The solution to the investment vs cuts debate
Author: Tom Shakespeare, eGov Monitor |
Local Government should be the first major institutional investor to stimulate the emergence and growth for a large scale social and environmental investment market.
There is a huge demand for increased support and growth of the social and environmental market, and given its mutual aims, local government is the best-placed industry to reconnect markets and morals. These are the conclusions of our recent Localis report entitled ‘More for your Money’.
The long term rewards for the growth of the sector include not only a stronger society and environment, but also a stronger local economy and a financial return for investment partners. The potential result for local government is greater investment into Council priorities while also saving money – essentially dampening the ‘cutting cost’ vs ‘more investment’ argument which has dominated the recent political debate about the future of the public sector.
However, achieving this apparently contradictory outcome of less cost, more investment requires a greater degree of consideration and thought from local government. The sector is complex, with at least five different types of ‘social enterprises’, each operating in different ways to achieve a financial return. On top of this, finding the ways of capturing the return on investment is also often non-trivial. Information is not shared about investment opportunities, there are issues over investment timescales and there are insufficient financial instruments to provide for the requirements of the industry.
There are also enormous inefficiencies. Suppliers of capital are not sufficiently coordinated to match the complex demands, and public sector operators still work independently, even despite the increasing rhetoric of ‘partnership-working’. Initiatives such as ‘total area’ budgeting may begin to create more meaningfully joined up services, but until this is effective, the market may struggle to meet the requirements of numerous disparate public services.
These barriers would lead one to the conclusion the creation of the market is all but impossible. But operating outside of the public sector domain there are several organisations which exist despite such problems. For example, Cafedirect Plc, the UK’s largest Fairtrade hot drinks company, has raised £5m from 4500 investors, returning 60% of profits to businesses and communities of partner growers. In the event of the sale of the company, a shareholder would receive equity returns on their investment.
But public sector investment is a bigger challenge. The recession and the Icelandic banking collapse have made Councils even more risk adverse than previously. Yet the government is simultaneously happy to provide extensive grants to charities. The biggest barrier to achieving large scale investment into the sector is a disconnect between public investment and moral public duty. The solution lies in reconnecting public duty with investment, and creating the infrastructure to pool risk and share resources. And local government is best-placed to achieve this.
Why? Firstly, Councils have access to financial resources through reserves and capital borrowing unlike almost any other industry operating across the Country. Secondly, no other industry is as well placed to know the local priorities and needs of the local area. And thirdly, the idea of a moral economy is probably best initiated by the public sector, and local government first and foremost. With the financial crisis fresh in our minds, there is a strong case for reconnecting financial investments with a sense of social and environmental duty.
But how would local government help to create the market for social and environmental investment? Firstly, Councils would need to reconsider what they mean by risk, and be willing to take ‘risks’ which result in the improvement of their local area. Secondly, local authorities should look to be more efficient in their accounting practices and work together to achieve genuinely ‘joined-up’ services through their budgets. Thirdly, they should look to pool resources and spread risk over wider areas through a mutual fund and regional or sub-regional PFI deals. And finally, Councils need to be clear about the priorities for their local area, and ensure their investment strategy meets these aims.
The current economic environment presents both an opportunity to rethink the role of local government whilst saving money, but also a potential crisis if nothing is done about it. Councils should be helping to ensure that the needs of residents are met whilst being fiscally prudent. They should be looking for new opportunities to share responsibility, risk and rewards across sectors and areas by creating a mixed economy to the benefit of local people and the taxpayer. Our proposals for cross-border PFI and a national mutual fund help to achieve these aims.
This may be the panacea for the public sector to meet its inevitable budget cuts come 2011. Even if it is not, and public sector cuts are an inevitability – the long term benefits of locally guided social and environmental investment combined with the strong direction and vision of local government are difficult to ignore.