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The rise of the shadow state: What can we do about it?

If the money doesn't go to giants like Serco and G4S, where can it go? Alan White explores the ability of social enterprises to commission services instead.

The huge Aylesbury council estate in Southwark, home to 7,500 people
The huge Aylesbury council estate in Southwark, home to 7,500 people. Photograph: Getty Images

Yesterday I catalogued the problems with the way Government outsourcing is conducted: the placing of profits before people, the siphoning away of money intended for communities that need it, the unaccountability; the rewards for failure.

Peter Holbrook, CEO of Social Enterprise UK says: “The Government has to act as more than a legislator. It can shape markets and it doesn’t do so. These markets have to be part of the solution. It’s not left wing to call for more transparency and accountability. There seems to be a contradiction - everyone knows localism makes sense, but as soon as various parts of local and national Government are given the chance to commission, they buy in bulk.”

The question is what we’re going to do about it. And the first question is obvious - if we don’t give the money to the giants like Serco and G4S, to whom can it go?

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The Paddington Development Trust (PDT) is what’s known as a social enterprise. What’s a social enterprise? There’s no legal basis for such a thing, so it can take many forms: it could be a charity, or a limited or commercial company, for example. This masks the fact the central idea is quite simple: the profits do not go to shareholders, instead being reinvested in the “social mission” the company is carrying out. A PLC is legally required to maximise shareholder value, while a social enterprise, of which there are 68,000, acts like a company but instead tries to maximise its social value. Well-known examples are things like the Big Issue and Jamie Oliver’s Fifteen.

The PDT was founded in 1997, one of the first community-owned social enterprises in the country. On paper, its goals perhaps sound wishy-washy and vague: to “increase social, cultural and economic opportunities by forming strong partnerships across the community and public sectors.” The projects it has delivered have been anything but.

The money the PDT receives is focussed on a specific local area: north Westminster - and is then broken down between even smaller areas. I first came across it in the process of researching a local housing estate. The community forum whose incredible actions ended up forming the core of the resulting long form piece I wrote is a PDT offshoot.

Its chief executive, the admirably straight-talking Neil Johnston, tells me more: “When the residents set up the PDT, the area of north Westminster was a colossal failure. You could see it through so many indices: housing, unemployment, mortality rates.” In 1998, the PDT won £13.5m of funding, through the government's Single Regeneration Budget programme, which ran from 1994 to 2001.

Johnston says: “The money went to other organisations in order to deliver services. We formed an interface between the public and the private sector – since then we’ve distributed £40m over fifteen years and have been influential in the spending of another £120m. The money’s come from various sources - the Great and Good, local government authorities, the Department for Work and Pensions (DWP), and others.”

The PDT now runs youth services, health centres, academies, has refurbished community centres, and has been involved in many more projects, most of which are designed to create employment and business opportunities for residents. One of the PDT’s most successful enterprises was Westbourne Studios, into which it invested £500,000 - it didn’t own the building, but paid a peppercorn rent to guarantee the assets were distributed through the local economy. Today it’s one of Britain's most imaginative office and studio complexes, home to over 100 small businesses. On top of that, the PDT even has a small grant through which it can fund start-ups.

 

One thing that struck me about the people I wrote about was how happy they were in their work. Despite the fact that pay for its staff has gone down in recent years, the PDT has a remarkably low rate of employee turnover, which in turn saves money and helps it pay acceptable wages.

Social enterprises are often limited in size, partly because their purpose is often built around the needs of a particular area, and partly because they don’t have the same will to grow as a purely profit-driven operation. It means they’re finding themselves squeezed in a market that increasingly favours the largest contract-size.

“Interestingly, we have been commissioned by the DWP for the Work Programme,” says Johnston. “We’re a small partner with Maximus, which is a huge company. Fortunately, Maximus are a commercial business, but they know what they’re doing - their vice president came over to visit, for a start. We actually lost money through doing it, but managed to supplement it through doing other projects.”

A belief has grown that commissioners can’t afford to outsource differently. In fact, the opposite might be true: they can’t afford not to. As Johnston says:  “The question for Government is - do you let the money out through companies, or inject it into local organisations? There seems to be a belief that you can economise through upscaling and contracting to the big organisations. But Maximus know what they’re doing on that side too - they won’t give away any more profit than they have to. The Government’s either aware of that, or it doesn’t understand profit in business.”

The way the Work Programme works is that once people have been unemployed for six months, their details are fed into a big databases. ”Prime” contractors then spit out names to the smaller charities. Johnston wasn’t surprised when the initial figures showed it to be a failure.

 

He says: “Prior to the Work Programme, we managed to get 500 people in work over the course of two years. But it was bloody hard work. We had to work in partnership with a lot of community enterprises. We had neighbourhood-based advisors, who were going around knocking on doors. With the Work Programme there’s a disconnect - I recently heard a story about one women being interviewed and asked why she hadn’t found a job sooner, even though she was blind.”

One could say that the very fact something like the PDT exists demonstrates the fact that it’s needed. Johnston says: “You have Whitehall, you have local authorities - and they’re always fighting a war over budgets and power - then you have nothing official, but there’s a whole plethora of stuff going on. If communities weren’t crying out for power, they wouldn’t set up things like the PDT. So the challenge for the Government - and it’s something all governments want to do, is how far they can drive down the democratisation of budgets.”

I point out to him that during the riots London called out for the return of Boris Johnson and David Cameron from their holidays. If that highlighted anything, it was a distinct lack of local leadership. He replies: “In New York you can see the leadership flowing down from the Mayor, the key officers - and that socioeconomic strategy makes the city sing. In our major cities the leadership appears to be less accountable than rhetorical.”
 

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Despite the gloomy history of commissioning described thus far, the future for social enterprises is looking up. In January 2013 the Public Services (Social Value) Act becomes law. It’ll require all public bodies in England and Wales to consider the wider social or economic benefit to an area of any contract they award, over the value of £113,000 for central government and £173,000 for other bodies. According to Social Enterprise UK’s report: “Commissioners have told us that the Act finally gives them the justification to commission in ways that they have previously wanted to, but could not.” The organisation has made a number of recommendations with regard to the law, including an independent body to scrutinise contracting, and previous performance being weighed up as part of the process.

There’s evidence of a growing appetite for more thoughtful commissioning. In October 2012 the Cabinet Office awarded contracts for the National Citizen Service. Management fees were capped at 5 per cent and payment was made in advance, so that smaller charities and community groups without large capital reserves could afford to bid. Ninety per cent of organisations involved were locally based.

There are small steps being made at a local level too: in Lambeth, the commissioning process is being stripped down to its first principles. This doesn’t necessarily mean that global companies are excluded, but the locally devised solutions are unlikely to include too many. Moreover, by the beginning of November 2012, 93 organisations, including nine local authorities, had become accredited Living Wage Employers.

Nick Hurd MP is quoted in Social Enterprise UK’s report: “You could do really smart stuff. In my area, Hillingdon Council, BlueSky do the landscaping. Their motto is, ‘we’re the only company in the country where you have to have a criminal record to work’. It’s the first chance to prove yourself, to prove that you can be trusted. From Hillingdon’s perspective, they get a good service at a good price. But they also reduce reoffending. For me, that’s smart commissioning.”

And as Neil Johnston tells me: “Part of the reason for the upscaling has been the assumption among commissioners that everyone will try to rip you off. But we’ve seen things like A4E recently - you will always get people who cheat, but is it the prevalent part of the community?”

Charities and social enterprises delivering public services was a much-repeated promise in the argument for the big society vision: the title may have fallen by the wayside, but is the idea dead?  As Social Enterprise UK’s report concludes: “Public debate in the wake of the financial crisis has centred on whether public spending cuts must be made or avoided. But who benefits and who loses because of the way that public spending is done, is a much bigger question.”