Funding the Big Society

By Chris Cook

David Cameron’s ‘Big Society’ is the greatest opportunity for Labour and the unions in 100 years. Of course, it doesn’t seem like that at the moment, as unions gear up for futile confrontation, and Labour remains politically skewered by their acceptance that cuts in public services are unavoidable.

But sometimes help comes from the most unlikely sources.

Scottish Futures Trust
Here in Scotland, the SNP government – with whom Labour should be making common cause prior to the Scottish elections next May – has created a strange beast called the Scottish Futures Trust (SFT).

The SFT, which resembles a non-toxic investment bank, has been labouring for over a year on new public financing options, particularly the development of ‘not for profit’ alternatives to the PFI schemes developed by the Tories and enthusiastically adopted by New Labour. It is ironic that Labour not only opposed this attempt by the SNP to de-fang capitalism red in tooth and claw, but also had the cheek to call the SNP ‘Tartan Tories’ for their pains.

SFT progress has been slow, but it has a decent team, and body of expertise, and mainly fulfils an advisory role. They have probably saved the Scottish government a small fortune in professional and advisory fees, but that fact is unremarked. The SFT recently made a submission to the independent budgetary review which reports today to the Scottish Government, and this otherwise unremarkable paper contains a key insight.

Financing and Funding
This insight – upon which much of my work is based – is that there is a fundamental qualitative difference between the short/medium term development credit necessary for the creation of productive assets, and the medium/long term credit which underpins productive assets over the years.

The SFT’s breakthrough is semantic: they classify development credit as ‘Financing’ and long term credit as ‘Funding’. The reason why the SFT isn’t getting very far in reforming PFI is that their long term funding is, like PFI, based upon debt. Firstly, the savings possible from borrowing at public rather than private, rates of interest, while significant, are not game changing, and secondly, the public sector debt tap has been conclusively turned off.

With a little Norwegian government support, the Nordic Enterprise Trust (NET) has developed new tools – using the UK Limited Liability Partnership (LLP) as a vehicle – for the financing and funding of productive assets, whether in public, private or ‘third’ sector ownership.

The Labour city of Glasgow now has five municipal partnerships – eg City Building (Glasgow) LLP – which partner the Council with service providers such as Serco to jointly provide council services. However, these Glasgow municipal LLPs are all conventionally financed and funded.

NET’s ‘ Capital Partnership’ innovation is to bring financing and funding within an LLP framework agreement. This enables use value (eg rental) or production (eg electricity) of productive assets to be shared between a Capital User (eg occupiers) and Capital Provider (investors of money, or even ‘money’s worth’ such as land, goods or services).

I have observed a >£1bn private sector prototype Capital Partnership in respect of development and operation of 10 UK hotels. Investment in municipal partnerships will create new classes of units in rental revenues of public assets: this is Public Equity.

Equity, but not as we know it…development financing is for another time. The use of Capital Partnerships for long term funding of productive assets – such as affordable housing (council and housing association properties); schools; health facilities; and public infrastructure such as Network Rail – will drastically cut funding costs, and will free tens of billions of pounds for other purposes.

This is not alchemy but is simply the result of the absence of both repayment of debt principal, and compound interest. Units of Public Equity in affordable – ideally index-linked – public rentals are the sort of asset class which investors holding trillions of $, €, £ and Norwegian Krone may find preferable to government debt yielding derisory – even negative, after inflation – returns.

Public Equity is a constructive alternative policy rooted in mutualism which enables Labour to take the Big Society ball and stroll it into the empty net: it will literally change the game.

Related posts:

1. Today’s social care green paper is overdue – now Labour has to be more decisive on funding
2. Fair funding for all
3. Unions – the Big Society is you
4. A United Society, not a Big Society: How Obama’s past could be Labour’s future
5. Party funding: challenges and opportunities