Wednesday, January 28, 2015

The decisions about the ideal public/private split in our economy needto be case by case.

I was born in 1946 a year or so into the only and last Socialist administration that the United Kingdom has ever had. During the course of those extraordinary six post-war years the British economy and society was shifted significantly to the Left. A National Health Service (NHS) was set up. Free secondary education  became a right. The Bank of England, civil aviation, coal mining, the railways, road haulage, canals, electricity and gas and the steel industry was nationalised in. By 1951 about 20% of the British economy had been taken into public ownership.

The Attlee government was unashamedly ideology driven and that ideology was Socialist. The driver was Clause IV of the Labour Party constitution which said the goal was:

“To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution and exchange, and the best obtainable system of popular administration and control of each industry or service.”

Over the past sixty years successive Governments have gradually unravelled the public ownership legacy of Attlee. This has partly been a result of a general ideological shift in the public at large and one that was to become common to all major political parties. Labour codified this by abandoning Clause IV in 1994 a move without which (arguably) they would not have come to power in 1997.
But whilst there has been an irreversible ideological shift away from Clause IV type socialism that does not mean that the debate has ceased, nor indeed that privatisation activity has stopped. Previously sacrosanct areas like the NHS are, to some extent, “up for grabs” – i.e. some of its service provision is and will continue to be provided by the private sector, where the profit motive by definition is dominant. In these cases we have common ownership (the physical assets of the NHS are mostly still publicly owned) without conventionally “equitable” distribution of the returns from them. The justification for this is that the private sector contractor will provide a more efficient and cost-effective service than if that activity was managed by Government employees. We will return to this later!

Given that the Public v Private battle has long since been won by the privatisers it is appropriate to take stock and see what’s next, or what in this writer’s view, should be. This is not about ideology at all. There is no presumption that Private enterprise is good and public ownership bad (or vice versa) – this is because this is self-evidently true. The very basis of a mixed economy is that there will be a public/private mix. The judgment calls relate to where the line is drawn, and why. Let’s start with the “Why” first and the most contentious area, and not just in Britain – Healthcare.
The original premise was that the public provision of health services would be at no cost to the patient. However prescription charges were introduced within a few years and charges began also to be levied for dental treatment. Today many areas of the NHS are chargeable though there are many who are exempt from these charges – not least those over 60 years of age and those on income support. The substantive point, though, is that though the premise that there would be free healthcare has long since been breached  it is all still undeniably a public service. The premise is that the Public “ownership” of Healthcare is non-negotiable and this is reinforced by a commitment that the quality of service received  will not be influenced by the ability to pay. Which then brings us to the subject of who provides the service. It is not black and white by any means! Let’s take a couple of examples. A hospital needs heat and power and the former is generally provided by a boiler house on site. The operation of this boiler house and all its connected facilities throughout the Hospital is of course crucial to the welfare of patients and staff. Does this mean that because it is important therefore it has to be provided by employees of the hospital on whose property it is located? I would argue not. There is no inherent reason why this service should not be contracted out to third party providers in the private sector who contract to provide a service against standards agreed as part of the tender against which they bid and were appointed.
Crossing the bridge from a dogmatic assertion that if it’s a public asset therefore everyone who works there should be a public employee to one where it is accepted that there will be a mix is crucial and reasonably uncontroversial! Where you draw the line is another matter. In the NHS case if we accept that a hospital (etc.) is a public/private partnership (which it is) which areas should never be contracted out and which always? Lets take the making up and issuing of prescriptions. These have to be right don't they? Our Doctor prescribes medication for us and gives us a prescription. The next step is vital. We must get from the dispensary exactly what the doctor has prescribed there is zero room for error. Vitally important you might say and therefore an area which should be under tight public service control. But of course it isn't and never has been. If we go to Boots, Britain’s largest dispenser of prescriptions, we are dealing with a Private sector business and indeed one that is presently owned by an investor – the Private Equity firm Kohlberg Kravis Roberts. In addition to their pharmacies Boots sells wide range of products which means economies of scale for their pharmacy operation. This work is carried out on behalf of the NHS against standards laid down by the NHS. Boots must meet these standards and their performance is monitored to see that they do. The same, of course, applies to all the other pharmacies that make up prescriptions, small and large. Whilst it would be going too far to say that it is immaterial who ultimately owns Boots -  clearly a business of such importance to British healthcare has to be well run and robust – in essence if they meet standards in a cost-effective, costumer-focused and efficient way that is all that is required. That they make a return and a profit on this activity ought  not to to be of know direct concern to those who give them the contract to trade – although it needs to be monitored of course in the public interest.
If we edge away from ideology – whether it is that of the free-market ideologue of the Right or that of the neo-Marxist of the Left – that takes us towards the consumer who is unlikely to be bothered by ideology one way or the other. That consumer just wants goods and services at reasonable prices and reliably and wherever possible to be able to make a choice between real competing offers. The word “real” is crucial here. If the competition is non-existent for logistical reasons or artificial then that adds nothing to the consumer’s benefit.
Having established the ground rules – no ideology, efficiency, cost-effectiveness, competition where possible and so on – we can then consider the appropriate public/private split across the economy. It comes up with some perhaps surprising conclusions, not least that there are some area where in the public interest activities should be taken (or taken back) into public ownership !
I wrote here about the Energy sector (especially gas although to an extent the same argument applies to electricity). I demonstrated that because no Gas supplier has any infrastructural advantages over any other, nor product acquisition cost benefits either, then their cost bases will be broadly the same. This means that over time competition is purely tactical and largely artificial.The profits made go in dividends, high executive salaries and so on. There is little doubt that a well-run publicly owned monopoly would be in the public interest producing lower prices and less wasteful pseudo-competition. This entity could be a Public/Private Partnership or it could, even, be a wholly private entity given a mandate to run the operation for a contract period against performance criteria and in return for agreed remuneration. It doesn't really matter who does it as long as it is, as I say, “well-run”. There is no bias in favour of public management – the only crucial decision is that the assets are publicly owned and that the whole operation is run in the public interest, which it self-evidently is not at present.
If Gas is an obvious area for public ownership railways are another. There are some similarities. Both Gas and the Railways rely on a single infrastructure supply system. Gas pipelines in one case and rail tracks in the other. Whilst there are some route based alternatives for some journeys in essence virtually ever rail route is a private sector monopoly with one or at most two operators on it. For the hugely busy London commuter routes there is only one choice – lump it or walk. Britain is unique in the modern world in having such a broken-up and confusing number of railway companies. There is no integrated system and fares, rolling stock, consumer offers, etc. vary between companies and across the country. While the individual companies are notionally private in fact most of them receive extensive public subsidy - £2.2 Billion in the last year. The very fact of the subsidies confirms what in any case is self-evident and that is that our Railway system is a public utility. This is acknowledged for the track (etc.) owned and operated by Network Rail – the “Private company limited by guarantee” which took over when Railtrack, the shambolic private company set up on the privatisation of British Rail in 1994, went bust. Network Rail is to all intents and purposes a publicly owned company.
There is a strong case for Britain's railways to be operated in the public interest rather than the interests of private sector companies. The failure of privatisation is not in serious dispute – but taking the railways (services as well a track and stations) back into public ownership does not necessarily mean a return to the old centralised and bureaucratic “British Rail”. Many other options exist as has been described here.  
If we eschew ideology and look only at public interest then the argument as to who owns our national assets becomes more informed. It seems to me that any truly strategic asset – absolutely vital to the State – is a candidate for public ownership. The Railways. Energy infrastructure. Water. Hospitals and the Health Service. The docks and airports. And so on. Then if we agree that the decisions as to who runs these assets is also non-ideological we can accept the reality that at a macro level it will always be a public/private partnership. A hospital boiler house may be contracted out to a private provider. But what about a maternity unit? If a private provider can guarantee to achieve agreed service standards at an acceptable price why not? Well the answer to that question might be an objection to profit – again not an ideological objection to profit per se but a recognition that if the publicly owned NHS on its own and without private sector help ran the maternity unit to the same standards and at the same cost this would be preferable. Preferable because the “profits” would not go to a third party (shareholders) but be retained by the NHS.
The point about all of this is that there is nothing new or indeed inherently controversial about it. We have seen that Boots Pharmacy offers a good public service in part because it can spread some of its retailing fixed and variable costs over other things that have little directly to do with the prescription dispensary. A publicly-owned pharmacy would struggle to do this! 
The problem many have with the principle of public ownership is that there is a history of low performance levels, high costs and failure in much of it in the past. But new management models and corporate structures can change that without in any way damaging the principle of public service. Public/Private partnerships don't have a very good name either but this ignores the reality that much of our society relies upon them. We use them every day whether we realise it or not!
I think that it is wrong that the domestic Gas retailing sector is such a source of high profits, high salaries and pensions all driven by phoney competition. This can and should change. Precisely what is put in its place is open to debate but the principle that this activity should be run solely in the public and national interest seems irrefutable. Apply the same logic in a non-ideological way to all of our key national assets and you might move forward.


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