New financial mechanisms for enhancing the impact of social enterprisesthe case of SIBs

Resumen

Especially in these long months between the beginning of 2020 and today, social enterprises have demonstrated to be crucial for addressing old and new needs. Nevertheless, one of the most significant challenges faced by social enterprises has been related to finance. Accessing finance was an issue before the COVID-19 pandemic, but it is important to note that today remains one of the most significant challenges for social enterprises. Before the pandemic, social enterprise financing gained momentum amongst scholars, practitioners, and entrepreneurs (Kickul and Lyons, 2015). Specifically, in the last few years, several initiatives and solutions emerged to supply resources for social enterprises. Nevertheless, it persists a scarce understanding of the “appropriate type of capital” (Nicholls, Paton, and Emerson, 2015: p.1) for social enterprises. On the one hand, solutions based on traditional finance may not suit the financing needs and the specific features of social enterprises (Nicholls and Emerson, 2015; Emerson et al., 2007; Nicholls, 2010a, 2010b; Nicholls and Pharoah, 2007). On the other, new requirements like social impact measurement – are adding further tension in social enterprise funding. As well explained by the authors of “Social enterprises and their ecosystems in Europe – Comparative synthesis report” (European Commission, 2020:89), the lack of financial resources is not the result of a shortage of supply, rather than other factors. “In several countries, the major barriers to obtaining the necessary external resources are not directly linked to the lack of supply but rather to a general lack of understanding of social enterprise models, a deficit of social enterprise assessment instruments, and the absence of collaboration and agreements between regulatory institutions from the financial, economic and social sectors. Difficulties in accessing finance also result from insufficient knowledge of the existing supply of finance, a lack of investment skills and a poor ability amongst social enterprises to develop adequate business project proposals” Back to the funding supply, the last years were fertile in terms of new instruments and solutions for social enterprises. In this sense, the emergence and the (partially) institutionalisation of the so- called social finance and impact investing offered tailored made resources for these organisations. Moreover, the introduction of the payment by results schemes in social services – due to public budget constraints - had relevant changes in the funding relationship with public actors as well as the emergence of private investments and investors in the delivery of public goods and services. The significant changes that occurred in the financial landscape had an impact on what and how to finance. The rise of impact investing, green and social finance, and the EU efforts to fund sustainable growth had and still have implications on the behaviour of market participants and the resources available. In this sense, it is interesting to note how the regulatory financial and banking EU framework is changing towards economic activities that have genuine long-term benefits for society . Notably, the advent of social investors in the funding of social services and social organisations introduced a new (private) logic and new (competitive) schemes. Social Impact Bond (SIB) represents the novelty in this framework: private investors occupying the social policy field. This product, genuinely rooted in the Anglo-Saxon world, entails funding measurable and preventive social services through private investments. The opponents of SIBs stressed this scheme's ideological limitations and the danger for third sector movement and users more in general. SIB is the expression of liberalisation and marketisation of the welfare state. The idea of having a financial return from social welfare opens the door to transforming social services into commodities. Moreover, private actors' presence in the public sphere allows private financiers to marketise the welfare state to decide what deserves to be funded. Despite these critical steps and advancements in the financial landscape, funding is still a sensitive issue for social enterprises. Nicholls, Paton, and Emerson (2015) highlighted the presence of limited literature and knowledge on social finance4 and appropriate resources for social organisations. As the authors mentioned above noted, social finance has not yet been recognised as a normative field of study. Nonetheless, the current debate on financing social enterprises and social finance is still characterised by vagueness. Although social finance has been recognised “as a distinct and legitimate field of research” (Nicholls and Emerson, 2015, page 6), the academic literature is at the very early stage of development (Nicholls and Emerson, 2015). More academic research and debates are needed to overcome the mismatching between (social) financial products and social enterprises' needs (Barraket, 2015; Nicholls, 2016). The existing literature is predominantly focused on social finance and impact investing as a whole; yet, little attention has been dedicated so far to specific instruments and contexts or the interaction with social enterprises. Currently, the social enterprise literature presents a variety of topics and themes. De Bruin ad Teasdale (2019) recognised that the social enterprise field had reached maturity. The authors stressed that different disciplinary approaches had enriched the field in the last ten years. Nevertheless, there are still several themes under-explored. Gupta et al. (2020) noted that the issues most discussed in the literature are social enterprise impact, innovations, business models and strategy, value creation and dissemination, and challenges. In this sub-set fall also accessing funding, it is interesting that this topic was developed in the first decade of the 2000s (see Gupta et al. 2020, pages 12-13) while today is currently unexplored. Despite a growing interest in social finance and impact investing, these two topics are little represented in social enterprise literature (Secinaro et al., 2021). Relatively little consideration has been given to actors’ interactions, assessment of tools and practices, contexts, and scholars of the field are calling for more theoretical knowledge and empirical studies (Dees and Battle Anderson, 2006.; Moore, Westley, & Nicholls, 2012; Nicholls, 2009). Beyond the coverage of the topic in the literature debate, the funding aspect is today more crucial than ever, considering the post-pandemic era and the evolution in the banking and financial sectors. Social enterprise funding is not just a matter of economic resources; instead, it is the generation of robust initiatives through the participation of several stakeholders. Making available the appropriate resources means reinforcing and consolidate social enterprise actions. Understanding the effects of the different financial schemes and services means to help the social enterprise in performing their role at their best. This dissertation explores social enterprise funding by focusing on a concrete instrument, the Social Impact Bonds. As noted early, the financial landscape available for social enterprises evolved in the last few years. New mechanisms and initiatives emerged, such as SIBs, for example. Although most EU funded sectorial study on social enterprise funding presents SIBs as a possible option to finance these organisations, limited academic and practitioner debate focuses on the issue. Thus, given the paucity of the academic discussion on the topic above mentioned and considered the call for more theoretical knowledge and empirical studies (Battle Anderson and Dees, 2006; Nicholls, 2009; Moore et al., 2012), this work will bridge the gap between practice and academic theory offering the experience of three social enterprises involved in SIBs projects. Thus, the overall three main objectives of this dissertation are: 1) What is the demand for social enterprise funding? 2) What are the current initiatives aiming at funding social enterprises? 3) How does SIB work for social enterprises? What is the social enterprise perspective under SIBs While the first two research questions aim to describe the demand and supply of social enterprise finance, the third one seeks to voice social enterprises involved in SIBs in Europe. Currently, the SIB debate occurs in the Anglo-Saxon world, characterised by a different welfare state approach, social services funding, social enterprises role and definition and civil society organisation than the European one. As Wilson et al. ( 2020) stressed, there is a need to “widen the perspectives” on SIBs, including different national and international voices, comparing academic and practitioner insights. The third part of the dissertation presents the exploratory case study to document and examine the motivation and implications of SEs participating in SIBs in Continental Europe. The main research questions of the qualitative study are: 1) What are the motivations and the implication for social enterprises in participating under SIBs 2) What are the implications for social enterprises in participating under SIBs? 3) How do social enterprises in the Netherlands use SIBs as a tool to fund their organisations? 4) In what ways can SIBs spur on how social enterprises measure and scale their impact? The case study offers a robust understanding of social enterprises' involvement in this scheme. On the other, it shares insights into a political and cultural context – the Netherlands - different from that in the United Kingdom (UK) and the United States (US), which has focused on much of the research SIBs. This dissertation applies a qualitative methodology due to the topics' novelty and the scarcity of reliable data-set. The subject and the unit of analysis of this research is the social enterprise. The term “social enterprise” covers various legal forms, movements, and experiences developed in Continental Europe. Thus social enterprise in this dissertation is a label that includes nonprofits and voluntary entities, the co-operative movement, third sector organisations, social-oriented businesses and pure social enterprises as legally defined by the EC (see the first Chapter for more reference). Indeed, this study is deeply rooted in the EU and European traditions of social enterprise. The first and second parts are dedicated to the demand and supply of social enterprise funding and apply a desk-based review of the academic and practitioner literature. While the third part presents the exploratory case study on social enterprise and SIBs (more details on the case study are available in Chapter 5) Given the research topics' characteristics and exploratory nature, I have conducted a pilot study selecting a case study methodology. The case-study method is the most famous in social sciences studies (Khan, Samia & VanWynsberghe, Robert, 2008), especially for exploratory, descriptive, and explanatory research (Yin, 1994). The case-study methodology seems to be the perfect approach to reveal and retain managerial and organisational processes, especially in the study's social entrepreneurship field (Dana & Dana, 2005). Generally, the case study is the appropriate methodology for the research questions about “How” and “Why”. In this sense, a case study can also provide interesting insights for policymakers by offering contextual and concrete evidence. The novelty of this research is to present the demand and supply analysis in the same piece of work. Furthermore, this dissertation has added a case study about a financial product (supply) from the user's perspective (demand). Nevertheless, the principal contribution is related to the SIB dimension and social enterprises. This thesis adds in the SIB debate experiences, motivations and implications of social enterprises participating under this scheme. As stressed in the previous chapters, the current discussion of SIBs, if related to non-profit service providers, is about the distortive incentives that the SIB model can create (Edmiston & Nicholls, 2018; Fox & Albertson, 2012; Joy & Shields, 2013; Loxley, 2015; McHugh et al., 2013; Warner, 2013; Williams 2018; Tse and Warner 2019). Thus, this dissertation offers - for the first time – a detailed report on SIB experience from the social enterprise perspective. The dissertation is not only about adding the voice of social enterprise in the SIB debate. Another novelty of this research is to have analysed SIB as a funding product for social enterprises. In this sense, it is the first research exploring how SIB can work for social enterprise funding. The dissertation has served as the opportunity to reflect on the “appropriate capital for social enterprise.” Of course, the research does not suggest that SIB is the panacea for social enterprise funding. Instead, it is undoubtedly an innovative scheme addressing some unmet financial needs of social enterprises. It is essential to clarify that the supply of financial resources for social enterprise is today wider than ever, almost “excessive”, considering all the range of products and services from the conventional ones to alternatives or impactful. Nevertheless, the demand for finance by social enterprises is quite unclear (Lyon & Baldock, 2014) and little developed. Furthermore, some studies (see Lyon & Baldock, 2014; Borzaga and Fontanari, 2020; Tiresia Social Impact Outlook Report, 2018) have focused on the demand-side, highlighting that it is not totally accurate that social enterprises experienced challenges in accessing resources (Borzaga and Fontanari, 2020); other have stressed the fact that just a tiny percentage of social enterprise (6,5%) presents high levels of investment readiness (Tiresia Social Impact Outlook Report, 2018). Other studies report that social enterprises prefer grant finance instead of debt finance (Lyon and Baldock, 2014), presenting a low appetite for investment (UBI Banca, 2020). Thus, the demand-side debate is quite multifaceted due to the geographical context and the lens of academic analysis. The “centrality of the social enterprise mission” affects how they address the funding process. So, social enterprises need to acquire and combine resources and manage funding relationships in order to realise and secure their mission(s). So, they must access a broader range of resources. This resource hybridisation means balancing market, non-market, and non-monetary relations (Laville and Nyssens, 2001). For this reason, the funding process is not just a matter of money. It is about a mix of financial and non-financial resources and relationships. It is a matter of external regulations and culture. It is a matter of capabilities and values shared. The emergence of social finance and impact investing, despite the limitations and ideological problems of the latter, has offered tailor- made and innovative solutions specified for social enterprises. These new forms of finance go beyond financial considerations by incorporating collective logic and acting with different behaviour compared to traditional finance or banking. And it seems that social enterprises are interested in these new funding opportunities. The case study confirmed this behaviour of the social enterprise. The organisations involved decided to participate in SIBs for expanding their - present and future - funding and market opportunities. In a certain way, given the current banking and financial choices, they decided to try with SIB. Undoubtedly SIB has not been created to answer social enterprise needs, but it actually addresses some social enterprise needs. For example, the necessity to innovate the social service delivery or the scaling-up of the initiatives carried out or to enter in more solid relations with public actors. So, it is essential to ask why these organisations saw in SIB a funding opportunity instead of choosing traditional banking or financial instruments. The reality is that the supply of social enterprise funding is designed with a top-down approach and no involvement of social enterprises in creating specific tools. So, the result is that social enterprises are pushed to try different solutions to satisfy their needs. It is the case to reflect on the meaning of “appropriate type of capital” . Firstly, the appropriate type of finance for social enterprises should consider the coexistence of social and economic objectives. In fact, the right finance should include a part of gift income or patient capital to allow the social enterprise to focus on generating social benefits instead of the economic return. Furthermore, the predominancy of the social objectives does not allow strict financial performance measures. Secondly, the entrepreneurial activity of these organisations - characterised by a continuous flow of production and delivery of goods and services - require a constant flow of finance. Furthermore, the scaling process requires financial instruments able to accelerate the social impact created. Moreover, given the presence of non-paid work within social enterprises is vital to design non- economic incentives for workers. Thirdly, social enterprises' communitarian aspects imply a type of finance deeply rooted in civil society. On the one hand, this means involving citizens in funding social enterprises through equity and non-equity crowdfunding. On the other hand, it means using local tax for funding initiatives to improve connectivity or financial intermediaries close to the social enterprises. Lastly, the participatory governance of social enterprises makes more suitable the involvement in the funding process of individuals or organisations close to social enterprises instead of one biggest shareholder. So, the central message of these final thoughts is to re-think how to fund social enterprises by changing the finance instead of social enterprises. It is crucial to understand that finance for working and being useful should be appropriate and proper for the organisations. Otherwise, it is only money without any values and visions for the future.