What to do about social enterprise failures?: Co-operative News

The Paul Gosling column

Ealing Community Transport – ECT – is one of the largest social enterprises in the UK. The parent company has evolved from simply providing community transport, into a business with a multi-million pound turnover and interests in a range of trading sectors.

“Over 25 plus years, ECT has evolved into a highly complex and diversified business, moving into recycling and waste management, and more latterly into rail and health,” explains Mahua Nandi, corporate development director of ECT Group CIC.

But having been regarded as a beacon of the social enterprise movement, it is now having the light shone on it from outside. In place of praise have come critical questions. The reason is that ECT is in the process of radically reshaping the business. And part of the restructure involves the sale of much of the business to a large PLC, registered on London’s Alternative Investment Market. In the rather euphemistic words of ECT’s press release, it “is moving in a new direction”.

ECT Recycling, one of the largest providers of recycling services in the UK, has been acquired by May Gurney Integrated Services PLC. The existing management team will transfer from ECT to May Gurney. “For some time, ECT Recycling had been exploring ways to secure its future and to build upon its successful business formula in delivering municipal waste services to local authorities,” the two companies stated in a joint press release.

Stephen Sears, who has led the development of ECT since 1980, said: “ECT has been looking for a partner for our recycling and waste management business with a good reputation in the local authority market place and with the commercial muscle to help us to secure bigger contracts. This will allow us to deliver our social and environmental objectives as well as the financial results that are essential to continued success.”

Other divisions of ECT are also being disposed of, or separated from the parent group. “The rail businesses – RMS, Weardale and Dartmoor – are in the process of being sold to new owners with the financial firepower and resources to develop them successfully,” says the statement. “Cuckoo Lane Health Care will become an independent organisation. Its association with ECT made Cuckoo Lane one of Britain’s most well known nurse-led practices.” The parent group also recently disposed of its stake in Bryson Recycling – a sector leader in Northern Ireland – to its partner, the Bryson charity.

ECT Group will now focus on its core transport operations, which include the London 195 service provided for Transport for London. It will also provide community transport services in Ealing, Milton Keynes and Cheshire and in a joint venture with Hackney Community Transport it will continue to fufil its contract with the Olympic Delivery Authority to transport construction workers around the large site.

But the disposal of most of the operations of one of the UK’s largest social enterprises has provoked criticism. One specialist consultant, who spoke on condition of anonymity, expressed their unhappiness. “What does this mean for the CIC as a model for the control of assets?,” they asked. The consultant suggested that if assets could be sold in this way, the sector had been misled by the Government about the effectiveness of CIC controls. “It doesn’t actually have the controls it is supposed to have. There needs to be questions asked about how this can happen. Is the CIC authority going to monitor what happens to this money? There are lots of interesting questions.”

We asked ECT Group’s Mahua Nandi to put its side of the story. “The company is taking the opportunity to refocus on its core business, i.e. community and passenger transport,” she says. “I think it’s fair to say that in recent years ECT’s community transport has increasingly had to ‘compete for attention’ against the other various divisions, and probably outside observers would not even have described it as a transport business. We therefore very much welcome the opportunity we now have to focus 100% on transport.”

Nandi stresses that the parent group remains firmly within the social enterprise sector. “ECT is and will remain a community transport organisation,” she says. “We currently operate community and bus services in West London, Cheshire and in Milton Keynes – jointly with Age Concern Milton Keynes – and long-term we aim to build on these solid foundations.”

Concern within the social enterprise sector has focused, in particular, on what will happen to the money ECT will earn from the proceeds of its sale of the recycling business. This misunderstands ECT’s financial position and the terms of the sale, Nandi argues. “There is not very much in the way of ‘capital receipts’,” she says. “May Gurney has provided consideration of £3.4m to us, for a business with an order book of approximately £175m. Of the £3.4m, a significant proportion is provided to cover the liabilities of the rail division, which is in the process of being sold. There is not much left over, and even the transport division on its own is a £5m business, so we have working capital requirements etc to cover. The deal essentially releases ECT from the liabilities of the rail and recycling businesses. Any legacy from the sale will be invested in the transport business.”

Nandi says what is left is a stronger core social enterprise transport business. “We run a quality operation—we compete against big bus operators in the London bus market and are consistently top of the small operators’ league table,” she says. “In conjunction with HCT [Hackney Community Transport] we beat stiff competition to win the contract to provide transport around the Olympic village during its construction. We’re also successfully expanding our community services, to Cheshire and jointly with Age Concern MK to Milton Keynes. With the sale of ECT’s other businesses we are in a position to focus entirely on the success of transport, which was always the ultimate aim of the business, and I’m confident that we will go from strength to strength.”

She dismisses suggestions the business has ‘sold-out’ its social enterprise roots. “You might have to explain to me why we’ve sold out…,” she retorts.

But there are clearly implications for the wider sector. Jonathan Bland, chief executive of the Social Enterprise Coalition, told us: “It is dangerous and often inaccurate to extrapolate from one particular case. ECT found a way to keep their business competitive, and we’re pleased that jobs were not lost. However, there can be barriers to certain social enterprises growing to the scale they need to, especially those that are capital intensive and reliant on large contracts. What we need to consider, and seriously research, are new models of investment, such as the Social Stock Exchange and Capital Risk Investment Fund, as a ways to get larger scale investment for social enterprises.”

In fact, as Jonathan hints, the case of ECT is not entirely isolated. Recently in Northern Ireland, a social enterprise (structured as a company limited by guarantee) agreed to sell its shopping centre because it was unable to find sufficient funds to invest to improve it to withstand the competition from a new major Tesco store that will be built a couple of miles away. The proceeds are to be used to improve social care and education facilities in the area.

Meanwhile, there are worries that many of the leisure trusts – which between them now have almost half the contracts for running local authority leisure centres – will find themselves unable to compete with the largest private contractors when their management contracts come up for renewal. Some of these may be effectively taken over by the private sector.

It had been hoped that the use of the CIC structure would ensure that community assets were protected for community benefit. There is a CIC regulator, situated within Companies House, whose role includes the protection of those assets. A spokesman for the regulator told us that about 40 CICs have ceased trading since the CIC structure was established by the 2004 Companies Act. “What normally happens if a CIC is sold or wound-up is that the proceeds of any asset sale would go to the body nominated in the memorandum and articles of association,” he explains. “If there is no body nominated, one would be nominated by the regulator. But this would apply only if the CIC was insolvent.” If part of a trading CIC were sold on, the proceeds of the sale can legitimately be used by the CIC to support other trading operations – providing the memorandum and articles of association are wide enough to allow this.

The spokesman added that as far as the regulator is aware, none of the 40 closed CICs has been re-opened as a for-profit trading business. However, it would probably be impractical to take any action if any did so, providing they used a different name.

But what, realistically, is the alternative to sale if a social enterprise is moving towards insolvency? (Not that we are suggesting this was the case with ECT.) Equally, how aggressive should a regulator be in intervening when they are worried that a sale is being conducted in other circumstances? Is it legitimate for a social enterprise to simply sell a trading division if it believes it can achieve a better return in another field of activity? And what recourse should a local authority have if it awards a contract to a social enterprise in the belief that it is supporting the community sector, but then finds the contract is sold on to a PLC?

All these questions need to be seriously considered by the social enterprise sector. It would be overstating it to say that the sector is now in crisis because of the steps taken – or forced upon it – by ECT. But this is the right moment to debate some very serious challenges.