The government wants public sector workers to come together and set up their own companies, embarking on a new life as contractors. Joshua Chambers looks at the obstacles in their way, and how they can be overcome.
While in the 1960s the ‘permissive society’ passed most Conservatives by, a revolutionary fervour is now gripping the Tories and the coalition government is working hard to spread a communal ethos throughout the public sector. The state is encouraging its employees to set up mutuals – organisations that are owned and run by their employees – which will then provide public services.
The cooperative movement – which gave rise to mutualism – formed an important part of the development of organised labour in the 1800s; but these days the concept is not seen as a radical one. The previous government put measures in place to encourage units of the NHS to set up as mutuals, and foundation trust hospitals are independently run with board members elected by employees. The scope of those initiatives is dwarfed, however, by the aims of the coalition, which wants to see such companies set up across the public sector. From nature reserves to civil service HR departments, and from Lambeth learning disability teams to Cumbrian agricultural colleges, the state’s delivery arms could wither away to leave a set of commissioning bodies and a panoply of new contractors bidding for service delivery work.
The Cabinet Office piloted its approach last year by establishing 12 ‘pathfinder mutuals’, mentored by people in the field. A further nine were announced last week, along with a new list of mentors and a specialist ‘mutuals taskforce’ to police the process (see box). Soon a white paper will be published on opening up public services; this, among other things, will clarify the Cabinet Office’s approach to the mutuals and set out how the schemes will work.
CSWhas assessed the biggest challenges faced by public sector mutuals, and looked at how to overcome them. The hurdles begin with the tricky task of building support for the mutual and attracting staff, and continue across the finishing line to the point when new mutuals are competing in the marketplace.
Structure strictures
Setting up a mutual can be burdensome for those involved, so it’s imperative that the testing and transition processes are as simple as possible. In accordance with the Cabinet Office’s often-cited ‘tight-loose’ approach, departments are taking control of the evaluation and establishment of mutuals. Cabinet Office minister Francis Maude recently told Civil Service World that the centre will restrict itself to “keeping an eye on [departments] and being a point of reference so that if concerns arise, they can be referred to us.” Consequently, approval procedures will vary between departments.
They must not, however, be so onerous as to squash sensible bids: Maude’s new ‘right to provide’ insists that departments must accept well-founded plans to establish mutuals. Those in charge of the process will have to create procedures that are tight enough to protect state assets and ensure that mutuals have a good chance of survival, but not so tight that interested managers are deterred or buried in paperwork. Lance Gardner, the director of care at mutual North-East Lincolnshire Care Trust Plus and an adviser to Maude on the mutuals programme, told CSW last year that civil servants “tend to over-bureaucratise and micro-manage the process. For example, the insurance requirements are prohibitive; massive.” Gardner mentored another mutual bidder recently whose business plan came to 147 pages.
Approval processes will always be difficult because an immense amount of thought and planning is required when establishing a mutual. For a start, the legal structure must be determined – precisely how will it be owned by its employees? True mutuals must fit a specific legal definition; although the Cabinet Office uses the term “in a sociological context” rather than the strict sense, says Stephen Lloyd, a senior partner at solicitors Baites Wells and Braithwaites. Determining the structure of a new organisation is a big challenge for public sector workers, and one which takes time and requires support. Lloyd suggests that those interested in establishing a mutual will need to set money aside for legal advice.
Indeed, Maude has already made clear that mutuals should seek third party partners that can help them improve their management skills and market knowledge as well as injecting cash. He told CSWlast month that he will encourage mutuals to “bring in an outside partner who could perhaps bring in additional management bandwidth or expertise or technology, or perhaps just development capital. That’s likely to strengthen them in any subsequent competition.”
In part, this kind of support will fill a gap filled under Labour by a dedicated mentoring agency. The last government wanted to encourage healthcare mutualisation, with foundation trusts becoming hybrid mutuals – whose assets remained within the NHS, while the employees took over their management. Peter Hunt, an adviser on that initiative and now chief executive of mutuals and co-operatives advisory group Mutuo, explains that there were “strict guidelines in place and strong support, provided not just by the government but also by an independent regulator: Monitor.” This meant that the assets of the NHS were well-protected, he says, but also provided managers with help as they set up their organisations.
Hunt believes it would be impractical for the coalition to provide this level of support to the new waves of mutuals. “The ambitions of the Cabinet Office are much wider,” he says. “It would be quite an undertaking to provide the same level of framework and support as provided to foundation trusts.” Deborah Rozansky, who is advising the Cabinet Office on its current mutuals programme, agrees that this would be unaffordable for central government.
Instead, the government is supporting its tranches of pathfinder mutuals by teaming them up with mentors from relevant organisations, while its mutuals taskforce will police applications processes and examine any complaints about them. There is also a hotline in place for curious public sector workers, manned by mutuals representative groups Co-operatives UK, the Employee Ownership Association (EOA), and public sector advisory body Local Partnerships. EOA policy director Carole Leslie says most callers need help with setting up a business plan, assessing the assets of the new company, or engaging stakeholders such as trade unions.
More support may have to be provided as the scheme expands. The mentor Rozansky warns that she has “met a lot of people who are considering making this transition and they have realised that it is very, very challenging and requires a lot of personal resilience and skills”. Her employer, the Office of Public Management, recently wrote a study calledShared Ownership in Practice– and this notes that “the time required to undertake a complex process has to be recognised… interviewees highlighted how vital it was to have at least 18 months to make the transition.” It’s important that departments don’t rush the process of mutualisation, she believes; certainly, it would be unreasonable for them to count on early efficiency savings resulting from the programme.
The task facing public sector workers developing a mutuals bid will be made still tougher by the fact that they’ll still be holding down day jobs – many of which are becoming tougher in this period of rapid change and headcount reductions. Rozansky argues that employees’ departments should take their extra responsibilities into account in setting their workloads – though the current pressures on the public sector may make this difficult.
Acumen obstacles
On completion of the bid process, mutuals often discover that they lack the right skills to compete with businesses in the contracts market. Hunt explains that a lack of finance skills in particular was discovered in the foundation hospitals initiatives. “Many trusts had to recruit new finance directors with different business skills from those who’d been operating in NHS trusts,” he says. While traditional NHS finance workers understand accountancy and budget management, mutuals need people with experience of managing a balance sheet who, he says, “take a longer-term view of profitability and investment.” Other skills may also be lacking – especially in managing the legal and governance issues presented by a mutual.
Therefore, Hunt argues that the government should consider the “key disciplines that will be common in each mutual,” provide relevant training, and make “funding available to assist public sector managers to make this transition. It’s very much about facilitating learning opportunities.” Last November, Maude announced a £10m fund to help public sector workers establishing mutuals to “reach investment readiness”. How this is spent has yet to be determined, but a Cabinet Office spokesman said it could go on training.
Expertise and training can also come from other organisations which are further along in the process. Ben Willmott advises on HR issues at the Chartered Institute of Personnel and Development (CIPD), and calls for “co-ordinated start-up training where you get mutuals from different regions and different parts of the local economy working together and sharing best practice from experience – creating networking hubs to support the process.” Such hubs of expertise would certainly fit with the coalition’s localism ideology.
Pension problems
Mutuals, by definition, require the active support of their workforce – and public sector workers may be reluctant to transfer into a mutual if they’ll see a fall in employee benefits. Rozansky believes these issues can potentially be a “deal breaker” – especially in the case of pensions.
Under Labour’s healthcare mutualisation policy, the Department of Health retained the pensions liabilities of many mutualised workers; in some cases, it also continues to accept new employees into NHS pensions. This is not the case across the board, however: the EOA’s Leslie says the Hull City Healthcare Partnership has had to set up its own separate pension scheme. Maude has been cautious on the question of whether the public sector will take on the burden of mutuals’ pensions plans, arguing that he’s open-minded but any solution must fit into wider public sector pensions reform. However, CSWhas received indications from a Cabinet Office spokesman that the public sector will be unlikely to take on liabilities for the pensions of new mutual employees.
Charles Cotton is a pensions expert at CIPD, and believes that it would be “very complicated and costly” for mutuals to set up the same type of ‘defined benefit’ pension schemes as found in the public sector, where a proportion of the determined pensionable salary is paid out every year on retirement. Cotton suggests mutuals look at flexible benefit packages, where staff receive extra money that can be put into a pension scheme or other benefits such as private healthcare.
While this may not be as appealing to staff as retaining a public sector pension, Hunt says that public pensions are anyway likely to be reduced, reducing the deterrent force of losing them. “I think the likelihood of that being a reason not to change becomes less significant as they become reformed anyway,” he says. Further, he thinks that mutuals can be more appealing employers than the public sector, and provide greater freedoms and prospects for their employees. If a mutual becomes profitable, lower pensions may be offset by higher salaries, he argues, or dividends may be paid – as at mutual retailer John Lewis.
Competition conundrums
While establishing a mutual is tricky enough, the next stage may be tougher still: the policy is designed to produce efficiencies by driving down service costs and, where possible, pitching mutuals into competition for delivery contracts. They will therefore face commercial pressures absent within the public sector.
In some cases, new mutuals will be spared early competition because no marketplace yet exists for their role: as Maude told CSWrecently, “in a lot of these areas there will not be a well-developed market for providing these services.” This will provide a reprieve for mutuals and allow them to get established before full competition bites.
However, as markets develop mutuals are likely to find themselves competing not only against their peers, but also well-established contractors. At that stage, the value of the government’s work to reform tendering processes will really be tested. Rozansky mentors a social enterprise in Leicester called Inclusion Healthcare, and explains that “they are competing for contracts and find it difficult because commissioners haven’t accommodated the new kid on the block… commissioners really need to think about how they’re going to commission from new organisations which don’t have a track record or resources.”
Issues faced by most firms may also come as a surprise to managers cushioned by the public sector: taxation such as VAT can be a big challenge, according to the OPM’s report into mutualisation. Some healthcare mutuals taking part in Labour’s initiative, it notes, were only able to survive thanks to the government’s flexibility on tax rates: community leisure centres in North Dorset, for example, agreed “a manageable VAT ratio on goods and services” with HMRC. The report adds that “in the case of Stockport Managed Care, the issue of VAT is so significant that funds have to be channelled through the PCT in order to make the business viable.” With public finances stretched, it is hard to envisage the government taking on the tax burden for new mutuals.
Many civil service mutuals will, most likely, enter an already thriving commercial market – in care services or outsourced HR functions, for example. Maude is resolute: they will receive no extra favours. “There will be a point at which they’re obliged to compete – and we’d want that: there will be no sweetheart deals here,” he told CSW. Hunt warns that consequently “a large number of public sector mutuals may be unable to compete in the marketplace, mainly because they are being squeezed by large commercial operators who are able to loss-lead.”
In the short term, government would benefit from such loss-leading, which would cut the cost of services. In the long term, however, it could lead a situation where public sector expertise and assets, passed to mutuals, are hoovered-up by larger competitors – which then raise their prices. The director of the Oxford University Centre for Mutual and Employee-Owned Business, Professor Jonathan Michie, says that mutuals must be careful in forming partnerships with commercial organisations, ensuring that there are legal mechanisms in place to “prevent large multinationals coming for public assets down the road”. He notes that in the 1980s, bus companies were set up with employee ownership models – but quickly transferred into private hands. “That’s got to be prevented by the assets being locked into the community,” he says.
Overall, the obstacles to mutualisation are manifold and complex. Some solutions have been determined, while others are expected to come either from the Cabinet Office’s white paper or from departments and other commissioning bodies. Mostly, though, mutuals will be expected to develop their own solutions with their mentors. At least the government hasn’t struggled to recruit a group of such support organisations: mutualisation does seem to engender a willingness to help others on the same path. No matter how many obstacles they face as they tap into the Tories’ newfound admiration for one of the organising principles of the old labour movement, some mutuals at least are likely to get by – with a little help from their friends.