Open Public Services: market fundamentalism with a thin sugar coating?

We forget at our peril that markets make a good servant, a bad master and a worse religion.

Amory Lovins, CEO, Rocky Mountain Institute

The Government’s long delayed White Paper on public service reform – Open Public Services – has now been released into the wild. I blogged an early reaction to its rationale over at Dale & Co on Tuesday. I’ve now had a chance to come to grips with the detail, such as it is. My feeling is that this is an intriguing, infuriating and – at times – alarming document.

It is a document that lacks coherence in a way that suggests it is the product of several hands, or a fevered mind. It is a document that lacks detail in its justification and its implications in a way that is troubling. The policies and initiatives it identifies as being in accord with the Open Public Services agenda are a ragbag of largely unrelated actions, some of which are problematic in themselves.

There are some components of the proposals that are welcome and sensible. They point, for example, to greater local government or community control over services delivered in their area. If the White Paper had stopped there then it would be a very different beast. But such moves to enhance local democratic control are the secondary storyline. This is the sugar coating.

The overarching message is the onward march of marketisation.

It is about maximising choice and competition and, where possible, consumerising service users. It is about enforcing provider plurality and giving alternative providers the right to challenge incumbents and destabilize existing systems of provision. The White Paper starts by observing that “good public services are one of the foundation stones of a civilized society” (para 1.1) and that “many of our public services are already among the best in the world” (para 1.6). But ultimately it is about rejecting the desirability of provision directly controlled by politicians and public servants. It rejects public services as public provision and reframes them as services that are publicly commissioned and financed. Conventional structures for delivering public services will only be accepted, reluctantly, where marketisation is deemed by public authorities not to be possible or desirable and alternative providers have no interest in forcing a market into existence.

The White Paper is intriguing because it is clear that someone is trying to steer a course around the problems that arose as a consequence of previous attempts to marketise public services. In fact, the White Paper is quite careful not to suggest that it signals the marketisation of public services. “Open public services” is the preferred euphemism. Who could be against openness? Surely only those protecting the interests of existing providers. Only once does the White Paper refer to “public service markets”. I suspect whoever was in charge of doing a Search & Replace on the document could be for the high jump.

Making “fair access” one of the key principles of reform is perhaps the clearest attempt to defuse criticism of marketisation. Markets have a tendency to reinforce inequality. That is acknowledged by all but their most zealous advocates. So the White Paper recognises that some users will not be able to exercise the role of consumer without assistance or capacity building. There are some very specific points that seek to address criticisms levelled at the quasi-markets experiments of the 1990s. For example, the White Paper states it is important to avoid creating incentives for cream-skimming – that is, setting a standard fee per user which gives providers the incentive to target low cost users. The White Paper’s position is that as long as you set differential fees that are weighted in favour of the higher need/more expensive users then that will override this type of perverse incentive. At the same time the White Paper rules out wealthier households being able to top-up vouchers in order to access services, thereby creating the possibility of differential access on the basis of income. In this respect, the White Paper has a strong resonance with arguments advanced by some well known metropolitan academic commentators with a strong faith in markets. They are, of course, arguments that align closely with those who adhere to a certain type of socially-inflected economic liberalism.

On the other hand, the White Paper majors on the concept of the purchaser-provider split without recognising the problems such arrangements can create. The purchaser-provider split was an idea that was strongly associated with the NHS internal market of the 1990s. It is now firmly entrenched in various parts of the public sector. It is a mechanism that is integral to creating a contracting culture. But in erecting an organisational boundary between purchaser (latterly, commissioner) and provider it increases transaction costs and decreases flexibility. This has been a problem in the NHS. But in the context of other local and public services there is a further dimension to the issue because it creates a disconnect between the democratic process and providers. The White Paper places a lot of emphasis upon communities, neighbourhoods, and occasionally local authorities, shaping the services in their area. But it does not work through how this is assisted by removing provision from their direct control. Whether the proposed system enhances or reduces genuine accountability is not obvious in the abstract. The detail is vital. Get it wrong and communities could effectively have their hands tied for years: the costs of contract variation and breakage are so great that they have to take what they’re given.

One key criticisms of the White Paper is that the economic thinking underpinning it is rather simplistic and the position rather confused. The starting point is that monopoly is bad. Choice and competition are needed to drive up quality. Increasing both is stated to be the only possible route to better public services. So far, so Economics 101. There is no recognition that choice and competition are not always synonymous – competitive processes can lead to lack of meaningful diversity and choice, while monopoly providers can offer choice.

While provider diversity is seen as a core mechanism for increasing choice and driving up quality, the White Paper recognises that information asymmetries and rationality problems can frustrate the effective operation of the mechanism. There is a recognition that choice can lead to falling standards and provider failure. So in markets we cannot necessarily trust. There is therefore a need for further regulation and state mandated minimum standards. There are going to be significant transaction costs and regulatory compliance costs associated with this type of regime.

The White Paper proposes that provider diversity should be enforced in all areas and public service consumers should have a right to redress if they are not offered sufficient choice. Mechanisms for adjudication will be required. Penalties could be levied. There is a reference to the problems of rurality in relation to provider diversity. There is an aspiration to allow providers of any size from any sector to compete to provide public services.

But the whole discussion doesn’t show any strong understanding of economies of scope or scale. In some contexts you can either have efficient provision, given the nature of the market, or you can enforce provider diversity and aggregate costs will not be minimised. There are few markets in which small, large, profit and non-for-profit organisations are competing on equal terms. There are economic reasons for this.

The White Paper has also learnt some of the lessons from the compulsory competitive tendering experience of the 1980s. It makes no pretence that markets are natural phenomena. They are socially constructed. Indeed, at one point they identify market making as one of the future roles for local authorities. This was a component of the debate over CCT. Local authorities were obliged to package up services for tendering. A lot of services – particularly the white collar services – were awarded to in-house teams. The Conservative Governments of the time suspected that local authorities were rigging the market by bundling services in ways that allowed local authority in-house teams could exploit their incumbency and, conversely, discouraged alternative providers from entering the market.

So the White Paper is proposing to require publication of cost data so that informational asymmetries are removed and one advantage of incumbency is removed. It is also suggesting that steps will be taken to stop contracts being offered on a scale/scope/complexity that favours incumbents and stops contracts placing unnecessary requirements for track record upon tenderers so that the chances of competition are maximised. This is clearly recognising that there can be artificial barriers to entry. But the discussion is structured in a way that implies that most barriers to entry are artificial. That is clearly nonsense. It may be that it is economically more efficient to offer services on a scale or in combinations that mean the contracts are out of reach of small non-profit providers. To break services down into smaller chunks may increase the number of potential or actual contractors. But it will also increase transaction costs and lower the efficiency of the service delivery system. That is the primary lesson of transaction cost economics.

Of course, disentangling whether scope or scale is necessary or a pretext for preserving incumbency is difficult. But if, as the Government claims, this agenda is about delivering more efficient and effective services then these are issues that need to be taken very seriously. Yet, the White Paper gives little indication that they have even registered.

Not only does the White Paper not refer to marketisation it doesn’t refer to the proposals as privatisation. Instead it persists with the notion of diverse “independent” providers. There is much talk of mutuals and social enterprises, very little mention of the private sector. While perhaps painting an attractive picture of diversity, this stance should be viewed with caution. It is a smoke screen. The voluntary and social enterprise sector has not shown great enthusiasm for some of the proposals. It is also unrealistic to believe that such organisations are going to be able to out-compete for-profit multinational corporations with deep pockets and the scope for predatory pricing. Even if the initial marketisation involves the Government engineering new forms of organisation we have to think what happens then. What happens after the government has lost control of structuring the market and opened it up to the full force of competition and the strictures of competition law. As Colin Talbot noted on his blog post Public Service: Mutually assured destruction on Friday, if we look at the history of mutuals in Britain we see that even where they are established they have not proved a particularly robust organisational form. They frequently either fail, scale up, or demutualise in order to survive against commercial competition. We might pretend that the world were otherwise. But it isn’t.

The gaps in the story the White Paper tells are substantial. The unresolved contractions embedded in the proposals are considerable. The case that reform is necessary is not made out, although I would not dispute it. The case that these specific reforms are required in order to deliver more efficient and effective services is in no way convincing. The Coalition claims that the proposals are not based on ideology (para 1.24), but without a lot more detail and a lot of more detailed consideration of how these proposals will deliver the outcomes sought then it is hard to give this claim much credit. The alternative interpretation – that marketisation is the objective and an end in itself, regardless of its impact upon vulnerable service users – would be just as credible.

David Laws, in his contribution to Beyond Liberty, noted (p150) that:

Th[e] fusion of the economic and social liberal agendas, when applied to public service delivery, is perhaps the greatest challenge that modern liberals face.

It may or may not be the greatest challenge, but it is certainly one of the biggest. Laws’ view is that the solution lies in bending economic liberal means to achieve social liberal ends. This is the position that underpins much of the White Paper. Indeed, some of the ideas in the White Paper are mirrored almost exactly in Laws’ writings from a few years ago.

This is a position that finds considerable currency in certain influential quarters within the Liberal Democrat party. I’m not so convinced. There are two components to the Liberal Democrat heritage – as reflected in the party’s name – and the democratic component is less sanguine about the economic liberal route being mapped out. If we take concepts like the public service ethos seriously as drivers of service quality, as the Coalition claims to (para 1.14), then we cannot be indifferent to organisational forms that embody conflicting incentives. If we are serious about administrative justice then we cannot focus upon outcomes alone.

And we cannot be indifferent to questions of economic power. We need to look beyond economic idealisations and consider power in action: its effects at micro- and macro-level, its concentration and diffusion. The White Paper most likely points to a concentration of economic power. That is not desirable.

These are bigger questions than can be handled here. I’ve a sneaking suspicion that it’s going to be necessary to go beyond blogging and set the arguments out in greater detail. And the task is an urgent one. If these reforms prove problematic once implemented then they will not – indeed most probably cannot – be reversed.

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