In this Update we look at the UK PPP market in 2013 and ask why is public sector reform so difficult, and ask is the Coalition doing enough to promote change? We also look at the foundation of public services and ask is it time for a new Beveridge Report fit for the 21st Century.

Introduction

The vast majority of outsourcings from the public sector have been successful. Virtually all of 700 plus PFI projects closed to date, were completed on time and on budget. Contrast this with conventional procurement prior to PFI, where virtually no projects were completed on time or on budget.  

But the 2013 UK PPP market faces mounting challenges from Westminster, the media and judicial review. Instead of facilitating change, the Coalition and EU instead appear intent on creating new hurdles to be overcome before services can be outsourced.  

Before looking at these challenges, to put things in context, it is worth going back to the beginning to consider the basis on which modern public services were conceived and notice how little they have changed over the last 60 years.

Public Services 1945

Politicians have been talking about the need to reform public services for more than 30 years. Public services as we know them today, including the NHS, were established by the Labour Government of 1945 led by Clement Atlee. With the support of all parties they enacted the “cradle to grave” welfare state as recommended by the Beveridge Report of 1942.  

In their time in office, Atlee’s Government passed more than 200 Acts of Parliament. In five years they nationalised a fifth of the economy including, coal mining, railways, electricity, gas and steel. They also built a million new homes as well as making a commitment to “full employment”.  

In relation to public services, in the post war years, it was widely accepted that there was a pressing need to replace the highly fragmented patchwork of uneven local social services, delivered by a multitude of suppliers, many of them charities.

Atlee’s three core principles for public services and welfare were:

  1. government-guaranteed universal access to high quality services, based on need and not ability to pay, in other words free at the point of use;
  2. services funded by general taxation;
  3. services delivered by the state itself.  

The passing of the necessary legislation involved lengthy debate about whether the UK could afford such universal services. Despite record levels of debt following the War, the legislation was passed as the Beveridge plan had become a symbol of the kind of Britain, Labour was determined to build after the victory.  

Attempts to Reform Public Services

Despite several attempts to reform, the core principles of Atlee’s blueprint, remain unchanged to this day. It is a testament to the success of the Atlee Government that right up until the 1980s, all three political parties broadly supported the changes made by his Government.  

Over the last 50 years public spending has risen from £12bn to almost £700bn. This looks like a huge increase – but much of it is due to inflation and growth in the economy as a whole. As a percentage of GDP, since the 1950s, public spending has varied between 34% and 54%. When Labour left office in 1979 public spending as a percentage of GDP was at 46% and rising.  

Mrs Thatcher’s new Government sought to bring local government spending under control, which included steps, for the first time, to move away from Atlee’s blue-print. Local authority funding was reduced by a third and compulsory competitive tendering (CCT) introduced to allow the private sector to compete for services previously supplied exclusively by the public sector.  

CCT was originally limited to domestic services in the NHS. After six years of CCT – the cost of such services fell by 29% in real terms. Compulsory competitive tendering undoubtedly reduced costs but it did not result in any real reform or improvement in services.  

In the 1990s John Major’s Government sought to tackle the problem via the Citizen’s Charter. The Citizen’s Charter was intended to force service providers to set out clear service standards, consult with users, and publish results for use in league tables. In 1997, New Labour inherited 41 national charters covering most major public services and 10,000 local charters.  

New Labour was committed to investment in public services. They focused on improving the NHS and other asset-based services, using PFI to pull in substantial private sector funding for new hospitals, schools and other facilities. In the 10 years up to 2007, in real terms, government spending increased 54% from £400bn to £620bn. In the same period spending on healthcare doubled.

The Blair Government sought to reform public services through a tough new top-down performance regime imposed by Whitehall. This featured a range of measures including Best Value, which established a statutory set of 90 performance indicators to measure the performance of local authorities, all of which were collected and audited annually.  

UK PPP market today

So where have all these combined efforts to reform public services got us?  

In their paper entitled Payment for Success – How to Shift Power from Whitehall to Public Service Customers – KPMG set out a critical account of the consistent failure to reform public services. Their paper highlights the challenges faced by public services across Europe, to deliver more for a lot less and to re-motivate demoralised public sector employees. KPMG are particularly critical of top-down interference by Whitehall – in the front-line’s ability to manage and deliver services.  

Examples of where central control had resulted in poorer outcomes include the decision by HM Revenue and Customs to save money by cutting staff. This seemed like a good idea but in fact turned out to be a bad idea, when it was realised the savings were less than the reduction in tax collected due to the reduction in staff. Another example is the decision by the Department of Health to develop a single IT based records system for the entire NHS, rather than allow local health authorities to continue purchase their own systems. This plan turned out to be a disaster, resulting in £12bn of taxpayers’ money being wasted.  

The top-down imposition of rigid compliance regimes and targets by Whitehall has not been a success. Although worthy in themselves, strict compliance regimes and targets can have the opposite effect, demotivating staff and removing any ownership or control they feel over the service. As seen in the recent NHS scandal, the over emphasis of targets can result in poorer patient care and in extreme cases, a higher risk of fatalities.  

Now – more than ever – the Government needs to attract more private investment and expertise into public services. But progress has been slow. The Coalition has floated a lot of new ideas to improve services, such as the Big Society, mutuals, localism, shared-services and use of SMEs. But these ideas, worthy in themselves do not amount to a strategy and instead tend to make outsourcing from the public sector more difficult. The lack of strategy has left a vacuum that those opposed to PPP have been happy to fill.  

As a result, the general consensus, whereby it was generally accepted that outsourcing of non-core services and private investment in public assets, was a good idea, is now being reversed. Without innovation and reform the current focus on shedding jobs and cutting services, will lead to less for less, not more for less.

Speaking to private sector clients, they have many good ideas to save money and improve services. But the public sector has been slow to take up such innovation, instead focusing on internal restructuring and reductions in headcount. Speaking to those in the public sector, there is a perception that the private sector has been slow to respond to changes in the public mood and growing feeling that making profit from public services is a bad thing, and further that PFI has been an expensive failure.  

PPP contractors need to do more to explain the benefits of outsourcing non-core and other support functions, which is still widely supported amongst private sector customers. They need to do more to justify paying the private sector to provide public services, and to demonstrate its social acceptability. They also need to publicise the numerous PPP success stories, and take more credit for the work they do to support the community and environment.  

PPP – the good

We could list many examples but here is a quick selection:

  • As part of the Barclays Cycle Hire Scheme, Serco created 234 new jobs including 27 apprentices. Serco deliberately recruited staff from the long-term unemployed and specifically targeted young people not in education, employment or training.
  • As part of the Sandwell Local Education Partnership, the Interserve-led consortium has linked up with FutureSkills, Sandwell – to supply 33 local apprentices. At the same time they are helping local business through a fast growing online business network offering SMEs the chance to improve their skills and comply with project qualification standards.
  • Over the last few years Mitie has created a network of FM Skills & Construction Centres across the UK. These centres are currently helping over 500 14 to 16 year olds learn a range of skills and to obtain nationally recognised vocational qualifications.
  • In relation to sustainability Mitie recently completed a waste-to-energy centre for the Royal Free NHS Trust. It is estimated that the new facility will save the Trust £14m over the life of the project, or one fifth of the Trust’s total utility costs.  

PPP – the bad

On the downside confidence in the PPP market has not been helped by several well-publicised failures. In Edinburgh, the proposed £170m FM contract, which Council officers recommended should be awarded to Mitie, was blocked three months before local elections by councillors. Around 2,000 council staff were expected to transfer to the private sector.  

The SNP group leader, said: “At the end of the day – having looked at the private sector bid versus the public sector comparator, we felt there was not sufficient advantage in going for the private sector bid”. The Council officers had calculated that the deal would save £50m over the initial seven year term.

In Barnet – the Council’s planned large-scale BPO has met fierce opposition from local residents. Part of the plan is to develop an “easyCouncil” model of no frills local services. Despite the anticipated £120m in savings to the Council over the next 10 years. If approved the project would involve outsourcing a wide range of services, including estates, human resources, IT infrastructure and support, corporate procurement, revenues and benefits, finance and payroll, and customer and other support services.  

Residents claim that the Council has no mandate for an outsourcing of this scale and have no confidence that the Council will be able to manage the contract. The Courts have now been asked, via judicial review, to determine whether the Equality Act 2010 requires Councils to consult residents on its decision to privatise council services.  

The Equality Act 2010, which runs to over 200 pages, includes a general equality duty applicable to all public authorities. Under this duty, public authorities in exercising their functions must have regard to three key aims namely:

  • elimination of unlawful discrimination, harassment, victimisation and other conduct prohibited by the Act;
  • advancement of equality of opportunity between people who share a protected characteristic and those who do not;
  • fostering good relations between people who share a protected characteristic and those who do not.  

Guidance on the Act published by the Equality and Human Rights Commission emphasises the need for public authorities to understand the needs of its service users, including any needs due to having a protected characteristic. Such knowledge is required to assess the impact of any changes to the services including any proposed outsourcing. In order to make informed decisions, case law stresses that public authorities must engage and consult with people, with different protected characteristics to fully understand the impact of their decisions on different people.  

In Barnet the judicial review case is being brought by Maria Nash – a 67 year old disabled resident who says she fears for her life if support services are removed if and when the private outsourcing firm, Capita, takes over. The legal challenge means the signing of the deal has been delayed, Capita was to take over services in April, just 10 days after the hearing is expected to conclude in late March. The outcome of the Barnet case could have a huge impact on the PPP market. It seems that in future, before embarking on any new outsourcing, local authorities will have to do much more to engage local residents to ensure that no group of residents is disadvantaged.  

PPP – green shoots of recovery

Despite all of these challenges there is still a lot of activity in the market. In the second half of last year – 13 PFI projects closed with a value of £2.7bn. This included five energy projects, a health project, a highways maintenance project, a housing project, a police project and three waste projects. Active PPP sectors in 2013 are likely to include: waste management; probation services; urban regeneration; energy and infrastructure; schools and social care.

In terms of new projects, the Coalition has taken a series of steps to try to get the market moving again. In July last year the Treasury announced the UK Government Guarantee Scheme providing temporary lending for major projects. This has now been enacted into law allowing the Government to provide financial assistance of up to £50bn to support infrastructure investment. It is said that the Crossrail Rolling Stock PPP will be one of the early projects to benefit.  

With banks reluctant to lend, the Government also established a new Pension Infrastructure Platform, aimed at creating a way of allowing UK pension funds to invest directly in infrastructure. The start of the platform has been delayed, but £700m has been pledged already by founding investors.  

In June 2012 it was announced that the Green Investment Bank was poised to help a number of stalled waste PFI projects which were struggling to secure lending. The Green Investment Bank is now open for business. The bank has already committed money to two projects, an energy from waste scheme in the North East and the Wakefield Waste PPP.  

As a replacement for Building Schools for the Future, the Government has established the Priority Schools Building Programme. Under this programme the Government has set aside over £1bn to build, or redevelop, 18 groups of schools. Batches of schools in the North East, Midlands and London have begun to be tendered, including 42 schools in the worst condition.  

And finally the Green Deal is beginning to get going, with local authorities and housing associations actively looking for funding and contractors, to carry out energy performance measures on their estate.  

Proposals for reform and new models

In terms of reform of public services KPMG’s solution is to shift control from the provider to the customer. They recommend we move on from the dysfunctional debate about public services where politicians compete on how much money to spend rather than what can be achieved, where providers, with poor efficiency, can only envisage making savings by slashing frontline output and cutting more jobs; where change is something imposed top-down and against resistance.  

KPMG suggest services should be procured by three distinct customer levels, each radically empowered to decide what they want and from whomever is best-placed to provide it. The three levels of customer are:

  1. Personal (this would include education, health and adult care);
  2. Local (covering social housing, child care, local leisure and security); and
  3. National (covering justice, infrastructure, tax and benefits).

Public sector bodies, in conjunction with the private sector, continue to try to find new and more efficient ways of providing services. Various models and vehicles are being adopted including:

Click here to view table.

To select a few:

BPO joint ventures

BPO 50/50 joint ventures in local government have been successful in managing transformation in local authorities. For complex services, especially where change is required, it is often difficult if not impossible for customers to set out their requirements in written contract requirements. They may not know their preferred solution, and as a result, it is unrealistic to seek to transfer risk to a service provider. The joint venture, in contrast, creates a structure whereby the customer and service provider can work in partnership to develop the right solution and the most suitable timetable for implementation.  

The Serco ACCESS project with Glasgow City Council has been running for five years now and has been a great success. The contract is for 10 years with a total value of £265m. Serco, via the joint venture called ACCESS, has guaranteed to the Council £50m in savings over the lifetime of the contract. During the transition phase ACCESS delivered over £15m of technology projects, whilst managing 20,000 computer desktops and 640 properties. They also condensed five Council helpdesks into one and collected 1,700 applications managed piecemeal into one single operating platform. The key to success of these projects is the sophisticated governance model –which also featured in Capita’s partnership with Birmingham City Council.  

Under this governance model the ACCESS management team reports to an overarching Joint Partnership Board. This allows the partners to build trust and understanding and ensure smooth running of operations. Twice a year, the ACCESS CEO reports to an External Scrutiny Committee, rather like a parliamentary select committee, to ensure that the joint venture is subject to the right level of independent democratic review.

The GOCO model

The MoD is currently seeking a new strategic partner to run the Defence Infrastructure Organisation (formerly Defence Estates). Various models are being looked at but the MOD seems keen on the Government-Owned Contractor-Operated Model which has been used before in UK projects such as the Atomic Weapons Establishment and National Physical Laboratory.  

At the Atomic Weapons Establishment – the GOCO model worked well. The site, at Aldermaston was long overdue for modernisation and needed a major culture shift to get it back on track. Using the GOCO model, a new first-class management team was put in place between the operational company AWE plc and the Authority. AWE plc continued to employ the workforce & maintain the nuclear site licences. Its directors have total responsibility for the day-to-day management and operations of the facility and are accountable to the private sector management company, formed by the three joint venture partners Lockhead, Jacobs and Serco.  

The MoD and other regulators continue to play a role in enforcing the Management and Operation Agreement as well as monitoring and assuring safety and security standards are maintained at all times. This clear division of roles allows effective accountability and ensures each party in the chain is able to concentrate on their area of expertise, without undue interference from other parties.  

The GOCO has an interesting history. The idea was developed in the USA. The first GOCO was established in the 1940s as part of the Manhattan Project, to develop the nuclear bomb. The federal government provided the laboratory site, the buildings, and equipment. The University of California provided the employees and managers. This model allowed private sector processes to operate without bureaucratic restrictions. Scientists performing for a GOCO contractor are largely insulated from political pressures. It will be interesting to see if the Government adopts this model once again to reform the Defence Infrastructure Organisation.  

Local asset backed vehicle

One further example is Development Agreements and Local Asset Back Vehicles which are being used in regeneration projects. The Public Land Initiative was designed to get homes built on land owned by public bodies. Land identified through the scheme is handed over to builders, who don’t have to pay for the Land until a later date. The Heart of East Greenwich £250m regeneration project – where RPC advised the developer – is the largest deal to date under the Initiative. This project will deliver a new community of 650 homes, a leisure centre, library, health centre, retail and commercial premises, plus many jobs and training opportunities. It has been lauded by local and central government as a great example of a successful public-private partnership. With the urgent need for more housing and school places in London and other major cities, it is expected that this type of regeneration project will become more prevalent.

Conclusion

The lack of clear political direction and concerted opposition, means that the PPP sector faces challenges going into 2013. For the market to thrive, any new projects and the private sector partner, will have to be socially acceptable. The private sector partner will have to demonstrate it can deliver real benefits, rather than be seen as simply interested in making profits from taxpayers.  

Rather than focus on cutting jobs and selected services, as KPMG suggest, we should be seeking to give service users real freedom of choice. This is the only way to ensure competition and service delivery evolving to meet the needs of users. Service providers should be assessed on outcomes and not cost, and be given real freedom to innovate and tailor their services in a competitive market.  

In order to improve services it is vital that the best providers be allowed to grow, and poor providers allowed to fail. Payment of the service provider, wherever possible, should be linked to success. Joint ventures should be used to bring the best of the public and private sectors together, to manage transformation and complex projects dependent on co-operation and teamwork.  

In relation to the reform of the public sector and welfare is it not time to look again at the Atlee blueprint? The universal guarantee of access to high quality services is surely unaffordable and simply creates unrealistic expectations. In reality public sector and welfare are always subject to limitations and rationing. To avoid the relentless increase in costs year after year, we need to clarify what “high quality services” means and design a new blueprint for affordable public services and welfare. Finally, the assumption that the public sector should be the monopoly supplier of any public services should be laid to rest once and for all.  

This article is an edited version of a talk given to the National Outsourcing Association, 27 February 2013.