Fake Non-Profits – lies, damned lies and Carillion’s non-profit companies

One of the ripples that has emerged out of the failure of Carillion is the use by private companies of ‘non-profit’ companies as a front for delivering public services.

What could be more trustworthy than a community enterprise which makes no profit out of essential services?

Well, the answer is that these can be fake non-profits, simply serving as a way for investor-owned outsourcing companies to launder the proceeds.

In June 2013, Carillion (then John Laing Ltd, subsequently Carillion Integrated Services Ltd) was awarded the contract by Ealing and Harrow Councils to run their library services for ten years, covering:

• Six static libraries

• Libraries back office support services

• Home Library Service

• Schools Library Service.

But there was a fig leaf thrown in, in the form of a non-profit company with a heartwarming name – Cultural Community Solutions, responsible for day-to-day management.

When we look at the accounts submitted to Companies House, the story becomes visible. Cultural Community Solutions made no profit because it looks as if it has paid all of its profit out to others including companies in the Carillion family. From year to year, gross profit is simply eaten up by the ‘administrative expenses’. In 2016, they were exactly the same figure.

As a non-profit, they could also do something that other commercial, or indeed in-house services, could not, which is to claim discretionary relief on business rates payable on library premises. As with the big fostercare companies financed by offshore venture capital, designed to escape taxation, the financial profits this non-profit passed through to Carillion were in every possible way a gift from the taxpayer.

This then is not a non-profit company. It is a for-profit operation, masquerading as a non-profit and presumably using time honoured techniques of transfer pricing – a device for corporate groups to shift monies between legal entities through inflated charging.

Devices like these, some charitable, have been used in the leisure sector as well. This is one part of public services where true social enterprises, like Freedom Leisure, Fusion Lifestyle and GLL, have a successful track record. Outsourcing companies have sought to get back into the market through a similar device of non-profit trusts. Serious questions surely now need to be asked about these.

It is not a new issue. Wolves will snap up some sheep’s clothing if they see a bargain and allowed to get away with it. In 2012, Social Enterprise UK’s Shadow State report helped to shine a light on companies like A4E, banned that same year from calling itself a ‘social purpose company’, since its primary purpose was always shareholder profit.

Cultural Community Solutions wasn’t a Community Interest Company, a specific form of social enterprise, nor necessarily marketing itself as a social enterprise, but it appears as if it was assumed to be such by some commentators.

Anyone can call themselves a non-profit, just as many can claim to be a social enterprise, but there is an underlying first principle that needs to be recognised, as in the International Statement of Co-operative Identity, which is that of independence.

The Financial Conduct Authority for example, rightly tests co-operative and community benefit societies against this measure of independent ownership and control, including any close links that societies may have. We need that same test more widely when claims of being community are made – in the name or in the legal form of a company.

If a business is set up with a dependency on others, whether state or private investors, the nature of the company will ultimately reflect the interests of those dominant partners.