26 October 2001
Rising from their post-election slumber, ministers burst into life last week with their latest solution for failing services, public or private: the not-for-profit trust. First it was applied to the mess that is Railtrack. Now the mess that is Hackney's education service has also been measured up for the new, one-size-fits-all solution.
Not-for-profit trusts, beamed Transport Secretary Stephen Byers and education minister Stephen Timms, are the way to reinvigorate services that have become a national and a local government joke.
And this `third way' may not end here. There are whispers in the City that the part-privatisation of National Air Traffic Services, put at risk by the catastrophic downturn in the fortunes of participating airlines, could now follow the trust route.
It has already been noted that Mayor Ken Livingstone and his transport commissioner Bob Kiley's proposals for funding the London Underground by bonds bear more than a passing resemblance to the model. There are even hints that the government may finally be prepared to dump the Tube public-private partnership into Livingstone and Kiley's lap.
Suddenly trusts are fashionable, this year's black, being portrayed in some quarters as a more acceptable halfway house between outright government control and the Private Finance Initiative.
The not-for-profit trust involves the creation of a theoretically independently-run company funded by bondholders and backed by a government loan facility. No longer will profits be paid out in shareholders' dividends. Instead they will be ploughed back into the new company.
Not only should this, in theory, help the service in question but it should also spare the British public from a repeat of the unedifying sight of a chief executive trying to win public sympathy for shareholders.
At first and second glance, it seems a classic New Labour policy modernising and an attempt to please everyone. The jury is still out on the former, but on the latter ministers have already failed.
The unions seem happy enough, not necessarily because of their belief in trusts to deliver but because they have their own agenda to get rid of the PFI. `This move [Hackney] is welcome. It is a pity it did not happen sooner,' said Doug McAvoy, general secretary of the National Union of Teachers.
`I hope this marks the end of the government's flirtation with profit-making companies.'
The City, though, with its view set on Railtrack rather than Hackney, is aghast. `They [Byers' office] haven't got a clue what they are doing,' says one economist curtly.
His is not an isolated view. Even the less angry responses contain few compliments.
Tim Stone, chair of PFI/PPP business at management consultancy KPMG, says that because of the passions aroused by the national rail network, the government is finding it difficult to come up with a rational solution.
`It is being driven by the emotion attached to this particular model. It would be a mistake to shoehorn any particular form into place,' he says.
Stone says ministers must ensure that the management structures eventually put in place are able to deliver real change to a service limping from one calamity to another.
The real worry for many in the private sector is that the body eventually created will not have the wherewithal and `organisational design' to make the hard decisions needed for recovery.
Ironically, says Stone, the parlous state of the railways allows time for more sober reflection on what to do by all involved rather than the need for a rush decision, especially as passenger numbers at least pre-Hatfield were increasing. After years of mismanagement, this is the time to get it right.
Whatever structure ends up running the service, the government will still have to dig deep into its pockets. Ministers can make the trust more attractive to the financial institutions by setting interest rates for City borrowers at a level where business returns are maximised.
However, the public sector will still shoulder the financial risk, especially in the light of the government's intention to ensure `NuTrak' as the new rail company has been dubbed has triple-B credit rating from agencies such as Moody's or Standard & Poor's.
City analysts worry that if investors choose to shun such a company there will be little option but for the government to stump up the cash if nobody else is interested. In effect, NuTrak is triple-A rated because ministers will always be its final guarantor ready, if not willing, to dole out taxpayers' money to avoid the political embarrassment of a failing train network.
The alternative is to load the financial risk on the train operating and maintenance companies, an option that may cause ministers to swallow hard.
NuTrak and Hackney are not the only examples of such trusts. In the past week people have become more aware about the business structure of the Welsh water industry than at any other time in history.
Glas Cymru, the not-for-profit company that has taken over the assets of Welsh Water (Dwr Cymru), has been cited as an example of a successful trust. It too has transferred risk to the private investors.
But it is still early days, as the company was only formed in May this year, far too early to be seen as a prototype for future public/private ventures.
Not-for profit trusts may be fashionable at the moment, but the result of this latest craze may turn out to be an even greater fragmentation in the way services are delivered to the public, rather than a panacea for failing organisations.
PFoct2001
