Cameron launches £600m fund to promote charity investments

Big Society Capital will provide credit for social enterprises and encourage individuals to invest

Individuals could soon be given the chance to invest their savings in charity ISAs as part of a fundamental shake-up of the way Britain's voluntary sector is funded.

David Cameron will today announce the official launch of a £600m fund to kick-start the world's first charity investment market. It is hoped that the project will eventually lead to easy-access loans for charities and social enterprises – resolving a long-standing complaint of the sector.

It also expects the new investment will encourage such groups to bid for lucrative contracts to run public-sector projects such as welfare-to-work programmes and prisoner-resettlement projects which are paid by results.

This would allow the Government to avoid handing the work to controversial private sector providers, such as A4E and Serco which, at the moment, are the only groups with the capital resources to compete effectively.

Eventually the new market should also offer individuals a way to invest in the charities and get a return on their money. Investment is also expected to come from existing asset funds – such as those held by the Church of England – which currently invest in the stock market.

Under the scheme, a new organisation called Big Society Capital will use around £600m in start-up money – £400m from dormant bank accounts and £200m in contributions from the high street banks – to invest in individual social investment funds. They in turn will raise further money from banks, individuals and possibly pension funds and invest those in individual charities or social enterprises.

This could range from a group wanting investment to run a community bus service, helping people get back into work or keeping children in school. They would be expected to repay the money – but at lower rates of interest than they would get on the open market.

The money would be provided for capital start-up costs and all the projects funded would be expected to be self-funding.

Critics have warned that the rates of interest charged by individual social investment funds may be prohibitively expensive for many charities – due in part to the new and potentially high-risk nature of the investments. There are also concerns that BSC will have so much cash (perhaps £100m in its first year) and so few established places to invest it that the money will be wasted.

Toby Blume, chief executive of Urban Forum, which provides support for charities, added he was concerned that the £200m being provided to BSC by the banks was on commercial terms, and said that the only way this money could be made affordably available to charities was if the other £400m, from dormant bank accounts, was used to subsidise the commercial investment.

"That money was earmarked for a social purposes and it seems wrong that it should be used to subsidise the banks," he said. But Mr Cameron hopes that the scheme will be the first tangible example of what he means by the concept of Big Society. He said: "Big Society Capital is going to encourage charities and social enterprises to prove their business models – and then replicate them. Once they've proved that success in one area they'll be able – just as a business can – to seek investment."

Big Society Capital: How it works

Big Society Capital is set up with £600m from dormant bank accounts and capital from high street banks. It puts money into social investment funds, such as Big Issue Invest, which in turn provide loans to social enterprises or charities. The capital investment provided is expected to create self-sustaining businesses, with wider community benefit, which can pay back the money.

The funds will also use the BSC capital to leverage extra investment from pension funds, banks and wealthy individuals. Investments will be packaged up to spread the risk of default by individual projects and provide returns to investors.

Oliver Wright