Governments need to partner with the impact sector, not just ‘get out of the way’

The world is watching huge cuts to US international development funding, with USAID investment paused. USAID spends over £50 billion each year, and freezing this funding has not only pulled the rug out from under humanitarian aid charities around the world, but has already cost lives.

Some in the development sector are calling for other funders and nations to step in, but it’s clear that philanthropy can’t plug the gap. Nor should it. It’s not the role of social impact funders to top up funding pots if governments make cuts or freeze spending.

We’ve seen a similar story in the UK before, with the ‘Big Society’ project of the 2010s. The expectation was that where the state retreated, charities would step in and fill the gap. We clearly saw the limits of that approach.

So if we know that ‘stepping back’ doesn’t work, what is the right way for governments to work with civil society? The key is a true partnership to tackle shared challenges.

Why should governments care?

There’s a significant amount of money in the impact sector. If you add up charity expenditure, impact investment, and social enterprise turnover in the UK, you have an impact sector worth over £200 billion. That’s around the same amount that the UK Government spends on the entire health system.

For international aid, the picture is similar. The OECD reported almost $224 billion of aid funding in 2023 from Governments and agencies like the UN. In 2022, development finance initiatives made up over a quarter of the global impact investing market, managing around $300 billion in assets. Some of that funding will have come from governments, but the wider impact sector clearly has a role to play.

This money is out there, and if governments don’t work with funders and investors, then there is a risk that it is spent in a disjointed way. There will be overlaps, double funding, and gaps that could all be avoided. On the other hand, proactive engagement and partnership can multiply the impact of investment.

But while the impact sector is big, it’s not infinite. If government expects funders to spend more in one area, then they will have to spend less in others.

What can governments do?

As we set out in our recent report in partnership with the Future Governance Forum, there are a whole range of things that government can do to strengthen relationships with civil society, and improve policymaking and delivery.

Fundamentally, it is about building a meaningful partnership on both sides.

This isn’t about governments simply expecting impact-driven funders and investors to fall in line with their agendas. Funders, investors, and charities will always have their own missions, own priorities, and own ambitions for the impact that their money can have. This is about coming together to identify shared challenges, and find shared solutions.

What governments can do is send a clear signal to funders, through things like targeted match-funding or tax incentives, about where they think that impact capital should be focused.

Another major role that governments can play is in de-risking investments from other players by putting up government capital. This applies to the private sector, as well as the impact sector. We have seen a big focus on this kind of approach from this Labour Government, with talk of the National Wealth Fund ‘crowding in’ private investment.

What can the impact sector do?

When governments are willing to work with the impact sector, we also need to think about what the sector can bring to the table, beyond just money.The impact sector is incredibly varied, including charities, social enterprises, impact investors, philanthropists, and others. Different parts of the sector bring different things to this conversation.

Firstly, funders and investors can invest in things that government can’t. They can take bigger risks, support novel ideas, and test whether things work in a way that a government can’t. (Particularly a government looking to tighten the purse strings.)

More broadly, charities working directly with communities will have unique insights into the needs of those communities. Their knowledge, insight, and ability to identify problems early is invaluable for any government. This includes intelligence about the real-time impact of government policy

Why isn’t this happening?

This all raises a good question: if this kind of partnership is so mutually beneficial, why isn’t it happening?

In the US, the merits of using government spending to encourage other investors hasn’t been part of the conversation. The political context means that the fact that $4 million of USAID spending in East Africa leveraged over $100 million hasn’t been a big feature in the debate about what should happen to USAID.

In the context of a world that feels increasingly insular, the picture in the UK is more optimistic. The Government’s Civil Society Covenant and a government funded Social Impact Investment Vehicle are both expected this summer, and Number 10 recently launched their Partnerships Unit.

It’s positive to see this Government taking steps to show what good can look like in this space, but what comes out of this summer’s Spending Review will be key to how much the impact sector feels valued by this Government.

Image: USAID