Social enterprises are starting to find that the odds are not in their favour in a cut-throat market, which could make for a bleak picture in a decade’s time, says Noel Plumridge.

Everyone wants social enterprises to succeed. During the last year, health sector pioneers such as Central Surrey Health, created in 2006, have been joined by numerous new “third sector” mutuals. Many are the successors of primary care trust provider arms, created under Cabinet Office-backed “right to provide” arrangements.

But they are entering an increasingly cut-throat market. Central Surrey Health’s bid for the five-year, £500m NHS contract for community services in south west and north west Surrey failed in September.

The Surrey contract went to Assura Medical, owned by Virgin Healthcare, denting some of the optimism within the sector. Nowhere does the Department of Health’s encouraging What are the Advantages of Social Enterprise? mention that when it comes to the business model and the realities of competition, the playing field is not especially level.

Many social enterprises are relatively small in financial terms. They face competition from hospital trusts: keen to grow, buoyed up by growing government interest in “integration”, and increasingly viewing merger and acquisition as a viable strategy. They also face competition from a commercial sector searching for growth opportunities in a moribund economy.

Meanwhile, requirements to put key community services out to tender are denting the financial stability promised by well-meaning PCTs and GPs.

“If we don’t get the work,” one anxious chief executive says, “our three-year contract’s in the toilet.”

So where are the inequities? VAT is one. For historic reasons, NHS providers, funded ultimately by taxation, do not add VAT to their invoices to commissioners. Social enterprises, however, must recharge the VAT they pay on various bought-in services, such as catering or facilities management for community hospitals. With VAT at 20 per cent, NHS trusts and foundation trusts gain a material competitive advantage.

Vicious circle

There is no sign, however, of any review of the foundation trust VAT regime – nor of stamp duty on foundation trust property transactions, where there is a similar disparity.

Then there is ownership of the estate. The destiny of ex-PCT land and buildings has been a vexed issue, but in general foundation trusts have gained another advantage by taking ownership of their premises – an option denied to social enterprises. This brings the power to rationalise capital assets and reduce costs.

“New buildings transform the relationship,” insists John Niland, chief executive of Central Essex Community Services, who sees decent premises as vital for staff and patient happiness.

But decent premises require access to capital, and social enterprises again find themselves at a disadvantage. Many foundations have built sizeable reserves and hence have ready access to cash for capital investment. Large outsourcing businesses can typically borrow at much lower rates than start-ups with minimal capital. And it is a vicious circle: the mutual ethos makes the governors of social enterprises reluctant to build financial reserves.

Pay and pensions has also become a crucial issue. Broadly, the assumption has been that social enterprises carry the additional staffing costs arising from TUPE transfers, and in return gain experienced staff entitled to keep their NHS pensions. (The loophole that allowed the Your Healthcare social enterprise in Kingston, Surrey, to gain existing employer status, allowing new staff to join the NHS pension scheme, was quickly closed.)

Where mutuals have incorporated social care, the local government pension scheme has been less accommodating. Lance Gardner, chief executive of the Care Plus Group in Lincolnshire, complains that the scheme put his local council in an “untenable position”: 178 staff were forced to transfer to NHS pensions. And with pensions becoming a political minefield, there are suggestions that large corporate providers may soon gain the same “direction status” as social enterprises, allowing them to offer NHS pensions to transferring staff – and removing the recruitment advantage of mutuals at a stroke.

What’s galling for social enterprise is a common assumption among their rivals of an inside track in bidding for NHS business. “If we’re successful,” Lance Gardner says, “we’ll be successful by right, not by privilege.”

In Essex, Mr Niland is “prepared to meet any competition on a level playing field.” But where’s the heavy roller? Meanwhile, there’s a growing fear among social enterprises that commissioner caution and vulnerability favours size.

The deciding issue in Central Surrey is understood to have been NHS commissioners’ insistence on a £10m bond as surety: simple enough for a large company or foundation trust, but probably beyond the means of even a well-established mutual. No wonder some trade unions are concerned that social enterprises could be carved up between commercial giants and powerful foundation trusts.

It’s a strategic fear expressed eloquently by Patrick Burns of the Cabinet Office mutual taskforce. He was quoted recently as saying: “If you don’t do something with the commissioning environment, then in five or 10 years’ time you will not be dealing with mutuals, you will be dealing with Serco, Capita and Virgin.”