Summary: Trade-offs Between Regulation and Fostering Social Enterprise - The Case of EU Policies

Trade-offs Between Regulation and Fostering of Social Enterprise: The Case of European Union Policies1 Summary and Recommendations This paper is an assessment and evaluation of European Union (EU) policies for social enterprise development. It covers measures initiated and implemented in Brussels, including new EU initiatives in 2011-2012, as well as the translation of EU policies into action at the member state level. The analysis identifies recommendations for overall EU social enterprise policy and for European Social Fund (ESF) reform.

Social enterprises are best positioned to provide innovative solutions to critical social problems, as most often they originate as community-based initiatives, close to the root causes of the problems.

However, the wide range of definitions of social enterprises, and a low level of awareness and understanding of them are obstacles to developing a more robust sector. It is a huge step forward to have a commonly agreed definition for the EU, but additional challenges obviously remain. The EU has identified access to funding and lack of an enabling environment for social enterprises as two of the three most critical barriers to social enterprise development.

Although there are many successful social enterprises in Central and Eastern Europe (CEE), a critical mass has not yet been achieved. Leaders of social enterprises often come from the non-profit sector and are interested in developing social enterprises to help diversify funding streams. However, they may lack business and management skills necessary to grow a social enterprise. Very few donors or support organizations in CEE have been willing to invest in long-term capacity building for social enterprises, or to invest financially (via loans, equity, or grants) in the enterprises. The lack of capacity training and financing are large barriers to the sector’s development.

Depending on their legal form and location, social enterprises can be excluded from a number of government financing options and programs. Commercial financing is also a challenge, because often the organizations do not meet the collateral or profitability requirements of banks. Most CEE countries do not have a social enterprise strategy, although some experimentation has taken place in the form of ad hoc funding initiatives. So far, the ESF mechanism has been mostly ineffective in helping to foster the social enterprise sector in CEE. It has not reached this target group and has primarily benefited large organizations. Many leaders in the civil sector thought of the ESF as a silver bullet, but its specific conditions and mechanisms have made its funding very hard for small or startup social enterprises to access. The mechanism had unrealistic co-financing requirements, grant sizes that were too large to manage and heavy administrative burdens. While the money could often be used for social enterprise development, most of it was meant to support beneficiaries and create new social programs that serve disadvantaged populations and administrative costs (salary of additional program coordinator, etc.), rather than support the creation of sustainable businesses. It also mostly targeted civil society organizations, and thus excluded other forms of social enterprise.

The 2011 Social Business Initiative (SBI; more information available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0682:FIN:EN:PDF) to create a favorable climate This paper was written by Eva Varga, Director of Portfolio Performance for NESsT. Eva participates on the expert panel on policies promoting social enterprise and appropriate financing (GECES) which makes recommendations to the European Commission. The paper will be published (2013) in Social Enterprise in Emerging Market Countries: No Free Ride, written by LoĂŻc Comolli and Nicole Etchart. Reproduced with the permission of Palgrave Macmillan.

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for social enterprise is the single most important initiative targeting the social enterprise sector in the history of the European Union. The SBI will increase funding for social enterprises via a EUR 90 million fund to leverage private capital. This will be used to invest or co-invest with financial intermediaries in various types of financial instruments, such as equity, quasi-equity, and debt instruments, plus portfolio guarantees. The SBI also launched a European Social Entrepreneurship Funds label, so that certified funds will be created to attract more private capital to invest in social enterprises. The certification label should provide a seal of quality for investors and investments Europe-wide, although the label will need to gain credibility to be effective.

Based on the research and analysis of the social enterprise sector in the European Union, the following recommendations are proposed to strengthen the sector and its positive impact.

Recommendations for EU Social Enterprise Policy:  Concentrate support on impact-first enterprises and assist them to create a pipeline of scalable, investment-ready enterprises.  Clearly articulate, monitor, and evaluate social impact expectations.  Use the European Social Fund (ESF) not only to directly finance SEs, but to support sustainable efforts, attract private sector financing, and to fund awareness-raising programs and investment readiness/capacity building programmes.  Provide appropriate, patient capital for social enterprises and social investors/intermediaries, which can absorb the higher financial risk in early stages.  Utilize a range of financing instruments including loans, equity, guarantees and grants.  Provide incentives to social investors to invest in social enterprises or funds that finance them.  Make small and medium-sized enterprise facilities available to SEs.

Legislative Areas Requiring Additional Work:  Provide an enabling framework without overregulating.  Consider the special needs of the sector and of social investors.  Harmonize with other legislation (e.g. state aid rules, procurement guidelines).  Push national governments to enact SE friendly legislation and policies.

Recommendations for European Social Fund (ESF) Reform:  The ESF should be more flexible, impact driven, and risk-taking, with a longer term and more holistic approach:  Announce specific call for proposals for SE development and sector support.  Use broad social enterprise definition.  Make business planning obligatory – enterprise versus project approach.  Allow profit generation.  Include long-term incentives to build sustainable enterprises.  Offer capacity-building and financing.  Focus on real impact, not administrative categories.  Share best practices.  Educate policy makers and local governments about social enterprise.