ISE05/16-17

• Social enterprises^{1Legend symbol denoting There is no universal definition of social enterprise. According to the Government, a social enterprise is a business to achieve specific social objectives such as providing the services (e.g. support service for the elderly) or products needed by the community, creating employment and training opportunities for the socially disadvantaged, protecting the environment, or funding its other social services through the profits earned. Its profits will be principally reinvested in the business for the social objectives that it pursues.} run business for social objectives such as job creation for the socially disadvantaged, but not for profit maximization. They make their business sustainable through reinvestment of profits. On top of conventional social objectives, social enterprises can also make contributions to the overall economy.
• In Hong Kong, the Government has injected a total of HK$450 million in the form of seed money to social enterprises over the past 15 years. In 2015, there were 574 social enterprises in Hong Kong, and 248 of them were established with the use of the seed money. As a whole, social enterprises employed some 7 000 people and mainly provided retail, catering and medical services in Hong Kong. Yet the number and diversity of local social enterprises pale in comparison with the United Kingdom ("UK") where around one million people working in 70 000-odd social enterprises, covering a wide range of high value-added businesses such as financing, business services, accommodation and education.
• At the meetings of the Panel on Welfare Services and Panel on Home Affairs during 2011-2015, members have repeatedly urged the Government to foster development of social enterprises. This issue of Essentials discusses the policy approach taken in the UK with respect to social enterprises, after a quick review on key issues faced by social enterprises in Hong Kong.

Key issues faced by social enterprises in Hong Kong

• In 2015, there were just 78 social enterprises per million population in Hong Kong, far behind that of 1 083 in the UK. Moreover, it is noted that local social enterprises are highly concentrated in business of lower value-added activities, such as catering (30%), medical care (26%) and retail and personal services (25%).^{2Legend symbol denoting See香港社會服務聯會(2016).}
• In a nutshell, development of social enterprises in Hong Kong are constrained by a number of factors as follows:
  
  

  (a)	Lacking business experience: At present, the Government's funding schemes for setting up social enterprises are earmarked to non-profit-making organizations ("NPOs"). According to a Government study3Legend symbol denoting See Central Policy Unit (2008)., "these organizations may lack expertise in running a business. The social enterprises may not be able to survive in open-market competition". In fact, 20% of social enterprises were forced to close upon exhaustion of seed money.4Legend symbol denoting See Home Affairs Bureau (2015).
  (b)	Limited support in application for funding: It would be burdensome for inexperienced NPOs to submit detailed business plans to apply for seed money. Coupled with limited government guidance and support in the stage of application, this tends to dampen the propensity of prospective operators to establish social enterprises.
  (c)	Limited mentorship support: During 2008-2013, the Government only arranged 41 voluntary mentorships for the social enterprises which were set up by the Government's funding schemes. In 2014, the Audit Commission commented that the mentorship scheme should serve all social enterprises of Hong Kong instead of confining to Government-funded social enterprises.5Legend symbol denoting See Audit Commission (2014).
  (d)	Lack of public service contracts: The Government launched a pilot scheme in 2008 to accord higher priority to social enterprises in bidding government service contracts. While this initiative helped create new service demand for social enterprises6Legend symbol denoting During 2008-2012, 75 government service contracts valued at HK$30.1 million were awarded to social enterprises., the scheme ceased at end-2012, weakening service demand for social enterprises.

Recent developments of social enterprises in the United Kingdom

• In 2014, there are some 70 000 social enterprises in the UK. They employ around one million people or 3% of the total labour force, and contribute £24 billion (HK$284.4 billion) or 1% of GDP to the UK economy.^{7Legend symbol denoting See Social Enterprise UK (2015).} These social enterprises are engaged in a wider range of businesses including financial support and services, business consultancy, employment service, accommodation and education.
• The success of the social enterprises in the UK can be attributable to a wide range public support schemes for social enterprises in accordance with their stages of business development, as summarized below:
  
  

  (a)	Financial support from non-government intermediaries: Apart from the traditional grant of start-up capital to social enterprises, the UK government sets up and fosters the development of a wide array of non-government intermediaries which provide financial backing, expertise advice and attract private investment to social enterprises, regardless of their background.
  (b)	Pre-start stage support: In 2012, the UK government launched a Social Incubator Fund, providing grants to social incubators to work with prospective social entrepreneurs from initial concepts to launch. More specifically, social incubators work with individuals step by step to (i) offer mentorship to walk through the trails of start-ups; (ii) give advice to refine the business model; (iii) offer networking with seasoned entrepreneurs; and (iv) provide start-up capital in the form of grant or loan. During 2012-2014, an initial fund amounting to £10 million (HK$118.5 million) has been invested in 10 social incubators, which offered services to some 500 prospective social enterprises. At present, the UK government is assessing the impact of the funding and considering to run the next round of funding.
  (c)	Early stage support: Also in 2012, the UK government set up the Investment and Contract Readiness Fund to assist social enterprises in (i) securing social investment; and (ii) bidding for public service contracts. Social enterprises may apply for a grant in partnership with government-approved consultants who are experts in public services and government contracting markets. As an illustration, a social enterprise received a grant of £149,300 (HK$1.8 million) in 2013, which was then leveraged for raising £3 million (HK$35.6 million) through a bond issue. With the £3 million capital, this enterprise could then set up a programme to offer jobs in property renovation to 150 ex-prisoners over a span of five years. According to the UK government, the fund has "unlocked £20 of social investment for every £1 of government grant".8Legend symbol denoting See Civil Society (2014).
  (d)	Growth stage support: To encourage social investment, the UK government set up an independent financial institution, namely Big Society Capital, in 2011.9Legend symbol denoting Big Society Capital was supplied with £400 million (HK$4.7 billion) from England's bank accounts left dormant for over 15 years and £200 million (HK$2.4 billion) from the four largest UK high street banks. Big Society Capital is the first "social investment wholesaler" in the world. It does not directly invest in frontline social enterprises, but in social investment finance intermediaries ("SIFIs"). These SIFIs in turn can provide finance and support to social enterprises with respect to their diverse and complex needs. As at end-2015, Big Society Capital has already invested in 20 SIFIs, which ultimately provided funding support to 270 social enterprises and charities in more than 15 business categories.
  (e)	Public service procurements: Similar to Hong Kong, procurement of public services in the UK used to be based on the pricing factor, with little weighting on social value.10Legend symbol denoting Social value is a way of thinking about how scarce resources are allocated and used. It involves looking beyond the price of each individual contract and looking at what the collective benefit to a community is when a public body chooses to award a contract. Social value asks the question: "If £1 is spent on the delivery of services, can that same £1 be used, to also produce a wider benefit to the community?" See Social Enterprise UK (2012a). Nevertheless, the UK government enacted the Public Services (Social Value) Act in 2013, mandating local authorities, government departments and public bodies to consider the economic, social and environmental well-being of the local area in relation to public service contracts. This has considerably enhanced service demand of social enterprises. For instance, 59% of social enterprises in the UK had business deals with the public sector, and almost half of them indicated that public sector contracts were their main source of income.11Legend symbol denoting See Social Enterprise UK (2015).
  (f)	Independent legal identity of social enterprises: In 2004, the UK government amended the Companies (Audit, Investigations and Community Enterprise) Act 2004 and granted social enterprises a legal status, named as Community Interest Company ("CIC"). Anyone can apply to set up CIC. The formation and registration of CIC are similar to that of any limited company. There is no requirement of the minimum investment amount. However, CICs are not allowed to distribute their assets to other entities, except to charities or other CICs. Furthermore, dividend and interest payments of CICs are subject to a maximum rate of 35% of distributable profits. An independent legal identity granted to social enterprises gives rise to a number of operational benefits. First, the CIC status offers a simpler company structure, without extra level of governance of a charity. Secondly, the CIC status is considered more facilitative in assisting social enterprises in running their business on commercial principle than using the legal status of charities.12Legend symbol denoting The CIC status is an overlay on one of the existing forms of limited company, which have greater flexibility to engage in different businesses and activities. According to the CIC Association of the UK, "CICs can be established for any lawful purpose, as long as their activities are carried on for the benefit of the community … charities are subject to more onerous regulation than CICs". See CIC Association (2010). Thirdly, an independent regulatory regime over social enterprises helps boost the confidence of investors and society.13Legend symbol denoting In mid-1990s, there were some concerns as to whether the social enterprise label could be "hijacked" by businesses that were not genuine social enterprises. It was not until the introduction of CIC that gave confidence to the investors and society. It is because CIC is required to (a) enshrine its social objectives in its governing documents; (b) contain an asset lock which stops the assets of CIC being distributed; and (c) cap the distribution of profits to the shareholders. See Social Enterprise UK (2012b) and British Council (2015). Fourthly, with a clear legal status, CICs can access to grants and loans from Community Development Finance Institutions.14Legend symbol denoting A Community Development Finance Institution is an organization that provides affordable loans and support to businesses, social enterprises and individuals who struggle to get finance from high street banks and loan companies.

  
  
• As a result, the number of CICs in the UK grew to 11 922 in March 2016, with about half of them (49%) operating for at least five years. While 50% of social enterprises reported profit, 26% could breakeven.

Observations

• By and large, the UK government has adopted a multi-pronged approach to foster social enterprises which may have reference value for Hong Kong. They include (a) granting social enterprises a separate legal status under a simpler regulatory framework; (b) facilitating development of a wide range of financial intermediaries offering greater diversity of financial products to social enterprises; and (c) introducing legislation to require public bodies to consider social value in the award of public service contracts.

Prepared by YU Chun-ho
Research Office
Information Services Division
Legislative Council Secretariat
14 November 2016