Social innovation is a central element of the digital and climate transition currently underway to improve the welfare and wellbeing of individuals and communities. This transition requires profound changes in the way social innovation is supported, with public authorities playing a key role.
The role of the public and politics in social innovation
First, public authorities can establish a regulatory and fiscal framework favourable to social innovations. For example, 16 countries within the European Union have specific legal frameworks for social enterprises (i.e., enterprises with a mission, cooperatives, foundations, etc.). These frameworks are often the source of social innovation.
Public procurement of social innovation is also a determining factor in the response of public authorities. In many countries, public procurement regulations provide recognition to the social mission and commitments of companies, providing services or work as part of their purchasing policy. However, the proportion allocated to these criteria is still too small to act as a sufficient incentive for companies.
Public authorities can also create a framework conducive to emulation and support for social entrepreneurs and organisations driving social innovation. In fact, many regions and cities in Europe have funded the establishment of incubation structures to provide support and advice during the development phases of social innovation. In France, for example, the Alter’Incub incubator was initially set-up in 2007 to provide advice to social innovators, with the support of Montpellier Metropolitan Area, the Regional Council of Languedoc-Roussillon and the Structural Funds (ESF and ERDF). Since then, it has expanded across several branches in three large French regions to create a network of social innovation incubators and has supported 661 innovative projects and the creation of +300 social enterprises.
Finally, it is imperative that policymakers put in place schemes to encourage the funding of social innovations, in particular to leverage private funding, as social innovations are often overlooked by public innovation support schemes. Replacing private investors with subsidies is out of the question, but developing financial engineering mechanisms presents an opportunity for de-risking private investment in social innovation.
Three requirements for fostering social innovation
From what we at Technopolis Group have observed in EU Member States and regions, based on market analysis we conducted over the last two years, there are three main needs to address in order to foster social innovations and up-scaling.
First, access to finance is key. The main gaps are the supply of equity funding, in particular for early stage and accelerating socially innovative projects. When interviewed about start-ups or existing enterprises willing to develop new business models and social innovation projects (early stage and acceleration), financial intermediaries (commercial banks, cooperative banks, impact investors or social economy investors), national networks and representatives of the social economy sector all point out a consistent financial gap for investments, operational costs and R&D.
Due to the risky profile of these projects, their innovative character, the lack of credit history or entrepreneurial background of the promoters, commercial banks are not keen to lend money, and equity investors’ appetite is not strong as the return-on-investment rate is relatively lower compared to more traditional businesses. The financial viability and profitability may be limited for some social enterprises, and many small-sized associations do not generate revenues and cash flows in sufficient volumes to be eligible for debt financing. As a consequence, the number of financial intermediaries potentially interested in investing in social innovations and social enterprises is traditionally limited in a number of EU Member States, considering this low return on investment, the need for providing technical advisory services to final beneficiaries and the cost of managing financial instruments. Financial intermediaries favour greater involvement from public authorities, in particular at European level. They particularly call for guarantee mechanisms to equity investors, as a tool to boost the market segment of early-stage social businesses. More generally, mobilisation of equity guarantees, equity or quasi equity by European funds for reinforcing the financial structure of social enterprises and for a leverage effect would be appreciated by financial intermediaries.
Second, beyond the access to finance issue, there is a vital need to establish or maintain grant public funding schemes that support social enterprise support organisations (e.g., incubators, networks, association, chambers of commerce, etc.). Given the limited profitability of many actors in the social economy sector, the grants are meant to pay for the technical support provided to entrepreneurs and the delivery of capacity-building measures (business development services). When delivering debt or equity funding to an entrepreneur or a social enterprise, so-called business development services are crucial for the success of the projects, in light of the usual lack of business skills on the promoter’s side, including the management of a company and/or business modelling. For most financial intermediaries that invest in social innovations and social businesses, publicly funded grant support to enterprise support organisations (state, local authorities or EU funds) is essential, helping to de-risk their investments (making the company more “bankable” and sustainable).
Third, awareness raising does matter. Indeed, there is also a need for improving knowledge about social innovations and social businesses; specifically: through conducting research, studies and facilitating knowledge exchange and peer learning on topics such as impact measurement, market analysis, experimentation of innovative models, etc. These activities are crucial for the development of the sector and could help increase the visibility of social enterprises as well as attract private investors.
Lastly, experimenting with new financing solutions, although it may bring some challenges (see hereafter), is another condition for social innovation.
Experimenting with new ways of social innovation financing: Lessons learnt from a social outcomes contract in France
A Social Outcomes Contract (SOC) is a contractual and financial mechanism that builds on close collaboration between investors, a social operator (e.g., an association supporting the reintegration of unemployed people on the job market), and the policymakers (the outcome payer), towards a shared objective. The policymakers commit to paying the investors, with or without interest, depending on the social impact generated by the programme operated by the social actor, and thus the savings effectively achieved. The terms of the contract depend on the programme as well as the stakeholders involved. Projects eligible for social impact bond financing usually meet the following criteria:
- An innovative project that targets a defined population group (e.g., job seekers)
- Quantifiable and relevant targets for medium-term (3-5 years) results via a limited number of performance indicators
- Sufficient savings for the policymakers to cover some of the project’s costs (return for investors, appraisal and impact assessment costs, structuring costs). The economic approach of the SOC is to address a social problem by reducing its net cost to the policymakers.
The added value of an SOC, compared to traditional funding schemes, is its capacity to build long-term public and private partnerships, thus mobilising the right skills of the different stakeholders, supporting innovative approaches and an outcome-driven design of social policies (contributing to disseminate an evaluation culture), and generating better value for money. SOCs could respond to the quest for efficiency gains, made possible by the implementation of innovations, in the treatment of specific social needs with the assumption of a better use of public or philanthropic resources.
In France, outcome payers are usually line ministries, local and national agencies, and local and regional authorities. The projects are co-constructed by all the stakeholders, with eventually the support from external organisations to structure the project (the structurer). The evaluation of the outcomes is key in the scheme, as it triggers the payment to the investor from the outcome payer. It is based usually on impact measurement indicators, assessment usually done by an independent evaluator. From 2016 to 2020, approximately EUR 13 million have been committed to finance 10 SOCs: Four SOCs focus on employment (EUR 3.7 million), two on child protection (social placement of children EUR 4.8 million), one on education (agricultural sector EUR 1 million), and two on the renovation of social housings (one amounts to EUR 3.4 million, unknown amount for the other).
Although an interesting way of channelling funding to social innovations, SOCs have been facing barriers in France, and have not yet been scaled up. The main reasons for this include the challenge to meet the requirements of the SOC mechanism and the complexity of the process to set-up a SOC. The process of setting up a SOC involves four different stages: (1) feasibility study to validate the relevance of setting up a SOC; (2) determination of the social objectives to be achieved; (3) set-up of the financial mechanism: (4) issuance of a bond for instance and preparation of the legal documentation. It results in relatively high transaction costs to structure the mechanism (10 to 15% of the total operational costs). Another remaining barrier is the lack of knowledge about the scheme within the public sector and the financial intermediaries.
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- European Investment Bank, Advisory Platform for Social Outcome Contracting, https://advisory.eib.org/about/initiative-social-outcomes-contracting
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