Communities and Local Government Committee - Mutual and cooperative approaches to delivering local servicesWritten evidence from Winckworth Sherwood LLP

1. Introduction

1.1 This submission is from Joanna Bussell, Partner in Winckworth Sherwood LLP, who has advised over 70 local authorities on the transfer of a range of local authority services to existing or newly established not-for-profit businesses and charitable trusts, supported by Simon Randall CBE, a Consultant at Winckworth Sherwood LLP, who is Chairman of the Conservative Co-operative Movement and a former London Borough Councillor, assists Joanna with the creation of not-for-profit businesses owned or controlled in full or part by people working for them. Indeed, the team has probably more experience in this area than most firms of solicitors.

1.2 The areas where such entities have been incorporated include leisure, culture, housing and heritage and the corporate entities have been both charitable and non-charitable, companies limited by guarantee or industrial and provident societies.

1.3 This submission is accordingly provided on the basis of experience gained in such outsourcing by local authorities and we propose dealing with the specific areas referred to in the Committee call for evidence. However, specific documents to which we refer are available on the links shown below:

1.3.1The Government’s programme: the Coalition—our programme for Government which contained the following paragraphs:

“We will support the creation and expansion of mutuals, co-operatives, charities and social enterprises, and enable these groups to have much greater involvement in the running of public services.

We will give public sector workers a new right to form employee-owned co-operatives and bid to take over the services they deliver. This will empower millions of public sector workers to become their own boss and help them to deliver better services”.

This latter right has now been incorporated as the Right to Challenge in the Localism Act 2011 which is likely to become operative within the next few months.

1.3.2Trusts for Big Society which outlines the advantages and disadvantages of the trust approach in respect of many local authority services.

1.3.3The Trust Option for Heritage Services which deals with the process involved in considering alternative options.

1.3.4The Right to Challenge which outlines the process for local authority employees exercising this right under the Localism Act 2011.

1.3.5Co-operatives in the Big Society—a publication of the Conservative Co-operative Movement outlining the opportunities afforded by co-operatives and providing a number of examples and areas of operation where co-operatives have been successful.

2. Executive Summary

2.1 The Government are promoting mutual, co-operatives, charities and social enterprises to run public services.

2.2 The Localism Act 2011 incorporates the Right to Challenge which should be embraced by all local authorities encouraging their staff to create an employee-owned co-operative or other non-profit distributing organisation (“NPDO”) to run their service.

2.3 Experience has shown that such NPDOs have significant advantages, particularly with active staff involvement, and are likely to provide a better service to residents and local tax payers.

2.4 Many NPDOs created to manage public services have expanded innovatively and sustainably to improve their services, create additional local employment and benefit their staff.

2.5 The tasks ahead for any nascent NPDO can be daunting with all the red tape involved in their creation plus the legal and practical issues.

2.6 We hope your Committee will promote a good practice guide for the Right to Challenge and urge the European Commission to amend the draft procurement directive to permit a temporary exemption for employee-led organisations/mutuals.

2.7 The planned Co-operatives Bill affords a great opportunity to simplify the existing legislation and improve the corporate framework in which co-operatives operate.

3. Advantages of and drawbacks to providing services via not-for-profit businesses

3.1 The concept of a not-for-profit business does, of course, include not only conventional employee-owned co-operatives and mutuals but also non-charitable social enterprises, such as community interest companies, and charitable trusts. These latter organisations which have taken over outsourced activities and services from a local authority frequently have the head of the paid service as an ex officio member of the entity’s board, as well as one or more elected staff members on such board. Thus our comments in answer to the queries raised by the Committee will deal generally with all entities where there is significant “ownership” of employees in the ownership or management of such entities and we use the term “non-profit distributing organisations” or “NPDOs” to stress the fact that they are not beholden to external shareholders (except the community interest company).

3.2 There are a significant number of benefits of providing service through not-for-profit businesses and these are set out in more detail in our publication Trusts for Big Society. However, they can be summarised as follows:

3.2.1Single focused body able to concentrate upon delivery of its core business. Such focus and freedom provides an exciting opportunity for the management team to use their innovative skills.

3.2.2The NPDO could, without changing its community and social obligations, become a business-led organisation able to make quick decisions freed from the sometimes lengthy local Government decision-making mechanics.

3.2.3Opportunity on transfer for one off cultural change with clear goals to develop the NPDO and its services.

3.2.4Increased probity and better governance.

3.2.5Community involvement and service user engagement in the management of the NPDO through membership as well as creating user groups for individual services or facilities.

3.2.6Staff involvement in the direction and administration of a focused NPDO.

3.2.7An NPDO running the existing facilities could contribute towards the local authority’s social and economic agenda and, most significantly, contribute towards the economic regeneration of the local area.

3.2.8An NPDO could access private finance for improving and enhancing any of the facilities or services, such finance not generally being available to a local authority.

3.2.9The local authority could still maintain involvement with the NPDO through grant funding and, possibly, membership of the NPDO’s board.

3.2.10If the NPDO was charitable, a status not available to co-operatives generally, it would be able to obtain mandatory relief for national non-domestic rates at 80% and apply for discretionary relief for the remaining 20%. In addition, charitable NPDOs have other fiscal advantages, including exemption from corporation tax and gift aid on donations.

3.2.11Opportunities to maximise efficiencies and cost savings with adoption of better business practices.

3.3 As far as drawbacks are concerned any local authority transferring services to this type of NPDO will need to bear in mind the following:

3.3.1The NPDO would be independent of the local authority although the latter will have significant involvement in its management.

3.3.2If the NPDO is charitable, they would be regulated by the Charity Commission, which is often seen as a positive advantage, but also irreversibility in that all charitable assets can only be passed to another charity.

3.3.3There can sometimes be difficulties recruiting trustees with suitable business and other experience, bearing in mind the obligations upon them.

3.4 In the Winckworth Sherwood brochure, Trusts for Big Society, referred to above, we undertook research among a number of NPDOs enquiring as to the advantages that this status afforded including the benefits for the transferring employees.

4. What difference will the local resident and local tax payer see where services are delivered by a not-for-profit business?

The principal differences arise from the nature of the NPDO and the extent of staff involvement in both the policy making and day to day management of the business Indeed, many of these issues arise directly or indirectly from employee involvement and participation. We highlight those which have been recorded in the research referred to above:

4.1 Creating an entity where the employees can take such a major role and, effectively, become their own boss will provide a huge incentive for them to concentrate upon the delivery of the services and, where relevant, to benefit from the financial success of the organisation. This powerful incentive will persuade the NPDO and its employees to provide services as cost-effectively as possible but without in any way compromising upon the quality of such services.

4.2 Local authorities, as political entities, inevitably have a degree of bureaucracy which can hinder quick decision making and involve senior managed in significant time servicing the organisation. Transfer of any social business to an NPDO will relieve much of this burden and provide additional capacity for managers to concentrate upon the service and create freedoms for innovation.

4.3 NPDOs will have freedom to grow outside the local authority and must take on additional public sector services or merge with other entities if they so wished. This freedom can enable the NPDO to access private finance not available to local authorities and this can only benefit the business, and all those using it.

4.4 In the Winckworth Sherwood research we were able to ascertain other significant advantages to the local resident and tax payer alike, including:

4.4.1The overwhelming majority of NPDOs surveyed, had significantly increased the number of employees, principally due to the increase in business.

4.4.2The enthusiasm of their staff and the change in ethos from a local authority run service to one based upon customer care and attention had, in most cases, significantly increased the income received by the NPDO and its ability to invest that additional income in improving the facilities, thus providing a spiral of improvement which for most of those NPDOs surveyed continued.

4.4.3Most of the NPDOs surveyed were competing against similar private sector entities and were able to provide better value for money for residents using the facilities and, over time, were able to shake off the epithet of simply being another Council facility. Indeed the NPDO, not having profit-making as an essential requirement with no conventional shareholders, they were able to both reinvest in the facilities and charge competitive entrance fees or monthly subscriptions.

5. Differences between a co-operative council where services are supplied via npdos and other local authorities

5.1 There is an organisation sponsored by the Labour Party and promoted by the Co-operative Party entitled Co-operative Councils Network. Their membership is open to Labour-led councils, Labour groups in opposition and other organisations working towards the aims and objectives of promoting co-operative ways of delivering local services. It is assumed that all the Councils concerned with this organisation are actively supporting the transfer of services via not-for-profit businesses and thus embracing the Right to Challenge in the Localism Act 2011 and hopefully your Committee will be working upon producing good practice for all local authorities—of whatever political control—as to how they take advantage of this new opportunity. If this opportunity is taken up new NPDOs will benefit from a range of opportunities not available to services continuing to be run by local authorities.

5.2 NPDOs, which have a high degree of employee ownership or involvement, enjoy a higher productivity and profit, and have lower staff absence and turnover, because both business and employee interests are closely aligned.1

5.3 The interests of local authority employees transferring to an NPDO can be protected, both under the terms of the Transfer of Undertakings (Protection of Employment) Regulations 2006 in that their existing terms and conditions can be enshrined on their employment by the NPDO and, furthermore, the NPDO could be an “admitted group” within the relevant local Government pension scheme. The local authority concerned could make such requirements in any transfer arrangements.

5.4 Employees not only benefit by sharing in the NPDO’s financial success but also by feeling a greater sense of pride, wellbeing and commitment in their work such that they are even more likely to be motivated to report and tackle poor practice.2

5.5 The most often quoted example is that of the John Lewis Partnership whose department stores and supermarkets are all staff-owned. Research by the Employee Ownership Association has shown that companies owned by their employees are more resilient than conventionally structured companies, outperforming the market during the downturn and demonstrating a lower risk of business failure.3

5.6 A report by the independent think tank, The Innovation Unit, shows how employees taking ownership of public services would yield exactly the same benefits as those seen in business, by creating the “engagement ethic” missing in today’s local authority run public services. The report says that this will not only improve their effectiveness and cost efficiency, but will also create economic benefits for local communities.4

5.7 The last Government’s own research cited independent polling that indicated that two thirds of people would prefer public services to be run through the social enterprise model, while only one in 10 chose the Government.5

5.8 One of the overwhelming differences between the two models is that a new NPDO could operate without the significant overhead costs imposed on all elements within a local authority and outside the inevitable bureaucracy with which any local authority is involved.

5.9 This freedom from local authority control also enables the NPDO to operate innovatively, seek opportunities elsewhere in the public and private sectors and recruit first rate managers to run their services. There are two particularly successful NPDOs, namely Fusion Lifestyle in Southwark and Mytime Active in Bromley, South London.

6. Arrangements for delivering services by not-for-profit businesses and some of the barriers and hurdles

6.1 This is the area upon which your Committee should perhaps concentrate in that there are a number of significant hurdles and barriers which need to be addressed and which, if not eliminated, could seriously affect the ability of NPDOs undertaking the management of public services and we outline below some of the key issues.

6.2 Much has been written about creating NPDOs and some of the barriers. In particular, the All-Party Parliamentary Group on Employee Ownership undertook an Inquiry on the issue and their report merits close review.6

6.3 There are a number of tasks for any employee group contemplating taking over services for which they are responsible and a helpful publication from Co-operatives UK7 suggested that the key ingredients include:

Specialist business sport.

Clear co-operative and mutual models.

Participative governance of the new mutuals.

Organisational forms that can be recognised in procurement.

Long-term commissioning.

Solutions for taxation constraints when moving from state to becoming a non-state mutual.

Links to the wider co-operative and mutual business sector.

An openness to user involvement as well as employee ownership.

Our firm, Winckworth Sherwood, has produced a guide to local authorities and nascent employee co-operatives wishing to exercise the Right to Challenge under the Localism Act 2011.8 This document sets out all the steps which need to be taken by individuals contemplating using this right, highlighting a number of key issues including:

Advantages for staff of creating a social enterprise.

Public services which can be run by social enterprises.

The risks involved.

The models and legal forms.

How to bid to run public services with a step by step guide which is attached as an appendix to this memorandum.

6.4 There are a number of challenges for any new NPDO or social enterprise:

6.4.1Capacity and skills: Many new NPDOs will need to examine carefully the available skills and, if necessary, access additional skills upon the board of their NPDO.

6.4.2Finance: Any entity will require seedcorn capital and thus the NPDO 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.

6.4.3Procurement: 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 NPDO from bidding. The issue has been recognised by the Government in two procurement policy notes9 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. There are, in fact, wider considerations arising from the EC’s proposals which have not, to our knowledge, been discussed at all by the UK Parliament.

6.4.4Co-operatives Bill: The Government have announced that they are shortly to introduce a Co-operatives Bill to consolidate the extensive legislation governing co-operatives. We hope that this will not only consolidate and simplify the existing legislation but also considerably simplify the ability of individuals to create and start a new business through an NPDO as, at present, at least six separate steps are required in the UK which puts us 19th in the international league for ease of starting a new business.

6.4.5Business Rates: Whilst charitable NPDOs are able to obtain 80% mandatory relief from their local authority, co-operatives are generally only able to obtain discretionary relief if the local authority so decides. This puts co-operatives and wholly-owned non-charitable NPDOs at a significant disadvantage such that there are a number of cases, notably the People’s Supermarket in Camden, who have been charged full business rates, which inevitably has an adverse effect on the business. Consequently, co-operatives should be given a fairer deal under the business rate system and that local authorities should not be prejudiced under the new local authority finance regime.

May 2012

1 See “How does shared capitalism affect economic performance in the UK”. National Bureau of Economic Research August 2008; and Evaluation of tax-Advantaged All-Employee Share Schemes—HM Revenue and Customs 2008.

2 See Share Plan Survey, London School of Economics September 2009; and Marmot, M (2004) “The Status Syndrome”, Times Books.

3 Employee Ownership Association Press Release February 2010.

4 The Engagement Ethic, The Innovation Unit, December 2009.

5 Social Enterprise: Making a Difference, Social Enterprise Coalition/Department of Health, November 2008.

6 Sharing Ownership: The Role of Employee Ownership in Public Service Delivery, All Party Parliamentary Group on Employee Ownership, June 2011.

7 Time to get serious: Co-operatives UK 2001.

8 Right to Challenge: Winckworth Sherwood May 2012 (see above).

9 Procurement Policy Notes number 05/11 August 2011 and 11/11 December.

Prepared 6th December 2012