A warning for public sector mutuals

The Government’s programme for mutualising public services is at its first important crossroads. While ministers remain enthusiastic, staff seem unimpressed. The initial scheme of mutualisation – though staff will only partly own the resulting ‘mutual’ – is MyCivilServicePension. Employees are planning strike action to resist the proposal.

Now we have a report from the National Audit Office casting doubt on the value for money of the first ‘right to request’ mutualisation arrangements and suggesting that public sector managers have not entered into contracts with the staff mutuals on a sufficiently hard-headed basis. One of the points made is that while it is assumed that mutuality will deliver efficiency improvements through greater staff commitment, no such financial or productivity gain requirements are built into the contracts.

The first application of the principle of staff ‘spin-outs’ has been in NHS social enterprises, where £900m of contracts have been awarded to groups of employees to run their own services. So far only 20 health social enterprises are operational through the staff spin-outs, so, says the NAO, it is too early, with too few case studies, to say definitively whether they represent good value for money and whether they have achieved efficiency improvements. But, it adds, there ought to be clearer and contracted expectations on the social enterprises.

Amyas Morse, head of the National Audit Office, concludes: “The Department [of Health] needs to reassess its approach, when contracting with social enterprises, of not requiring efficiencies over and above what would have been achieved if the services had remained within the Department.” The NAO study suggests that without defining the benefits expected to be achieved by spin-outs, these benefits are less likely to be produced.

The established social enterprises provide health and social services that were previously provided by primary care trusts (PCTs – bodies that are to be abolished under the current Government’s health reforms). So the social enterprise spin-offs do not offer the acute and chronic secondary care services that are provided at hospitals. However, at least one business that calls itself a ‘social enterprise’ – Circle Healthcare – does run hospitals and has recently won a contract to takeover a failing NHS trust.

But to my mind, the key point made by the NAO report applies pretty well to all public service privatisations. Despite the service being outsourced, in practice the risks and the service and financial liabilities will continue to reside with the NHS. Both services and business viability will therefore have to be closely overseen by the public body after the contracting-out has taken place.

This point was dramatically illustrated by the near collapse of a social care business that is most definitely not a social enterprise – Southern Cross. As readers will know from the massive publicity attached to the travails of the business, it no longer operates on a viable or sustainable basis and it has had to arrange a short-term rent reduction in order to continue trading. But, should the company (which is a PLC) actually go bust, it will be up to social services authorities to ensure either continuity of service provision, or, in worse case, take responsibility for moving patients and residents to other care homes.

The Southern Cross crisis provides a lesson for the outsourcing of all essential public services, which the NAO has stressed with regard to the ‘right to request’ programme. At least for a time, social enterprises will be highly dependent on work and cash flow from their respective PCTs,” says the NAO. “They will also be operating in an increasingly competitive market owing to changes in health legislation currently going through Parliament. PCTs or their successors will need to have a clear idea of how they will react if enterprises run into financial difficulty or fail.”

And, it must be conceded, social enterprises and other staff mutuals are more likely to be vulnerable to market forces than are PLCs, because they will not benefit from large investment backing, unless they are supported by venture capitalists in ways that purists – such as me – would argue mean that they cannot truly be called ‘mutuals’. The comment from the NAO is: “The sustainability of social enterprises is, currently, heavily dependent upon funding and cash flow from the NHS.”

Despite these reservations, there are indications that social enterprises and mutuals can be a model for public service improvement, says the NAO. There are…. a number of examples where increased staff engagement and awareness of local needs from social enterprises formed earlier have delivered cost and service improvements,” comments the report. “For example, Sandwell Community Caring Trust has made substantial savings by reducing staff sickness absences from an average of 22 days per year in 1997 to 0.34 days in 2008.” This is exactly the type of productivity improvement that would be expected from a mutualised public service.

However, it is difficult to calculate whether the productivity improvements have been achieved on a cost effective basis. “As regards the costs of the [Sandwell] programme, there is no central record and it is difficult to get accurate estimates from PCTs as most are still part way through the spinning out process,” explains the NAO. “A small number of trusts told us that their costs varied from between £120,000 to £500,000, but we have no assurance that these costs are typical. In addition to the costs of PCTs, the Social Enterprise Investment Fund provided over £7 million in grants and they were supported by the Department’s central unit.”

Although there are concerns about the structure of public service mutualisations, the programme will continue – not least because several contracts have only recently been awarded. Seven ‘Pathfinder’ social enterprises were spun out before 2008, another 20 have since been spun-out under the right to request programme and a further 30 are due to be spun-out by September 2011.

The NAO has made a series of recommendations on how to maximize savings and efficiencies from the ‘right to request’, not merely about specifying through contracts what gains are to be delivered. Public bodies should also have contingency plans regarding what should happen if the service provider ceases trading, or hits financial difficulties that cause it to reduce service standards. However, this contingency planning should obviously apply to any service externalization. But the NAO warns that a public body must ensure that such planning does not breach European Union state aid rules.

Those state aid rules also mean that social enterprises will have to retender for contracts periodically – and some are likely to be unsuccessful. There is, therefore, a serious concern that the right to request will simply the creation of short-term mutuals, that will then be replaced by PLC and private equity suppliers (now being referred to as ‘Trojan horse privatisations’). This is a major concern of trade unions and one reason for their lack of co-operation with proposals for mutualising public services.

Crucially, says the NAO, there are ways of supporting social enterprises that do not breach state aid rules. In particular, these involve providing practical support in advance of the contracting-out. “The Cabinet Office should ensure frameworks are in place so that new and emerging mutuals and public sector commissioners have access to appropriate information and support,” suggests the NAO. “This should include access to information and advice on adopting good financial practices such as: having clear objectives; ensuring that the means for evaluating success are established at the outset; and ensuring that cost or service improvements are secured.”

It is worth remembering that if we were today designing public service delivery, most of our readers would probably want to establish structures that were forms of mutuals, through which service users and providers operated in partnership to provide flexible and responsive high quality services. Part of the problem is how get from here to there – another is an issue of trust. The memories of Thatcherism are too raw to trust a Conservative-led government with public service reform.

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