Falling short

The government needs to address a range of issues that are inhibiting the growth of mutuals and social enterprises, writes Mark Johnson.

Prime Minister David Cameron claimed proposals in the new Co-operatives Bill would “build a fairer economy”. He highlighted, in particular, the role that co-operatives and mutuals should play in reforming public services. He announced plans to consolidate more than a dozen pieces of legislation governing co-operatives and mutuals into one piece of legislation to be put before Parliament before 2015. Ed Mayo, Secretary General of Co-ops UK, said the proposals would “make it as easy and natural to form a co-operative as any other form of business” and that this would put “co-operative businesses on an equal footing and create a diverse economy”.

Look behind the headlines, however, and these appear to be rather grand claims. The legislative proposal is for a consolidation Bill, a Bill which can pass through Parliament under a special fast-track procedure easing pressure on the Parliamentary timetable, but at the expense of not making any significant changes. Unlike the Charities Acts and Companies Acts which recently underwent thorough reviews, culminating in new Acts designed to reflect modern society and commercial practice, all this consolidation proposal is likely to do is take around 19 existing pieces of legislation such as the Industrial & Provident Societies Acts 1965-2010, harmonise them and change a few definitions and cross-references.

The Industrial and Provident (I&P) Society in its two guises of (a) a co-operative and (b) a community benefit society (bencom) with its roots in the self-help movement of the 19th century, has been enjoying a renaissance lately, as communities seek new solutions to local problems. The format has been used by housing associations, leisure trusts, healthcare providers and community hydropower schemes.

However, there are some major deficiencies with the current legislation around co-ops and bencoms. Perhaps the most pressing problem with the I&P Society format is that insolvent societies do not benefit from corporate rescue procedures such as administration and voluntary arrangements with creditors in the same way as companies and limited liability partnerships (LLPs). Part II of the Insolvency Act 1986 does not currently apply to I&P societies; although the Government has had the power under section 255 of the Enterprise Act 2002 to make an order to that effect, it has not done so. The practical effect is that mutuals set up as I&P societies which get into financial difficulties may have to proceed straight into liquidation, rather than gaining some breathing space to reorganise and refinance; in turn investors may be more nervous of investing in I&P societies. But this is not the only route to set up a co-op or mutual. Many successful co-ops and mutuals are established as companies limited by shares or by guarantee under the Companies Act, or even as limited liability partnerships (LLPs) under the Limited Liability Partnerships Act 2000.

Public service mutuals

The aspiration announced by Francis Maude a year ago was for some one million public servants to be working in mutuals by 2015. If the Government is serious about introducing mutuals into public services on a grand scale then reforming the legislative framework is only part of the story. Some very pressing practical and commercial issues inhibiting the programme must be addressed first.

Public service mutuals are being promoted through several programmes. In the NHS the ‘right to provide’ has seen the launch of a handful large scale spin-outs by the provider arms of Primary Care Trusts. In local government there is increasing interest in the mutual model in areas as diverse as education support services, HR support, domiciliary care, libraries and youth services. The new ‘community right to challenge’ in the Localism Act 2011 is expected to go live from this October, providing a boost to mutualism in the local government sector. For the first time this will give community groups, employees of the authority, parish councils and local charities the right to bid to take over local services. In central government, the first mutuals are about to be launched for, respectively pensions administration (My CSP) and public audit work (the DA Partnership).

Nevertheless, there remain some very practical obstacles to progress. First is the attitude to risk among public servants. Although front-line staff may be keen to spin out their services, senior managers are often quick to pour cold water on their ideas. There needs to be a sustained programme of education and training to make the policy work.

Secondly, access to start-up funding is very limited. The Cabinet Office announced a £10m fund to back public service mutuals but no cash grants are available for start-ups to develop their business plans. Expecting front-line managers to develop their plans whilst still doing their day jobs simply will not work.

Thirdly, EU Procurement rules continue to be an albatross round the neck of public service mutuals. Host authorities will find it difficult to award contracts to preferred in-house suppliers if the opportunity needs to be exposed to competition. The UK Government sought concessions for new public service mutuals in the negotiations surrounding the new EU Directive on Public Procurement, unfortunately none was forthcoming.

Finally, there is a lack of well-publicised shining examples. Public servants want to know that others have already trodden this path and been successful. Government still has a better selling job to do on the benefits of mutualism.

Mark Johnson is the managing director of specialist public services law firm TPP Law.