The call of duty
Nick Timmins considers the findings of the Julius Review, which measures the scale of the public services industry
The British State in all its manifestations – whether central government, town halls, the National Health Service or schools – has always bought some services from the private sector. Even when the hospitals were nationalised in 1948, the odd voluntary hospital – St John and St Elizabeth in Yorkshire for example – limped on, its services bought on contracts from the NHS.
Much road building and maintenance; some consultancy and services bought from hospices remained part of the contractual state. But it was in the1980s, with the introduction of compulsory competitive tendering (for bin emptying and street cleaning, followed by catering, cleaning and laundry in the National Health Service), that “the public services industry” truly began.
Just how big it has become – so big that it is now possible to think of it as an industry in its own right – has just been illustrated by the recent publication of the DeAnne Julius review, commissioned late last year by John Hutton, the business secretary, in a conscious, if slightly sotto voce declaration, that Blairism in public sector reform lives on, whatever the apparent wobbles that model faced in the first few months of Gordon Brown’s tenure as Prime Minister. The review’s conclusions are startling. A third of all public services – far more than previously thought – are now delivered by the private and voluntary sectors.
Its size has doubled in little more than a decade, and now embraces everything from health and waste management to IT, welfare-to-work, training, construction and legal and other consultancy services, not to mention PFI projects which range from simple student accommodation to the training of RAF pilots. According to the study, backed by analysis undertaken by Oxford Economics, the UK now spends a larger share of its gross domestic product on outsourced services of one sort or another than the US, or indeed any other country in the OECD other than Sweden and Australia.
Previous attempts to estimate the size of the market – undertaken for example by the Financial Times, various consultancies such as Kable, and by the CBI – concluded that around a fifth of public services were outsourced. The Julius Review puts the figure higher, at around a third, with the market now worth almost £80bn a year, employing 1.2 million people (almost as many people as the National Health Service), with revenues growing at 7% a year in real terms between 1995/96, before slowing to 3% a year in real terms after 2003-2004. Different point of view
Reactions to this finding were predictably varied, from a warm welcome from the CBI to one that “the sharks are circling” around public services, from Dave Prentis, the general secretary of Unison, who concluded, entirely rightly, that the object of this exercise was to establish how to make the public services industry work better.
Noting DeAnne Julius’ long track record as a private sector economist, Prentis argued that what was needed was “a genuinely independent review of the public services industry”, one that asks whether its increasing role is genuinely in the interests of the taxpayer or public service users, rather than one “simply asking what would make the lives of multinational companies easier”.
In fact, and even after all this work, the report has its debatable areas. Precisely what fits in to “the public service industry” still depends upon definitional niceties.
Thus the report chose not to count general practitioners (a large minority remain independent contractors) as part of the industry, instead stripping out GPs’ salaries from the calculations. It makes no distinction between service procurement by and from NHS Trusts and Foundation Trusts – although a case can be made that foundation trusts, as public benefit corporations, are themselves part of the public service industry, rather than state owned enterprises, which ordinary NHS Trusts are.
Although the report unpacks government accounts as far as possible to indentify public service purchases (as opposed to purchases of goods that can range from paperclips to tanks), the data remains far from clear. And the report’s evidence on how far all this ‘works’ – in the sense of providing better quality services to the public at the same or lower cost – relies on academic literature that is dated.
In a sense, like so many pieces of research, this one reaches the familiar conclusion – for external readers, if not in its own words – that more research is needed. For all that, however, recognising that the UK does indeed have a “public service industry” has real value.
Diverse though it may be – including running prisons, providing NHS operations, helping young people with multiple problems to get into work, servicing a university hall of residence and even providing the services that let the spymasters at GCHQ eavesdrop on the world – it is now bigger in terms of turnover than the UK food and drink industries, the utilities, the hotels and restaurant sector and the pharmaceutical industry.
And, as the Julius Review noted, it faces some common problems. There are issues of “competitive neutrality” – pensions, VAT and various other forms of tax treatment that can put each of the public, private and voluntary sectors at a disadvantage when it comes to competing for business. As a recent report from the Public Services Administration Committee on the use of the third sector recently noted, not all of these are resolvable. But where they are, the Treasury needs to step in, as individual departments alone cannot solve these problems.
The industry (which includes the third sector) would function better if a clearer pipeline of tendering opportunities was set out, with tentative first steps being taken towards this in health, for example.
While a growing number of departments in recent years have at least marginally strengthened their commissioning skills by the appointment of commercial directors, contracts rarely work if they are simply tendered, signed and forgotten about. So larger public bodies need a “director of service delivery” with the skills to make contracts work when problems arise, not just to sign them.
International business
And this is now an international business – clearly so in PFI and other forms of finance-driven public/private partnerships. But the UK’s drive to outsource some NHS operations brought in US, Canadian and South African health care companies, even if some of them have now gone home disappointed.
Others, however, have come in, interested in commissioning care and providing managed care services. Provision of prisons is now a small, but real, international business. And over the past five or six years, welfare-to-work has become one, with UK companies winning contracts in a range of European countries just as Australian and US providers have moved in to the UK and Europe.
International perspectives
If one looks around the world, the limitations to which services can be provided by the state, and which can be provided by the private and voluntary sectors, appear to be more culturally than economically defined.
Thus, the Belgians faced a huge political row over the privatisation of water, while having for years lived happily with private and not-for-profi t hospitals (the use of the latter for NHS patients still raising hackles in some quarter in the UK). Collectivist Denmark outsources much of its fire and rescue service. Sweden has encouraged independent schools. Australia has privatised huge swathes of its welfare-to-work provision.
So this is a business that is most definitely here to stay. What is still needed, however, despite the release of the Julius Review, is a better analysis of where it works well and why. We also need to know why, when it fails, it is due to structural and incentive problems rather than an individual company, or third sector provider, failure.
Nick Timmins is Public Policy Editor for the Financial Times
Further reading
To download The Julius Review visit: www.serco.com/julyreview
