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Who pays when the state can’t?

We don’t need public services and welfare spending primarily because commercial markets are a bad way of meeting social need but because they’re a bad way of determining what ‘social need’ means… ” – the latest in my series of Pioneers Post blogs on public service reform and social innovation.

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Social enterprises bigger and growing more slowly, profits dwarfed by subsidies

Social enterprises are getting bigger, they’re growing more slowly than last year and they still receive eight times as much income in grants and donations as they generate in profits. Those are the three key messages from this RBS SE100 index.

The SE100  is a list of the top 100 fasted growing established social enterprises – those that have been trading for three years or more – with separate awards for those organisations that are best at demonstrating social impact and newcomers trading for less than three years. It’s generated from a self-selecting but pretty big, in depth, sample of UK social enterprises, carried out behalf of Matter & Co, formerly publishers of Social Enterprise magazine, now running new social innovation website, Pioneers Post.

365 organisations participated in the survey this year, an 11% drop compared last year’s 409. It’s difficult to say conclusively whether or not this means there are fewer social enterprises operating in the UK than there were this time last year but it does suggest that there’s been a drop in the number of social enterprises who identify positively with the social enterprise movement to the extent that they want to participate in this kind of survey.

More important is the drop in the average % growth amongst the SE100, down 31% from last year’s 91% to 60%. This isn’t actually bad news at all because the total turnover of this year’s SE100 is £319.4million, an 85% increase on last year’s £172.5million. It only seems like bad news because, in previous years, a lot has been made of the massive increases in turnover generated by some extremely small companies. If the SE100 are delivering positive social change, and the organisations on the list that I know definitely are, then £319.4 million worth of positive social change seems better than £172.5million worth.

Interestingly, though, with this year’s total income amongst participants in down at £778 million compared to last year’s £844million, the average turnover of participants who didn’t make the top 100 has dropped from £2.17 million in 2011 to £1.73 in 2012, a drop of over 20%. That suggests that while larger social enterprises are weathering the current economic storm – and possibly benefitting from opportunities to secure newly avaiable public sector contracts – things aren’t going quite so well for social enterprises lower down the food chain.

The most shocking figures, though, relate to a situation that hasn’t got worse but has become far more relevant based on the changes to the ways social enterprises are funded. This year, enterprises participating in the survey generated total profits of £19million between them on a turnover £778 million: “with average income from trading (as opposed to grants or fundraising) at 80%.

This seemingly means that SE100 participants collectively received grants and donations worth £155.6million. That’s more than 8 times their total profits of £19million. So, for every ONE POUND PROFIT that social enterprises currently generate to reinvest in the community, they’re current receiving EIGHT POUNDS IN SUBSIDIES. That may even be a conservative estimate of the total subsidy because it’s not clear whether the £19million profit figure was arrived at by subtracting participants’ overall losses from total profits to get the total, or by adding together the profits of all participants who made a profit and ignoring the losses.

It’s important to recognise that this doesn’t mean that they aren’t some social enterprises that are making real profits and receiving no subsidy at all. There are. Unfortunately, though, if the SE100 is anything to go by there aren’t very many. It’s also important to recognise that many of the grants that social enterprises aren’t subsidies in the way that privatised rail companies receive subsidies. Many of the grants that social enterprises receive are funding for them to do work, with delivery-related strings attached that make them remarkably similar to contracts for all purposes other than taxation.

Even so, if I were a leading figure in the world of social investment, the stats wouldn’t fill me with confidence about my chances supporting the development of a £1billion+ industry of investment in social ventures generating enough profit to repay investments with interest while generating a social outcome. Based on our current position, the most likely scenarios would seem to be:

(a) we don’t see the development of £1billion+ social investment industry.

(b) we see a new set of social enterprises/social businesses/social ventures (delete as appropriate) emerging over the next five years that operate in a very different way to the ones we have now.

(c) we see lots of social investment being repaid based on either direct or indirect subsidy from grants and donations.

Scenario (a) doesn’t really matter either way to anyone who isn’t a cabinet office minister or an employee of Big Society Capital. (b) + (c) both have serious implications (not necessarily wholly negative) for the social enterprise movement and civil society in a broader sense. If social investment is going to reshape the social enterprise world in its image, the process is unlikely to be pretty.

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