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.
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.