Providing the Public Good Loand by the Private Sector
According to Alexander Dielius, CEO of Goldman Sachs, “Banks do not have an obligation to promote the public good” (Wall Street Journal, 2010). This may seem self-evident given the financial crisis of 2007-8. However a general definition of the public good is “to the benefit or well-being of the public”, so this should be something that the private sector (even banks) ought to be able to deliver whilst maintaining their duties to the shareholders and staff of the company. There will always be some “public goods” that can or should only be delivered by the public sector such as financial governance or defence but these days, in the UK, a significant number of public services have an element of private delivery to a greater or lesser extent.
In this essay I will look in more detail about how to quantify “a public good” and delve further into the meaning of private delivery. This will provide the starting position for examining the arguments, for and against, the delivery of a public good by the private sector. I will then examine how these arguments played out in Private Finance Initiatives (PFIs) which were conceived in the UK in 1992 by the Conservative but became widespread under the Labour Party after 1997. So to start let’s look at the public good. Economically speaking, public goods are goods which can be consumed by all without exclusion (Non-excludability), and which are not decreased by use (Non-rivalry) (Pettinger, 2017). A common example is national defence, if you protect the country from invasion, it benefits everyone in the country (Elliott, 2018).
Another is the police service; providing law and order meanings everyone in the community will benefit from improved security and reduced crime rates. Public goods can also be defined as externalities, social costs and benefits provided by private activities, which are not taken into account in the private transaction. Not all goods provided by the government are not necessarily public goods, for example, education isn’t a public good it is a merit good which is when people underestimate the benefits of consuming (Pettinger, 2017). In more general terms, public goods are activities that produce a positive outcome for all members of the community. Typically, public goods are not provided in a free market because firms cannot charge people directly. However, because there is no excludability, this can lead to a ‘free rider’ problem. Consequently this means there are no incentives for people to pay for the good because they can consume it without paying. This will then lead to no good being provided and social inefficiency (Pettinger, 2017).
Moving on to private delivery, this relates to a service that has been privately delivered, it is simply a service where some or all of the funding has been provided by the private sector, either a single company or consortium from the private sector sometimes due to funding deficiencies, or lack of expertise in the public sector. Where funding for a service has moved from the public to the private sector it is called privatisation such as train operators, though this word historically has some negative connotations it is still seen as an option in some service delivery. Another style of private delivery is sometimes through philanthropy. An example of this is from the largest philanthropic organization in the world, the Bill and Melinda Gates Foundation. This foundation is dedicated to the elimination of malaria and polio, and controlling the spread of tuberculosis and HIV. In total, they have given £24.2bn in grants to health programmes all over the world with its work focusses on prevention, immunisation and vaccination (Mathiesen, 2015).
Huge investors such as Warren Buffet, who joined the foundation as a trustee with a £30bn pledge, have helped the foundation become a powerful catalyst for the improvement of lives in the world’s poorest countries (Mathiesen, 2015). So while the initial funds have been generated in the private sector, they are making a significant difference to the lives of many individuals across the world. Seeing examples like this, begs the question whether having third party actors funding public goods is something which should be promoted more vigorously. So having defined what is meant by public good and private delivery it allows us to investigate further the argument that a public good can be privately delivered. Also the example of the Bill and Melinda Gates foundation that has provided an excellent public good in health care, it would seem clear that the potential for private involvement in the delivery of public goods is huge.However, where the private delivery is less philanthropic and more centred on delivery from the corporate world, there are a lot of additional constraints that become involved. David Cameron stated during his time as prime minister ‘it says loud and clear that it shouldn’t matter if providers are from the state, private or voluntary sector – as long as they offer a great service’.
During the coalition government, there was a push for more delivery and financing by the private and third sector as it would help to ease short-term financial constraints by providing investment (Grout, 2010). It could also potentially keep long term cost down if they provided a cheaper and better service. Nevertheless, a big problem with privately funding public goods is the public’s scepticism and suspicion surrounding them. Interestingly, the public are more likely to question a private sectors intentions because of the profit motive, compared to the non-profit delivery from the voluntary sector even though the public know very little about this sector and there is no evidence to suggest they provide a better service. The conflict between what the government want and what private delivery can offer with what the public want and think of it is the biggest constraint for the growth of the private sector delivering public good (Grout, 2010). Another question raised if a public good is to be delivered privately is, are the profits perceived to be legitimate. This doesn’t mean illegally of course, but private companies will always endeavour to explain profit from delivery of public services unless it is legitimised (Grout, 2010). Even implementing fixed priced contracts will not legitimise profits as profits can be maximised by delivering the minimum service. To fully understand if public good can be delivered privately, even with the scepticism, we will look at a policy example and assess whether it was a success or not.
The example I will be using for this is Private Finance Initiatives or PFI’s.PFI’s were first introduced by the Conservative government in 1992 under John Major, but became widespread under the Labour government in 1997 (Telegraph, 2017). They are a means of the state financing the construction of new public infrastructure without the government having to find the funds themselves. This includes hospitals, schools, prisons, railways or any other public buildings. Usually, to fund this infrastructure, the government would raise the money in taxes and then and pay the builders to deliver the project. After the work is complete, the public sector would then own the asset. However, if the project was under a PFI, the Government would commission the builder to deliver using its own money, which is normally borrowed from the credit market. The state then pays the builder (or a separate company that buys out the contract) regularly to effectively lease the building or piece of infrastructure for a substantial time period, agreed as part of the PFI. PFIs’ were put in place with the prospect that the private sector would be more efficient at delivering and managing projects than the private sector. They were extremely popular to start as it meant ministers could invest in large infrastructure projects for the public good, such as building new schools and hospitals, without paying any money upfront. However, the repayments would last over 30 years at a high interest rate meaning these huge debts were piling up ready for future tax payers to pay off. But how much will the uk exactly be paying off?
Currently, the taxpayer will be paying off £305bn in across 700 projects for the next 30 years. The most expensive single project is the Ministry of Defence’s Future Strategic Tanker Aircraft (FSTA). It has a capital cost of £2.7bn which, by the time the debt is paid off in 2035 would of increased to cost £10.5bn. However, this may be the most expensive single project, but the most expensive department in terms of PFI is the Department of Health. There are currently approximately 117 projects within the NHS with a capital value of £11.6bn, which will have cost around £79.1bn by the time they are paid off (Rogers and Ball, 2016). Seeing such a huge volume of debt definitely colours the public perception, not just against PFIs but against private delivery in general. However it can be argued, even in the case of PFIs and the NHS, there were (and are) both positive and negative arguments.
Firstly, we will look at the advantages of using PFI’s regarding the department of health. Financially, the advantages are that the project is service led and centred on patient need, not that of the private company investing. Interestingly, before a hospital is built, both the NHS and the strategic Health Authority need to agree that the scheme would be affordable and deliverable, so in theory it is agreed by the public sector that the scheme will produce appropriate benefits. There is also the shared liability, as no one company within a consortium is liable for the entire financial risk, it is shared. Once all is agreed the infrastructure project can begin. Sometimes, if agreed, the private consortium can also provide non clinical services such as catering or cleaning, making administration costs less. The advantages to the NHS and therefore the general public also seem reasonable. From 1997 to 2010, over 118 new hospitals were built under PFI’s (Rogers and Ball, 2016). By increasing the number of hospitals, access to healthcare is greatly increased, leading to helth improvements across the communities.
Norfolk and Norwich Trust had estimated in 2010 that it is treating 23,000 more patients each year as a result of moving to new PFI premises (Lambert, 2010). Without the PFI schemes, these hospitals would not of been built in such short time frames if done by the public sector. The advantages are not only in the building of hospitals, but the private consortia also maintain and update the buildings when needed too efficiently. This is backed up with the survey done in 2002 which showed that 88% of new facilities were deliver on time (Ford et al., 2005). The use of private investors has also opened up new employment options, not only increasing the amount of health care professional due to new hospitals opening, but also financiers, project managers, human resource advisers, legal and risk management representatives. An example of a PFI scheme in the NHS which has worked excellently is University College London Hospital. It is now the largest hospital PFI in the country at £442 million. The scheme was signed in 2000, and was completed on time and met the budget in 2008. Sir Robert Naylor, who is the chief executive of the UCLH NHS Foundation Trust, says ‘the decision as possibly the bravest and the best “ever made in this part of the NHS’ (Lambert, 2010). Not only did this hospital grant excellent healthcare to all patients, but it also has one of the largest teaching hospitals for one of the top universities in the world. In an idea l world this has all been done with no risk to the public purse as this is taken by the private consortia. So, what could go wrong? Well, having established a significant number of PFI the impact is now becoming apparent.
Currently the NHS will have to pay back £79.1bn with the repayments going until 2050, and the repayments will be coming from money made in taxes. In the next 5 years, £1bn of the taxpayers money, will go to the PFI companies in profits. Whilst the public will be paying back the governments debt the private companies would have made serious profits building and running the NHS hospitals. The Centre of Health and public interest put out a report saying what PFI’s will do to the NHS over the next 6 years, finically speaking. Over the past 6 years, they have made pre-tax profits of £831m , this money has obviously not been available for patient care over this period. If the NHS hadn’t been paying these profits, deficits in hospitals would of reduced by a quarter in the 6 years (CHPI, 2017). A number of PFI schemes are generating particularly high pre-tax profits for their operators. The company which holds the contract for the hospital at University College London has made pre-tax profits of £190m over the past 11 years out. This is out of £527m paid to the company by the NHS (CHPI, 2017).This report clearer shows that profits have not been transparent, and feeds back into the publics’ scepticism of the private sector. To try and reduce excess profits, the report makes some recommendations.
Firstly, to use public sector loans to buy out these private contracts. If this was possible, it would give control back to the public sector, but could hinder things such as maintenance and efficiency. Capping the amount of profit a PFI company can make is another suggestion, however, to control and keep transparency could prove difficult if these companies have already been making huge profits (CHPI, 2017). The only real way forward is to try and renegotiate contract with the PFI companies and the NHS, seeing if the amount that the NHS pays could be reduced due to private companies already making substantial profit. Poorly negotiated PFI contracts are the root of all the problems caused. One example was risk sharing. The NHS wanted the private companies to take all the risks, however if the risks were shared equally, there would be more innovation. This is a huge problem when it comes to healthcare as new technology and medicines are being developed every day, however the lack of knowledge by the private companies, results in new ideas not being tested. An example used one of the “successful” PFI’s (Norwich and Norfolk hospital), the PFI was negotiated so poorly that the rates that were paid by the local Trust, put it deep in the red.
When rates were reconfigured in 2003, two years after it opened, the NHS didn’t benefit, however the private consortium did to the tune of £70 million .Badly drawn up contracts have also lead hospitals to be tied to expensive, overpriced contractors for maintenance and catering. One example is the Queen Elizabeth Hospital in Woolwich. Each year they have over 60 visits from pest controllers even if there have been no reports of pests on sight. (Telegraph, 2011). This is not just a waste of time, but a huge waste of money that could be going towards healthcare. Contractors are charging high end prices simply because they can, in Central Middlesex Hospital they said on average a contractor will charge £210 to fit a plug socket. The greatest criticism that PFI’s have faced regarding the NHS has been that they a poor value for money. (Lambert, 2010) Seeing the amount of debt that the NHS is now in makes it very difficult for the public to see how it is good value. Dr. Flynn who is the deputy chairman of the BMA’s Consultants Committee said “The NHS has been saddled with debt. Had the Government borrowed in the usual way, the amounts would have faded into insignificance by now.” (Telegraph.co.uk, 2011).
However, from the government’s point of view, they are good value as government borrowing is the same and has always been spread across a number of years. PFI’s are an example where the private sector did and still are delivering public good, however, contracts were negotiated so poorly that the positives are strongly outweighed by the negatives. However, even though PFI’s were seen as a failure, other projects privately funded have been a success. The Bill and Melinda Gates foundation is a strong example of how private funding can be truly successful. Bill Gates for a long time was the richest man in the world, and saw that if he partnered with governments and the public and private sectors this would then promote greater public awareness of urgent global issues (Gates and Gates, 2018). What the foundation has done for developing countries is phenomenal, providing vaccines and developing new research everyday for diseases such as malaria and TB.
If public good can be privately delivered successful, it heavily relies on putting polices in place to make sure there is complete transparency. Firstly, there needs to be clear objectives with each individual project and a way to measure its success. If it is made clear to the public how well a project is doing, suspicion may decrease. If there are clear objectives, this would also make it easy to negotiate fair and realistic contracts which is the main cause of failure in private funding currently. However, the biggest obstacle facing private sector funding is the public itself. Due to the antipathy towards private companies, and evidence showing how that some can and have made huge profits from public goods, it’s clear to see why the public have their suspicions so are inclined to be anti any form of privatisation. However, if every detail was done with complete transparency, evidence of success and profits being put back into the projects, then there is definitely room to believe that public good can be privately delivered.
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