Introduction and background

The Government’s “Big Society” policy has, in recent months, been the subject of lively debate among public authorities and their employees, private sector providers of public services and the third sector. At the heart of the policy is a drive to end the era of ‘big government’ – the old-fashioned, top-down model of public service delivery where government is the primary driver. In its place will be a new model, which will encourage local communities to provide their own services and solutions.

According to Francis Maude, the Big Society has three key themes: diversity; de-centralisation; and adaptability.

  • Diversity: there will be a range of service providers in the Big Society, including charities, mutuals, social enterprises (SE), co-operatives, local authorities, private companies and joint ventures between these entities. Such a wide range of providers will lead to greater openness in public services as it will create greater choice for users and increase competition amongst those providing the services.
  • De-centralisation: the Government’s aim is for local communities to be more self-reliant. In order to achieve this, powers will be passed down to a local level from departments and local authorities and community ‘rights’ will be enshrined in statute. As a result, local communities will have greater democratic involvement over the day-to-day running of local services.
  • Adaptability: one of the criticisms of the big government model is that it is a “one size fits all” approach which does not take into account or accommodate the differing needs of society. By localising public services, local people and providers will be able to provide bespoke, innovative solutions to tackle the particular challenges they face. The Government has also asked people to inform it of the most burdensome bureaucratic red-tape that they encounter, the removal of which will allow people to get on and build the Big Society.

The Government has championed mutuals and SEs as key enablers in the creation of the Big Society in the hope that they will become important providers at the forefront of public service delivery. This guide aims to give you a summary of what mutuals and SEs are, their policy and legal context within the Big Society and some of the issues and challenges associated with them.  

What is a mutual/social enterprise?

A mutual is a business partially or wholly owned by and run for the benefit of its members, whether employees, consumers or members of the community (or a combination). A SE is a business with clear social and/or environmental purposes, as set out in its constitution. A mutual can also be a SE, but it need not be.

Mutuals and SEs are not specific legal entities in their own right. They can take a variety of different forms, for example, a company limited by shares, a company limited by guarantee, a limited liability partnership, a community interest company, a charity or an industrial and provident society. The choice of legal entity will be driven by a number of factors such as the services to be provided, any sector specific regulatory constraints, the constituency and control of the shareholding/membership, the need to leverage other sources of finance, the long-term plans for the business, the required amount of flexibility and control over assets and profits and tax advantages.

It is worth noting that since the launch of the Big Society, the terms “mutuals” and “social enterprises” have increasingly been used by those in government and elsewhere as umbrella terms for the range of different models that make up the third sector. This is because there is much overlap in the characteristics and nature of the different models. Other terms you may have heard of are: charitable SEs, which are charities (or group structures with a charitable arm) with specific social and/or environmental purposes; employee ownership, which means an organisation is wholly or majority owned by its employees; co-ownership, which refers to organisations jointly owned by their employees and third party investors and/or other stakeholders; and community ownership, which means an organisation which exists for the benefit of a defined community.

Policy and legal context

Public Services (Social Enterprise and Social Value) Bill  

The Public Services (Social Enterprise and Social Value) Bill (currently at committee stage in the House of Commons) aims to strengthen the SE business sector and make the concept of ‘social value’ more relevant and important in the placement and provision of public services.  

The Bill contains a duty on the Secretary of State to publish a ‘national social enterprise strategy’ to encourage engagement with social enterprise. Local authorities will also be required to include in their sustainable community strategy proposals for promoting engagement with SEs in their area and a statement of the measures that will enable those involved in SEs to participate in the implementation of the proposals.  

The Bill also requires, during the pre-procurement stage, contracting authorities entering into public procurement contracts to give greater consideration as to how the contract will affect the economic, social or environmental well-being of their area.

Localism Bill and the right to challenge

The Localism Bill was published in December 2010 and contains a number of provisions designed to facilitate the transfer of power from central government to local communities, including the ‘right to challenge’. The right to challenge allows civil society organisations to make ‘expressions of interest’ to councils (and other bodies “carrying on functions of a public nature”) to take over the delivery of a service provided by (or on behalf of) a council.  

Under the bill, civil society organisations include voluntary or community bodies, charitable organisations, parish councils and groups of two or more employees of the relevant authority. The definition of ‘community body’ is broad; it applies to any body carrying on activities primarily for the benefit of the community.  

Following receipt of an expression of interest, a council has the option to either accept, accept with amendments or reject the expression, taking into account the impact the proposal will have on the social, economic and environmental well-being of the council’s area. The council’s freedom to reject an expression of interest is limited to grounds which are to be specified in regulations issued by the Secretary of State. Importantly, if an expression of interest is accepted, this does not mean the challenging organisation will automatically be entitled to provide the services. The council is required to carry out a procurement exercise which the challenging organisation will be free to participate in, together with other competing bidders. In that sense, the right to challenge is labelled as such for good reason; it is not a right to provide the services.

However, Francis Maude also supports the introduction of a public sector ‘right to provide’ (first announced in November 2010). Under the initiative, which is similar in concept to the NHS ‘Right to Request’ initiative, every department will introduce a right for public sector workers to form a mutual or SE which will then have the opportunity to take over the running of the services that the workers provide (although services in some areas, such as defence, may be exempt). Maude has indicated he would prefer employees to ‘spin-out’ without having to compete for the running of the services, although he is careful to recognise there may be public procurement law constraints.

Given that each government department will have its own particular requirements, it is expected that the right to provide will not be uniform across the departments. It has yet to be announced how the right to provide will be implemented. However, the Department of Health has recently published its own guidance on the right to provide and, interestingly, the current DCLG consultation on the right to challenge (see below) states that the right to challenge will be the mechanism for implementing the right to provide for local authority employees.

Open Public Services White Paper

The Open Public Services White Paper is expected in the summer and, according to David Cameron, aims to release public services from “the grip of state control”. This will be achieved by seeking to increase competition in public service delivery – there will be a new presumption that public services should be open to a range of providers (subject to exclusions for national security and the judiciary). The White Paper will also outline plans to increase user choice and contain a new presumption that public services should be delivered “at the lowest possible level”.

Legislative and policy framework

Local authorities will need to keep up-to-date with the legal and policy framework around mutuals and SEs and their growing involvement in public service delivery. Even though the framework is still being developed, the Government is moving swiftly:

  • Government departments have begun to publish their guidance on the right to provide;  
  • The Department for Communities and Local Government is currently consulting on the right to challenge, seeking views on: which services should not be subject to a challenge; when a relevant body has to consider expressions of interest; the time periods for the process; and how and on what grounds a local authority can modify or reject an expression of interest; and  
  • The Government aims to introduce implementing secondary legislation for the right to challenge as soon as the Localism Bill receives Royal Assent.  

Key issues and challenges

There are a number of considerations to take into account when planning for a public sector mutual/SE. Perhaps most important of all are the employees themselves. The employees are crucial to the success of the venture and if they are unmotivated or lack the skills and energy required to set up and run a mutual/SE business, it will be unlikely to succeed. Therefore, a full options appraisal and early and proper consultation with the employees is vital. Other key issues include:

Contracts and procurement

As the mutual/SE will sit outside of and be independent of the authority, there will have to be a contract between the authority and the provider for the services. In relation to the right to provide, the Government has stated that it will try to, where procurement law allows, enable mutuals and SEs to acquire uncontested contracts from the authorities they are coming out of. Under current public procurement law, this is going to be problematic. There is no doubt that Government and the EU are keen to encourage SEs and SMEs to have greater participation in public service delivery (the EU Commission’s 2011 Green Paper on modernising procurement policy supports this), but it is difficult to see how uncontested contracts can be legitimately promoted as a government policy while the current procurement law regime exists.

Competing for business

Where uncontested contracts are not available (or such contracts are renewed), mutuals/SEs will have to compete with much larger, more experienced, service providers to win the work. Some say it will be impossible for mutuals/SEs to challenge the bigger players who will have the resources, financial support and economies of scale to offer more robust proposals. Francis Maude is keen to see mutuals/SEs at the top of the contractual chain but, unless the contracts are sufficiently small or mutuals/SEs partner-up or form joint ventures with the bigger players, this seems unlikely. Another option may be to join in partnership with other mutuals/SEs to collectively improve their chances of winning new contracts.

Conflicts of interest

One of the greatest difficulties in terms of conflicts of interest comes during the ‘grey’ period after an authority has accepted an expression of interest and prior to the mutual/SE going ‘live’. Many support departments (i.e. legal, HR) may find that they are being asked to advise both the would-be mutual/SE and the authority. Therefore, an effective system for dealing with such conflicts is required to ensure that both parties receive the right support and advice.

Funding

As with the setting-up of any new business, mutuals/SEs will need finance. Although the specific level and type of funding will differ depending on the services to be provided and the size of the mutual/SE, money will be needed to cover some or all of the following: initial set-up costs, such as relocation, equipment and insurance costs; working capital, to allow the business to operate on a day-to-day basis (i.e. salaries and marketing costs); and development capital to facilitate growth, for example, the purchase of assets.

But where will the money come from and what form will the finance take? There are a number of solutions, including grants/government finance (such as the Social Enterprise Investment Fund), debt from traditional finance providers, debt or equity from bespoke investors (i.e. social/sustainable banks), social venture capital and emerging models, such as the Big Society bank.

Financiers will want comfort that the money will be well spent and the mutual/SE will have the capacity to grow – just like any lender/borrower relationship. They will want to see, amongst other things, a sound business plan, whether there is a guaranteed contract, what potential future income streams there are and a management team with sound financial and commercial awareness.

Support and advice

New mutuals/SEs will need professional advice on a number of areas both prior to coming out of and once they have left the public sector. As independent and flourishing businesses, mutuals/SEs will need specialist advice on tax, financial management and legal issues to ensure they comply with statutory requirements and are able to sustain the business.

What next?

There will continue to be a degree of uncertainty as to how the mutuals/SE agenda will play out until we have more clarity regarding the right to provide, details of the outcome of the Right to Challenge Consultation and publication of the long awaited Open Public Services White Paper. In the meantime, authorities, employees and the third sector will continue to look at the options and assess the viability, in particular cases, of spinning out services to a new mutual/SE. How successful the Government’s agenda will be is difficult to say but given the challenges involved, it looks as though the Big Society will take some time to flourish.