Communities and Local Government Committee - Mutual and cooperative approaches to delivering local servicesWritten evidence from the Trades Union Congress

Executive Summary

The TUC supports moves to empower public service workers and forge closer relationships between service users and public sector professionals through greater cooperation in the design and delivery of local authority services.

However, we maintain a number of concerns about the coalition government’s public service mutuals agenda in terms of its aims, its practical implementation and its potential consequences for public services.

Driving out more functions to the market through public service mutuals and co-operatives creates further fragmentation, leaves mutuals and services vulnerable to competition and takeover by private sector competitors and potentially worsens working conditions and job security for public sector workers.

The success of public service delivery through employee-owned mutuals depends on a range of mitigating factors. Critical conditions of success might include long term contracts, staff buy-in, contract lock-ins, support and advice, protection of employment standards and effective governance mechanisms.

Evidence of the benefits of employee-owned mutuals delivering public services is patchy. Moreover, there is little evidence that mutuals in themselves are the reason for improved public service delivery or that similar service improvements cannot be achieved through in-house improvement models.

UK and EU public procurement legislation means that there is no right to award contracts to any particular group of enterprises and that employee-owned mutuals will be in open competition with the private sector. Experience so far suggests that they will compete at a disadvantage and that marketisation of public services leads to privatisation.

This process of marketisation is being entrenched by the coalition government through its Open Public Services agenda and key pieces of legislation such as the Community Right to Challenge.

Outsourcing of public services will lead to a complex range of competing service providers, covering a range of different organisational forms. Navigating this landscape will be particularly problematic for vulnerable service users with complex and multiple needs.

Accountability will be compromised as the democratic institutions of the state withdraw and are replaced by providers from alternative sectors, where accountability will be complex and managed through contract compliance rather than direct accountability to elected representatives and democratic institutions.

Evidence from the outsourcing and marketisation of public services suggests that in many cases additional costs are incurred and, increasingly, public sector organisations are looking to in-source services in order to achieve greater efficiency and better value for money for the taxpayer.

What is the difference between a co-operative council where services are supplied via not-for-profit businesses and other local authorities?

1. Given the terms of reference of the inquiry, we are assuming this (and subsequent questions) refer specifically to “not-for-profit businesses owned and controlled, in full or part, by the people who work for them” as opposed to not-for-profit businesses in the general sense.

2. According to research by the Office for Public Management (OPM),1 the potential benefits derived from employee ownership models, eg innovation, efficiency and creativity, only work where there is genuine employee ownership and buy-in. This process cannot be driven from the top. Unfortunately, experience so far suggests that the design and implementation of mutuals within local authorities is entirely being delivered from the council leaderships and senior management.

3. To date, evidence of local authorities delivering this model of provision is very limited.

4. Of the 21 pathfinder mutuals announced by the government in 2012, six are located within local authorities and none have yet to officially launch. There are 21 councils in the Co-operative Councils Network. The network incorporates a range of councils adopting different approaches to the promotion of co-operatives, from a broadly defined concept of co-operation between employees, council leaders and service users in the design and delivery of services to authorities actively promoting the spin out of co-operative enterprises. Again, few tangible initiatives have taken off to date and evidence of the impact on delivery is therefore negligible.

5. The central role that staff buy-in plays in the success of co-operative models has been echoed by organisations like Co-operatives UK as well as the government. Nick Hurd, Minister for Civil Society assured us that “the government will not seek to dictate what is best for employees”.2

6. Feedback from unions within the local authorities involved in both the Pathfinders project and the Cooperative Councils Network suggest that in all cases the drive for mutualism has been top down and has largely been used as a means of implementing restructuring. There is no evidence of local authorities adopting co-operative and mutual strategies in response to calls from employees through the Right to Provide or other bottom up initiatives. Engagement with unions has been variable.

7. This is not to say that employees are uniformly opposed to proposals. Staff votes at Kensington and Chelsea suggest that there is support for the plans to mutualise youth services. However, an in-house option has not been proposed and the mutual option was largely seen as the only means of guaranteeing sustained funding and job protection through a five year contract and the workforce has been assured of retaining admission into the Local Government Pension Scheme.

8. This reflects problematic implementation of employee-owned mutuals that have been witnessed in other parts of the public service such as the NHS and civil service.

9. Evidence from Unite, UNISON and CSP suggests that in the vast majority of cases where staff in the health service have been balloted, the majority have chosen to remain within the NHS. In many cases the results have been emphatic, as the following table indicates:

PERCENTAGE OF PRIMARY CARE TRUST STAFF
VOTING AGAINST THE TRANSFER

%

Cornwall

81

Plymouth

74

Shropshire

85

Greenwich

86

Mid Essex

97

Sandwell

67

Cornwall and the Isles of Scilly

80

10. In some cases, such as Greenwich, Sandwell and Shropshire, these overwhelming votes against transfer have led to a change of course and the retention of services within the NHS. However, in other cases, such as Mid Essex and Cornwall, the views of the staff have been ignored and the move to social enterprise status has been driven ahead regardless.

11. The government cites MyCSP as an exemplar mutual spinning out from the civil service. However, there has been minimal consultation or negotiation with the workforce or union and PCS members at MyCSP have been so hostile to the move that industrial action was held in July 2011 and a staff survey completed by 211 of the 380 staff at MyCSP found that 94% did not agree that turning them into a “mutual joint venture” would “empower employees and drive up performance”. 95% said they wanted to retain their civil service status—a request that the government has refused.

12. Of course, there are more long standing examples of both employee-owned and multi-stakeholder mutuals delivering public services, particularly in the areas of housing and leisure.

13. Research by the Association of Public Service Excellence (APSE) found that evidence of the benefits of public service delivery through mutuals was patchy but there were examples of mutuals (eg Oldham Community Leisure) where there was genuine staff and community buy in and other critical conditions of success, eg funding and specific support, and therefore community benefits accrued as a result.

14. Perhaps the most important conclusion of the APSE research was that “the evidence does not suggest that delivering benefits for the local community is unique to co-ops and mutuals or that they are necessarily any more efficient than in-house services at doing so. The evidence simply suggests they can deliver those benefits”.3

15. In every case, the correlation between delivery of community benefits and the use of the mutual model was dependent on the interaction and relationships between the public service authority, the staff, the community and the specifics of the contract conditions and funding. Simplistic attribution of benefits to the mutual model of delivery were insufficient, as APSE concluded “the complex configuration of conditions that need to be in place in order to produce specific successful outcomes highlights the fact that there are a range of organisational and contextual conditions that policy makers must take into consideration.”4

What arrangements need to be put in place to deliver services by not-for-profit businesses such as employee-owned mutuals? More specifically, what are the barriers to establishing not-for-profit businesses to supply services; what role does the local authority have in promoting and incubating a not-for-profit business; and where does accountability lie?

16. Based on the aforementioned research, APSE identified three critical conditions for success in adopting the mutual model, these are:

(a)A contract length of five years or longer, which also locks in previous benefits.

(b)Buy in from staff and/or citizens.

(c)Support, advocacy and expert advice.

17. In their report of June 2011, the All Party Parliamentary Group on Employee Ownership stated that they favoured “longer contracts for employee led mutuals, such as five to seven years in length, and do not see any conflict if the ultimate aim is increased diversity in supply.”5

18. In their report on European public service mutuals, Co-operatives UK identified three key lessons from the successful models in Spain, Italy and Sweden.

(a)All were set up to meet specific demands from local communities based on tangible needs.

(b)All have grown in partnership with state services. Whether this is achieved through creating specific funding mechanisms, through procurement or capacity-building, state support has been integral to the growth of mutuals.

(c)In all three countries, there are clearly defined models of public service mutual. For example, in Italy, the legal structure makes specific reference to community interest and the procurement regime allows preferred bidder status on the basis of this.

19. This last point is particularly important in a UK context where Co-operatives UK state there is “an array of different models and some risk therefore that core elements of being a mutual or a co-operative could be watered down in favour of quasi-mutual private enterprises”.6 The fact that the coalition government promotes both MyCSP and Circle Healthcare as best practice models of employee-ownership suggest that this is certainly the case.

20. The TUC believes that when considering mutualisation of public services, the following areas need to be looked at further:

(a)Consultation—how can we ensure that the agenda is employee driven?

(b)Commissioning—how can we ensure that open competition does not lead solely to privatisation?

(c)Governance—what exactly do we mean by the terms “mutual” and “co-operative” and how can we ensure genuine employee (or multi-stakeholder) ownership and participation?

(d)Safeguarding—how do we protect public assets from private takeover?

(e)Employment standards—how do stop the race to the bottom?

21. As such, we believe that other key conditions that are critical to the success of public service mutuals include:

(a)Explicit evidence of workforce engagement and buy-in, through dialogue with appropriate trade unions and the use of staff ballots.

(b)Contract lock-ins that protect services and assets from transfer to the private sector in the event of failure or transfer of ownership.

(c)Governance structures that adhere to the seven principles of co-operatives outlined by the International Co-operative Alliance, including clear mechanisms for ensuring workforce representation and majority ownership.

(d)Protection of employment standards, including admission to relevant public service pension schemes.

22. There are a number of barriers that local authorities will face in the development of employee-owned public service mutuals.

23. The role of the local authority in nurturing fledgling mutuals may be inhibited by the need to comply with its own financial standing orders as well as UK and EU public procurement legislation and State Aid rules that require open and competitive tendering.

24. Where local authorities do provide three to five year start up contracts, this may open them to challenge from private providers looking to access that particular market. This will be particularly strengthened by the coalition government’s plans to strengthen the right of providers to appeal where they feel they have been “unfairly excluded from the commissioning process”.7

25. Coalition government policy will also further entrench marketisation of public services through other ways. For example, the Community Right to Challenge within the Localism Act gives powers to employees to challenge existing services and to bid for the services themselves. However, the Right to Challenge 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.

26. Recent evidence in the health service, local authority auditing services and the DWP’s work programme shows that in the public services market, the employee-owned social enterprises like Central Surrey Health, DA Partnerships (the employee-owned mutual set up by Audit Commission staff) and a whole range of voluntary and community organisations have lost out in competition to private providers.

27. Other options open to local authorities for the incubation of new mutuals might lie through Teckal subsidiaries. However, Teckal options do not provide the autonomy or ability to diversify and grow that genuine employee-owned mutuals would require.

28. Staff buy-in is essential for the successful implementation of mutuals. However, as we have seen, most local authority proposals have come through top down restructuring and staff support has only been deliverable where the plans have entailed some guarantee of funding and protection of jobs and employment standards, including admission into the relevant pension scheme. It is notable that the early staff spin-outs from Primary Care Trusts in Surrey, Kingston and Hull enjoyed continued access to the NHS pension scheme. The extent to which this is affordable and sustainable in the long run is debatable.

29. The protection of employment standards for those workers delivering the service is crucial to the success of public service mutuals. There is a range of impacts on the workforce arising from the outsourcing of public services including reduced employment, reduced pay and access to pensions, increased use of fixed term and non-traditional employment and the reduction and fragmentation of collective bargaining coverage.

30. This is particularly evident for staff within the broadly defined “third sector” where evidence from UNISON and Unite suggests that even in the relative boom years for the sector in 2005–07, price competition was driving down funding and staff pay and benefits. This has been intensified recently as spending cuts begin to bite and contracts become renegotiated.

31. Evidence suggests that several organisations are either suspending or abolishing incremental pay progression or are considering it and that many more are looking for new flexibilities in terms and conditions in a sector that is not known for over-generous pay—at least at the lower levels.8 The Charity Pulse staff survey indicates growing dissatisfaction among the charity workforce. It found that the numbers reporting increased workloads, worsening work life balance, worsening pay and reduced job security had increased significantly from 2007–11. The CIPD reported that 23% of charity staff were seeking new jobs compared to 17% in the public sector and 19% in the private sector.9 Other research evidence indicates that third sector organisations are responding to the increasing need to compete for service delivery contracts by reducing staff, cutting terms and conditions and that smaller organisations are finding it increasingly hard to survive.10

32. Feedback from unions within local authorities suggests that there is insufficient support and guidance for the process of mutualisation. Use of the government’s Mutuals Information Service appears limited. Moreover, there was little clarity about how this process should be managed within local authorities. While the government might argue that it is taking a necessarily non-prescriptive approach to the implementation of mutuals, this has led to a degree of confusion within local authorities about where responsibility lies, how the process is managed and what information can be provided.

33. The context of public sector funding cuts and the restructuring and divestment of services resulting from this provides a huge barrier to effective long term planning and the design of services to meet need. In most cases, there has been little in the way of genuine options appraisal or business cases drawn up in relation to mutualisation. Feedback from unions within local authorities indicates that mutuals have been proposed in order to meet a diverse range of perceived structural and corporate needs, usually linked to funding cuts, with little regard for how the service might be improved and why the mutual model is the best vehicle for achieving those goals as opposed to other options, including in-house service improvement plans.

What are the advantages of and drawbacks to providing services via not-for-profit businesses?

34. We have heard on numerous occasions that mutuals improve performance management, encourage innovation, increase productivity and reduce absenteeism. While these are still the early stages in the mutuals roll out, it is worth tempering these claims until there is a more robust evidence base.

35. In looking at the evidence of employee-led spin outs so far, the Public Administration Select Committee (PASC) reported that it was “unable to corroborate” these claims and that “too much of the discussion is still hypothetical and anecdotal”.11 The Third Sector Research Centre report on social enterprise spin-outs from the NHS found an “absence of a convincing body of evidence that such organisations can consistently deliver the expected innovation and efficiencies in health provision”,12 the Department of Health’s (DOH) own findings are that “the benefits of the social enterprise model are not always clear, not only to potential commissioners, but also to staff and stakeholders”.13

36. The most systematic review of the evidence base for the effects of mutuals and co-ops delivering public services, undertaken by APSE found “a paucity of evidence informing the current claims over the performance of co-ops and mutuals in delivering public services”.14

37. While it may be the case that benefits can accrue, particularly when a number of conditions are met, many assertions are clearly based on aspiration and speculation rather than firm evidence.

38. Another important point to consider is the relationship between employee-ownership and employee-engagement or participation. The Employee Ownership Association (EOA) states that evidence suggests that the: “clearest benefit from employee ownership is when employee-owners have more say in the running of the company. What is less clear is the extent to which employee ownership inevitably leads to increased employee participation in decision-making”.15

39. Based on studies from the UK, USA and Sweden, they found that “employee ownership and engagement… are not necessarily correlated”16 and that in several cases there had been no increase in employee participation or following an initial period of enthusiasm participation decreased over time.

40. This should caution us against glib assumptions that the structural change leads us to promised goals. It also leads us back to the question, if employee participation is where benefit is derived, are there not models for enhancing employee participation within an in-house model?

41. Significant drawbacks will occur in service delivery through the coalition government’s use of market based models of public service reform that underpin the implementation of public service mutuals.

42. Market-based approaches to public service reform have generally failed to deliver promised improvements, with public services largely privatised and characterised by market concentration, reduced accountability, detrimental impacts on the conditions of public service workers and high profile project failures bailed out by the taxpayer.

43. Evidence suggests that the market approaches often contribute to the decline in public service quality through cost-cutting, short-termism, reduced investment, fragmentation, inflexibility due to narrowly defined contract specifications and reduced capacity for whole system approaches to quality improvement across public services.

Where services are delivered by not-for-profit businesses what difference will the local resident and local taxpayer see?

44. Service users will be faced with a complex range of competing service providers, covering a range of different organisational forms with different forms of accountability. Navigating this landscape will be particularly problematic for service users with complex and multiple needs dependent on a number of different providers, where clearly defined, integrated and holistic interventions are required.

45. Accountability will be compromised as the democratic institutions of the state withdraw and are replaced by providers from alternative sectors. Providers from the private and voluntary sector will be outside of the scope of the Freedom of Information Act and lines of accountability will be complex and managed through contract compliance rather than direct accountability to elected representatives and democratic institutions.

46. There is a widespread expectation that delivery of public services through employee-owned mutuals will provide cheaper and more efficient services. Writing for The Guardian in August 2010, Francis Maude made clear the link clear between mutuals and cost savings when he said “in a time when we need to save money we have to be ready to explore ideas like this”17

47. However, as both APSE research and Co-operatives UK’s study on European co-operatives shows, the development of mutuals is not a cheap option, it requires up- front investment and sustained funding.

48. Moreover, evidence from outsourcing and privatisation of public services suggests that in many cases additional costs are incurred and, increasingly, public sector organisations are looking to in-source services in order to achieve better value for money and greater efficiency.

49. As well as additional expense incurred through on-costs generated by alternative providers, the complex process of marketisation, contract management, evaluation and monitoring creates additional transaction costs for the taxpayer.

50. The OFT observed that “evaluating bids is costly, in particular where the buyer’s needs are complex and requirements cannot be specified in a simple way”18 and a related point was made by the Audit Commission, which noted that “at least some” of the apparent savings claimed for Compulsory Competitive Tendering “were offset by the costs associated with managing competitive processes.”19

51. Research by APSE found that the “need to improve efficiency and reduce service costs’ was the most cited reason for in-sourcing” by local authorities with 58.7% of respondents agreeing that this had been key.20

52. Advantages from in-house delivery cited by local authorities in the study included the reduction of “client monitoring and contract management time and costs”, “greater efficiency” and “greater flexibility”. More than 63% of respondents said that they anticipated financial savings as a result of in-sourcing. APSE states that: “a key consideration for local authorities in bringing a service back in-house is the anticipation of financial savings, through more agile and flexible ways to manage local services.”21

May 2012

1 New Models of Public Service Ownership: a guide to commission, policy and practice, OPM, August 2010.

2 Hansard, 7 June 2011.

3 Proof of Delivery, APSE, 2011.

4 Proof of Delivery, APSE, 2011.

5 Sharing Ownership, APPG, 2011.

6 Time to get serious: international lessons for developing public service mutuals, Co-operatives UK, 2011.

7 Open Public Services 2012, Cabinet Office, 2012.

8 “Government policy, recession and the voluntary sector”, Steve Davies, University of Cardiff 2009.

9 “Worse pay, better management”, Third Sector, 12 July 2011.

10 False Economy? The costs of contracting and workforce insecurity in the voluntary sector, Dr Ian Cunningham, University of Strathclyde, and Professor Philip James, Oxford Brookes University.

11 Public Services and the Third Sector: Rhetoric and Reality, PASC, July 2008.

12 Social enterprise spin-outs from the English health service: a Right to Request but was anyone listening?, TSRC Working Paper 52. January 2011.

13 Leading the way through social enterprise DOH, March 2010.

14 Proof of delivery? A review of the role of co-ops and mutuals in public service provision, APSE, August 2011.

15 The employee ownership effect: a review of evidence, Matrix Evidence, March 2010.

16 Ibid.

17 http://www.guardian.co.uk/commentisfree/2010/aug/12/mutuals-empower-public-sector

18 Healthy Competition: how councils can use competition and contestability to improve services, Audit Commission, November 2007.

19 Assessing the impact of public sector procurement on competition, OFT, September 2004.

20 In-sourcing Update, APSE, 2011.

21 Ibid.

Prepared 6th December 2012