Business at the heart of community

FOR Brian Tannerhill, a former coal miner turned small business owner, the opportunity to launch a community-owned business that reinvested profits back into his local community was a win-win arrangement for all concerned.

McSense Heatingwise started by installing insulation in pensioners' homes around Mayfield and poured the profits into local projects such as a house for young people to use as a hang-out and funding bus trips for the elderly. Last week, he sold that part of the business to Aberdeen-based facilities management firm Richard Irvin for what Tannerhill coyly describes as a "pot of gold".

But those following Tannerhill may not be so fortunate. So-called social enterprises that make up this "third sector" now represent a 3 billion industry, but for the most part they are heavily reliant on local authority grants. With the public sector facing a funding crisis as the UK struggles under record levels of debt, many will find themselves struggling for finance.

Antonia Swinson, chief executive of the Scottish Social Enterprise Coalition which represents the sector says: "Traditionally the sector was entirely grant-aided. It is going to go."

Yet Swinson is upbeat. This week, her organisation will host the fifth annual showcase for the sector, the S2S Social Enterprise Fair at the Edinburgh Corn Exchange. She insists the sector is in rude health, pointing out that exhibitors are up 21 per cent on last year and delegates 50 per cent higher.

Her optimism stems from a new form of funding for the sector launched late last year. Social Finance, a London-based social investment organisation, launched a pilot project involving the Social Impact Bond (SIB).

Although the bonds will be financed largely by private investors, and for the first time, investors in social enterprises will see a financial return and not just one based on giving back to the community.

The social firms receiving the bonds will use them to reduce reoffending among prisoners. Lower rates of re-offending reduce the cost of incarceration, and as a result the government pays the difference to the investors.

The SIB has been in development in the UK since 2007. David Hutcheson, the chief executive of Social Finance, says cross-party support for the project means it will survive beyond the next election. Although the current pilot project receives 5m, he sees it as a possible panacea for the "vastly undercapitalised" third sector firms, providing a range of services.

"There is scarcely an area of social or health care policy where prevention or early intervention isn't both cost-effective and socially desirable," says Hutcheson. "We envisage that future applications of the SIB might cover such disparate programmes as enhanced support for foster carers, home-care services for older people or nursing in the home for the chronically sick."

But for some, the arrival of the SIBs can't – and won't – happen soon enough for many firms facing loss of grants. Mike Finlayson, chief executive at Edinburgh-based social enterprise Forth Sector, says: "Organisations like ours have to wake up and smell the coffee. It's time to get tough or die," he says.

There are other forms of funding to support the sector. Swinson highlights the introduction in Scotland of community benefit clauses, whereby local councils set out requirements as part of contracts to deliver social services, such as the employment of local people.

She sees this as an opportunity for businesses taking on local government contracts to partner with one of Scotland's host of social firms in order to meet the requirements. The Scottish Government also supports Social Investment Scotland, a 30m fund for social enterprises. But as Finlayson points out, "it could be 300m" if it were to begin to meet the sector's funding requirements.

Finlayson, a former venture capitalist and retailer, admits that when he took over the running of Forth Sector it was "fat and lazy" and relied on grants for more than 50 per cent of its income. In the last two years the firm, which runs a soap factory and shop, an industrial embroidery business, a guest house and an industrial laundry, has reduced grants to 15 per cent of income, with the aim to "eradicate" grants by 2013.

Today, Finlayson launches a plan to raise 3.3m from "investors". As a registered charity, he can't sell shares in the business but he has unashamedly co-opted the language of capitalism to devise the value of returns to investors – providing grants or loans – in terms of the social benefits his firm can deliver.

Finlayson, who also runs a consultancy devising a similar approach for the Scottish Government, estimates every pound invested brings a social return of 7.34.

Alastair Cameron, a senior manager with PricewaterhouseCoopers, has worked with Finlayson and the goverment to develop ten "public social partnership" pilots whereby social firms provide similar "outcome-based" services to local councils.

"In this current climate, third sector organisations that survive will remember that there is an 'enterprise' in 'social enterprise'. As public bodies focus harder on outcomes, enterprising third sector organisations will be able to play a greater role in the design, commissioning and delivery of public services," says Cameron.

Measurement of what the "return" is will be a key plank of Forth's fundraising methods.

"What we expect is that investors in the public sector, the charitable sector, the ethical banking sector and venture philanthropists will say we have got money and we are prepared to invest but we want to see some sort of return. This is a significant change."

Forth, which specialises in supporting people with mental health problems, works with 120 people a year but Finlayson estimates he can take this to an "industrial" level to help 500 with the investment. "If we get off the starting blocks and it becomes self-sustaining we will grow like any other business. Lots of people are talking about it, but we are doing something about it."