House of Commons - The Big Society - Public Administration Committee

The Big Society - Public Administration Committee Contents

5 Commissioning public services and the Big Society

93. The Government's aim is to open up public services to charities, voluntary groups and the private sector. The skills and mindsets of the responsible officials in both central Government and local authorities (the 'commissioners') are crucial to this process. Danny Kruger warned that in its current state

central Government is spending half a trillion pounds a year: it is that vast, and it is not going to be able to contract with the hundreds of smaller local charities. ... They can probably only handle 40 contracts in central Government.[176]

94. Kevin Curley, Chief Executive of NAVCA, concurred, setting out two case studies of poor contracting:

[...] a couple of years ago in Leeds, the contract that was let for family support services to be provided by the voluntary sector was so big that local charities like Home-Start in Leeds, which had been delivering to a good standard and to the council's satisfaction for several years, were unable to bid, and the contract was won by a large national charity.[177]

A year ago, Hull city council put its advice services contract out to tender, and a very well-established, well-run and effective citizens advice bureau in Hull lost its funding—the contract was won by A4e, a private sector organisation. The essence of why A4e won the competition was that the commissioners responsible for sorting out that contracting opportunity were not able to place any value on all the aspects of the citizens advice bureau beyond the simple provision of advice from adviser to individual.[178]

A further example was provided by the Minister, who reported:

A big national charity bidding for a local authority contract to run one of the big services recently told me that the local authority had taken the perfectly sensible view that they wanted it to be run not in-house but by an outside provider, and it had so far cost the charity £800,000 just to bid for it, which is nonsense.[179]

95. The model to aim for was outlined by Polly Toynbee, who said that

If you are serious about Big Society, you will want to find a mechanism—and it is not that difficult—to make sure that it is the small, the local, the experienced, the people with the knowledge.[180]

96. The Cabinet Office produced a Green Paper on modernising the commissioning system in December 2010. It sought "views on how the Government can reform all stages of the commissioning process at both local and national levels to ensure civil society organisations play a full and active part in public services".[181] The responses to the Green Paper were intended to inform the publication of the Open Public Services White Paper. However, that White Paper includes little in the way of proposals to reform the commissioning process. The Charity Finance Directors Group cautioned that "despite publishing the Localism Bill, the Modernising Commissioning Green Paper, and the Giving and Open Public Services White Papers, there are still few tangible and clear policy initiatives. When faced with this vacuum, managing risks and re-shaping responsively is difficult."[182]

97. One of the barriers identified in the commissioning system is the interpretation of European regulations. Local authorities were accused by NAVCA of invoking the "full EU Public Contracts Regulations (2006) unnecessarily, adopting competitive tendering procedures by default" despite the fact that the regulations were designed for large scale public procurement and specifically exempt 'Part B services' such as "social services of general interest" which covers some of the public services carried out by voluntary groups.[183] One reason for this misinterpretation of the regulations, according to NAVCA, is the Office of Government Commerce's EU Procurement Guidance—Introduction to the EU procurement rules which neither set out clearly the exemptions nor explains in practical terms what this means for local authorities. To remedy this, NAVCA suggested that the guidance should be revised to include "practical examples of lawful flexible procurement of Part B services [which] would give commissioners the confidence to make good funding decisions, give grants, and use flexible and proportionate procurement processes".[184]

98. We welcome the Minister for the Cabinet Office's recent announcement on the Government's intention to re-negotiate EU procurement regulations. We look forward to the Government setting out what changes they are seeking, why they are sought and the timescale for implementation of the changes. We also recommend that the Government set out detailed plans to revise procurement guidance under the existing regulations. We intend to conduct an inquiry into the Government's public procurement policies in the light of the Minister for the Cabinet Office's recent announcement of a package of measures that are intended to reform how the Government buys from the private sector.

99. We recommend that the Office for Government Commerce revise guidance on the EU Public Contracts Regulations 2006 to promote appropriate interpretation of the regulations by local authorities in commissioning.

100. Another alleged bureaucratic barrier identified by the charity Community Links was the Transfer of Undertakings (Protection of Employment) Regulations (TUPE), which protects employees' terms and conditions of employment when a business is transferred from one owner to another. These arise from the European Acquired Rights Directive. They require that a charity or voluntary group wishing to deliver a public service has to take on the cost of personnel currently employed in providing the service, along with their existing pensions entitlement, annual leave, and other employment benefits. Charities delivering these promises will face potentially different sets of terms and conditions and employment benefits among their workforce.[185] Community Links argued that the TUPE regulations restricted the ability of charities and social enterprises to "innovate or redesign services to better meet need."[186]

101. We recommend that the Cabinet Office consult the voluntary sector on the legislative and bureaucratic barriers which inhibit voluntary groups from delivering public services. We note the commitment of the Chancellor of the Exchequer, in his 2011 Autumn Statement, to a review of TUPE regulations, and we urge the Government to give special consideration to smaller charities in this review.

102. The system of 'payment by results' for public services was also identified as a major barrier to opening up public services, as it could exclude from public service delivery some small and local charities and voluntary groups who did not have the working capital to continue operating while they awaited payment.[187] It also may not be suitable for all types of public service. The National Council for Voluntary Youth Services spoke of work which focuses on "increasing the social and emotional development of young people", a measure which they say cannot be immediately measured but which in the long term can provide savings for the public purse by steering away young people from socially costly choices.[188] Timebank identified "payment by results" as the "biggest preventer of participation in public service provision by the voluntary and community sector".[189]Case study 1 provides further details.

Case Study 1: WLAC - West London Action for Children
West London Action for Children is a charity that provides support to vulnerable parents and children in West London. It relies for almost half its income on contracts with local authorities. The NHS provides the remainder of its income through payment for the provision of counselling services to victims of domestic abuse, mental illness and poverty.
For many of its clients, WLAC is the only organisation that provides support at the end of a long journey. One client explained how her first interaction with the state following an incident of domestic violence was with the police, who then passed her on to the local NHS service, who finally passed her on to WLAC. At the end of this journey, WLAC provides one to one counselling, opportunities to learn new skills and support with child-care at a cost to the public well below equivalent state providers.
WLAC is one of the only providers of this service in West London, but its primary source of income is currently said to be under threat due to a combination of local public service cuts and commissioning practices.
Trustees of the organisation, who have years of experience in the public and private sector, explained that the Government's emphasis on payment by results is welcomed, but that small charities are not being given a fair chance to compete for tenders. They lack the finances and resources to bid for services, which are often inflated by the complexity of the process, and local government re-organisation has created even greater uncertainty around funding.
Government action on cuts, and inaction on public service reform, has added an extra level of difficulty to the job of WLAC's management at a time of broader economic uncertainty.

103. A further critical barrier was what Shaun Bailey, one of the Government's Big Society Ambassadors, identified as a "culture of being afraid, of not wanting to try" in Whitehall, preventing small and medium-sized charities and enterprises contracting with government.[190] Mr Bailey argued that the challenge of the Big Society would be providing "the political leadership" for local authorities and Whitehall to commission services from the right provider, even if they were not the cheapest. Kevin Curley of NAVCA neatly summarised the change in attitude required, stating that:

it is absolutely crucial that they do not apply the same approach to buying advice services and support for women fleeing domestic violence that they apply to buying wheelie bins and computer systems.[191]

Francis Maude recognised that "risk averse" commissioners who designed big contracts with a minimum turnover requirement for the bidders led to an "oligopoly of big, national and multinational providers, which is not what we want to see".[192]

104. There is also a skills issue. Mr Bailey told us that if officials had the skills to carry out the tendering process, the Government would receive a better service with greater value for money for taxpayer, but "if you force them [charities] to act like a general business contractor then you have lost the whole point of using them".[193] Mr Maude told us that civil servants were "not yet at all good" at being "commissioners and contract managers rather than line managers ... [they require] a different set of skills".[194] However, the Minister for Decentralisation and Cities, the Rt Hon Greg Clark MP reported a more positive approach by officials in the Department for Communities and Local Government:

I have found the officials I have worked with on this, far from having any degree of resistance to this whatsoever, have been delighted and inspired to get out there and work with communities. This is what people go into public life for: to make things happen on the ground.[195]

105. Sir Ronald Cohen also held a more optimistic view, assuring us that we "are not going to have to worry about whether or not this can get off the ground" as his experience with officials at the Ministry of Justice when developing the social impact bonds was that although there were sceptics, many officials were "very positive about trying this new idea".[196]

106. For rapid and successful commissioning, there must be a cultural shift in departments. Ministers must set out what practical steps are required to change the commissioning culture in Whitehall and how success will be measured. In particular, the objectives, roles and tasks of commissioners must be identified and skills shortfalls must be addressed both through training and through the recruitment of suitable staff.

107. The design of contracts was identified as critical to bringing in the charitable sector. The Employee Ownership Association stressed the importance of commissioners considering social value in addition to immediate cost savings when designing the terms of contracts for public services.[197] The Third Sector Research Centre warned that

narrowly targeted outcomes (such as the number of jobs created) can create incentives to abandon those clients whose social needs are most acute and costly to address.[198]

108. Two potential solutions were recommended to us. The London Civic Forum recommended that commissioners work with local communities and service users to determine the results a commissioned service is required to deliver.[199] NAVCA recommended that the guidance issued by the Office for Government Commerce, 'Social Issues in Purchasing', should be "updated and strengthened to reflect a positive commitment to commissioning social, economic and environmental value and to include the work that has been carried out in local areas to take this agenda forward".[200]

109. We also heard that the length of the contract to deliver a public service must be substantial, in order to provide groups tendering with the security required to deliver services.[201] UNISON warned that the contracting process at present rewarded only short-term results and discouraged innovation by voluntary organisations.[202]

110. Contracts must also be of a small enough size for local groups to be able to fulfil the contract without "experiencing significant change to their values, ethos and delivery through upscaling by merger or participation in consortia".[203] Holding a much greater number of smaller contracts will be a far greater challenge for commissioners than "to deal with fewer larger contracts with people with a track record of doing what you have asked them to do and can provide the data you need to see that they have done it".[204] It may also be at far greater expense. This was agreed by the Minister, who accepted the failings of the system at present and spoke of the necessary solution:

The key elements are that you need to chunk up projects more into smaller bites so that smaller local enterprises, whether for profit or VCS [voluntary and community sector] and social enterprises, are better able to bid effectively.[205]

111. To utilise the skills of charities and voluntary groups in tackling complex social issues, civil servants and commissioners must be able to work across Whitehall silos to ensure that contracts reflect the cross-departmental nature of the work of such groups, as Case study 2 demonstrates.

Case study 2: Emmaus
We visited the Emmaus Community in South Lambeth as part of our inquiry. Emmaus describes itself as the "homelessness charity that works", providing a solution to the 'revolving door' problem of homelessness, where the same individuals frequently return to hostels, by offering the long-term support needed to break the cycle of homelessness. In fact, Emmaus' effectiveness rests on their ability to address all the issues which a homeless person may confront, such as addiction, mental illness and repeat offending.
There are 21 Emmaus Communities in the UK, with 505 current residents, known as Emmaus Companions, who agree not to claim primary benefits and work full time in their Community's social enterprise, refurbishing and selling unwanted furniture and other household goods donated by local people. Companions typically have multiple needs, and each receives personalised support to help them regain control of their lives, for example through counselling, addiction support and training opportunities.
An economic evaluation of an Emmaus Community in 2008 undertaken by the Cambridge Centre for Housing and Planning Research found that Emmaus currently delivers savings to the taxpayer of £13.0m per annum—based on a saving of circa £26,000 per Companion per year in reductions in offending, reduced time in the legal system, more efficient use of health services and benefits voluntarily relinquished.[206]
In September 2011, Emmaus representatives met Rt Hon Oliver Letwin MP, Minister of State for the Cabinet Office, Rt Hon Chris Grayling MP, Minister for Employment, and Rt Hon Grant Shapps MP, Minister for Housing and Local Government to discuss how the work carried out in Emmaus communities fits into the Big Society. The work of Emmaus covers several government departments: the Department of Health, the Department for Work and Pensions, and the Cabinet Office as well as local authorities, who have the statutory responsibility for homelessness. Existing Government programmes, such as the Work Programme, work in only single departments, and are not suitable to people with multiple and complex needs.
Ministers recognised the need to develop outcomes measurement towards a Social Return on Investment measurement tool-kit which could provide the basis for a Payment by Results agreement in return for a Social Impact Bond that would provide the necessary start-up capital to enable the development of nine new Emmaus communities (at a cost of £10.5 million). There have not been any further attempts to work across Government silos to enable Emmaus Communities to contribute to Big Society policy delivery. Emmaus requires a single contract to address the multiple needs of its companions. So far, departments can envisage offering separate contracts through the Work Programme or through programmes operated by the Home Office or the Department for Communities and Local Government.

112. Attempts to open up public services to charities and voluntary groups may encounter the difficulty that services provided by such organisations do not fit easily into the siloed mentality of Whitehall departments, who are unable to address the multiple needs of the service user - even where this approach is the very key to the success of voluntary organisations. We regard the challenge to government presented by charities such as Emmaus as a litmus test of the Government's Big Society project. We believe that joint funds, managed by local authorities and financed by separate departments, may be the answer. We expect the Cabinet Office to lead decisively on this matter.

113. Offering charities and social enterprises only sub-contracting roles will not be sufficient. Claire Dove, Chair of the Social Enterprise Coalition, told us that some of her organisations would not take a Department for Work and Pensions contract that had gone to a private sector provider who was then subcontracting out to social enterprises "because the levels that they want to subcontract with are not acceptable if you are running a business".[207] Case study 3 provides further details.

Case study 3: The Work Programme
The Department for Work and Pension's flagship programme to tackle unemployment has been cited as "a massive boost to the Big Society".[208] The Department's press release noted that "almost 300 voluntary sector organisations are to be part of a massive national programme to tackle long term benefit dependency".[209]
Francis Maude has also said that an estimated 35 to 40% of the value of the contracts in the Work Programme will go to voluntary and charitable organisations, with a value of over £100 million a year. However, 16 of the 18 prime contractors are private sector companies, with only two prime contractor contracts won by voluntary sector organisations. A further 289 voluntary organisations have sub-contractor roles.
Prime contractors were expected to contract out significant proportions to voluntary organisations. However, a significant number of the charities that applied as sub-contractors have subsequently dropped out of the programme.[210] Locality reported that many of its members had had "reported very negative" experiences of being involved in the Work Programme, which they argue has, instead of empowering communities, "merely shifted power from the state to private companies who now act as the commissioner (and in some cases deliverer as well) in their role as prime contractor."[211] Locality further report that some of their members named in winning bids as sub-contractors were "being offered contracts that run at a loss for five years" while other members had reported reporting that prime contractors were asking them to deliver services for free.[212]
A report by the Association for Chief Executives of Voluntary Organisations stated that many of the charities involved felt like 'bid candy', that the primes were not serious about involving them, and only 9% were confident that the programme will meet its outcomes.[213] The National Council of Voluntary Organisations in its written evidence argued that the Work Programme's decision to have 11 contracts covering the country was an example of contracts spreading across too large a geographical area.[214]
The Minister defended the outcome of the Work Programme process, highlighting the number of charities and social enterprises in the Work Programme "underneath the prime contracting level". The full level of the value of such contracts cannot be known until the results of the Work Programme are clear, as they are based on the payments by results system, but this would reward the organisations from the charitable sector who succeed in finding employment.[215]
Responding to these criticisms, Nick Hurd accepted that many voluntary sector groups involved in the Work Programme had concerns over its working, but that Chris Grayling, the Minister responsible for the programme, was monitoring the concerns closely and would act "very robustly with prime contractors who have been proven to be acting irresponsibly with their supply chain".[216] The issue has also recently been raised with the Prime Minister who accepted that there was a potential conflict between getting smaller organisations involved in the Work Programme because "you need an organisation that has got the ability, the working capital and the size to cope with training people on jobseeker's allowance or incapacity benefit or employment and support allowance-the full spectrum-you need to be quite a big organisation". The Prime Minister did speak of the "tough rules for subcontracting" and the "success, not at the top level, but at the subcontracting level".[217]

114. The Minister for the Cabinet Office spoke of the need to "be much better at commissioning in a way that creates a genuinely level playing field". [218]On the evidence before us we find little reason to have faith that large contractors will subcontract to smaller, charitable or voluntary providers. We recommend that departments should keep public sector contracts as small as possible to ensure contracting with as wide range of providers as possible. Ministers should regularly review and publish the scale of public sector contracts and the size of organisations they procure from. The objective of the Big Society project of empowering communities will not be achieved by simply contracting with private companies and large national charities.

115. Furthermore it must be recognised that commissioning is but the first stage of the delivery process. Consideration must be given to by whom, and by what means, contracts are to be policed for quality of delivery, and complaints and problems dealt with.

Charities and value added tax

116. The Charity Tax Group published new research in February 2011 which revealed that charities were paying between £2.7 and £3.7 billion a year in tax.[219] The two main taxes paid by charities are National Insurance for employers, which makes up 54% of their tax liability, and VAT, which makes up 37.5%.[220] One of the stumbling blocks to charities delivering public services is that they are not eligible for the VAT rebate that public sector bodies receive. This creates an uneven playing field.[221]

117. The NCVO told us that "irrecoverable VAT is a significant issue for the VCS [voluntary and community sector] - it threatens the existing work of voluntary and community organisations [VCOs] at a challenging time and will act as a disincentive to developing the sector's public service delivery role." It costs charities significant sums: one average estimate is 4% of total expenditure.[222]

118. The NCVO proposed a number of priority areas for review including VAT on social welfare services, where charities are complementing/substituting government provision: "VCOs should be compensated here and not have resources taken from them in the pursuit of delivering public services. This would ensure fair treatment across local government/private sector or VCS [voluntary and community sector]."[223]

119. We put these concerns to the then Economic Secretary to the Treasury, Rt Hon Justine Greening MP. She explained that the sector already benefited significantly from tax relief in a variety of ways: "the UK is held as a good example of a tax system that supports charities".[224] She added that large areas of charitable activities are already tax exempt and that spending review settlements took account of VAT rebate entitlement in the public sector. She did agree that "as the landscape around public service delivery changes, and as charities get more involved, it is a fair point that we have to make sure that there is a level playing field."[225]

120. We recommend the Government extend eligibility for the VAT refund scheme which currently applies for public sector bodies, to charities who deliver public services under a contract with a public sector organisation. This recommendation should be considered as a pre-budget representation addressed to the Chancellor of the Exchequer for implementation in the 2012 Budget.

Public sector mutuals and the commissioning system

121. The Open Public Services White Paper sets out the Government's commitment to promoting mutualism among public sector staff, stating:

We are giving public sector staff new rights to form new mutuals and bid to take over the services they deliver, empowering millions of public sector staff to become their own bosses. This will free up the often untapped entrepreneurial and innovative drive of public sector professionals.

Ownership and control, through mutualisation, empower employees to innovate and redesign services around service users and communities, driving up quality. We will not dictate the precise form of these mutuals; rather, this should be driven by what is best for the users of services and by employees as co-owners of the business. Options include wholly employee-led, multi-stakeholder and mutual joint venture models.

The Government will take steps to identify and overcome the barriers placed in the way of public sector workers who want to exercise these rights.[226]

122. To promote mutualisation, the Cabinet Office has set up a taskforce led by Professor Julian Le Grand, who described public sector mutuals as an idea which he believed would have "enormous resonance" in the future.[227]

123. Increasing the number of mutuals delivering public services will mean specific challenges for the commissioning system. Professor Le Grand warned that mutuals would need considerable support at the start:

Many of the people who start mutuals have no experience of, or often indeed very little understanding about, what is involved, and the business of setting up a business, which, to some extent, is what is going on here, is very difficult.[228]

124. Adrian Brown from the Institute for Government warned of the danger of romanticising mutuals, arguing that the 'very enticing' rhetoric could lead to the underestimation of the new challenges that public sector workers might have to face, such as arranging their own IT and back-office functions.[229] To address this, the Employee Ownership Association recommended that during the early development of a mutual, commissioners should be able to see "market-building" as a legitimate goal, when new mutuals and established private companies were competing for a contract.[230]

125. Professor Le Grand identified four issues being considered by the Mutuals Taskforce which would need to be resolved to allow mutuals to flourish. The first was whether mutuals should have an "infant protection" period, to allow a new mutual time to develop without being exposed to competition from private companies, other mutuals and social enterprises or charities. This was, the Employee Ownership Association advised, "imperative" to ensure that new mutuals "do not risk losing out the moment they leave the public sector because they simply cannot compete with larger competitors".[231] Once developed, Professor Le Grand also raised the prospect of a new mutual being subject to an asset lock - a mechanism wherein the previously publicly owned asset is "not prone to takeover by large organisations or private sector organisations of various kinds". The remaining two issues were the application of value added tax to mutuals, and the question of whether working conditions and pensions of public sector employees wishing to mutualise would be transferred with the employee.[232]

126. A culture change within the public sector will be necessary for mutualisation to succeed. In early 2011, the Minister for the Cabinet Office set out a "very ambitious [...] but not inconceivable" target of one million public sector employees moving into mutuals by the end of the Parliament, representing one-sixth of the total public sector workforce.[233] The Open Public Services White Paper goes even further and talks of "empowering millions of public sector staff to become their own bosses".[234] Limited progress has been made towards this target, with 45,000 public sector staff are expected to have moved into mutuals by November 2011.[235]

127. One reason for this slow progress was identified by the Prime Minister, who recently told the Liaison Committee that "change was difficult" and that employees were likely to encounter "institutional resistance" of people higher up in the organisation who do not support part of the organisation breaking away.[236] Both Ed Mayo, the Secretary General of Co-operatives UK and Professor Le Grand described this resistance as commonplace both within Whitehall and the wider public sector:

I am continually shocked, unfortunately, by the lack of understanding of co-operative and mutual models right across Whitehall[237]

We have a particular issue with middle managers in local authorities who are approached by a set of employees who say they would like to spin out and develop a mutual, and they are simply told, "No, it is not possible." It is not part of the culture.[238]

To address this resistance, Ed Mayo suggested that each major spending department should appoint a mid-or senior-level employee as a "co-operative" contact to liaise with the Cabinet Office and increase understanding of mutual and cooperative models within the department.[239]

128. The success of mutuals depends not only on a redesigned commissioning system, but enthusiasm among the staff. The TUC warned that the benefits of mutuals, such as increasing innovation and productivity would only accrue "where there is genuine employee ownership and buy-in".[240] They contend that mutualisation is at present mainly being driven by management, not staff: staff in turn feel pressurised to support the change. Mutualisation has also been more common in healthcare than in other public sectors.

129. The Employee Ownership Association describes the potential loss of a public sector pension scheme as "the single biggest disincentive to transfer" for current public sector employees. They warn that to avoid this disincentive, it is necessary to go further than merely stipulating that historically accrued rights will be transferred.[241]

130. It is not clear to us that the Mutuals Taskforce is equipped to overcome the resistance to public sector mutuals. This resistance goes beyond bureaucratic inertia in Whitehall. The lack of understanding in Whitehall and local government about mutuals and cooperatives must be addressed by indentifying and training the key personnel who make the decisions. If the Government had a coherent implementation plan, this matter should already have been addressed.

131. Public sector workers will weigh up the choice between the advantages of mutualisation against the risk of losing their public sector pension provision and may decide against spinning off into a mutual. It needs to be recognised that the support for mutuals has so far been dependent on exceptional circumstances. We recommend that the Government take a fresh look at this issue and develop innovative approaches to encouraging and incentivising participation in mutuals.

176 Q 82, 84 Back

177 Q 405 Back

178 Q 444 Back

179 Q 588 Back

180 Q 79 Back

181 Cabinet Office, Modernising Commissioning, December 2010, p 5 Back

182 "Charities need clarity to adjust to changing environment" Charities Finance Directors Group and PKF Accountants 7 September 2011 Back

183 Ev 122 Back

184 Ev 122 Back

185 Ev w36 Back

186 Ev w107 Back

187 Ev 125 Back