12th January 2014

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Public service mutuals are the new tool in the box for the re-shaping of local authority services. An acceptable third way between outsourcing to the private sector and continuing in-house provision, they harness the power of employee involvement.

Public service mutuals are organisations which: (a) have left the host council (also known as ‘spinning out’), continue to deliver public services, and have employees playing a significant role in their operation.  

Seventy new provider organisations have been launched so far across a range of local authority services from social care to youth services, fire and community safety. These fledgling organisations now provide over £1bn of public services. With the ‘right to provide’ and ‘right to challenge’ now firmly established as the route for public servants and community-focused social entrepreneurs to take services out, and the continuing search for alternatives to decommissioning services in the face of spending cuts, the number of applications looks set to increase.

Fledgling public service mutuals face the same challenges as any other start-up business. The list is familiar - access to early stage working capital, capacity and track record of the founders and their corresponding appetite for risk; managing the payroll and pension costs of a workforce inherited from host authorities; the ability to assemble credible bids for local authority contracts. 

Changes to the procurement landscape

EU procurement rules represent a major big commercial challenge for public service mutuals. The current rules require, as a minimum, that contracts for the type of services which mutuals may deliver for councils are exposed to some degree of advertising, and even a full competitive tender process. Fledgling mutuals may struggle to compete in an open competitive bid process.

However, this is about to change. The EU will shortly adopt new Procurement Directives, ostensibly to modernise the rules and make them more flexible. With their mutualisation agenda in mind, the UK has secured inclusion of special provisions in Article 76a of the new Directive. The Cabinet Office is expected to draft new Regulations in 2014 to replace the Public Contracts Regulations 2006.

Article 76a says that Member States “may reserve the right for organisations to participate in procedures for the award of public contracts exclusively for [specified types of] services”. Note that it does not allow councils to make a direct award to the public service mutual; merely to restrict participation in the bid process to the types of organisation which meet set criteria. The types of services covered by this special regime are very-tightly defined.

They include administrative educational services; administrative housing services; supply of domestic help personnel; supply of nursing services; pre-school education services; higher education services; e-learning services; adult education; training facilities; tutorial services; a wide range of health and social services; community care and primary care; libraries, archives and museums; sporting services; services provided by social membership organisations, and services provided by youth associations.

So a procuring authority will be allowed to specify that only certain types of organisations with a social mission can participate in the award procedure. To be eligible all of the following criteria must be satisfied:

  • The organisation’s objective must be pursuit of a public service mission
  • Profits must be reinvested to achieve the organisation’s objective. If profits are distributed, this should be based on participation in the organisation’s business. (Perhaps along the lines of cooperative principles, where dividends are paid to members based on the volume of trade they put through the organisation).
  • Management and ownership structures should be based on employee ownership or must require the active participation of employees, users or stakeholders.
  • The organisation has not been awarded a contract for the same services by that authority within the past three years. The maximum duration of such contracts will be three years.

The new rules will provide a useful basis for councils to support fledgling spin-outs. However, the use of this carve-out is likely to be controversial with private sector outsourcers and local charities who do not qualify. They are likely to challenge any unfair restriction on competition.




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