Mutual and co-operative approaches to delivering local services - Communities and Local Government Committee Contents


5  Barriers to co-operatives and mutuals

49. In this chapter we examine and the barriers that local authorities and those wishing to set up mutuals and co-operative are facing and how they could be reduced.

Finance

50. We heard evidence of mutuals facing difficulties in securing the finance needed to start up at a size where they would not be squeezed out by in-house providers and large commercial companies. Staffordshire County Council in its written evidence pointed out that "significant time, effort and resource" was needed to establish a mutual or co-operative.[80] Oldham Council suggested that start up costs were a barrier to establishment of co-operatives and mutuals:

When co-operatives and mutuals are established, there can be significant costs associated with setting-up the new organisation. This includes, for example, governance costs and implementation-related costs, such as procurement. [...]

Securing external funding, including working capital, can be difficult.[81]

51. Winckworth Sherwood echoed these concerns and suggested that funding from Big Society Capital might offer a solution:

Any entity will require seedcorn capital and thus the [organisation] will be looking either to the local authority to provide such capital, although there is funding available from the Government to help with the initial tranche of entities created under the Right to Challenge. However, conventional bank finance or funding from Big Society Capital and other similar institutions may likewise be required.[82]

Simon Randall, a consultant at Winckworth Sherwood and Chair of the Conservative Co-operative Movement, said that more needed to be done to provide easier access to capital and that banks needed to be educated about the importance of co-operatives or staff-owned organisations so more money could be made available for them to take over these new roles.[83] Ed Mayo from Co-Ops UK agreed:

By and large, we do not have financiers and investors who understand the co-operative and mutual models very well. We find it can be difficult for people to go through the hurdles in terms of the understanding.[84]

Similar evidence was also recorded by The Nuttall Review of Employee Ownership in July 2012 which was conducted for the Department for Business Innovations and Skills. The review noted that at a practical level it was not easy to find someone to talk to at a bank or other financial institution about financing an employee buy-out and that there were few if any investment products and investment funds that were suitable for employee ownership.[85]

52. Lord Glasman suggested that new regional banks might be in a position to finance mutuals and co-operatives as they would be barred from lending outside their region thus making capital available locally to businesses.[86] The Mutuals Taskforce suggested another route:

there is potential to further increase the availability of finance, including through the strengthening and growth of the social investment market. In this respect, the establishment of Big Society Capital (BSC) is welcome.[87]

And it recommended that:

Big Society Capital (BSC) should conduct an analysis into the size and scale of the mutual sector to assess the potential opportunities and barriers to investing in mutuals.[88]

53. BSC is the first social investment institution of its kind. It has been capitalised with the English portion of the estimated £400 million in unclaimed money left in dormant bank accounts for more than 15 years.[89] When we asked the Minister, Francis Maude, what influence the Government had over BSC, he told us that "very deliberately" it had been set up so that the Government had none, but he added that those organisations it was entitled to support would "undoubtedly" include public service mutuals.[90]

54. Finance for starting up mutuals and co-operatives is in short supply. Encouragement, advice and guidance will come to nothing without finance. The Government has a responsibility to inform and educate financial institutions, including Big Society Capital, about lending to mutuals and co-operatives and we recommend that it establish a programme to this purpose.

TAXATION

55. The Mutuals Taskforce also concluded that the start-up costs of mutuals and co-operative might be eased by providing a degree of tax relief. It concluded that as part of its Employee Ownership Review HM Treasury should explore statutory reliefs on gains for employee benefit trusts and other employee-owned businesses.[91] In the 2012 Budget the Chancellor of the Exchequer announced that HM Treasury would conduct an internal review to examine the role of employee ownership in supporting growth. In assessing the evidence, HM Treasury's review will examine options to remove barriers to its wider take-up, including barriers relating to tax policy and administration.[92] When he gave evidence Francis Maude advised that the Treasury's review was still ongoing and added that he did not consider tax incentives to be "the be all and end all" in promoting mutuals and that cultural and behavioural barriers were more important.[93] We do not share the Minister's view. In our view tax incentives have an important role to play in helping mutuals and co-operatives to get established. Mutuals and co-operatives experience difficulties in establishing start-up finance, and any greater access to finance must assist their viability. In its review of employee ownership we would expect the Treasury to examine support not just for entirely employee-owned mutuals but also other broader co-operative models which include user and local authority stakeholder groups. We look forward to the findings of the Treasury's review of employee ownership.

56. Francis Maude also told us that the absence of a legal definition for mutuals and co-operative could make it difficult to provide tax benefits to these classes of organisations.[94] Simon Randall said that the legal complexities around co-operatives were a deterrent to their establishment and that the legislation for co-operatives needed to be reviewed and consolidated into one co-operatives statute to provide a clear definition and a simple model for organisations follow.[95] ResPublica told us that a new "legalised form of company model" should be defined to encompass mutual ways of working and encourage their creation.[96] While Ed Mayo, the Secretary General of Co-operatives UK, agreed that there had been "a neglect of some of the legal models that are open to co-operatives", he did not consider that another specific corporate form would simplify the system. Instead, he considered, it would add to the complexity.[97]

57. The Nuttall Review of Employee Ownership also found that that employee ownership was held back by its legal, tax and regulatory complexities. It noted that Employee ownership was described as "unusual" and "difficult to do", which often led to the conclusion that it was too hard to be worth considering.[98] The review considered a more flexible option of simplifying the options for establishing employee-owned enterprises with a range of off the shelf models that could be adopted which would:

  • reduce the time and cost of introducing employee ownership;
  • demystify how employee ownership works so more people can learn easily how they could achieve employee ownership; and
  • create a 'product' that a much wider constituency of business advisers and intermediaries can refer to and advise upon, and that can be easily incorporated into training materials.[99]

The Nuttall Review recommended that the Department for Business, Innovation and Skills, working with HM Treasury and the Advisory, Conciliation and Arbitration Service "should develop simple employee ownership toolkits including 'off-the-shelf' templates, to cover legal, tax and other regulatory considerations".[100]

58. We conclude that, while the absence of legal definitions of co-operatives may deter establishment of mutuals and co-operatives, the answer is not a new corporate entity defined in law. That would not only add a layer of complexity but also introduce a rigidity that could stifle innovation. Instead, we endorse the Nuttall Review's findings and we recommend that the Government produce a set of 'off the shelf' models, with supporting guidance to be made available to those interested in establishing a mutual or co-operative. We envisage that these would provide an easy route to understanding the tax and administrative burdens that starting up a business might present. We also recommend that these models encompass mutuals and co-operatives beyond the employee-owned mutual and take account of those considering the delivery of local services.

Procurement

59. The delivery of local authority services by mutuals and co-operatives is likely in some cases to follow a procurement exercise triggered by the Right to Challenge. The TUC, in its evidence, was sceptical about the Right to Challenge, stating that it

simply triggers an open procurement exercise where fledgling mutuals will be in competition with private providers, who are usually better placed to win contracts through their expertise, experience, capacity, ability to raise capital and economies of scale.[101]

These concerns were echoed by Councillor Reed from Lambeth, who said that smaller organisations found it difficult to navigate the "complex routes" through the procurement arrangements that had been created.[102] Some organisations cited the example of DA Partnership, an employee-owned mutual which was unable to compete against larger, well-established and financed organisations.[103] DA Partnership was set up as a wholly employee-owned mutual by employees from the Audit Commission to bid for local authority audit contracts. It failed to secure enough business to operate and was bought out by Mazars, a large accountancy firm.[104]

60. Winckworth Sherwood saw the procurement process as the most significant barrier, saying that EU procurement regulations made the process too complicated for small organisations:

This is probably the biggest single hurdle in that under the EU Procurement regulations tendering is required and this will discourage all but the most enthusiastic prospective [non-profit distributing organisations] from bidding. The issue has been recognised by the Government in two procurement policy notes where the Government is urging the European Commission to permit a temporary exemption for employee-led organisations/mutuals in the new draft EC Procurement Directive currently being discussed by the European Parliament. We urge the Committee to support the government in this respect.[105]

61. We heard that procurement exercises were conducted in some European states in ways that support mutuals. Ed Mayo said that in Italy, there was an exemption for low-level contracts with 'social cooperatives' which Italy had negotiated with the European Commission. This provided an exemption from the procurement arrangements for lower-level contracts involving social co-operatives.[106] Following intervention by the European Commission the exemption had been limited to contracts below the EU procurement thresholds though local authorities were provided with a power to lay down social conditions in contracts above the threshold.[107]

62. We suggested to Francis Maude, that the Government might consider introducing similar arrangements for mutuals and co-operatives in this country. He told us that he was not aware of the Italian example but would look at it. He commented that the culture in the UK on procurement was "very legalistic and rigid" and gave an example of a procurement exercise in the Cabinet Office during which officials said "we're not allowed to exercise judgment in choosing which suppliers to use." He was clear that there was a need to "think about doing things very differently".[108]

63. The Government needs to clarify how EU procurement rules apply to mutuals and co-operatives to ensure that they have the maximum flexibility. In its response to our Report we ask the Government to explain how the Italian derogation we cite might be applied to the procurement process in the UK, particularly for mutuals and co-operatives competing for contracts for local authority services, and what changes to EU procurement rules it is pressing for.

PUBLIC SERVICES (SOCIAL VALUE) ACT 2012

64. The Local Government Association's submission drew attention to the impact of the Public Services (Social Value) Act 2012 which will establish a requirement to consider social and economic value when commissioning public services.[109] Professor Le Grand, Chair of the Mutual Taskforce, told us that the Act would provide mutuals and co-operatives with a means of competing against other organisations in the procurement process.[110] He said that there was potential for employee-ownership to add social-value which would need to be considered in a Right to Challenge procurement exercise.[111] We go further. We consider that not only employee ownership, but the other benefits of co-operative approaches, including greater user and community involvement in local service delivery, offer social value which needs to be considered in procurement exercises. The Government should amend its Statutory Guidance on the Community Right to Challenge and its guidance on local authority procurement to reflect this.

Cultural barriers

65. We took evidence on non-financial barriers to setting up mutuals and co-operatives, commonly described as 'cultural barriers'. Professor Julian Le Grand suggested that cultural barriers were "more interesting and more problematic than the technical problems".[112] These barriers appeared to arise in two areas. The first was a lack of entrepreneurial enthusiasm in local authorities which held back employees from establishing their own service delivery organisations. The second was a lack of knowledge about business processes and a lack of the necessary commercial skills to develop an organisation.

66. The absence of entrepreneurial spirit was vividly put to us by Councillor Ian Parry, Deputy Leader of Staffordshire County Council:

in local government we have to accept that if there was a large pool of entrepreneurs in there, social or otherwise, they would be out there sipping pink gins on a yacht somewhere, I guess, because they would have done it already. But what they are doing is they took a career in public service for a reason, in that they wanted to work in public service. They did not necessarily want to go out and be entrepreneurs.[113]

However, Catherine Staite of the Institute of Local Government Studies (INLOGOV) said that such a view was an "over-simplification" and noted that entrepreneurial behaviours such as "empire building and building budgets" were common in the public sector. In her view sometimes it was organisational structures and political thinking that constrained entrepreneurial spirit.[114] Mark Bramah, also from INLOGOV, added that it was down to the management and the organisational culture to promote or restrict these behaviours.[115]

67. Shropshire Council believed that a lack of employee enthusiasm in developing mutuals or co-operatives was more likely down to a lack of the appropriate skills. It argued that the skills needed by those already in local authority employment and the skills required to set up mutuals and co-operatives were very different. It observed that:

  • Most staff don't know the true costs of their service and have a poor understanding of them. Very few have the necessary skills to make a commercial success of their service. When it is pitched into the open market (this is something we are attempting to address through a core skills programme for staff and which is also addressed in an experiential way through the structured support within our spin-out pathway).
  • Staff also have a poor understanding of the local market within which they will be operating and tend to have a somewhat idealised idea of the value to customers of their service and of who their competition might be.
  • Although not strictly speaking a cultural barrier, staff have little or no awareness of the contract and procurement restrictions which may prevent the council from 'gifting' their service to them. There are undoubtedly tensions in this area between the intentions of the Localism Act which triggers a competitive procurement exercise, and Government initiatives such as the Right to Provide which advocate for a closed procurement approach to staff led spin-outs of services. We have commissioned advice from the Office of Public Management to help us to navigate this emerging and complex area, but it is undoubtedly a potential block to government aspirations in terms of encouraging staff led and owned delivery of local services.[116]

68. When we asked Ministers about these cultural barriers, they were optimistic about the ability of the staff who currently work in local government to make the transition to mutual and co-operative organisations. However, they recognised a shortage in skills in a number of areas. They concluded that, most importantly, a better understanding of the procurement process would provide benefits. It would both ensure the best services were commissioned and would supply employees with the confidence to undertake service delivery themselves as a spun-out organisation.[117] Francis Maude pointed out how this was being addressed through a new Commissioning Academy[118] which was being developed by the Cabinet Office to improve the commercial skills and "confidence" of those commissioning public services.[119] He noted some institutional resistance from managers unwilling to encourage staff to consider developing spin-out services.

Quite often people are deterred because there is a hostile response from their managers. You should not underestimate that. Within many public sector organisations there is anxiety from the managers above the group interested in spinning themselves out as a mutual. The concerns are twofold. One is, "If they go, I will have to turn myself from being a line manager into a contract manager," which is a different skillset. Generally, the same people are perfectly capable of doing both, but it is a different skillset.[120]

69. The Mutuals Taskforce reporting on skills concluded that:

there will be benefits from complementing the existing professional and service delivery skills of the leaders and employees of fledgling mutuals with the development of skills focused on the creation and successful running of a new business [and that] this is essential for a successful transition from delivering services within the public sector to leading new, independent organisations.[121]

70. We do not consider it evident that local authority staff lack the entrepreneurial inclination to establish mutuals and co-operatives, rather we see that staff lack the skills and understanding required to embark on the process of setting up mutuals. Establishing an organisation to take over the delivery of a local authority service which might be heavily regulated or carry statutory obligations can be a daunting prospect. We welcome the Cabinet Office's objective to use the Commissioning Academy to address the skills gap in procurement and we agree with the Mutuals Taskforce report that the Cabinet Office through the Mutual Support Programme should target the broader development of commercial and other skills for public sector employees necessary to allow them to develop mutuals and co-operatives. We recommend that the Government outline in its response how many local authority officers it expects to train through the Academy. A better understanding of procurement might allay the fears of those in management positions who are unwilling to encourage staff to think about these options.


80   Ev 87 Back

81   Ev 85, para 3.6 Back

82   Ev 128, para 6.4.2 Back

83   Q 241 Back

84   As above Back

85   Department for Business, Innovations and Skills, Sharing Success: The Nuttall Review of Employee Ownership, July 2012 Back

86   Regional banks would be barred from lending outside their region thus making capital available locally to businesses and households. They are discussed in more detail in the following article. Lord Glasman, "Why we need regional banks", Progress Online, 25 March 2011, www.progressonline.org.uk/2011/03/25/why-we-need-regional-banks/ Back

87   Public Service Mutuals: The Next Steps, Mutuals Taskforce, June 2012, p 38 Back

88   Public Service Mutuals: The Next Steps, Mutuals Taskforce, June 2012, p 43 Back

89   Growing the social investment market, Cabinet Office website, 2012, www.cabinetoffice.gov.uk/content/growing-social-investment-market Back

90   Q 349 Back

91   Mutuals Taskforce, Public Service Mutuals: The Next Steps, June 2012, p 38 Back

92   HM Treasury, Budget 2012, HC (2010-12) 1853, p 6, paras 1.243, 2.46 Back

93   Q 355 Back

94   Q 357 Back

95   Q 226 Back

96   Ev 111 Back

97   Q 227 Back

98   Department for Business, Innovations and Skills, Sharing Success: The Nuttall Review of Employee Ownership, July 2012, paras 1.33, 5.1 Back

99   Department for Business, Innovations and Skills, Sharing Success: The Nuttall Review of Employee Ownership, July 2012, para 5.5 Back

100   Department for Business, Innovations and Skills, Sharing Success: The Nuttall Review of Employee Ownership, July 2012, para 5.22 Back

101   Ev 122, para 25 Back

102   Q 67 Back

103   Q 222 [Paul Nowak], Ev 122, para 26 [TUC], Ev 100 [APSE]; see also Ev 143, paras 17-18 [UNISON] Back

104   "Savings promised as Audit Commission contracts announced", The Guardian, 5 March 2012 Back

105   Ev 128, para 6.4.3 Back

106   Q 242; see also Ev 111-13 [ResPublica]. Back

107   Franco Dalla Mura (ed), "Social clauses and tendering: perspectives of implementation: the Italian context", English translation from Progetto Equal - Azione 3 - II fase Bridge - Una rete per lo sviluppo dell'Economia Sociale, Ambito 3, "Clausole sociali negli appalti", Articolo, February 2008 Back

108   Q 359 Back

109   Ev 144, section 2 Back

110   Public Services (Social Value) Act 2012, section 1 Back

111   Q 175 Back

112   Q 167 Back

113   Q 47 Back

114   Q 120 Back

115   As above Back

116   Ev 132-33 Back

117   Qq 319, 348 Back

118   Q 319 Back

119   Cabinet Office, Open Public Services 2012, March 2012, pp 10, 86 Back

120   Q 348 Back

121   Mutuals Taskforce, Our Mutual Friends, December 2011, p 34 Back


 
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© Parliamentary copyright 2012
Prepared 6 December 2012