How to be resilient

Four themes have been identified for the arts and culture White Paper due to be published in the New Year. One of these is “funding models and how they can contribute to financial resilience in the sector”. Arts Council England (ACE) is committed to a strategic funding goal of resilience and environmental sustainability for its national portfolio organisations (NPOs) and its major partner museums.

In June UK Theatre published a report by Graham Devlin and Alan Dix entitled ‘Theatre Touring in the 21st century – an exploration of new financial models’. It looked at the various alternatives noting, quite rightly, that all can be useful in certain circumstances: grants, loans, guarantees against loss, financial returns on investment, the Theatre Tax Relief, the Arts Impact Fund, enterprise investment schemes (EIS), consortia, use of technology, crowdfunding (also called crowdsourcing) and the Social Enterprise Tax Relief (SITF).

Resilience is partly about governance and management but also about the underlying financial operating conditions

There are others and hybrids but this gives a sense of the patchwork nature of the landscape and why it is unclear to many organisations which approach is most suited to them. Some of these options principally apply to ACE and trusts and foundations (guarantees against loss, an investment fund and whether the Arts Impact Fund should be continued or not), while others are measures recently introduced by government (Theatre Tax Relief and SITF), pre-existing measures (EIS) and others are ways of working (consortia and the use of technology).

The language of financial models is seductive as it seeks to connect the sector with the burgeoning sources of social enterprise finance which have developed over the past ten years in the third sector. It also seems to imply that if the right model is selected then the organisation will benefit. This is undoubtedly true in some situations, but not all. Models per se are neutral and I would suggest that there is a more useful way of analysing the options available to organisations as a means of indicating whether they will add to their resilience.

First, there are loans, which do not fundamentally change an organisation’s financial position but can reduce borrowing costs. Second, new funding is available through the use of strategic tax incentives or support, and third, there are ways of working which enable resources to be used more efficiently. As a trustee I would be reluctant for an organisation to take on debt which had to be serviced. Arts organisations’ earned income is uncertain, and unless your output is so significant that a minimum level of income over a given period can be predicted, then guaranteed loans may involve taking on a significant obligation that cannot be fulfilled. Conversely, organisations whose output is predictable are the least likely to need such loans and are most likely to have assets that can secure conventional loans. Most well-run organisations are able to manage short-term cashflow crunches without needing bridging finance. So on the whole, I do not see that many organisations would look to increase debt in order to increase income. For arts organisations the only exception I am aware of is where funding is obtained to fund refurbishing or extending a catering operation, which then enables the organisation to put more resources into its work. Even then these projects tend to be supported more by enlightened social enterprise funding, which is not guaranteed but secured on the income of the created asset, or is funded through a grant provided to enhance the resilience of the organisation (so not a loan at all).

I would argue that any fund offering loans did so on a limited recourse basis – paid out of specified income streams so that the funder takes part of the risk. This could relate to a particular production or project (akin to angel funding), or in respect of particular assets (rental income from the use of lights purchased with the funding), or a percentage of a refurbished café or bar’s turnover. These forms of funding are risky and there is no guarantee of return, but they can be viewed as a more commercial option to grants. If on average (and by way of example), 75% of such loans are repaid, it means that the funding can be recycled four times and as a result may leverage significant additional activity. This type of funding is often trumpeted as a type of social enterprise funding but while it may help to stimulate activity in the wider third sector it has little impact in the arts sector. I believe this is partly because many third-sector organisations operate at a scale that lends itself to this sort of funding, but also because the funder needs to understand the nature of the project and be able to assess the risks. So in practice, the funder needs to be part of the arts sector and be focusing on arts projects. The Arts Impact Fund offers repayable finance and requires demonstrable social impact. It may work for some projects but seems unlikely to be of significant use to most arts organisations.

Tax incentives can lead the way to developing the resilience of arts organsiations. Theatre Tax Relief can be seen as ‘new money’, which is enabling organisations to plan additional productions or enhance productions. This positive effect on the financial position is clear for the commercial theatre sector. For the subsidised sector it is undoubtedly positive but it should be noted that it will not exceed the cuts in grant in aid over the past five years and forthcoming ACE cuts.

Similarly, EIS and SITR enable organisations to offer tax breaks to investors to encourage investment in arts projects. EIS schemes need to satisfy particular requirements: that the investment is in shares and is invested for at least three years. SITR is more flexible in that the investment can be by way of a loan (including a limited recourse loan), but the maximum investment at any one time is much lower (approximately £250k depending on the euro exchange rate and prevailing tax rates) and there is a three-year minimum investment period. These approaches have great potential but they are complicated and there are practical reasons why they do not lend themselves to arts projects.

Consortia and joint working offer a real prospect of reducing costs by in effect treating co-production contributions as investments. Many organisations have already embraced the need to spread resources by co-producing, so I question the extent to which this can be a source of further savings. A welcome innovation is the large touring consortia which enable an expensive show to be produced. These can only work by a form of dictatorship (as to who makes decisions) rather than on democratic lines but even so they need a great deal of work to be successful.

Crowdfunding may be a useful source of new money, but for donation crowdfunding there are significant costs that need to be factored in and equity crowdfunding is yet to have real impact due to the set-up complications.

For there to be a long-term improvement in the financial resilience of arts organisations there are opportunities for the right approach for the right project. Resilience is partly about governance and management but also about the underlying financial operating conditions. There will need to be significant new innovations of the sorts mentioned if new money by way of investment or funding can be brought into the sector which outweighs the expected loss of funding over the coming years.

Sean Egan is a legal consultant.
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