Belief in the private sector’s ability to solve the problems of the public sector is widespread. Both Conservative and Labour governments have felt that through the private sector using state owned services to provide public services (public-private partnerships or PPP) there will be an increase in efficiency and improvement of services. PPP allowed John Major to distance responsibility from difficult reforms, as financial incentives allowed private firms to take tough decisions, such as cutting budgets in ways unthinkable in the public sector in a drive to reduce costs and increase efficiency. For Tony Blair PPP enables there to be a huge increase in investment in public services without the need to raise taxes. However, there are problems with PPP. For instance, there have been huge problems and inconsistencies in the contract making and these have led to inefficient structures. Many of the savings offered tend to occur from one off reductions in labour, the major cost of the public sector, which can leave staff heavily overworked. Many of the most successful reforms introduced by private firms often can be done by the public sector anyway. As the firms have to finance themselves under the terms of the Private Finance Initiative (PFI) the firms have to borrow from banks at a far higher rate than government funded projects. Although the cost to government is low at the beginning given the large initial investment, over time the burden of these investments create less value as the government continues paying the lease despite less future investment, unless the firms make significant improvements in efficiency and service.
Since the 1970s governments have sought to restructure and reduce the size of the public sector. Public choice theorists argue that bureaucrats are motivated to increase their budgets as much as possible in order to increase their status, as they are judged by the size of the budget that they control and by how much they can increase it. However, Lawton and Rose point out that it is “a fairly cynical thesis and its advocates offer plentiful prima-facie evidence to support it”. They go on to offer further criticism, suggesting that only the most senior officials would be able to influence policy. They also feel that there are significant barriers to change in the civil service and that the prevailing structure “is one of control of subordinates rather than allowing discretion,” resulting in slow changes in policy and a frustrated civil service.
Various initiatives have looked at reducing the inefficiency of public services and public companies. The Conservatives main solution was a movement from the hierarchical public sector to more market based solutions through privatising government owned industries, as it was considered the most efficient way of operating services. Some public services, such as social security, health and the prisons were considered as being unsuitable for privatisation and issues were raised over equity, such as by Lawton and Rose who asked: “Would it be acceptable for a police force to concentrate its resources on preventing crime in an affluent middle class area with articulate and vociferous residents at the expense of a run-down inner city estate?” Organisations such as the Secretary for Health and Social Security dismissed privatisation, as social security operations are not capable of being self financing. However, contracting out was considered, as it was felt to be cheaper, would avoid the need for direct government management and lead to “tighter monitoring of outputs and greater internal drive and incentives to rationalise and innovate.” This is a shift in policy, as government seems no longer interested in implementing policy but is merely interested in formulating it. Using the analogy of steering Osbourne and Gaebler recognise that government as the steerer has strengths in some areas, such as policy management and ensuring equity, while the private sector as the rower is better at performing complex tasks.
In 1991 a report by the Inspector of Prisons concluded that the management was the cause of the Manchester Prison riots and that it should be put out to tender. Flynn goes on to suggest that the tendering process produced quick changes to management and the regime as the managers “realised that it was not going to be credible to promise an improved regime in the bid document if such a regime could not be demonstrated in practice.” He goes on to say how this threat of losing the prison to the private sector provided an incentive to produce a better service and how the “success of the process led some to believe that market testing in this case was just a mechanism to reduce the power of the Prison Officers Association to resist operational changes.” However, this was not the case as the programme of competition continued, with private companies being invited to run new prisons without a counter bid from existing employees of the prison service, with the stated aim of improving the service and not to save money.
Measures such a part privatising measures did result in a shake-up of the management of the prison service. However, as Flynn concludes, it did not solve its problems. He finds that “recent inspectors’ reports have indicated that some of the problems identified by Woolf, such as long hours in cell, insufficient rehabilitation work, counselling and education persist.” Most PPP contracts don’t leave a streamlined management system. “Once a contract is signed, with a specification it is difficult to change the service” claims Flynn. Although he recognises that it may not be important with services such as refuse collection and street cleaning with services such as homecare or nursing “the details of the service are a result of the relationship between the service user and the provider which cannot be described in a detailed specification.” In the case of the Underground the analogy of Osbourne and Gaebler breaks down, as there are too many people attempting to steer because there are now three companies maintaining the London Underground’s tracks. This results in uncoordinated management, massive disparities in service and duplication of costs and as a result a fragmented system. Consequentially, significant economies of scale are lost and the cost of production goes up.
It is claimed that once private firms are in charge of public services there will be significant improvements to cost and service because they are motivated to increase their profits. It is generally considered that public services are economically inefficient because of larger staff levels, as public services have to take into account welfare and that there is no profit incentive from the people running operations to cut costs. “Given three quarters of local government costs being paid in wages and salaries” explain Lawton and Rose, “it would seem reasonable to assume that the major area for savings for a contractor would be in reducing labour costs.”This is also backed up by a study by Szymanski and Wilkins that shows that “most of the cost savings have been associated with improvements in labour productivity rather than through wage cuts.” In 1992 Walsh claimed that in refuse collection “the results vary by service but figures of 20 per cent reduction in the cost of refuse collection were common” and put this down to refuse crews being reduced from five people to four and the four having to take on the extra work. It is usually very difficult for politicians to employ large job cuts without a huge backlash. PPP is seen as a useful way for the politicians to circumvent this problem as demonstrated by Lord Ripley: “The root cause of rotten local services lie in the grip which local unions have over those services in many parts of the country…Our competitive tendering provisions will smash the grip once and for all. The consumer will get better quality services at lower costs.”
However, it is difficult to assess whether job cuts are necessary in order to increase efficiency or just a way for the new firms to make some extra profits. “Reductions in staff numbers, organisational changes and new working practices will continue for some time to place individual civil servants under stress” claimed one Parliamentary Ombudsman, who also claimed that “there is a risk that fewer staff will lead to slower service and to more mistakes because civil servants will have less time for thought to enable them to pursue considered and prudent action.”
The Underground PPP contract was finalised during a period of low profitability for national rail companies following the Hatfield rail disaster. As a result the companies were able to argue for being exposed to less risk. As a result Tube Lines, one of the private firms involved is expecting to earn at least £1.1 billion (more if targets are actually met!) over the thirty year contracts, a huge return on its initial investment of £180 million, not even including consultancy fees. The Government will have to pay out more to companies if they struggle with losses as a result of unforeseen disasters. For example, the part privatised air traffic control system (NATS) which takes its revenue from the number of travellers suddenly turned from being a highly profitable company into a struggling one as a result of the September 11th terrorist attacks in New York reducing passenger numbers. If air traffic control was still nationalised the Government would have easily been able to support NATS by absorbing the loss and resuming its normal service. NATS in its present state would be unable to do this and so in May 2002 it attempted to raise its fares when they were originally expected to reduce their charges and has since been complaining about its high levels of investment it is required to make. However, the Government still bailed out NATS with £30 million in 2002.
The Underground contract punishes the private firms when there is a short term disruption to services and it is similar in structure to subcontracting on national railways. However, the result is that firms would be likely to attempt to maximise short-term profits rather than quality and safety, and this would jeopardise the long-term viability of the whole system. Subcontractors have an inventive to cut corners and skimp. For instance, on the national railways the regulator has often increased the problems by fining the rail operator when faulty track and signals make trains late. If the Underground were to be closed down for repairs or its use restricted it would have to pay compensation, and consequentially the firms have the incentive to avoid closing lines. Preparations for the PPP on the Underground have jeopardised the systems safety and there had been many strikes prior to PPP being completed by Underground workers over safety concerns, with the RMT claiming that safety demands for part-privatisation on the Underground had not been made. For instance, Balfour Beatty, one of the firms was drawn into a row over the Hatfield derailment has also appeared in the Environment Agency’s ‘Hall of Shame’. Adtranz, who produces the trains, had been criticised by Railtrack and British train companies for delivering faulty trains.Jarvis has previously been criticised and fined for health and safety breaches. These firms were all considered despite these concerns being raised by employees, the Mayor, Transport for London and users of the network about their abilities to run a safe network.
The Government prefers PPP because the Private Finance Initiative relieves the Treasury of having to borrow the money to fund large-scale projects such as building new hospitals, as private firms have to raise their own money from the banks. The Government is committed to keeping a stable budget and avoiding the need to raise taxes whilst also increasing investment and creating lasting improvements to public services. PFI enables there to be a much needed large short-term increase in investment without the political headache of raising taxes or creating huge amounts of debt. As Flynn describes it, “if a building is bought, the expenditure is accounted for over the life of the building, rather than the cash spent on buying it in the year in which it is purchased.”
Although initially PFI creates only a small burden on the taxpayer in the long run it creates a larger problem. The Government is able to borrow at very low rate of interest compared to private firms, as it is considered to be of a significantly lower risk. Firms are taking risks when they borrow money to invest and consequentially they will demand a return on their financial risk. An executive involved in a PPP deal comments on its potential for large profits: “We buy all the equipment for a project up front, provide all the resources to do the work and charge back our costs, plus an agreed profit, to the Government. What always isn’t realised is that, in return for putting the money up – in other words providing a loan to the government – we are allowed to charge commercial interest rates plus an agreed percentage. Inevitably, this is at a much higher rate than the Treasury’s borrowing rate, which is extremely low because of its credit rating.” To make things worse the privacy of the agreements mean that none of the full details ever emerge.
Public-private partnerships appear to work only in very limited circumstances, such as in cases where there is urgent need for reform in order to reduce costs or improve services, or as a short-term method of increasing investment in public services. However, there appear to be a number of strong reasons why PPP is unsuccessful. Many reductions in costs have often appeared to be only one-off and in the instances where it has been through reducing the size of the labour force there is a potential reduction in flexibility. It is also difficult to assess where these motivated private firms have made improvements to services. The contract agreements also tend to be highly weighted in favour of the private firms, with only limited risk being moved from the public to the private sector. This appears to happen as a result of governments’ apparent inexperience and rushing contracts without examining the repercussions fully. Although Private Finance Initiatives are an enticing way to increase investment in public services they can end up be too costly over time compared to the lower borrowing rates that the Treasury can call upon. Openness in decision-making is important in order to create accountability. PPP’s complex contracts result in it becoming increasingly difficult for users of services and policymakers to work out who is to blame for costly or poor services and what can be done about it. The main problem is that many of the benefits that the private sector offer can be provided through an improvement or overhaul of the public sector and at a lower cost, as there is no profit margin raising the cost of services. Ultimately there appears to be too many inherent risks associated with public-private partnerships.
This report was written by Jonathan McHugh in January 2005
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