Maureen Burnside: Co-operatives' appeal is clear but they will not cure all our ills

AS SHADOW chancellor George Osborne this week outlined plans to "unleash a new culture of public sector enterprise" by encouraging public-sector workers to set up employee-owned co-operatives, it seems that motivating workers through ownership is set to be a key battleground in the coming general election campaign.

In the public sector, attention is focused on primary schools, JobCentre Plus offices, social worker teams, or any team delivering a function that can be paid according to a simple results-based contract.

These new co-ops would decide their own management structure and "innovate" on service and cost, with financial savings shared among staff.

On the face of it, this seems like a good idea. Here in Scotland, we can look to successful local employee-owned companies, such as the Loch Fyne Oyster Bar and Tullis Russell, the Fife-based papermaker.

Scotland's housing co-operative movement is perhaps an even more useful example of how the model might be used. These co-ops are set up by council house tenants to take over and improve their housing, employing professionals to carry out the day-to-day management, but under the direction and control of a board elected from the tenants.

Labour and the unions have attacked the Tory plan, characterising it is as a plot to undermine public services, despite its similarities to the government's own "Right to Request" health service initiative. The concern of the unions in particular is focused on what will happen when the local government contract is put out for retender – will the co-op be able to out-bid a traditional profit-based company?

I believe strongly in the employee-owned and co-operative model, but remain to be convinced it is the panacea we are being promised. The Tories are right to quote research showing employee ownership increases productivity and profit, as well as reducing staff absence and turnover.

But these benefits do not follow automatically – the employees must buy into the whole idea of employee ownership and see how it will benefit them as individuals. This may be a tougher case to make than it seems.

In theory, employees will share the financial savings made in any year, but will the enterprise really be paid the same amount each year to provide services if it is seen to be profiting? This eventuality is recognised in the Tories' small print, which states: "Any big savings leading to large surpluses on contracts will need to be shared with the taxpayer under the terms of the contract." At least in public services then, not all of the savings made will be shared among members, as the headlines led us to believe.

Public-sector pensions are another big unanswered question. If wages, pensions and benefits will transfer across to the co-op, that must mean taking a share in the public pension deficit. How could a co-op make a profit while trying to eat into that size of a deficit?

The recent sinking of Reader's Digest, apparently because of the gaping hole in its pension scheme, is a timely reminder of how dangerous such burdens can be. Should a co-op prove unsuccessful, who steps in to secure the pensions of employees? Will today's public-sector employees be prepared to exchange the security of an NHS pension for one backed by their co-op?

We also need to consider how co-operatives will work in areas where users have little or no choice. I can decide if I want to eat at the Loch Fyne Oyster Bar or elsewhere. But if my mother is in a dirty hospital ward, she cannot decide to move to another, cleaner hospital.

In the absence of a truly free market, the state will still have to set out what level of service is to be provided and how it is to be measured. Someone will then have to check these standards are being met and deal with the co-op if it is failing. Will co-operative schools, for example, continue to be regulated by Ofsted, alongside a new layer of target-setting and checking? In practice, it is hard to see how this plan can deliver against the aim of cutting bureaucracy and targets.

The UK has a good track record of successful employee and co-operative owned businesses. This experience has taught us how to structure such enterprises to encourage loyalty and good management. But, for all its flexibility, we also know the co-operative model is not a magic bullet for the various and deep-seated woes of all organisations.

• Maureen Burnside is a partner in the employee incentives unit at Maclay Murray & Spens LLP