Are pathfinder mutuals for public or private benefit?

Their legal status is unclear, says Andrew Studd, a partner at Russell-Cooke solicitors

The big society is currently the coalition government's prevailing philosophy.

In August, it launched the first wave of 'pathfinder mutuals' to act as trailblazers for the rest of the public sector. They will involve public sector staff providing services with voluntary organisations in new structures.

There are a number of structures suitable for such social enterprises, depending on an organisation's activities and capital needs. Some might also qualify for charitable status.

But there is a distinction between activities carried out for the public benefit, which can be charitable, and those carried out for private benefit, which cannot.

The pathfinder mutuals are described as being "employee-led mutual organisations". The relevant announcements acknowledge the need for them to find their own legal basis, but that would imply they are established for mutual or private benefit, rather than for the wider public benefit. Presumably, the members of the cooperative will be employees rather than service users.

Does the big society agenda mean, in this instance, a privatisation of services? Either way, they will need to be paid for to ensure sustainability, and the money will come either from service users directly or from government, collected from us through general taxation. But where do the profits go?

The Sunday Times reported recently that registrations of industrial and provident societies, which are now called cooperatives or community benefit societies, are at their highest level since their Victorian heyday.

Cooperatives have existed in something of a legal backwater for a number of years, with registration and regulation looked after by the Financial Services Authority.

A cooperative or community benefit society is an incorporated body similar to a company, with members and a management committee like a board of directors. A genuine cooperative must carry out business for the mutual benefit of its members and is democratically run, with each member having one vote.

The second type is a community benefit society, in essence a charity that does not at the moment need to register with the Charity Commission. Its business is conducted in the interests of the community at large.

Both types of society can issue withdrawable share capital and pay interest on such capital "sufficient" to attract and retain that investment. This provides access to capital, albeit in most cases put up by investors interested in the social issues rather than purely a financial return. But surpluses are treated differently.

The cooperative society can pay a dividend, in addition to interest on its shares, to reflect a member's level of transactions with the society, whether these are purchases from the society, salary levels or some other measure. The community benefit society, if it issues withdrawable shares, can pay only interest, and cannot pay any additional dividend to its members or any other person; so it reinvests profits in its business.

The newspapers feature stories of local communities purchasing their local pub or village shop, in the style of the big society. These might use the pure cooperative model or variations, such as the community interest company; but these are private, rather than public services.

The structures of the pathfinder mutuals will depend on a variety of factors, including their capital needs and their ability to raise investment from social rather than financial investors.

But what difference is there between an employee-owned business, such as the John Lewis Partnership, which distributes profits to employee members, and a privatised business where profits are paid to shareholders? Are the pathfinders, in reality, a privatisation of essential public services?

Andrew Studd is a partner in the charity team at Russell-Cooke Solicitors

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