Helsinki growth sectors background paper

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Social enterprises: equal work and business opportunities – Helsinki 5-6 February 2007

Workshop B – background paper

Growth sectors and business models

See also:

Contents

Four issues

Motivation

Whilst in theory social enterprises can operate in any economic activity, in practice there tend to be clusters in specific sectors. These tend to be sectors where there is a value base that is consistent with the spirit of social enterprise, and provides the motivation for the founders and leaders. Having a sense of mission is one of the key success factors for social enterprises. Some examples would be:

Motivations and businesses
Motivation Business
Reduce homelessness street newspapers
Reduce poverty in developing countries fair trade businesses
Stimulate local economy neighbourhood services
Reduce waste reuse & recycling

Questions:

  • what social issues can provide the engine for new social enterprises today?
  • what role can existing NGOs and lobby groups play?
  • are conventional companies an important and neglected force?

Market niches

There also needs to be a gap in provision. In 1995 the European Commission, concerned by the phenomenon of ‘jobless growth’, carried out a research exercise to investigate where the ‘new sources of jobs’ might lie. These are areas where there are social needs that are not being met by either the public or the private sector – in other words, where there has been a market failure. The resulting report (1) identified 17 such areas, as follows:

17 new sources of jobs
Category Area
Everyday services: home help, childcare, ICTs, assistance for young people in difficulty
Improving the quality of life: housing improvement, security, local public transport, redeveloping public urban areas, local shops
Culture & leisure: tourism, audiovisual, cultural heritage, local cultural development
Environment: waste management, water management, protection & maintenance of natural areas, pollution control

This categorisation maps fairly well onto current work within the EQUAL initiative. The development of social enterprises in specific trade sectors is an important strand in the work of the development partnerships in the second round of EQUAL. Of the 265 DPs selected, 55 (21%) are active primarily in this field:

Trade sector / cluster development (55 out of 265 round 2 DPs in EQUAL theme D social economy)
Trade sector No. of DPs
Environment (including organic farming and WEEE) 14
Care 13
Tourism 11
Neighbourhood services (services de proximité) 10
Leisure / culture / fashion 5
Other sectors 2

Questions:

  • how can public support programmes in specific sectors, such as tourism, be tapped to promote social enterprises?
  • do policies need to be altered to give social enterprises a fair opportunity?
  • can any sectors be viable on commercial revenue alone?

Finance

It is totally justified to give a public subsidy to work integration social enterprises, as they are performing a social service, which has a cost to the enterprise and brings a benefit to society. They are employing people who have a reduced productivity, and in so doing carrying out a task of integration. If fair competition is to be preserved, they should be remunerated for this social service. In Germany this is called the Nachteilsausgleich or 'compensation for disadvantage', and is paid for from a levy on companies that fail to employ their legal quota 5% of handicapped people (under Sozialgesetzbuch IX).

However it is in some cases possible, by combining revenue from different services, to reduce or dispense with the need for subsidy. For instance an enterprise which recycles furniture, such as Bulky Bob's, can combine revenue streams from four sources: from the collection of bulky waste; from the reduction in landfill; from the vocation integration of disadvantaged people; and from the sale of renovated furniture. In Flanders this model of multiple financing for multiple activities is called the kleefblad or 'cloverleaf' model.

This table shows of 4 classes of revenue:

Cloverleaf financing for the local services economy
Employment:
e.g. wage subsidy for hiring risk groups such as LTU, compensation for lower productivity and/or extra guidance
Client / user charges
(plus sometimes consumer subsidy through service vouchers)
Other policies:
e.g. childcare, home care, tourism, mobility, culture
Local authority:
e.g. social tender for community added value, cohesion, community development, poverty

Questions:

  • what sources of finance can be combined?
  • are there regulatory or institutional barriers to such combinations?
  • what partnership vehicles are required?

Replication mechanisms

Mechanisms are needed through which business ideas which have served well to realise social objectives can be replicated – copied – in new places or with different target groups. This will enable learning from experience, reduce the risk of failure and perhaps bring economies of scale into play. The codification of a business model, and the licensing of its use subject to certain conditions, is usually known as franchising. A franchise enables the inventor of a model to recoup some of their costs from people who subsequently pick up the idea and benefit from it. It is a way of establishing a liquid market for intellectual property. The idea of franchising can be applied just as well to social enterprise ideas as to conventional business ideas, and a number of experiments are in progress. Some adopt a ‘patented’ approach, whereby a price is attached to the intellectual property, while others take an ‘open source’ approach and endeavour to spread the practice more quickly by reducing entry costs.

Experience shows that such replication systems work best where there is a firmly established originator who can spend considerable time and effort in coaching new entrants to the business.

Questions:

  • how can the initial ’franchisor’ be sustained?
  • can we envisage a franchisor that is owned co-operatively by its franchisees?
  • are business advice agencies equipped to advise, or do we need a specific promotional effort?

Three cases

Environmental services – Reparaturnetzwerk Österreich (AT-3-08/135)

Austria’s RepaNet (Repair Network) is not just creating jobs that are sustainable in resource terms, but is also building attitudes and practices that are vital for the long-term development of the local economy. It is a training ground where consumers can learn to reuse waste, businesses can learn to co-operate and politicians can learn to think in terms of balanced growth.

In Graz, Ökoservice http://www.oekoservice.at runs several different environmental services. The first is chopping, removing and composting garden waste, for the local authority environment department and for local householders. The second service hires out recyclable catering equipment for events, serving 200 regular customers and washing a million tumblers a year. The third is the dismantling and recycling of electrical equipment, which is done in collaboration with a private company. A fourth ecological service supports the others: a 280 kW combined heat and power station turns 70 tons a year of used frying oil into electric power, as well as heating the premises.

Ökoservice employs 45 people, of whom 10 are ‘key workers’, 27 temporary Transitarbeiter – long-term unemployed people employed on subsidised contracts – and the rest ex-Transitarbeiter who have graduated to permanent contracts. It recruits long-term unemployed people, who find it difficult to get a job for any number of reasons – because they are ex-offenders, migrants, illiterate, ill, or just women who want to go back to work after raising a family. For each Transitarbeiter Ökoservice can claim a subsidy worth 60% of wage costs for up to 14 months. This brings in a little less than half the enterprise’s €1.3 million annual revenue, the other half being earned from the sale of services. In ten years, 297 Ökoservice trainees have found permanent work – a 75% success rate.

The RepaNet model has spread to five other regions in Austria. Altogether, the five enterprises employ 90 people and repair 4,000 items of equipment a year.

Neighbourhood services – Werk.Waardig (BEnl-16)

In the Werk.Waardig ('Worthy Work') project on a housing estate in Kuurne on the outskirts of Kortrijk, the Southwest Flanders Welfare Consortium has created 68 jobs in a range of activities including a canteen, short-term childcare (up to four hours), an after-school club, an odd-job service, and help with shopping, mending, and recycling.

The project’s underlying philosophy is to improve the quality of life in the neighbour-hood by activating the residents. On the employment side, it both creates jobs locally and, by virtue of the services thus provided, enables residents to obtain and hold down jobs with external employers. But it starts at a deeper level, by breaking down the isolation some of the residents, 40% of whom are immigrants, experience. For instance it runs parents’ groups and an after-school club, which is particularly helpful in improving the children’s Dutch. It colocates various services – for example placing the computer corner in the canteen – as mixed use encourages clients to mix.

A thorough needs analysis revealed that the principal problem is the lack of childcare. The official nurseries are aimed at two-earner families, operate for the whole day and have long waiting lists. Yet there were no facilities where a parent who wanted to go to a job interview or a doctor’s appointment could leave their child. The project therefore piloted short-term and flexible childcare, and managed to persuade the Flemish regional childcare authority, Kind en Gezin, to subsidise the scheme.

Werk.Waardig promotes a model in which multiple activities are financed from multiple sources – the so-called ‘cloverleaf model’, in which each leaflet contributes to a healthy and balanced whole. In Kuurne, about 45% of revenue comes from service vouchers, 13% from the King Boudewijn Foundation’s ‘Experimentation Fund for the Social Economy’, 20% from wage subsidies, 15% from subsidies for specific services and about 8% in sales to the public.

Home care – INSPIRE (UKgb-123)

Sunderland Home Care Associates (SHCA) was founded in 1994 and is now the biggest home care provider in the city of Sunderland in northeast England. It serves 500 clients and employs some 175 people, who deliver around 3,700 hours of care each week – in other words they work on average about half time. All but about 20 of the staff are women, and this flexibility of working time is a very important factor for them, especially those who already have family caring responsibilities. The company has also diversified out of home care. One service it offers is academic support, which is a service paid for by the local education authority, through which students with disabilities receive assistance in attending lectures and completing other study tasks. SHCA also provides short-term cover in residential care homes when they face a staff shortage.

Quality is a key competitive factor, and SHCA’s employee-owned structure enables it to attract a high-quality workforce and to offer them high-quality jobs, with above-average terms and conditions and workforce training. This builds loyalty: the staff turnover of only 3.5% a year means it can provide a high level of continuity of care.

INSPIRE has worked with SHCA to set up Care & Share Associates (CASA) as a vehicle to replicate the same model in other towns such as North Tyneside, Newcastle and Manchester – work which has so far created 70 new jobs. This steady process of growth through multiplication will be sustained through a central structure. Care & Share Associates (CASA) will keep a 10% shareholding in each new care enterprise it spins off. These will then pay an annual licence fee of around £35,000 (€50,000) plus a small percentage of their turnover (around 0.25%). Each federated company will also hold shares in CASA, thus ensuring the coherence of the group.

Three recommendations

The effectiveness of social enterprises in tackling exclusion should be recognised and subsidised

Work as part of EQUAL in Southwest Flanders shows how the development of neighbourhood services can improve the quality of life of severely excluded people, such as migrants who have been unemployed for over five years. The system relies on breaking down barriers by co-locating different services, and on mixed financing, including service vouchers that effectively give a 70% wage subsidy. An example that sprang from a needs analysis is that short-term childcare enables unemployed women to attend job interviews and thus gain paid work. In one estate in Kuurne, 67 jobs have been created.

At macroeconomic level, most experts agree that there is in principle no objection to the granting of public subsidies to certain types of social enterprises, under defined circumstances. These are that the grant should be used to establish fair competition for social enterprises that are carrying out an integration function. In other words if businesses are incurring additional costs by giving work to people who are less productive than the norm, they should legitimately be compensated for these extra costs (a principle implemented in for example in Pirkanmaan Syke ('Pulse of the Tampere Region'), FI-63). In this way, the task of integration can be made financially sustainable in the long term. This conclusion already formed part of the conclusions of the EU’s Third Sector and Employment pilot action in 1999, but still arouses politically motivated debate.

Sectoral development approaches are needed

A trade-sector approach to developing integration enterprises can work. A movement across the EU has arisen to take advantage of the market opportunity brought into being by the passing of the Waste Electrical and Electronic Equipment (WEEE) directive in 1995. This has seen 1,000 recycling centres started up, employing 16,000 people, many of whom are disadvantaged. The centres provide training in new vocations as well as offering services to public and private customers. They rely on the creation of three-way partnerships: networks with public authorities create growth opportunities, manufacturers sign contracts to recycle their products, while liaison with local chambers of commerce avoids any accusations of unfair competition. Multiple sources of finance are tapped to support multiple activities.

Underlying this is a strategic approach based on gaining intelligence of impending legislation, and acting to safeguard the interests of social enterprises. A European network (RREUSE) http://rreuse.org carries out large-scale lobbying and Serranet EEIG has been established to promote the social enterprise approach. (Examples include RepaNet – Reparaturnetzwerk Österreich (AT-3-08/135), EcoNet-Austria (AT-3B-08/315) and ELWARE – Social firms specialising in electrical waste recycling (FI-15))

Support should be given to replication methods

A cluster of EQUAL partnerships in several countries are achieving success in replicating – essentially copying with due regard for local circumstances – a proven business idea. Some of these have adopted the term ‘social franchising’ but this should not be taken to imply strong centralised and top-down control. On the contrary, the aim is to make unused local resources productive, by building a critical mass in the market place and through mutual aid. It is thus a process of local capacity building. There are two business models, the ‘open source’, where the know-how is available at no cost, and the ‘patented’, where the intellectual property is subject to a licence fee.

Some examples are:

  • Le Mat – a nascent chain of hotels employing mentally ill people, based on the model of the Hotel Tritone, which has operated in Trieste, Italy, since 1991. It has developed an operational manual and set up a permanent international association (IT-IT-S-MDL-203).
  • CAP Märkte – a group of over 50 medium-sized supermarkets in Germany, originating in the Stuttgart area and employing 5–20 handicapped people apiece. They are owned by a co-operative of sheltered workshops (GDW-Süd) and collaborate commercially with a co-operative of grocery retailers (SPAR-EDEKA).
  • Peiran – a chain of seven shops in rural Greece selling craft and traditional foodstuffs. They provide work for 17 young people and act as focal points for local development activities (GR-200917).
  • CASA (Care & Share Associates) – a group of companies providing home care services, on contract to local social services authorities. A distribution of shares in the company is made to employees each year. The core of this group is Sunderland Home Care Associates, which employs some 185 people, mostly women. It has been spread to four other towns in northern England (Inspire, UKgb-123).
  • Vägen ut! (Way out!) – a successful method which has established seven co-operatives employing 26 recovering addicts and ex-prisoners, is being spread from Göteborg to a number of other Swedish towns (SE-69).

Notes

(1) Local Development and Employment Initiatives. An Investigation in the European Union. European Commission, Luxembourg, 1995, 111 pp. SEC 564/95, ISBN 92-827-4208-3, €11.

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