A balance between care and discipline

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Balancing the needs of public sector companies with the needs of society is a delicate matter. It is however, possible to achieve.

What happens when public interest companies go bust? The question has been raised in the context of Alan Milburn’s plan for foundation hospitals. But it has been a problem of public sector management for at least 50 years. It is time to find an answer.

The fundamental issue is simple. Public service managers need autonomy and authority to do their jobs. And there is an overwhelming public interest in seeing uninterrupted provision of services. Unless you can reconcile the two, you are at the mercy both of weak managers who force you to keep subsidising their operating losses, and of self-confident managers who use the secure cash-flow to fund overambitious plans for investment and diversification.

The traditional British answer is that it will be all right on the night. But it never has been. You can always demand more cash by threatening to let the curtain fall. This is what the publicly supplied arts have always done. But it is not the arts that are the problem – it is mainstream public services. In the 1950s the British Transport Commission launched an extravagant rail modernisation programme. Their behaviour, and that of other nationalised industries, led the Treasury to remove their borrowing authority. In the 1970s, managers realised the power of the argument that their business was too important to fail: the taxpayer funded unrewarding investments in steel and cars and paid for the inefficiency of British Airways and British Gas.

The same unresolved problem – how to reconcile public service with financial control – keeps forcing itself on the agenda; at Vivendi Universal and the Royal Mail; in air traffic control; and foundation hospitals. Privatisation has not produced an answer.

Railtrack brought into play the most sophisticated mechanism for answering the question “what happens when a public interest company goes bust?” But the special administration procedure has not worked. The government has not only had to pay off Railtrack’s debts but also its shareholders, while creating sufficient doubt about its intentions to raise the costs of future borrowing.

Giving public sector activities more autonomy, and making use of private sector contract management, should be divorced from attempts to take public sector borrowing off the balance sheet. How responsibility for cost overruns and service failures should be allocated between the government and the private sector is completely separable from how finance can be raised most cheaply for public sector projects. How capital spending is best recorded in the national accounts is another question, and not one of much importance.

Indeed, the British government might usefully set an example for the private sector by eschewing off-balance sheet finance. It is hard to understand why disguising public borrowing continues to be an objective when other public finances are prudent and healthy. Enron was trying to deceive the public: in these transactions the government seems mainly concerned to deceive itself.

That would imply an end to ambiguous finance, in which the government claims to have transferred risk and the private sector provides the money on the assessment that the government does not really mean it. If I understand National Rail correctly, the government is guaranteeing its borrowings but claiming that the guarantee does not really count because the government will provide enough money to ensure the borrowings can be repaid without calling on the guarantee. This might have amused Alice in Wonderland but no one else.

Managers of public services need to be able to make forward commitments. When they do so, they are in effect borrowing on behalf of the government. It is not sensible, or even possible, for the Treasury to prevent this but it is necessary to ensure proper audit and accountability.

The many audit and accountability mechanisms currently available are not up to the job. These mechanisms would have to cover both the viability of public service providers and their effectiveness in meeting public interest objectives. The National Audit Office is an embryonic version of this but would need to assume some of the functions of commercial auditors and sectoral regulators. It would be good to have competition in the audit business.

If mechanisms also have to have consequences, financial and service failures should lead to a new form of receivership whose primary objective is the better provision of services. If this happens only when auditors recommend it, the key objectives – securing and legitimising inevitable political responsibility for delivery of the service while protecting managers from interference – are achieved.

It is not easy to find a balance in public services between political accountability and management autonomy, between an ethos of care and financial discipline, and between professional judgment and effective audit. But it is not impossible, especially if we are willing to learn from the chequered history of nationalisation, privatisation and partnerships of the two. It is what the effective delivery of public services requires.

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