Social Enterprise — Question for Short Debate

Part of the debate – in the House of Lords at 4:35 pm on 6th October 2011.

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Photo of Lord Newby Lord Newby Liberal Democrat 4:35 pm, 6th October 2011

My Lords, I, too, thank the noble Baroness, Lady Andrews, for introducing this timely debate. I begin with a declaration of interest as the chair of Live Sport Community Interest Company, which provides education programmes to disadvantaged children via the medium of sport, and as chair of the All-Party Social Enterprise Group.

Previous speakers have already mentioned a number of advantages that social enterprises bring and I should like to refer to three of them. The first has to do with the ethos. The commitment of those who work for many social enterprises is often exceptionally high. The consequence of that is that the productivity of those enterprises is correspondingly high. An example which I have given previously in your Lordships' House is that of Sandwell Community Healthcare Services, which was able to take over services provided by the local authority and to do it for literally half the price. One of the main contributions towards that saving was that the number of days of sick leave fell from 30 to three. It was all to do with the motivation of people who in their previous local authority guise had not been valued or motivated.

Secondly, social enterprises tend to be extremely flexible, partly because they are small and partly because they tend to have a very flat management structure but they do have the flexibility that one associates with the small business sector more generally. Thirdly, the sector appeals to a new sort of entrepreneur. Many people, particularly young people, want to be exactly the kind of social innovator to which the noble Lord, Lord Bhattacharyya, referred. But they do not want to do it via the medium of a straightforward private sector company or through a public body. They want to have a go themselves. They have an idea and they are just like other entrepreneurs, except that their motivation is towards producing a social good rather than a straightforward commercial good.

However, the sector now faces a number of problems, to which, to a certain extent, reference has already been made. The first is the problem of scaling up. Most social enterprises are small for a number of reasons. One is that they are typically over-reliant on a charismatic founder. I see a charismatic founder in the shape of the noble Lord, Lord Mawson-sparing his blushes. The challenge is how, as it were, to clone these charismatic individuals who start an enterprise and get it to a certain size, but then find it very difficult to get beyond that size because there are not the support structures that there are around straightforward private sector activity.

The second general constraint around scaling up relates to finance. There is limited scope for investing in community interest companies bar in a straightforward way because of the asset lock and the limit of dividends. There is an unwillingness in the banks to invest in the sector because it is slightly outside the ordinary. Even in good times, banks find that challenging. At the moment, they find it impossible. So there is an over-reliance on high net worth individuals and charities to fund the sector.

The good news is that the sector has grown significantly and there is more recognition that value is to be had in investing in it. It will be very interesting to see how big society capital uses its resources and £600 million is quite a nice start. We hope that it will act quickly and that the big banks which have contributed a third of that will be so inspired by what they see that they might get the habit and either use big society capital through which to invest more of their own funds or put money into social enterprises directly.

There is also quite a lot of activity around more traditional forms of funding. The report commissioned by the City of London Corporation from ClearlySo on investor perspectives on social enterprise showed that there was plenty of scope for progress there. The report produced by my noble friend Lord Hodgson, to which the noble Baroness, Lady Wheatcroft, referred, had the sensible idea of creating a social investor, equivalent to the established concept of an experienced investor, which would make it easier for people to invest in charities and social enterprises. I hope that the Minister will say that the Government support that proposal.

The other big issue that has been referred to relates to winning contracts, given that a large proportion of social enterprises look to the public sector for contracts. The starting point in terms of problems is that the cost is typically twice as much for public sector contracts as private sector ones. There is a terrific inertia in many parts of the public sector in terms of providers. The sector has a comfort zone of who it likes to give contracts to and is very wary of going outside that, particularly in the risk-averse environment in which we now find ourselves. As the noble Baroness mentioned, large private sector operators have the ability to undercut smaller social enterprises. They have huge resources with which to do the whole bidding process.

Finally, there are ridiculous delays-I see them myself-between the point at which a public sector body says that in principle it is prepared to let a contract go to a social entrepreneur and then actually signs it and makes the first payment. From my own experience, that sometimes takes well over six months. The social enterprise does not very often have six months of cash flow to cope with that kind of delay.

What is to be done? First, some social enterprises go on the back of successful private sector contractors for the work programme and other big public sector programmes. They become subcontractors, which is a way forward but not ideal. Secondly, on my point about the timeliness of decision-making, the Government ought to see whether there could be a presumption in terms of making a decision and finishing a contract with a social enterprise-and more generally SMEs-within a certain timeframe. This dragging on, which is now almost an art form in parts of the public sector, is very worrying. Thirdly, I commend the Public Services (Social Enterprise and Social Value) Bill which Chris White introduced in another place last November. It has government support and would nudge local authorities and other public sector providers into supporting social enterprises. Social enterprises do much good work already but they have much greater potential.