The following post was written by Filippo Addarii, Head of EuropeLab and Director of International Strategy, the Young Foundation. Mr Addarii will be speaking in Melbourne on Thursday August 7. Registrations for the event can be made here 

Last week the Portuguese Minister for Regional Development announced a new fund: €122m (175 million Australian Dollars) for social innovation. (Find more here).

The Minister wants to finance private solutions to solve wicked problems such as school drop-outs and re-offending. This is investment, not grants: service providers will be paid if they attain expected results. He believes that the fund can even attract private capital leveraging government funding for public good. What magic for a country in dire fiscal constraints and facing a rocketing social crisis! Is this political marketing of a young inventive Minister of a country desperate for innovative solutions or the peak of the iceberg?

My thesis: public good provision – finance to start – is changing dramatically everywhere across Europe. This reflects and reinforces a transformation in the relationship between citizens and State, public and private sectors, for profit and not for profit.

We are moving towards a new social contract fit for the 21st Century.

Let’s review the question from the beginning. As an idea, “social investment” has always existed. The State, philanthropy and cooperative movement have always “invested” in the creation of public good.

The reason this capital allocation has not been deemed an investment is that there was no need. In the last 60 years the State was the main funder and provider of public good, and politics defined targets and established success. On the other hand, there was no real means to identify, isolate and attribute the returns on investment.  This is not the case anymore.

Four are the leading factors of change: 1) The erosion of the nation-state’s power basis and the legitimacy crisis of politics in the global age to the advantage of transnational networks and policies 2) A shift from financing outputs to financing outcomes – the need for locally-driven innovation in the creation of public goods. 3) The new capacity to identify, isolate and attribute outcomes unleashed by Big Data science and 4) The need to move beyond a contractual relationship between public and private sector to provide public good eg PPP to embrace a multistakeholder democracy of investment and innovation in the creation of public good.

This transformation has been increasingly recognised by policy makers and global leaders.

The call on investment for public good was made for the first time in Europe in 2000. Social investment was proposed as the leading framework to transform welfare state service provision in the first pan-European industrial policy 2000 – 10 called the Lisbon Agenda. Apparently almost all the top European policies are named after Portuguese locations!?

However social investment didn’t really take off until 2008. The global financial crisis gave a boost to the agenda. The fear for social unrest is always the best incentive for progressive policies.

Austerity is forcing European governments such as Portugal to look for new solutions to fund services and public goods more broadly. Moreover investment for innovation has become the priority to relaunch economic growth and employment.

Social Investment was back on the agenda of the President of the European Commission in 2008, and got traction in Brussels starting with the Social Innovation Initiative (2010) followed by the Social Entrepreneurship Initiative (2011) and the Communication ‘Towards Social Investment for Growth and Cohesion’ (2013). (Find more here).

Social innovation, entrepreneurship, impact and investment are buzzwords in the policy circles. They have become priorities in more than one third of the EU annual budget making the EU the largest investor in the world: roughly €45bn a year (64 million Australian Dollars).

EU Member States such as France, Germany and Italy have set up dedicated budget lines and/or funds. The G8, in partnership with the OECD, launched a task force on social impact investment to explore the potential of private investment market to provide public goods in 2012. (Find more here).

Even the Holy Father, the Pontiff Francis I, has called on the world to find ways to use finance to serve people and has recognised the promise shown by impact investing to serve the poor. (Find more here).

This is a trend and is not going to stop. But capital aggregation is the easy part. Policymakers will soon face the real challenge: investment for a financial and social return. The capital supply doesn’t not have a mature demand. This is a market still in the making… and it’s likely to be an exotic market compared to liberal standards.

EuropeLab, the platform for experimentation and policy incubated by the Young Foundation to ‘reinvent Europe from the bottom up’ (find more here) is working in partnership with the Social Innovation Bank (Santa Casa do Lisboa) and some of the other main socio-economic players in Portugal to build the market infrastructure in the country. (Find more here).

The main challenges we are facing are:

1)       New narrative: commodification of public goods to enhance democratic capitalism, not further privatization of wealth and inequality

2)       New business culture/model: transformation of the social sector and service providers from a grant economy to social investment market

3)       New investment infrastructure: creation of a network of regional funds and incubators for civic entrepreneurship to share the new opportunities instead of concentrating them in few hands

4)       New citizenship: how to switch on citizenship, helping people to move from passive consumers to active agents and co-producers of public good

5)       New value measurement: tapping into the potential of Big Data and massive citizen peer-review, and not creating a new set of red-tape and professional gate-keepers

These are the facts and questions I will explore in my lecture. I’m grateful to the Portuguese for providing the inspiration and the Australians to act as critical friends. The sky and collective creativity are the sole boundaries to our ambitions.