Setting out their stall, by Karen Day

23 Jun 05
The public sector services market is here to stay. But now New Labour must get to grips with regulating and managing it. Karen Day reports

24 June 2005

The public sector services market is here to stay. But now New Labour must get to grips with regulating and managing it. Karen Day reports

New Labour has finally donned its sheepskin jacket, dodgy medallion and flat cap to set out its market stall. On offer today at good prices are juicy health services and firm, ripe schools and colleges. This is Labour's public services market, a bustling scene of 'nice little earners' as old, new and independent providers begin to jostle for business.

Over the past eight years Labour has been busy dismantling old barriers and flinging open the doors to new traders, creating quasi-markets along the way. But its next big challenge is managing these, and it faces the dilemma of whether to regulate or step back and let market forces run amok. The phrase 'markets know best' could develop a familiar ring in the coming years, or the government might accept that they don't work everywhere.

There have always been tensions when it comes to how far quasi-market forces should be allowed to run state services. But, having really won the battle of contestability last term, the issue for Labour now is just how far it is willing to go. The pressure is on to deliver capacity in health services and tangible reforms in schools and education. Ministers are pinning their hopes on the benefits of market structures, such as foundation trusts, city academies and foundation schools, as well as on the competition generated by new providers.

But to allow these to deliver, we come back to classic New Labour tensions. For a true quasi-market, ministers will have to sit back and allow it freedom to work, even if that means the political pain of state services failing, while granting unfettered access to new providers. Or will they be true to form, and to the fears of the private lobby, and create new forms of regulation?

Behind closed doors the government is just turning its attention to this issue. The traffic in special advisers – with an old guard leaving and a new set emerging, some with an almost evangelical belief in the market – means we could see the replication of more sophisticated market models in other sectors. Just as foundation schools are modelled on foundation trusts for example, some insiders are already toying with a payment by results system for schools, where payment follows the pupil.

Health is by far the more established and sophisticated quasi-market and all eyes will be watching the direction of new Health Secretary Patricia Hewitt. She has already indicated that she will stay firmly on the path of her predecessors, announcing, shortly after her appointment, a new wave of independent treatment centres funded by £3bn of NHS cash. But she is arguably at a crossroads in this market, which has matured to a point where there needs to be clarity on how certain situations will be managed – entry, exit, regulation and the NHS tariff, for example.

According to Robert Hill, a government special adviser for eight years and now a policy consultant, the tension between the private and public in service delivery is a 'good problem to have'.

'It shows that for the first time the NHS is getting near to having supply matching demand. As well as capacity, it introduces innovation. It will work as long as the Department of Health is thinking two to three years down the line about how to manage the situation when funding increases slow and the competition between health suppliers becomes more intense,' he says.

But he warns that failure for some trusts is inevitable. 'Many NHS trusts operate on the margins – it would not take a huge loss of business for some of them to have problems.'

Hewitt has already indicated that she is willing to accept the merging, even closure, of some trusts

('reconfiguration' in political speak) if they fail to deliver under the payment by results system. She accepts that PBR, where money follows the patient, will cause volatility, as will the entry of new providers and is keen for reconfiguration to take place within the next two to three years, before the next general election. How she will deal with this is still under discussion, but there is pressure to resolve the issue quickly.

'The government needs to reach a conclusion about how to manage service failure before it arises,' Bill Moyes, chair of Monitor, the foundation trusts' regulator, told Public Finance.

Unlike trusts, foundations can become insolvent, and, as the plan is to move all trusts to this status by 2008, there is a real risk of bankruptcy. Some trusts are already battling long-term deficits and the DoH is currently conducting a Monitor-like assessment of all of them to gauge their future financial viability. It is unlikely that the government will routinely step in and bail out those going under.

As one government insider said: 'This would send the wrong message to the market.' Instead, it might simply open these services to the market should they fail and let private providers bid to take them over.

There are other less extreme options. Moyes says it would 'not be too difficult' to replace or strengthen failing trusts' senior management. There could also be a system of mergers and acquisitions, where stronger trusts take over weaker ones.

But as he points out, larger hospitals constructed under the Private Finance Initiative are unlikely to face closure as they are 'valuable and their services are needed by the population'. Neither will ministers jeopardise services that already have 30-year contracts with the private sector.

But who will make the decisions on failing services? As the foundations' watchdog, Moyes is favourite to expand his role – and has made no secret of his desire to extend his empire to become an economic regulator. 'There needs to be a market regulator that deals with hospitals that get into difficulty,' agrees Chris Ham, professor of health policy and management at the University of Birmingham. But Ham believes that strategic health authorities, which are being rationalised from 28 to around eight or nine, could also take that role.

There are also calls for some form of regulation for entry into the market. The government's report, Creating a patient-led NHS, published in March this year, made it clear that the market was open to any provider, as long as they could deliver quality services under the NHS tariff. Moyes believes the government is inclined to 'let market forces loose' without much regulation and allow 'the market to manage itself'. However, he says that while he wants competitive pressure in the NHS, there is a danger of going too far.

'I wouldn't like to see a world where the private sector entered the market and destabilised it. Some foundation trusts will fail, that is a feature of life, but I don't want to see artificial failures because of the pressures created by standing back and letting all providers in.'

Ham, also a former special adviser, says the government needs to start acknowledging where markets work and where they won't. He warns against PBR in emergency care, as it will have a perverse effect, rewarding hospitals for admissions when they should be reducing them by working with primary care. Ham, among many, is beginning to argue for a second phase of reform, with more integrated health networks and more collaboration rather than competition.

'We could see emergency combinations where accident and emergency departments, out-of-hours GPs and NHS Direct are integrated and treat patients in the most appropriate place,' he says. He argues that under plans to review primary care (a white paper is expected at the end of this year), foundation trusts could also develop vertically integrated networks, taking on some primary care such as children's health networks, leaving PCTs to specialise in commissioning.

There is a long road ahead in health and as Hewitt has yet to appoint her full complement of advisers, with just Liz Kendall, former associate director at the Institute for Public Policy Research, so far, the reform in-tray is beginning to stack up.

In education, the picture is even less clear, although quasi-markets are springing up across the sector. In further education, colleges now have to compete with private providers to deliver employment-based vocational courses, which will inevitably lead to some becoming more commercially orientated and others losing students and funding. In higher education, tuition fees from next year could create a more consumer-centred student, opting for institutions that deliver 'more bangs for their bucks'.

But the bigger questions surround the management of schools and the type of market the government might create. The CBI argues that it has already neglected to sustain one market, the management of local education authorities, because it opened only one end, the failing one.

In schools, the market could be open to all. The government plans an extra 183 city academies, a £5bn flagship programme delivered by the private sector. Schools can opt out of LEA control and gain foundation status, and poor performers could find themselves swallowed in aggressive mergers and acquisitions from high performers. But, as with the health market, this will need to be managed and decisions taken on who is allowed to open schools, where and how.

Inevitably, this will need new legislation. The 2002 Education Act stipulates that if an LEA wants to open a new school, it must market test first to see if another provider could do it better. But there are no rules to stop it simply closing a failing school then reopening it.

One government insider said the Department for Education and Skills was still 'getting its head around' the issues but, as the education market was more stable, with pupils in the system for years, there was unlikely to be an appetite for creating market volatility. 'Failing schools will go under only on the margins,' the source added.

Another source inside government said there were discussions around granting licences to LEAs to regulate new providers, although this was only 'loosely being mooted'. These would set out the rules of services and standards that had to be achieved, rather like those issued by Monitor.

Introducing a system of payment by results for pupils is arguably a natural progression from foundation schools. This would take the market element of education much further and would almost create a voucher system, where pupils would naturally attend the schools that were most competitive. Inevitably, struggling schools would sink without trace, and it would be a way of reforming some inner-city schools more quickly.

But Hill is sceptical as to whether the government will allow the money to follow the pupil. 'There is a difference between money following pupil and opening up the market to new suppliers,' he says. 'There is a case for the latter – particularly in London – but the government can't afford to let PFI schools go down the tube so I cannot see how a voucher system can be made to work, particularly as under Building Schools for the Future, most secondary schools are being rebuilt or refurbished using PFI.'

A white paper is expected from the DfES by the end of this year. In the meantime, the government has to resolve the inevitable tensions it has created with these markets. And decide whether it will adopt a one-size-fits-all approach, creating a public services market to rival that in countries such as the US – or whether it will choose to be more measured, opting for slower reform and less pain.


Quasi-markets, as the term suggests, are the half way-point between a monolithic public service state, rather despised for its inefficiency by its political master New Labour, and a free market, a concept even the most ardent of Blairites would find hard to swallow. Quasi-markets are supposed to offer the best parts of the two; the public service ethos and structure and the competitive element and additional capacity of the private sector.

Labour has embraced quasi-markets with much the same gusto as their Conservative predecessors, but their markets are based on greater consumer choice and are 'free at the point of delivery'.

Contestability, along with phrases such as step-change and blue skies thinking, is a phrase that has gained greater currency under Labour. It means opening up public services to the forces of competition and measuring the market by allowing it to be contested by different providers.


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