Public Sector Mutuals - the future for local government services?

Shared professionals iStock 000009503395Small Newsletter pic 146x219Simon Randall outlines the development in the role of public sector mutuals in the delivery of local government services, dealing with the implications of the proposed new EU Public Procurement Directive.

Public Sector Mutuals (“PSMs”) have been defined by the Cabinet Office as “an organisation that has spun out of the public sector, continues to deliver public services and involves a high degree of employee control”.

The Coalition Government’s programme included the following:

“We will support the creation and expansion of mutuals, co-operatives, charities and social enterprises, and enable these groups to have a much greater involvement in the running of public services.

We will give public sector workers a new right to form employee-owned co-operatives and bid to take over the services they deliver. This will empower millions of public sector workers to become their own boss and help them to deliver better services.”

Since the election there has been a considerable growth in both PSMs, and other forms of social enterprise, taking over the running of public services in most areas of the public sector and, particularly, local government.

This article is principally concerned with local government, where there are, in fact, very few services which cannot be run either by PSMs or other social enterprises, with significant experience in the transfer of housing to housing associations and heritage/leisure facilities to charitable or non-profit distributing organisations. So far as the Cabinet Office is concerned, PSMs are planning to operate in services such as youth and community services, adult and children’s education, the environment and ICT.

The benefits of the PSM Approach

Experience has shown that these benefits can be summarised as follows:

  • Single focused body able to concentrate upon the delivery of its core business for the benefit of its users;
  • Empowering staff who have real ability to influence key decisions of the PSM;
  • Harnessing staff initiative and innovation;
  • Increased probity and better governance with ability to make decisions more quickly;
  • Opportunity to maximise efficiencies and cost savings with adoption of better business practices; and
  • Accessing private finance for improving and enhancing any of the facilities or services, such finance not generally being available to a local authority.

A report by the independent think tank, The Innovation Unit, shows how employees taking ownership of public services would yield exactly the same benefits as those seen in business, by creating the “engagement ethic” missing in today’s local authority run public services. The report says that this will not only improve their effectiveness and cost efficiency, but will also create economic benefits for local communities. The freedom from local authority control could also enable the PSM to operate innovatively, seek opportunities elsewhere in the public and private sectors and recruit first-rate managers to run their services.

Government approach

The Government have been actively encouraging PSMs, principally through the Cabinet Office and its Mutuals Taskforce and have successfully pursued, and are pursuing, changes in legislation to enshrine the benefits of staff-controlled organisations running local authority services.

Localism Act 2011

Under Section 81 of this Act a range of entities, including a voluntary or community body, charitable trust or parish council together with two or more employees of a local authority has a “Community Right to Challenge” and take over any service provided by that authority. In practice there are very few services which are exempt from the exercise of this Right and each local authority to which it applies must consider whether to accept or reject the expression of interest, in accordance with a fairly detailed procedure outlined in the Act and the accompanying regulations.

However, there is a requirement that the local authority in accepting an expression of interest “must carry out a procurement exercise relating to the provision ... of the Service” to which we return below. Although there is a Right for a range of entities to seek to take over local authority services, there is no reason at all why a local authority should not simply decide to spin out any of its services under the general power of competence contained in Section 1 of the Localism Act 2011, and, indeed, many authorities have done so.

The Industrial and Provident Society Sector

The Industrial and Provident Society (“IPS”) sector forms a major part of the PSM landscape. However, the IPS still operates under outdated and duly complex legislation that is sometimes far removed from the general company’s legislation. Accordingly, on 26 July 2013 HM Treasury issued a consultation paper indicating a number of proposed changes to update the legislative framework for IPSs and, in particular, rename the entity as “Co-operative and Community Benefit Societies”. As well as incorporating the changes to the legislative background of the sector, HM Treasury need to undertake a marketing campaign in the City of London as to the benefits of PSM status and the viability of such entities so far as provision of finance is concerned.

Some hurdles for PSMs

There are a number of hurdles that any group of employees wishing to create a PSM needs to bear in mind.

Procurement

As mentioned above, there is an obligation upon a local authority to undertake some procurement before any services are spun out to a PSM or any other entity. However the Cabinet Office recently announced some important progress on updating the EU Procurement Rules with two important concessions that should make it easier for PSMs seeking to commence work. In particular, the new Directive, which will be quickly transposed into UK legislation will provide the ability for local authorities to reserve the award of certain services contracts to mutuals/social enterprises for a time limited period, likely to be between three and five years. This would, thus, enable a PSM to gain an experience of running their own business before it is formally subject to procurement thereafter.

In addition, a further change to the Directive is that, much along the lines of the Public Services (Social Value) Act 2012 local authorities can take into account social and environment aspects of any contract they are procuring as well as the relevant skills and experience of the individuals involved when procuring any services. These changes are to be welcomed and should, therefore, provide some encouragement to PSMs during the set up phase of their project.

Finance

Any new entity will require some working capital. The market for this area has been the subject of a Cabinet Office / Boston Consulting Group report produced in July 2013. This report examined the financial requirements of PSMs as well as the barriers to accessing finance. The report drew attention to the growing interest in social-finance both through Big Society Capital and an increasing number of private investors in helping to incubate a new organisation.

Conclusion

As local authorities are faced with ever increasing financial pressure, spinning services out to a PSM is a feasible alternative to the diminution or closure of any service. Research has shown that two-thirds of people would prefer public services to be run through the social enterprise model and, thus, the future for the provision of employee-run PSMs will become crucial in the months and years to come.

Simon Randall is a consultant at law firm Winckworth Sherwood LLP. He can be reached by This email address is being protected from spambots. You need JavaScript enabled to view it..