The Big Society Bank – can it deliver?

As part of David Cameron’s flagship policy of the Big Society the Big Society Bank (BSB) has been created. Part of its existence will be to grow the so-called "social investment market" by creating new financial products such as social impact bonds. This will be key in developing the necessary support and finance to social enterprises that the government sees as a major policy instrument in moving away from the public sector.

Crucially, it will be an independent institution with no government control and will not make grants, but will be expected to make a return on its investments to cover its costs. Most interestingly, it will not directly make loans – it will not invest directly into social enterprises but rather it will invest in funds that will in turn invest in enterprises.

Initially, it will not be heavily capitalised - £100m will be issued in its first year which has come from dormant bank accounts and this figure could rise to £400m over time. As part of Project Merlin, £200m will also be put in either in loans or investment but this is not a grant. As a result, the four banks who invest money into the BSB - Royal Bank of Scotland, Barclays, HSBC and Lloyds – will lend at a commercial rate and so the BSB will have to make returns on its own investments.

It will be very interesting to see how much impact the BSB can make. Last year total social investments were estimated at £200m so the potential of an institution having £300m+ at its disposal could make a significant difference. It will also go a long way to educating banks and the public about social enterprises - in a speech in London, David Cameron conceded "banks don’t necessarily understand social enterprises. The Big Society Bank should mean more money, more lending and hopefully a better price."

Having said this, the BSB does seem to raise more questions than answers. Only a few months ago, the BSB was supposed to have £1.5bn of capital and so watering this amount down to £200-300m seems a huge waste.

While the encouragement of social enterprises can only be a good thing, the BSB does not seem to go far enough in itself, let alone taken in context with the significant public spending decreases that the government is imposing. The Government’s BSB key advisor, Sir Ronald Cohen, admitted that it cannot fill the gap that the cuts have made but said that it can still make a difference:

“There is no way it can make up for such significant cuts, but what it can do is what entrepreneurship did for business. It can front social entrepreneurs who want to do something about the major social issues that we face."

Fundamental questions also arise about the BSB – will it lend or take equity stakes? How will it be allowed to expand its balance sheet? What returns will it need to see in order to satisfy the private equity invested? Does this mean it will favour more conventional (read larger) social enterprises or can it take more risk in those deprived areas and sectors?

Overall, the idea is a good one – there is absolutely nothing wrong with the concept. Whether the BSB goes far enough in its remit, how capitalised it is or how it will work with balancing the risk portfolio remains to be seen.

The devil is in the detail and we are yet to see either.