The Collective Entrepreneur : Social Enterprise & The Smart State

Last March, a joint report was published by Prof. Kevin Morgan of Cardiff University and Adam Price (no not the Borgen creator) entitled The Collective Entrepreneur – Social Enterprise and the Smart State. Backed by Community Housing Cymru and the Charity Bank, the report looked in detail at the opportunities social enterprise, cooperatives and mutualism can bring to the UK (under the banner of the Big Society) as well as a detailed look at Wales. The foreword by Prof. Ian Hargreaves trumpets a "revival of the spirit of Robert Owen."

The reason I'm posting this now, is because in the past few months, "new capitalism", "mutualism" and "cooperatives" have been in the news due to a "decaying case for a monoculture of shareholder-led enterprise". This is embodied by the rise in things like open-source software - given as an example of the rise in mutualism and collaboration in business.

In From the Margins

The fallout from the Credit Crunch "exposed the shortcomings of the traditional business model", particularly the banking sector and credit agencies. However, social enterprises have a "Cinderella status", being a "poor relation to conventional business".


Andrew Haldane of the Bank of England argued that there needed to be "more systemic diversity" in the financial sector because the UK banking industry's over-dependence on share-holder owned PLCs led to a "homogeneity" that "bred fragility". As risk-management at these companies failed the interconnectivity and similarity between individual bank's business models caused the crisis to spread quickly and devastatingly (contagion).

The creation of banking mutuals - like credit unions - in Wales promotes Haldane's "systemic diversity". They also protect consumer choice - something seen as critical to providing more resilience in the financial services sector. The report also says that government needs to realise that social enterprise cannot just be an "arm of the state". The sector needs its own distinctiveness.

The Collective Entrepreneur

Big social changes rarely come about without some sort of crisis. The NHS and welfare state as we know it came about as the result of the Second World War. Also, before this, David Lloyd George's rapid social reforms post World War One could also be an example.

Although not completely diminished, the anger
against the excesses of the free market has been replaced
with disappointment after the Occupy Movement's failure.
(Pic : The Telegraph)

The credit crunch made us "ask questions about the nature and purpose of enterprise". However the momentum was lost. Look at the Occupy Movement – a "popular" cause that lost steam quickly. Were these examinations too uncomfortable for the free-market orthodoxy? Or did we have too many distractions? Phone-hacking, the Olympics, the Royal Wedding, MP's expenses....

The report highlights two different types of entrepreneur. The "Heroic" and the "Collective".

The Heroic Entrepreneur – a neo-liberal, rugged-individualist soldier in a war against state control. Austrian economist Joseph Schumpeter is called the "ambassador" for this type – saying that these individuals are not content with "being ruled", they "break routine" and are visionaries with "mental freedom". Schumpeter also interestingly argued that as socialisation grew alongside innovation and technological developments this "type must diminish".

During the rise on neo-liberalism this "hero" was given a new lease of life as a personification of the free-market. This celebration of the heroic entrepreneur gave the impression that "social inequalities in wealth were the result of individual differences in talent".

However, teamwork is in fact a key to enterprise success - a fact "ignored by centre-right politicians". A study is cited of Wall Street analysts where "star performers" who transferred to a different setting experienced a drop in performance that lasted as long as 5 years.

Collective Entrepreneur – Enterprise is seen as a collective social endeavour where "the team is the hero". Innovative firms aim to create a "corporate community" where workers and managers exchange innovation and ideas freely. Some of the worlds biggest and most innovative companies – Google and Facebook for example – do tend to use this sort of model. Indeed it's very common in "knowledge intensive industries".

Facebook HQ - An example of a new type of workplace hierarchy.
(Pic : Time.com)

This changing nature of authority is said to present problems however. Authority would be based on knowledge instead of a strict, layered hierarchy. That could mean that some workers could be answerable to those "below them" rather than superiors.

Collective entrepreneurship can't be given a singular definition. Indeed the roles of the knowledge economy and the social economy are quite different. The knowledge economy is focused on making profit, while the social economy is about providing a service with a surplus to ensure sustainability. The report argues, however, that many industries not traditionally associated with cooperatives or mutualism still extol the virtues of cooperation and teamwork.

In social enterprises, there's a "strong element of mutual support as a response to social and ecological problems". Robin Murray of the LSE argues that social economy requires "new infrastructures, tools and means of distributing resources services, new forms of organisation and new ways of linking the formal and informal economies".

From Big State to Big Society

At first glance the authors compliment the Conservative Party's Big Society vision. They say that David Cameron draws on a "One Nation conservatism" and that Eric Pickle's Localism Bill could "easily appear word for word in a centre-left manifesto" with its aims to "fundamentally shape balance of power in society....letting councils and communities run their own affairs". David Cameron is said to be trying to reshape the state "in the interests of civil society", undoing the Thatcherite policy of reshaping for market interests.

Cameron's Big Society is the opposite of previous Thatcherite
ideology of what society is and what role the state should play in shaping it.
(Pic : Political Scrapbook)

They are also critical of Labour's state-centric approach which gave the impression that the public sector as "neither democratic nor innovative", when they had in the past looked towards mutualism more.

On a closer examination of the Coalition's deficit reduction programme, it appears to be out of kilter with the Big Society ideals. Local authorities in particular are looking at "27% cuts over the four years to 2015". As a whole, the voluntary sector is reliant on the public sector in the UK, so declining income from state sources would leave "too big a gap to be filled". Of the £12.8bn public money spent on the voluntary sector in 2007-08, 70% of that came from public contracts and the remaining 30% from public grants. Liverpool City Council - one of four pilot councils for the scheme - say it would be "impossible to pursue Big Society aims while absorbing £100m of budget cutbacks".

To counteract this, a Big Society Bank is to be set up, funded by dormant bank accounts as well as donations from the commercial big banks. However, the arrangements and scope of those donations is yet to be decided.

Threats and Opportunities for the Social Enterprise Sector

Opportunities

1. More opportunities for direct service provision as the state cuts back.
2. Social enterprises could receive a proportion of the public money saved as a result of their work (Social Impact Bonds).
3. Community Asset Transfers from public sector to third sector.
4. Up to £236bn (2009-10) in public procurement possibly open to social enterprises.
5. Social enterprise could help public sector meet social and environmental goals as they are dropped due to costs.
6. Skills burden/dearth could be addressed by drawing on pool of unemployed graduates.

Threats

1. Public spending could dry up faster than public markets open to social enterprises.
2. Social enterprises need alternative sources of finance (40% of surveyed social enterprises were reliant on the state).
3. Community Asset Transfers can become a liability if the resources aren't there to maintain them.
4. "Management culture" in the public sector means penalties outweigh awards when risks are taken.
5. Social enterprises need to be able to form consortia to become credible bidders for big contracts.
6. More action is needed from government to develop leadership skills in the third sector.

Wales : The Social Network Nation

Social enterprise in Wales is expected to thrive due to the communitarian values, including the historic "cymortha" tradition of collective harvesting. Wales has historically high reserves of social capital and the Wales Co-operative Centre is said to be the largest co-operative development body in the UK. Wales is also said to be responsible for 8% of UK social enterprise turnover compared to a population share of 5%. However, these statistics are dubbed "questionable" and when compared to general business, the proportion of social enterprises was much smaller.


The longest running co-ops in Wales are agricultural societies, established due to the "dogged determination" of Augustus Brigstocke from Carmarthenshire. These societies had government support, and these models of co-operation in agriculture continues today with the "successful marketing co-ops for Welsh Beef and Lamb". The Miners Institutes of industrial Wales are also given as an example of Welsh cooperative tradition, with many out-surviving the mines they were formed for.

The report outlines three challenges needed to be overcome to sustain the growth of cooperatives in Wales.


1. Social Procurement

The biggest possible consumer for social enterprises is government. However social enterprises "face the same barriers as other small businesses" listed as : too much information, being perceived as high-risk ventures, the lack of trading record, public contracts being too large in scale and a decision process that emphasises cost reduction.

Public bodies have responded to these barriers by using EU procurement "community benefit" clauses to give social enterprises a "hook" with which to win public contracts. An example is given of the One Wales government encouraging the NHS and social landlords to use social enterprises in procurement. Despite this Welsh Government statistics show that their procurement arm, Value Wales, only sought 8% of services from social enterprises.

The report says there needs to be more detailed data on the social market share of government procurement and suggests setting a target of 20% of public procurement from social enterprises by 2020.

Joint purchasing agreements in the public sector created larger contracts than individual social enterprises could realistically provide for. Local authorities - the report suggests - should be given financial incentives to include "community benefit" clauses – for example, by the Welsh Government rewarding organisations that include these clauses in a high percentage of their purchases.

Another, more interesting suggestion - to immediately save up to £30million in procurement costs - is to transfer all major public sector IT contracts to open-source software.

Housing stock transfers have met resistance in Wales, but by transferring social housing to community housing mutuals – these housing associations are said to have become "major players" in themselves. Welsh housing associations have not only sought procurement from other social enterprises but have established their own. Moneyline Cymru – an alternative to doorstep lenders – is given as an example, as is the fuel-efficiency Arbed programme to retrofit social housing – recently given a boost in the Welsh Government's budget deal with the Liberal Democrats.

The report wonders whether the Welsh Government will continue to carry this experiment into services like health and education. Combining the "entrepreneuralism of the private sector with the accountability of public services" can "drive up quality and effectiveness of Welsh public services".

Examples of where this might work is in the reorganisation of rural schools, where parents and teachers form co-operative trusts as an alternative to LEA's.

Co-operatives are cited as being a "bulwark against (the) privatisation" of social care and there are plenty of examples already. The Assembly could aim for social enterprise to be the "biggest supplier of social care within a generation".

Social enterprises are already a part of the healthcare scene - despite the potential for controversy in this area. Children's hospice Ty Hafan is the leading example but there are also others, particularly in mental health and substance misuse. Independent health providers in Wales are said to be "closer to healthcare friendly societies" than outwardly profit-driven health providers.

With the possible future devolution of S4C to the Assembly, Gerry Holtham suggested a mutual solution there too. Viewers could made voluntary contributions to S4C's funding as a "partner" and the S4C Authority would be elected by its membership, which is said would increase accountability. Labour have also suggested that the BBC Trust become a mutual.

2. Scaling up, skilling up

The Welsh Social Enterprise Coaltion is "challenging some cherished beliefs within parts of the social enterprise movement". They call for social enterprise to turn into a "large-scale economic model". Despite these ambitions, RBS says that social enterprise growth in Wales is the slowest in the UK in spite of an inherent "cooperative culture".

The report says that over the next 20 years, Wales should aim to create three "beacon firms" : another Glas Cymru, a financial mutual to rival Principality Building Society and a "Welsh John Lewis" (I recently suggest something similar for Peacocks).

Jeff Skoll, founder of ebay, is quoted as saying that "social entrepreneurs will be the driving force of next 100 years". Wales needs to become its own centre of excellence during this future boom in the social market. It goes onto suggest a "Social Business School", with a Master of Social Business Administration, which would work to build skills in the existing social market as well as disadvantaged communities. The report creates an ambitious future role for Wales, including a "Hay Festival for social enterprise" inspired by the TED movement as well as many more ambitious plans outlined in the next section.

3. Finance is key

Surveys have found that good finance and funding are the greatest enabler of success. Out of the "People's Bank" idea - floated by both Labour and Plaid Cymru - there is a "public appetite for an ethical financial sector".

A Development Bank – Finance Wales would be moved from being a public interest company to once based on the Glas Cymru model. It could be part financed by the creation of Labour-owned investment and pension funds, however this would require central government support and legislative changes (an argument for independence? Wales wouldn't have to wait for "central government support").

The 8 major public sector pension funds in Wales have a collective £6billion under management. Even the diversion of a small amount of this would have a big impact on the capital available to business in Wales. It's said the creation of an "All Wales Pension Fund" would save on administration fees and would focus exclusively on investment in Welsh businesses, regeneration and public infrastructure – especially housing.

Could a "social enterprise square mile" become Wales's niche?
(Pic : Guardian Cardiff)

Mutual Home Ownership – In partnership with Welsh mutuals (Principality, Swansea & Monmouthshire Building Societies), tenants would pay a monthly payment for a share of collective equity funded by a "corporate loan by a social enterprise instead of a personal mortgage".

A not-for-profit rail company – Suggested by Plaid Cymru for when the Arriva Trains franchise ends in 2018.

A Renewable Energy "Glas Cymru" – A public interest corporation investing in locally-owned, community-based energy production or funding larger projects like tidal lagoons and the Severn Barrage. Simon Thomas AM (Plaid, Mid & West Wales) has suggested something similar in a recent short debate in the Senedd in the creation of a "Wealth Fund".

Broadband Mutual – The Dutch town of Nuenen is cited as an example where 95% of the broadband infrastructure is cooperatively owned. It's suggested a scheme similar to this could be rolled out in Wales via Public Bonds (issued presumably by the Development Bank suggested above).

A Savings Super Mutual – This would be a "national umbrella" that would "provide back office functions to Credit Unions" – effectively a "super Credit Union". It's suggested to reduce the risks that this company should start within an existing housing association, then be "spun-out" eventually as an independent company.

A National Trading Bank – This would provide "liquidity, treasury and payment services to local authorities" who currently "receive low rates of return from London-based funds that don't invest in Wales".

A Welsh Wholesale Social Bank – Communities First funding and the money from dormant accounts would be transferred here. It's role would be to "pool capital for social purposes" including a "right-to-buy" for community assets. This is similar to the Big Society Bank mentioned earlier.

The report is grand in it's scale and ambition, saying that a "social square mile" in Cardiff could "steal a march from other financial centres". This "Welsh niche" would also involve hosting a social investment market and a "social stock market" which would trade social impact bonds and other "ethical investments".

The Smart State Strategy

Social enterprise offers opportunities in areas where "neither the market or the public sector offer hope for social innovation and economic renewal". However social enterprise needs "stronger, better and more imaginative nurturing and structure" – a "Smart State Strategy".

The Smart State should:

• Create a "networking culture" where all partners; state, private firms and social enterprises collaborate.
• Use its own powers creatively to boost the social enterprise sector.
• Mobilise other key players like universities and banks to deploy their own resources.
• Deploy public procurement effectively and manage value instead of costs.
• Use new financial instruments (i.e social impact bonds) to mix banking finance with social capital.
• Fashion new training opportunities and university courses to upskill the third sector.
• Create a "social infrastructure" where social enterprises learn from each other.
• Wales in particular needs to prove that its cooperative values are an asset not a "thing of the past".

Conclusion

It's been hard to try and cram a 45 page report into under 3,500 words, so if you're still reading at this point I'm both impressed and gratified. I hope that you now get an idea of the ambition and vision this report – practically ignored by the media – has for the Welsh economy. I hope when you've got the time you'll read it yourself and form your own opinions.

I've always had the impression that social enterprises and cooperatives are only necessary to stave of a business failure. Clearly my thinking is wrong. Although the Welsh Government has a commitment to social enterprise and the "third sector", if we want Wales to achieve anything close to the ambition laid out in the report – a development bank, a "social square mile" and a re-ignition of Wales' "cooperative culture" – then it will not only require the tools but the political will. Independence might be the ultimate way to have all those tools and see this vision though – not having to rely on the UK Government to pass legislation for example, but clearly it's not as simple as that. (You can't blame a nat for making that point can you?)

AWEMA are still trying to defend the indefensible.
Allowing organisations to use "social enterprise" and "good causes" as
a shield to deflect criticism is just asking for trouble.
(Pic : BBC Wales)

In recent months, the Welsh third sector has been rocked by the AWEMA scandal, allegations made by Cllr. Neil McEvoy about Safer Wales and Welsh Women's Aid as well as ongoing concerns about how Welsh housing associations allocate housing. I fear that a small corner of the third sector is in danger of becoming a breeding ground for corruption without the proper skills and without proper oversight.

So I'd include the following "additions":

• The proposed "Social Business School" should be the first step in scaling-up the third sector before anything else. It should be academically rigorous and aim for global respect. Within a generation anyone running a third sector organisation in Wales should be expected to have an "MSBA" regardless of that organisations purpose.
• There needs to be a "third sector watchdog/third sector FSA" to properly audit social enterprises and charities – independent of government. Hiding behind "good work" cannot be used as an excuse for nepotism, embezzlement, incompetence or corruption. AWEMA for example are currently playing the race card with aplomb.
• The third sector should no longer be funded by central government grants - only from the proposed development bank, social market bank or other ethical investments. The links between the state and social enterprise should be broken completely or at very least held at arms-length.

In my personal opinion, transferring public services to a social enterprise or a not-for-profit is still privatisation by definition – just "nicer". I'm not sure what point the authors were trying to make by saying it would be a "bulwark against privatisation" in the cited social care example.

We also cannot ignore traditional enterprise. Profit isn't a dirty word. Although social enterprise might be the best way to reduce Welsh reliance on the public sector - as an employer and as an economic driver – free-market capitalism doesn't look like it's going anywhere soon.

As much as the Welsh Government should support the not-for-profit rail company or the "People's Bank" it needs to support the recruitment company or the fast food franchise. Cooperatives might be a way of making business more palatable to the Welsh people, who have traditionally been (or socially ingrained to be) mistrustful of the capitalist class. However it's going to take patience and time before it replaces the traditional free-market - good or bad - as the major economic model in Wales.