Competition to provide council services will soon come from within councils. From April 2012 council employees, voluntary groups, social enterprises and community groups will be able to challenge their local authorities for the right to run council services. This right, enshrined in the Localism Act 2011, is welcome. We need to expand the credit open to public sector spin offs to make sure their bids are credible. Social finance could provide the necessary funds.
Social finance is a broad category; I am referring to peer to peer lending firms in particular. Sites such as Zopa and Funding Circle allow ordinary citizens to fund individuals and business respectively. Through a similar set up, or a partnership with a firm such as Funding Circle, small savers could finance the new start-ups being set up by council employees.
The benefits are clear. Savers could gain a greater financial return. Local authorities could obtain private finance to provide start up capital for spin offs from their existing operations. Council employees wishing to mutualise would gain financial backing.
These loans would not be risk free. Enterprises would need to be credit checked. Funding Circle links savers with small businesses seeking funding, they have developed a model to credit check small enterprises. We could apply similar procedures to credit assess council based mutuals.
Credit is the lifeblood of business. Without credit firms can’t begin to trade, expand their operations and provide services. UK banks are failing to meet their government inspired lending targets to business. If banks are told to increase their capital holdings this will militate against increased bank lending, particularly to small businesses, which are more risky propositions.
No savings account beats inflation. Ultra low interest rates and high inflation mean the majority of savers are achieving no real return on their savings. Basic rate taxpayers need to earn 6 per cent per annum to maintain the value of their money. This rate of return is not obtainable on savings accounts without paying a fee to possess a linked current account (which in my humble opinion eliminates the gain).
We can each imagine council functions that have commercial potential. Parking is scarce in many urban centres. Charges are already in place. Council parking facilities can be sold off. Park maintenance services can and often are performed by bodies other than the council; existing employees could mutualise and bid to retain their role. Homes unlucky enough to be infested with wasps may prefer to enlist an ex council firm to fix their problem. Some councils continue to offer these services.
Councils need to manage this process with care. Existing staff need to be encouraged to bid to run services. A Chief Executive for a London Labour authority has met with staff at all levels to discuss whether they wish to mutualise. Council employees deserve to be treated with respect and should play a leading role.
Staff don’t have a right to veto change. Managers are employed to manage. This means setting a direction for the council. If employees do not agree to mutualise the alternative is to open services to full and immediate competition. The offer to mutualise is a generous offer to employees. It will allow them to prepare their services for competition. They are not obliged to take this offer.
Councils cannot sidestep European procurement law. Above £156,000 they need to put services out to a competitive tender. The Cabinet Office has produced a report to advise councils how they can encourage mutual and comply with their legal obligations.
One option is that local authorities operate an in house incubation period for select services. Staff can be offered contracts for a limited period to run their service funded according to existing budgetary plans. If funding is to be cut by say ten per cent a year the new social enterprise would agree to run the service on this basis.
The council would need to commit itself to opening the service to full competitive tendering after a designated period of years. A mutual could operate relatively autonomously within the council until then. It could use this period to develop into a viable operation. This is one example, there are other models where mutuals operate more independent of the council.
Social finance firms should be willing to fund new council based social enterprises. Confirmed contracts with the council could make these enterprises more credit worthy than other start-up operations. It is possible to imagine a council based social enterprise obtaining a loan from a social finance website to provide funding. The loan term could coincide with the period in which they have assured council funding. A council could even partner with a social finance firm to fund its spin offs during the start up period.
These enterprises would need to diversify their business. Some of them may fail following the move to full competition. It would be for the private firms to assess the credit worthiness of these businesses going forward. The council could limit its financial exposure during any incubation period by limiting the loans such operations could take out. For those mutuals that go fully independent more flexibility would be possible because the council would not be liable.
Mutualisation should increase the productivity of council operations. Employees will have an incentive to be more productive and flexibility to design their operations to provide better results for consumers. Each of these services, and others, could expand outside their local authority area. Local authorities will move from a role providing services to one of commissioning them. Social finance could fund this revolution in local service provision.
The views expressed above are my personal views and not those of my employer or any other organisation with which I am associated.