Fake Non-Profits (2)

A fake non-profit is a corporate body whose purpose beyond being non-profit is to enable other businesses to make profits.

The underlying practice is not new. It uses models of transfer pricing questioned by critics of multinational companies since the 1970s (setting exchanges between different bodies in an artificial way in order to move money where it is needed) and it is close to the tax shelters exposed in more recent years by campaigners and transparency rules which aim to show who controls the entity. But the practice is on the rise, thanks to the combination of public sector outsourcing and the extraordinary pressures on budgets that today’s public sector faces.

In the wake of the collapse of Carillion, I pointed in a blog in February 2018 to that company’s use of fake non-profits – for example around the provision of library services.

Carillion

Carillion’s Values: a beautiful diagram but also an illustration of a company that did the very opposite of what it said it stood for.

That triggered exchanges with practitioners in many a field, from academy schools to utility providers.

Professor David Hall, Director of the Public Services International Research Unit  at the University of Greenwich pointed me to non-profit partnerships developed by water multinationals, in Grenoble in France and Bogota in Colombia, which are run on a 50:50 basis with local authorities.

The running of the service is outsourced to a subsidiary of the utility, and the partnership slips into making regular losses, which are shared 50:50 with the council, so that public money is poured in year on year to cover half of the ‘losses’. Meanwhile, following the money, a substantial profit is made by the subsidiary, all of which goes back to the parent company, more than offsetting their share of losses on the joint venture. “I think both of them show that there are systematic strategies adopted by these companies, not just one-offs” he commented to me.

In the UK, one service where the use of non-profits is most in question appears to be leisure services.

Close to where we are based, at Manchester City Council for example, there is a decision out on leisure services – with two finalists named, one a longstanding co-operative social enterprise, GLL – also known as Better – (and a member of Co-operatives UK, for disclosure), and the second a company called SLM, which has taken up the non-profit model as part of a wider private sector bid.

Practice in the sports and leisure service sector is coming under scrutiny. Sport is a major sector in economic terms, employing close to half a million people and with something like 180,000 non-profit clubs across the UK. In leisure services, there has been a strong tradition over the last two decades of social enterprises, leisure trusts, looking at the social value that can be created in partnership through sport.

This is what the new private sector contracting model looks as if it might aim to subvert. I understand that SLM is one of the private sector leisure operators that SPORTA, the network of leisure trusts, is asking for more transparency on – in the context of the inquiry into Carillion and the outsourcing market by the Public Administration and Constitutional Affairs Committee.

There is a vital principle at stake here, which is the integrity and value of genuine social enterprises, that put social purpose first.

To tackle the rise of fake non-profits in any sector, we need two system changes.

The first is greater transparency around tax, for example through the use of the Fair Tax Mark. This was pioneered first by co-operatives, and it has been taken up by a number of investor-owned companies such as Scottish and Southern (SSE), who have seen it as a way of demonstrating that they put back into society through taxes, rather than take from society by avoiding them.

The second is a more effective system of registration around exempt charities. The official policy aim, set out in legislation over a decade ago, has been for the Charity Commission to monitor these, but the integration needed to achieve this has been slow.

Why these two? Transparency on tax ought to be a sine qua non of public sector or socially responsible procurement, alongside the wider story on social value through commissioning. The foster care sector, reviewed recently by Sir Martin Narey and Mark Owers, is one in which genuine non-profits such as the Foster Care Co-operative, with a proud record of support for their looked after children, are competing with national chains, venture capital financed and structured to minimise tax, through registration in tax centres overseas.

And when it comes to fake non-profits, there need to be stronger safeguards and if there are complaints or concerns, there ought then to be a single point of authority for the public to be able to turn to.

This is about the integrity of a proud and important sector of non-profits, one that plays a key role in people’s lives across the country.

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When British house building briefly went co-operative

Malcolm Sparkes was a builder, but he wouldn’t be a soldier. Exactly one hundred years ago, as many others of his faith as a Quaker had been, he was locked up as a conscientious objector.

When peace came, he saw the opportunity to develop an idea that he had been working up while in prison, co-operative house building.

The Government had made a wartime promise of ‘homes fit for heroes’ and in 1920 started a scheme in which the Treasury would meet the residual costs of all houses built by local authorities. Because of the way it was designed, the scheme – we could dub it ‘Help to Build’ – led to a surge in the price of housing. Private builders and suppliers of building materials saw that local authorities had no incentive to keep prices low, because all the losses would be met by the national exchequer.

Sparkes offered to build houses on a non profit basis, proposing the formation of co-operative Building Guilds to do the work. With open book accounting, they would take up contracts, charging only costs, plus a percentage for overheads and a fixed allowance for the workers to have ‘continuous pay’. Finance could flow because banks had the security of payments from the local authority as the houses went up.

The idea captured the imagination of trade unionists and the idea, starting in Manchester and London, spread by the end of 1921 to 100 towns and cities. Local guilds were formed and soon amalgamated into one powerful umbrella body, the National Building Guild.

In the first eighteen months, everything went well, with the guilds outperforming both on cost and quality in terms of the houses they were building.

But of course, the competition of private house builders were vocal critics. Just as the Government had some years earlier changed the rules to disadvantage consumer retail co-operatives (prompting the formation of the Co-operative Party), so it changed the rules to pull the rug out from underneath the fledgling co-ops. The ‘cost plus’ contracts were outlawed and new requirements introduced which meant that far more working capital was needed while houses were going up.

“These changes could hardly have been better designed if they had been intended – which of course the Government protested they were not – to sabotage the Building Guild” comments Geoffrey Ostergaard in his 1990s essay on the tradition of worker control.

As night follows day, the enterprise went into reverse. The Co-operative Wholesale Society which had provided vital working capital to the early societies was forced to withdraw. By the end of 1922, the Guild was in the hands of the receivers.

Of course, there is a proud tradition of non-profit and mutual landlords and developers that flourished over the twentieth century and today in social housing, plus a vibrant renewal of community, co-op and mutual housing in recent years. The Confederation of Co-operative Housing is gathering in early May for an event, People and Power, on this.

But if the UK had been less hostile to co-operative house building early on, who knows, perhaps we might not have some of the housing challenges we do today.

As a builder, locked up in gaol, Malcolm Sparkes would perhaps have been having just that very same, hopeful dream… one hundred years ago.

‘Rather than complaining, we are getting on and doing things’ – stories of local economic renewal

One of the great contributions of community and worker co-operatives that I visit is often in acting as a flywheel for wider renewal of the local neighbourhood. As such, co-operatives can often be understood as part of a deeper process of empowerment or community development.

 

CED

I have pulled together and published a series of slides today on the role of co-operatives in community economic development – with input from and acknowledgement of many partners and allies around this work (thank you), including the Co-operative Bank, Locality, New Economics Foundation, Centre for Local Economic Strategies, Responsible Finance, Power to Change, Reconomy & Transition Towns Network, New Weather Institute, Co-operative Councils Innovation Network, Co-operative Development Scotland, Development Trusts Association Scotland, Co-operative Alternatives (Northern Ireland) and the Wales Co-operative Centre.

There are a number of genuine success stories across the UK of local economic renewal:

  1. In West Dorset, rural communities have created local food links and new food enterprises.
  2. In the Hebrides, three quarters of land is community owned, with more renewable energy generated in South Uist now in Summer months than the national grid can handle
  3. In Preston, the local authority, police and health services are seeing where they can place contracts with locally owned businesses – a ‘community wealth building’ approach
  4. In Bristol, growing numbers of people have joined the local credit union, for local savings and a currency that can be cashed with local enterprise.
  5. In the Black Country, a loan fund supports local businesses turned down by high street banks to survive and thrive.
  6. Children in the seaside town of Rhyl get to play music after teachers laid off by the county council formed their own co-operative to keep music education alive.

Researchers, by the way, call co-op effects like this ‘collective self-efficacy’ – in essence, the belief and ability of people to come together to make a difference. It reminds me of a report I read recently from the Democracy Collaborative on community development initiatives in the United States, which found that: “virtually all of the cases profiled in this report stressed the value of embarking on an achievable task that builds capacity and buy-in within the community”.

Self-help has a proud history and if you look around, it is a story that is just as compelling today.

As Carolyn Loftus, member of the Esk Energy Society in Yorkshire puts it…“rather than complaining about things, we’re getting on and doing something.”