From public services to market services

Richard Hatcher looks at the forthcoming government white paper.
In the next few weeks the government is publishing a new White Paper on public services. In February David Cameron wrote an article in the Sunday Telegraph signalling its purpose.

‘We will create a new presumption – backed up by new rights for public service users and a new system of independent adjudication – that public services should be open to a range of providers competing to offer a better service. […] This is a transformation: instead of having to justify why it makes sense to introduce competition in some public services – as we are now doing with schools and in the NHS – the state will have to justify why it should ever operate a monopoly.’ (S. Tel. 20 February)

In other words, the whole of the public sector, apart from a few exceptions – Cameron cites the judiciary and ‘national security‘ – will be available for privatisation. The thinking behind this is spelled out in a report called How to shift power from Whitehall to public service customers published last year by three senior partners at KPMG.1 In February this year, the same month as his Sunday Telegraph article was published, David Cameron appointed one of the authors, Paul Kirby, as the government’s head of policy development.

The KPMG report draws a negative balance-sheet of Labour’s reforms. ‘Public service reform has not been radical – the underlying structure and culture of public service professions, institutions and management has not been fundamentally challenged.’ (p1). The fundamental issue now is not cuts, it is privatisation.

‘The presenting issue is about levels of spending, but the real issues are about shifting control from providers to their customers and from bureaucrats to enterprising professionals. This is the only way we can enable people get what they need from public services, albeit for less.’ (p1).

Marketisation hasn’t gone nearly far enough, because there isn’t enough competition.

‘Recent UK reform has tried to ‘marketise’ much of the public sector – creating buyers and sellers, transacting around defined services for annual funding. This includes: competition in the health service; money following the pupil, student and patient; a mixed economy of providers in social care; competitive tendering in blue collar and support services; transfers of social housing to new landlords; creation of executive agencies in the Civil Service; £10bn of services bought from the third sector; creation of PFI and other asset based PPPs. But these reforms have a more limited impact than many hoped (and some feared). The reality is that the ongoing income of the majority of providers has been guaranteed, even if their status has changed (to foundation trust, academy, RSL, outsourced care service, etc).
Public sector funding is far too sticky – once providers have funding, in reality they tend to keep it and have it increased every year.’ (p5).

The solution is almost total freedom for providers and payment by results (PBR).

(ii) Payment by results should be implemented across the public sector without exception – where it exists already, it should be made more forceful and sophisticated, where it does not exist, it should be introduced with very limited transitional periods.
(iii) Public service providers (whether public, private or voluntary sector) should be given almost total freedom to respond effectively to their customers and the PBR regime… (p1).

The government’s job is to rapidly construct this new free market in ‘public’ services. This requires new demand-side consumer control of funding, and new supply-side rights for providers.

On the demand side, services are divided into ‘personal services’ and ‘local services’. ‘Personal services’ include:

‘• Education – early years, schools, FE & skills, higher education and SEN.
• Health and adult social care – primary care, elective secondary care, dentistry, adult social care.’ (p12)

They would be funded through a voucher system.

‘In personal services, the funding [c. £200bn or over half of public services funding] should be in the hands of individual consumers, in education, health, and adult care. Money should follow the choices made by parents, patients, students and those receiving care.’ (p11)

The government would kick-start the market with

‘The use of a tariff to determine, as simply as possible, how much funding should be given to a customer to spend on their entitlement and to set the going price for providers. The tariff, e.g. X thousand per pupil, should include all the funding available, including any premiums for additional needs and any capital funding’ (p3).

‘For local services, the funding (c. £50bn or 15% of public services funding] should be unequivocally given to local communities to decide without any strings from Whitehall. Elected local people should be able to shape real local priorities and to pursue innovation in the services, accountable to local communities not Whitehall. This will include community safety, local environment, leisure, social housing and children services. (p11)

‘Accountable to local communities’ does not necessarily mean ‘accountable to local elected government’. On the contrary, the aim, as in the Localism Bill, is in many cases to replace local government with other types of community bodies, not necessarily elected, and not accountable to local councils.

To construct the supply-side, ‘There will have to be an aggressive programme of liberalization to give public service providers the incentives and freedom to respond.’ (p18). This would require new rules, including:

• A right to bid – where any public service provider (from any sector) can make a proposal to take on a service from another organisation
• A right to own – where staff and managers are able to propose a staff and/or management buy-out or mutualisation of their service, with or without external investors and joint venture partners
• A right to merge and acquire – where successful public service providers (from whichever sector) can propose mergers, demergers, acquisitions or disposals
• A right to manage – where public sector organisations are free to decide on resources issues (e.g. capital spending, workforce issues, IT, multi-year surpluses and deficits, etc).’ (p18)

In practice this would mean:

• Empowering all public service staff and managers to launch management and/or staff buy-outs of their services, whether that is whole organisations or parts of them – creating a whole new raft of enterprising public service providers;
• Inviting local authorities, social enterprises and enterprising public sector professionals to bid to take over any centrally controlled locally delivered services (e.g offender management, welfare to work, mental health, etc) as ‘new agents’.
• Freedom for providers to choose their own delivery processes, so long as they achieve the outputs or outcomes required of them.
• Freedom for external investors and suppliers (both not-for-profit and for-profit) to propose taking stakes in public service delivery, whether through taking equity stakes, insourcing expertise, etc.
• Financial flexibility through less ring-fencing, relaxing capital / revenue rules and having a permanent and predictable regime of end-of-year carry-forwards.
• Devolved decisions on resources (e.g. pay structures and levels, IT, property usage, improvement budgets, etc.)’ (p19)

A variety of types of providers and organisational forms are envisaged, not just private companies, though they are likely to be by far the main beneficiaries, but the logic of the untrammelled market is that all providers will be forced to act like for-profit private companies.

‘It also goes beyond the freedom to operate – into the freedom for staff and managers to own their organization, either on their own or jointly with the community they serve or with external investors. There are a wide variety of options (mutuals, employee co-operatives, joint ventures, management buy-outs, etc) but they all focus staff on their ongoing need to meet customer requirements to stay in business.’ (p19)

Finally, providers cannot be relied on to enter this new market voluntarily – they may have to be compelled.

‘Such a set of rights will need to be actively promoted and supported by Government and (counter-intuitively) empowerment will need to be forced onto public sector organisations in the early stages to break the tendency to structural inertia. History shows that just offering the freedom is not enough – e.g. the Government is still trying to persuade schools to take the freedoms as academies that they could have taken 20 years ago as grant maintained schools.’(p18).

The KPMG report’s programme represents the complete marketisation and privatisation of public services. To what extent will it be embodied in the new White Paper? On the one hand it is a huge risk for government in terms both of whether it would actually work and the likely opposition and resistance it would arouse. On the other hand, the Coalition parties know that the lesson of ‘shock doctrine’ and of the half-way Blair reforms is that you have to strike fast and hard if radical market reform is to be driven through to completion and the old public service system so completely demolished that it cannot be put back together again. If the White Paper incorporates much of what the KPMG report proposes it will represent a marketised transformation of public services without precedent, and the biggest challenge yet to its opponents.

Richard Hatcher

Reference
1. Alan Downey, Paul Kirby, and Neil Sherlock (2010) How to shift power from Whitehall to public service customers, London: KPMG. Online at http://www.kpmg.co.uk/pubs/204000%20Payment%20For%20Success%20Access.pdf