MYTH 2 The private sector costs less than the public sector to deliver services and is more efficient
REALITY There is no evidence to show that the private sector is more efficient than the public sector
In the pursuit to do ‘more for less’ the argument is often heard that the private sector can run services better than the public sector because it is more efficient and has better skilled managers.
It is also claimed that the profit motive is the greatest guarantee of efficiency. Yet, the fact that the private sector, unlike the public, must pay a dividend to its shareholders means that funds are always diverted into profits. And the private sector has certainly shown it can make a decent profit from the public purse.
The public service industry is a highly profitable market for the private sector with an annual turnover of nearly £80bn. Large companies such as Compass, Serco and Capita have made huge profits from the privatisation of public services and dominate the market. Local authorities account for a fifth of Capita’s business, which describes itself as “the UK’s leading outsourcing company”. Support services firm Serco, which runs prisons, railways, school inspections and London’s congestion charge recorded a 33% increase in pre-tax profit in the first half of 2009 to £83.4m.
The report by insurers Zurich into outsourcing indeed warns against the risk of the outsourcing market consolidating and becoming dominated by a few large providers. It says: ‘Big is not always beautiful and can bring risks in itself … Co-operation between authorities can in effect force a monolithic market place of suppliers that may give short-term gains but close down future opportunities to spread risk.’3
The box below highlights the particular case of the Private Finance Initiative (PFI). PFI contracts are notoriously inflexible, limiting the ability of public sector bodies to strategically plan for the future as they are contractually bound to pay for a building and a pattern of service provision which could later prove inappropriate and unfit for purpose. The box below also explores one of the main arguments used to promote the PFI, that risk is supposedly transferred from the public to the private sector. Experience shows that governments remain accountable to deliver services regardless of how well the PFI project or company fares.
Private Finance Initiative
The total capital value of PFI and PPP schemes to date completed or signed is more than £lOObn. The largest sector commitments are for transport schemes and hospitals and other health projects. As contractors typically operate on a 10% to 20% margin, this represents at least £10bn in profits alone for the construction companies. In addition professional fees – for legal services and accountancy/consultancy advice – generate substantial earnings for the firms.
Neath Port Talbot Hospital in Wales demonstrates the typical repayment set up of PFI deals, where loan repayment over 30 years (including maintenance) will exceed £445m compared with building costs totalling only £66m. Since such earlier experiences with PFI, the Welsh Assembly Government has taken a much more cautious approach to PFI than the UK Government and the initiative has been dropped in the NHS. In addition, 250 members of staff who provided cleaning and catering to the Neath Port Talbot PFI hospital were returned to NHS employment in 2009.
The Major Contractors Group (representing the biggest construction firms in the UK) estimated that at the height of the economic boom, PFI contractors were getting between three and 10 times the normal rate of construction industry profits. However, during the financial crisis, the risk was transferred back from PFI contractors to the taxpayer, with the government promising to bail them out with billions of taxpayers’ funds. In March 2009, a new Infrastructure Finance Unit was set up within the Treasury to ensure that PFI projects continued after the credit crunch and to lend directly to PFI projects instead of PFI consortium borrowing from banks. The infrastructure finance unit is expected to lend about £lbn-£2bn to PFI schemes in 2009-10, meaning that taxpayers’ money is being used by the government to subsidise the operation of many of the UK’s largest PFI schemes.
Stephen Glaister, professor of transport and infrastructure at Imperial College London commented that: “The financial crisis has highlighted a basic truth – that private finance is only a way to borrow money that will have to be repaid by the taxpayer sooner or later. Risk transfer has proved difficult or impossible, so the taxpayer has ended up bailing out the commercial failures of the PFI companies.”4
There is scant evidence of the private sector’s ability to provide more efficient services. Even the outsourcing industry acknowledges that the efficiency argument is an elusive one. Martyn Hart, chairman of the National Outsourcing Association recently expressed scepticism about the extent of the savings which could be made from outsourcing services, like cleaning.
He stated that: “If you’re cleaning a hospital, and if you’re doing it to the same standard and paying staff the same thing, then where are your economies of scale?…If you’re just outsourcing for cost savings there has to be somewhere where the cost savings can come.” He went on to suggest that small savings might be possible from bulk procurement of cleaning products, but said that there was a danger that companies would secure their profit margins by paying staff less.5 Since public services are highly labour intensive, this is the area that is usually squeezed to find savings, often leading to a downgrading of pay levels, holiday entitlements, sick pay, maternity pay, and training and development.
A study by the Office of Public Management (0PM) on outsourcing in the NHS found that “little hard evidence is available to suggest that outsourcing impacts positively on value for money or quality of care. Conversely there are several examples of outsourcing having a directly negative effect on the value for money and quality of care in services.”
The report from Zurich into outsourcing and PPPs found that outsourcing is often ‘the cause of a downward pressure on terms and conditions, fragmentation of services and a divisive effect on the ethos of the public sector and the NHS.’ But warns that ‘a very wide range indeed of disasters and embarrassments caused by supplier failure’ suggest that the risks of the push to outsourcing are ‘potentially catastrophic and urgent’.
The problems they highlight include:
- Countless and huge examples of the loss of sensitive personal data and privacy responsibilities eg
the £225 million Contact Point, child protection database issues; - Badly managed social care contracts leading to reputational damage and legal challenges;
- The National Audit Office is investigating alleged overspending and overrun of IT contracts worth £18 billion; and
- The failure or collapse of a number of shared service agreements
PRISONS
Private prisons are performing worse than publicly run prisons. Data obtained under the Freedom of Information Act by More4 News show that four of the 10 private prisons scored the second lowest rating of 2, “requiring development”, and only one above an assessment of “serious concern”.
There are also disparities in the number of complaints upheld in private and state-run prisons. Rye Hill Prison, a private prison run by G4 saw a total of 22 complaints, well above the average in both prison sectors.
The evidence contradicts the government’s claim that the greater use of private prisons has driven up standards. Despite this Serco has been awarded a £600m contract to operate two new prisons at Belmarsh West in London and Maghull in Liverpool.
There is Another Way
In September 2009, the Secretary of State for Health announced that ‘the NHS is the preferred provider’ in the provision of its existing services where it can show it can do so at high quality and value. If NHS services are railing and are not improved then commissioners can open up tenders to alternative NHS, private or voluntary providers. The Secretary of State acknowledged that it is usually more efficient to fix the current service than go out to buy a new one and that it is fairer all round for staff to be given a chance to improve.
A study undertaken by the Association of Public Service Excellence (APSE), highlighted small but growing signs of antipathy towards outsourcing. Looking at 50 councils, APSE found that the main reasons for returning services in-house was the poor performance of contractors. In many cases contracts had been terminated early, with cost implications for the council but more significantly, with little progress made towards greater efficiency. It appears that decisions to end these contracts appear to be driven by entirely pragmatic reasons – essentially providers have failed to live up to expectations.6
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3 Zurich Municipal, Public sector supply chain: risks, myths and opportunities, 2009
4 The Guardian, A bridge too far for PFI schemes, 18 April 2009
5 FM-World, Outsourcing FM could save government billions, 19 October 2009
6 APSE, Insourcing: A guide to bringing local authority services back in-house, 2009
Yes! Common sense really but since when did common sense ever stop a rip off?
Vast amounts of money have been wasted with all the shuffling of finances and privatisations etc