Goodnight, sweetheart deals

Since 2010, about 50 new staff-led mutuals have been set up from local authorities in England.  Nearly all have been granted uncontested initial contracts of up to 3 years from their council.

However, new rules from the EU mean that the way councils will need to go about setting up mutuals will have to change, in all likelihood, from June 2014.

So what do councils need to know?  There are three important points to take on board.   One is that the new rules mean that all services broadly of a social nature (there is a specific list) with a contract value under 750,000 euros (around £635,000) do not need to go through any procurement process at all.

So, very small staff-led ventures in many areas of council activity, e.g. a very specialist team that seeks to spin-out could easily be offered a contract without a need for further procurement effort on the part of councils, provided the case is made under their own contract standing orders (which themselves are designed to reflect the law at any given time). 

This is very good news for niche services with councils who can be given unambiguous legal support to simply spin-out of the organization in a no-fuss way without any risk of legal challenge.

The other really important point for councils is that they will no longer be able to simply offer a new mutual an uncontested contract for services over the 750,000 euros threshold as now often happens for services of a social nature.

This is because the EU itself has to comply with international trade obligations.  The ‘sweetener’ here is that there will be more flexibility about how those services are contested with, it is hoped, a range of less bureaucratic approaches available to council procurement officers than has been the case up till now.

A final point, and this is critical, the EU has created a special list of services, for which the council can, if it chooses, restrict the competition only to organisations which themselves have a clear social mission, commitment to employee involvement and a commitment to reinvestment of profits.

This list of services includes most social care, education, youth, library and heritage services.

So what are the implications of these changes for councils either actively setting up a larger mutual now or contemplating one?

The main thing to say is that any plans for uncontested contracts need to be changed if the mutual is to go live after pretty much after June this year.   Instead, councils need to consider how they approach what will be a mandatory competition under new EU regulations.

When it comes to how this is done, there will, broadly, be five alternative options.  

1. Standard Competition

Here, your nascent mutual to enter the competition on its own against established competition.  While brave, this may well mean the track-record of competitors makes it difficult for a new mutual in this kind of scenario.

2. Joint Venture in Standard Competition

Here, ahead of the competition beginning, you will identify a partner for your nascent mutual and set it up as a joint venture so that the weaknesses of the mutual in terms of commercial track-record are balanced by the qualities of the partner.  Care will need to be taken, of course, to ensure the competition is perceived as being fair, with clear ‘ethical walls’ between the commissioning element of the council and the part of it that is part of the competing joint-venture.

3. Competition for a Joint Venture Partner

A third option, and one already piloted, is also to set up a joint-venture – but by a different route.  Here, your nascent mutual does not enter the competition itself but run runs a contest for a joint-venture partner for the mutual.

This satisfies EU procurement rules and has been used successfully in at least two English councils in the last three years.  Care will have to be taken on how this is done but it can ensure that the benefits of mutual governance are maintained, whoever is chosen as the right partner.

4. Limited (social enterprise only) Competition

Here, you confine the competition to a contract for 3 years to social enterprises where the services qualify for such a competition.   This will be useful for councils that wish to develop the market in certain services in a way that ensures local providers offer additional social value beyond the contract itself.

5. A Slow Mutual starting as a LATCO

A fifth option is for the council to create a wholly owned “Teckal” vehicle, with a board structure based on “mutual” principles.

This can use its first couple of years to find its feet as a business before entering the competitive fray as it seeks to grow.  This again requires great care as there are clear legal limits on what LATCOs can do in terms of trading outside the public sector market.

To conclude, what these changes certainly herald is the end of ‘sweetheart’ contracts to large new, freestanding mutuals run entirely by former council staff. 

However, the changes are also a big opportunity.

They allow councils if they wish limit certain competitions to socially progressive organisations with business expertise, capital and experience to work with alongside the council to create viable, ethical properly funded new public service companies. 

This has to be attractive to cash-strapped councils currently caught between an unsustainable internal cost-base and a fear of what might happen in a fully-blown open market procurement involving global firms with no commitment to local social objectives.

If you have any questions about anything in this piece please contact Craig on Craig@stepping-out.biz or Mark on mark.cook@anthonycollins.com.

Craig Dearden-Phillips is CEO of social enterprise Stepping Out and Mark Cook is partner at Anthony Collins Solicitors LLP.

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