Arts Impact Fund: a radical new way of getting extra funding for the arts

Peter Bazalgette, chairman of Arts Council England, explains how extra funding could come from universities, social services and the NHS

Heart of coal: ‘Billy Elliot’ writer Lee Hall was a beneficiary of state funding (Reuters)

Arts Council England recently announced that it was jointly launching a new sort of finance for culture: the Arts Impact Fund. It has £7m to lend and the money comes from a mixture of the commercial sector, from charities and the public purse (even despite the reassuringly small reduction to arts and culture in George Osborne's latest round of savings). More about this new form of social investment shortly, but it's the latest example of a sector successfully diversifying its sources of revenue. This is something that cultural entrepreneurs have been driving for some years in order to maintain and expand our world-renowned arts and culture.

The larger organisations funded by Arts Council England are called National Portfolio Organisations (NPOs). You can take a constant sample of their finances since 2005, derived from the half of them that have reported on a like-for-like basis over that time. It's a revealing picture. They have driven their commercial income, such as ticket sales and hospitality, up by around 60 per cent in real terms over the period. It now represents more than half of their total take. They have also almost trebled their fundraising, albeit from a low base – it's still only 13 per cent of the total.

By comparison, since 2005, Arts Council grants have fallen from 37 per cent of their overall turnover to 28 per cent. You might therefore conclude that this diversification has been a matter of necessity, especially since local authority support has also fallen quite rapidly. But that's only part of the story. Over the nine years we've analysed these 443 organisations they have actually put up their overall revenues by 60 per cent, again in real terms. By this point you may be saying, that's enough statistics thank you. However, we must recognise the flair and commercial nous with which they have responded to challenging times. OK, a good number of these NPOs are in London where it's easier to grow your audience and supporters. But many aren't. And a lot of smaller institutions have, it's true, found surviving much tougher. But all the more reason to seek new sorts of income.

The classic four sources of revenue for arts organisations, as you'll deduce from the figures above, are commercial, philanthropic, local authorities and public funding. The last category includes Lottery funding which, while stable, has been needed to help the arts as government funding has reduced. But we can now add to this list new forms of social investment, other sources of public finance, tax credits, novel ideas from local government and digitally enabled fundraising. Before I explain the genuinely exciting, fresh thinking that's going on at the moment, one substantial caveat: it's all incredibly important but it is not a substitute for public funding; it's a brilliant addition to it. Indeed, many donors give to theatre and dance companies, orchestras and museums precisely because they know that they are publicly supported and accredited. So let's lay to rest the lazy canard I sometimes hear, that these new ideas are intended to allow the state to exit. Not so!

Now, what is social investment? It's probably best defined as a loan or equity stake on which part of the dividend is the delivery of public good. Is this not the raison d'être of the arts? But the idea was first pioneered over the past decade in the delivery of public services, such as reducing recidivism among offenders or improvement in school attendance. At the same time the Arts Council's thinking was being influenced by a fund set up some years ago, originally to finance families to buy musical instruments for their children. This was then extended into making loans to allow people to buy art. Out of this came Creative Industry Finance, which now makes loans to small creative and cultural enterprises enabling them to grow into sustainable businesses. Let me first explain how a loan might assist arts and cultural organisations to grow.

Of course, this approach is in its infancy so there are not many hard examples. But there are interesting parallels. The Arts Council can already make small capital grants. In 2009 a grant of £260,000 was made to Live Theatre in Newcastle to help it become a partner in a gastro pub next door. Their share of the pub's proceeds now delivers £110,000 a year, every year, to their famous new writers programme (Lee Hall of Billy Elliot fame got his first break there). And in 2009 a grant of £251,000 was made to the Yorkshire Sculpture Park for the installation of a pay car park. That yielded a return of £500,000 in 2013-14 to this world-class collection. Now, imagine that as an alternative to receiving a capital grant they had attracted a social investment loan. It would have been secured against future revenues and would have enabled both organisations to grow and, of course, deliver more public good. This is where the Arts Impact Fund could come in, with its finance from Bank of America Merrill Lynch, the Esmée Fairbairn Foundation, Nesta and the Arts Council. This will provide repayable loans of between £150,000 and £600,000. An overall fund of £7m is very small compared to the turnover of the sector, but it's a start.

Before Arts Impact was launched we had to be satisfied that there were "investment-ready" organisations capable of handling loan finance. And we did indeed find a handful. Now the financial and business acumen of arts executives and boards, already rapidly developing, will need to be enhanced further, and not just for this purpose. The Treasury has recently extended a system of tax credits from the film and TV world into the performing arts. This will put millions of pounds back into theatre, opera, dance and orchestras over the next five years. But to benefit from it arts organisations, as charities, need to set up separate "Special Purpose Vehicles" to receive the credit. All this requires new skills.

We like to point out that the arts enrich our entire quality of life: in hospitals, for those in social care, at all stages of education and in the regeneration of our cities. This is being increasingly recognised in how arts and culture are funded. In 2012 the Department of Education agreed to fund a national web of Music Hubs to revivify music education for children. This year £75m will be provided, via the Arts Council. Happily, the original strategy was written by Darren Henley, who's just joined the Arts Council as its new chief executive, and pushed through government by Ed Vaizey, just reappointed as Arts Minister.

Universities are redefining themselves as placemaking investors in their local communities, as well as centres of academic excellence. So Teesside University now runs MIMA in Middlesbrough, Derby University has opened up the moribund local theatre, Sunderland University has taken over the National Glass Centre and the University of the West of England has become a partner in Bristol's Arnolfini Gallery. I have sat down with more than 20 vice-chancellors in the past two years and they are all up for this imaginative extension to their remit. Not least because it improves the quality of life for their students and provides a pathway for some of them into professional careers.

Then there's health and well-being. While medicine attends to the body, the arts cares for the person and increasingly the NHS and social services are funding them. We have to prevent obesity, not treat it: hence the professionally run dance classes I witnessed in Ipswich. We have to cherish the mentally ill, not dismiss them with pills: there are theatre events for them in Birmingham, choirs to join in Gloucestershire and art workshops in Cambridgeshire. In Walsall poetry and photography classes are funded in hospices, in Staffordshire and Shropshire there's singing for people with Alzheimer's and in Kent for those with respiratory problems. There are now "Museums on Prescription" and "Books on Prescription". You get the picture. It's the same with social care, delivered by local authorities. In Cornish care homes they offer theatre, textile design, dance and drama. In Chester there's dance for the severely disabled. As we try to switch resources from critical medicine to prevention and as we attend to the needs of an ageing population, arts and culture is increasingly being funded to play its part.

The internet is offering new ways of raising funds too. There's a new crowd-sourcing mobile app called Donate that assisted the fire-damaged Battersea Arts centre to raise £75,000 over a weekend. While Creative Industry Finance is now partnering with RateSetter, which is designed as a peer-to-peer investment platform.

While it's entirely healthy that the arts should diversify its revenue streams in all these ways, we currently have a pressing need to continue to make the best possible case to government for the maintenance of public funding in an era of austerity. We'll be stressing the value delivered for the creative industries, for the growth of our cities, for our education and health. And we'll be reminding everyone that it is our small amount of public funding that makes all these other benefits possible.