The Barbarian Invasions

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Definitions

In Italy the “B type” social cooperative brings together disadvantaged people, permanent workers and previously unemployed people who are integrated into the labour market. The categories of disadvantage may include physical and mental disability, drug and alcohol addiction, developmental disorders and convicts. In “B type” social cooperatives at least 30% of the members must be from the disadvantaged target groups.

In the UK social enterprise enjoys a broader and perhaps more inclusive definition that doesn’t seek to define disadvantage. The British government definition established in 2002 states that “a social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.“ However there are supplementary conditions an enterprises is required to commit to before being certified as a social enterprise by Social Enterprise UK:

* the business has a clear social or environmental mission that is set out in its governing documents,
* it is an independent business that earns more than half of its income through trading,
* it is controlled or owned in the interests of its social mission,
* it reinvests or gives away at least half of profits or surpluses towards its social purpose,
* it is transparent about how the enterprise operates and the impact it has.

I Italy the direct social agreement is a public contract between local authorities and a “B type” social cooperative. Technical terms match social terms of contracts in order to support the emancipation of disadvantaged persons from the local social care. There is direct training, employment and income of a percentage of work included persons beside each direct agreement.

In 2012 a new law was passed with jurisdiction in England and Wales, the Public Services (Social Value) Act. It requires all public bodies and those dispersing public funds including universities, colleges, schools and social housing providers to demonstrate their consideration for social, environmental and economic impact when choosing with whom they wish to procure or to buy from. The Act currently only applies to services, not goods, and only applies to contracts over the EU procurement threshold.

Payment by Results (PbR) is a UK government policy instrument where payments to contractors delivering public services are contingent on the independent verification of results, normally after services have been delivered. It is being actively promoted for more effective implementation of domestic policy. However PbR requires contractors to have the financial resilience to cover all operational costs of delivery until results can be verified. In areas of public health, rehabilitation of offenders or support to unemployed people it can mean contractors having to wait many months or years until results are evidenced. In the UK this has meant that many smaller organisations, many offering specialist services, are unable to compete due to lack of working capital.

This article was written over the past six months form a starting assumption: the Italian social cooperation benefits a “privileged position”.

Not for all procurements

As far as government procurement is concerned, the EU sets the rules on three areas:

1) Supplies and services for the public administration: below the threshold of 200, 000 euros all members are independent.
2) Contracts for public services
3) Contracts for public works

The Italian legislation does not allow “B type” social cooperatives to compete for points 2 and 3. For example, they can’t run the local public transport and issue tickets directly to the paying customer; they can’t build a road, …

The only way for a social cooperative to deal with public services or public works procurement is through a joint venture with other companies that are not social cooperatives.

With the exclusion of social and educational services allowed only to “A type” social cooperatives, “B type” social cooperatives can participate in an open call for tenders ( above the threshold) or direct agreement ( below the threshold) only of the first kind: services carried out in favour of the administration for its instrumental needs (clean-up services, landscape management, maintenance, waste collection, seasonal manpower, …) and not those of the public undertaking.

This shrinks a little the (supposed) privileged position, doesn’t it?

Opening to EU single market

Italy also admits the operators established in other Member States (which are in possession of equivalent requirements – similar to “B type” social cooperatives with at least 30% of disadvantaged workers) to set direct agreements, below the threshold, with the Italian public entities. The requirements of this Italian treatment towards EU operators are updated and published in the Official Journal of the European Union.

[For Example: Blue Sky, the social enterprise based in Uxbridge near London, can enrol on the Italian board and Regional List of “B type” cooperatives and apply for managing the public parks in San Donato Milanese by direct agreement below threshold.]

This is not widely known and no one is doing it at present, but it shrinks a little more the privileged position, doesn’t it?

From political choice to institutional statements

In the past few years regulations have changed in Italy: now local institutions must issue a political resolution about the percentage of their balance sheet committed to “public interest” (work integration of disadvantaged people). Moreover they must issue an institutional resolution to set the list of licensed “B type” social cooperatives allowed to deal with direct agreement.

The aim of the new regulation is to shift the game from a political choice to a more institutionalized procurement, introducing the restricted call for tenders (within the list of licensed “B type” social cooperatives) as an alternative to direct agreement.

A lot of local institutions, rather than putting into practice these new procedures, have preferred to add those services, previously in direct agreement, in open call for tenders above the thresholds.

Many services previously managet by “B type” social cooperatives are now integrated in usual procurement without any social term of contract: it shrinks a little more the privileged position, doesn’t it?

Contract opportunity linked to work included persons

Many disadvantaged workers were paired to a “B type” social cooperative as an effect of a direct agreement of their local government with the co-op.

“B type” social cooperatives have hired them permanently, hoping that the political promises to renew the direct agreement ad libitum would be fulfilled due to the “public interest” set behind the procurement.

The “cutting costs” era and the regulations changes forced the local entities not to renew the direct agreement when it expired. The ethical and legal impossibility for the “B type” social cooperatives to fire the work included person, previously paired with the direct agreement, reduces the potential for new “pairings” in agreement with other local public entities, even the best preformed organization who have 50% of work included persons.

The direct agreement scheme seems to be hardly repeatable due to the high number of workers yet included in the co-op: it shrinks a little more the privileged position, doesn’t it?

Does the scenario match the “privileged position” assumption?

The ” competitive advantage” is the reason that makes getting good performance in producing an economic gain. This pattern can vary from company to company.

The economic gain never becomes profit for “B type” social cooperatives, because of their non-profit nature. The gain is only a measure of how well the NPO has been able to make market decisions. At the end of the year, the profit is transformed into assets for investment or self-financing.

The competitive advantage in public procurement for a “B type” social cooperative is the possibility to guard, to defend and to develop over time, with greater intensity than its competitors, a critical resource that is also a factor of success: the local government’s spending on services under the threshold.

How?

By creating a double bond with the local administration:

* Creating direct value: performing the best possible technical specifications required by the direct agreement as market standards.
* Creating indirect value: respecting the social terms of contract on job placement of disadvantaged persons in charge of the local social services. There are no industry standards for this indirect value (Social Value in the UK) because the compulsory employment has always been a public function.

The first level of competitive advantage is related to traditional companies: they are not rivals because they don’t fulfil the second function.

The second level of competitive advantage is related to the other “B type” social cooperatives, arranged on three hints:

1) Public tendering dedicated to all “B type” social cooperatives (more risky competitive advantage)
2) Negotiating invitation to submit an offer reserved for a maximum of 5 “B type” social cooperatives (less risky competitive advantage)
3) Direct agreement to a trustworthy “B type” social cooperative (maximum competitive advantage)

This is what politics has spun to the social cooperatives, using them to give employment to people who had been in administrative burden for years, and then the “free ride” was over. Some municipalities have encouraged / facilitated that, so at the end of the 90s a lot of “B type” social cooperatives were constituted on their territory. To date, it has become more difficult to make new job placements paired with new direct agreement because the capacity of a sustainable number of disadvantaged employees is over and they have been orphaned of the direct agreement that had started the collaboration with the social cooperative.

This is the scenario today: the competitive advantage lead by the Italian law n.381/91 is no longer producing sufficient added value or “privileged position”.

Social Value Act

In Britain the Social Value Act produces a competitive advantage because, as does the n.381/91 in Italy, it sets the rules (or the changes) of public procurement, not binding, however, the participation of private companies or restricting the access to a specific legal form of the participants, but reserving a higher score to those who have a social impact.

It’s as if the UK had extended step 2 of the Italian law, that is to say to provide a “social value” in any public tender. This does not mean creating a niche reserved to social enterprise, neither pushing traditional companies to ask themselves and introduce new processes on these aspects. Not only that, it also means that even on the social impact there is the prospect of building market standards.

Of course a “B type” social cooperative in the UK would rate the pattern under the threshold a bit more risky if compared to the Italian, but definitely more favourable than the Italian model for contracts over 200k euro.

In Italy “B type” social cooperatives have participated in tenders above the threshold against 30/40 traditional companies without being any recognition of the social impact.

But let’s get to the point, which is the most controversial: the result.

Work placement in “B type” social cooperative produces at least the following outcomes:

* The disadvantaged person becomes more and more autonomous, also from local public services. This means for the council to pay a fee less (an educator, a mentor, a day care centre, a housing). It also means savings in contribution for the “pocket money”. Many savings for the prison system in day care. No one in Italy has ever measured it because there is no need in a non-paid-by-results model.
* The disadvantaged person turns from welfare user to contributor! The council not only saves, it also gains from it. As far as prisoners are concerned, for example, there still is a rule to leave the “tithe” of their salary to prison.

This is a simple list of positive externalities or savings in public spent that the model of the “B type” social cooperative produces for the community:

1) VAT revenue produced by the productive activities carried out by disadvantaged people;
2) the revenue from personal income tax related to the new income of the disadvantaged people;
3) evaluation of the decrease / absence of public health and social care in an developmental perspective;
4) reduction or non-payment of disability support pension, if applicable;
5) reduction or absence of additional contributions to the family income (a sort of minimum living wage);
6) other savings for the local government (local services).

The UK system of Payment By Results is interesting because it sets clearly, in ever-increasing rates, the share of savings generated from the social impact for the community, recognizing it directly to the managing authority.

This is no longer a competitive advantage but a direct economic benefit, it does not affect the chance to get the following public tender, it affects the current balance. The PbR also becomes a kind of “certification” of the social impact, a new industry standard specifications of the terms of that contract, which becomes a track record: the next successful bidders will have to prove they can do better than the prevoius.

Two different Ecosystems

So our question is: is it better to get a public procurement of business with a “B type” social cooperative in Italy or with a social enterprise in the UK?

In Italy there is a very favourable ecosystem under the threshold, but virtually inaccessible above. Of course, the social impact is produced regardless to the source (public or private, no matter) but the public sector, which should be the most interested actor, connects to itself only in direct agreements below the threshold. There’s no direct financial reward if you invest in more efficient methods of social impact.

In the UK there’s a less favourable ecosystem (not considering the CIC), more competitive than the Italian, with the risk that the private competitor fails to beat on price rather than on work placement performance, but those who win can negotiate a reward in proportion to the saving products on welfare policies, no matter the scope of business for which the procurement was won. That way social enterprises can get more than private competitors.

The answer to our question also depends on the development strategies: if you want to maximize the competitive advantage in Italy you should remain a rather small or medium sized “B type” social cooperative with a diversified business sectors in order to participate in more direct agreements in a limited area, with a turnover “packable” in a tranche of direct agreement below the threshold.

If you want to maximize the competitive advantage in the UK you should become a medium or large “B type” social cooperative that specializes in one or two business sectors in order to participate in competitions over the threshold in a larger territory.

The theme of European competitiveness within single market will be placed at the center of the revision of the Public Procurement for Public Services, including the social enterprise field.

Will Italy and UK, the two best-performing countries in the social enterprise world, be able to build a unique ecosystem that promotes the growth of social enterprises and not only defends it from the “barbarian invasions”?

Authors of the article published on valori.it and socialenterprise.org.uk

Peter Holbrook

London, United Kingdom – ‎Chief Executive at Social Enterprise UK – Bio

Andrea Vecci

Milan, Italy – Vice President at Il Giardinone social cooperative and social innovation author