The customer knows best

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The management of public services is a key issue for the next five years. The process of re-appointing Tony Blair as Britain’s CEO gives some pointers to how it should be done.

Whoever wins the election, the key issue for the next five years is how public services should be managed. Public service is an old fashioned term, but a necessary one. I use it to describe activities whose purpose is to meet the needs of customers but in which it is inappropriate to meet these needs by the ordinary processes of allowing and encouraging free entry into competitive markets: businesses such as health, water supply, railways, education, and the transmission of electricity.

We don’t usually talk about customers for these products. We tend to use terms such as users, passengers, students and – most appropriately of all – patients. All of them designed to convey a sense that the supplier, not the customer, knows best. That is where the problems begin.

These problems have, in the last few months, become evident in two distinct ways. The government has money to pour into health and education. But it does so with an uneasy sense that it is pouring it into a black hole. Inputs will be increased, but outputs will be no better. You can hear the desperation in the voices of the ministers who have been instructed always to talk of public investment, never of public expenditure. If only the repetition of a soundbite made it true.

And the privatisation settlement has turned out not to be a settlement at all. The government has been searching high and wide for a new chairman for Railtrack while sending over subventions to meet its over-budget operating costs and negotiating its new investment programme – just like it used to do for British Rail. And companies such as Glas Cymru, Transco and now British Telecommunications are focusing their regulated activities into separate standalone businesses. For an intriguing reason: it is cheaper to raise finance for a stand alone public service that for a diversified private company. In this fundamental sense, the market itself has rejected privatisation.

Privatisation was the Conservative answer to the problem of managing public services. It has succeeded in a limited range of activities which were never really public services at all. But as we look at railways, water or telecoms, we can now see that privatisation was just another phase of the relationship between government and the managers of public services. The reasons why government became involved in these businesses in the first place continue to exist, and the need to work through that relationship remains.

Labour’s answer to public service management is objectives and targets. Hardly a day goes by without some identification of new targets, some assertion or definition of public service objectives. It sounds like a good idea, and if you begin from a world in which no one has ever examined objectives, or monitored performance it is certainly an improvement. But the recognition that any way of managing public services is likely to be better than the way we have been used to doing it does not take you very far.

Our knowledge that the combination of central political definition of targets and decentralised responsibility for implementation does not work is one of the most secure findings in economic and business studies. The most extensive experience of it not working was in the Soviet Union, but if we prefer to look closer to home we could look at the common agricultural policy. The objectives of public services are multiple, only partly measurable, and always changing, so targets rarely achieve the results hoped for. The usual response – the imposition of additional, and conflicting targets – leaves management cynical and demoralised. And believing that time is better spent lobbying the centre than running the business.

As in most businesses, we will understand the management of public services best if we begin at the top. Tony Blair was appointed chief executive of Britain having provided a loose prospectus and description of his management team. He was given substantial operational freedom for four to five years. In Britain, as in most successful democracies, the government controls the legislature, not the legislature the government.

So now, at the end of Blair’s first term, he is subject to a tough process of scrutiny and reappointment. His performance, and that of his finance director, is not judged by reference to any specific objectives. We regard formulating the objectives of government as one of the obligations of the chief executive. The election debate mostly seems trivial and banal – not about “the issues”. But government is there to deliver services, not ideology. It is on the basis of the general competence of Blair’s management team, relative to the alternatives, that he will secure a further term in office.

Note the key features of this governance structure. Managers – or ministers as we still like to call them – have considerable operational freedom, although their actions are under constant scrutiny. They try to control the flow of information about what they are doing, but they do not succeed, and it is vital that they do not succeed. And these managers are subject to regular, brutal reappraisal, by reference to very general criteria of competence and success, and against which there is no appeal.

It is by no means an ideal system, but, as Winston Churchill famously remarked, the merit of democracy is that it is better than the alternatives. Operational freedom with responsibility and accountability is today the governance structure of all successful states. Other public services should be run in the same way. And perhaps private businesses as well.

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