Ministers’ support for mutuals will give budding entrepreneurs the opportunity to change public service provision for good
Last month the government launched a new vehicle for public sector investment – the mutual. The announcement of the 12 pathfinder pilots seems relatively tame compared with other plans, such as for spending cuts, benefits reform and restructuring the NHS. It is, however, one of the government’s most exciting and radical projects.
For the first time, ministers are going to transfer ownership of some vital public services from the state to the organisation’s employees. The workers will have the independence to run their mutual exactly as they choose. In return, they lose the safety net of state ownership. Just like the entrepreneurs who enter the Dragon’s Den, these new owners will need to find ways to make their mutuals financially viable and obtain investment to grow.
This could really change public service provision – and KPMG has supported such an approach for a long time. Our report, Payment for success, called for responsibility for public services to be devolved to a local level where practicable, and provided by mutuals, social enterprises and community interest companies. It also called for a ‘right to own’, whereby public sector staff and managers could propose a buyout or mutualisation of their service.
Imagine a world where mutuals compete with state and commercially owned enterprises to provide unemployment support, rubbish collection and social care. Entrepreneurial employee-owners would design new public services for the future, with success dependent on their imagination.
The mutuals’ path will not be easy. At first, several of the vanguard organisations will depend on government funding. They must diversify their revenue streams and reduce their exposure to funding cuts so they can transform themselves into sustainable enterprises. The mutuals that are able to sell their services on a retail basis – that is, directly to the end-user – or obtain public and private sector contracts will have a greater chance of longevity and success. Those that continue to rely solely on state funding could find it drying up.
The employee owners of the new mutuals will have to embark on a big learning curve. Many public servants have spent the past 13 years focused on top-down targets and implementing policy changes; many of them do not think in the language of profit and loss and cash flows. However, as frontier public entrepreneurs, they will need to master financial management as well as innovative service design and provision.
It is also inevitable that some mutuals will fail, as in all experimentation. Ministers must avoid tempering their mutual aspirations if this does happen. They must, however, have a clear view on what the role of the government should be in the face of any such failures.
Some mutuals might require investment to build new products and service lines and diversify their income. Furthermore, partnerships with profit-making investors, who often demand a controlling share in an enterprise, could lead to difficult decision-making. Success and the prevalence of mutuals will depend on reconciling investors’ demands while maximising the output of services offered, which require painful choices.
While asset-rich businesses might have scope to secure funding using their asset base, others could be largely or wholly reliant on securing debt against future revenues. These might not be certain. Funders could initially be wary of this type of new model and look for greater security than they might expect from a conventional private sector service provider. The most successful early applications might well be in areas with low capital requirements or a high degree of income certainty.
Whatever practical limitations there might be, the Cabinet Office’s support for mutuals cracked open a door through which some of the 5 million public sector employees could become business owners. This could be as bold as the Conservatives’ policy on council house ownership in the 1980s. The 12 pilots could re-energise public servants by giving them the means to generate not just income but wealth. It could also change the public sector culture forever.
Alan Downey is head of public sector at KPMG
