The Labour government’s insistence on viewing SEs as, first and foremost, businesses meant that their assessment of SEs needs was based on a business-oriented, entrepreneurial paradigm that deemed it “important to emphasise the degree of commonality with other businesses” (HM Treasury, 1999: 14) that SEs apparently demonstrated. The policy focus on the development of finance provision was pursued as a direct result of the government’s aforementioned conceptualisation of SEs as businesses, which were known to often require “access to finance, both for start-up and for subsequent development” (Smallbone et al, 2001: 8). It also acknowledged that
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for mainstream Small and Medium Enterprises (SMEs) “banks are the main source of outside finance for new and growing businesses” (HM Treasury, 1999: foreword), and by instigating a BoE investigation of financing for SEs based on evidence gathered from mainstream SMEs, thereby affirmed its assumption of the presence of more similarities than differences between SEs and mainstream SME enterprises (Diochon and Anderson, 2009; Shaw and Carter, 2007).
The issue of the similarities and differences between SEs and mainstream SME enterprises formed a significant part of early research work on SEs within the academic community (Moizer and Tracey, 2010) as a common conceptualisation and definition for SE were sought (Diochon and Anderson, 2011; Teasdale, 2012). However, whereas the research topic provoked debate within the academic literature ranging from the assertion that “the complexity of social enterprise is more than simply an extra dimension to business” (Diochon and Anderson, 2011: 96), to a contention that “the definition of entrepreneurship might be modified to include the creation of ‘social and economic value’ and may thus be applied to both private, entrepreneurial ventures as well as social enterprises” (Chell, 2007: 5), the government remained unequivocal in its presentation of SEs as “like any other business” (DTI, 2002: 9), demanding that they “see themselves as businesses, seek to become more professional, and continuously raise their standards of performance and their ambitions” (ibid.: 29).
The anomalies between the business-like rhetoric, and the reported realities of the emergent SE sector were striking (Mawson, 2010; Parkinson, 2005), and were particularly evident amongst, and between, government-sponsored reports. Examples of these disparities included the questions raised with regard to the meaningfulness of debt/equity finance provision to organisations “providing services that are not profitable enough to attract private sector firms” (HM Treasury, 1999: 14), or whose “financial returns are insufficiently attractive for lenders and equity providers” (Smallbone et al, 2001: 86), alongside conflicting claims that, for example, “property assets and property-based lending are generally a crucial feature of social and community enterprise” (SITF, 2000: 11)but that “typically a combination of status and collateral issues
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[amongst surveyed SEs] had restricted access from [banks]” (Smallbone et al, 2001: 25).
Other conflicts emerged that highlighted claims that on the one hand “High Street banks [we]re active in providing finance to enterprises in deprived areas” (HM Treasury, 1999: 71), whilst other reports contended that “in the UK there is no public knowledge of the lending patterns of individual banks in specific communities” (SITF, 2000: 14).
The governmental justifications for the development of ‘access to finance’ policies for enterprises operating in deprived communities appeared dubious when acknowledgement was made of the conflicts evident in the claims made in various reports, and when it was accepted that such businesses rarely had either sufficient collateral to secure commercial loans, or the ability to generate sufficient profit to service a debt.
When recognition was given to the reported fact of the existence of a “knowledge gap, with little research carried out on enterprise formation and capital requirements in under-invested communities” (SITF, 2000: 18), and the fact that SEs were largely considered to be trading organisations spun-off from charities which often suffered from “a lack of business focus” (DTI, 2002: 61), compounded by a “lack of financial skills in many social enterprises” (SITF, 2000: 64), then the political drive to provide debt finance to SEs seemed unmatched by supporting evidence of need.
When the multiple contradictions outlined above were considered alongside the assertion that “[b]usiness sectors with high potential for social and community entrepreneurs [include] the provision of basic, everyday services such as laundry, cleaning, gardening, and childcare” (SITF, 2000: 11), and that “people in deprived areas are themselves capital poor” (HM Treasury, 1999: 10), it was hard to imagine a situation in which SEs operating within, and for the benefit of, deprived communities could ever reach a stage of ongoing, sustainable self- funding, let alone additionally produce sufficient profit to be able to properly service a repayable, and interest-accruing, debt.
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Indeed, the publication of the BoE report provided some interesting results which cast further doubt on the assumptions that had underpinned government- driven understandings of SE evidenced up to that point. Contrary to the assumption that, like mainstream SMEs, SEs could be expected to routinely require access to debt/equity finance, it was found that “fewer social enterprises than SMEs had sought external finance” (BoE, 2003: 57). The recommendation made in response to this finding was not a suggestion that SEs’ differences from mainstream SMEs might mean that they had less requirement for external finance, but rather that policy intervention should focus on the need “to build demand for non-grant finance” (ibid.: 58).
The widespread presence of a business and financial skills deficit on SE Boards was noted, as was the fact that “[f]or some social enterprises, the business activity may not be sufficiently developed to enable the enterprise to service a loan” (ibid.: 58). Again, the recommendation made in the report was not to critically explore the assumption that SEs would generally be capable of servicing debt finance given enough time to develop their business, but rather that business support should be provided, which would “concentrate on building up an enterprise’s trading activity” (ibid.: 58) and thus “increase investment readiness” (ibid.: 58).
The problems associated with managing diverse funding streams were also mentioned in the report, with specific reference to the fact that:
“[b]orrowing [from financial institutions] tends to be used to meet cash flow requirements (that sometimes arise as a result of grant payments made in arrears) or to purchase or develop assets” (ibid.: 59).
The conflicting demands of philanthropic funding and debt finance streams were further elucidated, and the vicious cycle facing SEs of trying to manage dual funding streams whilst attempting to develop their business and achieve sustainability was highlighted:
“we encountered several…cases in which social enterprises have been unable to borrow against assets purchased with grant money, because of the grant funder’s concern to ensure that the assets [we]re retained for the purpose for which they were intended” (ibid.: 61).
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Thus, what the BoE (2003) report revealed was that SEs often used grant funding to purchase assets, which for mainstream SMEs would represent fixed assets against which debt finance could be secured. However, because the terms of the grants provided to the SEs often formed an asset lock – which, as highlighted above, prevented the fixed asset from being sold or used for any ‘purpose [than that] for which they were intended’ – the SE was effectively prevented from using such assets as surety against commercial debt finance. Indeed, on the basis of the revelation of this particular problem, the report specifically suggested that “the ‘asset lock’ included in the terms of the proposed Community Interest Company [a proposed new legal form for SEs] should not preclude those assets from being used as collateral for loan finance” (BoE, 2003: 61). The further conclusion that debt finance was often ‘used [by SEs] to meet cash flow requirements’ which problems were acknowledged to ‘sometimes’ occur as a direct result of retrospective grant payments, demonstrated the perpetual vicious cycle of financial insecurity facing many SEs, without offering any meaningful solution.
Figure 6.5 on the following page demonstrates the myriad, interrelated barriers revealed by the BoE (2003) report, that “grant dependent voluntary sector bodies” (DTI, 2002: 61) faced in attempting to develop “a trading strategy in order to secure a more sustainable income stream” (BoE, 2003: 57).
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Figure 6.5: The interplay of barriers faced by SEs seeking loan finance from banks
The fact that lending banks were reported to require “a clearer means of distinguishing social enterprises from other borrowers” (BoE, 2003: 60), suggested that like the general public, they had a poor general understanding SE – a finding echoed in the DTI (2002) document – and further implied that contrary to governmental rhetoric, both the lending banks and the BoE considered SE to be sufficiently different in nature from mainstream SMEs as to require (or be entitled to) differential treatment.
The notion of the ‘difference’ of SE was also highlighted in the HM Treasury (2002) report which, when discussing the business support and training needs of SEs, suggested that “there needs to be more training of Business Links [a national, government-funded SME business development service] advisers on how to work with social enterprises” (HM Treasury, 2002: 24). Similarly, the DTI (2002) document sought to highlight the “particular characteristics and needs of
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social enterprise” (DTI, 2002: 8), whilst simultaneously asserting the similarity of SE to mainstream SMEs (Teasdale, 2010).
Perhaps the most significant challenge to the legitimacy of governmental rhetoric around SE to emerge from the BoE (2003) report was the identified lack of business skills amongst SEs, which was attributed to the fact that “many managers and trustees come from the voluntary sector and may not have previous business experience” (BoE, 2003: 33).
The same issue was highlighted in the DTI (2002) document, which stated that “[t]he Government acknowledges that, at present, too many social enterprises appear to have underdeveloped financial management and business planning skills” (DTI, 2002: 68), as well as in the Smallbone et al (2001) report, where skills-development needs within SEs were identified in such diverse areas as “marketing, business planning […] management skills […and] staff and volunteer recruitment and training” (Smallbone et al, 2001: 44).
The knock-on effects, in terms of access to debt finance, of the lack of business acumen within many SE Boards (illustrated in Figure 6.6 on the next page) shows how the micro level financial skills deficit would translate into meso level access-to-finance barriers, which in turn would reinforce SEs’ lack of credibility with lenders (BoE, 2003; HM Treasury, 2002), and thereby create a second level of exclusion around bank-supplied debt funding for SEs.
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Figure 6.6: Information/skills deficit within and between banks and SEs creates self- reinforcing cycles of negative behaviours
However, in spite of the clearly widely-acknowledged paucity of business skills within the SE sector at the time alongside the problems that these were shown to cause, the political rhetoric rendered such issues invisible with the creation of the aforementioned “grand narrative of social entrepreneurship [which] comprise[d], among other things, a high level of univocity, unambiguousness, one-sidedness as well as a quasi-religious makeover” (Dey and Steyaert, 2010: 88).
The year 2004 saw the publication by the DTI of a ‘good practice guide’ to collecting comparable data on SE activity in the UK in order “to help strengthen the evidence base of this vibrant sector” (DTI, 2004: 3). Aimed at “regional and local bodies” (DTI, 2004: 5) wishing to conduct scoping exercises of SEs and wider third sector, the publication was informed by findings from the DTI- commissioned ECOTEC (2003) document and provided consolidated information that reflected the government’s SE agenda, and its attendant conceptualisation of SE.
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The main section of the document laid out the parameters within which organisations could be assessed for potential inclusion in the SE sector. The main criterion suggested for inclusion, was adherence to the DTI (2002) definition of SE, which could be confirmed by the application of three ‘tests’. The first of these related to ‘registration’ – specifically the formal registration of an organisation with Companies House – which it was claimed “indicate[d] both a degree of permanence and that the organisation ha[d] defined its core values through a process of constitution” (DTI, 2004: 9).
Particular legal forms such as Companies Limited by Guarantee, Industrial and Provident Societies, and Community Interest Companies (CICs) were proffered as being clearly indicative of DTI-compliant SE status, but researchers were advised to consider including “qualifying social enterprises which adopt alternative forms of legal status, such as those which are registered as Companies Limited by Shares” (ibid.: 9).
Such advice made clear the almost all-encompassing nature of the ‘legal form’ approach to identifying SEs, which effectively only excluded sole traders and publically limited companies. As Teasdale (2010) noted, the fact that since “no legal form [is] used exclusively by social enterprises […] any attempt to count the number of social enterprises [is potentially] an exercise in futility” (Teasdale, 2010: 14).
The second test for compliance was the ‘trading’ test, from which it was concluded that “[s]ocial enterprises with trading income of 50% and above should be included as part of the core group” (DTI, 2004: 9). Within the definition provided, trading income was limited to income earned through the provision (sale) of goods and services, with all non-earned income including “grants, subsidies, supporters’ membership fees, voluntary contributions and fundraising” (ibid.: 9) excluded. However, as before, a further suggestion was made to the effect that “you may wish to collect information on social enterprises with income under 50%, for example to cover ‘emerging’ or ‘fledgling’ social enterprises” (ibid.: 9).
The third and final test was called ‘pursuit of a social aim’, and sought to exclude from consideration, all organisations that did not trade primarily in
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support of a social or environmental mission, and which did not reinvest generated surpluses in the business, or in the community, in support of its stated social mission.
However, what the compliancy tests revealed was not so much how SEs could be identified, but rather how difficult it was to identify them. Whilst the general rule might hold that certain legal forms, combined with official registration, might indicate an SE, the reality was that there was no definitive way by which to identify one with absolute certainty using such measures. Similarly, although a 50% minimum trading income was suggested as a potential ‘marker’ of SE activity, it was simultaneously acknowledged that less established SEs, which might have a lower level of earned income, should nevertheless not be precluded from inclusion.
Finally, the claim was made that SEs should demonstrate the primacy of a social aim – which may or may not be explicitly stipulated as part of the required incorporation process – and that surpluses made should be reinvested “in the business or in the community, in pursuit of these [social] objectives” (DTI, 2004: 9). However, such ‘defining features’ were proffered in spite of the acknowledgement of the existence within the SE community of ‘alternative forms of legal status’ including Companies Limited by Share which, by nature, would require the payment of dividends to shareholders, and could legitimately provide owner/shareholders with a means by which to engage in unethical behaviours such as income tax avoidance.
It could therefore be seen that whilst the three compliancy tests were presented as a means by which to identify an apparently robust ‘core group’ when undertaking SE-based research, their general applicability was highly questionable as a result of the exceptions attendant upon every rule proposed. Their usefulness was therefore uncertain, and even though the document admonished readers to ensure that “only those organisations which satisfy all three tests should be included as part of the core group” (DTI, 2004: 8), the ultimate evidence of the contradictory nature of the government’s discursive construction of SE was demonstrated with the offering of a get-out clause that effectively rendered all the previous guidance meaningless: “you may wish to
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incorporate additional flexibility and collect information on social enterprises falling outside the tests” (ibid.: 8).
The obvious confusion associated with the process of identifying SEs through the application of the three tests (and their exceptions), and the associated acknowledgement of the difficulty in defining SE activity in any way meaningfully, was ultimately rendered ‘unproblematic’ through the discursive normalisation of the difficulties associated with the “dynamic sector” (DTI, 2004: 8) represented by SE, which, it was claimed, would ‘naturally’ require “some flexibility in categorisation” (ibid: 8).
In late 2004, the DTI published the first in a planned series of ‘fact sheets’, entitled ‘An introduction to Community Interest Companies’. The document presented an overview of the “new type of company for those wishing to establish social enterprises” (DTI, 2004b: 2), and sought to both raise awareness of the new legal form, and to disseminate information relating to the specifics of the Community Interest Company (CIC).
Marketed to “those who wish to work within the relative freedom of the familiar
limited company framework without either the private profit motive or charity status” (ibid.: 2), an interesting side-effect to the creation of the CIC was its ability to represent a resolution to the definitional dilemmas exposed by the SE mapping agenda.
The ambiguity and imprecision associated with attempting to identify SEs based on legal form was resolved through the creation of “a form of limited liability company […] limited by guarantee or shares” (SEUK, 2012: 12) conceived purposely and uniquely with SE activity in mind (DTI, 2005; Park and Wilding, 2012).
The CIC’s ‘community interest test’ provided evidence that the organisation would “pursue purposes beneficial to the community and w[ould] not serve an unduly restricted group of beneficiaries” (DTI, 2004b: 6), thereby meeting the ‘primarily social objectives’ part of the DTI (2002) definition of SE, whilst the ‘asset lock’, designed “to ensure that the assets of the CIC (including any profits or other surpluses generated by its activities) [we]re used for the benefit of the
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community” (BIS, 2010: 14), met the DTI (2002) requirement that “surpluses [be] principally reinvested for that [social] purpose in the business or in the community” (DTI, 2002: 6).
Thus, the creation of the CIC – approved by Parliament in 2004 (Defourny and Nyssens, 2008), and officially launched in 2005 (DTI, 2005) – served political ends at several levels by, for example, providing a means by which to “complement government services at the community level in areas such as childcare provision, social housing, community transport or leisure” (Galera and Borzaga, 2009: 223), further demonstrating the government’s support and legitimisation of SE through its “use [of] legislation to support the development of social enterprise” (Nicholls and Pharoah, 2008: 43), providing an uncompromisingly business-oriented model for nascent SEs that would “not have the benefits of charitable status, even if their objects are entirely charitable in nature” (DTI, 2004b: 9), and presenting a means by which to apparently “reconcile the inherent tensions between having a business focus and providing social benefit” (Mason et al, 2007: 286).
2004 also saw the publication of a Social Enterprise London (SEL) document entitled ‘The social enterprise starting point guide’, within which the issue of the paucity of robust business knowledge within the SE sector re-emerged. “[A]imed at social entrepreneurs [defined as] anyone with an idea for making money and using it to benefit others in some way” (SEL, 2004: 1), it sought to “offer guidance on the sort of things you need to think about when starting out on your journey to set up a social enterprise” (ibid.: 1).
What emerged was less a ‘how to’ guide than a ‘dummies’ guide which proffered the most basic of common-sense information, for example, the ‘financials’ section declared (in a pink, highlighted font) that “there must be more money coming in than going out, otherwise even the most committed or well intentioned social enterprise will be unable to keep going, let alone make a profit” (ibid.: 13).
Whilst such a message was, without doubt, a key point to raise in terms of