Opening up the public service monopoly

The Government is committed to extending corporate involvement in the state sector. But just how good are private firms at providing what the public needs in comparison with their centrally funded rivals?

by Ian Wylie
Last Updated: 09 Oct 2013

If you'd forgotten about the Big Society, now might be the time to start paying attention again. The Coalition Government is about to kick-start a rejig of public services, seeking to open up all aspects of state activity to non-state providers, including the private sector, charities and social enterprises. The policy is underpinned by a radical shift in thinking: instead of having to justify why competition and choice should be introduced to some public services, such as health, education and council services, the public sector will have to justify why it should be permitted to operate a monopoly.

A white paper on open public services was published in July. And, as MT went to press, Downing Street was expected to publish a much-delayed response to the white paper, with a route map of action steps. The argument over who is best placed to deliver public services has traditionally been binary - and there's plenty of rancour left in the public versus private debate. Critics of private operators fret that profit will be prioritised over care and that the white paper is a smokescreen for cost-cutting, widespread privatisation and the destruction of welfare state pillars such as the NHS.

And those critics don't need to look hard for ammo. The white paper was published the very day that Southern Cross, the private owner of 750 care homes, ran up a white flag and walked away. Then there's PFI. By the Department of Health's own admission, 22 hospitals built through private finance initiative schemes are teetering on the brink of bankruptcy because the payments on their PFI contracts cannot be met.

And yet there is also compelling evidence to demonstrate that large chunks of the public sector cannot run themselves efficiently or effectively ... or both.

Of course, some of the UK's public services rank among the best in the world. But outcomes can vary enormously. Total public spending increased 57% in real terms from 1998 to 2011 - from 38% to 48% of GDP. Yet on key international comparisons such as school results, cancer survival rates and crime rates, the UK was been marking time even before the current austerity measures. Although underperformance could be offset by higher spending when the economy was booming, that option is no longer available. In any case, argues the Government in its white paper, the causes of poor standards in the public sector are not the lack of resources, low expectations, lack of passion or absence of ambition. The problem, it claims, is 'an outdated approach to organising public services that is out of step with the way we live now'.

But whereas previous attempts to modernise public services acted only as a magnet for entrenched dogma, there is just a chance that austerity and an accompanying 'needs must' mind-set is provoking a more genuine search for improved and innovative service delivery.

The white paper talks specifically of a 'diversity of providers' - a recognition, says Phillip Blond, 'Big Society' adviser to prime minister David Cameron, of what happened under Labour when most non-ICT contracts were won by just a handful of companies; in effect, a transfer from public to private monopoly. 'No longer will one business model be favoured over another,' says Blond. 'There will be a genuinely competitive market between business models.'

At least 40% of local authority spending already goes on contracts to the private and voluntary sectors. Nearly half of all councils have outsourced refuse collection and 55% of social housing is provided by housing associations. 'The third sector brings distinctive characteristics and qualities which other sectors do not, such as local knowledge, responsiveness and a high level of involvement from local people, enabling a genuinely community-led approach,' says Sir Stephen Bubb, head of the Association of Chief Executives of Voluntary Organisations. 'It has a proven capacity for effective early intervention and prevention, releasing significant future savings and proven capacity for innovation, creativity and the development of new ways of working.'

But sceptics point to the Work Programme, the Coalition's £5bn welfare to work scheme and an early model for public service reform. Yet 90% of the prime contracts have gone to big corporates, the only organisations with the financial muscle to bid low for contracts and bankroll services under the payment-by-results mechanism. For example, St Giles Trust, a charity praised by ministers as the kind of organisation they want involved, said it would be financially unworkable for it to take part. 'The way payment by results has been set up is quite damaging to SMEs,' concedes Blond. 'Capital adequacy arrangements before you enter the "black box" shut out lots of competitors. Payment by results is too risky for many SMEs as they could go bankrupt if they don't deliver. The Government recognises the problems with this method - we need a new model for payment by results.'

For partnerships to work, says Bubb, the private sector must go beyond treating third sector organisations as 'bid candy'. He says private sector companies must also gain a better understanding of the level of financial risk that third sector organisations can accept - and adjust their dealings with them accordingly. 'Our work programme survey shows that only 18% of third sector contractors believed that their payment profile had been softened in comparison with their prime's Department of Work and Pensions contract,' he says. 'Third sector organisations do not have the same resources and access to capital as the private sector and this should be reflected in the arrangements made between private-sector primes and third sector subcontractors.'

But Blond is optimistic that the private sector can develop and adopt new partnership-working models. 'We lack the proper company structures to enable different sectors to work together. Until we can create a hybrid model that allows private to make returns and public to do the social good, we're not going to be able to take this to scale. However, once we can crack that, we will have gone a long way to solving this problem.'


Ali Parsa, Circle Partnership

ALI PARSA is founder and managing partner of Circle Partnership, which is overseeing Hinchingbrooke NHS Trust in Cambridgeshire on a 10-year contract.

Don't think this is about public versus private, but about finding the talent to solve a problem. Take computing. Processing power has gone up 40 times in 10 years, while the price has fallen threefold. From the customer's point of view, that represents 120 times better value. In healthcare, meanwhile, cost has gone from £40bn to £120bn a year in 10 years. But the quality of healthcare - clinical outcomes plus patient experience - has not increased threefold. There has been a destruction of value. There is no love for private healthcare providers in this country because they haven't yet demonstrated they can do anything beyond buying hospitals, leverage them up, sell them for higher prices and leave industry with a bigger debt burden. Customers have seen only short-term greed.

Our mission is to re-engineer the value proposition of healthcare for patients. Let's go back to computing. IBM was responsible for 90% of profitability in technology until 1975. Then the PC gets invented and the barrier to entry goes from millions of dollars to thousands of dollars and a whole new generation can compete. Bill Gates does what IBM could never do; Yahoo! does what Gates couldn't do; Google does what Yahoo! couldn't do.

At Circle, we brought in Norman Foster to design a hospital in Bath, Mandarin Oriental to design hospitality services, and a Michelin-starred chef to cook the food every day. And we deliver that to NHS patients at NHS prices. In our Nottingham hospital, the chances of having to go back to theatre are eight and a half times less than the NHS target. We deliver our services as if Toyota were doing it, with almost zero defects. As a partnership, we give people ownership and it matters because they put patients first. And we are relentless about cutting costs. So when people say public services need to remain in public hands, I think they are forgetting that there is a healthcare problem that this country needs to solve. Let's lower barriers to entry to allow anyone to enter and come up with solutions and then let the nation choose who's best.

RICHARD VINCE is the governor of HMP Manchester, the only UK prison to be run by the Prison Richard Vince, HMP ManchesterService under a government contract

Don't have to make a profit. I don't pay dividends. And I don't have shareholders or owners in the strictest sense of the word. I am less exposed to the market and less exposed to financial pressures brought to bear externally. You could argue that this could lead to financial indiscipline. But I would argue that it enables me to spend what I need to spend to deliver the service required. And if there is an excess, I give it back. To say the private sector is always cheaper is a very broad and sweeping statement, particularly if you consider it in the context of PFI arrangements. You have to look at the whole life cycle of a contract if you are to evaluate it properly.

I don't doubt that as markets mature, new providers will develop the necessary expertise, but when you are dealing with public safety, public protection and reoffending you need a proven and trusted supplier. That's what the public sector offers.

Public service shouldn't be dirty words. Public servants work on behalf of the public and are proud of that. Businesses are there to make a profit - that's an absolute truth. But freed up from those constraints, I'm here to deliver a public service - and there is a clear distinction between those two priorities. They can be conflicting at worst; at a minimum they can create tension.

Any organisation, whether public or private, needs to be showing best value for money against the highest standard of delivery. So my position here has been to deliver public services while applying commercial disciplines in the way that we operate - ensuring we always get the best provider of services, whether internal or external, and that contracts are hard negotiated and hard applied. We view public money not as a right, but something to be managed with great prudence and on which to maximise return.

What we mustn't lose sight of is the fact that what we are providing is public services. How that is delivered is really not the issue. It's about the quality of the service and the price.

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