Recommendations for the implementation of financial instruments

The Network for the Better Future of Social Economy
Strand “Financial instruments and mechanisms of funds’ allocation
to Social Economy”
Recommendations for the implementation of financial instruments
Prague
May 2012
1
Author: Marek Jetmar
2
Content:
Executive summary ................................................................................................................... 4
1.
Introduction ....................................................................................................................... 7
1.1.
Aim of the Recommendations ............................................................................................... 8
1.2.
The process and method of preparation .............................................................................. 9
1.3. Network for the Better Future of the Social Economy, Strand Financial instruments and
mechanisms of funds´ allocation to social economy ..................................................................... 10
2.
State of play in participating countries and regions...................................................... 13
3.
To match the financial needs of social enterprises ....................................................... 16
3.1.
Business environment and regulatory framework for social entrepreneurship ........... 16
3.2.
The quality of the financial environment for social enterprises ...................................... 21
3.3.
Social enterprises................................................................................................................. 26
Annex 1: Support of social entrepreneurship at EU level ..................................................... 29
List of abbreviations ............................................................................................................... 33
3
Executive summary
The Recommendations for the implementation of financial instruments represent
the second main output of the Financial instruments and mechanisms of funds´
allocation to social economy strand of the ESF learning network Better Future of the
Social Economy (BFSE). This product presents practical information regarding the
financial needs of social enterprises, the role and needs of public institutions and
financial intermediaries and recommendations for designing comprehensive support
system and its elements, co-funded by the ESF or the ERDF.
The document considers a role of stakeholders and addresses the main decision points
in a policy shaping process. The attention is focused on policy coordination, on suitable
designed financial tools (financial instruments schemes, grants), way of implementation,
training/advisory programmes, strengthening stakeholder participation and
way/technique of using EU SF. It is based on practical examples from NBFSE countries
and regions, which were analysed in terms of their functioning. These examples may be
described as innovative and can be considered as good practice. The recommendations
aims to help policymakers and ESF or ERDF managing authorities to organise the
implementation of financial mechanisms particularly through financial engineering in
the frame of their social entrepreneurship policy.
The Recommendations was developed by an external consultant Marek Jetmar, drawing
on inputs from NBFSE partners and activities conducted within the work of the network
Better Future of the Social Economy during 2009-2012. The main sources of information
to this product were outputs as the NBFSE baseline study, questionnaire survey amongst
NBFSE partners, interviews with experts in the field and meetings of the NBFSE,
especially peer reviews of Financial instruments strand.
Nowadays, social enterprises represent an emerging sector with rapid growth.
According to the Global Enterprise Monitor 2009 report, range from between 3% and
7.5% of the workforce in selected EU Member States were employed in various forms of
social businesses. Their social mission is connected with a strong focus on sustainable or
inclusive development. Investment in social enterprises has a greater positive social
impact than investment in SMEs in general.
Ensuring that this sector continues to grow and boom and therefore will be a valuable
contribution to meeting the objectives of the Europe 2020 strategy. The sustainable
growth of the EU’s social enterprise sector depends on possibility to receive a wide
range of investment and financing sources. The EU level has just taken some initiatives
and others are in the process (Social Business Initiative, specific investment priorities in
proposals of regulation for CSF funds of programming period 2014-2020), which should
be then followed by actions on national and regional level.
The situation of social business in participating countries and regions is different. It is
associated with the 1) orientation value of society and the attitudes to marginalized
groups of population, 2) role of the governments and public sector to address social
inclusion and employment, 3) level of development of civil society, 4) political and
4
institutional tradition. Although most values are now due to role of the ESF very similar,
there exist significant differences regarding policy focus and range of financial
instruments used and the accompanying mechanisms. However, it is possible to trace
some common features of actors in social entrepreneurship and focus on their effective
interaction.
The legal system and regulation usually do not create an immediate barrier to social
business development. However, traditional legal forms of profit or non-profit oriented
entities are matter of specific requirements relating to their status. On the one hand, (as
to the business entities), there is an ideological contradiction with maximizing of profits
(which is not the purpose of social entrepreneurship). On the other hand, a regular
framework can impose restrictions on business behaviour of different forms of NGOs
(foundations, charities).
Social entrepreneurs often face the problem with insufficient institutional support
from the government in some countries. The reason is a lack of harmonized/unified
employment policies, social inclusion and social entrepreneurship. It would be
reasonable to align tools of active employment policy, social inclusion and promoting
social entrepreneurship to encourage development of social entrepreneurship. It is
appropriate to seek solutions that will harmonize support for social enterprise with
development policy (local or regional development, community lead development). It is
necessary to set up integrated support schemes combining traditional instruments of
active employment policy - such as education, training, among other things aimed at
strengthening business skills, ability to formulate a business plan and manage their own
business.
Supporting framework should combine different types of incentives (such us
discounts on social insurance, contributions to wage costs, social and health insurances)
with grants or loans/equity for start-ups, preferential loans, micro-credits, guarantees
for next development of social enterprises. One of the mechanisms that can be used in
order to improve the business environment to social enterprises is the application of
tax breaks and preferential accounting practices. Discounts on social insurance
and contributions to employment of marginalized individuals are key for
competitiveness of social enterprises.
Social enterprises should be supported by different types of tools in order to
influence their development, functioning in various stages of development. The idea is to
create an environment that will enable effective and sustainable functioning of social
enterprises (social and economic criteria). It is necessary to mobilize funds of the
financial sector, third sector, citizens, etc. and seek ways of cooperation between
private and public sector in order to increase availability of financial resources to social
enterprises.
However, problem is the creation of comprehensive financial mechanisms (rules of
combination resources affect the ability to create complex mechanisms - financial tools
plus consulting services and education of stakeholders) and inadequate experience of
some countries and regions with non-grant financial mechanisms. Uncertainties
5
regarding the application of state aid may represent another problems - in many cases
(because of doubt) only within by de minimis rule. This attitude results in addressing the
consequences, but not the causes of problems.
Real availability of funds is only one element in the promotion of social economy and
social entrepreneurship. Activities focused on increasing capacity and reinforcing of
entrepreneurial skills of social entrepreneurs (before the launching and during their
business) play crucial role. Increasing awareness of the importance of social economy
for employment and social inclusion among local actors (including politicians) is also
very important. It is possible very effectively support these measures through the ESF.
The main recommendations for implementation of support to social enterprises from
ESF and ERDF are following:
1. Co-operation between the financial sector, NGOs and the public sector in
providing funding for social enterprises is necessary. From this perspective, local
financial intermediaries need to understand the role and needs of social
enterprises and recognise their financing as a business opportunity. Policymakers and Managing Authorities should understand the constraints of financial
intermediaries so as to strengthen their capacity to work with the social
economy. The lack of capital or increased risk of lending can then be remedied by
involving public resources – primarily in the form of guarantees – with a fair
distribution of risk.
2. It is necessary to set up integrated support schemes allowing the use of various
types of financial instruments and their combination (grant mechanisms, loans
using financial engineering instruments). The aim is to make funds available for
the different stages of development of social enterprises. Besides the initial
capital investment it is also necessary to consider the availability of working
capital to ensure the sustainability of social business.
3. It is efficient to couple the investment in social enterprises with investment in
human capital. The ESF should be significantly focused on strengthening the
capacity of social entrepreneurs and their employees, using already existing or
developing new business support services for coaching and mentoring of social
enterprises. Ensuring access to capital without the corresponding business
services (advice, coaching, mentoring) only partly helps the development of
social enterprises.
4. Finally, it would be appropriate to continue to strengthen the ability and capacity
of Managing Authorities and other policy-makers to create integrated financial
mechanisms co-funded by the ESF or ERDF. It would be fruitful to continue to
promote the exchange of experience among Managing Authorities regarding the
provision of support for innovative solutions in ensuring resources for social
enterprises.
6
1. Introduction
Social enterprises represent an emerging sector in the EU. They are comprised of
undertakings whose primary objective is to achieve social impacts rather than generate
profits for shareholders. To achieve these impacts, social enterprises seek to build on
business techniques – including business finance. The sector is characterised by a rapid
growth. According to the Global Enterprise Monitor 2009 report, between 3% and 7.5%
of the workforce in selected EU Member States were employed in various forms of social
businesses.
The social mission of social enterprises is connected with a strong focus on sustainable
or inclusive development, and on tackling social challenges across EU societies: It means
that investment in social enterprises is likely to have a greater positive social impact
than investment in SMEs in general. J. P. Morgan suggests that social investment could
grow rapidly to become a market well in excess of €100 billion, underlining the
potential of this emerging sector.1
Ensuring that this sector continues to grow and flourish will be a valuable contribution
to meeting the objectives of the Europe 2020 strategy. The sustainable growth of the
EU’s social enterprise sector depends on drawing on a wide range of investment and
financing sources. The EU level has just taken some initiatives and others are in the
process.
The European Commission states in its Social Business Initiative2 that the funding
system for social enterprises is underdeveloped compared with that used by other
businesses. Different financial tools and an appropriate regulatory framework are
necessary in order to establish equal access to capital for social enterprises. For
example, the Commission has proposed a microcredit initiative for social enterprises as
part of the Programme for Social Change and Innovation, which is to start in 2014. 3 This
programme includes a funding instrument for the start-up, development and expansion
of social enterprises. The aim is to provide approximately €450 million in microloans as
well as approximately €100 million for direct support to social enterprise development.
The aim of new European Social Entrepreneurship Funds4 is to facilitate access to the
financial markets for social enterprises by harmonising rules for investment funds. The
objective is to stimulate the creation of dedicated funds, enabling them to be active
across the whole EU single market. 5
1
See J.P. Morgan, Impact Investments: An Emerging Asset Class, 2011.
COM(2011) 682, 25.10.2011
3
http://ec.europa.eu/social/main.jsp?langId=en&catId=89&newsId=1093
4
COM(2011) 862, 7.12.2011
2
5
The aim of the draft of regulation is to lay down the strong foundations for a vital European market of social
investment funds. It introduces a new term "European funding for social enterprise" in order the investors
could distinguish funds that focus on investments in European social enterprises. Fund which wants to be
accepted as the "European Fund for Social Enterprise" will have to show that spends a high share of investment
7
The Commission proposed “Support for social enterprises” in the ERDF and “Promoting
the social economy and social enterprises” in the ESF as investment priorities for the
2014-2020 programming period in order to provide a clear legal basis and an inclusive
approach to diverse financial instruments targeting social enterprises.6 This is further
developed in the Commission working paper “Common Strategic Framework for
implementation of structural funds 2014-2020”.7
Even if all these initiatives are welcome in order to improve the supply of appropriate
capital for social enterprises, more actions are needed. These initiatives need to be
regarded as the first step towards tailored financial instruments that still need to be
explored.
When designing an appropriate financial framework, it is also important to look at
existing investment instruments specifically developed and adapted for social
enterprises. These include social investment funds, cooperative banks, 8 ethical and
social banks,9 commercial banks with social programmes,10 innovative instruments such
as "social impact bonds"11 and favourable tax-funded solutions. Such instruments could
be used as part of a hybrid capital approach, which is often seen as the most appropriate
model for financing social enterprises.
The ESF represents unique opportunity that allows solving most problems of social
enterprises. The ESF is able to support most of the measures linked to the development
of SE. Its resources can be used to co-finance the vast majority of the identified needs
such as:
- to improve access to capital (investment, working) - loans, equity;
- to encourage local financial intermediaries - increase of resources;
- to strengthen the capacity of financial intermediaries - their ability to work with
SE;
- to strengthen the capacity of social enterprises – their ability to access finance;
- to improve environment through informing relevant stakeholders.
1.1.
Aim of the Recommendations
The Recommendations for the implementation of financial instruments represent
the second main output of the Financial instruments and mechanisms of funds´
allocation to social economy strand of the ESF learning network Better Future of the
(at least 70% of assets held by investors) to support social enterprises. Due to a uniform disclosure rules,
investors will receive clear and concise information about these investments.
Detail information are available in Appendix.
6
http://ec.europa.eu/regional_policy/what/future/proposals_2014_2020_fr.cfm
http://ec.europa.eu/regional_policy/what/future/index_en.cfm
8
www.eurocoopbanks.coop.
9
www.triodos.be.
10
For example www.bancaprossima.com, https://www.unicredit.it/it/chisiamo/per-le-imprese/per-il-nonprofit/universo-non-profit.html and www.ubibanca.com/page/ubi-comunita
11
www.socialfinance.org.uk/sib.
7
8
Social Economy. This product presents practical information regarding the financial
needs of social enterprises, the role and needs of public institutions and financial
intermediaries and recommendations for designing comprehensive support system and
its elements, co-funded by the ESF or the ERDF.
The document considers a role of stakeholders and addresses the main decision points
in a policy shaping process. The attention is focused on suitable designed tools (financial
instruments schemes, grants), on policy coordination, way of implementation,
training/advisory programmes, strengthening stakeholder participation and
way/technique of using EU SF. It is based on practical examples from NBFSE countries
and regions, which were analysed in terms of their functioning. These examples may be
described as innovative and can be considered as good practice.
The proposed recommendations should contribute to increase of awareness and
capacity building of policymakers at national and regional level, to share of best
practices, to enforce successfully proposals submitted by SBI and new generation of the
cohesion policy 2014 +.
The recommendations aims to help policymakers and ESF or ERDF managing authorities
to organise the implementation of financial mechanisms particularly through financial
engineering in the frame of their social entrepreneurship policy.
1.2. The process and method of preparation
The report was developed by an external consultant Marek Jetmar, drawing on inputs
from NBFSE partners and activities conducted within the work of the strand “Financial
instruments and mechanisms of funds´ allocation to social economy”. The parts
associated with references to the European initiatives and policies on social
entrepreneurship refer to official documents presented by the Commission such as
working papers, draft regulations, etc.12
The main sources of information to this product was the Overview of attitudes and
financial instruments for social economy in NBFSE countries and case studies of selected
practice of support and previous outputs as the NBFSE baseline study, questionnaire
survey amongst NBFSE partners, interviews with experts in the field and meetings of the
Financial instruments group.
12
Social Business Initiative, Creating a favourable climate for social enterprises, key stakeholders in the social
economy and innovation, 25.10.2011. COM(2011) 682
Proposal for a Regulation of the European Parliament and of the Council on the European Social Fund and
repealing Council Regulation (EC) No 1081/2006, Brussels, 14.3.2012 COM(2011) 607 final /2
Towards a job-rich recovery COM(2012) 173 final, 18 April 2012
Elements for a Common Strategic Framework 2014 to 2020 the European Regional Development Fund the
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and
the European Maritime and Fisheries Fund
9
The findings and recommendations were debated, and consequently, modified during
common meetings of the NBFSE.
1.3. Network for the Better Future of the Social Economy, Strand Financial
instruments and mechanisms of funds´ allocation to social economy
The learning Network for better future of Social Economy (NBFSE) is a project of 7 EU
member states: Poland (lead partner), Belgium-Flanders, Sweden, the Czech
Republic, Italy-Lombardy, the UK-England and Finland represented by national or
regional authorities and their experts. Apart from participation of the core partners ESF Managing Authorities, other public authorities, experts and social economy
representatives at the local, regional, national and European level participate in the
project.
Over the last three years the network has worked together with partners and
stakeholders in order to reach its objectives, namely:




Improving the quality and efficiency of Structural Fund programmes and their
impact on employment, social inclusion and training across Europe;
Promoting support for social economy in participating Member States;
Identifying, sharing and disseminating good practices regarding support
measures, especially to countries where the social economy is less developed;
Developing EU policy and tools (vertical mainstreaming).
NBFSE has worked on solutions for the social economy in five thematic strands focusing
on:
1.
2.
3.
4.
5.
Social franchising;
Financial instruments and fund allocation mechanisms to social economy;
Measuring social added value;
Socially responsible public procurement and public-social partnership;
Community law (state aid) and social services of general interest (SSGIs).
In each strand the members of the network have shared their knowledge and good
practices, and taken part in peer reviews and learning seminars in order to understand
how Managing Authorities can better support the development of social economy
through the ESF.
The aim of the Financial instruments strand, which is led by the Czech Ministry of
Labour and Social Affairs (ESF HRE OP MA), is to contribute to implementation of more
efficient and complex mechanisms of financial support in the new EU programming
period 2014+ or to streamline existing support, to increase the impact of support from
public sources and to contribute to better expertise of staff involved in the
implementation of support from the ESF or ERDF.
Activities of Financial instruments strand were focused on:
10
1) The identification of financial instruments and mechanisms of financing,
particularly in countries of NBFSE partners;
2) The analysis of financial instruments, the process of their shaping, aims,
conditions for the recipient, ensuring capacities, and mechanisms of assessment
(evaluation);
3) The assessment of strengths and weaknesses, transferable elements, the role of
ESF (ERDF) and
4) The evaluation of the legal framework for the implementation of financial
instruments.
The recommendations and solutions were drafted on the basis of outputs from previous
research, analysis and assessment. Draft recommendations were presented and
discussed during the common meeting of the NBFSE in Milano, Italy, on 5-6th
December 2011. Final version of recommendation was prepared for common meeting
of the NBFSE in Warsaw, Poland, on 2-3th April 2012.
The outputs of the Financial instruments strand are closely correlated with the activities
and recommendations of other strands of the NBFSE13, and also to the outputs of the
COPIE14.
An analysis of individual financial instruments and mechanisms that we have provided
repeatedly faced to the confusion regarding the application of state aid rules. Managing
authorities emphasized the complexity of these issues, which resulted in postponing
start implementation of certain tools. Progress, made in this area, has become an
important factor affecting the viability of a number of plans of managing authorities.
The issue of social franchising is closely tied to the theme of financing social
enterprises. Experience in providing resources for the development of these networks,
financial relations within this structure represent a stimulus for the formulation of new
financial instruments.15
The key outcome is a comprehensive tool for assessing the benefits of social
enterprises (based on the SROI) and assessing the quality of social business (based on
Social Auditing and Accounting). These outputs can be used for assessing the applicant's
eligibility for a grant or loan, or the application of preferential provisions designed for
social enterprises during the public procurement procedure. This tool can also be used
for ex-post evaluation of the benefits of interventions.16
13
See www.socialeconomy.pl
http://www.cop-ie.eu/
15
Social franchising – financing its growth,
http://www.ekonomiaspoleczna.pl/files/ekonomiaspoleczna.pl/public/_MRR_Better_Future/ESFN_research_p
aper_2_financing_social_franchising.pdf
16
EVALUATION OF SOCIO-ECONOMIC VALUE OF SOCIAL ENTERPRISES, EUROPEAN TOOL,
http://www.ekonomiaspoleczna.pl/files/ekonomiaspoleczna.pl/public/_MRR_Better_Future/Social_value_mea
sur_tool_EN_FINAL2.pdf
14
11
Recommendations for social responsible public procurement and public social
partnership17 proposes procedures, how to properly apply the common European
provisions into national legislation to support the social economy and local
development. Recommendations are usable to ensure social enterprises preferential
access to resources.18
The findings concerning the application of European law on state aid and social
services of general interest, are very challenging for the preparation of new financial
tools and supporting mechanisms. It also shows how to use all available block
exemptions in the promotion of social entrepreneurship.
The NBFSE Recommendations are complementary to the findings and proposals of the
Access to finance thematic group of the ESF learning network COPIE. The manual
“Designing microfinance operations in the EU” 19 elaborated by this working group deals
with the availability of microfinance for the disadvantaged entrepreneurs and their
microenterprises. A lot of experience with micro-financing listed in the COPIE Manual
can be used when setting-up financial instruments for social enterprises.
17
Available on http://www.socialeconomy.pl/x/774377?projekt=531302
Detail findings on application and best practises are in THE APPLICATION OF SOCIALLY RESPONSIBLE PUBLIC
PROCUREMENT AND PUBLIC SOCIAL PARTNERSHIP, http://www.socialeconomy.pl/x/774377?projekt=531302
IN SUPPORT TO SOCIAL ECONOMY DEVELOPMENT
19
http://www.cop-ie.eu/sites/default/files/COPIE_Access_to_Finance_Manual.pdf
18
12
2. State of play in participating countries and regions
The issue of social entrepreneurship in many countries and regions is at the heart of
the entire society. It represents a part of extensive societal debates on the role of
social entrepreneurship in solving societal and social problems and the degree of
involvement of the public sector (state, regions and municipalities) in resolving them.
However, achieved level of development of social economy and social business is very
different. The situation is associated with the 1) orientation value of society and the
attitudes to marginalized groups of population, 2) role of the governments and
public sector to address social inclusion and employment, 3) level of development
of civil society, 4) political and institutional tradition. Although most values are now
due to role of the ESF very similar, there exist significant differences regarding to policy
focus and range of financial instruments used and the accompanying mechanisms.
However, it is possible to trace some common features of actors in social
entrepreneurship and focus on their effective interaction.
Funding options for social enterprises differ across countries and regions with regard to
the quality of the business environment, the degree of development of the financial
system, proportion of the social economy and the economic strength of the third sector.
The quality of the business environment for social enterprises is determined by
adjusting the regulatory functions for small and medium-sized enterprises, preferential
measures aimed at reinforcement of social economy and development of social
enterprises. Setting up the quality of the environment is related to the functioning of
public institutions as guarantors of the system, type and intensity of regulation,
appreciation of the value added of social entrepreneurship by society, awareness of
stakeholders about the benefits of social entrepreneurship.
The degree of development of social economy and quality of environment for social
enterprises is significantly different in participating regions and countries of the NBFSE.
In the UK, the system of financing needs of social enterprises from private sources, nongovernmental organizations and through direct involvement of citizens is very well
developed. This reflects power of civil society sharing values of social economy in the
population, but also the economic power of charities, foundations, endowment funds,
which are able to support both the creation of social enterprises and support their
projects. There are significant tax benefits and other measures promoting activity of
social enterprises.
In Italy and especially in Lombardy, there is a high proportion of small social
enterprises closely involved in the local community. Phenomenon is the role of social cooperatives. Social cohesion in the local context and social inclusion are strongly
emphasized. There is available number of tax advantages focused on social enterprises
at national and regional level. Their operation is supported in every manner. Innovative
approach supports the introduction of new forms of financial instruments, co-funded by
the ESF. The big advantage is the possibility of cooperation with local financial
intermediaries, who are strongly integrated into the local economy.
13
In Poland there is a rapid growth of social enterprises from the bottom. This natural
development responds to the significant social transformation of Polish society. Besides
the massive support to the establishment and development of SMEs (available to social
firms too) from the ERDF, there is also a number of measures directly focused on social
enterprises, co-funded from the ESF. Emphasise is put on strengthening capacity of
social enterprises and other actors in the territory. New ESF financial mechanism
increasing availability of capital in the form of micro-credits for social entrepreneurs
start-ups is formed.
In Flanders, Belgium, social economy is highly developed and is significantly
represented by enterprises focused on social and work inclusion. The regional
government supports the development of social enterprises in every possible way.
There is a sophisticated support system enabling to mobilize private resources. Public
resources are then used as a lever to achieve the necessary effects. Various forms of
partnership between the private and public sectors to support the social economy are
well developed. Social entrepreneurship is constantly supported in various stages of
development - before starting a business, setting up businesses and in course of
business. Attention is paid both to invest in to business (eg. the purchase of equipment)
such as human resource development (capacity building of social entrepreneurs and
their employees).
Social enterprises in the Czech Republic are still nascent and social economy sector is
weak. The majority of society does not share the values associated with social
entrepreneurship, although the situation of disadvantaged people and the overall social
climate deteriorates. So far there is no broader support for concept of social economy
amongst policy makers at national and regional level. It will be necessary to strengthen
awareness of the different actors about the benefits of social enterprises. Subsidies are
provided only for disabled employees as a measure of the employment policy. The
financial sector provides products (loans) for social enterprises in small scale as pilot
initiative in the frame of CSR activities. The activities of NGOs in social entrepreneurship
area are still weak although improvements can be observed (pilot projects on the
formation of social enterprises).20 Support to social enterprises has pilot and innovative
character and is essentially funded by grants from the ESF and the ERDF.
In Sweden social enterprises do business aimed at integrating people into society and
working life and empowering employees. The strategy and the objectives of the public
activities are to create opportunities for more social enterprises to start and grow. High
level of social cohesion at national and local level plays the crucial role in promoting the
development of social enterprises. This is reflected in the promotion of ethical banking,
which allows small savers to finance projects with social added value.
20
Via foundation fosters community life of Czech towns and villages, as it strengthens non-governmental
organizations and invests in their development. Its activities are newly focused on support of social enterprises.
Citi Foundation.
14
The broad debate on the development of social economy and the possibility of support
undergoes in Finland. Attention is paid to spreading knowledge about the need for
social entrepreneurship and its benefits. The effort is focused on support of social
enterprises, especially their set up.21
21
Ministry of Employment and Economic Development launched social enterprise development project. The
project mission is to provide information about social enterprises, and the establishment of operating
conditions as well as matters related to development of proposals. In addition, the task is to serve as support
structure of regional and local government authorities as well as those who are planning to set up a business
social firm or social development of the social business.
15
3. To match the financial needs of social enterprises22
3.1. Business environment and regulatory framework for social
entrepreneurship
The quality of the business environment, in which social enterprises operate, is
determined by the following parameters. The first is a legislative approach to social
entrepreneurship – i.e. the legal regulation through the special forms for social
enterprises or adaptation of traditional forms of business or non-profit entities. This is
closely related to the formulation of public policy in the field of social entrepreneurship.
Another factor is setting protection of competition policy and state aid rules in order to
promote development of social enterprises. Finally, there are tax and fiscal incentives to
stimulate the creation of social businesses and strengthening their competitiveness in
the market (tax relief, preferential accounting procedures, relief, insurance,
contributions to employment of disadvantaged).
Legal regulation and institutional support
The legal system and regulations usually do not create an immediate barrier to
business development. However, traditional legal forms of profit or non-profit oriented
entities are matter of specific requirements relating to their status. On the one hand, (as
to the business entities), there is ideological contradiction with maximizing of profits
(which is not the purpose of social entrepreneurship). On the other hand, a regular
framework can impose restrictions on business behaviour of different forms of NGOs
(foundations, charities).23
Most countries and regions indicated that the current system does not provide
sufficient support for the operation and development of social enterprises. In other
words, social entrepreneurs face with insufficient institutional support from the
government in some countries. The reason is a lack of harmonized/unified employment
policies and social inclusion policies. The cause may also be unclear relationship
between support of small and medium enterprises and social entrepreneurship, which is
covered by different authorities24. Related challenge for public institutions in some
NBFSE countries is that no specific public strategy on social entrepreneurship is
implemented.
In past, the natural development of social entrepreneurship was in some countries
interrupted together with suppression of civil society. A lack of institutional support can
significantly slow the development of social entrepreneurship. Low degree of co22
Examples and references in this chapter are related to the findings contained in the document “Overview of
attitudes and financial instruments for social economy in NBFSE countries and case studies on selected practice
of support”.
23
A special legal form for social enterprise does not exist in the Czech Republic, but there is ongoing debate on
their introduction. Form of social co-operatives appears in the new Civil Code of the Czech Republic. Details will
be adjusted in the subsequent act on business corporations. By contrast, in Italy, there is a long tradition of
social cooperatives.
24
It was indicated by Czech or Flemish representatives.
16
ordination between the various support systems and policies (social inclusion,
employment policy, local development) including insufficient cooperation of central,
regional and municipal authorities is another weak feature. We must not forget that
social entrepreneurship comes from local society and is always closely connected with
local and regional economy25.
Inappropriately set of the regulatory framework, fragmentation of public policies, low
willingness to establish cooperation between the public sector and social economy
entities harming the business environment and business climate for the creation and
development of social enterprises.
It seems that public authorities do not take in many countries carefully advantage of
huge potential associated with a growing dynamism of social entrepreneurship.
Recommendations26:
Policy makers and ESF MA:
It would be reasonable to align tools of active employment policy, social inclusion and
promoting social entrepreneurship to encourage development of social entrepreneurship.
It is appropriate to seek solutions that will harmonize support for social enterprise with
development policy (local or regional development, community lead development).
The EC Social Business Initiative proposes comprehensive approach to support of social
entrepreneurship. National and regional authorities need to adapt their policies and to
prepare such financial tools that improve the availability of funds to social enterprises and
facilitate their effective use. This is a modification of conceptual documents, adoption of
regulatory measures and change of existing tools or creation of new ones that enable draw
resources, co-finance or made funds available in other way.
It is necessary to set up integrated support schemes combining traditional instruments of
active employment policy - such as education, training, among other things aimed at
strengthening business skills, ability to formulate a business plan and manage their own
business27.
When setting up these schemes it is required to make links between actors from different
areas with different competencies. The close cooperation of central and regional
25
See Italian example.
26
Some outputs of Socially responsible public procurement and public-social partnership strand
(under the leadership of Poland) were focused on strategic partnership: THE APPLICATION OF SOCIALLY
RESPONSIBLE PUBLIC PROCUREMENT AND PUBLIC SOCIAL PARTNERSHIP IN SUPPORT TO SOCIAL ECONOMY
DEVELOPMENT, http://www.socialeconomy.pl/x/774377?projekt=531302
27
Support of development of social entrepreneurship requires a close coordination with formal and informal
education, etc. It is necessary to spread awareness about the value of social entrepreneurship from primary
school level. It is appropriate to support the development of entrepreneurial thinking, strengthen
entrepreneurial skills through training in secondary schools and universities, to develop them through
continuing education. What is important is the involvement of representatives of social enterprises in teaching,
which allows quick acquisition of practical skills.
17
authorities is usually necessary. Applying the principles of cooperation and partnership
between different levels of government (multilevel governance) seems beneficial.
It seems that in some countries and regions has successfully developed support
mechanisms, containing all the above elements leading to the effective promotion of
social entrepreneurship.
They realized that to achieve the objective of increasing employment of socially
excluded people it is necessary to link different types of measures that increase the
chance of success of social business.
Hefboom, Flanders was founded in 1985 as a cooperative society for ethical investing.
It provides funding and advice to projects to work on a social and sustainable society.
Hefboom offers ethical investment products for individuals, organizations, companies
and public administrations. Organizations and companies with a social mission in
Flanders and Brussels can lever in turn for various loans. Hefboom together with
partner organizations supports employment and training initiatives for disadvantaged
groups, projects in welfare, projects focused on environment and sustainability.
Hefboom supports organizations in two ways: with short and long term loans and also
with advice on various aspects of enterprise policy.
Hefboom also provides business support services in two stages. Prior the submission of
application -coaching for the shaping a business plan and after 24 months active
support provided by Dexia Foundation. Every credit borrowers has to be coached in
order to limit the default risk.
Hefboom is also the parent company for other special initiatives promoting social
economy such as Trividend allowing access to equity.
State aid and public procurement rules
However the expansion of social entrepreneurship and the ability to compete with other
businesses brings the need to clarify (modify) the application of state aid rules.
Uncertainties regarding the application of state aid are in many cases (because of doubt)
solved only by de minimis rule28. This attitude results in addressing the consequences,
but not the causes of problems. Most countries29 do not use any block exception,
although it is in some cases possible to use the provision of services of general economic
interest and in case of cohesion regions also follow the rules the regional aid map.
Support from public funds and use of social clauses in the case of public procurement
is often avoided due to the creation of unequal market position and harming
competition. But in accordance European and national law, the contracting authority
may specify in the tender conditions also requirements relating to special conditions in
respect of public procurement, especially in social, employment, or the environment.
Simplification and clarification of these rules would greatly accelerate the
implementation of these mechanisms into practice. Significant progress would be to
formulate of the methodology including procedures to effectively address the issue of
28
29
This mechanism is used by Czech, Polish, Flemish, Lombard managing authorities or intermediate bodies.
It was indicated by Czech, Polish, Lombard, Flemish, Swedish experts.
18
state aid. It could contain examples of good practice in supporting the creation of
various financial mechanisms with the participation of public resources.
We consider the issue of securing contracts and financing of social enterprises through
public procurement as very important. More detailed recommendations were
formulated in Socially responsible public procurement and public-social partnership
strand (coordinated by Poland) and the Community law (state aid) and social services of
general interest (SSGIs) strand (under the leadership of Flanders).
Recommendations:
EU and European institutions:
To facilitate the use and mutual combination of tools developed at European level in order
to promote integrated approach in the field of social entrepreneurship.
It is necessary to set clear rules for state aid in promoting social enterprises.
It would be beneficial to increase to strengthen the capacity of social economy actors in the
field of state aid and public procurement regulated by EU legislation.
Tax and fiscal incentives
One of the mechanisms that can be used in order to improve the business environment
to social enterprises is the application of tax breaks and preferential accounting
practices. It can be, for example, preferential amortization of assets and other
accounting operations that accelerate the consumptions of costs during a year. In the
case of reporting profits is often applied mechanism of deductible items, the creation of
funds, as well as providing tax relief or tax remission.
In Italy, the tax support system of social entrepreneurship is complex and considerably
vary depending on the Region. Social enterprises are taken out of paying the tax on
company’s income (IRES tax in Italy). Act No 1/2008 provides a tax break for NGOs (as
well social cooperative) which reduces workforce costs by 4.25%.
The social enterprises do not pay taxes on profits if they are classified as
indivisible reserve (i.e. reserves which cannot be distributed to the associates). In
accordance to Act No 460/97 social enterprises are non-profit making and
socially useful. For this reason, they are entitled to other special conditions 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.
In Lombardy, there are tax subsidies on employees of social enterprises for social
cooperatives in accordance with National Act No 381/91. Social cooperatives
employing disadvantaged people do not pay National Insurance contributions of those
employees. All taxpayers in Italy have the possibility to earmark a small percentage of
the taxes they owe State (i.e. 5x1000) to support no-profit organisations (social
enterprises as well as universities, research centres etc.).
19
The tax advantages do not only concern social enterprises themselves, but also those
that provide financial resources, capital for social enterprises. It can then act as a relief
on income tax. In the UK specific tax incentive exists - Community Investment Tax relief
which is due to finish in 2012.
The Community Investment Tax Relief (CITR) scheme offers a tax incentive to
investors in accredited community development finance institutions. CITR is available
to any individual or company with a UK tax liability investing in an accredited
community development finance institutions where the investment is held for at least
five years. The taxpayer, who can either be an individual or company, receives a relief
to offset against their income or corporation tax liability of 5% of the amount invested
in the year the investment is made, and a further 5% in each of the subsequent four
years. The total relief is worth up to 25% of the value of the investment.
This tax relief is in addition to any interest or dividend paid by the community
development finance institutions. Community development finance institutions lend
and invest in deprived areas and markets that cannot access mainstream finance. They
provide financial services to enterprises and individuals with the aim of achieving both
financial and social returns.
Discounts on social insurance and contributions to employment of marginalized
individuals as an important instrument of employment and social inclusion policy affect
the competitiveness of social enterprises. It is a tool is widespread in the participating
countries of the NBFSE (eg. the Czech Republic, Poland, Finland). Providing this support
is not usually subject only to the social enterprise, but may also be used by other
entities. It is associated with a specific person or created post. The competent
authorities recognize that it is more efficient and more effective to provide a partial
contribution to employment, to help the natural form of integration through return into
the labour market, rather than just pay benefits to disadvantaged people. Differences are
in intensity of support and focus on the target group. Contributions to the employment
of disadvantaged people can be provided with the co-funding of ESF projects.
In Finland are available subsidies (Palkkatuki, it means salary Support) for employing a
disadvantaged person or long term unemployed (palkkatuki) that can be used by
“normal companies” or social enterprises.
The Ministry of Employment and Economic Development Office may grant a wage
subsidy to the employer to pay the costs of an unemployed person. Wage subsidy
consists of two parts, the basic support and additional part. In 2011 basic amount is
EUR 25.74 /day. Add-on varies from case to case, based on Employment and Economic
Development Office's discretion. The social enterprises that employ persons difficult to
place in the labour market may be granted for basic support plus the additional up to
90 %. Disabled or long-term unemployed may be granted for salary support plus an
additional payment however, a maximum of EUR 1 300 a month.
20
Recommendations:
Policy makers and ESF MA:
The introduction of simplified accounting practice for social enterprises could contribute to
smooth functioning of social enterprises. It is for example preferential speedy amortization
of assets during years.
In terms of tax, there is a broad range of options such as the creation of special tax
reserves, reserve funds to cover possible future losses due to greater sensitivity of social
enterprises to fluctuations in the market, on the economic crisis. Other potential
instruments are tax relief, tax abatements, etc.
Wider use of tools to support employment of disadvantaged groups by social enterprises discounts on insurance, drawing on contributions to cover part of the wage costs. These
measures are able to partly offset the competitive disadvantages of social enterprises
(work integration social enterprises30 especially) in the market compared to other
companies.
3.2. The quality of the financial environment for social enterprises
Financial market imperfections weaken the ability of social enterprises to obtain
appropriate resources on the open market. It can lead to de facto exclusion of applicants
- social entrepreneurs when assessing applications for credit or venture capital. The
reasons usually presented are a slow return on investment, lack of own resources for cofinancing, lack of property as a guarantee for the loans and in some cases, short business
history. Private financial institutions have traditionally been very conservative in
assessing business opportunities and very risk-averse. They always try to carefully
distinguish types of risks and allocated them between the financial institution (such as a
bank) and the applicant. The moral hazard of some banks which took place in recent
years and caused the financial crisis leads to a re-tightening of lending rules. The
implementation of the Basel II and Basel III rules will greatly affect banking practices
and will result in a re-tightening of lending rules. This development will have an adverse
impact on funding of social enterprises. Borrowed funds are often covered by several
collaterals. This applies to both investment loans and working capital. Sometimes it is
more difficult to raise funds to finance business operations than to obtain long-term or
medium-term investment credit. This policy, however, significantly reduces the
chance for social entrepreneurs starting up to obtain loans on the financial market.
Knowledge of the specifics of the social entrepreneurship among financial institutions
and banks differs but generally is weak. Most of them do not distinguish between
traditional small and medium-sized enterprises and social businesses and
therefore they applied the same scoring and evaluation rules in process of assessing the
business plans. Only some financial institutions understood the social dimension of
business and can offer special products designed for social enterprises.
30
http://www.isede-net.com/content/social-economy/wise-work-integration-social-enterprises-toolpromoting-inclusion
21
Motivation of banks may also result from the corporate strategy based on CSR.
Another factor influencing the decision of financial intermediaries to finance social
enterprises is corporate strategy based on CSR. It is possible to demonstrate examples of
products for social enterprises closely linked to marketing and promotion policy. On the
other hand, for a number of large banks is creating special products for social
enterprises and their financing so expensive that they do not find these strategy as a
profitable and they do not provide these services.
Another aspect is the market situation in the segment of financial intermediaries. In
many countries there is a wide structure of small and large banks, credit cooperatives,
municipal unions and other financial institutions operating nationally or regionally, that
due to high competition in the market segment they are able to distinguish their
products according to the special needs of target groups. A different situation is on
oligopolistic market controlled by large banks, which have little interest in dealing with
small interest groups, or invest in development of a new segment of financial products.
Smaller financial institutions operating in the regions have greater understanding of
the needs of social enterprises31. These mutual financial institutions, credit unions and
ethical banks know the local business environment and business opportunities well, and
can usually better reflect local needs. Although the procedures for assessing business
plans and applications are similar and result from efforts to reduce risks, greater
knowledge of the social environment, personal contact with the applicant, close
familiarity with his or her situation and possibilities, as well as the ability to appreciate
his or her social capital, increase the chance of receiving funds. Ethical banks, in addition
to assessing the financial and business risks, examine the consistency of the business
plan with their values and those of stakeholders. There is also an opportunity to invest
available funds of savers only into narrowly-defined thematic areas.
Local financial intermediaries are more willing to provide a wider range of financial
products (particularly different types of loans) for social enterprises, and to flexibly
respond to changing requirements. They are able to meet most of the financial needs
that arise in the life of a business. In situations where this is not possible, under existing
conditions, to provide an investment loan, there is an opportunity to establish
cooperation with the public sector. The possibility of using knowledge of finance,
professional staff and the existence of distribution channels for the provision of
preferential products is a big advantage.
The importance of these financial institutions is in providing short-term funding and
liquidity to social enterprises. They provide funds that supplement current income from
the sale of goods, charges for services etc.
Another source of financing the investment needs of social enterprises is venture
capital – seed and venture funds. The accumulated capital is contributed by private
investors, banks, government (unclaimed assets, dormant accounts), fund injections
from public institutions indirectly controlled by the government or a combination of
31
For example in Sweden, Italy, Belgium and France, Poland, etc.
22
these sources. Funds are then used directly for social enterprises, or to capitalise
financial intermediaries.
Trividend is a Flemish cooperative that provides venture capital to organisations with
a social value. It is a public-private partnership created by the Flemish government and
stakeholders from the social economy, and its name refers to the "triple bottom line":
people, planet and profit. Trividend invests money, in the form of risk capital and
subordinated loans, but also offers business support in the form of guidance (shaping
the business plan), support and monitoring. Trividend provides direct equity
investments of up to €150,000 per customer, becoming a minority shareholder with the
right to appoint a director to the board. Exit is usually after a maximum of six years, but
this can be extended. Trividend also provides subordinated loans to companies and
associations, whose maximum duration is normally 10 years.
In the case of equity instruments is the situation in some countries long precarious.
These financial instruments are not widely offered on the market. This means that
neither the dominant financial institutions due to lack of experience are not ready to
offer these instruments massively to social enterprises.
The possibility of using the ESF and ERDF to kick off these financial instruments is
important. Legislative support for the establishment of European Social Entrepreneurship Funds or European Venture Capital Funds (as proposed by the European
Commission) can then create the necessary institutional framework for the functioning
of these mechanisms.
In countries with a strong tradition of civic engagement and civil society, nongovernmental or mutual organisations operate in order to provide equity or lending
capital. These entities focus on mobilising citizens in order to provide resources for
financing investment by social enterprises, usually in social services.
The Win-Win loan (Belgium) opens up a new strand a financing for the social economy.
The purpose is to encourage friends or relatives from a SME (both regular as social
economy) to lend money, in any phase of entrepreneurship. The lenders receive a tax
refund (annual tax discount of 2.5% on the amount of the loan) for doing this and in
case of a default of the borrower receive up to 30% of money back.
They also may create a parent company or network of companies, through which they
borrow available funds to ensure the operation of their social enterprises. However in
many countries these organisations are not financially strong enough to provide
financial resources to start social enterprises on a larger scale. Another problem is the
scarce experience of these organisations in providing financial services.
If it is not possible to rely on third-sector financial institutions (foundations, ethical
banks) or services of commercial financial intermediaries this situation make possible
take action by the public sector. Its aim is to modify the conditions of the capital market,
create a set of alternative financial instruments and mechanisms that would address the
needs of social enterprises.
23
The public sector reacts to this situation in different ways. It can contribute to creating
alternative financial mechanisms to provide investment resources for social enterprises.
These financial instruments generally require the involvement of other sources, at least
co-financing of projects by the applicants. Fiscal limitations and the current debt
problems of the public sector lead to the search for innovative approaches that would
allow to mobilize financial resources and knowledge of other entities - financial
intermediaries, business, NGOs, citizens.
These tools should be complementary to existing mechanisms provided by private
profit and non-profit sectors. Public intervention should be based on specific market
conditions so that it cannot displace private initiatives.
Public authorities may create grant mechanisms whose aim is to provide initial capital
for start-ups, which complement the range of commercial tools on the market. Grant
policy, however, usually can not satisfy all the investment needs of social enterprises
and they engaged additional resources in the form of equity, external private sources,
etc.
The social enterprise sector is still in the formative stage in the Czech Republic. Low
interest of financial intermediaries to support the creation of social enterprises and
third sector economic weakness led to the creation of grant mechanisms aimed at the
creation (later development) of social enterprises.
The “Investment support for the social economy” global grant, part of the ERDF
Integrated operational programme, provides start-up capital for social service
providers, employers and other social economy organisations. Grants range from
€12,000 to €200,000. In parallel, the “Social economy” global grant, part of the ESF
Human Resources and Employment Operational Programme, supports the creation and
development of new social businesses – operating costs. Grants range from €4,000 to
€200,000 (under the de minimis regime). These complement activities represent
complexity of attempting to finance investment and operation.
The public sector therefore aims to influence decision-making of lenders or equity
providers. It consists of reducing the risk in providing loans or the provision of cheap
funding sources allowing shape financial products to social enterprises.
It may focus its activities on financial intermediaries, affecting their decisions on the
financing of business plans by reducing credit risk and portfolio risk, or by providing
additional financial resources for low interest rate loans and micro-credits. Resources
can also be used to strengthen capacities of financial providers in order to better
understand the needs of social enterprises and adapt their products and services for this
business segment (such as local financial intermediaries).
The Social Investment Fund (SIFO) in Belgium offers a solution to a market deficiency,
in that traditional banks are not interested in offering loans to the social economy at a
rate that is acceptable by social economic organisations. SIFO offers funds at a
discounted rate to intermediary financial organisations that meet certain criteria. These
24
organisations can combine these funds with their own finance to offer social economy
organisations loans at a discounted rate. The target group are organisations that are
part of what in Flanders is called the inclusion economy and are recognised as such by
the Flemish government. SIFO aims to support organisations in all phases of
entrepreneurial development and offers co-financing of up to €200,000.
The result is a range of financial tools that are supported by the public sector, but are
implemented by private financial intermediaries. A typical example is providing
guarantees for loans, providing capital to create new financial instruments
administered by financial intermediaries or providing additional capital for a
joint financial product32. This form of support might encourage financial
intermediaries to create a range of other products tailored to the needs of social
enterprises.
The structural funds – ERDF (guarantees, loans and resources for the JEREMIE
initiative) and ESF (micro-credits, JEREMIE in Lombardy) play an important role in the
process. Their activities may help to create favourable conditions in order to encourage
local financial intermediaries to solve the specific needs of their clients. This support led
to the expansion range of financial products and acquisition of new customers.
JEREMIE ESF Lombardy (IT) is designed to promote easier access to credit to micro,
small and medium enterprises and access to employment and education to
disadvantaged people. Under the JEREMIE initiative, the ESF Lombardy Regional
Operational Programme makes loans to disadvantaged workers to enable them to buy
shares in the social cooperatives that employ them. This extra working capital
strengthens the enterprises’ capacity to provide services and employment.
The local financial intermediaries provide loans to disadvantaged people amounting to
€4,000. The JEREMIE contribution is 50%, configured as a ‘bullet component’, a 5-year
interest-free loan, with a single repayment. The above-mentioned local financial
intermediaries provide the rest, also in the form of 5-year loan, but with a fixed interest
rate and monthly repayments. If the borrower remains with the co-operative
throughout the period of the loan, the ESF component is written off, becoming in effect
a grant. The JEREMIE fund, worth €20 million, is managed by Finlombarda, a public
financial institution, through selected financial intermediaries. After the first call in
2010 Banca Popolare di Bergamo and Federazione Lombarda BCC received €5 million
each, and in 2011 Banca Popolare di Bergamo, Banca Popolare Etica and Banca
Popolare di Sondrio obtained €3 million each.
Recommendations:
Policy makers and ESF MA:
It would be appropriate to create integrated support schemes, combining grant
mechanisms with instruments of financial engineering. The aim is to make funds available
32
These tools are widely used in supporting small and medium enterprises eg. The guarantee facility in
Flanders, CoopEst, JEREMIE initiative in Poland – ERDF ROPs.
25
in the different stages of development of social enterprise. Providing the initial capital
investment without ensuring the sustainability of financing the firms is inefficient. It
means, it is also necessary to consider the availability of working capital, bridging and
other similar loans.
Access to capital without the corresponding business services will not lead to accelerating
the development of social enterprises segment.
Cooperation of the financial sector, non-profit sector and public sector in providing funding
for social enterprises is necessary. From this perspective, it is needed that local financial
intermediaries understood the role and needs of social enterprises well. Strengthening the
capacity of financial intermediaries is one of the ways to promote their ability to work with
social enterprises.
Policy makers and MA should well understand the problems of financial intermediaries,
which cause lack of funding for social enterprises. Lack of capital or increased risk of
lending is then possible to solve by participating of public resources.
Monitoring of product development and risk management must be clear. The allocation of
risk between the support provider (loans, equity), public sector (such as MAs of ESF
programs) and applicants determine the extent of support.
EU and European institutions:
It would be appropriate to continue to strengthen the ability and capacity of Managing
Authorities and other policy makers to create sophisticated financial mechanisms financed
by the ESF or ERDF.
It would be fruitful to carry on promotion of exchange of experience among Managing
Authorities regarding the provision of support for innovative solutions in ensuring
resources for social enterprises.
3.3. Social enterprises
Social entrepreneurs are recruited from different target groups. They are
individuals from the non-governmental sector, where they served as social service
providers, organizers or volunteers. Furthermore, this also includes businesses
growing from so-called third sector, often strongly community-based, reflecting the
mutuality and shared responsibility. Another group represents people with business
experience who share social and environmental values and try to apply the practice in
the business (provide social services, produce environmentally friendly products,
employ disadvantaged people, involve democratic way of managing of the enterprise).
Different group of entrepreneurs recruits from marginalized groups of population
that are vulnerable on the labour market (disabled or disadvantaged, young graduates,
persons over 50 years, ethnic and national minorities, etc.). 33
33
This target group was specifically addressed by the COPIE network.
26
They face many problems in starting a business. Social entrepreneurs have often an
innovative business idea, based on the needs of local communities. Their
enthusiasm, however, often faces a lack of realistic assessment of business
opportunities (setting up a sustainable business strategy), lack of business experience
and limited access to capital for realizing their ideas and plans.
The positions of the social entrepreneurs differ in willingness to take the business risk.
Entrepreneurs from the third sector and NGOs are more risk averse. When seeking to
minimize it they may reject business plans that could have a chance to push the market.
Another problem is in poorly developed entrepreneurial skills, low business experience
and or limited knowledge of the business environment including also rules of regulatory
framework (entry into the business, conditions of employment for disadvantaged
people, financial and tax aspects). However, successful start-up business is to overcome
this barrier. Therefore, it is important to invest in human resources, strengthen their
ability to operate in the changing business environment, and be able to capture the
business opportunity to acquire the necessary skills, etc. Strengthening the capacity of
social entrepreneurs before starting and in the course of business is an important
moment influencing the success of a business plan. This is a necessary prerequisite for
the initiation and operation of sustainable social business.
Unfamiliarity with the financial environment and financial products represents only part
of the problem. To increase efficiency of support for the development of social
entrepreneurship is necessary to see all these aspects. Therefore it is needed to set
chain of interconnected, complementary measures that will also focus on skills
development. Many countries and regions have recognized this, i.e. already mentioned
Hefboom.
The ESF presents a unique tool that allows solving most of these problems. ESF may be
used for strengthen the capacity of the social entrepreneurs, their employees business skills, marketing, management, financial management, creating business plans,
professional knowledge etc. Resources can also be used for capacity building of
providers these services.
The need to focus on strengthening the capacity of social enterprises recognized in
Poland. They also focused on promoting the dissemination of ideas social economy
among actors in regions.
Through sub-measure 7.2.2 Support to social economy, Human capital OP, ESF is
possible inter alia provide grants to (individual and group) advisory as well as trainings
facilitating obtaining knowledge and skills necessary to set up and run social
cooperatives,
Sub-measure 7.2.2. Support social economy is focused on building the support system
for SE institutions on the regional level – based on the call for proposals for already
established institutions (at least 2 in the region) which provide: legal, bookkeeping and
marketing services, advisory centres / points, social economy incubators, training on
27
how to start up and lead social economy entity, building local partnerships for SE
development, promotion SE as a source of employment. These institutions are called
Social Economy Support Centres.
Recommendations:
Policy makers and ESF MA:
The development of social entrepreneurship is not possible without investment in human
resources. To achieve a sustainable business concept and its implementation is necessary to
acquire a number of entrepreneurial skills.
The ESF should be significantly focused on strengthening the capacity of entrepreneurs and
their employees through prestart-up training and support and development of consultancy
services, coaching and mentoring tailored to social enterprises.
EU and European institutions:
It would be appropriate to support solutions that will assist each other in removing various
bottlenecks associated with the development of social economy. The ESF should be
prepared to finance these solutions.
It is about creating projects, which will include an educational role, focus on strengthening
the capacity of actors to offer investment in human resources development and access to
resources for business development of social enterprises.
28
Annex 1: Support of social entrepreneurship at EU level
The European Union pays attention to developing the social enterprise and social
economy for some time. This is evidenced by both the European Social Fund activities in
many countries and regions and the creation of tools like Progress.
Social Business Initiative
The European Commission has adopted a Social Business34 Initiative action plan as part
of a package of measures entitled the Responsible Business Initiative. Single Market
rules can and should take into account that the social market economy promotes an
open economy that gives a plurality of business models latitude to develop and grow.
The aims are to increase access to finance, particularly by streamlining the structural
funds, creating a framework for social investment funds and spreading microfinance.
The Commission proposes 11 priority measures:
1. Developing a European regulatory framework for social investment funds (December
2011).
2. Favouring the development of microcredit in Europe, in particular its legal and
institutional environment (from 2014).
3. Setting up a European financial instrument of €90 million to improve social
businesses' access to funding (operational from 2014).
4. Introducing an investment priority for social enterprises in the regulations
ERDF (European Regional Development Fund) and ESF (European Social Fund), as
proposed in the regulatory package on the Structural Funds 2014-2020.
5. Developing a comprehensive map of social enterprises in Europe in order to identify
good practices and models which can be reproduced (from 2012).
6. Creating a public database of labels and certifications applicable to social businesses
in Europe in order to improve visibility and comparison between them (from 2012).
7. Promoting mutual learning and capacity building of national and regional
administrations for putting in place integrated strategies to support social enterprises,
especially via the Structural Funds, by means of analysis, sharing of good practice,
awareness raising, networking and dissemination (from 2012).
8. Creating a single, multilingual electronic data and exchange platform for social
entrepreneurs, incubators and clusters, social investors in order to better advertise and
improve access to EU programmes which can support social entrepreneurs (from 2012).
9. Proposing to simplify the regulation on the Statute for a European Co-operative
Society; as well as a European Foundation Statute. A study on the situation of mutual
societies is also envisaged (in 2012).
34
The Commission uses the term 'social business' to cover an enterprise:
- whose primary objective is to achieve social impact rather than generating profit for owners and shareholders;
- which operates in the market through the production of goods and services in an entrepreneurial and innovative
way;
- which uses surpluses mainly to achieve these social goals and
- which is managed by social entrepreneurs in an accountable and transparent way, in particular by involving
workers, customers and stakeholders affected by its business activity.
29
10. Further enhancing the element of quality in awarding contracts in the context of
public procurement reform especially in the case of social and health services. Another
key element in here would be to ensure that the working conditions for people involved
in the production of goods and services can be taken into account, provided that the
Treaty principles of non-discrimination, equal treatment and transparency are fully
complied with (from 2012).
11. Simplifying the implementation of rules concerning state aid to social and local
services that would directly benefit a number of social businesses (from 2012).
New dynamism represents Social Business Initiative action plan as part of a package of
measures entitled the Responsible Business Initiative. The aims are to increase access to
finance, particularly by streamlining the structural funds, creating a framework for
social investment funds and spreading microfinance.
European financial instrument
Two key funding mechanisms will be available for development of social enterprises.
The first channel represents European financial instrument, an initiative, which will
provide an easier access to finance for social businesses. It will be a part of the European
Union Programme for Social Change and Innovation from 6 October 2010 (COM
2011/609) and will amount to circa EUR 90 ml. This program will be directly managed
by the European Commission. Together with the European Social Fund and European
Globalisation Adjustment Fund is the third pillar of the EU Employment and Social
Inclusion 2014-2020. PSCI integrates three previously separate existing programs and
expand their scope. This is a Community program PROGRESS (Programme for
Employment and Social Solidarity), EURES (European Employment Services) and the
European Microfinance PROGRESS for employment and social inclusion. This will allow
the European Commission to strengthen the political coherence and impact of its
instruments, which have common objectives and thereby contribute to the Europe 2020.
PSCI will promote policy coordination, sharing of best practices, capacity building and
testing of innovative policies to expand the most successful measures for ESF support.
Cohesion policy 2014+
In addition, the support of social enterprises under national and regional cohesion
policy programmes will be financed from European Social Fund (ESF)35 and European
Regional Development Fund (ERDF) interventions in the Member States and regions.
Drafts of new regulations were published in relation to the preparation of the next
programming period of cohesion policy. The ESF 2014-2020 could divide EUR 84bn, of
which more than 20% must be focused on social inclusion and combating poverty. The 6
of the 18 investment priorities are closely related to social economy and social
entrepreneurship: active inclusion, integration of marginalised communities, combating
discrimination, enhancing of access to services, promoting social economy and social
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Drafts of new regulations were published in relation to the preparation of the next programming period of
cohesion policy. The ESF 2014-2020 could divide EUR 84bn, of which more than 20% must be focused on
social inclusion and combating poverty. The 6 of the 18 investment priorities are closely related to social
economy and social entrepreneurship: active inclusion, integration of marginalised communities, combating
discrimination, enhancing of access to services, promoting social economy and social enterprises, communityled local development.
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enterprises, community-led local development. These draft regulations for the
programming period 2014-2020 is now discussing with the Member States.
Another task is higher visibility – increase awareness about social entrepreneurship,
share better information etc, plus to set the regulatory framework (legal statutes, public
procurement, state aid).
In proposal of Common Strategic Framework36 is very strongly supported promoting
the social economy and social enterprises:
– capacity-building and support structures for the promotion of social enterprises, in
particular through social entrepreneurship education and training, networking, the
development of national or regional strategies in partnership with key stakeholders, and
the provision of business development services and easier access to finance;
– mobilisation of funds to support initiatives in the social economy and social
entrepreneurship.
Citizens, social businesses and investors into social businesses (i.e. social or impact
investors), will be the main beneficiaries of the measures proposed by the Commission.
These measures are designed to boost social businesses which are social in their means,
or in their ends, as they e.g.:
- produce goods or services through social and professional integration of
disadvantaged people, and thus creating jobs in social inclusion businesses, or
- provide social services and/or goods and services to the local community, or to
vulnerable persons (access to housing, health care, assistance for elderly or disabled
persons, dependency management, access to basic banking services, child care,
employment and training services, etc.).
A comprehensive view of the need to promote of social entrepreneurship does not leave
aside the issues of education, administrators' capacity building or simplifying the
implementation of rules concerning state aid.
European Venture Capital Funds
Imperfections in the venture capital led to the following acts on the draft new European
framework for the functioning of these institutions.
The European Commission presented a proposal for a REGULATION OF THE EUROPEAN
PARLIAMENT AND OF THE COUNCIL on European Venture Capital Funds (EVCF),
regulating venture capital. According to the Commission's apparent need for this
regulation in relation to the financial crisis and a general denial of funding for small and
medium enterprises. In this context, consider that a balanced measure consisting of a
regulation that encourages investment in SMEs in the EU, in combination with direct
support from public funds.
Elements for a Common Strategic Framework 2014 to 2020 the European Regional Development Fund,
the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and
the European Maritime and Fisheries Fund
36
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The proposal provides for a uniform set of rules for this type of administrative entity
under the name "European venture capital." European venture capital fund must meet
three basic requirements: 1 invests at least 70% of assets in SMEs; 2 These SMEs
provide equity or quasi-equity funds (ie "new capital"); 3 does not use financial leverage
(ie the fund does not invest more capital than investors who put in and so the fund does
not indebted to). When raising funds throughout the EU, all funds that operate under
that name, uniform rules and meet the quality (including requirements for disclosure of
information to investors and operational requirements). This single set of rules to
ensure investor understanding about the implications of investment in European
venture capital funds. Only then the fund may use the title "European venture capital."
European Social Entrepreneurship Funds
Furthermore, the Commission on 7 12th 2011 presented a proposal REGULATION OF
THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on European Social
Entrepreneurship Funds (ESEF). The aim of the draft of regulation is to lay down the
strong foundations for a vital European market of social investment funds. It introduces
a new term "European funding for social enterprise" in order the investors could
distinguish funds that focus on investments in European social enterprises. Fund which
wants to be accepted as the "European Fund for Social Enterprise" will have to show
that spends a high share of investment (at least 70% of assets held by investors) to
support social enterprises. Due to a uniform disclosure rules, investors will receive clear
and concise information about these investments.
The proposal also sets out the requirement to inform investors about how the funds will
proceed in monitoring and reporting the impact of their activities. Furthermore, the
proposal will simplify the rules of the Member States focused on this type of fund.
Due to the fact that investing into social enterprise brings a number of risks (including
risks losing the entire investment) will be able to invest in these funds so-called
professional investors only. After introduction of legal framework, the Commission may
review the measures that make available these investments to the public.
Design of the EVCF of the proposed regulation ESEF complementary (with the exception
of the investment strategy is a material change in essentially the same). Both proposals
however aim to achieve different objectives and the two proposals, if enacted, will exist
as separate legislation.
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List of abbreviations
CITR
CZK
EC
EIB
EIF
ERDF
ESF
EU
EUR
HC OP
HRE OP
IB
JASMINE
MA
NBFSE
NGO
OP
PLN
ROP
SFEDI
SME
UK
Community Investment Tax Relief
Czech crown
European Commission
European Investment Bank
European Investment Fund
European Regional Development Fund
European Social Fund
European Union
Euro
Human Capital Operational Programme (Poland)
Human Resources and Employment Operational Programme, the CR
Intermediate body
Joint Action to Support Micro-finance Institutions in Europe
Managing Authorities
Network for the Better Future of Social Economy
Non-governmental Organization
Operational Program
Polish złoty (new)
Regional Operational Program
Small Firms Enterprise Development Initiative
Small and Medium Enterprises
the United Kingdom
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