The government’s plan to establish public sector mutuals – run by staff – will face a number of difficulties, not least European Union competition rules

Colin Talbot’s excellent blog on the Open Public Services white paper shows how the government’s aim of creating mutuals as part of the diversification of local services faces a formidable set of obstacles.  And even once established, those mutuals face an uncertain future because they will be subject to competition rules if the service contract exceeds current EU thresholds of about £150,000 – which, of course, most will.

It’s worth taking a look at the experience of the one area of local government that has diversified most – housing – and how it has navigated the competition rules.  Thirty years ago, social housing effectively meant council housing, with less than 10% owned by housing associations.  Now social housing’s 4m units in England are more or less evenly split between relatively new housing association dwellings, those transferred to associations from councils, those now managed by arm’s length management organisations and the remaining million still managed by councils.

Tucked into these figures there are also more than 200 tenant management organisations, mainly in council housing, and in housing associations a small number where tenants have a majority on the boards.  What could be more diverse than that? – especially given that more than 2m houses were sold through right to buy.

How could this happen without EU competition rules applying? Stock transfers are exempt because of the sale of the land (an exception within the EU rules).  Because Almos are owned by their councils, they don’t face competition either.  However, this is an area in which the European courts are constantly vigilant – contracts have to meet the Teckal Test, which ensures that the contractor really is under the public authority’s direct control. Mutuals clearly don’t meet this test – they’re owned by their workforce.

As the National Federation of Almos made clear in a recent report on options for Almos, if they move out of council ownership – even if they become mutuals or become tenant-owned – they would probably have to compete under the Teckal Test.  To some extent their position can be protected by social clauses inserted into the contract, but these must be carefully argued and themselves comply with the rules.

There is only one way round competition requirements: transfer the stock so that the management operation goes with it.  Rochdale Boroughwide Housing – an Almo – is planning to become a mutual in this way.  One of the NFA report’s new options for Almos also involves stock transfer.

Despite the obstacles, mutuals have made some progress in social housing. Several mutuals have taken over council housing in Wales, but only on the back of stock transfers.  The ‘community gateway’ model has been used by some English authorities, notably Preston.  Again this involves transfer, but to a body with majority control by tenants.  So the only guaranteed way to create and – more importantly – maintain a mutual is to transfer the assets as well as the service.  It must be doubtful whether councils can find assets other than housing that they would be inclined to transfer.  And transfer isn’t free, the new owner has to buy the stock.

But how come over 200 tenant management organisations run their own council housing services, and do this without having tendered for contracts?  Again there is an exception in EU rules, because tenants exercise a statutory ‘right to manage’. This seems to be a possible hook on which the government could hang its plans for mutuals – create a statutory ‘right to mutualise’.  However, the private sector would surely lobby hard against it.

Ironically, much of the diversity in the housing sector is now threatened by the Open Public Services white paper.  If the plans go ahead, Almos will be moved into the housing associations sector, and it’s unclear whether this depends on tenant or local authority approval. Social housing management is to be subject to competition, which if enacted will almost certainly provoke a further wave of stock transfers.

A small proportion of housing management is already outsourced to private sector companies like Serco.  From small beginnings at the time of compulsory competitive tendering in the 1980s, these companies are now well placed to outbid local providers, including mutuals. A literal reading of the white paper would see the long-term future of social housing management being either through housing associations or contracted out to private companies, with a small proportion managed directly by tenants.  I need hardly add that this would make social housing less diverse than it is at present.

Original post and comments: Public Finance