First published in the Society Guardian on 1 November 2011.
The failure of Southern Cross wasn't a failure of private capital per se. If properly regulated, private operators can make services better for citizens.
The collapse of care home provider Southern Cross earlier this year was the worst possible backdrop for the launch of the coalition's vision for opening up public services to more private and third sector providers. The Southern Cross meltdown came just five years after private equity firm Blackstone sold the company, quadrupling its initial investment. Surely, opponents argued, this was proof that inviting private capital into the delivery of public services was doomed: it would privatise profits for investors in the good times while loading losses on to the taxpayer when things go bad, and result in catastrophic upheaval for vulnerable service users.
But if we care about providing the best possible care services for our older citizens, that's the wrong conclusion. To draw the right conclusions, we need to understand what the failure of Southern Cross means.
The behaviour of Blackstone and Southern Cross's subsequent investors was highly questionable. Financial engineering, in the form of a sale and lease-back deal, massaged short-term profits. But those profits came at the cost of loading up the company with risk, making it highly vulnerable to small changes in its costs and revenues.
While the good times rolled, the architects of the plan cashed out their huge gains. But ultimately rising rents, falling local authority fees, and declining occupancy rates – partly due to councils wanting to save money by caring for more older people in their houses – sank the firm.
As experienced watchers of the care industry know, revenues are subject to periodic squeezes when the public spending taps are turned off. Developing a business model that was so vulnerable to those risks was at best naive. At worst, it was a ruse by which the management and shareholders at the time could unfairly profit at the expense of future shareholders and insecurity for residents.
But the failure of Southern Cross wasn't a failure of private capital per se. There are plenty of private providers who don't run such a risky model. One of the largest operators, Bupa, for example, owns its care homes. Any care home operator that leases its premises, whether public, private or third sector, would struggle in the current conditions.
The risks of private and third sector involvement in care provision also have to be seen in the context of the benefits they bring. No government, either central or local, would have been able to afford the high levels of investment that have gone into improving care home facilities in recent years. A pluralist market of providers gives service users choices they simply wouldn't have if care was provided by the state alone. Indeed, part of the reason Southern Cross failed was down to under-occupancy in those of its homes rated poor in Care Quality Commission inspections. Under a state system, service users would have had no option but to move into their local home, regardless of such poor standards.
So the lessons from the Southern Cross debacle are about the need for proactive regulation.
First, we need a regulator that will scrutinise the business models of care home operators and other public service providers. In the same way that regulators are forcing banks to build up bigger capital buffers to see them through the bad times, so public service contractors should have their business models stress-tested to check they can withstand normal fluctuation in demand for their services.
Second, we need to accept that it's a good thing that poor service providers are allowed to fail and be taken over by better ones – so long as users are protected from upheaval. In the case of care, as the National Audit Office recently argued, there is an urgent need for government to establish a failure regime that facilitates this. Private finance has the potential to make public services better for users. The task for government is to keep the cowboys out and manage failure so that citizens get the best deal.
A pluralist market of providers gives service users choices they simply wouldn't have if care was provided by the state alone. Indeed, part of the reason Southern Cross failed was down to under-occupancy in those of its homes rated poor in Care Quality Commission inspections. Under a state system, service users would have had no option but to move into their local home, regardless of such poor standards.