Gift economy

Amongst last week’s UK social enterprise news was this story in The Shetland Times about the difficulties encountered by Shetland-based social enterprise, COPE. The company, which provides training, support and employment opportunities for people with disabilities, is in the process of working out how to deal with “the loss of more than £100,000 of core funding” from the local council.

In the story, COPE’s chairman, Jimmy Smith, explains: “Luckily we have a grant from the charitable trust, and that covers the rental of our building and some of the administration staff, but it does not cover any of our participants or our support workers.”

Smith goes on to talk about the success of COPE’s businesses, which include a soap company and a pet supplies shop saying: “We actually cover more than 50 per cent of our costs with what we sell to the general public, though there are bits of that which we think we can do much more efficiently.

The position on grant income within UK social enterprise is a fraught and ambiguous one. That’s not because there’s a major dispute over the core principles. Umbrella-body Social Enterprise UK(SEUK)’s new membership criteria for social enterprises state: “Social enterprises are businesses so they must aim to generate the majority (more than 50%) of their income through trade (rather than from donations)“.

Elsewhere, in the booklet Why Social Enterprise? – a guide for charities, which I wrote for SEUK and Pilotlight, the Salvation Army’s Social Enterprise Development Manager, Steve Coles, talks about “a spectrum of social enterprise” and says that for his organisation a social enterprise is: a market-led venture, aiming for profit but achieving at least 70% of income from trading, while striving to achieve social impact for those furthest from the labour market.”

While they’ve often been (and will inevitably continue to be) the subject of much heated debate, the percentage figures mentioned here are not the key point. The key point is the fact that a social enterprise is widely acknowledged within the sector to be an organisation that aims to generate as much of its income as possible through trading but which, based on its attempts to deliver wider social impact.

The 2011 State of Social Enterprise survey, Fightback Britain, showed that 32% of social enterprises responding to the survey were earning 75% or less of their income through trading, with 17% earning less than 50%.

It also showed 17% of relatively large social enterprises, those with a turnover of £250,000 – £1million, reporting that grants – either from the public sector or Big Lottery/grants trusts – were their major source of income.

Unfortunately, one of the more interesting question about social enterprises and grant income is one that’s simultaneously disadvantageous for social enterprise supporters to ask and potentially both disadvantageous and difficult for social enterprises to answer accurately.

That’s the question of the extent to which receiving a grant (or not receiving it) is the key factor in whether a social enterprise continues to exist – either at all or whether it continues to exist while delivering a positive social impact.

Knowing the % of grant income received as part of an organisations overall turnover doesn’t necessarily tell us that much about the relationship between grant income and viability. It depends what that grant income is paying for.

For example, if social enterprise A somehow manages to run a commercially viable cafe that breaks even (or better) by selling tea and cakes but gets a grant – equal to 30% of its income – to put on exhibitions of local artwork in the cafe, 30% of its turnover comes in grants but its core business is not grant dependent.

On the other hand, if social enterprise B runs a cafe that loses money on selling tea and cakes, and receives a grant equal to 10% of its income to subsidise its running costs, it only receives 10% of its income in grants but its core business is grant dependent.

The only thing these two situations really have in common is that the social enterprise movement hasn’t yet worked out how to talk about either of them. We’re very comfortable talking about start-up grants, which many businesses – including entirely private-owned businesses working in socially useful sectors – receive to help them get up and running.

We’re uncomfortable talking about grant-funded activities – such as social enterprise A’s art exhibition – because accepting that they exist means accepting that the traditional charity model both still exists and remains a good way to fund stuff that’s social useful but doesn’t generate any income.

Social enterprise B’s subsidy makes us even more uncomfortable. How can we, on the one hand, promote social enterprises as a fundamentally better, more sustainable way of doing business while, on the other hand, drawing attention to the fact that many social enterprises will go out of business if they lose grants towards core costs? 

What we definitely shouldn’t do is continue to avoid the issue while trotting out the usual platitudes about how social enterprises make profits and reinvest them in the community. A few of them do, and that’s great but far more operate in efficient business-like way while delivering social good at relatively low annual cost to the council, grant-making or larger organisation that’s subsidising.

Rather than pretending social enterprises don’t receive subsidies, we should be concentrating on finding to better ways to explain and demonstrate the social impact that those subsidies pay for.

In challenging economic times, many social enterprises face having subsidies reduced or cut.  In some cases these decisions may be justified, some subsidies are just a waste of money.  In other cases, social enterprises are delivering fantastic value for money by generating significant social impact for the people they exist to serve at the highest possible level of commercial viability, and in doing so they’re ultimately saving the state huge amounts of cash in benefits and other costs.

As a movement that prides itself on being both principled and pragmatic, we shouldn’t let dogma around trading prevent us from making the case for subsidy.

 

 

7 Comments

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7 responses to “Gift economy

  1. Alisdair Cameron

    There’s another element, almost a hybrid that I’ve noticed, David. What,for want of a better term, might be called “pity” or “conscience-salving” contracts. Thinner on the ground than they used to be, but I’m aware of instances where an SE has a contract, purportedly a commercial one, but on terms skewed in their favour by a commissioner (it’s usually been via public sector commissioning) almost as an act of goodwill. This is, I’d say, different to a commissioner’s taking social value into account, and more a kind of soft-heartedness or favouritism (depending how you interpret it).

    • Beanbags admin

      Hi Alisdair,

      Yes. I’ve certainly heard about this approach being used a lot in the past. A generous interpretation is that this represented a primitive form of recognising additional social value provided by social enterprises (or, in some cases, state-owned supported-work providers).

      I tend more towards your interpretation. And no one benefits if public money gets spent of stuff that’s no good based on feelings of pity towards the people doing the work.

      Subsidies based on supporting people who have difficulty getting into the labour market to get jobs or training opportunities delivering high quality goods and services while developing skills and gaining experience are a very different matter. And those are the sorts of subsidies I’m arguing we should promote and preserve – along with subsidies that support social enterprises whose end product itself (successfully) meets a clear social need.

  2. David, to respond to you point about core sustainability with grant dependent projects versus core dependency, I offer our own example.
    We generate revenue from trading and use it to research and design initiatives which tackle poverty and childcare reform. For this to happen it has been neccessary to leverage investment from traditional goverment sources:

    http://people-centered.net/Services.aspx

    For example in Russia we’d been able to recover our research costs and leverage $6 million invesment for a community bank which in itself delivered full cost recovery, by design.

    Taking the situtaton closer to home where for ecample, I’m helping a local artist, currently in receipt of benefit, develop a web retail outlet, I’m aware that while I fo this at my own expense, there are agencies doing the same things with grant funding assistance. Our financial sustainability is threatened by competition from those who are grant supported.

    Now there’s another case to be made for being self sustaining and independent, when it comes to being sponsored by corporations. Where do you stand if your research reveals your sponsor to be the cause of the problem you’re trying to address?

    Would you bite the hand that feeds you?

    http://www.p-ced.com/1/node/59

  3. In my experience, government organisations sometimes prefer to grant-fund rather than commission and can be more interested in tracking and auditing inputs than in the delivery of outputs or outcomes. I’ve also had experience of trying to interest charitable trusts in making social investments but having considered the matter, they decided to make grants instead as they found it easier to get their heads around.

  4. Here’s something which may be of interest.
    It was Bill Clinton who was warned first about the threat of wealth distrbution and with a connection in the presidential race for 2004,
    we attempt to get (self sustaining) social enterprise on the agenda through VP candidate John Edwards who became one of the first politicians to speak up about the 1% and ‘Two Americas’
    It’s Al Gore, Clinton’s VP who’s now drawing our attention to wealth distribution, with a book and a video:

    http://www.p-ced.com/1/node/60

  5. Karl Wilding

    Only just catching up with this David.Another great post. A few things worth noting in passing:

    Lets not be too rational: work we did a few years ago for the NAO suggested that most funders werent clear on why some transactions were grants and others were contracts. Julia Unwin’s work on giving, shopping and investing remains relevant.

    There’s no shame in getting grants: large swathes of the private sector (I’m thinking defence industry as an example) use grant funding and various forms of industrial subsidy, to presumably mixed impact. Some of these subsidies are more visible than others (R&D tax breaks), but industrial policy isnt dead. How many car makers from Japan etc have been given grants to locate in the UK? I suppose my point here is, social enterprise needs to stop worrying about the brand image and grants.

    Grants are good sometimes. Outfits such as the TSB are using grants to foster innovation and doing good, from what I can see. We come back to Julia Unwin: we just need to be clear that a grant is the right transaction. Conversely, for charities and non-charitable social orgs, sometimes contracts will be better.

    It seems desirable to me that we recognise grants can play a role in subsidising outputs so that they can be sold at below market value. I think we need more transparent pricing so that we can say how how a grant to an organisation subsidises the price to an individual purchaser.

    The grants/contracts thing has implications for how social orgs are viewed in the national accounts, but that’s for another time!

  6. Beanbags admin

    Hi Karl,
    Agree with all those points. I think, in some cases, describing funders understanding of the distinction between grants and contracts as not clear is a generous understatement.

    Many councils in the New Labour-era – very excited about the idea of moving away from grants but completely bamboozled by its practical implications – came up with some quite bizarre grant/contract hybrids.

    Interesting idea about transparent pricing. I definitely agree that we need to find ways to explain what grants are enabling to happen. Not completely sure that it would help to say ‘your 60p cup of tea in this community cafe would cost 90p without grant funding’.

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