By John Tizard
8th May 2009
The public expenditure squeeze and the credit crisis will require a fresh approach from private providers. They will have to rely less on confidentiality clauses and more on user satisfaction surveys, ‘open books’ and new forms of partnership
Not so long ago, public bodies and private companies involved in service provision often indulged in lazy stereotyping of each other to explain problems. Executives of private firms would moan: ‘If only the public sector could procure better we would win many more contracts – the public sector should let more contracts.’ Their public sector counterparts would complain: ‘The private sector always fails to deliver to specification and is usually not cost-effective.’
But that was then. Today both sectors have generally moved on and grown up. Now they are going to have to grow up some more as public services face belt-tightening and a new efficiency drive following the Budget and the Treasury’s Operational Efficiency Programme. While there is understandably much emphasis on what the public sector will need to do to address the recession and the spending squeeze, there has been less focus on the changes required in the business sector.
Public confidence in private enterprise and market systems has been severely dented by the spectacular mismanagement and regulatory failures in the financial services sector. This makes it even more vital that companies providing public services are transparent about their financial and operational performance in their public sector contracts and, indeed, in their wider business activities. They will need to publish performance results in real time and in an accessible form. They will also need to accept greater public scrutiny – both by Parliament and local authority scrutiny committees.
Contracts involving services that are not provided directly to individuals need to build in ways of gauging public and/or customer satisfaction and make some elements of the suppliers’ payments subject to this. Some public bodies have already done this, including Woking Borough Council’s environmental services contract with Serco, which includes street cleaning and landscaping. Serco’s payment for these services is determined by customer satisfaction, as measured through regular telephone surveys of local council tax payers. The BBC has contracted its information services to contact centres on a similar basis. The degree of reward at risk could be material to the supplier even if it represents only a small proportion of the total contractual payments, given that profit margins will usually be less than 15% and often substantially lower.
Commercial confidentiality should not stand in the way of openness – it needs to be carefully defined and applied only in exceptional cases. This could prove more difficult for public sector clients than for business sector providers. Contractual terms might be published, as was the contract between Transport for London and Capita, which was posted on the former’s website. ‘Commercial confidentiality’ should not be applied to avoid political discomfort; the information commissioner has been tightening his expectations in this area. The extension of the Freedom of Information Act to cover more explicitly contracted providers will have a beneficial impact. And, of course, it can already be made use of by requiring the disclosure of information held by the public sector client.
The industry and the public sector should define and agree accountancy standards for financial reporting and ‘open book’ processes. Companies and their public sector clients should expect these to be subject to external audit.
Given that public sector commissioners and procurers want some certainty and robust service provision solutions, it will be essential that companies can demonstrate their financial viability when bidding for contracts. Public sector due diligence will need to be highly effective. Contracts should also include provision for handling potential bankruptcies and takeovers of providers in ways that minimise the risk to the public sector, service users and taxpayers as much as to the company shareholders.
All public sector agencies will face major financial pressures from 2011, and some earlier. They will need to achieve long-term efficiency savings – and in many cases much greater cuts than efficiency alone can provide – and will expect their contracted suppliers to contribute to these. They might also be seeking more substantial cost and price reductions from both existing and new contracts. But it is vital that public procurement does not become a race to the lowest price – and bidders should avoid submitting tenders that they know to be unrealistic. There is an opportunity to introduce means and incentives to improve productivity and business transformation, resulting in quality improvement as well as better value for money.
There will be budget reductions and the decommissioning of public services. The provider industry and the public sector should together identify the implications for contracted services and consider how they can be addressed within long-term contracts in ways that share the risk. These will not be easy discussions. However, they will be essential and are urgently due. There could be mutual benefit for both parties if pragmatic approaches can be found.
Public sector commissioning should involve some early dialogue with the supply market to understand what is available, what would be commercially attractive and what service delivery models are available. Companies wishing to be significant players in these public sector markets will have to decide how commercially they respond to this opportunity – as the risk and cost is almost certainly going to have to be borne by participating providers. This will be a challenge for small and medium-sized companies and new entrants. Short of falling foul of ‘state aid’ and competition rules, this issue will need to be addressed.
Moves towards commissioning for outcomes – or overall results – will also lead to contract changes. For example, contracts will need to include measurable outputs that are clearly linked to the achievement of community outcomes – for example, Local Area Agreement outcomes in the case of local services. This can link back to the previous example of supplier payments being at risk if there is found to be a lack of public or customer satisfaction.
A further feature of public sector commissioning will be market development and management. Commissioners might introduce new providers into markets, which could have long-term implications for some companies already operating in these markets. Competition is no automatic protector of current suppliers. It can be a stimulus to those willing to respond.
In some circumstances, public sector clients will want to see more opportunities for third-sector organisations and local SMEs. Business providers might be encouraged to establish genuine partnerships with the third sector. There is anecdotal evidence that third sector organisations feel that they are sometimes used as ‘useful for the sales pitch partners’ and are shabbily treated by the business sector prime contractors once the contract has been signed.
This has led some organisations to seek alternative forms of partnership. One example is a strategic partnership agreement between the business and the third sector body, which sets out the ‘rules of engagement and commercial terms’ for the relationship. Another is a ‘joint venture company’. These usually require the parties to invest equity, which might not be an option for the third sector organisation. However, its contribution to the partnership can add significant value in areas such as brand, expertise and specialist knowledge. One option is to quantify the value of this contribution to the partnership and in effect to capitalise it, which would then represent the third sector partner’s equity stake. Businesses will have to be ready and willing to consider such arrangements.
The expansion of personalisation, individual budgets and direct payments for a variety of public services will also alter the relationship between service provider and service user. It will also potentially have a major impact on the business model used by many business sector providers – demand risk will increasingly transfer from public sector to provider. Providers might have to shift their business models from those based on wholesaling to retailing. This will have the potential to radically shake up the supply market and new entrants from the retail sector might emerge as major players.
Another significant change will follow the Treasury’s decision to fund £13bn worth of investment in projects that would otherwise have been financed through the Private Finance Initiative. The government understandably wants to close deals and ensure that projects are under way as quickly as possible. This is one way to stimulate the market and get things moving.
However, it is critical that as far as is feasible, the projects retain the commercial disciplines of the PFI. The pressure on contractors from investors and financiers, as well as from the public sector, has resulted in this discipline – providing more projects to time and to budget, and ensuring whole-life cost benefits. Even where there is some public capital involved there remains a case for seeking co-financing so that there is still some private finance in the system.
Other models will need to be developed to ensure effective co-financing and the prudent use of publicly financed capital – which, in the short term, might be more readily available and cheaper than that raised on the markets privately. This has to be a priority for government and the wider public sector.
As new forms of public-private partnerships for outsourcing are emerging, such as strategic partnering and joint ventures, there is a need to consider how these can best be developed and shaped to meet contemporary challenges. Public agencies must also have the willingness and boldness to consider service provision models based on public sector solutions.
Joint venture companies are attracting increasing interest. Several local authorities have established these with their supplier partners, including Birmingham, Liverpool and Salford, for a range of services and transformational support. The companies have a joint board, shared profit and risk, and contracts with the local authority for the provision of specified services.
These models require robust governance and strong independent client functions to avoid real or perceived concerns about probity, securing value for money and the fulfilment of fiduciary duties. How will these companies respond to the budget pressure? There needs to be up-front careful consideration of the interface between public accountability, efficacy, governance, and company law and business cultures. There are also opportunities to consider how staff and other stakeholders might have equity in and benefit from such arrangements.
Companies and other providers of public services will have to demonstrate that they can add public value – in terms of ethos, employment standards and practices. This will particularly be the case if we are to avoid a repeat of some of the worse excesses of the old compulsory competitive tendering regime and its impact on staff, local sourcing and corporate citizenship. These are all factors that many public bodies will want to take into account in their procurements.
The current public sector markets offer many opportunities for the business sector. But it will have to demonstrate a capability, a public service ethos, robust solutions and a willingness to respond to the public sector client’s wider requirements.
Equally, the public sector has to consider how best to secure services. The move towards strategic commissioning widens the options to include: in-house provision; partnership between public agencies; joint ventures, partnerships and outsourcing to the business and/or third sectors; and more direct payments, co-production and user commissioning. No one sector should assume an automatic right to bid and certainly no entitlement to win contracts. The public sector has no duty to let contracts – it has a duty to secure effective and efficient services for citizens.
John Tizard is the director of the Centre for Public Service Partnership at the University of Birmingham
