The case against social enterprise

The headlong rush towards social enterprise could undermine any prospects of a genuine social economy, says STEVE SCHOFIELD

Social enterprise is very much the flavour of the month, or even, possibly, the next big thing. Its proponents put forward an ambitious agenda of creating jobs, providing training and developing local services in areas of serious and long-standing deprivation, while holding out the prospect of financial viability rather than grant dependency.

According to Jonathan Bland, chief executive of the Social Enterprise Coalition, interviewed in the Observer in 2004: ‘… we want to establish the building blocks for social enterprise so that in 20 years time, the coalition will sit alongside the TUC and the CBI. It will be that central to the country.’

Allowing for a smidgen of hyperbole, there is no doubt that the momentum around social enterprise has accelerated. Central government, through the Department of Trade and Industry’s Small Business Service (SBS), has set up a Social Enterprise Unit (SEU) which recently concluded a major research project on the scale of the social economy in England and Wales as the basis for targeted support. Each of the Regional Development Agencies (RDAs) has a similar support structure and no self-respecting local authority would be seen dead these days without at least one Social Enterprise Advisor.

Why has this interest in social enterprise taken off in this way and what are the implications for poorer communities and their local economies which are supposed to be the main beneficiaries? I want to tease out some of the difficulties and inconsistencies in the definition of social enterprise before critically analysing the model as a significant contribution to regeneration.

Social enterprise, as presently constituted, is a catch-all phrase that masks serious problems including ones of scale, significance to the local economy, ambiguity as to social versus private purpose, and the tensions between trading for profit and providing a local service for disadvantaged communities. Little consideration is given to how the overarching context of privatisation and marketisation in public provision impacts on the prospects for radical alternative models of the social economy.

Definitions

As John Pearce, one of the leading thinkers on social enterprise, argued in Understanding Social Enterprise, published by the Centre for Local Economic Strategies in 2004: ‘It is essential to have a clear, unambiguous, definition of social enterprise that allows society to know, not only when an organisation is a social enterprise, but also when it is not.’

For him there were six defining characteristics that distinguish social enterprises:

  1. a social purpose
  2. engaging in trade
  3. no private profit distribution
  4. holding assets for community benefit
  5. a democratic structure
  6. accountability to stakeholders.

But this emphasis on social purpose above profit is not universally shared. In Introducing Social Enterprise, published by Social Enterprise London (SEL) in 1999, social enterprises are portrayed as essentially part of the private sector:

‘Social enterprises are competitive businesses, owned and trading for a social purpose. They seek to succeed as businesses by establishing a market share and making a profit. Social enterprises combine the need to be successful businesses with social aims. They emphasise the long-term benefits for employees, consumers and the community.’

Similarly, the DTI argued in its 2003 report, Enterprise for Communities, that: ‘Social enterprises, large and small, bring together the expertise and dedication of the voluntary sector with the flair and flexibility of the commercial world.’

Clearly, there is considerable scope for differing interpretations of what constitutes a social enterprise. For Pearce, and many others whose roots are in the voluntary sector and the co-operative movement,social enterprise represents a radically different model – a vision of the way people and organisations might work together for the common good through democratic organisations without relying on profit as traditionally perceived. Others see social enterprise as a way of maintaining social purposes through normal market mechanisms of profit.

Exciting alternatives

Given these different perspectives it is worth reflecting on who or what were the main drivers of social enterprise – the key people and organisations that influenced policy. As early as 1997, with the election of the first new Labour government, a stream of papers was produced by think tanks such as Demos, the Institute of Public Policy Research and the New Economics Foundation that promoted social enterprise as an exciting alternative for social provision, particularly in poorer communities. Perhaps one of the most influential was Charlie Leadbetter’s 1997 paper for Demos, The Rise of the Social Entrepreneur, which focused on: ‘… visionary individuals … creating innovative forms of active welfare, health care and housing which are both cheaper and more effective than the traditional services provided by government.’

Such ideas were very much influenced by social entrepreneurship in the United States that revolved around dynamic self-starters, backed by philanthropic supporters who stimulated social enterprises in deprived areas – a sort of heroic ‘ideal type’ that could be transported back across the Atlantic to break through the shackles of hidebound, unimaginative bureaucracies in the public sector. For a government committed to a general culture of support for enterprise and ‘third way’ alternatives to the provision of mainstream services, this held many attractions.

The role of regeneration funding was also significant – specifically European Regional Development Funds (ERDF) – which, during the late 1990s, began to prioritise what was defined as community economic development. The work of Professor Peter Lloyd from Liverpool University was influential here. He wrote several reports for the European Commission highlighting an underlying concern that many previous regeneration programmes had been infrastructure-driven; in other words, they were big capital-building projects that had not directly benefited the most economically disadvantaged groups such as the long-term unemployed. Different forms of regeneration support were required to stimulate new services and local employment both in and for deprived areas.

Recognising that serious barriers existed, such as a low skills base in those areas, the emphasis was very much on capacity building and training, to move people towards a position where they could create new enterprises that satisfied real needs in their communities and provided good jobs, skills and wages. The benefits of these measures, it was said, would include a higher local multiplier effect than other regeneration programmes because a greater proportion of income would be spent by local people in their communities, so contributing to longer-term development and sustainability. This approach gained significant and rapid support through European Union institutions as community economic development became a major funding programme under ERDF Objective 2, Priority 3 measures.

Other support for social enterprise is now in place. The government’s Phoenix Fund was set up by the DTI to stimulate new businesses, including social enterprises in deprived areas. There were also tax concessions for investors in social enterprises, and a new legal structure, the community interest company (CIC), that makes it easier to start up, while having special features to ensure profits and assets are used for community benefits.

Clearly there has been a powerful political impetus behind social enterprise, but mainly this has come from the top down, rather than the bottom up. In other words, there has been little organic development that builds on local organisations’ experiences of service delivery, or of strong traditional models such as workers’ co-operatives. Rather, the main drivers have been a core group of Blairite think tanks married to influential networks of support agencies such as Social Enterprise London. These looked to external models of social entrepreneurship, ones not necessarily representative or transferable, but which chimed with the Blair government’s broader objectives to shape alternative provision of public services and build an entrepreneurial culture.

That is not to say that such local organisations did not exist. There was a legacy of co-operatives and voluntary organisations in the UK that married social provision with successful trading operations, and these were cited as potential enterprises. But the over-riding impression is of a bandwagoning effect in response to the government’s assertion that a ‘third way’ could, indeed, must be found for public provision.

With regeneration funding, such as ERDF, available, the government and key advocates insisting on social enterprise as the wave of the future, and an extensive support network of agencies being set up, it is not surprising that many organisations, particularly in the voluntary and community sector, looked to rebrand themselves as social enterprises in order to gain access to funding and institutional support.

Practical terms

What are social enterprises in practical terms? That is, in which areas of economic and social activity are they involved, what is their scale and their importance within the overall economy? The following list is not meant to be exhaustive but gives some flavour of the range of activities social enterprises are involved in:

  • social care / child care / health care
  • community arts
  • sports / recreation facilities
  • community transport
  • recycling / renewable energy / environmental improvement
  • community cafes / shops
  • social housing / insulation and repair
  • ILM organisations / training / managed workspace.

As mentioned earlier, the DTI commissioned national research which was published in 2005 as A Survey of Social Enterprises across the UK by the Small Business Service. Previously, there had been widely different estimates of the number and scale of social enterprises, but this report, based on a nationwide telephone survey, suggested 15,000 organisations could be classified as social enterprises in the UK – 1.2 per cent of all enterprises, employing 475,000 people and generating £18 billion turnover, of which £14.8 billion was from trading activities.

Predominantly these were service-based, with a third of them involved in health and social care. In fact, much of the trading activity appears to be associated with public sector delivery, including health care, social care, childcare and training. This raises questions about whether the services are funded through contracts with public bodies, or from income raised or earned from other sources, especially as many of the services were offered free or at low cost to recipients.

Half of the enterprises had only 10 employees or fewer, and only two per cent had 250 or more. Quite how sustainable some of these organisations are is open to question since no assessment was made of their financial viability nor of the attrition rates of failed social enterprises.

Where information is readily available it tends to be on the larger and higher profile organisations. The box on page 12 summarises some of these enterprises, illustrating how, although they have evolved from a variety of backgrounds, including local authorities and community and voluntary organisations, they share the general aim of moving from grant-dependency to financial independence while maintaining their commitment to social purposes.

However, the expansion of these enterprises has depended to a large extent on public procurement, work secured either through contracts for training or for delivering services for central government, local authorities and other public agencies. While these organisations would stress the innovative character of their work compared to mainstream agencies, the fact remains they are part of public sector provision.

Another facet that deserves some comment is how many of the enterprises display some characteristics of traditional co-operatives, yet the term is hardly ever used – presumably because of its associations with old Labour, and because of the Blairite emphasis on entrepreneurial innovation rather than democratic accountability.

In contrast to the limited number of leading social enterprises, there are a far larger number of smaller social enterprises about which information is still patchy, despite this new research. Issues here include the balance between social and economic activity; the proportion of trading against other forms of activity; and the relationship between grant and trading income – hence the use of the term ‘hybrid social enterprise’ to identify some of these possible tensions.

So, despite the general perception of rapid growth in social enterprise activity, serious questions remain over their real significance both to the overall economy and to the areas of social deprivation they serve, even taking into account social audits that attempt to gauge wider community benefits.

The future

For proponents, the success of the larger scale organisations proves how effective social enterprises can be. For them, the major issue now is to build on this growth by opening up public procurement on a wider scale, especially in major institutions such as local authorities and the NHS, organisations responsible for billions of pounds worth of contracts but which are criticised for being reluctant to look beyond their mainly private sector suppliers because of (unwarranted) concerns that social enterprises lack financial viability and scale.

A fundamental, but generally unacknowledged, question is how social enterprises are expected to operate in the context of the privatisation of public services and the marketisation of activities within the remaining public sector. With central government introducing what is effectively a sea-change in the structure of public services that automatically favours private industry over the public sector – such as the Private Finance Initiative (PFI), and two-tier systems such as foundation hospitals and academy schools that abandon equity of provision – it is difficult to see how social enterprises can address issues of social purpose unless they first satisfy criteria of financial viability, efficiency and profitability in similar ways to the private sector.

This could seriously alter existing consensual and sympathetic relationships between the public sector and not-for-private profit service providers. Logically, it could also mean private sector companies encroach into areas of service previously delivered by the voluntary and community sector.

For small-scale organisations in the voluntary and community sector that serve a particular group or community those same market values and entrepreneurship are being emphasised above social purpose and democractic accountability. Much is made of moving from grant dependency to financial self-sufficiency and, if possible, to a trading profit. But the vast majority of these organisations do not trade in any recognisable form or, if they do, their trading activities are small or relate to work with some of the poorest members of the community. When organisations work with vulnerable and marginalised groups, is it acceptable to generate a financial surplus in this way, even if it were possible?

The answer to that question is a simple ‘no’, and the logical conclusion is that the vast majority of voluntary and community organisations are not social enterprises and should never be constituted as social enterprises. (Conversely, the pressure on the social enterprise agency network to achieve targets could lead to some highly dubious classifications; for example, when sole traders are given support as social enterprises if they can make any sort of case that their trading has social value.)

In the context of marketisation, it becomes increasingly easy to create a climate where voluntary and community groups feel compelled to move to a social enterprise structure for opportunistic reasons, and then can easily be blamed for not showing sufficient ‘entrepreneurial spirit’ if they run into difficulties. The real issue is having consistent and stable funding in order to provide a good service.

Alternative models

It is worth referring back to the original vision of a social economy that Pearce and many others from the co-operative movement put forward. For them it was a radical one that would create an alternative to globalisation based on a range of local services, including food, energy, housing, transport, and so on, supported by credit unions for local finance, possibly through alternative currencies, and Local Exchange and Trading Schemes (LETs). However utopian it might sound in the present political climate, the fact that social provision was the absolute priority signposted how the social economy should evolve.

Under a more supportive political framework it might also be possible to look for other alternatives that echo radical ideas from the 1970s around democratic ownership and real economic power. Locally Owned Public Enterprises (LOPE), for example, are one possibility – organisations locally owned through municipal or community structures with substantial financial backing, clearly accountable to representative public bodies, and providing core or essential tradable services to their communities. Such structures would run directly against the grain of privatisation because they would actively seek to bring back into local public ownership services such as water and public transport while supporting an expansion of public enterprise into new areas of technology, including community-based renewable energy systems to satisfy a large proportion of our energy needs.

LOPEs would work to a public service ethos and have long-term contractual relationships with municipal authorities which incorporated social goals such as training and employing marginalised groups, but would also retain flexibility in how they delivered services (hence retaining the term enterprise in the context of public provision).

Clearly, these notions are not on the political agenda at the moment and are unlikely to be so, but they do seem to be much more in tune with the original vision of a social economy. They also raise serious but practical issues around ownership structures, funding and financial resources for municipal authorities independent of central government control, training public enterprise managers, and accountability to local communities.

Solid citizens

What we need right now is not the heroic entrepreneurial individual who performs miracles on a shoestring budget and against insurmountable odds but a cadre of solid citizens, well-educated public servants who could run important, properly funded local public enterprises efficiently and with a public sector ethos. There would still be scope for social enterprises in other areas under a strict interpretation of what constitutes a CIC. However, a clear distinction needs to be drawn between these and the broader voluntary and community sector that works with marginalised groups and has no substantial trading activities.

Prospects for radical policies may seem so far off the political radar as to be invisible, but we desperately need a real debate about the meaning and structure of the dominant model of the social economy emerging through the social enterprise movement, and about possible alternatives, because there has never been a time when local communities have had less control over the economic decisions which impact on their quality of life.

Over the years, with the privatisation of key services, the erosion of local municipal power, and the acceleration of market principles into the public sector, real economic power has moved into the private sector or to unaccountable quangos. Even the Post Office, nominally in the public sector, now operates on the basis of individual profit centres, and has so abandoned the concept of social purpose that local post offices can be closed down on the grounds of efficiency as management seeks to capitalise on property assets.

There are real dangers in the headlong rush towards social enterprise that could actually damage the capacity of the voluntary and community sector to work with disadvantaged communities while undermining the vision of a social economy as a radical alternative to present trends towards privatisation, marketisation and globalisation.  As things stand, the Social Enterprise Coalition may well be significant in 20 years time, not for sitting alongside the TUC and CBI, but as a subsidiary of the latter.

Dr Steven Schofield is a freelance researcher based in Bradford. This article was originally published in the Journal of Co-operative Studies, volume 38:3 (no. 115) December 2005. Email: coop_studs@fastmail.fm

Leading social enterprises

Wise group

Established in Glasgow in the 1980s to help long-term unemployed back into work through construction and environmental projects, the Wise Group has expanded into a training organisation employing 350 staff in Scotland and the north east. Funded by the European Union, local authorities, local businesses and central government.

Create

Established in Liverpool in 1996, Create describes itself as a social business providing training and work opportunities, mainly for people from Speke and Garston, by recycling used electrical products and selling them to low income households. It had a turnover of £1 million in 2004, 55 per cent from sales, 42 per cent from training contracts, and only 3 per cent from grants. It has 26 full-time staff and 50 on short-term contracts.

Greenwich Leisure Limited

In 1993 Greenwich Council was looking for a not-for-profit solution to government cutbacks to gain access to external funds not available to the local authority. Greenwich Leisure Limited was set up as an Industrial and Provident Society and has expanded significantly through contracts with other boroughs in London and the south east providing municipal leisure services. It now has more than 800 full-time staff, 2,000 part-time, and a turnover of £35 million.

Hackney Community Transport

Established in 1983 offering a community bus service, Hackney Community Transport has become a mainstream service under contract to London Transport. It now runs three bus services and a range of other community transport projects. It employs 320 people and grant income has declined from 70 per cent to less than 3 per cent.

EAGA Partnership

The EAGA Partnership was established in Newcastle in the early 1990s to provide loft insulation to low-income households. It now runs the government’s warm front scheme that offers grants to low-income families. EAGA employs more than 700 people to instal insulation and central heating and has a turnover of £250 million.

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