Memorandum by the CBI (PSR 7)
1. At the last General Election, the public
made it abundantly clear that their priority was improvements
in public services. The Prime Minister has since acknowledged
that reform of health, education, transport and community safety
were the key issues on which the Government would be judged at
the next election. These concerns are also shared by business,
which relies upon a competitive economy, healthy public finances
and effective public services to create jobs and build socially
2. The public and the business community
are demanding customers. The Local Government Association commissioned
an attitudes survey on public services. 85 per cent of senior
managers in local government thought public services had improved
over the last four years. Only 20 per cent of the public and 23
per cent of business agreed.
3. The CBI believes that the private sector
has a vital role in helping to improve public services, not just
through leveraging in higher levels of capital investment but
by raising standards and improving the quality of public services.
There is already a considerable track record of achievement where
the public and private sectors have worked together. It would
therefore be inappropriate to rule out private sector involvement
due to dogmatic beliefs and a misunderstanding of the motives
of the private sector. Instead government should make a clear-headed
decision to work with the private sector (or the voluntary sector)
where this will lead to better quality services to the public.
4. This paper aims to demonstrate that:
effective strategies for reforming
public services require revolve around strong political and managerial
leadership and commitment and skills at all levels to achieve
a wide range of public private partnerships
are delivering effective services. The public and private sectors
are becoming better at working together. The goals are becoming
more ambitious and there is a concerted effort to solve previously
the discussion should revolve around
a "public service ethos", not a "public
sector ethos". Profit does not act as a barrier to effective
public servicesit can motivate the private sector to deliver
better quality services. And PPPs can strengthen accountability
to citizens and end-users;
but there is more to do to reach
the stage where PPPs are delivering optimum results; and
business has useful ideas on wider
policy and the public service reform agenda, and is keen to share
them. Government's aim should be a good return on this investment
of business's time.
5. Effective strategies for reforming public
services revolve around strong political and managerial leadership
and commitment and skills at all levels. The following requirements
always apply, though how they should be put into practice will
Leadership. Strong political
and managerial leadership is required, from "front line"
spending departments, local authorities and NHS Trusts to central
units such as the Delivery Unit, the Treasury and the Office of
Government Commerce. It is no coincidence that leadership is strong
in local authorities that are achieving step changes in service
delivery. The Office of Government Commerce is making a difference
because it has clout and buy-in from spending departments.
Performance management, not micro-management.
There is a growing recognition that public sector bodies should
be managed through output and outcome based targets, as opposed
to the prescription of inputs and detailed processes. Examples
of this shift include the introduction of Public Service Agreements
across the public sector and efforts to stop micro-managing Regional
Management tailored to the needs
of individual organisations. The CBI welcomes steps towards
using different management and regulatory approaches towards high
performing, struggling and mid-range bodies such as NHS Trusts
and local councils.
A commitment to "what matters
is what works". This requires an open mind, a focus on
service user requirements (not producer interests) and skill in
discerning what would deliver the best result in terms of service
quality and cost.
A culture that supports risk-takingwhen
it is well thought through. Experimenting with new approaches
will inevitably mean that not every project will deliver the perfect
result. The public sector needs to develop a less risk-averse
culture, and have the support of Parliament and other scrutiny
bodies in doing so.
Capacity and skills. The public
sector needs practical help in developing skills in areas such
as managing change, project and performance management, procurement
and managing relations. Smaller organisations face challenges
and need cost effective support. The CBI has been a strong supporter
of practical support networks such as the PFI Treasury Task Force,
the IdeA and Partnerships UK.
Local ownership of the challenges.
This is required at all levels of any organisation. Good communication
and staff involvement to build support for change is important
in effective leadership. The public sector faces huge challenges.
The table below, from the LGA attitudes survey, shows that the
public sector is more optimistic than the public or business about
services improving over the next four years.
HOW PUBLIC SERVICES WILL CHANGE OVER THE
NEXT FOUR YEARS IF PRESENT TRENDS CONTINUE
|A lot better||36
|A little better||64
|A little worse||0
|A lot worse||0
What characterises public services
6. It is worth briefly examining some of the characteristics
of public services, which then have implications for the way in
which they are delivered. The following list is not exhaustive,
and not all services share all the characteristics, but many services:
Are provided collectively to achieve scale economies.
The consequence is often a monopoly provider in the locality (eg
refuse collection) or a limited choice of providers (eg education).
Service users often have only a limited power to express their
satisfaction through remaining with or switching from a particular
Amount to "citizenship entitlements",
so the service provider cannot refuse to deal with "awkward
customers" or those in difficult or complex circumstances.
Are funded through public money, which demands
high standards of public accountability.
Are of fundamental importance to the service user,
eg education or delivered at a point of crisis, eg health, typically
prompting front line staff to "go the extra mile". Also,
market failure is not acceptable, eg a company can go out of business
but there will always be compelling pressure to rescue a failing
hospital or school.
Are the subject of highly political choices about
the level of provision, the balance of cost and quality, the balance
of short and long term factors and the balance between fairness
or uniform standards and local discretion or performance.
The role of the private sector
7. None of the above factors rule out private sector
delivery of public services, though they do have a bearing on
the partnering relationship that is required between the public
and private sector. Earlier instances of outsourcing often failed
to live up to their expectations through:
a failure to understand the rationale for involving
the private sector, with polarised debates and the public and
private sectors being labelled intrinsically "good"
or "bad" at each extreme.
a failure to achieve genuine partnership and to
strive for whole life value for money and continuous improvement.
Too often in the past the relationship has been adversarial and
the goal has been short term lowest price.
8. By contrast, more recent and emerging models of public
private partnership are putting business between the public and
private sectors onto a much sounder basis. They have higher ambitions
and attempt to solve previously intractable problems, either within
the public sector or in the way public sector bodies worked with
each other or with the private sector.
PPPs bring new ideas and a healthy competitive pressure
9. The rationale for PPPs is certainly not one of "private
good, public bad". This is as false and unhelpful as the
opposite extreme. Rather PPPs have an important role because having
a range of service providers provides different approaches and
sources of innovation. And a healthy competitive pressure provides
a useful spur to all providers to improve their performance.
10. For example, private sector involvement in the Prison
Service has made the public sector part of the Prison Service
considerably more competitive. Work commissioned by the Prison
Service in 1998 suggested that they could not compete competitively.
That may now be changing, with a contract for the running of a
prison, run very successfully by the private sector, returning
to the Prison Service because the public sector bid was judged
better. Martin Narey, Prison Service Director, says of the impact
of PFI, "It has allowed me to introduce a competitive element
into the prison service which we otherwise could not have had".
He argues that the private sector retains substantial advantages
in designing, financing and building new prisons, that it also
achieved a "massive step forward" in the flexible use
of staff and that the prison service has now caught up and arguably
overtaken the private companies in this.
11. PPPs are established to address a wide range of issues.
Consequently their remits and structures vary considerably. Current
The Private Finance Initiative (PFI), which
is a particular form of PPP. The PFI is not just about the private
sector financing capital projects in return for an income stream.
It uses private sector skills and management to deliver a "capital
and services package solution", giving whole life value for
Strategic service delivery partnerships,
covering instances where the Government enters into partnership
with the private sector to deliver public services. Examples include
recent major outsourcings by local authorities and the NHS Concordat
with the independent sector to put in place a partnering based
approach to using the independent sector's spare capacity in clinical
services to treat NHS patients.
Joint ventures, where the public sector
takes an equity share in projects, sharing and sharing in both
up-side and down-side risks. NHS Lift (Local Improvement Finance
Trust) will be a PPP set up as a limited company with the Department
of Health, NHS and the private sector as shareholders. It will
build and refurbish primary care premises, which it will own and
then rent to GPs and other parties (eg chemists, dentists) on
a lease basis. The intention is particularly to make it more viable
and provide better support for GPs in deprived inner city areas.
"Wider markets" PPPs have the
purpose of exploiting Government assets (physical or knowledge
based). Inventures is being set up as a PPP joint venture with
the private sector, covering what has been the trading activity
of NHS Estates. It aims to maximise the value from the redundant
NHS Estate and expand the activities of the trading group. Inventures
will sit outside the NHS Estates Agency (which will retain policy
functions such as advising on building and maintaining healthcare
Partnership models for decision making,
such as Task Forces and Local Strategic Parnerships.
12. PPPs can and do fail where the remit or the structure
is not suited to the situation, or where implementation suffers
from a lack of skill or commitment from the public and/or private
sector partner. The final section suggests an agenda for solving
these sorts of problems. But fundamentally, successful PPPs deliver
by aligning the motivations of the public and private sector to
deliver an agreed outcome.
A public service ethos: putting the public first
13. The most successful businesses and public sector
bodies achieve their success above all by putting their customers
first. Effective public services require a public services ethosnot
necessarily a public sector one.
14. The argument that private companies tend to sacrifice
the interests of customers in order to put the shareholder first
is fundamentally flawed. It fails to understand that if a company
does not put its customer first, it quickly finds there is no
profit to distribute to shareholders. The private sector has been
forced over the past twenty years to radically redesign the way
it delivers services to the public, from e-enabling services to
developing a highly sophisticated understanding of individual
15. The HM Inspector of Prisons commented in his report
on Altcourse Prison, delivered through the PFI, that the prison
"was a very impressive establishment in many respects and
a delight to inspect. It was a very strong candidate for being
the best prison we have seen and we had to keep reminding ourselves
that it had been open for less than two years at the time of our
inspection". There is clearly a strong commitment to public
service in this prison. In his evidence to the House of Lords
Select Committee on Public Service in 1998 the then Director General
of the Prison Service Agency said, "I find a good commitment
in private sector establishments to the principles, the goals
and the values of the main Prison Service. We require them to
be run to the same policies, the same standards, the same rules,
and we specify quite clearly what sort of regime we want and what
they must deliver on a daily basis".
16. The Institute for Public Policy Research's Commission
on Public Private Partnerships conducted qualitative research
into the attitudes of nurses, patients and health managers on
the ethos and motivations of public and private sector providers
of health care. Nurses and health care managers strongly felt
there was no difference in ethos between providers. Patients maintained
that the attitudes of nurses to patients did not differ significantly
between the sectors. But the commitment and dedication of NHS
nurses was felt to be more noteworthy because they were typically
working under worse conditions and in worse working environments
than their private sector counterparts.
A focus on outputs, or even outcomes
17. Under PPPs, the public sector sets out the required
outputs or even outcomes, giving the private sector provider maximum
scope for innovation. Initially, the public and private sectors
clearly found this challenging. But an output-based approach is
being embedded and, in some cases, the goals are being set in
outcome terms. For example, Dovegate Prison PFI contract includes
a performance bonus for reducing re-offending rates.
Whole life value for money
18. PPPs must strive for best value for money, setting
them apart from the lowest price tendering which characterised
initiatives such as Compulsory Competitive Tendering. Moreover,
they aim to achieve best value for money over the life of a project.
A major benefit from the PFI programme is the contractual commitment
to maintain the newly built or refurbished assets. The backlog
maintenance liability in the health sector alone is £3.1
A "win-win": better quality services and a better
deal for staff
19. Public private partnerships have done more than most
public services initiatives to promote a "win-win" of
better quality service and a better deal for staff. Staff suffered
most, along with service quality, through the lowest price tendering
of the past. PPPs ought to be quality driven. The Government client
should demand a quality service, be prepared to pay a fair price
for it and accurately identify the best bid. And this should drive
the successful bidder to have the good employment terms which
are necessary to recruiting, retaining and motivating staff of
the necessary calibre to deliver the quality service. The long-term
nature of PPPs also provides a better environment than short term,
arms length contracts for developing staff.
20. The Government, the CBI and the trade unions have
worked together to improve the handling of workforce issues in
PPPs. This has included jointly producing Government guidance
to give certainty and consistency in the handling of staff transfers
and arrangements for protecting the pensions provisions for transferees.
More work is needed on this agenda, though, and ideas are set
out in the next chapter.
True partnership at all levels
21. Handled well, PPPs align the goals of the public
and private sector partners, and motivate them to work jointly
towards these aims. PPP is also driving the private sector to
work as a teamdesigners, builders, financiers and service
providers collaborating to provide complete solutions.
22. Successful partnerships are managed in a strategic
and positive way. A partnering culture permeates all levels of
both organisations. Strategic partnerships achieve outstanding
results through aligning wider "business" goals of the
public and private sector partner. Partners need to be happy with
the cultural fit between them.
Holding the private sector to account, rewarding the good management
23. PPPs are founded on the principle that risks should
be allocated to the party best able to handle them. Complex contract
or joint venture structures and, above all, the payment mechanism
holds the private sector provider to account. If the service is
not available, under a PPP contract, the private sector does not
On time and on budget
24. PPPs are proving successful in ensuring that projects
are delivered to budget and on or ahead of time. This benefit
should not be underestimated. Over-runs remain a serious problem
in conventional public sector capital procurement. For example:
Guys Hospital Phase III redevelopment was completed
three years and four months late, at a total cost of £151.8
million£68.7 million more than the approved budget
cost, and with a funding gap of £26.8 million.
The Jubilee Line extension was delivered nearly
two years late and £1.4 billion over budget
The British Library's new £511 million building
cost three times more than the original estimate.
25. The arguments against a partnership approach between
the public and the private sectors are typically couched either
in terms of:
Public opposition in principle.
A misunderstanding of profit.
Partnerships failing to deliver on the ground.
26. Public opinion surveys can be manipulated through
the phrasing of the question. The public is hostile when asked
whether the NHS should be "run for profit" or "privatised".
But where the questions are more clearly seeking views on partnership
working, the answers are much more positive. In June 2001, a MORI
survey for the Economist indicated 69 per cent of people supported
the policy of "having more NHS patients treated in private
hospitals". In a MORI poll in September 2000, 79 per cent
of respondents agreed that "the country's healthcare needs
would be better served if the NHS and the private sector worked
hand in hand". And 84 per cent of people were confident about
a future health service where there is some degree of partnership
between the public and private sectors.
27. It is important to understand the role of profit.
Too often profit is poorly understood and sometimes misrepresented
to politicise outsourcing decisions. Profits are a return on risk
and the investment of scarce resources. There is no reason for
that scarcity not to be reflected in the prices (or costs) the
public sector bears when it procures services at best value for
money. Whoever carries a risk should benefit from the up side
as well as suffering from a downside. In a successful partnership,
the public sector benefits from better quality services. The private
sector partner is able to:
Return a profit to its shareholdersProfits
paid out by government to private companies are not a net cost
to society. Pensioners, for example, rely on profits for their
income. 80 per cent of shares are held by pension schemes that
provide for the retirement of the vast majority of private and
public sector workers.
Share the profits with the public sector partner.
For example National Savings receives half of the amount by which
Siemens Business Services annual net profit margin exceeds expected
profits in their 15 year deal.
Reinvest the profits back into the company.
Use the money to fund research or development
and invest in other projects.
28. Working Links is a good example of a PPP that has
reconciled the profit motive with providing a high quality service
to the public. This partnership between the Employment Service
and the private sector (Cap Gemini Ernst & Young and Manpower
PLC) was formed to address the issues facing long term unemployed
in an innovative way:
The private sector is rewarded: Last year the
company made a profit of £0.8 million.
The Treasury is rewarded: Working Links paid £0.3
million in tax.
The public sector as a whole benefited: In its
first year Working Links placed over 4,000 long term unemployed
people into jobs and nearly 85 per cent were still in work three
months later. That is more than double the success rate of any
comparable programme. So the Treasury also benefited through extra
tax revenues (and reduced benefit claims) from those now in work.
Working Links receives its main income£2,500
for each jobseekeronly when somebody has been in work for
13 weeks. This means there is an incentive to provide "aftercare"
support to those individuals settling back into employment.
29. Too often, there is a lack of balance in presenting
the record of private sector delivery. For instance, press stories
about the opening of the Cumberland Royal Infirmary in July claimed
flooded wards, raw sewage in operating theatres and many other
failings. These were wide exaggerations. A broken pipe did cause
a small amount of water to drip into a ward and caused damage
to four ceiling tiles, but cardiac patients were never drenched.
And a temporary soil pipe bung was erroneously left in place causing
a waste water overflow in an ancillary room (not an operating
theatre). Also, most of the problems related to last spring, when
the hospital (the first major PFI hospital to be completed) was
initially handed over, and were put right before the hospital
opened to patients.
30. These scare stories and simplistic assessments of
the problems that do occur are damaging because they stifle informed
debate about how to make progress.
31. Data aggregating the total value of all PPPs is not
available. This is inevitable given the spread of activity. Over
400 PFI contracts have been signed to date, worth a total capital
value of nearly £19 billion. But PPPs are certainly not the
only option for capital spending. Over the period 1997-2000, PFI
capital spending mounted to only 9 per cent of publicly sponsored
32. In January 2000, the Treasury commissioned Arthur
Andersen, together with the LSE to examine the value for money
drivers in PFI. The study concluded that PFI contracts were achieving
on average 17 per cent value for money savings against the public
sector comparator. Applying this average across the PFI programme
to date implies a total saving to date of £3.2 billion.
33. The headline value for money statistics only highlight
the financial dimension of what PPPs are achieving. The PricewaterhouseCoopers
report published earlier this month, "Public Private Partnerships:
A Clearer View", sets out findings of a survey of 27 PFI
projects which are already delivering services, including six
hospital projects. They questioned public sector clients, private
sector partners and service users where possible. The conclusion
was that PFI projects are delivering to time, to budget and to
plan. The report rightly identified where improvements could be
made, but the feedback from senior public sector managers and
service users was overwhelmingly positive, and the following quotations
"The PFI has delivered a new hospital on time, and it
is working." Chief Executive, NHS Trust
"We have come from something which was, in my case, appalling,
to something which works well with everything in close proximity
on one site." Senior Clinician, NHS Trust
34. Issues of accountability are important whoever provides
a service but as the boundaries of public and private change,
the issue has become more high profile. Business has an interest
in this issue as a provider of public services but also as a user
and an important contributor to the funding of public services.
Accountability issues are not new to the private sector.
35. Experience has shown that where responsibility for
service delivery is transferred to the private sector, accountability
can be improved. The public sector is typically prompted to review
current service levels and draw up revised (and improved) service
specifications. Experience to date has shown that before investigating
the PPP option, public sector bodies often did not have an accurate
assessment of their current cost base or quality of service being
delivered. Performance management arrangements have also often
36. Successful handling of the accountability issues
that arise in PPPs requires:
Recognition of the distinction between ultimate
accountability and responsibility for delivery. In a public
private partnership the client does not simply hand over their
responsibilities to the private sector. The client specifies the
requirements and the contract holds the service provider to meeting
Effective governance arrangements. Increasingly
under PPPs, the partners are establishing partnership boards and
other mechanisms for ensuring accountability in new partnership
Consideration of how best to incorporate service
user attitudes in specifying and monitoring the service. This
is an obvious ideal. It is sometimes complicated. For example,
clients must be open when their decision to reduce a budget was
the reason for the reduction in service levels. A major issue
in the community that affects the overall perception of, say,
the local authority could distort service user feedback on a completely
37. It is encouraging that these sorts of issues feature
more prominently now than previously in debates about improving
public services. There are already examples of good practice.
For example, the partnership between the National Savings and
Siemens Business Services ensures accountability through a joint
governance structure for the contract. To help monitor the contract
at a strategic level and on a day to day basis, National Savings
has established a relationship management unit that includes professionally
qualified senior staff who negotiated the contract. And in Stoke
the refurbishment of all LEA schools will be accomplished through
a PFI. "Stakeholder days" were arranged for governors,
unions and head teachers and all schools were regularly updated
through evening meetings and briefing pamphlets.
38. The Committee asked specifically about accountability
and probity issues where the private sector is contributing to
Government decision making as opposed to delivering public services.
Generally speaking the Civil Service does not have enough people
at a senior level with genuine, successful operational delivery
experience. As a result Government has increasingly drawn on business
involvement in task forces, ad hoc advisory groups and reviews
to seek ideas that go beyond traditional approaches to policy
making. Since 1997 the Government has created more than 300 task
forces and similar bodies to advise on public policy. Civil Servants
have benefited from access to new information and insights of
the impact of policy in the real world.
39. The CBI recommends a report by the Public Management
Foundation (PMF), "In the Public Interest", which investigated
how to achieve a greater "return" on the investment
of business time given through involvement in task forces. Rather
than rely on further regulation, the CBI believes that the priority
should be for further action to design a process that effectively
captures private sector expertise. We support the PMF's recommendations
for creating a climate where business people can contribute effectively
to policy making. This includes a process which:
Has clear and specific objectives.
Moves quickly and is well managed.
Is listened to by senior managers and has a discernible
impact on outcomes.
An agenda for progress
40. PPPS are not yet delivering to best possible effect.
Further policy improvements are needed. And even where the policy
is more or less sound, better practice is needed on the ground.
Here follows a suggested agenda:
Strengthen the emphasis on value for money.
The public sector needs to be more focused on securing whole life
value for money, particularly on assessing quality and securing
the gains that come over time through a diverse and contestable
market. Quality still suffers through lowest price decisions and
a failure to recognise that "you get what you pay for".
Many local councils pay independent nursing homes £2.00 an
hour per resident, which does not easily cover basic costs. Council
run residential care homes are paid on average 48 per cent more
than comparable independent sector provision.
Improve public sector planning, procurement
and contract management. Priorities include better initial
planning (and more realistic outline costing of projects), better
procurement to reduce bid costs and more exploration of how public
bodies can procure collectively.
A commitment to and an understanding of what
works. There needs to be a more minded approach and a better
understanding of what does work in different circumstances. The
optimum model of public private partnership will vary from case
to case, depending on issues like how best to package the work
and to share the risks.
Improve the handling of staff issues within
PPPs. The CBI has worked with the public sector and trade
unions, for example to produce Cabinet Office guidance giving
more certainty on TUPE (staff transfer arrangements) across the
public sector. More work is needed to address the "2-tier"
workforce problem (of new starters and transferred staff being
employed on different terms). More employment legislation is not
the answer. Seconding staff from the public sector to private
sector partners is also deeply problematic. Workers would lose
out on promotion and development opportunities with the contractor.
Meanwhile the contractor and the public sector client could too
easily blame each other where problems did arise. Better procurement
is the key to achieving the "win-win" of better quality
services and a better deal for staff. Lowest price tendering damaged
service quality and employment conditions. The Government must
behave as a "quality driven" client: requiring and paying
for a quality service, which would then require service providers
to maintain high standards of HR, terms and conditions and pensions.
Give the private sector confidence in deal
flow. The Government must give the private sector confidence
in future deal flow in all areas where it wants to have a strategic
relationship. This is key to persuading firms to innovate and
build capacity specifically to meet Government customer needs.
A "stop-go" approach from Government clients is extremely
damaging. Specifically, the PFI programme in health (which has
arguably stalled while some pilot projects investigate the option
of seconding staff instead of transferring them) should pick up
End the confusion over issues of funding and
delivery. There needs to be a mature and informed debate about
the need in some areas, such as health and transport, for more
private funding of services or charges at the point of use. But
this must be clearly separated from the question of how to optimise
the benefits from partnership working between the public and private
sectors to deliver best value high quality services that are publicly
funded through taxation.