Official Report (Hansard)
Date: 13 May 2009
COMMITTEE FOR FINANCE AND PERSONNEL
Inquiry into Procurement Practice in Northern Ireland
13 May 2009
Members present for all or part of the proceedings:
Mr Mitchel McLaughlin (Chairperson)
Mr Simon Hamilton (Deputy Chairperson)
Dr Stephen Farry
Ms Jennifer McCann
Mr David McNarry
Mr Declan O’Loan
Mr Ian Paisley Jnr
Ms Dawn Purvis
Mr Peter Weir
Mr Mark Dougan ) Ulster Community Investment Trust
Mr Brian Howe )
The Chairperson (Mr McLaughlin):
We will hear from the Ulster Community Investment Trust (UCIT), which is represented by its chief executive, Brian Howe, and its research, policy and fund-raising officer, Mark Dougan. You are very welcome. I apologise that the previous evidence session overran; I hope that you were not too inconvenienced. I ask Brian to make some introductory comments, after which members will ask questions.
Mr Brian Howe ( Ulster Community Investment Trust):
I will give a brief background of our organisation. UCIT is a charity that finances the social economy and that began operating in 2001. At that stage, we received approximately £8·5 million funding from Government and took over a loan book of about £6 million. Since 2001, we have invested about £22 million into approximately 150 social enterprises.
We help the social economy to grow, and we help to create jobs, income and wealth for local communities. Therefore, we are part of that sector, and we want to continue to support social enterprises, of which there are a large number. We estimate that approximately 1,200 social enterprises operate throughout Northern Ireland, and they employ in the region of 20,000 people. We recognise that the sector needs to grow and become more professional. As part of that, the whole sector should be able to access work through procurement. That is what the Committee is concentrating on at the moment.
From our point of view, procurement and having a level playing field for the social economy are important. We think that we could establish a brokerage service for the social economy. Many of the players in that sector are very small. However, they do a lot of good work in various areas. We propose to set up a brokerage service that would build those groups into a cohesive unit that could bid for jobs in public services — in health care, for instance.
We see ourselves joining with others in the social economy. One group that we are interested in joining with is the Social Economy Network, which has access to the sector and its members. Another organisation is the School for Social Entrepreneurs, which works alongside the University of Ulster and could build the capacity of the sector. We would provide the finance, it would provide the capacity building, and the Social Economy Network would provide access to a broad range of organisations.
In order to achieve that, we see further funding as being necessary. We are not suggesting that we need funding to set up the service; however, we need money that we can provide to those organisations. That is necessary not only to help them grow, but to help them take on those jobs. Our suggestion to the Committee is that part of the available dormant funds should be ring-fenced as a social economy loan fund. Part of the interest from that could be used for the brokerage service.
It may not be within the Committee’s remit, but our sector, and particularly our organisation, must be professionalised. One way to do that is by regulation, and we advocate that our organisation is regulated by the Financial Services Authority. We will be asking the Government here to lobby central Government to regulate the sector and to regulate us within that sector. We are asking for the Committee’s help in doing that, if it is within its remit.
It is probably not. However, we certainly hear your case.
You put forward some very interesting ideas. I like the fact that they are ideas to try to get the sector professionalised, which is important, and, perhaps more importantly, they are ideas to get the sector going, growing, and getting more work. You talked about establishing a brokerage service to encourage, assist and advise. That sounds like an interesting concept. How do you see that working in practice? Are there examples from elsewhere — for example, in the rest of the UK, in Ireland, Europe or beyond — of similar schemes working successfully?
Mr Mark Dougan ( Ulster Community Investment Trust):
Thank you for your question. We have done research looking at all the regions in the United Kingdom. A similar scheme, called an online matchmaking service, is provided for social enterprises by Futurebuilders England. That scheme is confined to the English region. The idea of that is to build co-operation and partnerships between social enterprises so that they can come together, increase their business strength, and go on to win public service contracts.
In England, there have been moves towards financing the social economy and building its capacity on a wider basis. Again, that has been done through Futurebuilders. In 2004, the Government put approximately £150 million into Futurebuilders and in 2008, they put in another £65 million, although I must stress that that is for the English region only. That money was to be used to scale up social enterprises so that they could go on to win public service contracts.
In addition, a programme called Capacitybuilders has been launched. The business support can be seen as working alongside the investment. Capacitybuilders has been designed to increase the business capacity of groups so that they can win public service contracts. The key is that the Government, within the English region, and the Scottish Parliament are recognising the need for social enterprises to win public service contracts. There are several reasons for that. Social enterprises are seen as important community stakeholders because of their sense of community ownership. They are run by local people for local people and are a good way of delivering public services to vulnerable sections of society particularly in disadvantaged communities. It is recognised across all regions that social enterprises have a very important part to play.
Equally, social enterprises are saying that they have an important contribution to make to the economy as a whole. As members are aware, the public procurement sector in Northern Ireland is worth approximately £2 billion a year: I think those are last year’s statistics. For the sector to grow, it is important that social enterprises play their part in public procurement as effective competition for the private sector. We are not talking about them working on their own; we are talking about them subcontracting with the private sector or working together in collaboration.
I have learned that last year the Scottish Executive have put £30 million into the social economy over a three-year period. That money, which went to Social Investment Scotland, a similar organisation to ours, is designed to allow social enterprises to scale up their operations and increase their business capacity and procurement readiness.
We have taken an ongoing interest in capacity, allied to other issues. You talk about current capacity and the need to upscale and build up organisations; maybe even grow new ones. That is recognition that although there are currently 150-plus enterprises doing good work they are by and large quite small-scale, certainly in the wider economic sense. Those enterprises are getting a very small chunk of that £2 billion of public procurement every year.
We have been examining the possibility of inserting social and environmental clauses into major public procurement contracts, of which there are a significant number. Doing that would put pressure on existing social economy enterprises. Does the capacity exist to deal with a proliferation of social and environmental clauses or is that what you mean by upscaling and encouraging through a brokerage service? Do you see that as an essential cog in the wheel to get the sector to the level at which it could take advantage of more social clauses within contracts?
There is a need to build capacity in the sector. At the moment, some organisations are handling large public procurement contracts very well. However, the sector is dispersed in the sense that a lot of small groups would love to do the work that they may not be able to do on their own. The idea of our offering a brokerage service would not be just so that we could bid for contracts but that we could upscale and help those organisations prepare to take on contracts. There is a lot of work involved in that.
Part of our work is to help grow the sustainability of the sector. Ultimately, we lend money to get it back. We are very conscious of the sustainability of the organisations that we are working with, the idea being that if there is a chance to win public sector contracts, we will support them in that. That is the idea of the brokerage service. However, a lot of work in skilling and building the sector will be required.
Simon has covered some of the points that I was hoping to raise. Your submission is very useful and has a good focus, and I am aware of the good work that you are doing. You are to some extent a banking system for the social economy, if that is a not too pejorative term nowadays.
That is a very pejorative term.
On other occasions, people may think it an insult to be accused of being a banker.
I want to touch on a couple of points. First, you mentioned ring-fencing a level of funding within dormant bank accounts funding to help with brokerage activities. Have you given any thought to the ballpark figure that would be necessary for those sorts of activities?
Yes. If we want to get into a brokerage service in a reasonable way, it is going to cost money. If there were a fund of, for instance, £10 million — that is just a figure I am using — and we were earning 5% interest on that, it would provide an income of £0∙5 million a year. Most of that income could be directed towards the brokerage service because UCIT is sustainable in its own right. At this stage, it is very difficult to estimate the actual cost of the brokerage service. An economic appraisal should be carried out and, if the idea is shown to be feasible, a business plan should be prepared and the service properly costed. All of that work needs to be done. However, it could be achieved within that ballpark figure.
Simon has already teased out some detail of the brokerage service with you, and I know that it is to some extent at the embryonic stage. However, as I see it, the idea seems to be potentially three-fold. First, there is what I would view as a degree of administrative and financial backup for social economy groups to help with bids. Secondly, there is the gathering together of smaller groups and helping to form them into consortia so that they can achieve the economies of scale needed. Thirdly, you indicated that there may be a situation in which the brokerage service bids for contracts and then seeks to subcontract them to various social economy groups. Are there any functions other than those three that you see the brokerage service performing, or is there anything else that we have missed out at this stage?
Those are the key functions. It is about getting in early and building the business capacity of the smaller groups and, as you say, connecting them with the private sector and larger social enterprises. There is also the function of segmenting the public procurement marketplace for those groups, educating them about public procurement opportunities and connecting them with the Central Procurement Directorate in its Meet the Buyer events. It is about getting social enterprise groups involved at that stage. Generally, your overview is exactly what the service would be involved in.
I assume that part of the service is also about providing information. One of the major problems both for social enterprise groups and small businesses in the private sector is about getting a handle on the vast number of procurement opportunities that are available. The fact that one opportunity may be advertised on one website while others are advertised elsewhere means that it is difficult to get an overall picture of what is happening. Lack of co-ordination of information seems to be one of the problems.
That is where the market segmentation of public procurement opportunities will come into play.
Simon Hamilton spoke about social clauses. Some larger companies perceive social clauses in public procurement contracts to be a bit of a headache and a nightmare to try and work out. However, social economy enterprises already do much of what social and environmental clauses require with respect to environmental protection and economic regeneration by providing local employment and services. Therefore, social enterprises are probably best placed to take on large procurement contracts that have social and environmental clauses. Will you comment on that?
As you rightly say, in most cases social enterprises have a double bottom line. They exist to provide services in the community and make a profit so that they can continue to provide those services. In many cases, organisations have a triple bottom line, because they also have an environmental aspect. I advocate including social clauses in public procurement contracts; however, such clauses should not be so onerous that they disadvantage others.
We are trying to professionalise the sector and get it up to speed with the “ordinary economy”. The social economy sector needs to realise that it is part of that economy and that it creates great wealth for local communities. The public procurement service could help to professionalise the sector. It could help organisations realise that they are professional, that they have to bid against other companies and that unless they are properly structured and set up they are not going to win contracts, even if those contracts contain loads of social clauses. I certainly advocate the idea, but social clauses should not be so onerous that they exclude others.
One criterion for public procurement contracts relates to financial capacity and the financial health of a business, and that seems to disadvantage a lot of smaller or new companies and social economy enterprises. Given that a lot of smaller businesses do not have enough financial capacity, how do you see that aspect playing out? Who will take the risk? Will the brokerage service take the risk by providing security when tendering for contracts?
I take your point. Many smaller social economy enterprises were grant-funded, but most now have sustainable funding, having borrowed from UCIT, etc. However, they do have a weakness regarding their financial accounts. The brokerage service will connect smaller organisations that have a lack of financial history with larger social enterprises and the private sector. Therefore, the brokerage service will play a subcontracting role in local communities.
Beyond that, our aim is to build the business capacity of small social economy enterprises in respect of their financial accounts and how those are presented and professionalised. The connections that small social economy enterprises have with larger social enterprises and the private sector will be the key to them overcoming that obstacle and successfully winning public service contracts.
I like the idea of dormant bank accounts funding being used as an investment loan or fund. You provided examples of those being used in Scotland and England for the benefit of the social economy. A number of bids have been made here for dormant bank accounts funding, particularly by the community and voluntary sector. Is there room for everyone, or should it really be used for one purpose only?
Provision is being made in England for the establishment of a wholesale investment bank using a portion of the dormant bank accounts funding. The Irish Government used the Dormant Accounts Act, 2001 to redirect dormant account funds in the South to grant-funding. All of that money has been used up and questions are being asked about the sustainability of that decision. I did a wee bit of research into the money that the UCIT received from Invest NI in 2001 and 2002, which amounted to approximately £4·5 million. We have recycled that money, which now amounts to £8·2 million. Our original target was to support 30 projects, and we managed to support 83 as of this year. That money is still in play, and will still be in play for another 10, 15 or 20 years — for ever more, really. That gives members an idea of how that money can go on working repeatedly to build sustainable enterprises across Northern Ireland.
Ms J McCann:
I want to talk about social clauses. During the Committee’s inquiry into public procurement practice, it has become clear that individual Departments have it in their gift to implement public procurement contracts so that the social investment is as valued as the monetary investment. You are correct; the social economy provides local employment that generates income for the wider economy. You gave us statistics about the amount of money that is being put into social economy enterprises in Scotland and England. The Scottish Parliament have conducted a proactive campaign to ensure that the social economy in Scotland grows and develops. Is it fair to say that that is not happening here?
As far as I am aware, the social economy here is perceived to be a small enterprise that does not help to build the economy, provide employment, or, as you said, tackle disadvantage and need. Tackling disadvantage and need is one of the key commitments in the Programme for Government. Are you making any headway in convincing Departments that the social economy is a viable enterprise that requires investment? Are you making any progress towards ensuring that, in line with the Programme for Government’s public service agreements, social economy enterprises can compete for public procurement contracts and can grow and develop accordingly? I am not always sure that many people are listening to us when we express that view here. I sense that Departments, Ministers and the Executive are not listening. Do you share my sense of frustration?
You are probably right. We have not come here to criticise Government or criticise what they do for the social economy, because we have been funded by Government in the past. We are grateful for that funding and we would not be here without it. By way of example, Invest NI has just launched the social entrepreneurship programme, to which it will commit approximately £1·2 million during the next few years. That is the main vehicle for developing the social economy in Northern Ireland. We are playing our part in that investment because we are providing the loan finance, which does not come from anywhere other than the funds that we already have. However, I do not think that that is enough; it is far short of what is required compared to what is happening in Scotland where £30 million has been put into capacity-building projects. There is a great need to build the sector and put more money into it.
The problem here has been caused by the plethora of grant-funding that was available in the past. Organisations were built on the back of Peace I, Peace II and Peace III funding and International Fund for Ireland money. In a sense, that is coming to an end and organisations must be fit and ready to continue without grant-funding. Invariably, some organisations in the community and voluntary sector will need grant-funding consistently; and rightly so: for example, one cannot run a centre for blind people without some form of grant-funding. However, I am suggesting that social economy organisations are trying to become leaner, fitter and meaner so that they can take on their role in the wider economy, and we are promoting that.
However, we still feel that there is a need for investment in such organisations. Invest NI has directed money into foreign-direct investment and organisations have taken that money, set up in Northern Ireland for a while and left soon after, which has resulted in the loss of hundreds of jobs. The social economy sector has been constantly building up jobs on the ground and working away. In the current economic circumstances, such organisations are creating jobs; so a lot more funding is required for them.
Ms J McCann:
You mentioned the capacity of some social economy enterprises to grow. I have had discussions with some that have linked with private companies to invest and try to secure public procurement contracts but which cannot get their foot on the ladder. A barrier still exists, even when those enterprises are building capacity and almost becoming part of a consortium with private companies. That seems to be the culture, and it is not only the case in the social economy sector, it is also happening with small and medium-sized businesses. Do you sense that you are making progress on eliminating those barriers? Building social and environmental clauses into contracts from advertising stage through to when the work is complete is the way to break down the barriers. That way, at least there is a format for enterprises, and they are not marked only on their financial capacity, as Dawn said, but on the social benefits that they provide. Those social benefits also benefit the economy: supporting social economy enterprises is not just about building the capacity of communities it is also about social benefits to the local economy.
There is evidence of a language barrier between the Departments in how they understand the social economy sector, and that causes a lack of awareness of social enterprises and what they are doing in communities.
I want to take up your point on how proactive other regions are, and add to some of the points made by Brian. The Department of Health has created a £100 million social enterprise fund for existing social enterprises involved in public procurement. Although the fund is for the English region only it gives a sense of how proactive and willing that Department is to bring together the social economy and public procurement. Across England, Scotland and Wales I get the sense that there are two elements in their drive to increase opportunities for social enterprises and public procurement; access to investment capital and provision of business support. To answer your question, Northern Ireland is falling behind on those two elements. For example, last year Wales announced a new £7 million investment in business capacity for 200 organisations over the next five years. That gives a sense of how proactive the various authorities are in driving new opportunities for public procurement for the sector.
You mentioned some impediments and difficulties that the social economy sector encounters. Have you identified those difficulties in your research? It would be helpful to the Committee’s inquiry if you have identified and codified the obstacles. There may be cultural or language issues, but I am sure that there are other issues too.
We have tabulated some information on accessing finance over the last few years.
Will you share that with the Committee? I am sure that that would be helpful.
Can you point to examples of contracts being awarded to social economy projects that did have access to the public procurement process?
Yes; a number of organisations are involved in public procurement in a large way. You are probably aware of the Bryson Charitable Group.
Yes; we will be hearing from that organisation.
The Bryson Charitable Group is involved in a number of projects. A smaller organisation, Employers for Childcare, does extremely good work and is very well organised. Praxis Care has existed for quite a while and has grown hugely over the last while. Extern Recycle is a smaller organisation that does very good work, and The Orchardville Society is another example.
I asked about individual organisations and you have given me some very good examples. I recognise the organisations that you have mentioned although I must confess that I would have forgotten some of them had I been asked to make a list. Has there been any experience in this region of groups collaborating in order to bid for contracts?
We are not aware of any examples of that.
Dawn is indicating that she knows of an example.
A consortium came together to do the groundwork at the hospital in Fermanagh.
I will talk to you about that separately, because it is something that we may need to look at.
I am impressed by what UCIT is doing and by your approach to your work. Your story needs to be told louder, and it is healthy that you have come here to meet the Committee. Is your organisation unique in the sector? Who checks that you are behaving yourselves financially?
We are unique in Northern Ireland but not throughout the UK. I hate using acronyms, but we are a CDFI (community development finance institution). There are many throughout the UK, and we are part of the Community Development Finance Association (CDFA). The Charity Bank, which came to Northern Ireland recently, is not dissimilar to UCIT, although it has a banking licence and is regulated by the Financial Services Authority (FSA).
We want to be regulated by the FSA. If the Department or the Committee has any sway in that matter then we would like to lobby to become regulated because that would enable us to access further funding. There are a number of larger players in the social economy. Housing associations and the credit union movement, for example, consider themselves to be part of the social economy. We have had discussions with those organisations, and they would happily invest large, essentially free, funds in us and we would provide them with a return. However, they need us to be a regulated organisation.
Invest NI carries out checks on our organisation, and our accounts are audited by PricewaterhouseCoopers. All of the Departments that have provided us with funding are given copies of our accounts, annual returns etc.
I like your views on the strategic use of dormant bank accounts funding. You partially answered this question before: approximately what sum of money are you looking for? What proportion would that be of the money that is available?
As far as we are aware from research that we have carried out, there is something in the region of £25 million in dormant account funds in Northern Ireland. We suggest that approximately half of that should go into some sort of loan fund.
David, I think that it was you who first flagged up the work of the Ulster Community Investment Trust to the Committee.
I do not want that to go against them. [Laughter.] I was very impressed by their work. To their credit, the UCIT representatives have provided information that I was unaware of. As an elected representative, that puts me in a predicament, because there are obviously avenues that they can take and directions in which I can point them. Their proposals seem to be a fundamentally natural progression. The release and use of money, subject to scrutiny, without any real direct cost to the taxpayer, has obvious attractions. It is those attractions that I would like to see the Committee take forward.
I heard what was said about our remit, but there are a lot of people who would like to know more about what the Committee is talking about. However, there are no people from the media in the gallery. It is no criticism of your organisation, but it seems that when we get down to unearthing something, nobody is interested. Nevertheless, we need to try to take the matter forward, tap into the professionalism that there is, learn from it and see how it can be used.
I heard what you said in response to other questions. I am interested to know how weak the local social economy enterprise network is when it comes to punching its weight and competing in the procurement market.
It is weak. However, it is a sector that is growing and being developed. Part of our remit has been to build that sector. We are not just a lender to the social economy. We spend a lot of time working with community groups and organisations to build their capacity. We do not have a large staff; we have eight and a half people, so to speak, working in Northern Ireland. A lot of our time is spent working with organisations; building, helping, handholding and mentoring them. We are confident that the organisations that we are working with are building their capacity, becoming sustainable and are fighting fit to take on those jobs.
In our proposal, we recognise that there is still a lot of work to be done. That is why we would utilise other organisations with the capacity to do that; including, as I mentioned, the School for Social Entrepreneurs, which has access to all the University of Ulster’s research and work. There is a need to grow and build the sector. However, it has become much more sustainable over the past few years. Organisations that are not fighting fit will go to the wall. That happens in every economy. If there are organisations that are not able to remain in business, we are trying to make sure that their assets are used by, or handed on to, other organisations that can use them.
There are 48,000 people unemployed, and that number is growing. I am not sure how many of the businesses that contributed to that unemployment can come back. Given the growth that there has been in your sector, are you able to identify a role in the procurement market that could help unemployment to be eased? Perhaps it is too early to tell.
It seems to me that the economy needs to be kick-started, and that is going to have to come from somewhere. I am caught as to whether private enterprise may have lost some of its entrepreneurial spirit and it may not take risks quite as easily Some of the things that you are talking about could be used to tackle unemployment. Is growth hindered by the downturn in the economy, or can the social economy take advantage of the downturn by giving it a boost that will help the economy to grow and will help social economy enterprises to get a foot in?
Every quarter, we carry out a business sector report on all our clients. Over the past two quarters, there has been a huge rise in unemployment and factories have been closing down, but our clients have been performing well. They are retaining jobs, and they are contributing to economic development in their local areas. Around 70% of our clients are based in areas of disadvantage, as recognised by the various targeting social need objectives. Social enterprises are retaining jobs at a time when they are being lost elsewhere. Many private sector companies often do not want to go into those areas and take the risk of trading. That is the key to the social economy. It has been growing organically in the areas that need it most, and it is already well placed to take public procurement opportunities and provide essential community services in those areas. Hopefully, that answers your question.
That is helpful. Finally, a lot of people are having problems with their credit rating. Given the current climate, is there a role for UCIT to assist with credit rating? I believe that the current situation is likely to last for some time. Is there a way of enabling a credit rating to be endorsed or guaranteed that is likely to be beneficial to someone in securing a procurement contract? Even if everything is going well with tenders etc, it can be very difficult for an organisation if it is told that it cannot be lent the money that it needs.
At the moment, we are raising further funding for the sector, and it would be beneficial if the Committee could help us to lobby the banks to free up the sector. We envision UCIT approaching the banks to lend us the money. We will take the risk, because we have proven that we are happy to work with organisations in the sector and take on loans with them, and because we know them, work with them, and provide that handholding and mentoring and support, in general, those organisations have not failed. We have a few problematic accounts, but, in the seven years that we have been running, we have had no bad debt, which is phenomenal.
You ought to talk to the Presbyterian Mutual Society.
I spoke with the society’s administrator to find out whether we could help.
That would be very interesting; perhaps we could go down that route.
The banks are reluctant to lend to any sector at the moment, but we are approaching them and asking them to provide loans to UCIT at affordable rates, and we will take the risk and lend the money on to the sector.
Is there a history of UCIT acting as the middleman? I am sure that the banks are not really interested in which organisations UCIT is going to lend the money to, because you are accepting the risk.
We have bid into that fund. In the South of Ireland, through the Government, the banks were convinced to provide an initial fund of ·€25 million into the Social Finance Foundation. In the past few months, that foundation — backed by the Taoiseach or someone else in the Irish Government — has convinced the banks to lend it another €75 million over the next 12 years, which it will lend on to the social economy. It acts as a brokerage service that takes funds and lends them on. Therefore, it acts as a middleman.
The banks have decided not to move into that sector, because they do not know it well enough. They are prepared to take a small risk on the interest income, because that is all that they are losing. For instance, if we borrow from the banks at 1% below cost of funds and we lend it to groups at 1% over, that represents a 2% spread, which is adequate to allow us to take that risk. The banks lose very little. Their corporate social responsibility is helped for a small amount of money. That is the proposal that we are intending to present to the banks.
Chairperson, I believe that it is reasonable to request that the Committee considers assisting UCIT to find a way into the banks on that issue. We could discuss this matter all day, but is it in order for the Committee and, perhaps, our guests to outline on paper their desired approach to that matter? The banks will attend the Committee soon enough and we will, I hope, bounce them off the walls of the Senate — I assume that you have arranged that?
The banks and the lending institutions will attend the Committee. I am particularly keen to receive a document that provides a fleshed-out account of UCIT’s discussions with the banks before that meeting. Moreover, you mentioned earlier that you are seeking regulation; some detail on that would be helpful. Finally, the terms of reference for the brokerage service would be extremely helpful, because we want to discuss that matter with other witnesses during the inquiry. Those are our three requests.
That is fine; we are more than happy to provide those.
It has been some time since the Committee received an update on the dormant accounts issue. We participated in the development of that proposition, which eventually went to the Assembly. An update on that matter would be useful and would feed into our review of the procurement process. Anticipating the Committee’s view, I believe that we want to increase the capacity of local SMEs and social economy enterprises to access more and more procurement contracts. Today’s session was helpful. The follow-up information will be of further assistance, and we might correspond with you as our inquiry progresses. Thank you for your assistance.