Would running government more like a private sector business be a way of improving its performance?

Much has been made of the effects of private sector thinking and its application to the public sector. The scope of this influence has been felt in all areas of political life. From empty rhetoric to actual legislation and implementation and from areas as wide spread as health, prisons and the arts, the influence of the private sector has been massive. Hastened by the fall of socialism, both in the collapse of the communist bloc and by the retreat of socialism politically and academically in the west, the influence of private sector thinking looks as if it only stands to increase in the domain of western domestic politics.

The UK was, under the Thatcher governments of 1979 onwards, at the forefront of embracing private sector ideologies in running the state. What followed were a series of changes that resulted in the biggest shake up of the public sector for some time before and, to this day always.

Before this, Britain was in a stagnating crisis. Unlike the false memory being cultivated of pre-Thatcher Britain of happy communities it was in truth an era of muscular unions with disregard for the public. Consumers where treated with top-down, prescriptive contempt. The civil service was bloated and incompetent and the bureaucracies within its remit failed to deliver the most basic of amenities. Even the private sector was full of independently schooled and long lunched industrial managers who feared competition more than they feared the unions.[1]

The reform of the public sector by the conservative administrations after 1979 was centered on four main points of action; privatisation of state owned industries and services, the introduction of internal or quasi-markets in those sectors of provision which could not be covered by the private sector, the creation of executive agencies in the place of some of the existing bureaucracy (the Next Steps reforms) and the Citizens Charter, a legislative base for the enforcement of appropriate behavior from public services.[2]

These actions where based around, intellectually, Public Choice theory. Public choice theorists blamed the situation in 1970s on public bureaucrats pursuing their own interest and those of their office/department by expanding public services.[3] The solution, they beleived, was to extend the market place. This would allow citizens to become consumers and buy public services, rather than being prescribed them (through mechanisms like health care vouchers). The problem at the time and still experienced is some sectors now, was that the one department was responsible for policy advice, regulation of its sector, service delivery and any commercial trading functions. This meant that departments where setting and achieving their own targets, all under their own regulation, an atmosphere which could only have led to expanding infrastructure and cost, and tumbling standards of delivery.[4] They believe that bureaucracy should be slimmed down, activities returned to the private sector wherever possible and for the influence of the market to be built into systems of prevision where the pure market could not deliver.

Improvements of accountability were to be delivered by the changes too. In pre-Next Steps system, civil servants, especially senior ones, had nearly no accountability. Outside of the political system that elected members of parliament and with no threat of being fired like a private sector worker, the civil service seemed to nurture laziness, corruption and waste.[5] Reforms have come in various forms, mainly centred around the four above. These began with Thatcher but have been successfully continued since under Major and Blair.

The process of privatisation began in 1979 with the British Petroleum. BP already had some shares held in the private sector (done at the request of the IMF). The state sold another proportion of the shares in BP bringing the government’s stake below 50%. Now that the was a minority share holder and BP could behave commercially. Further more, as the government was no longer responsible for BP’s debts, any borrowing was no longer public.[6] The residual shares were sold of later and success of the privatisation of BP is a formality for the history books.

A significant case of the merits of conscientious privatisation was the sale of Vickers shipyards in 1986. It was bought by a consortium, lead by management, that included workers, local banks and residents of the local communities. The bid made was the second highest, to that made by Trafalgar House. The consortium bid was however believed to be the most beneficial for the stakeholders involved.[7]

The removal of power over these often centrally critical bodies from the government was certain to arouse controversy and opposition in groups that benefited from the current, central system. Further, public fear of losing their supply of services to something unknown can undermine efforts to decentralise. Ways around this where found by making the the success of the privatisation.

The simple truth is that since privatisation, most prices for utilities have risen bellow the rate of inflation except for in those sectors in need of massive reinvestment.[8] Regulatory bodies have succeeded in maintaining standards in the delivery of services by the private sector. Its is now also true that in privatised sectors the monopoly that may have remained immediately after privatisation has been eroded and competition in areas like utilities and telecommunications is continually increasing. Privatisation has, on the whole worked.

Privatisation is not always appropriate however. In areas where it was felt the private sector would not provide as well as the state, state provision has remained. To introduce the bottom up consumer inputs needed to redirect public services, features of the market have been introduced to areas of public provision. By creating a “purchaser provider split” in an internal market, consumer needs can be met yet the centrally funded service can be delivered “free at the point of consumption”.[9]

In the NHS currently, Primary Care Trusts (PCTs) purchase health care provision from NHS Trusts. Further more, those PCTs and NHS trusts that perform well[10] can be granted “foundation status” allowing far greater autonomy over their management. Despite the conservatives starting many of these reforms, the health service remained chronically under-funded. New Labour maintained and in fact consolidate the internal market and increased far greater competition between health care institutions in the form of published assessment of hospital performance. They also added to the reforms much needed funding to achieve the vast improvements in health care of recent years with ambitious led quality targets being met again and again by the NHS.

However, competitiveness can be dangerous in health care. Before funding was increased, under the competition based system of the conservative years, failing hospitals did just that, they failed. In the private sector, if business fails to achieve income and keep costs down it fails, is liquidised and a competitor takes its place. In areas where the private sector fails to provide, the public sector can not be allowed to fail.

Also, in a competition quasi-market, research has shown that hospitals can show more concern for meeting targets than providing the best quality care for all patients.[11] It didn’t conclude that competition itself was dangerous, but that hospitals should compete for quality, as they do now in league tables, than on price, as happened in the early 1990s. However, some still believe competition in the NHS is destructive:

“The whole concept of trying to raise standards by introducing competition between different parts of the NHS is stupid and damaging”[12]

Frank Dobson, Secretary of State for Health, 1997-1999

However, New Labour continues to reform health care in a direction led primarily, if not entirely on Public Choice theory.

Possible the most critical, private sector inspired, reform was also the least visible.

This essay was written by Jonathan McHugh in March 2005

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[1] Mathew Parris, The Times, 21.12.2002: http://www.timesonline.co.uk/article/0,,482-520219_1,00.html

[2] Dr Madsen Pirie, Blueprint for revolution 1993. Pg:5-8 – Published by ASI (Adam Smith Institute)

[3] Greenwood, Pyper and Wilson, New Public Administration in Britain, Pg10, 3^rd Edition 2002 (First published 1984). Routledge

[4] Robert O’Quinn and Nigel Ashford. The Kiwi Effect. 1996: Adam Smith Institute

[5] Greenwood, Pyper and Wilson, New Public Administration in Britain, Pg10, 3^rd Edition 2002 (First published 1984). Routledge

[6] Dr Madsen Pirie, Blueprint for revolution 1993. Pg:11 – Published by ASI (Adam Smith Institute)

[7] Dr Madsen Pirie, Blueprint for revolution 1993. Pg:14 – Published by ASI (Adam Smith Institute)

[8] Price increases since privatisation and before 1992, from Dr Madsen Pirie, Blueprint for revolution 1993. Pg:23 – Published by ASI (Adam Smith Institute):

Telecom: 17% against inflation of 50%

Gas: 20% against inflation of 40%

Electricity: In line with inflation

Water: 5% above inflation

[9] The NHS in particular has become somewhat of a “sacred cow” politically, with governments defending reform on the grounds of it not being privatisation. It is with the utmost vigour that the British public and the “establishment” believe that the NHS should be, as Aneurin Bevan created it, “free at the point of delivery”

[10] Performance is measured both financially and through ongoing assessment and accreditation schemes. These are much more focused on the quality of care patients receive.

[11] Research conducted by the university of Bristol, cited in a press release by the IPPR, 29.01.2003. It compared death rates from heart attacks in A&E between hospitals with and without competition. It found variation in rates between those with competition after the establishment of the internal market, ratyes being highest in those hospitals that had to compete.

[12] Taken from; Row over foundation hospital plam, BBC News, http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/1/hi/health/4146181.stm