Public service markets

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The following discussion of markets for social enterprises, by Roger Spear, Chair of the Co-operatives Research Unit in the Communication and Systems Department at the UK's Open University, is extracted from Chapter 5: European perspectives on social enterprise - of Social Enterprise for Public Service - How does the third sector deliver?


Contracting for public and welfare services

In many countries, traditional partnership arrangements between the state and the social economy for welfare and public service provision are reconfiguring through more marketlike arrangements favouring social enterprise. Similarly, there have been general trends from grants to contract funding. There is also a trend towards more mixed economies where public, private and social enterprise players compete. Contracting may be either in quasi-markets via the state or in consumer/user markets via voucher systems. This raises the issues: What is the added value of social enterprise? And how can it be best supported?

The added value of social enterprise

As noted above, social enterprises may operate more flexibly than the public sector, and they have a trust advantage over for-profits.[1] They also claim to provide various externalities that add social value to market contracts. These added values are due to their typical operating characteristics, such as: participative structures giving user and staff involvement (as well as supporting active citizenship), multi-stakeholder structures providing more social cohesion, and proximity of services (locally based close to users and workers).

There is considerable European debate among social economy providers and policy makers about these issues, since health and welfare services are increasingly being commissioned through market mechanisms. There is concern that the rules on competition, state aid and the internal market, on the one hand, are in tension with concepts of public service, general interest and social cohesion on the other; and that certain values in welfare/health services need to be preserved: values of equality, solidarity, respect for human dignity, and the principles of accessibility, universal service, continuity, proximity to service users (user involvement). It is argued that it should be possible to promote positive synergies between the economic and social aspects, within the EU framework of rules on competition, state aid and the internal market – and that the contribution of the social economy should be better acknowledged in public procurement processes and state aid procedures.[2] This situation is exacerbated by policy trends influenced by Gershon[3] and Freud,[4] which give support to a growing tendency for contracts to be packaged into larger units to achieve economies of scale. Consequently, there is the issue of how smaller providers (like social enterprises) can manage the transaction costs of large contract processes or procedures, and access to public procurement markets.

But public service markets are very different – while most are quasi-markets where the state purchases on behalf of citizen-users, there is a growing trend towards consumer markets (via vouchers and personal accounts). International experience reveals different approaches to how social enterprise (and the social economy) can be positioned in these different markets:


Relationship marketing

Procurement (by the state) of services varies considerably. Earlier adversarial, conflict-based “hard” or tightly specified contracting models have sometimes given way to “soft” relational contracting models that allow for more flexibility because a more trusting relationship has been developed. However, this may be easy only for smaller contracts, since larger contracts are subject to the full EU procurement regime, which is quite complex, and EU Treaty free-market rules apply to most contracts (fair, open, transparent and non-discriminatory competition). In addition, there may be a tendency for public authorities not to pay the full cost[5] of services provided by non-profits, and to assume that voluntary work and donations can compensate.

Also, special relationships are always subject to challenge, thus the solution may be to specify more clearly the social outcomes delivered by social enterprise. For example, the Italian social co-ops in the early 1990s had a preferential procurement arrangement with municipalities. This was contested as a breach of European Commission competition law. However, they subsequently developed an approach consistent with EC procurement law whereby municipalities specify tenders for contracts from organisations to meet specific social requirements to employ a minimum number of disadvantaged people – and social co-operatives have continued to demonstrate their effectiveness in this respect.

Protected niches via social clauses and registration schemes

It is possible under the EU framework[6] to include social requirements (“social clauses”) in contracts and in the whole procurement life cycle (provided the social value/outcome is properly specified); the proviso being that the contracting authorities be predisposed to do so – the main barriers are their motivation and any additional cost. In this way public-sector organisations can address social issues in their supply chains. None the less, there is pressure on costs, and although “best value” (which can include socially valued outcomes) is often the official criterion, it is easy to see that contracts might be awarded by lowest price. Registration schemes are also used where a public policy is linked to a specific legal form – for example, the Walloon region in Belgium only supports work integration organisations that are registered as a société à finalité sociale (social enterprise structure).

Fiscal measures

In many countries, members of the CMAF family of social enterprise (co-operatives, mutual organisations, associations and foundations) enjoy some degree of tax advantage (especially non-profits or charities), and in a few cases this position has been consolidated in recent years. For example, Portugal, Italy and Spain have been able to maintain their special tax regimes. But the trend is for these advantages to be eroded. And there have been legal complaints from private competitors against co-operatives’ legal and fiscal frameworks in Italy, Spain and France. These private competitors demand that certain of these legal/fiscal provisions be considered as state aid and against European competition law.

Consumer markets

Consumer purchasing of public services through voucher systems (for schools, healthcare, food stamps and the like) are generating considerable interest; they function through users purchasing services directly rather than through the quasi-market of state procurement. A recent Belgian voucher system has created a mixed economy market for work integration and proximity services (with competitors from the public and private sectors as well as the social economy); it proved effective in eliminating the black economy (the informal economy) and creating 80,000 new jobs in four years (with subsidies both to service users and providers). But only 10% of the vouchers were spent in the social economy, and there were issues of “creaming” by private-sector providers. This may be compared with a voucher system for similar services in Quebec, which requires that all suppliers are social economy providers.

Operating in consumer markets requires a different approach from that of quasi-markets. Fairtrade provides a useful model, where brands, marketing campaigns, and marques become more important. And the development of consorzi social franchises offers the possibility of economies of scale. For example, the social franchise Age d’Or Services (a coopérative à finalité sociale) has 463 franchisees in Belgium, and has become one of the main networks for the delivery of proximity services and transport for older people and those with low mobility.


Since social enterprise organisations often provide multiple social outcomes, they provide transversal benefits to other departmental budget areas and so have to negotiate multiple contracts.


  1. Spear, R “The Co-operative Advantage” in Annals of Public & Co-operative Economics (Blackwell, 2000)
  2. See: 0070+0+DOC+XML+V0//EN&language=E
  3. Gershon, P Releasing Resources to the Front Line: Independent Review of Public Sector Efficiency (HMSO, 2004)
  4. 2 Freud, D Reducing Dependency, Increasing Opportunity: Options for the Future of Welfare to Work, independent report to the Department for Work & Pensions (HMSO, 2006)
  5. "12% of charities delivering public services reported that they obtain full cost recovery in all cases; while 43% indicated that they do not obtain full cost recovery for any of the services they deliver" – UK Charity Commission report (2006)
  6. Commission of the European Communities Interpretative Communication of the Commission on the Community Law Applicable to Public Procurement & the Possibilities for Integrating Social Considerations into Public Procurement (2001)

Source: Roger Spear in Social Enterprise for Public Service - How does the third sector deliver? ed. Paul Hunter, Smith Institute, London, 2009, ISBN 1 905370 44, chapter 5., p 43 et seq