Marketisation and social enterprise

The reform of public services in the UK was one of the central themes of social policy development under the previous Labour governments, and has been taken up as a key priority by the Coalition government since 2010. Since the turn of the century, much of social policy in the UK has been devolved to the separate administrations in Scotland, Wales and Northern Ireland; however, this article focuses on developments in England only. This programme of reform is sometimes referred to as ‘modernisation’ (Margetts et al., Reference Margetts, Six and Hood2010) or ‘new localism’ (Milbourne, Reference Milbourne2009), but the policy agenda has in practice been based, too, on significant elements of ‘marketisation’. Marketisation refers to the adoption of market or quasi-market practices with the aim of generating greater efficiency, effectiveness and responsiveness of public services. At the core of this marketisation is the involvement of private and third sector providers in a mixed economy of welfare provision (Powell, Reference Powell2007).

Both Labour and now the Coalition have committed themselves to accelerating diversity of provision, and in particular to enhancing, and supporting, the role of third sector organisations (TSO) in playing a greater role in service delivery. TSOs have been encouraged in large part because of expectations that they can secure the engagement and trust of excluded or hard-to-reach groups due to their specialist knowledge, flexibility and independence from state structures (Haugh and Kitson, Reference Haugh and Kitson2007; Carmel and Harlock, Reference Carmel and Harlock2008), although what this has meant for these organisations in practice has been incorporation into the discourse and practices of marketisation (Salamon, Reference Salamon1993). There are two key dimensions to this.

The first implication of marketisation involves the way in which organisations are funded. TSOs have been opened up to a diversification of funding streams, with earned income becoming more important to many TSOs. According to the National Council for Voluntary Organisations (NCVO) Civil Society Almanac, earned income for charities in England and Wales almost doubled in the first decade of the new century from £10.6bn to £20.1bn (Clark et al., Reference Clark, Kane, Wilding and Bass2012: 40), and within this it is earned income from public sources that has grown the most. Income from public sources has been playing a greater and greater role in third sector funding, with public funding growing from £8.6bn in 2001 to £14.3bn in 2010, around 38 per cent of overall funding (Clark et al., Reference Clark, Kane, Wilding and Bass2012: 37). That increase is largely comprised of a reduction in the availability of grants and an increase in the use of contract funding for the provision of public services – with grant income declining from £4.4bn to £3bn and contracts increasing from £4.3bn to £10.9bn (Clark et al., Reference Clark, Kane, Wilding and Bass2012: 41).

Contracts to deliver public services have therefore become a much more important part of the earned income that have shifted TSOs towards marketisation, and public sector contracting has led to a significant shift in the way many TSOs engage with public bodies (SQW, 2007). The impact of this marketisation on the ways in which TSOs increase their share of commercial revenue through the adoption of market discipline strategies is explored by McKay et al. (Reference McKay, Moro, Teasdale and Clifford2011), who conclude that organisations are to some extent adopting the practices, structures and languages of the private sector and ‘succumbing to market forces’. There are interesting comparisons with the US here, where cutbacks in government funding for non-profits since the late 1970s and 1980s have been accompanied by encouragement to replace government in the provision of public services (Eikenberry, Reference Eikenberry2009), with the result that earned income now makes up the largest source of revenue for the third sector (Kerlin and Pollak, Reference Kerlin and Pollak2010).

The second consequence of marketisation is its impact on organisational structure, culture and practice. The process of securing and managing contracts has led to TSOs having to act more and more like commercial organisations. Macmillan (Reference Macmillan2010) describes this as ‘mission drift’ and Billis (Reference Billis and Billis2010) suggests that it means that TSOs have been increasingly ‘hybridised’. One particular dimension of this organisational change has been the trend for third sector activity to be labelled (or re-labelled) as social entrepreneurship. Social entrepreneurship is an activity, but it also can take an organisational form – social enterprise. Social enterprises have been promoted as being particularly capable of delivering the shift to earned income and marketisation within the third sector because they combine the market principles of business with the social values of charities and voluntary action (Peredo and McLean, Reference Peredo and McLean2006; Peattie and Morley, Reference Peattie and Morley2008).

Social enterprises have been described as ‘more market driven, client driven, self sufficient, commercial or business like’ than traditional voluntary organisations (Dart, Reference Dart2004: 414), and as occupying the increasingly blurred boundaries between non-profit and for-profit. They can encompass a range of overlapping organisations, objectives and values (Pharoah et al., Reference Pharoah, Scott and Fisher2004), and academic analysis has pointed out that both theoretically and empirically their form and scale are contested (Teasdale, Reference Teasdale2010). Despite this contestation, however, social enterprise comprises a discourse which addresses the impact of marketisation on the third sector, and social enterprises provide an organisational form which can embrace the pressures of mission drift and hybridisation. As a result, it is claimed that social enterprise has the potential to respond to the need for adaptable approaches to service provision in the context of potentially scarce public funding by providing more diverse and potentially more reliable income streams, thereby generating greater efficiency and accountability (Eikenberry and Kluver, Reference Eikenberry and Kluver2004), as well as providing the financial capacity to create sustainable improvements rather than short-term responses to social problems (Dees and Anderson, Reference Dees and Anderson2003).

Supporting public service markets: the social enterprise investment fund

Social enterprises have been attractive to politicians concerned with public service reform, and they have been an increasing focus of political and policy intervention over the last decade or so. In 2001, the Department of Trade and Industry (DTI) set up a Social Enterprise Unit to provide direct government support for social enterprises. This role was incorporated into the work of the Office for the Third Sector (OTS) in 2006, and has been continued in the Coalition's re-titled Office for Civil Society (OCS). The DTI unit developed a definition of social enterprises as: ‘business[es] with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners’ (DTI, 2002). It is this broad definition which has informed subsequent policy intervention and underpins the particular initiatives discussed in this article.

Social enterprises capture the shift towards earned income and contracting within the third sector, and they have been seen as particularly important in implementing a more diverse provider base within health and social care reform – and this has enjoyed cross-party support. However, combining social goals with business practices has also created some potentially significant problems for these organisations, especially within the context of the shift from grants to contracts in public funding. Questions have been raised over the extent to which social enterprises in practice have the capacity and skills needed to adapt to new financial and political environments of public sector contracting and business development (Dees and Anderson, Reference Dees and Anderson2003). Many social enterprises and TSOs are small community groups who have tended to rely on grant funding from public sources, even where they are engaged in service provision (Macmillan, Reference Macmillan2007; Sunley and Pinch, Reference Sunley and Pinch2011). Furthermore, third sector organisations encounter difficulties in negotiating commissioning and procurement processes as they tend to have less capacity and experience to tender successfully for contracts, especially when competing with large private providers (Addicott, Reference Addicott2011; Macmillan, Reference Macmillan2010; Packwood, Reference Packwood2007). As a result, commissioners may perceive such organisations as not business-like enough (Chapman et al., Reference Chapman, Brown and Crow2008).

Access to appropriate capital and skills is required to support the growth and sustainability of social enterprises, and enable them to bid for and deliver public services (OTS, 2006a; 2006b; Macmillan, Reference Macmillan2010; Wells et al., Reference Wells, Chadwick-Coule, Dayson and Morgan2010). However, the support provided to social enterprises in particular has been criticised as ‘fragmented and patchy’ with an emphasis on new start-ups rather than established organisations looking to reach financial sustainability (Lyon and Ramsden, Reference Lyon and Ramsden2006: 37). Income streams in the social care market in particular have been criticised as unpredictable, meaning that organisations live ‘hand to mouth’ in an ongoing search for funding (Alcock et al., Reference Alcock, Brannelly and Ross2004), limiting their capacity to grow and develop. Packwood (Reference Packwood2007: 36) argued that some TSOs ‘spend so much time struggling for survival that they have very little time or energy to develop leadership skills, or to undertake the research needed to gain a clear picture of what is coming around the corner’. Instead, their only concern is with delivering services rather than in developing and investing in the future sustainability of the organisation.

Access to finance and business support was recognised by Labour as being one of the biggest barriers facing the sector (SQW, 2007), and as a result the government committed the investment of significant resources to the direct provision of these. These social investment programmes were part of a wider process of ‘market making’ which is intended to support TSOs to develop their capacity to secure contracts to provide public sector services. The most significant of these was the Futurebuilders fund, which was established in 2005 (HM Treasury, Reference Treasury2002) as a ‘policy experiment’ to test how the third sector could be supported through loan funding and business support to improve its capacity to deliver public services and achieve social outcomes (Wells et al., Reference Wells, Chadwick-Coule, Dayson and Morgan2010). It provided £215m between 2005 and 2011 to support TSOs in bidding for public sector contracts. Formal evaluation of the fund indicated that whilst investment did appear to support third sector organisations to build organisational capacity and secure public service delivery contracts, some organisations found it difficult to make the strategic shift needed to generate income and actually deliver contracts (Wells et al., Reference Wells, Chadwick-Coule, Dayson and Morgan2010).

The Social Enterprise Investment Fund (SEIF) was another element in this support and investment strategy. It was established by the Department of Health (DH) in 2007 and was focused directly upon supporting social enterprises to improve their capacity to deliver health and social care services and to compete with other public and private providers for public sector contracts. Health and social care was one of the key areas where public service reform has sought to embrace a more plural and diverse provider market of private and third sector delivery, and where in particular the last Labour government felt that social enterprise could play a critical role. Although the SEIF was an English programme in the area of health and social care, it has implications for the implementation of marketisation across public services, and for other welfare regimes in Europe and beyond those where ‘modernisation’ programmes are underway.

The SEIF was initially delivered by Community Health Partnerships, an independent company wholly owned and controlled by DH, who administered the first two rounds (August 2007 to May 2009), and was then transferred to the Social Investment Business (SIB) in 2009 (in collaboration with Local Partnerships – formerly PUK). It began with a potential budget of £100m to be disbursed as a mixture of grants and loans, and continued after the change of government in 2010. The initial disbursement took place over the four-year period to March 2011, and a further year of funding was announced by the Coalition government for the financial year 2011/12. However, its longer-term future remains unknown. It provided advice and seed funding for social enterprises ‘starting up’, and investments to support the growth of ‘established businesses’ already delivering health and social care services. In addition, it offered business support, including advice on business plans and governance structures, to support social enterprises and help them bid for and win public service contracts and as a result become sustainable (DH, 2009).

The longer-term objectives for the SEIF included supporting the provision of high-quality services, improving health and social care for patients and service users and enabling better commissioning in line with the health and social care reform agenda. A further long-term aspiration for the SEIF was to itself become sustainable through the repayment of loan finance. This article draws on research to evaluate the SEIF, funded by the Department of Health (DH), and is focused in particular on the extent to which it was able to support and promote the role of social enterprises within the emerging market for health and social care delivery.

Supporting social enterprises

Assisting start-ups

The SEIF supported 531 social enterprises by investing £80,712,510 up to 2011 into their start up or growth. The organisations received an average of £152,001 (see Table 1), although this ranged considerably from £546 up to £3,115,150. Central to the aim of the Fund was to provide a mixture of grant and loan funding, in order to help organisations to develop business plans and to challenge the potential for grant dependency identified by Macmillan (Reference Macmillan2007). Despite this, however, 86 per cent of investments (£69,339,872) were in the form of grants (with a further £3,086,430 of repayable grants), and only 14 per cent (£11,372,637) were loans. A total of fifty-five organisations (10%) received a loan; however the majority of these investees also received a grant and only eight investees (2%) received a loan only.

TABLE 1.

All SEIF Investments up to 31 March 2011 (Rounded to the nearest £)

Source: SEIF administrative data

Grant funding was especially prominent for social enterprises ‘starting up’, as they were often not in a position to make interest repayments. The survey of investees indicated that 52 per cent of SEIF funded organisations were new start-ups (including existing charities that were beginning to trade), and the case studies suggested that many organisations starting up may have been using the SEIF to obtain grant-based start-up funding, which was used to fund business support, legal and development expenses. Within this, external and specialised consultancy support was the key component, which enabled the development of marketing tools, a business plan, legal frameworks and accountancy systems.

There are some basic ingredients if you want to bake a cake, you need eggs, flour, milk, butter, well if you want to have a social enterprise, you need legal support, you need those pieces, and you need somebody to tell you how to do it. (Healthcare SE 1)

As far as we're concerned the impact [of SEIF] is very simple, it has made the difference between setting the company up and not . . . we'd have found it difficult to get investment from elsewhere. (Health and Wellbeing SE 3)

Grant support was particularly important for those fifty organisations that ‘spun out’ from NHS agencies under the Labour government's Right to Request initiative (Miller and Millar, Reference Miller and Millar2011). These comprised 10 per cent of all investees who received a total investment of £8,333,385. These ‘spin outs’ were often led by clinicians and for them SEIF was critical in providing business and management skills through funding consultancy costs, legal expenses and employing business support managers.

As a clinician, suddenly having to go from being, a dare I say it, a competent clinician and very comfortable in that to being pushed way out of my comfort zone to running a company and that's a huge transition. (Healthcare SE 3)

For these organisations in particular, the SEIF was also the only potential source of financial support.

[SEIF] was the only place we could go. I mean obviously with the Right to Request, whilst PCTs [Primary Care Trusts] have to offer support, support doesn't equate to money. (Healthcare SE 4)

The remainder of SEIF investments (48%) were used to develop and grow existing social enterprises. From the 48 per cent who were expanding within an existing social enterprise, most (44%) were already delivering health and/or social care services. Therefore, only 4 per cent of investees were using the SEIF investment to enable their social enterprise to break into the health/social care sector. Case study findings suggest that many of these organisations received a grant as well as some loan-based investments to make structural improvements, including purchasing and refurbishing buildings or equipment.

The organisations receiving SEIF investment were diverse, including ‘hybrids’ with multiple functions and specialties, but virtually all were operating with missions that we defined as ‘health inclusion’, responding to gaps within the health and social care system rather than replacing existing provision. They included in particular services that targeted disadvantaged or vulnerable groups, including those struggling with poverty, mental illness or the harm caused by alcohol, drugs or violence. The SEIF thus played an important role in helping the DH to meet health inequalities targets (DH, 2010; Marmot, Reference Marmot2010).

The commissioning environment

The ability of social enterprises to become sustainable through the securing of contracts to deliver health and social care services does not just depend upon their organisational development and preparedness. The value of social enterprises as providers also has to be recognised by those commissioning the services. Both the Labour and the Coalition governments have been keen to improve the commissioning environment, with the new government promoting their ‘any qualified provider’ strategy (DH, 2011). However, the SEIF research suggested that social enterprise delivery of health care services was still at an embryonic stage, especially in the minds of those commissioning services.

Although some commissioners believed they had positive relationships with social enterprises and encouraged them to grow and develop, they continued to be concerned that these organisations were not quite investment ready or capable of taking on the requirements of the contracting process.

These risks meant that providing a contract to social enterprises to deliver public services was a gamble. Furthermore, for those social enterprises that were ‘investment ready’, commissioning structures and processes were not particularly amenable. Bureaucratised and formal procurement processes were often in tension with the relative fluidity of small community-based social enterprises.

The SEIF was not an intervention in commissioning practices, of course, but its aspiration of promoting sustainability of social enterprises delivering health and social care was inevitably compromised by the limitations that have been exposed by our research.

Towards marketisation

The development and operation of the SEIF must be seen within the context of marketisation and social enterprise outlined in the introduction to this article. As we argued, marketisation in the UK meant that TSOs, and social enterprises in particular, had to be willing and able to establish and survive within competitive markets, and the Labour governments were keen to do what they could to promote and support them in this. The SEIF was one such initiative that aimed to equip social enterprises with the capacity and skills to be able to compete with other public, private and third sector providers within an open market for health and social care. The research suggested that it has been largely successful in enabling the start up and growth of social enterprises, and expanding the range of providers. What is more, most of these organisations were outside of mainstream health and primary care services and were working with vulnerable and disadvantaged groups in the health inclusion field. A particularly important dimension of this were the ‘Right to Request’ organisations, most of whom felt that without SEIF investment they would not be able to exist. This tallies with the findings of a recent NAO study (2011) which reported that the majority of the thirty-seven Right to Request organisations, which had by then spun out of the NHS, had received SEIF support.

Here, the fund was a major new source of income for social enterprises and had significant effects in helping organisations to become established and to expand their capacity for competition and delivery. Furthermore, it focused investment especially in the health inclusion field, where public provision was generally weakest, helping the NHS to meet some of its equalities targets. However, despite initial intentions, the vast majority of SEIF investments took the form of grants, and even where loans were made these were often accompanied by grants or were on terms that were more favourable than those available in the external commercial markets or where commercial loans were not available. These investments supported the start up of social enterprises, but it less clear that they provided for their longer-term sustainability, with 13 per cent of organisations in our survey closing down within the funding period.

The high proportion of grant funding within the SEIF was primarily driven by demand from applicants. However, this was also compounded by administrative factors. These included the ‘bankability’ test for loan applications mentioned above, but this was also compounded by the impact of the ‘annuality’ rules on all applications. As the SEIF was a public sector fund, it required the fund managers to spend and account for funding within each financial year. This meant that administrators were under pressure to ‘get the money out quickly’ at the end of the year, and in this context grants were more attractive to them. This was recognised as a problem by the Department of Health, but it could not be avoided given the way the scheme was set up. Overall, therefore the management of the scheme operated to exclude many of those organisations which might be the most willing and able to take on loans.

As a result, whilst the SEIF had been largely successful in enabling the start up and growth of social enterprises, and expanding the range of providers, when it came to enabling the longer-term sustainability of social enterprises and their ability to secure and manage longer-term investment funding, the research suggests that the SEIF was less successful. It can take some time for organisations to reach this level of development, and this was particularly true for the ‘Right to Request’ agencies spinning out of the NHS, for whom previous research has suggested that the timescale required to establish a social enterprise is often underestimated (Tribal, 2009; Miller and Millar, Reference Miller and Millar2011). Many social enterprises were not therefore in a position to be able to compete with other public, private and third sector providers to secure contracts and, as explained, this was compounded by the limited understanding of social enterprises in a commissioning environment. Here the evidence supports previous research that social enterprises may struggle to secure new contracts or re-tender for existing ones (NAO, 2011; Addicott, Reference Addicott2011).

This means that the longer-term sustainability of social enterprises, and their ability to compete and survive within the developing market for health and social care, will require more than the short term grant support provided by the SEIF. The future of the fund is itself in doubt now in any case, in particular given the spending constraints imposed on the NHS, and this has been compounded, ironically, by the heavy reliance on grant funding through to 2011, which has not left a significant return on loan repayments into any future fund. An initial aspiration of the Department of Health was for the SEIF itself to become a sustainable source of funding for social enterprise. This may not now be realised in practice.

Concluding remarks

The SEIF provided an excellent example of the strengths and weaknesses of government investment to promote social enterprise in the context of public service delivery. Although this was an English initiative, its generic aims of supporting the start up and sustainability of social enterprises through grant funding and loan investment is a model which other governments may be seeking to replicate, and which policy makers and practitioners addressing these issues in different welfare regimes are likely to find instructive.

The SEIF had up to £100m to invest in social enterprises over four years from 2007 to 2011, and it promised to support the start up and sustainability of social enterprises and prepare them to become ‘investment ready’ providers in a marketised health and social care environment. However, our research, in evaluating the effectiveness of the SEIF in achieving these changes, in practice presents a rather mixed picture. There are some important – and to some extent contradictory – messages that emerge.

Introducing marketisation into public service delivery requires changes in both the supply of, and demand for, alternative providers. Supply is a problem, particularly in the third sector, if organisations are not prepared for and equipped to enter into the competitive market, and for many of the smaller and newer social enterprises encountered in our evaluation this was a problem. Governments can seek to address this problem by providing support to equip organisations and prepare them for the market, but access to and use of this investment will depend upon the demand for support and the ability of fund administrators to meet this. When this is translated into practice, it may lead to an over-reliance on short-term grant funding, focused on helping organisations to get established and enter the market, rather than the longer-term loan and investment funding which might enable them to secure a sustainable economic base for the future.

These supply-side problems are also compounded if the demand for social enterprise providers in health and social care is limited by the perceptions and activities of commissioners. Our research did not focus directly on the commissioning of health and social care services, but we did uncover evidence that some commissioners at least did not fully understand the circumstances and the potential of social enterprises and were cautious about extending market contracts to them. These problems do not mean that the marketisation of public services is flawed or unachievable. But simply wishing for a diverse market of alternative providers does not make one, and providing public investment to prepare organisations for this may not meet the long-term changes needed to create it.

Finally, there is another dimension to the SEIF investments and the promotion of social enterprises in providing alternative forms for the delivery of health and social care. The underlying policy goal here was to introduce more choice and diversity in health care provision, with the expectation that this would lead to improvements in service delivery – and ultimately health outcomes. Our evaluation of the SEIF did not seek to address these longer-term health policy goals, not the least because any assessment of their achievement would indeed need to be conducted over a longer term. Nevertheless these research challenges remain, and from them flow arguably the most important policy questions – to what extent does investment in alternative providers of service lead to diversity of health care services and improved outcomes for citizens?