Communities and Local Government Committee - Mutual and cooperative approaches to delivering local services - Minutes of EvidenceHC 112

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House of COMMONS



Communities and Local Government Committee



RT HON FRANCIS MAUDE MP and rt hon don foster mp

Evidence heard in Public Questions 311 - 369



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Oral Evidence

Taken before the Communities and Local Government Committee

on Monday 10 September 2012

Members present:

Mr Clive Betts (Chair)

Heidi Alexander

Bob Blackman

Simon Danczuk

Bill Esterson

George Hollingbery

James Morris

Mark Pawsey

Heather Wheeler


Examination of Witnesses

Witnesses: Rt Hon Francis Maude MP, Minister for the Cabinet Office, and Rt Hon Don Foster MP, Parliamentary Under-Secretary of State, Department for Communities and Local Government, gave evidence.

Q311 Chair: Good afternoon and welcome to you both. We are formally beginning this final session of our inquiry into the Co-operative Council. Francis, welcome. We were expecting you-we have been for some time. Don, welcome again and congratulations on your appointment and first appearance before our Committee-no doubt the first of many that will happen over the years.

Mr Foster: I look forward to them-the dialogue and exchange.

Q312 Chair: Absolutely. The Thursday afternoon session in Westminster Hall was a brief introduction to the work of the Committee. We are now into serious issues. The whole issue of cooperatives and mutuals is an important one. It is clearly seen as important by the Government in general terms. To begin with, perhaps you could tell us how you see cooperatives and mutuals delivering local authority services. One of the striking things about our inquiry so far is that we have written to councils up and down the country. Quite a few have come back and said it is something they are interested in and are looking at. There are not many examples of practical things happening on the ground and cooperatives being delivered as working organisations. I wonder whether you would like to say a little about the generalities and what is happening in practice.

Mr Maude: I cover the development of mutuals right across the public sector. This started under the last Government, where there was a particular focus on health and social care. When the coalition Government was formed about two and a half years ago, I think there were eight public service mutuals in existence across the public sector. There are now about 50-it is a gradually rising number-with another 40 or so in the pipeline, so there has been significant growth. Across the range of the public sector, this is still relatively small but growing. They range in size from about 2,000 staff down to one of two people. I do not think you can go lower than that and have something that calls itself a mutual, but who knows?

Local authorities have tended to focus, although not exclusively, on the social care sector-more is happening in the area of youth services-and we are aware of 37 local authority projects, of which 14 are live. They have a wide geographical spread and cover a range of services including education, particularly the field of school support services, social care, social work, youth services, housing, leisure, community safety and the environment. We have a live project involving a fire brigade, with, I think, two other fire brigades interested in going down the mutual path.

Mr Foster: I think there is a difference. The role of my Department is to support the work being done elsewhere through the Open Public Services White Paper and the development from that. The key issue for my Department has been very much to find ways of assisting voluntary community service organisations and SMEs so that they can become involved in the activities and delivery of services at local government level. We have done a variety of things to free up local councils that have facilitated that, removing many of the inspection regimes and reporting and administrative burdens. New freedoms and flexibilities will help-general power of competence and so on-but, most importantly, through the Localism Act, communities have a number of new rights, for example the community right to bid in relation to community assets; the community right to challenge, which is what you are specifically concerned with in terms of services; and the community right to build. In each of those areas there is provision of financial and technical assistance to organisations and groups that wish to avail themselves of the facilities provided under the Localism Act. Our job is to enable the opportunities. To some extent, the help and support is provided elsewhere, although within our own Department we are providing some of that support as well.

Q313 Chair: By the end of this Parliament, would you expect to see a scattering of services clustered in one or two particular authorities, or would you see mutuals and co-ops as a mainstream deliverer of services? Have you any idea what percentage of local authority services might be delivered by co-ops and mutuals by the end of the Parliament?

Mr Foster: At the moment, it is very difficult even to get figures as to how many such organisations are providing those services to local government, or providing local government services in that particular way. Our very best estimate is that about £11 billion-worth of services are provided that might have been provided in-house by local government in the past.1 We are seeing a gradual increase in the number, but the introduction of the Localism Act provides new routes that make it easier for such groups to engage with their local council and start working in that way. Hopefully, we will see growth, but there is quite a lot of work to be done, both on providing support to groups that might wish to do it and regarding councils themselves, as they learn how to cope with those new opportunities that have been provided to local communities.

Q314 Heidi Alexander: You mentioned the provisions of the Localism Act. Not all the provisions of the Act have come into force. In relation to the community right to challenge, have those provisions come into force, and what has been the response so far that your Department is aware of in relation to the number of challenges that have been made?

Mr Foster: We are at the very early stages. If you look at different aspects of the Localism Act, on Wednesday we are taking a statutory instrument through Parliament to give effect to some aspects of it. It is far too early to see where we are, but what I can give you, which may be helpful to the Committee, is the fact that about 400 organisations have already expressed an interest in finding out more about the opportunities. You cannot conclude from that that 400 organisations are going to take it forward once they look at the challenges. Given some of the barriers, which we may come to a little later, they may drop out, but others may come along as well. It is very early days, but we are optimistic that there has been some progress already, and certainly 400 organisations expressing interest is a good start.

Q315 Simon Danczuk: The Mutuals Taskforce concentrated very much on employee ownership rather than broadening that out to look at other stakeholders and perhaps service users. Was there a reason for the particular emphasis on employee ownership?

Mr Maude: Yes, because that was what we thought was the thing that would deliver it most quickly. That was what we had in mind, as mutuals were employee-owned/led cooperatives. All the evidence is that when those organisations become employee-owned/led you get a dramatic improvement in productivity. Often, with conventional outsourcing to a commercial provider there will be productivity improvements but they have to be ground out, and it takes time. With employee ownership, you can see a dramatic transformation almost literally overnight. I visited a mutual that was then not vested, but it is now, where the intermediate care part of a hospital trust-people were employed directly by the PCT-was merged with the social care part of the local council. In the ward manager’s office was a chart showing the rate of staff absence. It had halved from one month to the next. All the evidence is that you get a dramatic uplift in productivity. Staff morale improves dramatically-staff sickness/absence is often a good indicator of morale-the quality of the service improves, and you can put the service on a contractual basis, which generally should be done with a reducing cost base, so you get cheaper services done better with staff who are more motivated. That was what we had in mind.

Q316 Simon Danczuk: That’s good. You have drawn a distinction between the performance and quality of local authority public services and the performance and quality of services offered by mutuals. I get that. What about the distinction between mutuals and private sector companies? Why not just pass the service to a private company?

Mr Maude: I think that by going down the mutual path you get a better outcome. Not always-there are some services that are not susceptible to that. Take the example, not in the local authority area, of the organisation that administered the Civil Service pension scheme, which was being delivered in-house when I arrived in the Cabinet Office. The first thing that landed on my desk was a proposal to spend £50 million or so on a new IT system. I immediately thought that the right way to do this, rather than have another government IT project, was to see whether it could be outsourced. What we have done is place the business on a contractual basis with a new entity where the staff own 25%. They own a blocking minority, if you like, and have negative control over the operation; the Government own 35%, and we sold 40% to an external private sector provider that can put in capital, technology, management, bandwidth and expertise. The result is that there is a new enterprise in the marketplace. The cost to the taxpayer of providing the service will halve over the coming years because of the contract that has been put in place. If it does very well, the taxpayer, through the Government’s continued 35% stake, will benefit as well. From my point of view, you get a better outcome with the 25% stake. It is easier to do; the staff are immediately engaged and have a genuine sense that it is their enterprise, and to that extent it is true. It is easier to get done, and I believe you deliver better results.

Q317 Simon Danczuk: Don, do you think that the delivery of certain key functions and services should be reserved for local authorities, never to be spun out to the private sector or to mutuals or social enterprises? Do you agree that certain key functions should stay in local authority control?

Mr Foster: We have already made clear that education services will not fit into this in the same way as others, although some of the services being provided, for example school meals, would still be available. We debated the development of the programme at length during proceedings on the Localism Bill. Because councils have the ability to make decisions about the relative merits or otherwise of bids under the right to challenge, they are best placed to make those decisions rather than to prescribe centrally what can and cannot go through this particular programme.

Q318 Simon Danczuk: What you are saying, Minister, is that any local authority services at local level can, if they so wish, spin them out from the local authority. You are happy with that.

Mr Foster: Yes, provided all the necessary checks apply, bearing in mind that the local authority has the ability to look in detail at all those bids and decide whether or not it wishes to develop a procurement process on the basis of a first proposal. One of the areas we have looked at very carefully-it may be one to which you are alluding-is that defined by some as high risk, particularly in relation to children’s services. We have looked at that very carefully to ensure that the protections for a local authority, for example to get rid of frivolous bids and so on, are there. We believe that the local authority has the ability to make the decisions itself without central Government telling it which it should and should not.

Q319 Simon Danczuk: Fair enough. My last question, which is a bit of a hobbyhorse for me, is about the accountability and transparency of mutuals, co-ops and social enterprises. How far should that go? I have seen some resistance locally in terms of Rochdale and Link4Life. I also noted some resistance when Greenwich Leisure gave evidence to the Select Committee. Do you have a view on that?

Mr Maude: For me, the issues of accountability remain the same. Whatever the basis on which the service is provided, whether it is an in-house pyramid with a bureaucratic structure-I am not using that in the pejorative sense-or whether at some point there is a contractual rather than management relationship, accountability is exactly the same. In many cases when there is a contractual relationship accountability can be even more acute and direct. The Rochdale housing example, which I visited a few months ago, is genuinely not just for employees; tenants will be able to be part-owners as well. I think that is a fabulous model, and increasingly we will see models where both staff and service users are able to be part of the ownership structure.

Mr Foster: All members of the Committee will be very well aware that, even where councils go through a procurement process, perhaps under the right to challenge, they remain responsible for those services. That is where the line of absolute accountability is. That means that those councils, as they develop procurement procedures covering a wider range of service, will need some assistance in doing that. That is why the Government have set up the Commissioning Academy, which will provide support for about 2,000 senior public sector employees over the next few years, and my own Department is providing, free of charge for all those working within local authorities, access to learning materials on commissioning.

Mr Maude: Don is right that the commissioning part is absolutely crucial. My aim is that the Commissioning Academy will get through a lot more than 2,000, because it is the Civil Service, the NHS, local government and the police-a whole lot of areas-where public services are going to be increasingly commissioned rather than line managed. Having public servants-not procurement people but mainstream officials-who are comfortable dealing with and talking to suppliers in a knowledgeable and confident way, and then effectively managing contracts subsequently, is absolutely crucial. It is generally acknowledged that those skills are in deficit in the public sector.

Q320 Bill Esterson: Don, I want to come back briefly to what you said about education. The academies and free schools are in a position to buy from whomever they wish. There are some mutuals and cooperatives providing services. Can I set that against what you said earlier?

Mr Foster: To be absolutely clear, academies and free schools are outside the local authority remit and therefore do not fall under the right to challenge, full stop.

Q321 Bill Esterson: I shall resist the temptation to ask your view of that situation.

Mr Foster: If you wish, I would be more than happy to answer it, but I am entirely in your hands.

Q322 Bill Esterson: The Chair might stop us. Francis, perhaps you would tell us about the evidence to suggest that mutuals deliver improvements in service delivery to local authorities. The Mutuals Taskforce looked at the private sector for comparison, but there did not seem to be a huge amount of evidence about the effect in local authorities, so perhaps you can tell us where that is coming from.

Mr Maude: The explanation is that there has not been very much of it. There is not much real-world data to work from. I recommend-I am sure the Committee has done this-that you talk to people who are running and working in mutuals. For me, it is always an absolutely inspirational experience. You hear public servants who are utterly dedicated and steeped in the public service ethos but who have been deeply frustrated working within the constraints of the in-house, line-managed structure. They all say the same thing. When you ask them what has changed and what is different, they all say, "We can do things; we can see what needs to be done and can just get on and do things, and do things differently."

Q323 Bill Esterson: But can’t that be achieved by improvement in the way the existing organisational structures are set up?

Mr Maude: I am sure that in a perfect world where everyone behaves with the public interest in their mind it could, but often what is needed is for layers of decision taking to be removed. When we published our Civil Service Reform Plan one of the things we identified as a big inhibitor to things moving quickly is the hierarchical nature of the organisation and the behaviour within it where decisions get referred up. If you talk to people in a health service mutual who have previously been employed by the PCT, you will hear them describe how, if you have an idea, it gets put into the system and disappears into a committee. They say it is like dropping a stone down a very deep well; you never hear the splash and get anything back. In a mutual, where the public service that the organisation is to deliver is specified in the contract, if the people in the organisation see a better way of doing things, they can just get on and do it.

On the visit to the mutual that brought together intermediate care with the social care part from the council, while we were going round the ward they said, "Just pop into the storeroom." I thought, "Well, how interesting can that be?" There were lots of racks of bits of kit: blood test sets; hypodermics; and lots of different things. Someone had painstakingly put a sticker on each of the boxes with the unit cost of each of the things: for example, a blood set is £13.20; a hypodermic is whatever. I said, "What’s been the result of this?" and they said, "We use things much more carefully, because when people go to get something they can see that it costs money." I said, "You are a not-for-profit organisation. If you save money, you’re not going to declare a dividend, profit share or anything. Why are you doing it?" They said, "First, in three or four years’ time"-or whatever it was in their case-"we’re going to have to re-compete for the contract, so we need to be able to cut our costs to have the best chance of winning the contract, as well as the best chance of winning business from other purchasers within the health and social care sector. Secondly, every time we save money on that, a bit more money can go into the quality of care." You are quite right that nothing says that could not happen in the old world of it being managed in-house; it is just that it does not in most cases.

Q324 Bill Esterson: But it does in some.

Mr Maude: In some.

Q325 Bill Esterson: The point is: why aren’t we learning from the some and applying it to the many?

Mr Maude: I do not know. You would have to talk to the people running the organisations who would know and give you an answer.

Q326 Bill Esterson: You seem to be saying fairly clearly that mutuals will be able to deliver more efficient services at a reduced cost to the taxpayer. Does that also factor in the cost of set-up and, as you say, after three or four years the re-tendering process?

Mr Maude: The re-tendering process should not particularly cost money, if we start to do procurements in the way we are setting out. The way we have done procurements in this country has been grotesquely bureaucratic and legalistic, but it does not need to be done that way. In France and Germany, procurements are done in half the time and at a quarter of the cost. They are smaller contracts, often of shorter duration. In this country, we have done things in a very clunky way, so re-competing should not be an excessive cost. These things can be done much better in future. There are set-up costs, but the more we do it, the cheaper it will be.

The mutuals support programme has a very modest fund of £10 million for groups that want to set up a mutual. I was adamant at the outset that one thing we would not do is constantly have different groups buying the same advice from the same advisers with repeat fees. We said that where there was business case advice, legal advice, drafting of legal documentation and so on we would buy it once. We own the intellectual property; it is made available to any future group, so we can increasingly do this. There will be lots of different models of how you do a mutual, which is fine; that is how it should be, but increasingly the more we do, the more previous experience, advice, drafting and documentation there will be to draw on so we can do this much more efficiently.

Q327 Bill Esterson: Don, do you think that mutuals are inherently more efficient and will deliver better value for money than local authorities?

Mr Foster: They have the potential to do so; it does not mean that axiomatically they will. Although we have had the cooperative movement for a very long time in this country, the mutual process has not been very widespread. That is why you have already heard from Francis about the £10 million his Department has set aside. My own Department has set aside £11.5 million to provide support and help for those organisations, whether through a mutual approach or many others that can be adopted through the right to challenge, to find out how they can do it, including some modest grant support for the early set-up stages. Equally, both of us very strongly share the view that help is needed on the whole commissioning process by local authorities and others, which is why we are providing support there. It is only when we put these two things together, the sharing of best practice and all of those things, that we will make the sort of progress we want to see, but there are already some good examples of work.

Q328 George Hollingbery: Francis, at the heart of this is a conundrum that I have not quite got my head round. If this is an incredibly efficient and highly productive way of running services, how come there are so few mutuals in the private sector that are successful? Why is it that they do not work there when they are so efficient at doing public services? Are they just overwhelmed by capitalist forces? Is it just that people want to make a profit and the two are not compatible? I am forced to conclude-I would like your comments on this-that this seems to me to be a way of dealing with sclerosis in public structures rather than just a model that produces more efficiency.

Mr Maude: Why not more in the private sector? Increasingly, you will find that in most private equity structures, for example, there will be a significant element of employee ownership. For me, a mutual is not necessarily-it can be, and in most cases so far it has been-something that is 100% owned by the staff. I talked about MyCSP, the pension administration organisation, which is 25% owned by the staff. For me, that is the minimum that stamps mutual on it, because in a company structure that gives the employee benefit trust a kind of negative control; it can stop it being sold over their head and so on. You will find loads of structures in the private sector that have very significant elements of employee ownership. Everyone goes on about John Lewis. John Lewis is John Lewis, but it is a bloody good organisation that delivers very good productivity, lower levels of staff turnover, lower levels of staff absenteeism and all of those things. It is horses for courses.

My point about mutuals in the public service arena is that we used to work in a world where there was a binary choice: you either did it in-house in big monolithic structures or you totally privatised it, or outsourced it, to full red-blooded commercial profit-making entities. My point is that there are ways in between those, which may in lots of circumstances be better, because you have the chance to engage staff in a way that in many places in-house they are not, because it feels remote and bureaucratic and they feel under-empowered. They also do not feel engaged when they are TUPE-ed over into a red-blooded profit-making organisation. There are ways of doing this. Go to Hinchingbrooke Hospital where Circle has taken over the management. Would it have been possible for an organisation owned by private equity investors to run an acute hospital solely for profit? The politics of that would have been really difficult. Because Circle is 50% owned by its staff and has a philosophy of giving a huge amount of power to frontline clinical and other staff, stripping out layers of administration and management, it has absolutely transformed the performance of what was by then a failing hospital.

Q329 Mark Pawsey: I wonder whether I might ask some questions about community engagement because of the element of democratic accountability in the delivery of local authority services, although there are lots of consumers of services who do not wish to be engaged. They simply see themselves as consumers and want the service provided without any fuss and having to consult. Do you think that mutuals and cooperatives are better able to communicate and engage with their communities than the equivalent service provided by a private contractor?

Mr Maude: It is probably more for Don than for me. I do not think it is a rule, but they may well be.

Mr Foster: Perhaps I may place on the record that our Department is looking at a range of ways in which services could be provided; it is not looking just at mutuals as the way services could be delivered. Mutuals are one way, but there are many others: bringing in the voluntary community service; looking at things like tenant management organisations; public/private partnership arrangements; and so on. The reason we are very keen to do that is twofold: it gives opportunities for members of the community to become more involved in the delivery of the services, but it is also about empowering local communities themselves. You are absolutely right. There are some members of the local community who just want the service provided; they do not wish particularly to get involved in it, but it is right that we offer the opportunity for those who do to have a greater say and possibly greater involvement in them. As we develop this model, hopefully we begin to empower more members within the community who will wish to have more of a say. I think that improves accountability as well.

Q330 Mark Pawsey: But if the mutual is simply employee-owned, what is the difference between that and a private contractor? Why should the former provide better community engagement than the latter?

Mr Foster: I would not claim to be the expert on mutuals, and I will hand it back to Francis to some extent. If you want a common-sense answer, it is simply that, if it is done as a mutual, there are more people with direct involvement in the day-to-day running of the organisation. They are members of the local community; members of the local community will be their friends and neighbours, and they will meet them in the pubs, shops and everything else and will talk to them about it. They take on responsibility; they hear more about what the local community is saying; and help to put that into practice in the way they deliver the service, but I am afraid that more than that as a common-sense answer I cannot give.

Q331 Mark Pawsey: But would the mutual be more effective if it included other people in its management structure such as councillors and consumers? Should we extend it further? Where are the limits?

Mr Foster: Certainly, it would not be for my Department to start saying to councils which type of organisation and structure they should prefer. They would go through a procurement process and base it on some of the key fundamentals that we require, one of which is social benefit, which is very important.

Q332 Mark Pawsey: But there must be a preferred model that is the most effective one.

Mr Foster: As to my Department, I can say categorically that there is not. We believe that is down to the local councils who will continue to have responsibility for those services and will be accountable for their delivery. They will look at the various types of organisations and structures that make proposals and put them before them. That will lead to a proper procurement process, and they will make a decision. I do not think it is for us to presume that there is one type of structure that is better than another.

Mr Maude: I strongly support that. When I started on this path two and a half years ago, there was a sense in Whitehall that we needed to have a strategy, models and all of that. I felt that the right thing to do was to try lots of things. We started our Pathfinder programme and deliberately found lots of different kinds of organisations and services, some of which might be for profit-most have chosen to be not for profit-to see what worked and what did not, with all sorts of different approaches, and what the barriers, possibilities and opportunities were. That still feels like the right way to go.

One of the things we are all keen to see is the engagement of people on a voluntary basis as communities and local neighbourhoods in the provision of services that we all want to see happening. By and large, people do not volunteer to support things run by the local council. If you go to a youth centre run by the council generally, not absolutely, you will not see a cluster of volunteers around it. Go to any youth activity, a youth club or whatever, run by a not-for-profit organisation-a local church, voluntary organisation, or whatever it may be-and it will be swarming with volunteers and you will get much more engagement. For example, if you take a youth activity that has been run in-house by the council’s youth service and it turns itself into a mutual, as a number are doing, it then effectively launches itself as a social enterprise.

It will be very interesting to see how this develops. You have the real possibility that that will start to attract volunteers and get community engagement, because it will feel different; it will feel that it belongs much more to the community, rather than something that is being done by them over in the town hall. I am not aware of an evidence base for this at the moment, but it is a completely observable fact that, where youth services are run by the council and by voluntary organisations, generally the former do not attract volunteers and the latter do.

Q333 Mark Pawsey: This Committee saw exactly that procedure when it visited Torbay in respect of leisure provision as I recall. You spoke about good practice. Can I ask about the mutual support programme? How has that worked, and what input has CLG had in the mutual support programme?

Mr Maude: It operates on a very small scale; it is a small fund. I operate it extremely meanly. I chair a small board with some outside engagement. Some of the projects we support are local government ones, and CLG feeds into that so we consult them along the way, but we are at pains to ensure that we are not constantly paying the same advisers to produce the same advice to different bits of the public sector. Doing it centrally is essential.

Q334 Bob Blackman: What will the public see when mutuals or cooperatives are running a service compared with what they see at the moment? Will there be any difference?

Mr Maude: Absolutely. Go and visit particularly the ones in the health sector and talk to patients. When the staff become re-motivated they feel an enhanced sense of pride and ownership, which we should not underestimate. My big insight into this was my visit to Central Surrey Health probably two years ago. That was one of the first health service mutuals delivering services, running four community hospitals as well as primary health care in the community. All the staff I talked to spoke about being owners. I said, "Technically, you’re owners but you don’t have an economic or financial interest. You do not have shares you can sell; you do not have a profit share, so you’re not owners in the sense of being commercial shareholders." They said, "No, but we feel like owners and we can hold our management to account." That is a powerful change in the internal dynamics of an organisation.

Q335 Bob Blackman: That is internal to the organisation, but how did that manifest itself to the public? What do they see as a benefit?

Mr Maude: The short way I would put it is that happy and more motivated staff treat service users better.

Q336 Bob Blackman: One of the risks with anything associated with this, whether it is mutuals, cooperatives or outsourcing, is that you fragment services. You have contracts, service-level agreements or whatever, that lay out exactly what is going to be provided, but equally that could damage flexibility. How are local authorities going to manage this process so they gain the benefits of better services but do not lose the flexibility of being able to instruct staff to do things in a different way?

Mr Foster: Perhaps I may draw the Committee’s attention to the very lengthy debate on this very issue that took place during the passage of the Localism Bill and the various mechanisms put in place in relation to the procurement procedures to be followed by councils if the right to challenge was exercised by individuals? One thing that was made very clear was that, if the right to challenge applied to a very small element of the service that could have the very impact you are describing, the local authority would have the ability to reject the bid and not even go forward with a procurement exercise. One of the reasons we have the very clear public value tests within it is to ensure just that.

Q337 Bob Blackman: But once a contract is in place, which might be for three, four or five years, and circumstances change and there is a requirement to change the specification, what happens then?

Mr Foster: That can happen at present, and it already does. It must be remembered that local authorities for a very long time have had the ability to find ways of delivering their services other than by direct provision. Many people will know that, for example, going back quite a long way, compulsory competitive tendering had a number of pitfalls associated with it, and a lot of lessons have been learned since those very early days that now provide the protections that are in place. What we have done through the Localism Bill is to go one step further, not in any way to prevent authorities doing what they can already do, and many have, but to introduce the right to challenge to enable community-based bodies, whether they are mutuals, cooperatives or any other form of organisation, to come forward with proposals and, at the same time, provide protection for local authorities to be able to say no, if in doing so it is within reason.

Mr Maude: I totally agree with what Don has said. All contracting authorities have always had the ability to change the terms of contract by agreement. Your second point was: what happens if the local authority wants to change the way something is done? Increasingly, when we contract for services, we should not specify how things are done. We should be specifying the what, not the how; that is, the outcome, not the process. When I was a Treasury Minister 20 years ago I published a White Paper on market testing. I put into that White Paper a photograph we discovered. It was of a pile of paper, literally the height of his chair, that was the tender document for a cleaning contract in a not very big NHS hospital. Why was it so detailed? What was being specified was exactly how the cleaning was being done at the moment, with no scope for the new provider to provide a different way of doing it. What you want to do when you contract for services is allow the most innovative, creative organisations in the market, which may be private sector, mutuals, social enterprises, or whatever they may be, to provide different ways of doing it. What you want is the outcome, and we should be much less prescriptive about the process by which the outcome is delivered.

Mr Foster: I hope the Committee will recall the Public Services (Social Value) Act earlier this year, which made a requirement that social value should be one of the tests in procurement. That helps to provide part of the answer to your question.

Q338 Bob Blackman: What is the role of councillors in this? One of the frustrations that councillors up and down the country have expressed about external organisations with contracts to deliver services, whether they are mutuals, cooperatives or whatever, is that residents complain to them. Councillors then get on to the officer cadre. The officer cadre say, "Oh, we’ve got a contract." You cannot speak to the end supplier, and councillors end up very frustrated. What is the role of councillors in this brave new world?

Mr Foster: The role of councillors is absolutely crucial, and it has been underestimated for far too long. One of the reasons my Department is very keen on localism and decentralisation is to restore that responsibility to local councils so people know who to blame but equally who to praise for services that are delivered at a local level. I described earlier-we could go into more detail-the responsibilities of local councils in terms of the accountability route. Earlier this year, my Department published a very detailed document about the responsibilities and accountability route. That now makes very clear that people know what councillors are responsible for in the delivery of services. The second part that is crucially important is that the role of the councillor, with greater responsibility and accountability, is somewhat different and increasingly becomes one of the procurement exercise and the monitoring of the delivery of those services.

Q339 Bob Blackman: Do you draw a distinction between executive and nonexecutive councillors in that responsibility?

Mr Foster: I am sorry to draw attention again to things we have done in terms of the devolution of responsibility to councils. We are saying increasingly that we do not wish to be involved in telling councils how to organise themselves. It is not necessarily the case that there will be executive councils anyway, because those that wish to can now revert to the committee structure. It is entirely up to them to do so. Those councils that do not revert to the committee structure but retain executive council responsibility will be defined within the remit of those councillors in executive positions decided by the council, not central Government. There is already a range of different models in operation. I have my own personal views as to the structures I would like. I was not a great fan of dictating to local authorities that they had to move to that executive structure because of concerns about the role of what became back-bench councillors, but that is purely a personal view. I am delighted that the coalition Government have agreed that councils can now decide what they want to do.

Q340 James Morris: I want to probe a little further the community right to challenge. My understanding of the original idea was that it would be a radical challenge to the monopoly power of local government. In order to empower local community organisations there will be real freedoms for those community organisations to start breaking up the monopoly control of local government. It seems to me that what we have in the Localism Act is a minute step in that direction, the unintended consequence of which might be to reinforce the power of local government control. You say that 400 organisations have expressed interest. I would be very surprised if more than a handful broke through in the context of the current provisions of the Localism act.

Mr Foster: I should just make clear that the 400 are related to various rights provided. If you want a specific figure in terms of the right to challenge-my officials will correct me if I have got this wrong in a letter-my understanding is that by the end of July we had just under 300 specific inquiries from groups that collectively involved over 4,000 people expressing interest in this. Therefore, the 400 did not apply specifically to that. I would be misleading the Committee if I said we know what the implications will be. We are providing an opportunity. We recognise that it will take time to provide the support to communities themselves to feel powerful enough to come forward with bids. That will take time. This is new.

Q341 James Morris: I recognise it is the early stages, but if you look at the number of checks and balances, all that the Localism Act provides is the ability for a procurement process to be triggered under the direct control of the local authority, the practical effect of which will probably be to rule out a lot of small and medium-sized community organisations. Do you think that potentially that will encourage precisely the opposite type of behaviour to the one intended?

Mr Foster: That is certainly not our intention. One of the reasons we set up the system in the way we have is to ensure that local authorities cannot, without good cause, reject bids coming forward and moving to the procurement process. There are checks and balances on both sides, but we are in a situation where we have to empower councils and councillors to feel slightly more relaxed about what is going to happen. We also have to provide support and encouragement to community organisations to feel confident enough to come forward. That is why, through our work with the Local Government Association, we are providing support for councils to help them through this process.

We are providing support separately through Francis’s Department in terms of commissioning and some of the things we are doing, and we are providing support for community groups, because not only do we want to provide better services hopefully to the communities but also empower them through this process. It is very early days, and I am sure the Committee will understand that. Perhaps I may say, as all Ministers do on these occasions, that we will constantly keep under review the working of these new proposals as they develop and be prepared to reconsider aspects of them if the need arises.

Q342 Chair: That is a very well written piece of civil service-speak.

Mr Foster: I have to tell you it did not say it anywhere, but I am prepared to say it none the less.

Q343 Heidi Alexander: I would like to ask both of you what you think should happen when publicly owned assets-it might be a library or youth centre-are transferred to a mutual and there is a risk of something else happening to that asset after the transfer has taken place, such as it being sold on to the private sector. Do you think there should be a contractual lock-in in place to prevent that from happening?

Mr Maude: There generally will be. What happens to physical assets is one of the issues that continually arises. There will be anxiety about assets disappearing from the public. Equally, there will be-I have come across this with existing mutuals-deep frustration where they cannot optimise the use of the assets because they do not own them. Some of the mutuals running community hospitals-there are now quite a lot-express deep frustration that they cannot get out of one property and use the proceeds to develop something different, so they are locked into what may be an outmoded model. There will always be a built-in tension and anxiety not to allow asset stripping, but equally that may prevent an innovative, entrepreneurial mutual from making best use of the value in those assets.

Q344 Heidi Alexander: On which side of that tension do you come down? You recognise that the tension exists.

Mr Maude: It will be horses for courses. I suspect it will always be the case that there is a desire to have an asset lock so it cannot be exercised at whim. I cannot remember the exact details of the division of physical assets under the new NHS PropCo, but there will be a healthy desire by entrepreneurial deliverers of services in mutuals or otherwise to use the value in those assets to the best effect for the public, and with things like libraries there will be an equally strong desire for a community lock on the use of the assets.

Q345 Heidi Alexander: Do you think there should be a mechanism in place if an asset or service is transferred to a mutual and it all goes horribly wrong? Do you think there should be a process for, say, a local authority to bring that back in-house, if you like?

Mr Foster: If you have a service that goes horribly wrong, in those circumstances the contractual obligations are not being met by the person who was given that contract. This is part of the procurement process. It was one of the problems that existed in the very early days of compulsory competitive tendering. You are absolutely right to describe that as a problem that existed in the past, but the new procurement procedures and the advice and support we have hopefully lead to a very clear understanding of what happens in those circumstances. The contract will be broken, and the local authority will then have the power to look at how to continue to provide the services. In relation to assets, the right to bid that my Department introduced in the Localism Act refers not only to assets owned by a local authority, for example, but community assets that may be in the hands of other organisations.

Q346 Simon Danczuk: I am worried that we are at risk of simply having a polite conversation about mutuals and cooperatives at this moment.

Mr Maude: We are permitted to have polite conversations. We must not feel embarrassed about it.

Q347 Simon Danczuk: For all the rhetoric, two and a half years into your Government there is very little to show for what you propose. Very few mutuals and cooperatives are taking up the cudgels of delivering services. If you take local government as an example, it spends £62 billion annually on third-party payments. Don, you said that your Department was committing £11.5 million towards supporting mutuals coming forward. Is it not fair to say that in reality you are just playing at this?

Mr Foster: If I may say as politely as I can, you are not acknowledging that until now we have been in a situation where local councillors have had the ability to look at these ways of provision. What we have now added under the Localism Act is the opportunity for those interested in delivering the services to have the right to challenge to enable them to seek to provide those services. That changes the whole dynamic of the situation. That is where I think we will see big changes, but it will take a little time, as changes are required by local government, as the procurers of services, and by community and other types of organisations feeling confident enough to come forward.

I do not think that is playing at it at all. You are right that £62 billion is a huge sum of money that is available to local authorities for the provision of services, purchasing of items and so on, and looking at other ways of delivering them than the traditional way of doing it is something that local government is increasingly up for, if it is right for a particular service to be delivered in another way. That is where the really exciting challenge comes.

Q348 Simon Danczuk: But £11.5 million is not a lot to help this idea, is it? We want some entrepreneurial spirit and dynamism from you guys in terms of pushing this forward, don’t we?

Mr Foster: With respect, the real change that has come about through the Localism Act is the ability for organisations to come together and do things. We already have evidence, in a very short period of time, of a number of organisations, admittedly in their hundreds, expressing interest, but there has not been much publicity about this and the opportunities. There are not very many examples of practice that we can share yet. It will take time, but I am absolutely confident that this will start a significant increase in the number of different ways in which services are provided. Many local authorities are already exploring different ways: public/private partnerships, management organisations, structures and so on. There is already a start there, and I think we will see much more of it.

Mr Maude: It is a fair point. Of the total addressable activity, only a very small amount has yet been done. We are at the very early stages; we are in the foothills. A very modest start was made under the last Government just in the health and social care sector. When we came in, there were eight public service mutuals, as far as we were aware. That has multiplied, and more is happening all the time. There is a huge amount of interest. Our Mutuals Information Service is available for a group that is interested; it can get in touch and obtain some basic information. If it develops, it can come to the Mutuals Support Programme for much more tangible help.

There are lots of inquiries. 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. The second thing is the anxiety: "Is there a job for me if these people go?" There is massive resistance. We have come across cases of people being threatened with heavy-handed action by middle and senior managers who have deterred entrepreneurial leaders and groups from going ahead with it.

Q349 Simon Danczuk: In terms of Big Society Capital, what influence do government have on that? Is that an opportunity or resource for people to draw upon?

Mr Maude: Yes, it is. What influence do we have? Very deliberately none, because we set it up as an organisation independent of Government. A trust sits over the top that preserves its social mission, but its operation is very deliberately independent of Government. It exists precisely to give support, start-up and expansion capital for social enterprises, which will undoubtedly include public service mutuals.

Q350 Bill Esterson: You commented on the expertise of line managers in becoming contract managers. What evidence or analysis have you done of the ability of people to transfer? You said it was relatively easy to pick up. I have come across examples where perhaps that is not the case. How much in-depth study have you made of that point?

Mr Maude: Across the whole public sector, not all that much; within the Civil Service, which is my direct responsibility, we do not know exactly, because there has never been a systematic skills audit within the service. One of the things we have said in the Civil Service Reform Plan is that we will set out for the first time ever a cross-Government capabilities plan for the whole service. It has never been done before, but one thing we absolutely know anecdotally as much as anything else is there is a deficit of commercial skills, which includes contract management skills.

Q351 Bill Esterson: In the private sector often one of the big contributors to why businesses fail is lack of financial acumen, is it not?

Mr Maude: Yes, absolutely. There are two sides to it: one is managing the contract on the contracting authority side; the other is managing the contractor in terms of the business. There is nothing that says that someone who is a good line manager is incapable of becoming a good contract manager. It will not always be the case. I think the other point you would make, which is completely correct, is that the bit most would-be mutuals miss is: do they know how to run a business? The answer is that many of them do not, but they can get those skills, and part of what the Mutuals Support Programme is about is buying in the support to give them those skills.

Mr Foster: I am slightly more optimistic about the ability of many of the people who currently work in local government to make the transition. If I could just draw the Committee’s attention to a service such as building control, that used to be run solely in-house by the local authority. The Government then allowed competition. It was very difficult for the first two or three years. If you talk to people working in building control, who are now in competition with outside organisations, they are enjoying their job far more. They have raised their game; they enjoy the challenge. I have talked to many of them, and I think they have the capability to do it with help and support.

Q352 Heidi Alexander: Have you had any discussions with Ministers in the Treasury about the possibility of amending tax law to provide some relief to mutuals and cooperative delivery organisations?

Mr Maude: We have raised issues.

Q353 Heidi Alexander: Have you had discussions, or not?

Mr Maude: Treasury Ministers say, "That’s a matter for the Chancellor and the Budget," in time-honoured fashion, as I would have done as a Treasury Minister.

Q354 Heidi Alexander: You have not had any joy yet.

Mr Maude: No. There are issues being raised in the wider context of employee ownership in the economy generally.

Q355 Heidi Alexander: Do you think it is worth exploring, as it could have some benefit in promoting this way of service delivery?

Mr Maude: It could do, but I do not think it is the be all and end all. Those are not the barriers; people are not deterred from setting up a mutual because of the tax treatment. It is much more cultural and behavioural.

Q356 Heidi Alexander: But it might add an extra incentive.

Mr Maude: It might, but I would not say that changes would transform the arena.

Q357 Heidi Alexander: If there were to be changes in tax relief, do you think it might be necessary to define mutuals and cooperatives in statute?

Mr Maude: It might, and that is one of the reasons I would be a little sceptical about it. Once you start to try to define these things you get all sorts of artificial distinctions. You can recognise and describe a mutual much more easily than you can define it.

Q358 Heather Wheeler: You have talked once or twice already about procurement issues. We have also talked about the right to challenge. Quite often, when the right to challenge comes in it is probably from a commercial organisation. In the past, they have been so much more geared up and ready to take on the issue. Is there any area where you might relax rules in procurement for mutuals to help them jump in at that point on a right to challenge?

Mr Maude: As far as it concerns mutuals, absolutely that. One of the barriers to creating a mutual is that, if it is above the 100,000 threshold, or whatever it is, it becomes subject to the Official Journal of the European Union (OJEU) rules. If it is in a market that is mature enough that the law currently says you have to go through a procurement, that could be a real disincentive. You can have all the grief of setting up a mutual and then not win the business. That is why we have made a proposal to the European Commission. A review is being carried out. Changes to the Public Procurement Directive are being debated in the Parliament at the moment. Generally, the changes are beneficial; they are about simplifying and streamlining, which is good.

When the Commission was consulting we suggested a change that would allow an exemption for employee-led mutuals to spin themselves out on a negotiated basis, with the proviso that the contract would then need to be completed in three years’ time. I think of it as a sort of slipway, so you can easily go out, have a contract and give the new entity a chance to develop its skills and get established, and then compete on a much more even basis in three years’ time. When I talked to Commissioner Barnier about it he was very sympathetic. He completely understood the point that if you do this you will increase the competitive marketplace very dramatically, because you make it a lot easier to have a lot more new enterprises in the market. His officials, though, took a much more purist approach to market theory and competition and felt that somehow it would dilute the pure milk of the free market. I think that a pragmatic approach gets you the best of both worlds. You get new enterprises into the market but give them a chance to develop their capability.

Heather Wheeler: You have touched on my favourite subject: Europe. Thank you very much for that answer.

Q359 Chair: We had some evidence earlier that the Italian Government already has an arrangement in place to give additional support or favour to mutuals being established in that way. Has that been mentioned at all?

Mr Maude: I am not aware of that. I am sure it is wholly compliant with the regulations, but I would be interested to look at it. The culture around procurement is very legalistic and rigid here. In the context of central Government I heard about a Government Department doing a procurement that affected my Department. Officials said, "We’re not allowed to exercise judgment in choosing which suppliers to use." I thought that, first, it was not true and, secondly, insane. We need to think about doing things very differently.

We will have a look at the Italian example. Thank you for that; it is very interesting. You need to build into the criteria at the outset a preference for employee involvement. That is a way of approaching this, which I think we should be more willing to do. This absolutely needs the contracting body, local authority or whatever it is, to want to do this. I would love to see more local authorities doing what, for example, Oldham Council is doing, which is really embracing the spirit of this approach.

Q360 Chair: But this would be only for employee mutuals, not service user mutuals.

Mr Maude: I would not rule out the latter. We will look at it all; it is very interesting territory.

Q361 Bob Blackman: Francis, you mentioned the cultural barriers preventing people from wanting to do this. What do you think those barriers are? To give you an example, this weekend, I was looking at the fact that the local authority covering my constituency operates 700 individual services. If you multiply that by 500 councils up and down the country, it gives you the scale of the services out there that potentially could come into this. What is stopping them?

Mr Maude: I would guess that it is a trade-off between job satisfaction and security. You take yourself out of being employed in the public sector, with all the security that certainly used to come with that, and you are on a contract. You have to deliver on the contract; if you do not, or the contract is breached, you will lose it. Then it has to be competed. Interestingly, when you ask people inside mutuals how it is different, they all say, "Well, we’re working harder," but they also say, "We’re enjoying it more; it’s more fulfilling and rewarding, because we can see what needs to be done and do it." It is more freedom and people feeling more empowered and going home at the end of the day feeling better about themselves and what they do.

Q362 Bob Blackman: Don, what do you think local authorities should do to encourage employees to consider taking on mutuals?

Mr Foster: I have already seen a number of examples of local authorities that have worked with their staff to do this. In those cases that I know of, largely they have come from senior members of staff who have got a real excitement and belief they can do something differently and better for the people they seek to serve, and so on. Unfortunately, we do not yet have an attitude among lots of staff that they can do it. Part of the way forward is that, as more examples come forward, more people will say they wish to do it.

On the other side, my Secretary of State is keen to provide a nudge to local councils in terms of the way they rethink the procurement process, and perhaps reduce some of the impositions placed within those contracts, so that those who are even thinking of forming a mutual, or another way of providing services, will be less likely to be put off. To that end, the Secretary of State intends to produce in a very short time a myth-busting document to make very clear that it is not as difficult as you might think it is. Certainly, when it is available we will be delighted to provide it to the Committee.

Q363 Bob Blackman: Francis, the Mutuals Support Programme provides advice and help for employees who want to spin out of a local authority or public body, but there does not seem to be a similar type of thing for a community organisation that wants to take over a local service. To give you an example, in the borough where I live a number of libraries have been closed. The local authority has no interest whatsoever in the community being able to take over those services. With some help and advice, they could probably set up an organisation that would run the libraries far better, at much lower cost and preserve a community facility, but there is no help for them. Where do they go?

Mr Maude: It is more a matter for Don than me, but it is a good question.

Mr Foster: Clearly, the right to bid is not the sole answer to the question, but it has been introduced for those sets of circumstances. As I said earlier, the right to bid applies to community assets, or assets of community value, that are not necessarily local authority-owned at the moment, but it can equally apply to such assets. We have seen some fantastic examples of the way it can be done. You only have to look at the large number of village shops that have been taken over and are being run by local communities to see we can already point to very good examples of what you are describing.

Q364 Bob Blackman: There are some great services, but what I am talking about is that effectively this is a business, although it may be not for profit. People need capacity; they need help and advice on where to go. Equally, when the local authority says, "Sorry, we’re not interested in you doing it; we want to use the asset for something else or sell it off," people need specific help and advice very quickly. It is going on in a range of local authorities.

Mr Foster: We have established the Asset Transfer Unit, which provides help and advice. It has already helped 1,500 asset transfers. We also provide a large sum of money. £19 million has been set aside by my Department to provide the very support and help you are requesting in terms of direct grants, an answerphone advice service, links to peer sector support systems and so on. We have systems in place to help with that, and we now have the new legislation that makes it easier for people to do it, if they want to, and the support mechanism is already in place.

Q365 Heidi Alexander: But the regulations in respect of the register of community assets have not even gone through yet. What is taking so long?

Mr Foster: They will hopefully be resolved by Wednesday, subject to a successful outcome in a statutory instrument committee. I am afraid I cannot answer why it has taken that long, but I can assure you that I have been in post for only three days, and within six days we will have got the legislation through. I hope that is some progress.

Q366 Chair: Is the mutuals advice service just for employee-owned mutuals?

Mr Maude: The Mutuals Support Programme is for employee-led and owned mutuals, but that does not exclude ones that may, like the Rochdale housing one, include tenants or other stakeholders.

Q367 Chair: The Mutuals Taskforce has produced its report. We are awaiting the Government’s response. Can you tell us at this stage when the response might be available, and maybe a little about its likely nature? In looking at the response, given that the Mutuals Taskforce is very much set up to deal with the spin-offs of employee-owned mutuals, will the Government also be looking to shape their longer-term approach to mutuals, looking at other types of organisations like Rochdale or indeed community-owned mutuals?

Mr Maude: I think we can. I am not sure we are planning to do it at the moment, but it is something I am very happy to talk to Don and Eric about. As to the response to the recommendations of the Mutuals Taskforce, the standard answer in these circumstances is: shortly; it is of indeterminate length. When Julian Le Grand published the report, which I thought was excellent, I said there were some suggestions directed specifically to the Treasury rather than me, to which obviously I am not empowered to respond. The piece that it produced at the end of last year on evidence for productivity improvements coming from mutuals was a fabulous piece of work.

Q368 Chair: The issue of accountability came up earlier in our discussions. To some extent, the response was around the model of the employee-owned spin-off where the service that is going to be done is commissioned by the authority, and the authority determines the nature and level of the service and is therefore accountable. When we start moving into more community-owned and empowered ventures, particularly if the community has a real role in shaping the nature of the service, where some councils are starting to move forward quite a long way, does that change the whole issue of accountability, where the commissioning of services itself might to some extent be determined by the people who will be involved in the organisation running it?

Mr Maude: It is more for Don than me, but my two reflections on it would be: first, in those circumstances, there are two kinds of accountability. One is financial. Is the money being spent appropriately? Some kind of auditing, not heavy-handed, will be necessary to determine what is going on and what the money is meant to be spent on. That will be important. Secondly, you want accountability for the service to be to the people who are using it. They will generally express themselves fairly vigorously if they do not like what they are getting.

Mr Foster: I am sure the Committee will be aware that the Permanent Secretary of my Department at the end of last year produced a detailed document about accountability in public services generally, and made a number of key recommendations covering issues to do with regularity, propriety, value for money and other things. Those were turned into the document, Accountability System Statement for Local Government, which I recall from reading my briefing note-which has disappeared-was published in March this year. We would be very happy to provide a copy of that statement to the Committee, which I think would answer most of your questions, and obviously you can come back if it does not. We will send it to you.

Q369 Chair: The point I was simply getting at is that, in having a proper commissioning and accountability process, you do not want to squeeze out of the system the sorts of things we saw in the Supporting People programme, where ideas came up from the organisation that was going to provide the service about what the service should be. There was a real dynamic to that.

Mr Foster: If it is helpful, we have a total of 12 pilot programmes organised by the Department to test different models of communities working with local councils in codesigning service delivery patterns so, rather than taking over the service, looking at the nature of the service. Those are under way, and we will evaluate them. We will make sure that copies of the reports and the evaluations are provided to the Committee in due course.

Chair: Thank you very much, Ministers, for coming this afternoon. Francis, we got you away on time for your next appointment.

[1] Note by witness: This figure relates to total public sector spending on contracts with voluntary sector organisation which stood at £10.9 billion in 2009/10 (Source: NCVO Almanac)

Prepared 6th December 2012