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Good and bad news on public service mutuals

20 July 2015

This first appeared on the Public Finance website,

As the government has set out plans to increase the number of mutuals delivering public services, ministers must acknowledge the challenges ahead for mutuals as well as the benefits. There are reforms that could be move to improve the system.

With the government signalling its intention to introduce a new ‘right to mutualise’ throughout the public sector, it’s a good time to weigh up what the spin-out delivery model offers local government, health and Whitehall employers.

Ahead of the election, Francis Maude, the then Cabinet Office minister in the coalition government, lauded the tally of a hundred public service mutuals, many formed since 2010 with help from his department’s £10m support fund.

So what lessons can be drawn from an alternative delivery model that is now supplying £1.5bn in contract value and employing at least 40,000 staff formerly part of the public sector?

Inevitably there’s good news and bad news. On the plus side, Cabinet Office evidence suggests that public service mutuals have delivered significant savings to their parent authorities; generally improve and certainly innovate in the services they offer; and tend to achieve the ‘John Lewis’ effect of combining employee ownership with high levels of staff engagement. This is very much a business model that has proved its viability.

One minus, arguably, is that 100 spinouts doesn’t compare well with Francis Maude’s ambition for 15% of public sector staff to have transferred to employee mutual businesses by 2015.

Another concern is the relative vulnerability of many co-owned businesses to have exited the public sector. To date, spin-outs from local government or health are small to medium sized, averaging turnover of around £15m a year. Nearly all are stand-alone businesses with thin balance sheets. Many operating highly sensitive services, like social care, also choose to adopt a less ambitious, more ‘socially responsible’ attitude to profit distribution than conventional businesses, particularly publicly limited companies, would tolerate.

With Cabinet Office set to boost the model further via a yet to be defined right to mutualise, it’s worth ministers also noting some of the significant challenges ahead.

At the heart of those challenges lie the sectors most likely to experience mutualisation. As austerity cuts even deeper into public sector budgets, authorities are now looking for drastic savings in the most sensitive of services: adult social care, youth services and children’s services.

Combine that reality with the vulnerability factor described above and a number of warning signs appear.

Firstly, how many public service mutuals will be able to re-win their initial spin-out contracts when pricing is based on relatively thin profit margins, and when balance sheet weakness and big competitors may damage them for the first time?

Second, with contracts expiring, how many spin-outs can be sure of securing the investment capital essential to diversification and growth? And third, how many of the more vulnerable mutuals could end up selling themselves to buyers their parent authority no longer has the right to vet?

None of this is a reason for government to hit the panic button. Most spin-outs are robust, performing well and popular with their customers. Among a variety of alternative delivery models in the public sector, mutuals are a minority but growing option. But there are clearly issues for Cabinet Office to address. Ministers could consider offering certain spin-outs what could be termed ‘public service obligation’ status. Under this option, mutuals supplying essential, complex services to the most vulnerable in society could opt for a form of ring fencing – accepting socially preferable lower profit margins, as many do now, in return for, say, tax concessions, obligatory asset locks or ceilings on external ownership.

Scale is another challenge. Without the emergence of some genuinely large public service mutuals, markets such as social care could become less diverse and more vulnerable to domination a few conventional suppliers. So one policy lever for government is to use a new round of support funding to help some of the mutuals they’ve fostered to become bigger and more resilient. There are encouraging signs that Cabinet Office has targets like these in its sights.

For public sector employers, with spending cuts homing in on children’s, youth and disability services, employee mutuals’ relatively high trust ratings among voters may make the model an increasingly attractive option. By addressing these issues, government can help ensure the viability of these innovative new providers.

Prospects and CIPFA have produced a new guide for the Employee Ownership Association: Employee ownership in our public services – making it happen.

Patrick Burns
Patrick Burns is Mutuals Dvelopment Director at Prospects.

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