Why we need a new deal for the public sector

The authors of The Public Wealth of Nations have some novel ideas for making state-owned assets perform more efficiently, but will they work in practice?

by John Kay
Last Updated: 02 Jul 2015

Public sector assets are mostly not managed well. In Russia and Indonesia state-owned enterprises are vehicles for theft by the rulers and their relatives and friends. In Greece these businesses have been mechanisms of political patronage. The close relationships between large companies and governments in North America and western Europe while less overtly corrupt are unhealthy, and are now far more extensive as a result of outsourcing traditional public sector functions. Britain has today a suite of companies better at winning government contracts than executing them.

At the formation of the National Health Service, Aneurin Bevan (probably apocryphally) claimed that 'the sound of a dropped bedpan in Tredegar Hospital would reverberate around the Palace of Westminster'. But, as events have shown, such political attention to day-to-day operational matters is not in the best interests of consumers, employees, or the politicians themselves. Centralisation undermines individual responsibility - was the dropped bedpan the fault of the nurse or the minister? Decentralisation, while appearing more democratic, opens opportunities for capture by interest groups, most often public sector employees.

But it is easier to list problems than define solutions. Detter and Fölster argue that we should account for public sector assets as if the state was a private company, commending Britain's lead in producing 'whole of government accounts' that set out a national balance sheet. But what is the value of the London Underground network, the M1 or the pictures in the National Gallery, or Stonehenge? And what purpose is served by even asking the question?

Local authorities, the NHS and the Ministry of Defence have property assets that could be put to better use. We should recognise - and then reduce - the opportunity cost of this. But that is not a question often asked by the auditors of a private company.

Privatisation is an answer where there are competitive markets and no compelling reason for public sector involvement. British Airways was transformed by giving its managers operational freedom. But most state-controlled assets, such as schools and hospitals, are state controlled - or heavily state influenced - for good, or at least unavoidable, reasons.

But it is easier to identify public sector inefficiency than to cure it. There are often savings to be made when private contractors compete for state contracts, and outsourcing has been beneficial in many cases. But this works well only when the nature of the service the government wants is clear. Attempts to procure through highly detailed project specifications are usually costly failures, of which the collapse of the private-public partnerships charged with upgrading the London Underground is a prime example.

Detter and Folster see the answer in a National Wealth Fund - an arm's-length agency designed to hold the government's assets. The British government has two such agencies. The Shareholder Executive owns a miscellaneous collection of businesses, including the Ordnance Survey, the Royal Mint and Channel 4. UK Financial Institutions holds the government stakes in those banks that failed in 2008.

But this solution fails to recognise the genuine need to find a means of managing hybrid institutions that blends public interest with commercial management. Running the Royal Mint requires business skills. But neither the Controller of the Mint nor the Chancellor of the Exchequer, who is ultimately responsible, could possibly follow the recommendation of Detter and Fölster that 'political acceptance of value maximisation as the sole objective for the state-owned commercial portfolio was crucial'. The state did not invest in Royal Bank of Scotland with a view to maximising returns from the government's asset portfolio.

Political involvement in state-owned businesses is not only inevitable, but necessary. The real question is how to ensure such political involvement is limited and well conceived. The authors point with approval at the examples of Sweden and Singapore, which they consider manage their public assets well.

But Sweden and Singapore manage most things well. And where government understands business, even state-owned airlines can fly. Emirates and Singapore Airlines are among the world's best carriers. Alexander Pope put it best three centuries ago:

'For forms of government let fools contest;
Whate'er is best administer'd is best'.

John Kay is visiting professor of economics at the LSE. Follow him on Twitter: @JohnKayFT

The Public Wealth of Nations by Dag Detter and Stefan Fölster is published by Palgrave at £24.99

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