dividends in order to protect
Social Ventures Australia noted that CICs were designed to encourage
investment in the sector and argue that Australia needs to 'shift to a more
innovative and sympathetic tax structure'.
In the US states of Vermont and Michigan a new legal form for a
low-profit, limited liability company (L3C) has been created. The structure
facilitates investment in socially beneficial, for-profit ventures. The L3C
differs from a standard limited liability company (LLC) by holding an explicit
primary charitable mission and only a secondary profit concern. Unlike a
charity however, a L3C is able to distribute the profits to owners or
Foresters, however, cautioned against creating a purpose-built legal
structure for social enterprise:
Though legal structures can act as a barrier for accessing
certain types of capital, it would be erroneous to think that the development
of ‘new’ or social-enterprise specific legal structures will automatically or
simply solve issues of undercapitalization in this sector.
The joint submission from the Department of Education, Employment and
Workplace Relations (DEEWR) and the Department of the Prime Minister and
Cabinet (PM&C) also questioned whether a new legal structure is the
appropriate response for overcoming some of the barriers to equity for social
enterprises. They proposed that the needs of organisations and investors could
be better met by designing the 'right' capital to meet the flexibility
requirements of organisations and the exit strategies for investors.
The departments' submission highlighted that these international
organisational forms that have developed are still relatively new and it is
unclear whether they will be effective in promoting investment. The department
argued that 'the scope for Australian enterprises to adopt a structure and
constitution with features equivalent to some of the overseas structures within
the current regulatory regime is untested, particularly if the organisation is
also seeking charitable tax status'.
Social Enterprise Development and Investment Funds (SEDIF)
As mentioned earlier, the SEDIF is the main government initiative helping
to improve access to finance for social enterprises. The main target for the SEDIF
is social enterprises that require seed and growth capital to move past the
start up phase and grow into viable businesses. The departmental joint
submission describes the SEDIF as an interim step in market development to
provide a 'buffer' to test the market:
The initial stage of selecting the fund managers has been
illustrative of the interest in new ways for government, investors and
community organisations to work together on finance options for the delivery of
For government, the program demonstrates the wider
application of a model already in use to attract investment to areas like green
technology, one where government acts as a catalytic investor rather than
contractor. For social organisations, the SEDIF presents a model that focuses
on long term financial viability and moves away from grant dependence. For
investors, the SEDIF demonstrates that the social sector can represent a viable
investment, one that can produce social as well as financial dividends.
The government conducted a consultation process from
28 October 2010 to 3 December 2010 to assist in the
development of guidelines for the SEDIF process. The guidelines were released
on 22 December 2010 along with a call for applications for eligible fund
managers. The SEDIF Advisory Committee supported this process. The Advisory
Committee consisted of members with expertise in relevant aspects of finance,
funds management, social enterprise, social investment and legal and governance
As mentioned earlier, the two organisations selected for funding through
the competitive grant process are Social Enterprise Finance Australia (SEFA)
and Foresters Community Finance. The funds are to receive $10 million and $6
SEFA, established on 1 July 2011, intends to provide finance to social
enterprises on commercial terms. An integral objective is to help customers
build their capacity to manage debt and to become financially sustainable over
time. SEFA will focus on three broad areas of social impact: community
development; indigenous community enterprises; and community environment
enterprises. Loans will only be given to social enterprises with tangible
social outputs. SEFA has partnered with a number of organisations including:
Triodos, a leading social impact finance institution founded in
the Netherlands—providing significant loan funding and sharing its experience,
intellectual property, resources and seconded personnel;
Community Sector Banking—contribution of investment funds,
generating loan applications, full banking services and supply of personnel
experienced in investment in social enterprise and the community sector;
the Macquarie Group Foundation—business mentoring to applicants;
the NSW Aboriginal Land Council—founding investor and partner in
Bush Heritage Australia—expert land valuation for conservation;
the University of Sydney Business School, Innovation and
Entrepreneurship Research Group (IERG)—development of key performance
indicators and metrics to measure social impacts;
Mallesons Stephen Jaques—pro bono legal services; and
the Institute of Strategic Management—development of a
Certificate IV for social entrepreneurs.
Foresters has partnered with the Christian Super Fund, which contributed
$6 million towards the establishment of two new investment funds. These
the Community Finance Fund (CFF) which will provide a range of
tailored financial products to established social enterprises; and
the Social Enterprise Finance Fund (SEFF) which will assist
innovative and emerging social enterprises to build their capacity to meet the
criteria of mainstream financial institutions. The SEFF may utilise
quasi-equity or patient loans that put social returns ahead of financial
Social Investment Australia Limited, a subsidiary of Foresters, will be
the trustee to manage the two funds. Both funds will assist applicants with
targeted business advice to ensure financial sustainability of the enterprise
over time. Applicants to the CFF and SEFF will only be accepted if they
demonstrate social value.
Submitters welcomed the development of the SEDIF and the new capital it
has attracted to the market.
Christian Super highlighted that the SEDIF was a particularly attractive mode
of investment as it lowered the risk associated with investing in the sector:
Currently, direct investments into the not-for-profit sector
can expose a fund to risks that cannot be justified by the returns, and making
such an investment would not be prudent for our fund members. However, sharing
the risk with government, as we did with the SEDIF program, improves the
risk-adjusted return and allows us to make meaningful investments that make a
real difference in the community. In our view, the shared risk and reward model
is a key component of any investable structure that seeks to improve both the
financial and the social return of the investment.
DEEWR outlined that the two funds would be open for operation before the
end of 2011, making their first loans not long after.
SEFA informed the committee that 70 applicants have contacted them in relation
to the SEDIF in their first six weeks of operation, estimating that roughly a
dozen of these would translate into viable investment loans.
SEFA provided some commentary on the applications received so far:
The inquiries we have followed up are all good business
ideas, and ideas are what they are. The first challenge is to make a social
business idea into something that can work from a viability point of view. On
the one hand there is a need for some mentoring, for education and to have
people on their teams who can do business plans. A number we have spoken to so
far are yet to have a business plan. When I have asked if they could write one
they have said they do not have the consultants or the funding to do it. On the
one hand that says that perhaps there is a lack of funding but much more
relevantly it says that the CEOs of these initiatives by and large do not have
the ability to write their own business plans. There are obviously some issues
Dr Ingrid Burkett of Knode Pty Ltd acknowledged that the injection of
capital in the market has developed the supply side, but noted that the big
challenge is going to be whether the demand is up to the mark in terms of
accessing the SEDIF finance. Dr Burkett recognised that the fund managers and
intermediaries in the sector are presented with a challenge to build the
capacity for social enterprises to access the new credit supply.
Monitoring the SEDIF
Social Business Australia and the National UN International Year of Co‐operatives (IYC) 2012
Steering Committee, (SBA and the IYC steering committee) recommended that the
government provide guidelines to define the tasks of social enterprise fund managers.
The guidelines would provide advice to ensure that successful applicants for
funding are viable and sustainable, comply with the Fair Work Act, health and
safety regulations and environmental standards. SBA and the IYC steering
committee argued that fund managers should use legally binding and enforceable
loans, and produce public lending guidelines to enhance accountability.
In relation to performance evaluation, under the guidelines for the
SEDIF, successful fund managers are required to adopt a robust approach to
measuring the social value created by their investments and to benchmark
against international standards.
SEFA is working with the IERG at the University of Sydney to develop key
performance indicators and metrics to measure social impacts.
Foresters uses Impact Reporting and Investment Standards (IRIS) to provide
transparent and consistent social impact measurement.
DEEWR has opted not to prescribe a form of evaluation, but instead develop
systems in consultation with the fund managers taking into account best
While the government has taken an 'arms' length'
approach to managing the work of Foresters and SEFA, DEEWR has committed to
regular reviews of the progress of the SEDIF:
In terms of making too many judgments, it is going to take a
while. This is a change process, too. It is conversation with the sector; it is
a conversation with investors. We will certainly be looking at this at regular
intervals to see how it is tracking. The way that we have thought about it
conceptually in setting this up is that there will be an establishment
phase—getting doors open and getting things tracking in the first little while.
Then there is whatever the remainder of the first three years is. Then, hopefully,
there is a successful business as usual phase.
The committee acknowledges the government's work in developing the SEDIF
initiative. The SEDIF provides a positive example of strategically directing
funds to deter dependence on government and encourage sustainability in the
sector. It is a means to build the capacity of social enterprises, strengthen
the work of financial intermediaries in the sector and attract investors to the
market. The committee commends this approach to other departments.
The committee emphasises the importance of reviewing the SEDIF. This
analysis will enhance the learning for the wider sector, government and future
potential investors. A thorough analysis may also reveal whether further
capacity development is required on the demand side before supply is further
reinforced. The committee looks forward to the public reports of both Foresters
and SEFA evaluating both the work of the fund managers and the social impact of
the loan recipients.
Social procurement is an approach used by governments, councils and
other service providers that focuses on generating social benefits and social
It allows organisations (or individuals) to choose to purchase a social outcome
when buying goods or services.
The process of social procurement can involve:
social tendering (directly identifying a social purpose business
rather than competitive tendering);
engaging a principal provider (who delivers services through the
use of sub-contracts with social benefit organisations);
including a community/social benefit criterion in the call for
and assessment of competitive tenders; and
procuring goods and services only from suppliers who demonstrate
socially responsible work practices.
Social procurement is another option for government in promoting social
enterprises. Social procurement policies from government play a key role in the
development of the social enterprise sector. As SoFA commented:
[Social procurement] initiatives will assist social
enterprises with opportunities to secure a stable source of longterm revenue.
There needs to be an associated capacity building mechanism to support
not-for-profits to respond to commercial opportunities... In the area of social
procurement SoFA has recently launched a ‘Partnerships With Industry project’
that works specifically to identify opportunities and develop relationships
between government, business, and social firms to increase contracts for
existing social firms. Ultimately this work will lead to increased employment
opportunities for people with a mental illness, SoFA's primary target group, to
secure durable employment.
Social Traders suggested that all levels of government should encourage,
and partake in, social procurement through purchasing goods and services that
deliver public benefit and in turn strengthen the diversity of social
The Victorian government administers the 'Expert Support Program' which purchases
goods and services from social enterprises. In doing so, the government is able
to unlock strategic value in procurement of social outcomes in addition to
their required products.
In October 2010, the Victorian Department of Planning and Community Development
(DPCD) launched Social Procurement: A Guide for Victorian Local Government
to assist councils in their efforts to procure with positive social impacts.
The guide forms part of the Procurement Excellence Program led by Local
Government Victoria. The guide will build upon current initiatives to enhance
triple bottom line procurement:
The triple-bottom line approach to procurement is frequently
explored by councils wanting to achieve strategic objectives around economic,
environmental and social outcomes. The economic and environmental objectives
delivered through procurement are increasingly recognised by councils; however,
the social objectives of the triple-bottom line approach are often
Social procurement involves using procurement processes and
purchasing power to generate positive social outcomes in addition to the
delivery of efficient goods, services and works. For local government, social
procurement builds on initiatives already undertaken by the sector in enhancing
sustainable and strategic procurement practice, enabling procurement to
effectively contribute to building stronger communities and meeting the social
objectives of councils.
As part of the Expert Support Program, tools and templates will be
released including advice on implementing social procurement initiatives, social
procurement mapping methodology and a Social Procurement Engagement and
Awareness Strategy. The Centre for Social Impact considers it 'a good model
for how to drive that sort of change at the local government level'.
Large councils such as the Brisbane City Council and Parramatta City
Council have also supported social enterprise through purchasing arrangements.
The Nundah Community Enterprise Co-operative (NCEC), for example, creates
sustainable employment and training opportunities for people with mental
illness, learning difficulty or intellectual disability. The City of Brisbane contracted
NCEC to maintain initially three, and later eight city parks. This gave the cooperative
a significant revenue stream, and its members an interface with the community.
The development and promotion of 'purchasing directories' is another
area in which government could bring a positive influence to social
procurement. Social Traders is in the process of developing an online directory
of social enterprises across Australia. 'The Social Enterprise Finder' will
stimulate demand for the products of social businesses and enable government,
corporate and community organisations and individuals to purchase and procure
from social enterprises. Other purchasing directories include the Australian
Indigenous Minorities Supply Council, the Industry Capability Network,
Australian Disability Enterprises and 'Ecobuy' in Victoria.
Community investors and member owned businesses
Member owned businesses represent a considerable proportion of the
social enterprise sector in Australia, and rank as the second most common
ownership structure (18.1 per cent) in the FASES survey.
The main types of member owned businesses are cooperatives, associations, and mutuals.
Member owned businesses strengthen and encourage diversity in the economy
through job creation, the development of skills and encouraging business
investment in rural and regional Australia. In addition to a member owned
business' specific mission, its activities serve a dual purpose of improving
the economic and social wellbeing of its members and the community.
The CSI and SENTECH (Social Enterprise Technologies) argued that utilising
community investment to raise capital for business ventures is often overlooked
within the social investment debate in Australia.
The emphasis is instead placed on 'disengaged institutional investors':
...much of the debate around social investment here seems to
be an extension of the “grants culture” and pays little heed to community
engagement and the provision of locally based finance for social ventures. This
is especially a problem when the evidence is that it is “community investment”
that provides the breadth of support that will see a trading social enterprise
through to long term sustainability.
SENTECH argued that there are greater amounts of potential capital in community
investors than traditional mechanisms of giving, and that community investors provide
a sustainable means to finance social enterprises:
The full potential of community investment is easy to
imagine. Most people's savings and investments are far greater than the amount
they could afford to donate to good causes. So if mechanisms are created to
enable people to invest and save in good causes in their communities, there is
the potential to raise far greater sums of money than are currently raised
through charitable giving.
Hepburn Community Wind Park Co-operative Limited consists of 1900
members and has successfully financed a community owned and operated renewable
energy generator on a commercial scale ($13.5 million). It is designed to
accommodate the energy needs of the local community in Daylesford, Victoria.
The finance for the venture consists of Victorian State Government grants, bank
debt and members equity in the form of shares. Members of the co-operative
include 'retail investors' (individual local investors), self-managed super funds
and philanthropic investors who have contributed more than $8.7 million to
build the farm. Profits generated from the venture will be distributed to
members annually, and profits will also fund community programs.
Hepburn Wind states that the broad-base support from local community members, 'demonstrates
the ability of these projects to tap into local capital':
...the idea is to channel institutional and retail investors
who want to pursue something which has an objective that is not entirely profit
driven. So, at the same time, as I said, our objective is to deliver a healthy
investment return to them, but we are not all about profit. We are
fundamentally about coalescing our community, delivering renewable power and
providing hope and opportunity for people in regional Australia, because it
gives them a chance to energise—all puns intended—their community.
Employee Share Ownership
An Employee Share Ownership Plan (ESOP) provides a means for employees
to acquire shares in the company in which they are employed. The shares are
held in a trust or similar mechanism and can be purchased or granted free of
charge. Purchases may be through a loan, salary deductions, bonuses or profit
shares. ESOPs allow employees to become part-owners of their employer's
business. The concept of the ESOP revolves around employee incentive, and
productivity and profitability for the employer.
ESOPs can also be instrumental in job creation, particularly via employee
SBA and the IYC steering committee noted that one of the success stories
of the Global Financial Crisis was the rescue and restructure of failing local
business into community owned and operated businesses.
SENTECH argued that the buy-out of failing businesses by employee ownership
structures provides a 'democratic community engagement' which 'provides a
powerful competitive advantage over other business models in these cases'.Ms
Elena Kirillova of the Australian Employee Buyout Centre provided a recent
example of the benefits of an employee buyout:
In a recent case study, which has just been completed by us
for a company called CMAC Industries, an ageing owner with a marginal financial
business and no serious prospects of selling on any trade basis or transferring
the business to her children, introduced an employee share ownership plan which
was offered to all the employees. Twenty-nine out of 31 decided to
participate, and we paid for all the advisers that were necessary for this
which of course included financial due diligence by independent accountants; a
valuation of the business; and marketing advice to improve their prospects and
customer base. There has been an immediate shift in the employee attitudes
towards the business and the productivity has increased apparently—I was
speaking to the adviser yesterday—18 per cent in three months. It has brought
them the job security, which they for some years have been worrying about. They
are participating in what is happening in the business. There is transparency
and of course there is ownership and, over time, the idea is that they will
wholly own the business based entirely upon the company transferring part of
the profits as the productivity increases.
CSI agreed that cooperatives, and in particular employee buy-outs,
present opportunities for regional areas to remain economically viable. However,
it noted that there can be limited capital and capacity for employees to
...in those communities where maybe the for-profit
organisations are finding it unviable, how you can facilitate community
ownership and also employee buyout where there is the concept of shared
ownership? These are huge opportunities to ensure that communities continue to
be viable in remote, rural and regional areas. However, you need to have a pool
of capital ready to support such initiatives. The problem at the moment is that
there is probably insufficient focus of capital on those types of problems.
Unfortunately, the community cannot get organised quickly enough or the
employees do not have access to the expertise they need to enter into an
employee buyout situation. Once again, I think there would be an opportunity if
there was a fund that was actually dedicated to providing bridging capital
until the community or the employees could get organised.
A number of submitters recommended that a Shared Ownership Centre be
established with a mandate to support SMEs and social businesses 'for the
benefit of saving jobs and assisting local communities with start up
initiatives and businesses'.
The Centre would act as an intermediary and engage private sector advisors to
provide advice to SMEs and community start up initiatives. Submitters argued
that government support is required to establish the Centre as existing support
agencies for employee shared ownership operate almost entirely on a volunteer
Government support is required for the Shared Ownership
Centre, to drive change and to provide support for broad stakeholder ownership,
grass roots social innovation and self help initiatives, as well as to
contribute to the debate for legislative, tax and industry reforms on behalf of
stakeholder owned social businesses...
We also envisage that some funding on a matched basis could
be provided in due course by the relevant professional membership bodies, in a
manner similar to the way that community legal centres function with the
support of Government and the legal profession to allow access to professional
services, inter alia, in the public interest, where it would otherwise not be
The Centre would bring recognition of the importance of community
initiatives for social enterprise, 'as they reflect actual need at a grass
roots level' and support existing and start-up business initiatives.
The committee emphasises that social enterprises must be 'investment
ready' in order to engage with a capital market. In this context it acknowledges
the government's partnership with the intermediary, Social Traders, to provide
the continuation of business development and support services to enterprises
that have recently concluded engagement with the Jobs Fund and Innovation Fund.
The committee recommends that the government continue to examine ways to
partner with intermediaries to develop the capacity of social enterprises,
particularly those that have procured government funding. In addition, relevant
government programs that support small and medium sized business initiatives should
be expanded to provide further opportunities for social enterprises to
strengthen their capacity.
The committee notes the measures taken by a number of state governments
to further procure the services of social enterprises. It highlights the work
of the Victorian government's Expert Support Program and recommends that targeted
social procurement should be adopted at a federal level. The committee
recommends the Department of Finance and Deregulation, responsible for the
competitive tendering and contracting framework, should review the framework
with a view of increasing social procurement options.
The Office for the Not-for-Profit Sector identify relevant current and
future government programs, such as Enterprise Connect and the New Enterprise
Incentive Scheme, that could be extended to offer specialised support for social
enterprises. The programs should be extended to include support for
cooperatives, employee share ownership plans and employee buyouts.
The Department of Finance and Deregulation, Treasury and the Office for
the Not-for-Profit Sector should jointly conduct a review of the competitive
tendering and contracting framework and examine the costs and benefits of:
social tendering to identify a social purpose business rather
than a competitive tendering process; and
including a community/social benefit criterion in the call for
and assessment of competitive tenders.
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