The logic of Public Choice theory resulted inexorably in government shedding responsibilities, reducing its investment in its own capacity-building, and eventually to privatization. Privatization can occur through the actual sale of a unit, as has happened with public banks. Or it may be indirect privatization through ‘outsourcing’, whereby a private contractor is paid by government to provide a service – such as publicly funded education, housing, health, transport and even prisons, road traffic management and benefits assessment.
The 1980s, when Public Choice began heavily to influence public policy, saw a wave of privatizations and outsourcing, first in the UK and the US, and then slowly spreading across much of Europe. It was also the decade when, as we have seen, financialization started to take hold. The idea (or ideology) that government control of productive enterprises was inefficient and wasteful became accepted wisdom. In the UK it chimed with the Thatcherite ideological purpose of creating a nation of asset owners, whether of shares or privatized council houses. These were the years of ‘If you see Sid, tell him’, the famous advertising campaign to persuade British citizens to buy shares in British Gas, which was privatized in 1986, and the privatizations of British Telecom and British Airways, the electricity and water industries and a host of smaller government-owned enterprises. The following decade saw the privatization of the railways.
Many other countries did not always embrace privatization with the same enthusiasm as the UK – the French electricity industry, for example, remains basically state-controlled – but it quickly became a worldwide trend. The IMF and World Bank often deployed their considerable weight to persuade developing countries to sell state-owned enterprises. Even in countries where the privatization wave has weakened – if only because most suitable assets have been sold – the idea that the state should not own but only fund (if that) is firmly lodged in the public mind. Today, few governments or politicians argue for wholesale nationalization and government ownership.
But Public Choice theory always ran the risk of throwing out the baby with the bath water. By insisting that government could not create value – indeed, was likely to destroy value – it shouted down the subtler but no less substantive debate about what value government did produce. There may be a strong case for retaining a significant public share in industries that have a natural tendency towards monopoly – essential utilities such as water, gas and electricity – in order to benefit from economies of scale in provision, and also to avoid speculative rent-seeking on basic goods needed. In more consumer-oriented industries, especially ones in which technology is transforming the market (mobile phones, for example), the case for a strong public presence may be less strong – though history shows that often a hybrid public-private form might prove the most interesting, as with French Telecom (which later became Orange).
The solution to the problem of natural monopolies was regulation. In the UK a series of regulatory agencies sprang up, each intended to stand between the public and industry. Regulatory capitalism replaced state capitalism. It was not what pure Public Choice theorists intended; indeed, regulatory capitalism resulted in exactly the kind of government cronyism and corruption that they had warned about.
Another consequence of Public Choice theory has been the rise of intermediary mechanisms to fund public activity. This has mainly taken two forms. One is private finance initiatives (PFIs), for example to build hospitals. The other, mentioned earlier, is outsourcing to private providers to run a wide range of services. In both cases, public activity is financed privately. Turning to PFIs in this way has been called ‘pseudo-privatization’, because the private firms receive their income not from clients in the ‘market’ but from government through a guaranteed profit margin. An outsourcing contract is in effect a type of monopoly which locks the government in as the sole customer. In the UK, moreover, the degree of competition between providers of outsourcing services is questionable: only a handful, dominated by Capita, G4S and Serco, account for most the contracts.44
The aim of PFI financing is to share costs and remove from the government’s balance sheet the debt associated with large projects such as hospitals; however, it can be costly for the public sector because projects are financed with private debt and equity, which is significantly more expensive than public borrowing. Governments also pay private contractors an annual charge, running for decades and usually indexed to inflation, to cover the capital repayment plus interest and maintenance costs. So exclusive PFI contracts in effect create monopoly licences. The end result can be one where the costs to government are often more than if it had provided the service/s itself. We look at two examples below, healthcare and infrastructure.
Privatizing and Outsourcing Healthcare
In 1948, when the UK was still undergoing a long and difficult post-war reconstruction (public debt was well above 200 per cent over GDP in that year), British citizens received a leaflet on which was stated: ‘Your new National Health Service begins on 5th July. What is it? How do you get it? It will provide you with all medical, dental, and nursing care. Everyone – rich or poor, man, woman or child – can use it or any part of it.’ The National Health Service (NHS) was created that year, following the initiative of the Minister of Health, Aneurin Bevan. The following three core principles were behind its establishment:45
that it meets the needs of everyone
that it be free at the point of delivery
that it be based on clinical need, not ability to pay
Over its almost seventy years of existence, the NHS has become one of the most efficient and equitable healthcare systems in the world, as recognized by the World Health Organization46 and also more recently by the Commonwealth Foundation.47 In the UK it is considered a national treasure, sharing its place in the pantheon with the Queen and the BBC. The NHS is also among the cheapest healthcare systems in advanced economies: according to OECD figures from 2015,48 health expenditure relative to GDP in the UK was only 9.9 per cent, almost half of what the US has spent (16.9 per cent) on its far less efficient semi-private system.
The NHS owes much of its past successes to its public mission and to its universality principle, translated into an efficient central provision of healthcare services aimed at reducing transaction costs. UK citizens have repeatedly recognized the importance of its public nature: currently, 84 per cent of them think that it should be run in the public sector.49 Even Prime Minister Thatcher stated: ‘The National Health Service is safe with us’ during the 1982 Conservative Party conferences, temporarily discarding plans for outright privatization set out by the Central Policy Review Staff within the Cabinet Office.
Nevertheless, such positive rhetoric on the merits of the NHS soon became the cover for a long series of reforms that have progressively introduced elements of private provision in the British healthcare system. With the National Health Service and Community Care Act of 1990, management and patient care were forced to behave as part of an ‘internal market’, with health authorities and general practitioners becoming autonomous purchasers of services under a limited budget. Hospitals were transformed into self-governing NHS trusts and their resources became dependent on contracts stipulated with purchasers. Contracting out to the lowest bidder was also introduced as a first element of outsourcing, with the NHS progressively moving away from its role of provider towards becoming a mere customer. Since 1992, the outsourcing process created by the Private Financing Initiative (PFI) has involved also the building of NHS hospitals. Through PFI, private companies were allowed to build hospitals which were then rented back to the NHS for a substantially high price. PFI was widely used throughout the ‘New Labour’ governments to save on infrastructure investment, with the renting price of hospitals subsequently burdening the NHS budget. Finally, the 2012 Health and Social Care Act de facto abolished the second principle of the original NHS, by introducing user charges and an insurance-based system that resembles the US healthcare model, passing costs and risks to patients, now customers in a
market for healthcare provision. This final reform has also further increased the scope for outsourcing in many different areas, such as cleaning, facilities management, GP ‘out of hours’ services, clinical services, IT and so on.50
Those reforms were aimed at producing a more efficient and cost-effective NHS, through the introduction of market elements in the provision of healthcare. In reality the efficiency has hardly improved, while ever-scarcer resources are largely misallocated. This is what Colin Crouch has called ‘the paradox of public service outsourcing’.51 Market-oriented reforms of healthcare fail to appreciate the evidence that there is no such thing as a competitive market for those services: contracts run for several years and they are granted to a small number of firms which come to dominate the outsourcing market. Those firms become effectively specialized in winning contracts from the public sector across different fields in which they do not have a corresponding expertise. As a result, the market is highly concentrated and the diversity of tasks makes it difficult to obtain a quality-efficient outcome in all the services provided.
A study by Graham Kirkwood and Allyson Pollock shows that increased private-sector provision is associated with a significant decrease in direct NHS provision, a reduction in quality, and costs being propped up by the public sector.52 There are many examples of inefficient outcomes created by the outsourcing process, for example Coperform with the NHS’s South East Coast ambulance service and Serco with out-of-hours GPs contracts in Cornwall;53 in some cases the public had to cover losses when private contractors withdrew from their obligations. Moreover, the whole system of contracting out has a distortive effect on the activities of NHS personnel. As noted by Pollock, ‘clinicians, nurses, managers and armies of consultants and lawyers spend their days preparing multiple bids, tenders and awarding contracts, instead of providing patient care’.54
Finally, outsourcing appears to be immensely cost-inefficient. Contracting activities create a ‘new market bureaucracy’ that has to deal with the cumbersome process. These administrative burdens are effectively transaction costs that in the US represent around 30 per cent of total healthcare expenditure, while in the UK the actual figure is not known, although it was in the order of 6 per cent in the pre-marketization NHS.55 Yet, perhaps the elephant in the room will be the huge burden for the public that the PFIs will have created by the time their contracts expire. Especially in the case of NHS hospitals, that cost is estimated to be several times higher than the actual worth of the underlying assets.56
Although reaching a more efficient provision of healthcare services for a lower cost has always been the stated purpose of outsourcing in the NHS, recent evidence seems to suggest that this might just be the second phase of what Noam Chomsky has called the ‘standard technique of privatization: ‘defund, make sure things don’t work, people get angry, you hand it over to private capital’.57
Outsourcing Scotland’s Infrastructure
Use of PFI financing was particularly prevalent in Scotland between 1993 and 2006. Data published by the Scottish government show that the eighty projects completed in Scotland during this period will cost the public sector £30.2 billion over the coming decades – more than five times the £5.7 billion initial estimate. As well as poor value for money, there is a real concern that PFI projects may be low-quality and even dangerous: in April 2016, seventeen PFI schools in Edinburgh were closed because of safety concerns about construction defects.
In response to growing concerns about PFI, the Scottish government developed after 2010 the Non-Profit Distributing (NPD) model to fund a range of projects in three main sectors – education, health and transport. In this new model, there is no dividend-bearing equity and private-sector returns are capped; however, financing is still by private loan with the expectation of a market rate of return. Projects funded under the NPD model are therefore still significantly more expensive than they would be if they were paid for by direct public borrowing.58 A recent study by the New Economics Foundation found, for example, that between 1998 and 2015 the Scottish government would have saved a total of £26 billion if the projects financed through the Private Finance Initiative (PFI) and Non-Profit Dividend (NPD) schemes had instead been funded directly through a Scottish public investment bank.59
As we have seen, outsourcing often increases costs and is a form of monopoly. Social Enterprise UK, which promotes organizations such as the Big Issue, Cafédirect and the Eden Project, has referred to the oligopoly of outsourcing providers as the ‘Shadow State’. Capita, G4S and Serco continue to win contracts in both the UK and US, even though they have all been fined for improper management.60 In 2016, for example, an investigative article revealed that G4S has been fined for at least 100 breaches of prison contracts between 2010 and 2016, including ‘failure to achieve search targets, smuggling of contraband items, failure of security procedures, serious cases of “concerted indiscipline”, hostage taking, and roof climbing. Other cases include failure to lock doors, poor hygiene and a reduction in staffing levels.’61
The fines, however, are minuscule in proportion to the profits made by both Serco and G4S – and such companies, rather than being penalized for carelessness and reckless cost-cutting, are being rewarded with more contracts. The applications procedures for Obamacare were outsourced in 2013 to Serco in a $1.2 billion contract.62
Indeed, US Federal government outsourcing contracts to such companies are rapidly rising. A recent GAO report shows that in 2000 contract spending was $200 billion, while in 2015 it was $438 billion.63 This amount represented almost 40 per cent of government’s discretionary spending. The GAO report also distinguished spending on contracts for goods from contracts for services. Among civilian agencies, 80 per cent of contractor expenditures were for services, of which ‘professional support services’ was the largest category. The GAO report notes that ‘contractors performing these types of services are at a heightened risk of performing inherently governmental work’. Indeed, one of the most worrying aspects is probably not the amount of money spent on contractors, but that such a big proportion of it is for ‘professional support services’. This often means that inherently governmental work has been contracted out.
The cost to the taxpayer of all the contract workers is double that of civil servants, not because contract workers are paid better – they often have to put up with low wages and poor conditions – but because the contractors’ fees, overheads and profit margins, and the ratio of the number of contract workers to the number of civil servants is sometimes as high as four, revealing how bloated and inefficient the outsourcing process can become.64 A recent study shows that the ‘federal government approves service contract billing rates – deemed fair and reasonable – that pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the total compensation paid in the private sector for comparable services’.65 Again, it is not the contracted workers who get the higher amounts, but the firms that win the public contracts.
The mantra of higher efficiency through privatization, therefore, is unsupported by the facts – if you can get hold of them, that is. Such facts can be hard to ferret out, despite claims of greater transparency in the private sector. Rather than increase competition through more consumer choice, privatization has often resulted in less choice and less democracy – as is clearly evidenced by the above description of the outsourcing of many NHS services and the high cost of PFI contracts to build and maintain hospitals.66 What the public gets is frequently less transparency, lower quality, higher costs and monopoly – exactly the opposite of what in theory privatization (poorly justified as it was in the first place) is supposed to achieve.
Good Private, Bad Public
What is also striking is the commonplace assumption that when the public does own something, it will privatize that asset by retaining in the public hands the ‘bad’ company and selling off the ‘good’ company. The narrative of good private versus bad public could not be more clea
r! A salient example is the privatization of Royal Mail, which delivers post, and runs a chain of some 11,000 post offices across the UK. But, as is well known over the last two decades, email and the Internet have caused a dramatic fall in the level of postal traffic. In 2008 an independent review commissioned by the government, led by Richard Hooper CBE (the former Deputy Chairman of the government’s competition authority, Ofcom), concluded that the Royal Mail and the post offices be split into two separate private companies. Five years later, the Conservative-led government privatized Royal Mail by floating it on the London Stock Exchange, while retaining a 30 per cent stake. The now separate Post Office Ltd remains wholly in public ownership. But the government was strongly criticized for selling Royal Mail at too low a price: on the day of flotation the share price rocketed from the official price of 330p a share to 455p within hours. According to some critics, the flotation valuation of £3.3 billion should have been more like £5.5 billion. Moreover, fees to banks, lawyers, accountants and other advisers came to £12.7 million. The sweetener that greatly added to the attraction of the privatization for investors was that the Treasury took responsibility for the Royal Mail Pension Plan, the biggest in the country, which covers workers in both Royal Mail and the post offices. This was to all intents and purposes the ‘bad company’ dumped on the taxpayer.
Similar situations have occurred with banks which are affected by bad loans, such as RBS in the UK. Such banks end up with balance sheets full of worthless loans that then prevent the banks in question from making any further loans. The default answer in such cases has often been to take out all the toxic assets from the ‘good’ part of the bank, and to put them in a government-run ‘bad bank’. The idea is that doing so will allow the private bank to get back on its feet, with the taxpayer taking on the responsibility of managing or selling off the bad assets. But this has resulted in the socialization of risks and privatization of rewards that we examined in Chapter 7: in the same way that the US government picked up the bill for the failed Solyndra, and let the profits from the similar investment made in Tesla go private, the taxpayer picks up the bill for those parts of public assets that are less efficient, and sells off the better bits to the private sector – and often at a garage sale discount. Similar examples have occurred in non-financial companies: in 2014 Italy’s national airline Alitalia was split into a good company, sold privately, and a bad company which remained in government hands.
The Value of Everything (UK) Page 30
