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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 35 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. 30 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 31 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. 32 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 33