News that the ECT Group, one of the UK's most successful and diversified social enterprises, has sold its recycling business to a private company raises important questions about the future role of social enterprise.
People are asking whether a sector that sees itself as essentially different from conventional business should become part of it in this way - and if it does, whether it can preserve the distinctive social benefits that underpin the social enterprise movement.
May Gurney, the waste management consultancy that has bought ECT Recycling, will still be obliged to maintain the social enterprise's status as a community interest company, one of the most important aspects of which is that only 35 per cent of profits can be distributed to any shareholders. Four ECT senior managers, brought over in the deal, will continue to manage the recycling business.
£12m debt, no loans
But there is widespread concern that ECT was, in effect, forced into the sale. With debts and hire purchase liabilities of nearly £12m, the business was refused further loans and was unable to raise the capital to develop the business further. As a result, the ECT Group's four businesses - bus services, rail links, waste recycling and nursing care - have been sold off or recreated as independent enterprises. Only the original enterprise, Ealing Community Transport, remains.
Other social entrepreneurs could be forgiven for feeling that the fragmentation of a flagship enterprise bodes ill for the future of social businesses with ambitions to scale up and compete in a commercial market.
Steve Sears, previously chief executive of the ECT Group and now chief executive of ECT Recycling, admits that the business might not have survived without the May Gurney sale.
"We weren't getting the support we needed from our bank, RBS," he says. "We had a credible recovery plan, but they just wouldn't lend us any more money - I was looking at ways of bringing money into the business because we had developed recycling as much as we could on a debt basis."
Sears also points to a more general problem - social enterprises that are structured as CICs have to rely on loans because they cannot attract adequate equity investment. "The dividend cap is a bit arbitrary and should be eased," he says. "It's not necessarily wrong for all business structures, but it just wouldn't work for a high-risk, high-return structure."
Malcolm Hayday, chief executive of sector lender Charity Bank, agrees that the ECT sale highlights the limitations of the CIC form.
"If you want to operate a social enterprise on a large scale with a range of activities, you have got to think very carefully about the proper legal form and capital structure," he says. "The problem with the CIC structure is that the Government thinks it works, but it clearly doesn't."
Hayday warns further that the events at ECT will affect other social enterprises. "Part of social enterprise activity has gone into the private sector - what's that going to do to the confidence of those giving out contracts?" he asks. "Will they think that social enterprises aren't robust enough to do this kind of work?"
However, others advise a more pragmatic approach. Matthew Thomson, chief executive of London CRN, a network of recycling organisations, says: "The CIC still employs 1,200 ECT staff, and the deal has generated a windfall that has been ploughed back into the main business.
"If genuine entrepreneurs can harness private capital for social good, surely we should be celebrating that. ECT will stamp its mark on May Gurney's expansion into waste."
Allison Ogden-Newton, chief executive of Social Enterprise London, points out that recycling businesses in particular require large capital investment, so social enterprises in the area have no choice but to be creative.
"They will have to look at new options such as selling to a private company, creating a third entity with a private sector business or getting major capital investment from somewhere else entirely," she says.
Sears himself is emphatic that selling to a company isn't necessarily a bad thing.
"Businesses are changing their structure and ownership all the time, and I don't see any reason why social enterprises should be any different," he says. "The distinction between social enterprise and a socially responsible business is not as great as people might think."
For him, it's what the business achieves that's important. "If the company grows fast and delivers better social and environmental results with May Gurney, that's an entirely worthwhile thing, whatever principles have been compromised in the process," he says.