Work & careers

From councils to co-ops: how public workers can form an mutual

The coalition is encouraging public workers to form mutuals to offer public services. So how do you set one up?

Have you heard the one about the Conservative-led government encouraging public servants to form employee-owned mutuals? Well, despite the healthy scepticism – a born-again conversion to worker democracy seems convenient at a time of reducing the public sector wage bill – this is no joke.

Dorothy Francis, chief executive of the Co-operative and Social Enterprise development agency, offers an alternative punchline: "We do not support what the government is doing, especially in terms of what I see as the dismantling of the NHS. But at the same time if these things are happening, we have an opportunity to ensure it stays in co-operative and community hands rather than private ownership."

However, regardless of the government's goals for the strategy, employee-owned mutuals offer an attractive third way to the cuts programme. There's little substance as yet to back up Francis Maude's policy – the localism bill is expected to give local authority staff the right to bid to deliver a service, and it is anticipated that a Mutual Taskforce will produce a £10m fund and support programme. But if you're a public servant thinking of running your service as an employee-owned mutual, here's how to do it:

A "mutual" is a catch-all phrase for any organisation owned by members made up in part or entirely by the employees: these include co-operatives, fully bound by the democratic principles of the International Co-operative Alliance, and social enterprises, a looser term referring to companies set up for a social or environmental purpose. If the idea of forming a mutual appeals to you and your team, Co-operatives UK suggests you consider the public service need you want to fulfil and how you think it can be done better as an independent organisation.

And, all importantly, why do you want to do this? Francis advises people not to be coerced by a local authority looking to make cuts. You "need to put your heart and soul into it", says Francis, so if the local authority is so keen to cut you loose you need seriously to question your future business potential.

"If you fall out with the local authority, then you're not going to go far," says Ed Mayo, chief executive of Co-operatives UK. GLL, a leisure co-operative, separated from Greenwich council in the early 1990s. "Our biggest partner and strongest ally is still Greenwich council," says its chief executive Mark Sesnan. "It's not about going it alone and sticking it to the local authority, it's the opposite – it's working with them, with a different hat on."

Start positively: this is your opportunity to be creative, put into action those ideas you've had for years and think beyond borough boundaries. But more importantly be critical: what's your competition in the market, what will your main costs be, where will your income come from (including what price you will place on your services)? Mayo advises: "People have a tendency to under-estimate costs and over-estimate income, so try to buck this trend." From the outset, you should ask an expert for advice.

Les Double, volunteer chairman of Harwich Connexions, a transport co-operative that broke away from its local authority in 2003, cautions: "The danger is you are looking at safeguarding your jobs rather than the sustainability of the service. You are a company, and you need to understand that."

One issue comes up more than other: pensions. Francis puts it bluntly: "To be honest, anybody who works for the NHS would be an idiot to leave and set up a social enterprise if their pension didn't transfer with them." Look into this early. Local authorities do have the power to admit not-for-profit organisations into their pension schemes under "admitted body status", and keeping those already in the scheme is obviously not an additional cost. While relatively easy to become an admitted body in local government, the health service is far more complex. And the sticking point may come if pensions contributions were already identified as a cost saving.

"You have to check VAT very early on too," adds Mick Taylor, founder of Mutual Advantage, which helps public sector organisations reform as mutuals. "If by selling services the public body cannot reclaim the VAT that you have to charge, it is a significant net increase in service costs."

The single biggest obstacle to setting up mutuals is funding. Every business has start-up costs, whether for marketing or machinery. The difficulty, says Taylor, is: "You can't go to the bank and say I want to borrow £100,000 to do a feasibility study on externalising a gang of nurses from the public sector. It just won't happen." The parent body is the source to look to first. "Essentially the employer stands to gain from losing your NI costs and all the rest," says Francis, "so a golden handshake to help you set up is not unreasonable."

In some cases the capital is the people within the business. In others, existing assets (eg, buildings and equipment) may transfer to the new organisation from the parent body, but often with conditions, perhaps preventing you from selling them on. Sourcing funding may also require creativity. "We started with no assets," says Double, "and in eight years we've brought around £2.5m to £3m into Harwich through grants from all sorts of areas from development agencies, community council, district council … the East of England Development Agency ran a competition to bid for money to buy assets, and we were successful on four occasions."

Having started with three vehicles, Harwich Connexions now owns nine, plus a 26-bed hostel and 11 business workspaces.

The success of most ex-public sector mutuals rests on them securing a contract with their previous employer or another public sector body. Thanks to EU procurement law, this is easier said than done. Ask the parent body to determine whether the legal requirements apply to your circumstances. If not, try to negotiate a long-term contract. Early signs from the recent public sector mutuals are that three- to five-year contracts have been offered in some cases without the need for a competitive tender process. This should be your goal for negotiations.

Also do not take a "yes" at face value – ensure you get agreement from both the political and managerial arms of the local authority. GLL's Sesnan says: "Where there's a market, under EU rules, it should go to competition. Where there isn't, it doesn't. But taking these things outside the council will in effect create a market, so in three, five, seven years' time, expect some competition."

Mutuals and co-operatives are, to a greater or lesser extent, democratically run. "It can range from the absolutely flat and egalitarian structures where each decision is made on a very open basis," says Mayo, "to those limited to an annual AGM where members elect the board and then the board gets on with it."

As it's often an existing team looking to mutualise, Mayo says: "If those involved are up for continuing with the same leadership, then that gives continuity. At the same time you have to ask whether that leadership team is the right one to take you forward, given the significant changes in the way you operate. You may need to reorganise."

Fundamental to a worker-owned co-operative is the one worker, one vote principle. Other mutuals find it beneficial to involve wider community groups – also known as stakeholder co-operatives. Harwich is one, says Double: "We have three pillars of the co-operative: users, workers, and supporters. We've got a management board of nine, of which no one pillar of the stakeholder community can be in complete control."

As Taylor explains: "If you run a local park for the community and employ a couple of people to maintain it – it's not those two workers who are the critical members, it's the community."

Many new mutuals tackle this first and get bogged down. It's important that the business plan and management ethos are in place before committing to a legal framework.

"A lot of our work comes from people who get legal structures on the internet, or from solicitors at a low cost, and then find later when bidding for contracts or looking for funding that their legal structure precludes them," says Francis.

Mayo says: "It's more of an alphabet soup than it needs to be. You can form a co-operative as a company limited by guarantee, a community interest company, limited liability partnership. The industrial and providence society or community benefit society has the co-operative democratic system built in, while some people prefer a limited company form."

The lesson is, get expert advice. "Co-operatives UK sent us different models to go through and helped us choose the one we felt was more applicable to us," says Christine Bailey, of the recently formed Sunshine Care mutual in Rochdale. "We decided on community interest company because if things did go wrong, any money or equipment we had would go to the local community."

While many ex-public sector mutuals will tell you how much hard work is involved, they are typically happy that they did it. Christine Bailey at Sunshine Care, for example, says: "We are definitely providing a better service than we were as council employees. The customers are much happier, and that makes the staff more positive."

And John Wilson of York Disabled Workers' Co-operative, an inspirational survivor of the Remploy factory closures, says: "We believe in what a co-operative is about, the principles of a small group of people who work together as a unit and feel like a family. You feel proud of the organisation because you are an integral part and everybody counts."

And that could be worth the effort.