Monday, October 12, 2009

The first failure of George Osborne

The first years of David Cameron's leadership of the Conservatives have been a largely policy free zone. In that sense the Tories took a leaf out of the Tony Blair playbook: establish some kind of trust in the minds of the electorate and their votes will follow, even if they disagree with some aspect of your policies (which most voters will do).

In that sense, the Conservative conference was a significant change of tack- George Osborne has been prepared to set out a clear policy of a pay freeze and deep cuts in public expenditure. For this he was lauded in the media as being rather brave. That the financial burden of the state is too large is now frankly pretty obvious, yet the way in which the Conservatives are likely to attempt to reform the public sector will most likely be counter productive, and will end up increasing the overall burden on the tax payer.

For most Conservatives it is pretty much axiomatic that the private sector is a more efficient provider of services than the public sector, but this is to overlook one critical aspect of the private sector. It is not just that the private sector seeks to maximise profits- frankly I don't have a problem with that- it is also that the private sector takes on the risk of a project.

The problem is that most contracts awarded by the public sector to the private sector give the opportunity for the private sector to make profits, but do not necessarily share the risk fairly. With Private Finance Initiative (PFI) or Public-Private-Partnership (PPP) projects what typically happens is that the public sector contracts the administration of a project to the Private sector and its agreed that both sides will subscribe a fixed amount of capital. That is fine if the project is completed on time and to budget, but since most projects are not completed on time or under budget. The result is that the Private partner (usually a company specially created for the project) runs out of capital. The consequence is that if things go right, the private sector makes a profit, but if things go wrong, the public sector has to pay for it. In other words, it is still the public sector that carries the ultimate risk of the project.

There are many examples of the public sector being forced to bail out PPP or PFI projects. The London Tube network was a large project that was ultimately underwritten by the taxpayer, not the private partners. In the end, when considering each project, neither Ministers not civil servants asked the key question "what happens if this project goes bankrupt?". If they did and the answer was that the state would have to either take on the project itself or subscribe more capital, then the public sector is still taking the risk and therefore the project should either not be financed in this way or most likely it should not leave the public sector.

Nevertheless, the Conservatives have focused on the generally greater operational efficiency of the private sector as an ideological reason why the public sector should be shrunk. It is not wholly without truth that much of the public sector is a cost centre and therefore should be kept within strict limits. Though many choose public sector jobs, such as teachers, nurses, prison officers out of altruism, it also means that the overall quality of management is probably lower than where the profit discipline dictates some tough minded decision making.

Unfortunately George Osborne made a dramatic error in his speech outlining how he intends to control the ballooning costs of the public sector. His proposal to freeze all public sector salaries essentially destroys the ability of public sector management to reward their key staff, while the implied corollary of workers with frozen salaries "keep their job" also means that poor performers are less likely to be disciplined. In short Mr. Osborne, as the result of his pretty woeful ignorance of basic management has essentially created a layabouts charter. Instead of capping the total amount of the budget for salaries, he is proposing to cap individual incentives.

Perhaps it is intended that increasing the inefficiency of the public sector will create demands for increased privatisation, but judging by the mood music from elsewhere in project Cameron praising the state sector, I rather doubt it. I see this as a mistake pure and simple.

Meanwhile this failure to understand the basics of management will probably lead to an ideological commitment to greater "competition" in the public sector. Yet the so-called competition will be essentially meaningless, because it will be between entities that are both ultimately backed by the full faith and credit of the British taxpayer. The result is that instead of reducing costs, this fictitious competition will actually increase it. A good example is in the PFI in the Ministry of Defence. Military PFI projects, because they are both secret and involve protecting the lives of our service personnel are typically given quite a loose cost control. The consequence has been both an explosion of costs and, as the private contractors struggle to make a profit, severe cuts in the quality of the equipment in the field. It is now not unfair to say that the Ministry of Defence budget is in meltdown.

The problems of the UK public sector lie not in the absence of competition but the absence of effective administration. Only a few senior civil servants and virtually no politicians have qualifications like an MBA that would allow them to understand the scale of the managerial problems that they face. Mr. Osborne is no exception to this melancholy rule. Unless he gets back to the drawing board fast, he is likely to be a spectacular failure in his first really managerial job.

As one bunch of student politicians seems set to succeed another, my belief that only a dramatic reform of the system of government can stop the decline of the UK or even its break up, grows ever stronger.

1 comment:

Newmania said...

The problems of the UK public sector lie not in the absence of competition but the absence of effective administration.

That could have been said by Gordon Brown who precisely thought that with tough policing people could be turned from the lazy self serving jobs -worth’s they are into ferociously motivated providers of services. It has spectacularly failed .
You over stress the commitment of the Conservative Party to the private sector , by comparison to socialists yes of course, but there is no great ideological revulsion against Government. Liberals of course like to rail against bureaucracy whilst at the same time prescribing more ... this is the central weakness of the Janus faced position , Conservatives are less ideological .

Conservatism is the Party most ready to accept that once you have decided to provide things the market will not inefficiency is inevitable . It will never be perfect but the tendering process for contracts is a vast improvement on the old don`t care , sod you approach. Having seen it from the inside I can speak with some confidence there