Enterprise culture

Where now for social enterprises, mutuals and public procurement? David Hansom explores some of the wider issues around the Big Society agenda.

A key tenet of the Government's Big Society agenda is the expansion of the voluntary sector to deliver more services locally. One of the key ways in which this shift from centralised, "top down" service provision might be achieved is through championing the roles of mutuals and social enterprises as structures through which to deliver these services.

The Government is keen to develop the social enterprise sector and aims to do this in part through new legislation. Parliament is currently considering the draft Public Services (Social Value) Bill – a private member's Bill put forward by Chris White MP but backed by the government – which seeks to entrench public service delivery through mutuals and social enterprises. The Bill puts obligations on public bodies to consider the role of social enterprises and mutuals when putting contracts out to tender and obligations on the Secretary of State to take steps to encourage the wider public sector to work with social enterprises and mutuals.

What is the difference between a social enterprise and a mutual?

The Government uses the terms 'mutual' and 'social enterprise' relatively interchangeably and as a catch all to describe a variety of different structures and models across the voluntary sector. There are differences in the detail, however, and no 'one size fits all' solution.

Broadly, mutuals are businesses which are run and owned (in whole or in part) for the benefit of its employees and/or members of the community or third party stakeholders, the so-called "John Lewis model". A social enterprise is a business which exists to deliver social or environmental benefits. Social enterprises and mutuals can take many forms including companies limited by guarantee, companies limited by shares, limited liability partnerships, general partners, community interest companies, non-profit distributing organisations, industrial and provident societies or as charities. A mutual can also be a social enterprise although this is not a requirement. Some of the most innovative models are those which involve charities, such as charitable social enterprises (either charities or groups of companies with a separate charitable arm).

In each case, the driver for the choice of structure needs to reflect specific local needs including the tax position, ability to raise and harness new types of finance, the control over membership and entry/exit arrangements and any legal constraints affecting the sector.

Typically, a mutual will be pump-primed through being awarded a services contract by the public sector body that was previously responsible for delivering the services. For example, many Primary Care Trusts are currently looking to let such contracts to new start up social enterprises, with a view to those bodies eventually taking on a wider trading role and potentially delivering services for the wider population and, in some cases, making a commercial profit.

Tensions with public procurement law?

As a legally distinct body, the newly formed mutual or social enterprise will need to be awarded a contract to deliver the services by the public body. Such a contract will trigger public procurement obligations on the part of the public body, even if many of the services being outsourced are Part B services which do not require full compliance with the EU procurement regime if there is no cross border interest. It is difficult to see how such arrangements could be exempt from procurement obligations, for example on the basis that the new organisation can be legitimately treated as a Teckal company. This case law exemption, if made out, broadly means no procurement would arise between the public body and social enterprise on the basis that it is effectively under the same control as an in-house department of that public body. The limitations on the Teckal exemption in terms of the three tests (particularly the requirement that the majority of services are provided only back to the public bodies who are participating in the company) are problematic when applied to the model of many social enterprises and mutuals. As we have seen from the LAML decision, any reliance on this exemption is strictly interpreted by the Court.

This is one of the real tensions with the new localism agenda – on the one hand, the Government's drive towards relationship based, local purchasing as envisaged through the Open Public Services White Paper, against the European Commission's focus on transparency, non discrimination and equality of treatment required to ensure access to opportunities across every EU member state. Key elements of the model do not sit at all comfortably with the Commission's stance or the current rules and the only way to ensure procurement compliance in many cases is to open the contract up through the required level of advertisement and run a fair and transparent process to choose the best bidder.

This tension is evidenced clearly by the Government response to the recent EU consultation on the future of public procurement, noting as it did that it would seek an exemption to the application of the public procurement rules to new social enterprises and mutuals for a period of three years from start up. This exemption is perhaps unlikely to curry favour with the Commission because of the risk of a piecemeal approach across the EU (although given the breadth of the review being undertaken, nothing can be ruled out) and, in the meantime, there is procurement challenge risk in directly awarding a contract which would be otherwise caught to the social enterprise or mutual.

Indeed, we have recently seen the first judicial review challenge in this field. As reported by Local Government Lawyer plans to award a health services contract to a community interest company by NHS Gloucestershire have been halted following a potential injunction application from concerned residents. Whilst there are ways to manage and mitigate, but not remove, such risks, we can perhaps expect to see many more of these types of challenge as the impact of public spending cuts reduces the number of other new opportunities coming to market.

Setting up a new social enterprise or mutual can be tricky and expert advice on key issues such as structuring, charity law, tax, property, staff/TUPE, and public procurement can really help early on when formulating your strategies. As with much in the current climate of change, authorities will want to watch this space and learn from unfolding events.

David Hansom is a partner and head of Veale Wasbrough Vizards' public sector group. He is involved in a wide range of social enterprise and mutual companies both in terms of creation/structuring and all related issues. David can be contacted on 0207 665 0808 or via email to This email address is being protected from spambots. You need JavaScript enabled to view it..