Mutually beneficial? Employee ownership and future public service reform

There was precious little in the Budget in way of reform to public services. A mention here from the Chancellor that savings on interest debt was ‘now going to pay for the NHS and other public services’; a further nod there to the difficult decisions being taken in order to ‘protect our NHS and schools’.

That, despite departmental spending being cut by 19.8% between 2010–11 and 2018–19 and ‘unprotected’ departments facing annual real-terms cuts of 6.1% from 2014-15 to 2018-19.

In fact, the only direct reference to management of public service expenditure was an extension of the pay restraint in the public sector. Pay awards for most public sector workers covered by the recent Pay Review Body recommendations will be limited to 1% in 2014-15, and the intention is to limit awards to 1% in 2015-16.

But, pay restraint is only a sticking plaster (as the almost immediate demand from GPs for more cash suggested). So, what might a more positive and long-term strategy be for reforming public services and increasing productivity in public services?

Francis Maude is talking today on one: boosting the diversity of public service provision by mutualising public services. And, ironically, this is one area where a pay restraint may help – giving public sector employees a way of escaping unrelenting wage restraint.

A quick glance at the update on the Open Public Services White Paper agenda published ten days ago (if you missed it you weren’t the only one) suggests that this is an area where the Government has something of which proud it can be proud. And rightly. There now over 80 mutuals delivering a wide range of public services, the value of which adds up to between £1bn and £1.5bn.

But, there are other factors at play as well. The first is a negative one: as last week’s Public Accounts Committee (PAC) report showed, private sector provision of public services is receiving a bashing. The redoubtable Chair of the PAC, Margaret Hodge, concluded that ‘the Government is clearly failing to manage performance across the board, and to achieve the best for citizens out of the contracts into which they have entered.’ Not only has there been straightforward failure such as G4S at the Olympics, but firms have reportedly been overcharging against the contracted price. One can’t imagine any political party leading with private sector outsourcing in their next manifesto.

There are also positive reasons for the Government to continue to promote diversity. Diversity is a good in and of itself – public services could do with a higher dosage of innovation and alternative ways to boost languishing productivity levels. As Francis Maude notes, creating a mutual potentially ‘releases creative energy and entrepreneurialism’, and social enterprises and charities often tackle problems in different ways to large private or public sector organisations.

However, despite the growth of free schools and academies, and the hundreds of voluntary sector and mutual providers involved in the Work Programme or bidding to be part of the new probation services, diversity can also conceal.

First, diversity can conceal a lack of choice. Greater autonomy for providers and plurality of provision does not equate necessarily to more choice. Schools are a good example. When parents choose they typically do so by paying more for a house in a good catchment area. In fact, diversity may also hide poor accountability: in schools local democratic accountability has been replaced by ineffective consumer power.

Second, diversity can conceal a partiality towards non-state providers. Effective contestability and competition is the holy grail of outsourcers. Public service mutuals allow the most entrepreneurial public servant groupings to bid for contracted-out services. However, in becoming employee-owned they are – by definition – no-longer of the public sector. So, what about the state competing for commissioned services? Is it such a bad thing that there is a state provider to compete against private sector providers such as in rail?

Third, diversity can conceal poor competition. Theoretically, diversity means more providers bidding for contracts and thus greater competition in the market and better value for money for the taxpayer – but only if these organisations have got a decent chance of winning the contract in the first place and on reasonable terms. Next week the SMF publishes a paper on reforms to the probation service which illustrates the fundamental problems that smaller providers face when bidding for contracts. Typically, they do not have the economies of scale that larger providers benefit from; when they operate in supply chains they are exposed to significant risks that are a direct consequence of their size.

Without steering the market in a very positive way towards alternative providers, much of the heavy lifting will continue to be done by the private sector (it might be noted that, for all the significant advances, mutuals deliver only about 1% of the value of contracted-out government services). Among other things, boosting the chances of mutual and other providers to win a larger share of public service contracts requires subsidies to alternative providers and much stricter regulation of supply chains.


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