Where is the evidence of private sector delivery?

Henry Stewart's picture
 19
It is becoming clear that a key part of the right-wing agenda for our schools is privatisation. Proponents argue that the profit taken from schools would be more than made up for in greater efficiency. However where is the evidence that public services can be delivered well by the private sector?

There are plenty of examples of the failures of the private sector. There was the disaster of Southern Cross and its mis-management of care homes. There was G4S and the Olympics. There is the example of mutual building societies, like Northern Rock or Bradford and Bingley, that converted to banks and had to be rescued at massive cost to the taxpayer - compared with the sound performance of Nationwide Building Society, still a mutual acting in the interests of its members. There is the vast cost of PFI. Brown's forced privatisation of tube repair was a disaster that cost an estimated £2 billion. The railways swallow many more billions in subsidy than they did under public control and most (including, it seems, Cameron) regard the privatised energy companies as ripping off the customer. I could go on and on.

Where, in contrast, are the examples of private sector success in delivering public services?

RM Education: A Case Study in Poor Service



For a detailed example let me look at a school I know well. A condition (under Labour) of refurbishment under Building Schools for the Future was that services like IT support had to be privatised. The school would no longer have direct control and instead would rely on a long and complex contracts - but they were told that the combination of targets, Key performance Indicators (KPIs) and penalties would guarantee great service.

The school's IT used to be cutting-edge and widely admired. The contract was awarded to RM Education (a public listed company and probably the largest supplier of IT support in UK schools),  The service was so bad that penalties in some months reached 50% of the contract value. That was the first lesson. Companies providing consumer products have to respond to competition in the market, which can improve service and prices. Private provision of a public service generally relies on KPIs and long contracts.

How Government Ensures Market Failure



These contracts are generally long-term and very difficult to get out of. In this case even though schools across the borough would like to be rid of RM, they have so far found no way out. One thing private providers are very good at is contracts. I asked one private provider of public services if they were worried about certain changes in government policy and whether it would affect them. Their response: "No, we spent half a million pounds on the very best lawyers. There is no way they can get out of that contract, whatever their new policy is."

For much of the private sector the market is effective. If a company produces faulty cars or too expensive yoghurts, they are likely to lose sales. The school would happily give up all its KPIs targets for the option to change supplier at the end of the year, to bring into bear the pressure of competition. Most government contracts cut out the very mechanisms which ensure the success of the market model. One director of a government department, who was mid-way through a 20 year contract for IT supply told me "We are their second biggest customer worldwide and they treat us like shit". There was simply no market pressure to do anything beyond the contract.

RM Education: A Continued Story of Failure



Four years into the contract, staff say the IT is “worse than is ever has been”, that many have simply “given up” on the IT working reliably and cannot rely on the technology working when preparing a lesson. RM Education seems to be taken by surprise each year by standard activities at the start of the school year, changes are slow to implement and upgrades, that in the past would have meant a long weekend working for the dedicated IT staff, are now quoted at £20,000 or more.

One irony is that the RM staff present in the school are actually well liked and seen as helpful. However the combination of restrictive software, of rigid protocols, of lack of ownership and bureaucracy prevent them providing quick and effective solutions. That seems to be a common problem with the large companies that are involved in public sector procurement - procedures and rules are everything, and actually get in the way of providing a good service. And most government procurement is structured to be on such a scale that small companies or social enterprises cannot apply.

I asked one colleague, who had been responsible for running contracts like this for a private sector supplier (not RM), whether he would recommend using such a firm. He was clear: "No way. Our targets are to maximise income. It is very clearly understood that the aim is to fulfil the contract requirements at minimum cost. Providing a great service simply doesn't come into it."

I write as somebody who has run a private sector company for over 20 years. However I also know the pressure of a customer who can change their mind tomorrow is a far better driver of provision than a contract that guarantees income for years.

We Need the Private Sector. But We Also Need the Public Sector



The failure of the planned economies in Eastern Europe and elsewhere showed that provision entirely by the public sector did not work. But that is not an argument for going to the other extreme, provision of everything by the private sector. I would agree with free-market economists that market competition ensures value and innovation in markets like consumer technology (though even there key innovations, such as the world wide web, have come from the public sector).

But providing a high quality education to our children is a very different matter to creating a new brand of ice cream or a new phone. There is no evidence that profit-maximisation is a good mechanism to deliver public need.

Fortunately the school is delivering steadily improving results despite the ICT problems. When the contract comes to an end (and the school is pleading with RM to be let out early) IT support will not be provided by RM or by any other large contractor. Instead it is likely to be brought back in house, where dedicated public sector employees - managed by the school leadership - will work to get the school back to the forefront of technology in support of student learning, something the private sector supplier seems unable to do.
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Comments

agov's picture
Wed, 24/10/2012 - 07:54

I suppose you have to be gentle as you have named a particular company.

The reality however is often worse than you describe. It is not just that private sector suppliers may be unable to meet the needs of the 'customer', it is that they may actively wish not to as they can then get paid more to fix (or pretend to fix) the problems that shouldn't have been there in the first place.

The last government (ever-anxious to give money to the private sector and the rich) came up with a ruse to curtail individual freelance IT staff for the benefit of software houses. The net was then flooded with tales of how staff were instructed by these software houses to insert deficient code into programs in order to ensure they would not work properly.

Mark Scott's picture
Wed, 24/10/2012 - 09:52

Great article. I think this hits the nail squarely on the head:
"Most government contracts cut out the very mechanisms which ensure the success of the market model."

Allan Beavis's picture
Wed, 24/10/2012 - 10:13

When private sector companies like RM Education depend almost entirely on profits from public sector schools, they also depend on the reliability of the state to fund these schools at least adequately so that more of their services are bought.

It seems that 60% slash of the capital budget on schools and the zero growth austerity budget, both implemented by the coalition government, had a disastrous impact on RM Education. In the autumn of 2011, RM was forced to shed more than a fifth of its total workforce of 2,500, blaming education cuts, and saw its shares drop down 16%.


RM announced that they were entering a “challenging period ahead for shareholders and employees” and that they should anticipate a ‘material reduction’ in this year’s dividend.”

So a lot of concern for diminishing profits and for their shareholders but, unless I have missed it, no concern or regret from RM about the impact of their losses on the services they provide to schools who are forced to continue paying them for poor quality services.

If maximising profits is more important than the educational needs of schoolchildren (as it was in Sweden, to the extent that they are revising their Free School experiment), then when profits plummet, it stands to reason that an already unsatisfactory service is likely to get much worse.

The example here of RM Education goes to the heart of the unfair and unbalanced relationship between private sector profit making and public sector service, where the former can virtually hold the latter to ransom no matter which way shares drop or fall.

It will be interesting to see if the fortunes of RM will pick up as more and more schools become independent of their local authority and go it alone, funded directly by central government and aided by sponsors. But wherever the money goes, there is still a limit to the annual schools budget and since it’s not getting any bigger, companies like RM will ride out the drought by taking what they can from the tax payer to give to their shareholders whilst providing a service that hampers, rather than, supports schools.

I do hope Henry’s post will encourage more people and schools to complain about poor service from private sector companies. The government has done its level best to bash public sector “incompetence” and “bureaucracy”. Its about time to question and challenge the incompetence and lack of rigour of the private sector in schools before they get too much of a grip and lead them in a “Race to the Bottom”.

Janet Downs's picture
Wed, 24/10/2012 - 14:23

Panorama investigated how schools were ripped off in an IT scam (first link below). The programme revealed how a local authority expert on procurement was now redundant because schools had "opted out". Her experience and expertise were no longer deemed to be required. At the same time, heads and governors inexperienced in procurement were (still are) ripe for exploitation.

Another example: the IT firm, Capita, was accused of making "excessive profits" over IT contracts in newly-converted academies (second link below).

http://www.telegraph.co.uk/education/educationnews/9561147/Warning-as-sc...

http://www.tes.co.uk/article.aspx?storycode=6086539

Ben Taylor's picture
Wed, 24/10/2012 - 19:27

Henry you run a private company selling IT services and have some public sector clients. We can agree that this fine. Do you maximise your profits in delivering services to public bodies? Maybe you don't which is a fair enough decision.

So we are talking about poor procurement, rather than the principal of the nature of the provider. Yes I agree some of these deals are lousy and schools need advice on contracting. LAs could probably provide some valuable assistance with that.

"However I also know the pressure of a customer who can change their mind tomorrow is a far better driver of provision than a contract that guarantees income for years". Well that's one of the ideas behind school choice!


However I also know the pressure of a customer who can change their mind tomorrow is a far better driver of provision than a contract that guarantees income for years.

Allan Beavis's picture
Wed, 24/10/2012 - 19:42

Ben

Once again you don't grasp the point. The example with RM Education is that the school cannot get out of a binding contract with RM despite the poor level of service without possible and expensive legal recourse. It's not a question of "changing their mind" tomorrow and suddenly switching just because you suddenly fancy one brand of apples over another. And all of a sudden you want LAs to give valuable assistance? You have said elsewhere they are incompetent and don't deserve to oversee schools so hurray for Academies. Confusion reigns. No wonder you worship Gove!

Ben Taylor's picture
Wed, 24/10/2012 - 19:44

Poor procurement... as I said.

Allan Beavis's picture
Wed, 24/10/2012 - 20:37

Poor procurement? So you want "choice" but want to punish people for making the wrong choice? RM was imposed on the school by legislation obliging them to do it. Better of they had never been let into schools on the first place.

Ben Taylor's picture
Wed, 24/10/2012 - 21:39

We can't remove risk from buying things completely. It looks in the case of RM that the Labour government did a bad job of contracting these services on behalf of schools based on Henry's reporting.

Maybe Henry's company would have done a better job. Or do you think he should not have been able to provide IT services such as has done to boroughs such as Islington and Camden? See here;

http://www.happy.co.uk/happy-computers/happy-computers-clients/

As for punishing people I don't blame the schools if they were obliged to take these contracts. I would go after RM and anyone to do with the contracts.

You'd be good at that - get some shares in RM and if they have a shareholders AGM bring it up.

Allan Beavis's picture
Wed, 24/10/2012 - 22:22

Ben

The Labour government didn't contract these services on behalf of schools, so you might want to drop the snide attempt at a smear. It is also not what Henry wrote. [Redacted]

Ben Taylor's picture
Thu, 25/10/2012 - 12:01

We have Henry's private company apparently successfully supplying the public sector and RM badly doing so. That's all we can really conclude. No confusion.

It might be an idea to see who contracted RM. Was it the school? The LA? Some other government entity?

Henry Stewart's picture
Thu, 25/10/2012 - 12:24

Ben, I think yours are fair questions and comments. This procurement was contracted by the LA using a Building Schools for the Future contract supplied by Partnership for Schools (PfS). I don't think the PfS contract was fit for purpose but we were not allowed to make significant changes to it & had to follow their model.

Indeed because PfS insisted on one big contract, building the school was combined with ICT support, facilities management etc. So ultimately which ICT supplier was used was actually decided on the the basis of which bidder offered the better caretaking (as this was where the scoring differed).

Ludicrously poor procurement? Yes, but its the norm in the public sector approach. Any sense of quality is almost always determined by clauses in the contract rather than by any market forces. And thats a big problem.

Yes, Happy does have a lot of public sector clients & I believe we provide a great service. But we have never bid for the outsourcing of a public sector training function. And the reason is simple: We've never seen a way to provide a great service at lower cost than can be done internally. Instead we prefer to work on helping improve the capability of the internal team.

As I asked in the article, where are the examples of great provision of public sector services by the private sector?

Janet Downs's picture
Thu, 25/10/2012 - 06:32

Re procurement - as the Panorama investigation found, when schools and governing bodies are responsible for their negotiating their own contracts for services then things can go badly wrong. Heads and governing bodies are not expert in procurement, contract law and so on - that's a job for lawyers, accountants and procurement experts. Of course, schools could employ such experts (and divert some of the money which could be spent on education) but local authorities often had their own procurement experts like the one featured in Panorama who was made redundant as more schools took on their own procurement.

Janet Downs's picture
Thu, 25/10/2012 - 06:41

The National Audit Office (NAO) has just published a report, "Delivering public services through markets: principles for achieving value for money." It says that outsourcing "under certain conditions" has the potential to delivery higher quality services and efficiency. However, this potential comes with "a new set of risks to achieving value for money" and government departments, local authorities and agencies need "to possess and deploy a very different skill set suitable for a commercial market environment."

The NAO lists ten principles which will minimise risk. I'll summarise these and key findings from the report in a later thread.

http://www.nao.org.uk/publications/1213/delivering_public_services.aspx

Ben Taylor's picture
Thu, 25/10/2012 - 20:04

I am don't think it's always possible to neatly categorise direct public provision or publically funded private services as better or worse.

Examples of good private sector provision of public services off the top of my head are GP practices and dentists, motorway construction and operation, elective medical care and occupational adaptions in homes for sick and disabled.

I am not an apologist for RM or any company. If they are really that bad then I hope they can be made to pay, whether in contract or any other legal claim. I think Henry is correct in suggesting the contract is poor value. I consider some local authorities are educational versions of RM and what they do is involuntarily contract children who don't want their offer.

By the way Gove said earlier this year that he would consider approaches from LAs who wanted to sponsor a trust to take over failing academies.

Henry has identified the ability to choose not to use poor services and take others as a useful social mechanism.

Henry Stewart's picture
Sat, 27/10/2012 - 14:10

Interesting response, which I think confirms how difficult it is to find positive example of private companies delivering public services. I know GP practices are an odd hybrid but I doubt many GPs would regard themselves as working in the private sector.

Schools and other public bodies will always buy many things from the private sector. Supply teaching is one example. Probably all schools sometimes contract supply teachers from private agencies. The quality is not always great but they can always send back teachers who are not good enough, or choose a different agency. Here the market plays a useful function, making it easier for supply teachers to find work, and easier for schools to find cover. But the school is still clearly in charge.

However the equivalent of placing the private sector in charge of provision would be to hand over all teaching in a school to a private supplier. If contracted in line with normal outsourcing, there would be a contract lasting several years and the head would have no control over individual teachers. Quality issues would be dealt with not through performance management (well, not by the school) but through recourse to contract. I hope you agree it would be a recipe for disaster.

The government appears to believe that public services can be better met by private suppliers, and there are clear indications they would like to place schools in the hands of private profit-making companies. My argument is that the private sector can provide some services well, where competition is maintained and the school is clearly in control, but should never be placed in charge of public services - there is no evidence that the motivation to maximise profit is a good driver of meeting the public good.

Janet Downs's picture
Sun, 28/10/2012 - 08:04

Henry - you are right about the difficulty in discovering whether outsourcing public services to the private sector is value for money. The National Audit Office told BBC Radio 4's "File on Four" that it hadn’t seen sufficient evidence that savings could be made by outsourcing although it hadn’t yet completed its work.

For further details of what "File of Four" found:

http://www.localschoolsnetwork.org.uk/2012/10/huge-profits-being-earned-...

The National Audit Office has published a report on the opportunities and risks of delivering public services through "user choice and provider competition" which relies on "market mechanisms". I will provide a summary shortly which I will post both as a thread and in faqs for reference.

Ben Taylor's picture
Sun, 28/10/2012 - 12:51

Would you agree that a school such as WLFS which is popular and resourced with capital and revenue rates equivalent to maintained schools is value for money? We will of course need to wait and see how the academic performance turns out. As far as I can tell there is no legal structure that can permit this school to make and distribute a profit to shareholders, but I am ready to be corrected on that.

Henry Stewart's picture
Sun, 28/10/2012 - 23:46

Ben, I'm confused about why you are introducing WLFS. This post is about the danger of introducing profit-making firms into public sector delivery. There are different issues around free schools but we've never accused Toby Young of seeking to make a profit from WLFS.

However it is clear from the recent Policy Exchange document that many on the right would like to see schools run for profit. I, as I outline above, question whether there is any evidence of private firms successfully running public services for profit. (Successfully as in delivering great service.)

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