The Network for the better future for social economy Seminar on 15-16 March STRAND: Financial instruments and mechanisms of fund’s allocation to Social.

The Network for the better future for social economySeminar on 15-16 March

STRAND: Financial instruments and mechanisms of fund’s allocation

to Social Economy

Findings from research amongst NBFSE partners

Hotel Mercure Warszawa Fryderyk Chopin,

al. Jana Pawła II 22, 00-133 Warsaw

Key topics of SE finance

Definition of SE Legal system Tax incetives and subsidies for SE Grants Banking instruments Stategic aproaches EC Activities

ContextWhat is the definition of social enterprises partner´s countries / regions?

Czech Rep.: Social enterprises run business activities with focus on the interest of the society in the first place, where the profit is the mean not the aim. There is no legal definition, but it has to fulfill some requirements when asking for start-up grant from ESF and ERDF global grants (e.g. at least 30% of disadvantaged employees, over 50% of profit to be reinvested, principles of local development, empowerment of employees)

Poland: SE run business but focus on social objectives (spend profits for social purposes), i.e. social cooperatives, vocational rehabilitation facilities, mutual insurance companies, public benefit organizations, non-profit organizations, companies belonging to non-governmental organizations, labour cooperatives, mutual guarantee and loan funds (including MFIs) and NGOs engaged in economic activities. Their goal is to maximize social benefits, such as by providing good quality public services, promote local development and the restoration of dignity and economic independence of the socially excluded people.

Flanders: Broad spectrum of firms: Work integration firms (neighborhood services, insertion companies, sheltered workshops, social workshops), Recognized support structures (start centers, financiers solidiars, advisory center), Other social goals as primary focus (activity cooperations - official recognition).


UK: The UK government definition of a SE is a business or service with primarily social objectives whose surpluses are principally invested for that purpose in the community, rather than being driven by the need to maximise profit for shareholders and owners.

Sweden: Social enterprises conducting business with the goal of integrating people into society and working life. They empower employees. They re-invest their profits in their own or similar nature. They are independent of the public sector. Some of the social enterprise business is therefore the rehabilitation and labour-oriented services you are providing for remuneration from the public sector. The second part is the production of goods and / or services sold in the market for private individuals, companies or public sector.

Finland: No clear definition of social enterprises, on other side a law concerning social firms; the concept of social enterprise is just rising and under discussion. Small co-operatives and associations with economic activity could be also included as well as some social firms for work integration.


Lombardy: Starting from the definition of “enterprise” contained within the Italian civil code the following can be considered as “social enterprises”: Social enterprises as defined by law N. 118/2005 (specifies the criteria which an enterprise should fulfil to be considered a social enterprise and hence be able to benefit from specific fiscal and financial support; the two most important criteria are social utility, total absence of profit-making features). Cooperative enterprises and social cooperatives as identified in the Italian civil code and specific laws.

Summary: - broad (social objectives) or narrow definition (integrating) of SE, - SE as an independent entity in the legal sense and functionally, - different approach to:

1) legal regulation - special legal form vs. traditional forms (business entities plus NGOs forms),

2) profit - total absence of any profit-making features vs. rules of profit sharing.

Legal barriers for financial instruments and financial institutions

Czech Rep: No legal barriers, but rather that SE is not considered by key decision makers.

Flanders: State aid and block exemption rules UK: Charity Commission guidelines on social investment by

foundations and charities (CC14). This is currently under consultation. Pension fund fiduciary responsibilities to maximise shareholder value.

Sweden: Lack of co-ordination between the various support systems which makes it difficult for individuals to participate in social enterprise. Uncertainties and obstacles in public regulations in relation to social enterprise nature and circumstances, among others the existing wage and employment security. Difficulties for social enterprises to participate in public procurements. Large demand for information, advice and business development of the social enterprises. Difficulties relating to financing and capital for start-up and development of social enterprises. Lack of statistics and research on social entrepreneurship. In addition, they want a special law that would facilitate aid efforts, and even more clearly, define the concept of social enterprise.

Legal barriers for financial instruments and financial institutions

Finland: Lack of relevant knowledge about social enterprises, unwillingness to make special arrangements, unclear concept of social enterprise, fear of distorting the competition.

Lombardy: There are no legal barriers to the access of financial tools

Summary for all partners EU state aid rules, Difficulties for social enterprises to participate in public

procurements, Lack of co-ordination between the various support systems, Uncertainties and obstacles in public regulations in relation to

SE Lack of statistics and research on social entrepreneurship. Pension fund fiduciary responsibilities to maximise

shareholder value (UK)

Does the legal system provides appropriate support to social enterprises?

Czech Rep.: Generally no for the whole SE sector. Only work integration or employment of disabled people is specifically supported as defined in the Employment law

Flanders : The legal system with regard to support to social enterprise is under revision with respect to state aid regulation, block exemption rules. The reform is based on a matrix with as a vertical ax the different target groups defined by Europe and other relevant groups in Flanders. On the horizontal ax is possible to find the different kind of support.

Sweden: No, but it will be subject of discussion. Finland: No Lombardy: The support system in Italy and especially in Lombardy

is rather adequate for social enterprises needs.

Summary for all partners System often does not exist, is weak or is being reviewed.

How would you score your legal system ?1=totally hinders SE financing, 2=hinders SE financing to a small extend, 3 neutral to SE financing, 4=supports SE financing to a small extend, supports SE financing significantly

Czech Rep. 3 Poland: 3 Flanders: 4 or 5 UK: 2 Sweden: 2 Finland : 2 Lombardy: 4

Summary for all partners The responses are very variable, In countries with a spreading system of SE is greater

satisfaction with the legal (regulatory) system.

SE finance

Tax incentives/relieves and subsidies Grants Banking Instruments

Tax incentives/relieves and subsidiesCzech Rep.: There are no specific tax incentives in the form of e.g. tax reliefs

or tax break, no relief on the social or health insurance of disadvantaged employees.

The Czech Employment Law defines three types of incentives for employment of disabled people provided by Labour Offices, which represents important source of finance for social enterprises - subsidies on:

• i) creation of a new sheltered work place, ii) creation of a new sheltered workshop (at lest 60% of disabled employees) and iii) time limited subsidy to compensate higher costs on disabled employees (for employer with at least 50% of disabled employees)

• There is also another measure to enhance employment of disabled persons – companies with more than 25 employees can choose to buy products of sheltered workshops instead of their obligation to employ certain percentage (at least 4%) of disabled employees.

• This system is currently being analyzed, discussed and reviewed with the aim of increasing its effectiveness and reducing its misuse.

Tax incentives/relieves and subsidies

Poland: Particularly are offered subsidies on employees of social enterprises, subsidies on newly created jobs, social insurance exemptions and other subsidies related to social enterprises.

Flanders: Specific subsidies for wages and coaching for SE as defined in following regulations: Decision of the Flemish Government on the recognition and financing of insertion companies (15.7.2005), Decision on the criteria for recognition of sheltered workshops (17.12.1999), Decision on an impulse and support program for the surplus value economy (8.9.2000), Decree on neighbourhood services - lokale diensteneconomie (21.12. 2006), Decree on social workshops (14.6 1998).

Tax relieves/incentives for SE investors.

UK: No specific subsidies or legal support mechanisms specifically for social enterprises. The only specific tax incentive is Community Interest Tax relief which is due to finish in 2012.


Sweden: There are no legal differences between social enterprises and other enterprises. The difference is in the financial contributions.

Finland: subsidies for employing a disadvantaged person or long term unemployed (palkkatuki), can be used by “normal companies” or social enterprises. Subsidy is mainly for wages and social insurance payments. There is a very little used subsidy for worker's co-ops which are established by unemployed people (3/4 of members). This is a subsidy for start up, but it was only used by 2 co-ops last year, so it is not well functioning.


Italy (Lombardy): The support system of SE is complex and it can vary considerably depending on the Region.

Tax subsidies/incentivesTax subsidies on employees of social enterprises for social cooperatives in accordance National law n. 381/91.Social cooperatives employing disadvantaged people do not pay National Insurance contributions of those employees; Social enterprises are exempted from paying the tax on company’s income (IRES tax in Italy).Regional law n. 1/2008 provides for a tax break for NGOs (among which we find social cooperative as well) which reduces workforce costs by 4,25%.SE do not pay taxes on profits if they are classified as indivisible reserve (i.e. reserves which cannot be distributed to the associates). Other legal support instruments - Law 460/97 establishes that social enterprises have to be “ONLUS” i.e. non-profit making and socially useful. For this reason, they are entitled to other special terms such as the exemption from the stamp tax (i.e. a tax normally paid to produce official documents and certificates) and other specific taxes such the tax on government concessions.


Italy (Lombardy)

Subsidies on newly created jobs for work integration of disadvantaged people (particularly disabled) benefit from regional funding known as “Disabled Work Dowry”.

5x1.000 - a contribution to ONLUS social enterprises (i.e. non-profit and socially useful enterprises). All taxpayers in Italy have the possibility of earmarking a small percentage of the taxes they owe to the State (i.e. 5x1.000) to support no-profit organisations (social enterprises as well as universities, research centres etc.).


Summary

System of subsidies generally regulated by law, but rare regulation of special instruments for SE,

Difference between classical SME and SE in the financial contributions – rules of distribution resources,

Particularly are offered: subsidies on employees of social enterprises, subsidies on newly created jobs for disadvantaged, tax relieves or tax incentives (Italy, UK, Flanders),

Italy (Lombardy): The most complex system of tax relieves, incetives and subsidies

Grants for a new Social enterprises or their development

Czech Republic: HRE OP (ESF): Global grant “Social Economy”; cca 10 mil. Eur. Support of social integration through employment or self-employment of socially excluded people and support of local development, support of start-ups - new social enterprises or new disadvantaged individual entrepreneurs. IOP (ERDF): Global grant “Investment Support to Social Economy”. Support of social services providers, employers and other entities in the social economy. The aim is the support of sustainable employment of disadvantaged groups in the real business environment and support of social services. Allocation 14 mil Eur.

Applicants could submit application in both global grants. Currently 16 projects implemented in HRE OP and 19 in IOP.

Poland: A sub-measure 7.2.2 of Human Capital OP (ESF) focused exclusively on support of social economy. It is dedicated mainly to institutions from social economy sector's surrounding that within approved project perform one or more of the following activities: legal, accounting or marketing services, counseling, training, supporting local partnerships for social economy. Recently added support of establishing social cooperatives. The aim of the measure is to strengthen and broaden the scope of social economy sector.


Sweden: Through ESF in Sweden, it's possible to finance the preparation works and a start up of social enterprises (pre-planning and implementation phase).

Lombardy: Disabled Work Dowry offers dowry provides a small grants for new social enterprises start-ups working in the field of work integration.

Banking Foundations represent a important source of funding to create new jobs for disadvantaged people. They allocate grants for around 60% of the overall project costs.

JEREMIE ESF Fund – the aim is to promote and faciliate (through the granting of financial intervention) access to credit by cooperative associates. One half of the loan becomes a grant in case the associate stays within the social enterprise for more than five years (for more details see banking instruments in Lombardia).


UK: Community builders: invests in the sustainability of multi-purpose, inclusive, community-led organisations (sometimes known as Community Anchors) through business support and investment (loans and grants?). Future builders: a programme set up to assist unbankable front-line third sector organisations through a mixture of grants and loans to build their capacity to increase the scale and scope of their public service delivery. Was already finished – can serve as good practice.

Finland: No special support for social enterprises. Rule, that ESF money cannot be given to enterprises as grants or aids. Only for different kind of projects.

Flanders: ESF grants


Summary 3 countries/regions (Czech rep., Poland and Lombardy) have defined instruments to

financially support social economy within ESF/ERDF with pre-set allocation of resources dedicated to this target area: - Measure 7.2.2 of Human Capital OP (ESF-Poland)- Global grants in Human Resources and Employment OP(ESF) and Integrated OP (ERDF) - Czech republic.- JEREMIE ESF Fund (Lombardy)

Common elements: Form of financing - grants (CZ, Poland) to projects applicants (natural and legal

persons), loans of which half may became a grant (Lombardy) Target groups – similar in all 3 cases (disadvantaged people and people endangered

by social exclusion)• Supported activities- setting up new social cooperatives, new members of cooperatives (Poland, Lomb.) - setting up new social enterprises with sheltered jobs; self-employment of

disadvantaged people (CZ), - complementary activities

EU Funding of social economy – integrating different types of instruments (ESF and ERDF) allows more complex support to beneficiaries.


Summary

Other partner countries/regions uses ESF grants only to support SE environment (advisory, trainings, networking, research) as they are not allowed to provide grants to enterprises (mainly due to the state aid rules)

Grants are often (co)funded by other then EU sources and combined with loans.

Banking Instruments Flanders :

SIFO (Social investment fund) offers money at a discounted rate to organizations that comply to certain criteria. These organizations can combine this money with their own money to offer loans at a discounted rate to organizations in the social economy. Organizations from social economy often cannot obtain a loan from traditional banks because of higher risk involved, low amount of money asked (high handling costs), lower return on projects in social economy making regular banks not interested, lack of guarantees. SIFO aims to support organizations in all phases of entrepreneurship.Trividend is a successful example of a public-private partnership offering venture capital. Private investors are offered a tax break when investing in microfinance institutions that invest in developing countries. It could be extended to investing in the SE thereby opening up a new source of credit for the sector. The guarantee facility offers greater security to banks and credit providers in situations where an entrepreneur would like to invest but is unable to produce sufficient guarantees. In any phase of entrepreneurship.Win-win loan - To encourage friends or relatives from a SME (both regular as social economy) to lend money, in any phase of entrepreneurship. They receive a tax refund for doing this and in case of a default of the borrower receive back up to 30% of money lend.

Banking Instruments

Flanders:

Kringloopfonds - Preceding the Flemish SIFO. It was an investment fund set up by the Belgian government in 2003. Through the issue of a 5-year government bond it raised 72 million euro which it used for co-investing (with specialized institutions) in the social economy and in projects aimed at a sustainable economy. Private investors were offered a tax break, thereby promoting Socially Responsible Investment.

Specialised institutions Trividend, Netwerk Rentevrij, Hefboom and Triodos offer a range of financial products for the SE. The way they work and the origin of their capital differs but they have been successful so far, meeting a demand from the SE. The Business Angels Network – at the moment the focus is only on the regular economy but it could be extended to the SE. ARKimedes doubles the amount of venture capital that is available to young high-growth enterprises. Its focus is on the regular economy.

Banking Instruments

UK: The Charity Bank is a retail bank and lender with an investment subsidiary offering mainstream, listed corporate bond facilities for charities and social enterprises. The Charity Bank is an FSA regulated bank and also a registered charity. It is a bank for the sector and of the sector (its shareholders are all not-for-profit organisations). It provides financing (loans), investment readiness support for charities and social enterprises as well as facilitating corporate bond loan finance infrastructure for charities and social enterprises to raise long term, unsecured, mission driven finance from social investors. The basis of all investment decisions is risk, return and impact.

Big Issue Invest provides medium-term, growth capital for social enterprises that have a clear social purpose, compelling business model, strong management and which can demonstrate a sustainable revenue stream and growth potential. The mission is to finance the growth of established social enterprises, but will also consider financing some early stage businesses. Big Issue Invest provides provide short-to-medium term loans at competitive rates of interest.

Banking Instruments

UK

The Social Investment Business is social investor in the UK who helps social enterprises, charities and community organisations prosper by providing innovative financial solutions and business support. Social Investment Business manage the Social Enterprise Investment Fund (SEIF) with Local Partnerships, on behalf of the Department of Health. SEIF is a fund that provides loans, grants and professional support to social enterprises involved in the delivery of health and social care services. Social Investment Business also set up The Adventure Capital Fund that back community enterprises by offering a combination of financial investments and expert support.

Big Society Bank – will provide money to social economy through intermediaries, (it is in preparation - detailed information are not available yet).

Banking InstrumentsSweden

New Micro Fund will provide assistance to companies and projects by providing collateral for loans and in other ways to work with to obtain venture capital. The fund will interact with the credit guarantee associations for social enterprises or other organizations with local presence and broad experience of local development, social entrepreneurship and social economy. The funds of MF uses Eko-banken.

KGF Social Economy West Cost and Stockholm offers those, working within social economy organizations, a bail at the expansion and start-ups. In that case there is no formal security for the entire engagement. In that way they are able to, after the usual credit check, borrow money without risking their personal finances.

Microfinance Institutions for promoting employment, economic and social integration, aim to extend financial services to groups that do not have access to funding to start or develop their own business. This is a three-year project implemented in four counties in Sweden.

Banking Instruments

Lombardy-public:FRIM Cooperation fund (i.e. Entrepreneurship Rotation Fund) which provides funding for setting up new social cooperatives or for widening and developing existing activities. Mutualistic Funds - national system helping social enterprises (co-operatives) to develop or support their start-up.

JEREMIE ESF Fund - integrates ESF policies on work inclusion with tools to support SMEs. JEREMIE ESF provides loans to social cooperative (to associates) which work force is made up of at least of 30% of disadvantaged people. The amount loaned depends on number their associates (maximum 4.000 Eur for an associate, up to maximum of 200.000 Eur for an enterprise). One half of the loan becomes a grant in case the associate stays within the social enterprise for more than five years. Access to the funding is managed by local banks and takes place through the so called “counter service procedures” which means that funding is allocated chronologically to all eligible applicant until all funding is exhausted.

Banking Instruments

Lombardy-private:

The Italian banking system and its system of financial institution is same for social enterprises like for other SMEs even though there are small differences in some of the terms (i.e. interest rates etc.) due to the nature of the enterprise and its low capitalisation.

Banca Prossima – specialized on non-profit organisations. It developed an innovation Terzo Valore - a peer-to-peer web site which enables individuals to lend direct to social enterprises. It is brand new and not frequently used yet.

Banka Etica (see NBFSE baseline study)

Banking Instruments

Poland• TISE SA developed lending activity and provides loans for NGOs and SMEs. The

company offers bridging loans for projects co-financed from EU funds and investment loans for business. TISE SA manages the private capital fund - CoopEst, which is the fund promoting social economy in the countries of Central and Eastern Europe

• All Polish regions in their operational programs decided to allocate a part of EU funds on granting loan and guarantee funds.

• Five voivodships (dolnośląskie, łódzkie, pomorskie, wielkopolskie, zachodniopomorskie) implements JEREMIE (joint European initiative of EC, EIF and EIB). For more information visit: www.jeremie.com.pl

• Krajowy Fundusz Kapitałowy – National Capital Fund (NFC) - the Company is wholly owned by Bank Gospodarstwa Krajowego. NCF operates as a fund of funds that invests in private equity / venture capital funds operating in Poland. The mission of NCF is to limit the size of equity gap that prevails on the domestic SME market. NCF will strive to accomplish this aim through investing in PE/VC funds that finance the growth of Polish SMEs, and especially those funds that focus on innovation and R&D.NCF supplies financing to the selected funds either through equity investments or through provision of long-term debt. As a fund of funds, NCF does not commit to companies directly. NCF uses state funding, EU structural funds and Swiss Contribution funds.

http://www.jeremie.com.pl/

Banking Instruments

Summary for all partners Financial instruments are often designed to SMEs but SE may also

participate vs. special instruments for SE development, The participation of private entities based on a combination of

commercial interests and social responsibility, Public-sector initiatives to attract private capital investors (retail vs.

entrepreneurs vs. institutional investors), Public-private partnership initiatives, Objective - the accumulation of capital funds for start-ups (loans,

guarantees, seed capital) and for next development of SE.

Strategic Sector Approaches

Czech Rep.– no strategic approach

England – social ent. Strategy and action plan

Finland – strategy for identifying and developing social economy sector in Finland is currently being

prepared at ministerial level

Flanders – creating a „matrix“ for reform of SE supportive matrix

Lombardy – complex set of measures

Sweden – subject of political discussion

EC Inititives in relation to SE finance Public hearing in EP in March 2011

Preparation of communication that will set out the Social Business Initiative

The Commission is working on the following issues:• better visibility of the social economy to investors – by assessing existing

rating schemes and if possible improving them to create a ‘social rating’ which could improve investor confidence

• a ‘stock market’ for social economy finance – this is part of the Competitiveness and Innovation framework Programme 2014-20;

• a solidarity investment fund – a legal instrument to improve investor confidence;

• microfinance – the first €20m loan under the EPMF has gone to Credits in the Netherlands, and the question of whether JEREMIE can help the social economy more is being looked at;

• an equivalent to the USA’s Community Reinvestment Act (CRA) which obliges banks to report on whom they lend to.

Filip KučeraE-mail: [email protected]

Ministry of Labour and Social Affairs

ESF HRE OP Managing Authority

mailto:[email protected]