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KNOWLEDGE MOBILIZATION PAPER SERIESMAy 2010

C a n a d i a n S o c i a l E c o n o m y R e s e a r c h P a r t n e r s h i p sC e n t r e c a n a d i e n d e r e c h e r c h e p a r t e n a r i a l e e n c o n o m i e s o c i a l e

CENTRE

CANADIEN DE RECHERCHE

PARTENARIALE EN CONOMIE SOCIALE

CANADIAN

SOCIAL ECONOMY

RESEARCH PARTNERSHIPS

Fnancng Socal Econom Organzatons

George Karaphillis, Seth Asimakos, and Stephen Moore


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Canadian Social Econom Research Partnershipsc/o Canadian Social Economy Research Hub

University o Victoria2300 McKenzie Avenue

echnology Enterprise Facility (EF) - Rm 214Victoria BC V8P 5C2

Canada

el: 250.472.4976Fax: 250.853.3930

[email protected]

www.socialeconomyhub.ca

o purchase copies o this or any other o the Occasional Papers series, send $6 to the above address.Cheques should be made payable to the University o Victoria.

AbOUT THE OCCASiONAL PAPERSTe Canadian Social Economy Research Partnerships (CSERP) will periodically publish research paperson the Social Economy. Tese papers will be by both scholars within the academy and by practitioners.CSERP hopes these publications will increase understanding o, and discussion about the Social Economy past, present and uture.

AbOUT THE CANADiAN SOCiAL ECONOMy RESEARCHPARTNERSHiPSTe Canadian Social Economy Research Partnerships (CSERP) is a collaborative eort o six regionalresearch centres across Canada, their community partners, and the national acilitating research hub.

CSERP reaches out to practitioners, to researchers and to civil society, and undertakes research as neededin order to understand and promote the Social Economy tradition within Canada, and as a subject oacademic enquiry within universities.

Copyright 2010 Canadian Social Economy Hub at the University o Victoria

Any portion o these materials can be reely available or inormation and educational purposes, but cannot be re-published in any ormat that may entail ees or royalties without the express permission o the copyright holders.

Design and Layout by Lindsay Kearns, James Kingsley and Ashley Hamilton-MacQuarrie

Printed in Victoria, Canada

CENTRE

CANADIEN DE RECHERCHE

PARTENARIALE EN CONOMIE SOCIALE

CANADIAN

SOCIAL ECONOMY

RESEARCH PARTNERSHIPS


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AbSTRACT

he paper examines the challenges acing Social Economy Organizations (SEOs) that pursue externalinancing, on the basis o a recent Atlantic Canada research study. It reviews results o a comprehensivesurvey o the inancing needs o organizations in the Social Economy and a survey o lending and

investing practices o inancial institutions and government agencies in the sector.

he project includes a survey o both providers o inancing and SEOs as users o inancing. Pastresearch has looked at programs available, the importance o the social economy to the Canadianeconomy, and theoretical attempts to prove that a inancing gap exists. In our research, we haveconirmed that there is a gap between demand and supply o inance in the social economy. heexistence o this gap threatens the sustainability o the social economy and all levels o governmentshave a responsibility to enact policy that will help close the gap. he policy recommendations relatingto legal structure, removing obstacles to start-ups, easing inancing or expansion, and support capacitybuilding are based on empirical analysis. he majority o these policies require legislative and taxchanges; not grants.

FOREWORD

he Canadian Social Economy Research Partnerships is a research program unded by the SocialScience and Humanities Research Council to strengthen knowledge, policy and action or a vibrantsocial economy in Canada. Six regional community university research partnerships across Canada,together with a national HUB co-led by the University o Victoria and the Canadian CommunityEconomic Development Network, have been managing the research since 2006, involving over 300community and university based researchers, including aculty, students, and practitioners.

his paper is one o ive commissioned by the Canadian Social Economy Hub through a competitiveproposal call to mobilize knowledge arising out o the research across all o its partners in key thematicareas: governance and movement building; social enterprise and social innovation; procurement;inancing, and; new business models or sustainable development. hese papers were unded by aKnowledge Mobilization Grant rom the Social Science and Humanities Research Council to engagestakeholders and citizens in learning rom ground breaking and inormative research across the program.Each paper has involved signiicant public events to share indings and incorporate eedback. At atime when society, governments, citizens and stakeholders o all kinds are seeking new and innovativeways o addressing inter-related social, economic and environmental challenges we hope that thesepapers contribute to inormed debate on how we can strengthen the social economy as a means to a

more sustainable approach to our utures.

On behal o the Board o the Canadian Social Economy Hub we thank our authors, contributors,participants in engagement events across the country, and representatives o the university andpractitioner organizations who helped with the development and implementation o this knowledgemobilization initiative.

Rupert Downing, Co-director, Canadian Social Economy Hub


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Tale of Contents

Acknowledgments

Abstract

Foreword 5

Introduction 7

Deining the Social Economy 8

External Finance 11

Current Role o the State 13

Atlantic Research Study

Proile Summary 16

Financing Assessment 17

Findings Summary and Policy Recommendations 17

Conclusion 24

Resources 25


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Karaphillis, asimaKos and moore

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introducton

In the last ew years Canadians are recognizing the great impact Social Economyorganizations (SEOs) have in their communities. Te Social Economy grew outo necessity in the 1980s as employment in primary industries collapsed (Shragge

and oye, 2006). Recently, SEOs took on a larger role in their communitiesas local economies were swept in the deep global recession. Canada is a mixedeconomy, with the private sector, the public sector, and the Social Economyco-existing and complementing each other. Te Social Economy is an essentialcomponent o the Canadian system and it consists o innovative, resourceul,and entrepreneurial organizations that can eciently deliver job creation, re-integration, skill development, aordable housing, accessible childcare andeldercare, health promotion, and sustainable development during both goodtimes and bad times.

Te Social Economy is oten spoken o as lling a void; it addresses theneeds and demands not met by traditional organizations in the public andprivate sector. It developed as a response to the social issues created by themainstream economy and the limitations o the state to address inequalitiesthrough traditional public sector organizations. As economies have becomemore liberalized there have been increased instances o market ailures, makingsociety to consider SEOs and the support and stability they have been oeringto their communities. Canada has a larger Social Economy than most OECDcountries. Quarter, Mook, and Richmond (2003) report the Canadian Social

Economy includes an estimated 175,000 to 200,000 non-prots, including78,000 with a charitable status that generate revenues o more than $90 billiona year and employ 1.3 million people (not including volunteers) [and] about10,000 cooperatives that generate more than $37 billion a year and employabout 150,000 people. Te Social Economy has the potential to lead toincreased employment and economic growth in the uture!

An overarching problem with the Social Economy is that it is severelyundercapitalized and has limited access to external nancing. SEOs arestructurally handicapped in accessing nancing. Access to capital is hard orSEOs because they do not have owners to guarantee loans, do not have assets

to use as collateral, their legal structure may not allow sale o shares, theiroperations are not singularly ocused on generating nancial returns, and theydo not have exit strategies. Major nancial institutions are hesitant to lendto SEOs and there is not a large or diverse enough supply o social nance tohelp the Social Economy attain a level o sel-suciency. Without access tocapital, the Social Economy cannot invest, innovate and grow. In response tothe nancing gap, practitioners have turned to both the market and the state.


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Financing social economy organizations

canadian social economy research partnerships / centre canadien de recherche partenariale en conomie sociale

Te major policy response came rom the Government o Canada in 2004: theGovernment o Canada made several commitments to the Social Economythat amounted to tens o millions o dollars (Neamtam, 2005; PRI Project,2005). However, Quebec was the only jurisdiction that had a well developedenvironment or the Social Economy and was able to take advantage o the

multimillion dollar intervention, creating capital pools or SEOs among otheroerings. Other provinces had not established an ecosystem or the SocialEconomy and were not able to access this program beore it was terminated bythe new government.

On an ongoing basis, state policy responses to the unding gap will arisemore slowly than market responses and there is a debate within the sectorthat is trying to determine the proper role or the government in the SocialEconomy. Policy responses will inevitably dier rom region to region as SEOs

are rooted in their communities and each provincial government is operatingin a specic context that is not necessarily similar to those experienced by otherprovinces. Any eective and successul discussion around policy will rst haveto acknowledge limitations, dene roles and then develop policies that can beapplied within the current socio political system. Without eective marketand policy responses to the unding gap aced by the Social Economy, its verysustainability is threatened.

Tis paper will examine denitions o the Social Economy and SEOs, examine

the scope o the Social Economy and the current state o external nancingin the sector. Te paper will also present results o a comprehensive researchstudy o demand and supply o nance in the Social Economy o AtlanticCanada and analyze the unding gap. Finally, this paper will discuss policyrecommendations that will help close the current nancing gap and create amore sustainable Social Economy.

Denng the Socal Econom

Te Social Economy is a response to market ailures (Mendell, 2008; Neamtam,2005). Market ailures include uneven development, widening income gaps,social exclusion and structural unemployment. Te Social Economy is generallyconsidered to occupy the space between the state and the market (Goldenberg,2004; Mendell, 2008; Neamtam, 2005; PRI, 2005). Mendell argues that theSocial Economy began as a utopian movement in theoretical thought and hadregained importance and attracts renewed interest ater market crashes. Teorganizations that compose the Social Economy are generally reerred to as


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the Social Economy organizations (SEOs). Tere are many dierent orms oSEOs; or example, non-prots, not-or-prot, social enterprises, communityinterest companies and community development corporations are all dierenttypes o SEOs.

PRI (2005) argues that, [SEOs] involve a diverse collection o stakeholders indecisions and reinvest annual prots to advance the mission o the organization,instead o redistributing them to owners/shareholders (p. 2). Te reportadds that, Te missions o [SEOs] are based on a combination o commoninterest and public service objectives. Goldenberg (2004) argues that evenwith the varying denition o SEOs there are come commonalities among allorganizations that are part o the Social Economy. Goldenberg (2004, p. 5-6)writes that SEOs:

SEOs are non-governmental. Tis means that SEOs are institutionallyseparate rom the government, but that they can still receive unding romthe government.

SEOs are autonomous. Autonomy is dened as being sel-governing andhaving the ability to control their own activities.

Prots or surpluses are not distributed to owners or members, but insteadare reinvested back into the organization

SEOs are voluntary. Tis does not mean that SEOs are staed completelyby volunteers. Instead, it means that SEOs rely on volunteers and that they

have an easy time nding volunteers because their mission is communitybased.

Finally, SEOs operate or the public or communitys benet.

Bouchard, Ferraton, and Michaud (2006) have combined criteria used indening organizations in civil society and in dening organizations in theeconomy and have proposed a set o our qualication criteria or SocialEconomy Organizations: economic activity, limited distribution o surpluses

to members, voluntary association with legal and decisional autonomy, anddemocratic governance. Te multi-dimensional spectrum o organizationaltypes is illustrated in Figure 1, with the hard core o SEOs placed in thecentral rectangle. For the sake o our research we decided to adopt Bouchardsdenition o the Social Economy.


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10 Financing social economy organizations


Figure 1: Characteristics o Social Econom organizations (Bouchard,

Ferraton, and Michaud, 2006).

I the Social Economy is going to attract attention rom policymakers it willhave to be large enough to justiy the attention. Te size o the Social Economywill also be important in determining appropriate policy measures to assistit in its journey towards nancial sustainability. Goldenberg (2004) states

that, based on his denition, Almost a million Canadians (over 900,000) areemployed in [the Social Economy]. Tis represents about 8 percent o all paidemployees in Canada (p. 7). He adds that, otal payroll expenditures by[SEOs] are over $22 billion a year, representing a very signicant contributionto our economy. PRI (2005) contends that the Social Economy accounts or4.7 percent o real growth in GDP (p. 25). Neamtam (2005, p. 73) arguesthat the Social Economy in Quebec ...accounts or over 10,000 collectiveenterprises and community organizations that employ over 100,000 workersand have sales o over $4.3 billion. As mentioned above, Quarter, Mook,and Richmond (2003) estimate the Canadian Social Economy employs over

1.3 million people, not including volunteers. Tis is higher than the numberemployed in retail, mining, or oil and gas sectors. In our region, the AtlanticProvinces, the Social Economy is bigger than the shery and orestry sectors.


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Karaphillis, asimaKos and moore11

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External Fnance

Small businesses rely on accumulated prots (retained earnings) to nancetheir expansion; some businesses seek external nancing, as in taking a bankloan, leasing equipment, selling shares, etc. However, SEOs typically do nothave signicant operating prots and they rely almost exclusively on externalnance or any planned expansion. Tey rely on grants and loans to nancetheir expansion.

Tere is a special type o nance available or the Social Economy sector, knownas social nance. Social nance is a combination o tools and strategies thatallows capital to intentionally seek out a combination o economic, socialor environmental return. A more nuanced denition comes rom Quarteret al (2009). Tey state that, Social nance is distinct rom others orms onancing in that its intention is to support organizations in developing a socialimpact, as well as nancial ones (p. 248). Foundations and philanthropistsare the main suppliers o social nance.

Hebb et al (2006) point out that on the supply-side there are several sources ororms o nancing or SEOs: government grants, donations rom individualsand organizations, tax credits, ees, loans and investments. Governments areimportant suppliers o external nance (Hebb et al, 2006; Quarter et al,2009) to the sector and provincial governments supply more external nancethan any other level o government (Hebb et al, 2006; Quarter et al, 2009).Neamtam (2005) argues that many o the sustainability issues acing the SocialEconomy originate rom their over-reliance on government unding. Tissupply gap is threatening social innovation in Canada (Goldenberg, 2004)and threatening the ability o Social Economy organizations to start up newventures and enterprises. While governments, oundations, and philanthropistsare important sources o unding or SEOs, the amount o capital they supplyis not sucient. Tis means that Social Economy organizations are orcedto turn to credit unions and banks to access the necessary levels o capital.

While some credit unions practice fexibility when they lend to community-based businesses; the commercial banking sector is unable to make concessions(Quarter et al, 2009).

Tere are additional issues that lead to a gap between demand and supply oexternal nance also.


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Some o the common issues mentioned are low awareness o social nancingopportunities, risk and return discrepancies, high transaction costs or suppliers,and unclear public perception o social enterprise. (Strandberg, 2008). In athorough examination o sector nancing Quarter et al (2009) point to threeother problems aced by SEOs: ...they do not generate a competitive rate o

return on investment, Banks consider most Social Economy organizationsas too small or too risky, and, Many individuals running Social Economyorganizations have little experience dealing with the market economy (p.247).

Several o the above ndings agree with the ndings o our own AtlanticCanada research study. We discovered that, lending ocers o banks and creditunions overwhelmingly indicated that repayment capacity, security/collateral,credit history, management experience and quality o the business plan are the

most important actors considered in assessing loan applications in general.Tey also pointed that low protability, lack o security, reliance on grants, lownancial expertise and incomplete business plans made it dicult or them toapprove nancing or Social Economy organizations. Te overall rejection rateor our surveyed SEOs was quite high: 42 percent o SEOs have experiencedrejection on their nancing requests.

Our research led us to conclude that there is a heavy reliance on governmentgrants; 60 percent o SEOs received grants in the last 12 months and 74

percent o SEOs are planning to rely on government grants to nance aplanned expansion. Te current state o nance or the Social Economy createsa problem or the sector: an over reliance on government grants threatens thesustainability o the Social Economy; government grants are short term andrepeat oerings are not guaranteed.

Considering the noted importance o the Social Economy to society (Hebb etal, 2006; Neamtam, 2005; PRI, 2005) and or social innovation (Goldenberg,2004) the nancial sustainability o the Social Economy is a deeply troubling

issue. o some extent, governments at all levels have taken note o this problemand o the importance o the Social Economy (CCEDNet, 2009; Hebb et al,2006; Neamtam, 2005; PRI, 2005; Quarter et al, 2009).


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Current Role of the State

Quebec has been the most proactive government in Canada or creatingpolicies and initiatives that support the Social Economy in Quebec (Mendell,2008; Neamtam, 2005). Neamtam (2005) writes that, Te Social Economy

has been part o the Quebec reality or over one hundred years, but it ociallyentered the public policy discourse only in 1996 when the Quebec governmentconvened the Summit on the Economy and Employment in which a widerange o civil society organizations ... participated (p. 72). In 1999, the Quebecgovernment gave control o the Social Economy portolio to the minister onance. Five years later the ederal government ormally acknowledged theimportance o the Social Economy in Canada, with a commitment o over$100 million to the Social Economy (Neamtam, 2005) and Quebec was readyto implement the necessary programs to dovetail with the ederal unding.

A 2005 study conducted by the Policy Research Initiative (PRI) ound severalcommonalities among the various orms o state action. Tese include:

Changes to regulatory rameworks in which SEOs operate

New unding approaches have emerged over the last 15 years

Increasing the number o organizations that can serve SEOs

Te ederal government supplies most o its unding to the Social Economythrough various regional development authorities and Aboriginal developmentagencies. It also leverages the Business Development Bank o Canada (BDC)to provide venture capital to Aboriginal projects. One way in which provincialgovernments support the development o social nance is through taxincentives or investors who purchase labour sponsored venture capital undsor community investment unds. Quarter et al (2009) mention that there havebeen some issues surrounding labour sponsored venture capital corporations(LSVCCs). However, they argue that, Nevertheless, among those that areunctioning as were intended, there is evidence o support or organizationsin the Social Economy (p. 263). Int he early 1980s the Quebec Federationo Labour created the provinces rst LSVCC. In British Columbia there isthe Working Opportunity Fund that is owned by seven trade unions. TeCommunity Economic Development Investment Funds (CEDIFs), in NovaScotia, are another outlet or Social Economy organizations and SMEs in thatprovince; however, the legal structure o the vast majority o Social Economyorganizations does not allow sale o shares and thereore they cannot takeadvantage o CEDIFs. A ew, like New Dawn Enterprises and Just Us Coee


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Co-Op or example, have used CEDIFs repeatedly to nance their expansion.

While there has been increased attention paid to the Social Economy bygovernment (Neamtam, 2005; PRI, 2005, Quarter et al, 2009), our research

shows that the resources provided are insucient. In 2009, the CanadianCommunity Economic Development Network (CCEDNet) authored a report(2009) that made policy recommendations in three categories:

Create a greater role or social enterprise in economic revitalization

Provide sustained support or community economic developmentorganizations and community capacity building

Improve access to capital

Te reports authors write that, A key barrier hindering the potential o CEDand Social Economy organizations is access to long-term capital, they continue,...[SEOs] need scal measures or other means to access patient capital andnancing (p. 4). Te CCEDNet report makes three policy recommendationsrelating to nancing the Social Economy. CCEDNet recommends:

Te Canadian government create urther community investment capitalunds that are available or non-prot organizations (NPOs)

A CED tax credit that will encourage urther investment in community

based unds

Te creation o a ederal Co-operative Investment Plan, similar to whatexists in Quebec

Te role o nancing in enabling entrepreneurial activity and general economicgrowth has been well recognized or years. It has also been recognized thatnancing gaps are detrimental to the creation and growth o SMEs andgovernments have sponsored signicant research on SME nancing. However,

although the relative size o the Social Economy is larger in Canada than inother developed countries, governments in Canada have not shown comparableinterest in SEO (Social Economy Organization) nancing issues.

In a 2008 study o community investment in Canada conducted by theCanadian Community Investment Network Co-operative (CCINC) a totalo 487 organizations reported having $1.5 billion in assets. Collectively

1.

2.

3.


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these organizations also saw a demand o a minimum o $750 million overthe next two years. Some o the greatest growth areas as projected by theseorganizations included alternative energy, social enterprises and aordablehousing. Te key policy recommendation rom the study was or Canada todevelop a comprehensive community investment (aka social nance) strategy,

similar to the one used in the U.S., that incorporates tax incentives to leverageprivate capital; capacity building dollars or project proponents; research anddevelopment dollars or community investment organizations; and researchdollars or better mapping and proling o the sector. (CCINC, 2009)

Te national study conducted by CCINC gave an estimate o the size o theopportunity and unding gap in the sector and also indicated the lack o insighton the drivers o this gap. Up to this point, discussion around public policyhas been at a high level and has lacked the detailed empirical data necessary to

support its requests. It was to ll this void that we launched our study into thenancing o the Social Economy in the Atlantic Provinces.

Atlantc Research Stud

As we noted above, the role o nancing in enabling entrepreneurial activityand economic growth has been well recognized or years. Although therelative size o the Social Economy is larger in Canada than in other developedcountries, governments in Canada have not shown comparable interest in

Social Economy nancing issues. Tere is agreement in the literature that theissues surrounding the nancing o the Social Economy and how SEOs utilizeand access external nance are central to the sustainability o the sector and theorganizations therein. Tere has been some research on the nancing optionsand instruments available or SEO, but there is little research on the demandor external nance and the uses o nancing; or Canada in general and orAtlantic Canada in particular. Tere is also little research on the criteria used bynancial institutions and government agencies in providing nancing.

Te Atlantic research node o the Social Economy research suite believesthere is great value in gaining insights on the nancing issues aecting localSEOs. Tis research initiative was spurred by community partners, such as theCanadian Community Investment Network and the Saint John CommunityLoan Fund. We conducted the study at Cape Breton University over a periodo 18 months, starting in the all o 2008. Its intended goal was to develop anaccurate picture o both the supply and the demand side o external nance orthe Social Economy in Atlantic Canada.


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Te study used samples o Social Economy organizations and nancialinstitutions within ve geographical areas suciently restricted that we couldenumerate the population o Social Economy organizations within it, namelySaint John NB, Cape Breton Island, Haliax regional municipality, PrinceEdward Island, and Newoundland. Te rst phase in the research included

a o Social Economy organizations in an attempt to understand the currentdemand or social nance. A sample was drawn that included representativeso each organizational type o Social Economy organization, representatives oeach sub-sector, and a variety o organizational size and age. Te second phaseconcentrated on surveying the nancial institutions and granting agencies ineach community.

Te National Survey o Non-prot and Voluntary Organizations reported that13,000 incorporated organizations and registered charities operated in Atlantic

Canada and they generate revenues o $5.7 billion (Rowe, 2006). Whendeciding which Social Economy organizations the research would target, weused the our generally accepted characteristics: economic activity, limiteddistribution o surplus to its members, voluntary association and legal anddecision-making autonomy (Bouchard, 2006).

Tere is no comprehensive database o SEOs in each o the ve geographicalareas and we spent a lot o time in assembling lists rom dierent sources. InSaint John we beneted rom the resources o the Human Services CouncilSaint John and the support and direct help o the Saint John Community LoanFund. In Newoundland we beneted rom the support and direct help o theCommunity Services Council. Our compiled list included 5,036 organizations.By applying the our criteria described above, this listing was reduced to 1,142SEOs, resulting in 281 completed surveys. Te surveys include sel-screeningquestions to ensure the respondent SEOs met the our qualiying criteria. Outo 281 responses, 206 met all our SEO criteria.

Prole Summar

Te majority o SEOs surveyed are small organizations: three quarters have

ewer than 20 employees, with orty six percent having ewer than 5 employees.However, six percent o SEOs employ over 50 people! One third o organizationshave a budget below $100,000, but hal o the SEOs have an annual operatingbudget over $250,000, with one third surpassing the $500,000 level.

Te majority o organizations surveyed are well established: ty nine o


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respondents have been established or over 20 years. SEOs mentioned sales ogoods and services, grants, and donations as their primary sources o unds onan ongoing basis. Te majority o SEOs (seventy seven percent) have pursuedexternal nancing. SEOs predominantly use grants, loans, and lines o creditor nancing. Te primary reason or external nancing cited is to expand

services, purchase a building, and purchase equipment

Fnancng Assessment

Te second phase o the study ocused on the supply o nance and surveyedthe nancial institutions and granting agencies in each o the ve geographicalareas. Researchers compiled a list o 224 branches o nancial institutions,government granting agencies, oundations etc. in the ve study areas.Surveys were completed by 56 agents and ocers o nancial institutions and

government agencies.

Lending ocers o banks and credit unions overwhelmingly indicated thatrepayment capacity, security/collateral, credit history, management experience,and quality o the business plan are the most important actors consideredin assessing loan applications in general. Te survey also indicated that lowprotability, lack o security and personal equity, reliance on grants, lownancial expertise, and incomplete business plans were oten encountered inloan applications rom social enterprises.

Only a quarter o bank ocers indicated they could relax their lending criteriaor community-owned organizations, as did ty percent o credit unionocers. However, seventy seven percent o CBDCs indicated they could relaxthe criteria or community organizations and apply preerential terms! Onlya quarter o bank ocers and orty ve percent o nanciers in general wereaware o the term Social Economy; an even smaller minority were aware othe correct denition.

Fndngs Summar and Polc Recommendatons

Our study in Atlantic Canada suggests there are a ew gaps in nancingorganizations in the Social Economy, especially or startups. Rejectionexperienced or SEO nancing is airly high at orty two percent. Tere is heavyreliance on government grants: sixty percent o respondents had received grantsin the previous twelve months and seventy our percent o SEOs planning an


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expansion are pursuing grants to nance the expansion! Interestingly, ortypercent o SEOs are pursuing public/corporate undraising or expansionalso.

Tis particular set o issues has been raised by a number o other researchersand practitioners in the past. However, there is now a raised awareness o theimpact o the Social Economy in Canadian society and there appears to besome political will in making interventions. Mainstream political personalities,like ormer minister o nance and ormer Prime Minister Paul Martin, arenow actively involved in the Social Economy and the recent Speech rom theTrone hinted that Canada is open to a bigger role or social enterprises. Policyinterventions have the potential to make transormational improvements.

Research fnding #1: Majority o SEOs need to pursue commercial activityand external nance to grow, but restrictions in their legal organizational ormare an impediment.

NFPs are not share-based and cannot access equity nancing. Te sector hasto resort to dual organizational structures to be able to generate revenue andoperate social enterprises in a sustainable manner.

A ew charities and NFPs have operated social enterprises as projects withoutully understanding that they may be in deault o their legal status: only 7% oour survey respondents mentioned that legal restrictions did not allow externalnancing. Similar ndings have been reported in the literature (Corriveau,2010). Social Enterprise is not a legal expression in Canada.

Recommendation

Te time is now ripe or evaluating and introducing a legal orm or SEOs

that is similar to the UKs Community Interest Company (CIC) or the USsL3C; two dierent approaches, with UKs CIC oering the advantage o thewell known company legal orm and the USs L3C making the organizationattractive or investments by oundations. A new legal orm will allow SEOs tobecome more entrepreneurial without having to create multiple cumbersomecorporate structures.


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Tis issue has attracted a lot o attention recently and it is recommendedthat the Government o Canada enact a Community Enterprise Act enablethat will enable organizations to incorporate as community enterprises;with the capacity to issue shares subject to limitations on scope o activitiesand investment returns, a capital lock to ensure that assets remain in the

community, and avourable tax treatment (Bridge and Corriveau, 2009). Tiswill bring organizational eciencies and savings and will acilitate growth. Arecent report by the MaRS Centre is recommending this or the Province oOntario (Hewitt, 2010). Te Canada Revenue Agency has recently stated thattheir policy people are working on the concept o social enterprise (Winggrove,2010).

Research fnding #2: SEO start-ups ace major obstacles in accessingcapital.

Rejection experienced or SEO nancing in general is airly high at orty twopercent o the Atlantic SEOs surveyed. Te survey o nanciers indicated theirconcern over security/collateral, personal guarantees, and lack o personalequity, in SEO nancings. More than sixty percent o the nanciers stated thattypically SEOs low collateral, protability, and revenue are very problematic.

Reliance on donations and government grants and contracts also make SEO

start-ups risky prospects or debt nancing by mainstream lenders. Morethan thirty percent o nanciers stated that SEOs heavy reliance on grantsand government contracts was problematic; wenty our percent o SEOsmentioned they were unsuccessul in obtaining nancing because nancialinstitutions do not nance social enterprises.

Mainstream SMEs ace similar obstacles in securing start-up nancing;organizations in the Social Economy ace a much bigger challenge, as they donot have owners to guarantee loans and their multiple bottom-line mandates

usually means low protability.

In Quebec the presence o RISQ, a $10 million capital pool dedicated to SocialEconomy ventures lls this need to a great extent. Although there are somegovernment-backed lending programs in the rest o Canada that cater to theSocial Economy or small loans (CBDCs, Community Futures, etc.), there is a


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gap or nancings over $100,000.

Recommendations

Federal and provincial governments have a responsibility in enablinglending to SEOs. Tere is no SEO loan-guarantee program, like the ederalCSBF program that is available to SMEs. A ew provincial loan programsoperate similar to the CSBF but most are not available to SEOs either.Tere is no lending institution, besides the CBDCs, that accommodatesthe diculty o securing personal guarantees on SEO loans, like the CSBFprogram does or SMEs. Studies indicate that the ederal loan guaranteeprogram has resulted in substantial total and incremental job creation inthe mainstream economy (Riding, 2001) and will most probably havea similar, i not larger, eect in the Social Economy. Co-author Seth

Asimakos is the General Manager o the Saint John Community LoanFund which has a small pool o $200,000 built on private investments.He adds that a guarantee and tax incentives would help place capital incommunities. A social enterprise guarantee similar to CSBF would bringthe risk down or our committee and enable lending to more innovativeprojects. ax incentives would leverage more private investment into poolsdevoted to community development. We recently invested $35,000 in ahousing initiative that in act leveraged the credit union to mortgage therest. Te act is, these projects demand greater capital and we need a wayto create better fows

Experiment with oering generous tax incentives to corporations andinvestors who wish to invest in start-ups in the Social Economy. Mainstreammid size businesses, corporate Canada, mutual unds, and wealthy investorsmay be interested in investing in venture capital pools that und SEO start-ups; especially i they can benet rom tax credits similar to the ones oeredto investments in junior exploration companies. Tis is an idea mentionedby a ew potential investors, including Paul Martin, ormer minister oFinance and ormer Prime Minister. Tis development indicates that theconcept is becoming acceptable to mainstream policy makers and it has thepotential to create a sizeable venture philanthropy sector in Canada.

Evaluate the easibility o ensuring that the instruments used or nancingSEOs are ully compliant and registered with Canadas electronic capitalmarkets. Enabling community unds (ex. CEDIFs) and venture capitalpools to be listed in Canadas electronic und system will provide enhancedcredibility, make such investments mainstream, and increase accessibility toinvestors. Canada is one o the ew jurisdictions where the capital marketsand investment instruments are entirely electronic and it is prohibitively


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may 2010 / mai 20

expensive or community unds to register their instruments electronically.A national approach to this project will most likely make it sel-sustainingover a ve-year period.

It is well known that mainstream large national nancial institutions do

not invest/lend proportionally in the periphery. SMEs and SEOs located inperipheral regions nd it more dicult to obtain nancing. Canada shouldconsider introducing legislation similar to USs Community ReinvestmentAct (CRA). Tis legislation would require that nancial institutions dolend/invest to SMEs and SEOs in each community they operate in. CRAhas been criticized as contributing to the nancial meltdown o 2008, butCanada has a mature and conservative banking sector that knows howto manage risk; the likelihood that the minimal community investmentswould weaken the banking system is very small.

Research fnding #3: Many SEOs have expansion plans that requiresizeable nancing.

A large percentage o the Atlantic SEOs surveyed (orty two percent) planto expand or start a new venture. Tey are reporting that they require largeamounts o nancing: a quarter o the growing SEOs require unds in excesso $500,000 or expansion. It is understood that projects in the housing, realestate, healthcare, green energy, and hospitality sector are capital intensive and

require large size investments, However, lass than twelve percent o SEOs haveraised this level in the previous twelve months, indicating a unding shortallis in the ong.

Recommendations:

Tere is need to develop stable patient capital pools, that could operate likebond unds and will lend to mature SEOs or expansion. Should supportthe concept o a community capital program, with assistance or regionalloan pooling and a government guarantee. Regional capital pools may

work better as they oer some geographic and company diversicationto the investors. Both individual and institutional investors understandxed income instruments like bonds and these capital pools could attractsignicant investments. Tey may appeal to oundations and other SociallyResponsible Investment (SRI) organizations as a good investment vehiclealso. Te Canadian Alternative Investment Co-Operative, oronto, is anexample o a pool that invests nationally, but the concept would evolve


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into aster growing regional pools with the help o a partial governmentguarantee.

Provincial governments should initiate discussions with labour unions andconsider partnering with labour on a capital pool dedicated to unding

social enterprises, in the model o the Fiducie du Chantier de lEconomieSocial. Tis is obviously not easily duplicated: the creation o the Chantierhas been in the making since 1996 and Quebec has a unique socioeconomicculture and a labour movement that is committed to the Social Economyand the environment. Te Chantier has assets exceeding $50 million andhas invested over $6 million in social enterprises. Some provinces mayhave the right climate in place or such collaboration. Regarding housinginvestments, unionized labour unds have collaborated on a real estatedevelopment company, Concert Properties, aimed at providing low pricedrental housing; they have constructed over 8,000 units since 1989 in BC,Alberta, and Ontario. It is conceivable that a small public investment mayleverage large investments or expansion o social enterprises that targetsectors avoured by the labour pension unds.

ax incentives should be oered to all Canadians who wish to invest inthe Social Economy, especially through the convenient and popular RRSPvehicle. Te RRSP eligibility o Nova Scotias Community EconomicDevelopment Investment Funds (CEDIFs), coupled with the 35% NovaScotia tax credit makes it a successul model: it acilitates the use o equitynancing by SEOs, rom investors using their RRSP savings. Consideringthe risk-averse nature o RRSP investments, this route would be best used

by mature SEOs. Over $33 million have been raised to-date by CEDIFs,with a sizable portion being invested in SEO and green energy start-upsand expansions. Te Province o PEI is adopting this model and it isexpected that CEDIFs will be available to PEI citizens next scal year. SethAsimakos, General Manager o the Saint John Community Loan Fund,adds: In Saint John, the idea o having a CEDIF as part o our und wouldbe put to good use in leveraging mixed use housing and commercial non-prot space. Capital can get used up quickly in projects o that sort. I thinkwe would really see a boom in activity. Te built-in RRSP eligibility o theCEDIF model would be a major draw or investment rom individuals in

the community. Ideas are bubbling to the surace. With some guaranteesand tax incentives to move capital, the ideas can become reality

Research fnding #4:

Community organizations typically have low nancial and managementexpertise and submit incomplete business plans.


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may 2010 / mai 20

Fiteen percent o surveyed SEOs mentioned) that the quality o their businessplan document was one o the reasons they did not succeed in obtainingnancing. In addition, over orty percent o the surveyed providers o nance

stated that SEOs typically submit incomplete business plans and have lownancial expertise. Tirty one o the surveyed providers also stated they hadconcerns over the management o SEOs.

Tere is obviously a gap in management capacity within the SEO sector. Teederal government has provided support or capacity building in the co-operativesector, through the Co-operative Development Initiative. In Quebec, Labourhas partnered with the provincial government and oers extensive capacitybuilding services to the Social Economy via CSMO-ESAC; an organization

mandated to the development o human resources or the Social Economy.Tere is no systematic programming to build human resources or the wholeSocial Economy in the rest o Canada. Te ederal government understandsthe importance o the social inrastructure as it ocuses on social inrastructureand capacity building, ahead o physical inrastructure, in CIDAs internationaldevelopment projects. It is expected that the ederal government would see thewisdom o social inrastructure or domestic development also.

Recommendations:

Federal and provincial governments should consider investing in SEOcapacity building by: Investing in human resource development andtraining programs; Subsidizing salary o business proessionals seconded tohelp growing SEO

Governments should provide business support, customized to the needso the Social Economy. Tis will help increase investment readiness andcreate demand or external nancing. Government agencies mandatedor economic development should oer support or proessionals; towork with SEOs in developing business plans. Governments should also

support easibility studies on SEO business plans and should und proo oconcept projects. Mainstream businesses can use ater-tax dollars or suchinnovation projects, but Social Economy organizations cannot use such taxadvantages to take risks.


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Conclusion

Tere is no doubt o the impact and importance o the Social Economy to theoverall Canadian economy (Shragge and oye, 2006, Neamtam, 2005; PRI,2005; Quarter et al, 2009). Tere is also no doubt about the importance o

external nance to the overall growth and success o the Social Economy inCanada. Past research has looked at programs available, the importance o theSocial Economy to the Canadian economy, and theoretical attempts to provethat a nancing gap exists. In our research, we have provided proo that inAtlantic Canada there is a gap between demand and supply o nance in theSocial Economy.. Te existence o this gap threatens the sustainability o theSocial Economy and all levels o governments have a responsibility to enactpolicy that will help close the gap. Te policy recommendations relating tolegal structure, removing obstacles to start-ups, easing nancing or expansion,and support capacity building are based on empirical analysis. Te majority o

these policies require legislative and tax changes; not grants.

We presented these recommendations in March at the ACCSE regionalconerence, attended by 120 people in Dartmouth, Nova Scotia; with a panelo representatives rom government and the sector. We also held a country-wide teleseminar in April and we have incorporated all received eedback inthis report.

A concentrated eort to enact several o these policy recommendations willmake a long-lasting contribution to the health o communities in Canada.


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References/blographe

Karaphillis, asimaKos and moore 25

may 2010 / mai 2010

Bridge, R and Corriveau, S. (2009), Legislative Innovations and Social Enterprise, BC Centre or Social Enterprise,February 2009

Bouchard, M. J., Ferraton, C., & Michaud, V. (2006). Database on social economy organizations: he qualiication

criteria. Chair de recherche du Canada en economie sociale, Research Series No. R-2006-03.CCEDNet. (2009). Recommendations or a Sustainable Economic, Social and Environmental Future, August

2009

Canadian Community Investment Network Co-operative (CCINC) (2009). Building Local Assets: CommunityInvestment in Canada

Corriveau, S. (2010). he ine print: Vital inormation or Canadian charities operating social enterprises.

Corriveau, S. (2010). he ine print: Vital inormation or Canadian charities operating social enterprises. RetrievedFebruary 5, 2010 rom http://www.centreorsocialenterprise.com

Goldenberg, M.. (2004). Social Innovation in Canada: How the non-proit sector serves Canadians .. and how it canserve them better. CPRN Research Report W|25.

Hebb, . , Wortsman, A., Mendell, M., Neamtam, N., and Rouzier, R. (2006). Financing Social EconomyEnterprises. Carleton Centre or Community Innovation, Ottawa.

Hewitt, A., Convery, M., and Chung, W.. (2010). Social Entrepreneurship: Legislative innovations. Socialentrepreneurship white paper series, MaRS Centre, oronto.

Mendell, M. (2008). he three pillars o the social economy in A. Amin (Ed) he Social Economy. London: ZedPress.

Neamtam, N. he Social Economy: Finding a Way between the Market and the State. Policy Options July-August2005: 71-76.

PRI. (2005). What We Need to Know About the Social Economy. PRI Project: New Approaches to AddressingPoverty and Exclusion.

Quarter, J., Mook, L., & Richmond, B. J. (2003). What is the Social Economy? Retrieved April 2010 rom http://www.urbancentre.utoronto.ca/researchbulletin.html

Quarter J., Mook L, & Armstrong A. (2009). Understanding the Social Economy. oronto: University o orontoPress.

Riding, A.L. , and Haines, G. Jr. (2001). Loan guarantees: Costs o deault and beneits to small irms.

Journal o Business Venturing, 6, 595-612

Rowe, P. (2006). he Nonproit and Voluntary Sector in Atlantic Canada. oronto: Imagine Canada.

Shragge, E. and oye, M. (2006) Introduction: CED and Social Change, in Community Economic Development:Building or Social Change, Cape Breton University Press.


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References/blographe



Strandberg, C. (2008) Primer: Responsible Investment pilot Project. Community Foundations o Canada

Winggrove, J. (2010). he Right Brothers, Globe and Mail, 20 March 2010.


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