NEWS IN FOCUS: Charities monitor impact of social enterprise plans

Emma Maier

The proposals to provide a social enterprise framework are being scrutinised by charities with an interest in extending it to cover their own trading.

From the Eden Project and The Big Issue to the Furniture Resource Centre and Greenwich Leisure, social enterprises are becoming an increasingly popular way of tackling a range of social issues.

Essentially, social enterprises are hybrid organisations that use private sector procedures and techniques but adhere to voluntary sector principles.

They are run as businesses but they use their profits for social benefit rather than lining the pockets of shareholders.

Now that the Government has promised legislation to allow the creation of Community Interest Companies as early as next year (Third Sector, 29 October), social enterprises will finally have a clear legal structure within which to operate. Though the nitty-gritty of how CICs will work is still to be hammered out, the Government's commitment to put the framework in place has been welcomed not only by those organisations that they are designed to help, but also by the wider voluntary sector.

In fact, the sector's response to the proposals, which was published by the Department of Trade and Industry last week, showed that 77 per cent were in favour. Bodies such as NCVO, the Association of Charitable Foundations, and Acevo have all lent their support.

Social enterprises have enjoyed particular support from the Government over the past few years, not least because of their potential for efficient public service delivery. In 2002, the Government published a strategy to help social enterprises become more successful, and the one-year progress report launched last week suggests that this has already had some impact.

The number of social enterprises is on the rise, and many are highly successful. Ealing Community Transport has become the largest not-for-profit recycling organisation in the UK, whilst Greenwich Leisure is often hailed as the model social enterprise.

But the lack of an obvious legal framework for a social enterprise has meant that some have chosen to establish themselves as charities, while others were set up as Industrial Provident Societies, co-operatives or private companies. This has caused confusion, resulting in social enterprises often being misunderstood by funders and financial institutions. Most have, therefore, cheered the impending arrival of a customised legal framework.

Although CICs were initially mooted for social enterprises, closer scrutiny reveals they may have applications beyond their original remit and could be a valuable tool for any organisation working for public benefit.

"CICs could provide a way for some organisations to be freed from the burdens associated with charitable status," says Jonathan Bland, chief executive of the Social Enterprise Coalition, which has recently released a publication entitled There's more to business than you think! to promote the values of social enterprise.

CICs are attractive because they will be simpler and less expensive to set up than charities, as they have fewer administrative demands. They are also expected to be less tightly regulated than charities, although they will be subject to a CIC regulator and will have to produce an annual report detailing how they are fulfilling the 'community interest' test.

"The government has recognised the need for light-touch regulation, and I would expect them to follow that through in the final plans," says Stephen Lloyd, head of charities and social enterprise at law firm Bates, Wells and Braithwaite.

Because CICs can't allow their assets or profits to be used for private gain, investors are unable to skew the priorities of the organisation.

This rule also means that shareholders can't take control and turn the organisation into a private interest company, so CICs are protected against the demutualisation experienced by many building societies. However, the loss of tax breaks means registered charities are unlikely to choose to morph into CICs.

"Becoming a CIC would involve forgoing all the tax-related privileges related to being a charity, and that would be barmy," says Lloyd. "Since CICs are a type of company they will also be subject to greater controls when they raise money from the public than charities are."

But charities that own or are looking to start-up a trading subsidiary may well decide a CIC would be better than a private company. "There is a very strong possibility that those trading with a social purpose will take up the opportunity," says Bland. "This may involve charities setting up a CIC as a trading subsidiary or as a separate spin-off that ultimately contributes to their aims."

CICs may also provide an alternative for other voluntary sector organisations such as Co-ops and Industrial and Provident Societies, which are not always understood and often face some of the same problems as social enterprises.

"Some of the purer co-operatives have viewed CICs as an unnecessary capitalist diversion," says Lloyd. "But most see it as a way of adding to freedom of choice available to organisations."

Nevertheless, he predicts that CICs will be much more relevant for start-ups than those with an existing infrastructure. "I can't imagine that many existing organisations will change if they have a structure in place that is working."

In France, SCICs (a similar concept to CICs) have been up and running for a year. But in the UK, one of the major unresolved questions is whether CICs will be required to consult with their shareholders as part of their governance structure, as is required of SCICs.

In the end, the success of CICs in the UK may depend on more practical considerations. CICs will only work if enough relevant professionals - such as lawyers and accountants - understand the system and promote it to their clients.

"In the past, many of my members have been in favour of the compulsory stakeholder consultation," says Bland. "But there are good reasons for not pursuing that route for fear of over-burdening organisations."

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