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I. BACKGROUND TO THE IPPR REPORT AND THE CURRENT BRITISH DEBATE
The report of the Institute for Public Policy Research (ippr) into public private partnerships (PPPs) began life in 1999, at a time when there was comparatively little general interest in the subject of PPPs. There were enthusiastic devotees and detractors where specific schemes had been announced, for example the planned modernisation of London Underground. But on the whole the issue was largely seen as a technical one, for those with a special interest in public procurement and finance.
However, the fierce passions aroused in these debates, particularly in relation to the use of Private Finance Initiative (PFI) in the National Health Service (NHS) and the planned PPP for the London Underground, meant that PPPs would soon become a key part of the mainstream political debate.
Within large swathes of the Labour movement there was still widespread hostility to the use of the private sector in public services. During the last Labour Government of the late 1970s there was serious debate among senior Labour figures about privatising the top 100 private companies. And during the massive electoral defeats of the 1980s the Labour Party became increasingly reliant for its self-image on opposition to the Conservative Government's privatisations.
However, in 1994 the newly elected leader of the Labour Party, Tony Blair, headed a campaign to ditch Clause Four of the its constitution that committed it to "common ownership of the means of production, distribution and exchange". He won the campaign, but the fight was fierce. Clause Four commanded huge emotional support amongst many grassroots party members and union affiliates.
The scars of the Clause Four battle are reopened whenever PPPs are debated within the Labour Party. However, the harsh distinction between public and private was mostly the self-creation of a Party that had suffered 18 years in the political wilderness. Working with private and voluntary sectors was a long-standing practice within the UK's public services, under both Conservative and Labour Governments. For example, Registered Social Landlords, in the form of Housing Associations, have long received public funding to provide social housing, even though they are considered to be private sector not-for-profit bodies.
The reform of Clause Four was not simply an exercise in political rebranding. The Labour Government of 1997 had to face up to transformation of the public sector bequeathed by an enthusiastic, privatising Conservative Government. The Conservatives had sold off public assets such as the telephone, water, power and rail networks; they had begun to experiment with the way in which new public assets were built through the Private Finance Initiative; and had reformed the way in which public services were delivered at a local level through the system of Compulsory Competitive Tendering, in which local authorities were required to contract out services to the lowest bidder.
The new Labour Government was elected on a promise to improve the quality of public services, but they had made it clear that they would not seek to undo all the work of 18 years of Conservative rule. Privatised companies would not be renationalised (though see the discussion of Railtrack below), and partnership with the private sector would continue, though a number of reforms and new protections were introduced.
This combination of Labour's ideological baggage, the challenge of working out what to do with the policies inherited from the Conservatives and the overriding imperative of improving the quality of public services ensured that PPPs would become a high-profile issue for the Labour Government.
II. OVERVIEW OF THE IPPR REPORT
The ippr report argued that getting public private partnerships right was vital if the quality of the UK's public services was to meet the expectations of the British public over the next decade. But it stressed that delivering this would require significant changes in the direction of policy as many PPPs have performed poorly over recent years.
Its starting point was that this should be a golden age for the champions of public service. The Labour Government has asked to be judged by its ability to improve the quality of collectively funded services. But if, after a sustained period of increased funding, citizens felt that those services were still failing to deliver there could be a major political backlash. Those opposed to the principle of collective provision would find it easier to argue that public services are an anachronism; blunt, inefficient, restrictive of choice.
Before the ippr report there were few even-handed studies into the contribution that partnerships between public, private and voluntary sectors could make to our public services: prejudice and anecdote had tended to dominate analysis and evidence. Hence the report aimed to cut through the arguments on the rights and wrongs of PPPs and set out a reform programme aimed at ensuring that in the future PPPs were used at the right times and to maximum effect.
Being open minded about the contribution that partnerships could make to public services would mean challenging two intransigent perspectives on public-private relations. One is the privatisers' vision of public services: their aim is always and everywhere to increase the role of the private sector in the provision and funding of public services. Their desired outcome is smaller Government and residualised public services. The contrasting view is the public monopoly perspective which holds that, as a matter of principle, public services should always and everywhere be provided by the public sector. Both approaches view PPPs as a form of privatisation by stealth.
A more fruitful approach is to recognise that for too long there has a been lack of diversity in the way in which public services are provided and projects are procured. Government has tended to rely on too limited a pool of service providers and too restrictive an approach towards undertaking large capital projects. This has resulted in public services missing out on the skills, creativity and areas of expertise that reside in a wide range of private and voluntary organisations. This means less choice for public authorities, less innovation than would otherwise be the case, and less scope for learning within public service organisations.
The real challenge we face is to manage a diverse public service sector effectively so that it enhances social equity by improving the quality of, and commitment to, publicly funded services. A more progressive approach can be summed up in four steps.
Foundations for partnership
One of the reasons why debates on PPPs tend to generate more heat than light is because there is little agreement as to what constitutes a partnership or the types of problem that they might help solve. Public managers do not have a clear account of how partnerships can help to improve the quality of services. PPPs are a risk-sharing relationship based upon an agreed aspiration between the public and private (including voluntary) sectors to bring about a desired public policy outcome. More often than not this takes the form of a long-term and flexible relationship, usually under-pinned by contract, for the delivery of a publicly funded service. Greater freedom to enter into PPPs should run alongside the decentralisation of decision-making authority to public managers.
There are several rationales for considering the use of this type of arrangement:
Making a success of partnerships is difficult. If PPPs are to make a significant improvement to the quality of public services over the medium term then a number of conditions need to be in place:
Economics
How significant are PPPs?
Keeping a sense of perspective on discussions of partnership requires an awareness of the significance of PPP arrangements within today's public services. The overall picture in the UK is one of the continuing dominance of services that are publicly funded and publicly provided. The Private Finance Initiative still plays a fairly modest role in relation to overall levels of investment, accounting for nine per cent of total publicly sponsored gross capital spending between 1997 and 2000.
It is also important to distinguish between the types of role that Government asks the private and voluntary sector to play. A spectrum of different approaches exist:
In prisons there appears to be a 'private sector default' position in relation to the building and operation of new prisons. In social services there appears to be a 'level playing field' between different types of provider. In clinical health services there is almost a 'public sector default' position. It remains unclear why one approach applies in one sector but not in another.
The lessons of the Private Finance Initiative
The economic arguments for PPP and in particular for PFI have been confused from the start. Two rationales have been offered: one potentially serious, one spurious. The potentially serious argument is that in the right circumstances PPPs can offer significant value-for-money gains and generate improvements in service quality. At the moment the evidence on value-for-money is variable across sectors. PFI seems to be offering significant gains in roads and prisons but not in hospitals and schools. The spurious argument is that using private finance to pay for capital investment allows Government to undertake more projects than would otherwise be the case. However, all PFI projects are in the end publicly funded and incur future liabilities for the exchequer.
A number of key reforms are necessary to make the PFI work more effectively:
PPPs and public enterprise
Over recent years the most contentious debates on PPPs have concerned Government proposals for revenue-generating public enterprises such as London Underground and National Air Traffic Systems (NATS), the provider of British air traffic control. The arguments over the use of the proposed PPP models resemble those for the use of the PFI approach in public services. The extra costs of private finance have to be outweighed by the benefits resulting from the skills and risk-transfer that comes from working in partnership with the private sector.
There are significant problems with the proposed PPPs for these two public enterprises, though some of the criticisms made of them are wide of the mark. The key issue in relation to London Underground is ensuring the integration of investment and maintenance with operations rather than whether or not bonds are used to finance investment. In relation to NATS, other more attractive structures were available but not considered.
In general there should be a wider diversity of models of public enterprise. In some instances there are arguments in favour of transferring the ownership of public enterprise to a not-for-profit trust, particularly where there is a natural monopoly and where safety is a key feature. The ippr has advocated such an approach for Railtrack, and the Government has recently proposed such a structure itself. Such a trust should still be able to raise private capital and contract for private management.
The financial framework for public enterprises also needs to be reformed to ensure that PPPs are used as a way of securing value-for-money rather than evading financial controls.
PPPs and key public services
There is scope for policy-makers to encourage greater diversity in provision across the health, education and Local Government sectors. In some areas such as the provision of education services to schools by local government, there are solid grounds for moving to a position where all purchasers select the most appropriate provider regardless of whether they are based in the public, private or voluntary sector. In other areas, such as clinical services in health, a more cautious approach is necessary as the arguments are less clear cut and the evidence is more contested. In all areas, an evidence-based approach needs to be adopted. If evaluations show that PPPs are not performing satisfactorily then policy must be revised accordingly.
Making the public sector a better partner
If partnership is to play a major role in the modernisation of public services then Government needs to become a more effective partner. At the moment it suffers from a severe shortage of skills and those it has are often under-utilised. It finds it hard to learn from past mistakes, it is poor at picking quality partners, and it is fiendishly difficult to get different bits of the public sector to work together to purchase services. Change is needed on all these fronts.
In addition to this Government must play a pivotal role in promoting good employment practices across the public service sector: public money should not support poor employers. A motivated workforce is critical in delivering high quality services to the public.
Communities and partnership
Public service providers should be accountable and responsive to local citizens and communities. Policy-makers and local public managers need to explore new and innovative ways of engaging local people in the design and governance of their public services and spaces.
For too long proposals for enhancing community involvement in public services have lacked bite. If PPPs are really to transform public service delivery it is essential that the vision of communities as the agents of partnership moves from lofty aspiration to concrete reality.
Making partnerships accountable
The traditional model of accountability assumed that public services were delivered through the public sector. PPPs stretch this traditional approach in a number of ways but they also offer a device through which clarity can be brought to the role of purchasers and providers, transparency can be ensured, and the responsiveness of service providers to users enhanced. Ensuring that the involvement of private and voluntary providers in public services does not lead to a dilution of public accountability will require a range of reforms.
Thus the shift towards pluralism in provision which PPPs represent can go hand in hand with more diverse and effective forms of accountability.
III. WHAT HAS HAPPENED SINCE THE REPORT WAS PUBLISHED?
General Political Climate
The huge opinion poll lead that the Labour Party enjoyed over the Conservatives in the run up to the 2001 election meant that the Prime Minister was free to address the issue of PPPs head on in Labour's election manifesto. Knowing that a clear commitment to PPPs in the manifesto would help the passage of future PPP legislation, the Manifesto hinted strongly that the use of the private sector in partnership arrangements would increase throughout Labour's second term in office.
In some areas this was to be expected, for instance the PPP for the London Underground would continue apace. However, the manifesto controversially expressed a desire to increase the use of PPPs in core public services such as health and education. The tone was striking, but it was backed up by few concrete proposals. The subsequent hostile reaction was fuelled by the inability of the new Labour Government to elaborate on their election rhetoric.
The Government replied with a number of high profile speeches, for example Ministers spelled out the limits of private sector involvement in the NHS. However, without proposals about the detailed role of the private sector across the board the Government was unable to calm fears. There was swift reaction from the main public sector unions, with a well-funded 'keep public services public' campaign and the withdrawal of significant funding from the Labour Party by the GMB union. Indeed, during the election, the ippr's report on PPPs itself became a part of this excitable political agenda, being leaked to the press and spun by both those for and against PPPs. It seemed that PPPs were to dominate the political agenda for the foreseeable future.
And then the events of September 11th refocused priorities. The international situation stopped the Prime Minister from delivering a speech on PPPs to the Trade Union Congress annual conference, and the Labour Party's annual conference, which had threatened to be dominated by this issue, passed without there being a major row.
However, during Labour's conference, the main Local Government union, Unison, agreed to a truce on PPPs in exchange for some concessions (see below). The Unison truce left the GMB union as the lone major union at conference that opposed the use of all PPPs in principle.
Policy Developments
i) Transport
Since the publication of the ippr report, the debate on the London Underground has continued in its starkly polarised manner.
Following allegations by London Mayor, Ken Livingstone, that the PPP would be unsafe, the Government invited the Mayor's Transport Commissioner, Bob Kiley, to negotiate improvements to the scheme directly with the private sector bidders. The talks began days before the general election and broke down shortly after. To help refute accusations that the PPP would be unsafe the Government made minor changes to the contracts, allowing for example, the Commissioner to step in and direct maintenance work.
The Mayor and Commissioner have also challenged the wisdom of the PPP for London Underground on cost grounds. The Mayor lost a high court battle against the Government to halt the PPP on the grounds that it would be both uneconomic and unsafe in July 2001, but he succeeded in an August court case in forcing the release of a report by accountants Deloitte and Touche that criticised the cost of the PPP. The Government has signalled its determination to continue with the PPP, and has begun a major advertising campaign outlining the benefits to a sceptical public. However, by the autumn of 2001 it had still not published a clear case for the PPP based on value-for-money.
In a surprise move on 7th October, the Government refused to provide an extra £700 million requested by Railtrack, the private company charged with the maintenance of the overground rail network. This resulted in the company going into administration overnight. Shares in the company were suspended and shareholders are expected to get little return on their investment.
Echoing the work of the ippr on this subject, The Transport Minister, Stephen Byers, is proposing the establishment of a private company limited by guarantee to take over Railtrack's responsibilities. The new company would have a small professional board of executive and non-executive directors, with performance targets set and linked to levels of service, safety and value for money. Any operating surplus it makes would be re-invested in the railway network: the new company would therefore be run on a not-for profit basis.
The treatment of shareholders in this matter has aroused considerable anger. Shareholders feel that they were not properly informed of the events leading up to the collapse, and have seized on comments by the Chief Executive of Railtrack that the Government has enacted a shoddy backdoor re-nationalisation. More interesting still is the perceived effect the matter could have on the Government's whole public private partnership agenda. There are concerns that these events will increase the risk premium for PPP deals, making private finance less attractive. It has also renewed concerns about the structure of the proposed PPP for the London Underground.
ii) Local Government
The Government is expected to issue a White Paper on Local Government in late 2001. It will build on the previous Local Government finance Green Paper of September 2000. There has been much debate over the content of the new White Paper, and Government is expected to signal a new, less bureaucratic and less restrictive approach to Local Government.
The number of plans submitted to Government by councils are likely to be streamlined, and the inspections that police the new Best Value regime (which replaced the old compulsory competitive tendering) are also likely to become less bureaucratic. The number of areas where local councils cannot act without a Minister's approval will also be cut back. But the most radical reform is likely to be proposals to increase councils' freedom to borrow for capital projects (as advocated by ippr). The White Paper is expected to include a system which will allow each local authority to decide for itself how much it can prudently afford to borrow for its capital projects. This will help tackle the current situation in which many local authorities feel that PPPs and PFI are the 'only game in town' for investment projects.
During the Labour Party's annual conference in early October, the Government announced that they would undertake a 3 month review of the Best Value regime. It would aim to reduce bureaucracy and ensure a level playing field between public, private and voluntary provision. However, the most important aspect was the commitment to take action to end the 'two-tier workforce 'where it was found to exist (which arises when private contractors take on new staff on terms and conditions inferior to those transferred from the public sector). This significant concession was the price of tacit support of PPPs at the Conference from the main Local Government union, Unison.
iii) Health
Use of PPPs in the health service has so far primarily focused on involving the private sector in the financing, designing, building and operation of new hospitals. 'Operation' in these cases has meant the private sector taking responsibility for managing the staff who provide ancillary services (such as catering, transport, portering and cleaning). The NHS has also made some use of the private sector as a provider of clinical services. It has entered into agreements so that the NHS can use operating theatres in private hospitals to carry out elective surgery for NHS patients, or has purchased these services directly from private hospitals.
Amid controversy about the use of the private sector the Health Secretary Alan Milburn made a statement during the election campaign in May 2001, where he spelled out the limits of private sector involvement in the NHS; three 'red lines' beyond which he said he would not go. The first red line was that private hospitals would only be used only where he is satisfied there is both value for money and a health benefit for patients. The second red line was to confine private managers to managing NHS areas where they have expertise, such as the running of new non-urgent surgery units, with operations remaining free to NHS patients on the basis of medical need. The third red line regarded not creating a mixed economy in healthcare in this country, as the current private hospital sector is still very small and delivers largely specialised services.
He also sought to address one of the main disputes concerning the use of the PFI in the health service which has been the terms and conditions of new workers employed by the private company or consortia after the original NHS employees have transferred. The differential pay and conditions of these new employees has given rise to charges of a 'two tier' workforce. The Government is seeking to address the this issue where it affects NHS ancillary staff by piloting a scheme to allow them to remain employees of the NHS whilst being seconded to the new contractors. New staff would then be recruited by the NHS and would receive the same terms and conditions as their colleagues. However, the scheme has run into legal difficulties as well as the claim that it will fragment managerial responsibility between private companies and hospital trusts.
In contrast with these moves, that suggest a cautious approach to the use of the private sector, the Prime Minister's office in 10 Downing Street has recently begun a review of NHS services. This review aims to examine what 'contestability' (the option of bringing in alternative providers to deliver a service where standards are judged to be too poor) and 'diversity' of service provision might mean in relation to the NHS.
iv) Education
The Government's plans for reform of the education system were delayed by a number of months this summer following wrangling over the extent of private involvement in schools.
Prior to the initial release date of the Education White Paper, Ministers expressed their intention to allow outside bodies, including private companies, churches and not-for-profit groups, a majority stake in governing bodies when taking over failing schools, with a view to also taking control of the governing bodies of successful schools. The plans were met with outrage from teachers unions and the Local Government Association, and when the White Paper was eventually published, the plans had been significantly toned down.
The White Paper, when it was finally published, indicated that local education authorities will have to ask "external partners" for proposals on how to help schools threatened with closure. If an LEA rejects the ideas, the education secretary could force it to work with an outside organisation, which could be from the private or voluntary sectors.
IV. GIVEN THE CURRENT POLITICAL DEBATE HOW SHOULD THE GOVERNMENT RESPOND?
The Government now needs to follow up its general reassurances on PPPs with some concrete commitments. A first step should be to lay to rest the bogus argument that PPPs somehow produce 'extra' investment that the country could otherwise not afford. It has not in the past, it does not now, and it will not in the future. PFI may have its merits, but loosening the resource constraints that the country faces is not one of them. Clearing up this point would help ensure that private finance is only ever be used for projects when it is genuinely thought that it will outperform a publicly financed alternative. Despite repeated ministerial utterances to the contrary, public managers the length and breadth of Britain still insist that PFI is all often the 'only game in town'. The Government should use the Local Government White Paper to bring forward the policies required to end this situation.
A second step would be to acknowledge the serious concerns that exist on the question of whether PFI offers cost-savings. Much of this uncertainty stems from Government's refusal to systematically evaluate the use of PPPs; the rhetoric of 'evidence-based policy' rings hollow on this issue. Mistrust now runs so deep that the Treasury should commit itself to setting up and acting on an independent review body that will assess the process through which value-for-money is calculated and then evaluate the performance of PFI projects compared to the alternatives. We should not be surprised if this exercise embarrasses those who have made rash statements over recent months. On the one hand it is likely to take issue with the dubious way in which risks transferred to the private sector are priced; on the other, it may confirm the suspicions held by senior Whitehall figures that cost-overruns under traditional models of procurement are far worse than generally recognised.
Taken together these two steps would guide us towards a more rational use of PPPs. But on their own they will not unlock the door to genuine political progress on PPPs: this will require a robust commitment to employee protection. The Prime Minister needs to go beyond the Department of Trade and Industry's recent pledge to further protect the pensions of staff transferred to the private sector and address head-on concerns over the 'two-tier workforce'. Rather than rushing out an ill-thought through proposal, Government should make clear its intent to settle this issue and then make a virtue of inviting the Trade Union Congress and the Confederation of British Industry to work together to come up with a tractable way forward. Given the clear interest both sides have in resolving this issue, Ministers might be pleasantly surprised by the progress made.
Would this package of reforms mollify the harshest union critic whilst keeping all private contractors on board? Clearly not - one or two unions will remain implacably opposed. But these measures would succeed in a vital respect: they would separate those who are committed to public service reform but hold genuine doubts over aspects of PFI, from those who will always - regardless of the inadequacy of the status quo, evidence, or anything else - oppose working with the private sector.
There would also be a mixed reaction from business: some companies would cry 'regulatory over-load' and walk away. But if firms can only deliver so-called efficiency gains via cuts in the terms and conditions of already low-paid workers we need to question why we are keen to let them run services. Other well run companies would be supportive, welcoming the fact that they no longer run the risk of losing out to cut-throat competitors who have no compunction about cutting wages.
Sensible discussion of PPPs ended six months ago due to a few ill-thought through government press briefings. It is time to move on. The current truce within domestic politics provides an opportunity for all those committed to public service reform to compromise in order to avoid a winter of discontent and deadlock. The Prime Minister should not feel defensive about taking the first step. He has the ability to win support from both unions and business for this new deal for private involvement in public service. A rejection of ideological dogma, sound economics, a commitment to evidence-based policy, and a fair deal for employees - this should provide the foundations for Labour's use of PPPs.
Peter Robinson is Chief Economist at the Institute for Public Policy Research
The ippr report "Building Better Partnerships - Commission on Public Private Partnerships" (ISBN: 1 86030 158 4, £12.95) was published in June 2001
The opinions expressed in publications of the Friedrich-Ebert-Stiftung London Office are those of the author(s) and do not necessarily represent the views of the Foundation.
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