PUBLIC/PRIVATE SERVICES - TOTAL CONFUSION

In Britain, the public and private sectors are uneasy bedfellows.

Why don't politicians get it?

Both the Conservatives and New Labour are in love with the idea that the private sector is a superior vehicle when it comes to providing public services. This is despite an overwhelming body of evidence that the involvement of the private sector in the provision of public services too frequently results in poor service and runaway costs.

Consider Metronet and a host of Private/Public 'Partnerships' that have resulted in cost overruns, extortionate expenditures for simple jobs and poor performance. It happens in schools, prisons and hospitals. It happened in the railways, with fatal results, it is happening even now in the Underground, it happened in the military, (remember helicopter pilot training). It happens in a big way in the privatised utilities, which were supposedly going to deliver superior service and lower prices to consumers.

Across the Atlantic, there looms the awful warning of the US private health system, which delivers far poorer public health outcomes than most European systems - at vast cost - and still leaves some 50 million Americans not covered by medical insurance.

But still the myth that the private sector is better is still firmly rooted in the minds of most politicians.

Here is the reality.

The private enterprise system is based on free markets. The aim of players in the free market is to win the competitive battle. The reason for doing this is to earn superior profits. Players in the market will, if left to their own devices, employ any (ethical?) strategy they can to gain advantage and maximise earnings.

You don't believe it?

All the evidence of the last 20 years gives us an unassailable argument that private sector companies will go to considerable lengths to beat competitors and win the competitive battle. In this Darwinian struggle, the consumer becomes cannon fodder. The behaviour of the drinks, food, tobacco, financial services, banking, electricity, water and many other industries is living proof that profit comes first and customers' interests some way down the list.
Further confirmation of the nature of the quoted private sector comes from a respected investment industry body. For quoted companies, we should all by now have realised that investors are king.
In October 2000 Hermes Pensions Management, one of the larger UK pensions investors, produced a Statement of Principles designed to make clear their views on what they expect from companies when investing. They accompanied the Principles by stating clearly some fundamental convictions that drove their thinking:

• It is axiomatic that the Primary Goal of a UK-listed company is to be run in the long-term interests of its shareholders
• Central to this goal is the need to create a financial surplus.
• That financial surplus is achieved by having a competitive advantage
• That companies should behave ethically

So there we have it - the first three important goals of a private company are to satisfy shareholders, make profits and beat competitors. The exhortation to behave ethically seems to be almost an afterthought - and has been demonstrated time and time again to be somewhat flexible if there is any difficulty in achieving the super-ordinate and axiomatic goal of serving shareholders.

Where is public service? What about social responsibility? Where are customers? Apparently well down the list, mostly dealt with by rhetoric and spin.
Why do many politicians persist with behaviour that puts us all at the mercy of single-minded profit-seeking private companies? We guess a mixture of reasons:

• They are beholden to the private sector for financial support and post-retirement wealth
• They frightened of the power of the financial markets
• They are trying to hide the true costs of public service provision by financial engineering and tricky accounting. This has driven the Treasury for many years and the public has not realised the true long-term costs of the subterfuge.
• They are naïve and ignorant - or blinded by the vast amount of propaganda, lobbying and free-market dogma that they are subjected to.
• Only one thing is clear: they can't be doing it based on evidence of superior performance and lower costs.

The result - a huge mess

Gordon Brown has recently announced his intention to continue with New Labour's 'reform' agenda. This includes carving out more opportunities for private sector involvement in the provision of public services. He has recently appointed Blairite James Purnell as Work and Pensions Secretary. Mr. Purnell describes himself as 'ideologically neutral' when it comes to choosing between the public and private sectors to provide public services. This is an interesting position for a 'social democrat' to adopt, especially as it clearly favours the much more aggressive private sector.
The real tragedy of the government's position is that it creates an enormous mess. On the one hand, public servants are congratulated for their commitment and then abused for being resistant to reform. The public and private sectors are in effect placed in competition with each other - but on an unequal footing as the private sector insists on high-return, low risk involvements. Market forces and competition are injected into the public sector, accompanied by a disastrous panoply of targets, measures and faux-market practices. Behind the scenes, big consultancies such as PriceWaterhouseCooper, KPMG and Accenture cream hundreds of millions devising targets, reward systems and 'implementation' plans. The main result is that public sector becomes more adept at meeting targets and subverting information and consequently spends less and less time on providing flexible and appropriate services.
Meanwhile, the government pushes harder and harder, increasing the confusion and resentment and resistance by public sector workers, apart from a minority who see considerable opportunities for self-enrichment. Meanwhile the public, who have been promised 'choice' and brilliant services, focus on the bad news rather than the generally good performance of the public sector and lose faith in the whole system.

On another dimension, Britain is trailing far behind many developed countries in developing sources of renewable energy. Apart from the fact that the civil servants' first reaction to this failure was to try to cover the reality, the UK government seems terribly nervous about taking a direct hand in encouraging the creation of renewables, despite the fact that it is obvious that the private sector will not take a hand in funding new technologies with possibly risky long-term payoffs. Also,the early stage of any new energy source will produce expensive power for a number of years until volume and experience are built up.
In a 2004 conference on renewable energy policy, jointly supported by the Adam Smith Institute, Centrica and the then-DTI, Tony Wright of the DTI confirmed that the UK would pursue "market-based" solutions to renewable development.

Governments in countries like Denmark, Germany, Spain and Finland have both directly supported the development of new technologies or have subsidised expensive energy at the early stages of growth from the public purse - or both.
Result? Germany has over ten times more electricity from renewables than Britain; Denmark now is world leader in the design and manufacture of wind generators.
Finland, which doesn't have the tide or wave resources of Britain, has decided to develop nuclear power through a public/private co-operation. In this case, the providers are accountable, not to the government or the financial markets, but to consumers. This is the Finnish version of a market-based solution.

Its not about private sector or public sector - it's about clarity of thinking, organisation, clear roles and management skills

Many other countries seem to deliver public services through publicly accountable state enterprises. Unlike Britain, they do not suffer from ideological hang-ups about free markets. Instead, they take an empirical approach, considering what will work best in the public interest, what will be most effective and economical. This means that when they decide to do something, they don't have to worry about the sensibilities of financial markets or creating massive legal agreements costing hundreds of millions, but can pursue their goals single-mindedly. These countries do, of course, use private contractors to provide services, but when it is a private/public partnership, they are clearly subordinated to the public interest by confident public authorities.

In Britain, we have not yet faced the real issue - the organisation of public services and management competence. We suffer from a dearth of management skills in both the public and private sectors.
The advantage that competently managed public enterprises have over the private sector is that they should be able to single-mindedly address the objective of providing excellent public services without looking over their shoulders to see if their investors are happy.
But good managers in the public sector suffer from the gross incompetence of politicians who try to micro-manage, introduce myriads of initiatives, one piled on top of another and top-down targets that have little to do with on-the-ground realities.

The fact is, the whole system of the organisation of public services is fatally flawed, with total confusion between what is private, what is public; between policy-making, executive strategy and implementation. The system needs to be fixed - this would give public sector managers the opportunity to do their proper jobs. The introduction of the private sector is a red herring and ignorant 'fix' that creates confusion and only makes matters worse.

Latest - the PPP disasters compounded by corrupt private company practices.

Readers may remember the outsourcing disasters at Railtrack in the good old days when it was a private company, employing top managers who knew much about the City and little about running railways. Railtrack outsourced rail maintenance and in effect stood back to let the private sector get on with it. They and the public were rewarded by sub-standard work to the point that several fatal disasters occurred. The ministers at that time had the sense to bring rail maintenance back into public control with highly beneficial results.

Now, in early April 2008 comes news that a large number of PPP private sector contractors, including some of the largest, are under investigation by the Office of Fair Trading for bidding irregularities and inter-company collusion to keep bidding prices up.

We wonder when the current crop of politicians will come to their senses and realise that in every respect, the bright idea of public-private partnerships for capital and building work has resulted in huge long-term costs, sub-standard and sometimes dangerous work and a range of swindles and scams that amount to a national disgrace of Banana Republic proportions.

Time to work on injecting managerial competence back into the public sector, stop pretending that the private sector is somehow better, and trying to fool us all that PPP is somehow more cost-effective when it is obviously not.
We are being grossly betrayed by ignorant and incompetent politicians.