A radical experiment was announced in August 2010 by the Cabinet Office: 12 “Pathfinder mutuals”, run by entrepreneurial public sector staff, were to be supported in their bid to take over their services as employee-owned organisations. This is the story of how they got on – and of what their experiences tell us about the future of public service mutuals.

At its launch, Cabinet Office minister Francis Maude proclaimed the initiative “the first step in creating a genuinely ground-up movement where staff, who are the real experts, can come together to take over and deliver better services”. Almost two years later, only four of the Pathfinders are fully-fledged mutual organisations (see below) and one of them had begun the process in 2009, before the coalition government. Six more are still trying to get off the ground, and two have failed altogether. With hindsight, Nick Hurd, minister for civil society, concedes it has been “a very challenging business environment to operate in”, but says he’s happy with the progress that’s been made with the mutuals so far.

“They know their stuff about the services they provide, but they need access to the skills that they don’t have – principally, business skills,” says Hurd. “We’re dealing with an environment where there’s less money around, tremendous risk aversion in the system, inconsistent commissioning. But my sense is [the Pathfinders] feel a tremendous sense of liberation and excitement to be given the opportunity to develop their business along entrepreneurial lines.”

Some, however, argue that the government’s words of support need to be backed up by more action – that fledgling mutuals are being spawned without the necessary defences to withstand private sector interest. Others say that this was the government’s aim all along. Hurd strongly refutes this, saying, “I don’t buy it. It’s not the agenda – the agenda is to promote the benefits of mutuals and employee-ownership. There’s certainly no grand plan. I think it will evolve as driven by the desire of the people in the business.”

Ed Mayo, secretary general of the national trade body Co-operatives UK , works with the Cabinet Office on the Pathfinder project, mentoring one of the second wave of Pathfinders and sitting on the Mutuals Taskforce, an advisory body set up by the government last year. Mayo believes that “in order to see a widespread rolling out of public service mutuals, there needs to be a real step-change in seriousness, commitment and resources”.

In particular, he wants to see something done to simplify the process of setting up mutuals. There is no single legal company structure within which to form employee-led mutuals in the UK; rather, there are several to pick from (see What is a mutual? below). Nor is there across-the-board agreement on whether mutuals formed out of the public sector should be allowed to Tupe-transfer staff on existing terms and conditions. Many of the Pathfinders have done this, or are pushing for it, but all have faced a battle – particularly over pensions. Then there’s VAT – should they, as any other private sector provider would, be required to charge VAT on their services, or not? Again, there is no standard answer. Add in EU legislation on procurement, and that’s an awful lot of hurdles.

“Countries that have made a success of public service mutuals have done so by making things more simple rather than more complicated,” says Mayo. “Francis Maude started off essentially saying ‘Let a thousand flowers bloom’ – anything goes. But actually what really works is a model that can be simplified and rolled out. In Italy, the majority of public service mutuals are formed under a special type of co-operative called a ‘social co-operative’, which is built into the commissioning process and is given special tax treatment.

“At the moment we are asking people in public services to climb a wall of technical complexity, and the most urgent task for the mutuals programme is now to simplify it.” Mayo highlights taxation and procurement as the areas in most need of attention, and would ultimately like to see public sector mutuals given the same special dispensation as they have in Italy. Katie Taylor-Neale, engagement manager at ex-NHS Pathfinder SEQOL (see Case study, below), also believes there need to be “tax breaks and financial incentives to support organisations through this process”.

The joint mutual project between Hammersmith and Fulham, Westminster and Kensington and Chelsea borough councils (see Case study, below) is actively seeking a private sector backer to help navigate these difficulties. The mutual’s lead, Andy Rennison, describes a well-attended bidders’ day held with 28 private organisations: “The feedback from one organisation was that we had too many people, we’ve got to cut this and cut that. But we felt that, actually, no, we’re already quite lean with a clear business plan which we’re confident we can deliver. That demonstrated their lack of understanding about what this business does – it’s a people-focused business.” It also demonstrates the challenges ex-public sector mutuals face.

Nick Hurd believes it’s too early in the “learning” phase to be talking about tax breaks or special dispensations. However, that is not to say the government is doing nothing. As well as setting up the Mutuals Taskforce and Mutuals Information Service, David Cameron has stated an intention to publish a draft co-operatives bill by the end of this parliament – its primary focus being to consolidate existing co-operative legal models and related legislation into one act. There is also, says Hurd, the social investment bank, Big Society Capital, launched in April, that will eventually have around £600 million capital, as well as a £10 million “investment readiness fund”. The “social investment market” is taking a growing interest in mutuals, according to the minister.

Amid all this activity, one type of mutual remains entirely absent from the Pathfinder project. Not a single one of the Pathfinders is, in its strictest sense, a worker co-operative; the “C” word having gone AWOL since the prime minister’s “big society” speeches – and indeed the Queen’s Speech – of 2010. All 12 Pathfinders have chosen company models, rather than the industrial and provident society structure championed by Co-operatives UK. Ed Mayo describes this as the only structure with co-operative values “baked-in”, since the “lock” placed on its assets means it cannot lead to a private takeover.

Only time will tell whether the various employee-led and owned mutual structures of the Pathfinders are able to survive – four years, in fact, as that’s the length of contracts most are on before they go out to competitive tender.

What is a mutual?

Mutuals are organisations in which members are the dominant shareholders. They can take a number of different forms:
Consumer-owned mutuals such as the Co-operative Group are owned by consumer members who share in profits and can vote on business decisions.
In worker co-operatives, which are often registered as industrial and provident societies, every worker has equal ownership and voting rights.
Partnerships are either wholly owned by employees or by a trust, which owns and runs the organisation for the benefit of employees.
Social enterprises are set up to serve a social purpose and generally re-invest profits back in the business. Some social enterprises register as community interest companies. These must have an “asset lock”, which means that their assets can only be used for the stated community purpose.
 

Mutuals now up and running

1: Inclusion Healthcare
Description: Care for homeless people in Leicester.
No of employees: 15
Launched: July 2009
Type of mutual: Community interest company limited by shares

2: Anglian Community Enterprise 
Description: Community health services
No of employees: 1,100 employees and 400 volunteers
Launched: January 2011
Type of mutual: Community interest company limited by shares

Case study: Anglian Community Enterprise

“It took us about three years from start to finish,” says Julie Young, business manager. “Back in 2006, government policy stated that primary care trusts should just be commissioners of services, rather than providers. So, from early 2007, we were looking at what our options could be. We chose a social enterprise [structure] mainly because it fitted the ethos and culture of the NHS for caring and support.”

Carole Hughes, interim director of HR, adds: “What really appealed to our staff was that we could be working with the community in a different way, without the restrictions that come with being an NHS organisation, but without generating profit for shareholders.”

Young believes there won’t be “a temptation to get financial input” from the private sector. “What we need to do, given that competition will increase, is look at working with other providers where we can, more likely on a sub-contract basis, rather than as part of the governance structure of the organisation.”

Each employee was offered a £1 share, and a staff council was set up. Initially, 40 per cent of staff became shareholders, a number expected to rise steadily. Engagement wins are already evident. “We are really starting to see involvement,” says Hughes. “If anyone feels an issue has been missed it gets escalated and raised. Even with the Department of Health – where we have had a ‘no’ in the past, we’ll push for a ‘yes’ now.”

3: Kaleidoscope
Description: One individual supporting people with learning disabilities
No of employees: 1
Launched: May 2011
Type of mutual: Limited company by guarantee

4: SEQOL
Description: A spin-out from NHS Swindon and Swindon Borough Council, providing adult services
No of employees: 750
Launched: October 2011
Type of mutual: Community interest company limited by shares

Case study: SEQOL

“NHS Swindon was looking at how it could manage the separation of provider services,” says Katie Taylor-Neale, SEQOL’s engagement manager. “We joined the mutual Pathfinders scheme to explore it as an option.”

Currently finalising all the legal documentation, the organisation will be fully employee-owned, with an elected employee group working alongside the managers to help shape decision-making. Staff transferred via Tupe, maintaining their highly valued public sector pensions, although new joiners (in a model echoed across most of the Pathfinders) will join the new company’s private pension scheme.

“When we were considering which of the legal forms to go for, it was community interest company limited by shares that was very much the favoured option because it has employees as shareholders at the heart of it,” says Taylor-Neale. “We have to reinvest any surplus income back into the business, so it re-connects people with the purpose of why they entered into this type of work. “People are shifting to that sense of ownership,” she adds. “There isn’t a ‘they’ any more; it’s ‘us’. That’s quite an energising, liberating, exciting place to be.”

The mutuals still in progress

5: The Lambeth Resource Centre
Description: Rehabilitation support
No of employees: 10
Launch expected: Spring/summer 2012
Type of mutual: TBC

6: The Royal Borough of Kensington and Chelsea
Description: Youth services
No of employees: 175
Launch expected: Spring/summer 2012
Type of mutual: Expected to be a community interest company limited by shares

7: Westminster City Council Children’s Services
Description: Children’s services
No of employees: TBC
Launch expected: TBC
Type of mutual: TBC

8: Resolving Chaos
Description: Targeted interventions for disadvantaged people
No of employees: 5
Launch expected: Spring/summer 2012
Type of mutual: TBC

9: The 157 group
Description: a consortium of up to 28 FE colleges looking to set up an awarding body
No of employees: Unknown
Launch expected: Unlikely to happen this year
Type of mutual: Unknown

Case study: The 157 group

“The reason it’s taking so long is that 28 colleges are negotiating together,” says Lynne Sedgmore, executive director, 157 Group. “Between them they have £1.6 billion revenue and 700,000 students. So you need to take longer on the trust, vision and purpose, and that’s what we’ve been doing. In February we decided to go forward collectively as an awarding body, which meant that we will now start to look at the exact composition of this joint venture and its ownership. The whole point of this was for colleges to establish an awarding body, which they have never done before. Then, if you make it into a mutual, you will have a whole new range of ownership.

“I think most of the Pathfinders have been trying to do things differently or better as a collective group of staff. Employee-ownership is the next stage that we have to work towards. The vehicle and the nature of it has taken much longer than I had anticipated, so the real meat of the mutual and the ownership conversation is yet to take place. Even so, taking the time for people to get the feel for it and have the necessary discussions has actually been very worthwhile.”

10: Hammersmith and Fulham, Westminster and Kensington and Chelsea Schools ICT services
Description: ICT and strategic support services for schools and local authorities
No of employees: 43
Launch expected: September 2012
Type of mutual: Company limited by shares

Case study: Hammersmith and Fulham, Westminster and Kensington and Chelsea Schools ICT services

This mutual was formed out of the schools information and communications technology services of three London boroughs, which were already operating on a fairly commercial basis, according to Andy Rennison, lead officer on the mutual project. “We were keen to set up an employee-led mutual,” he says, “but at the same time mindful that new businesses tend to have difficulties. We felt one way around that was to find an independent sector partner to provide support with the commercial aspects.

“The idea is that the ownership will be weighted in favour of the employees; the shares for the employees will be held in a trust, with the private sector partner taking a proportionate share depending on how much they are putting in. The employees by default will become shareholders, there will be a management team with staff representatives on the board, and by owning part of the business they’ll have a greater sense of control and direction.”

The process has been more challenging than Rennison expected. “The staff have to continue to do their day jobs, and the delays cause them concern,” he says. “But the fundamentals are agreed – staff will transfer under Tupe, and pensions will still be local authority pensions, so we’re not attempting to change people’s terms and conditions or take away the things they’ve earned.”

The failed mutuals

11: Mansfield Multi-Agency Rented Solutions
What happened: A Mansfield District Council proposed spin-out to deliver multi-agency housing tenancies through a mutual. Because of the impact of budget cuts and restructuring, staff were unable to commit the time necessary, though plan to reassess in September 2012.

12: Newton Rigg Agricultural College
What happened: After the University of Cumbria announced the sale of the college in 2010, employees put in a bid to create a mutual (see Case study, below). But the college was taken over by another agricultural college, Askham Bryan College, and attempts to turn Newton Rigg into a mutual bit the dust.

Case study: ? Newton Rigg Agricultural College

“Newton Rigg is an agricultural college near Penrith in Cumbria,” explains Howard Newton, a member of the lecturing staff. “In 2007 it was incorporated into the new University of Cumbria, and in the summer of 2010 it was announced that the university was selling off the college to reduce a significant budget deficit. We met with our local MP, Rory Stewart, and with his help were made one of the Pathfinder Mutuals, with the aim of creating some form of co-operative or mutual.

“From the first day it was clear that we had very significant obstacles to overcome: a very tight deadline, a group led by relatively junior staff with no experience of running a business of this size, no financial backing, and no natural leader. The help we received from both KPMG under the Pathfinder scheme and the Co-operative group under our own initiative was valuable and helpful. The perception that we were being backed by the Cabinet Office gave us a degree of credibility that was very helpful. However, success was always a very long shot.

“A larger agricultural college based near York was successful in winning the bid to take over Newton Rigg. Initially, staff at the college were pleased that the long-term future of the college seemed to have been secured. Now I think the majority regret that the culture and benefits associated with a mutually-run college are out of reach.”