What matters is what works

The Third Way and the case of the Private Finance Initiative

in The Third Way and beyond

This chapter outlines the Private Finance Initiative (PFI), and highlights its political and ideological importance. It reviews research findings on the operation of the PFI in the health service. The chapter explores that there is little substance to the Government's claim that the PFI is on strictly pragmatic grounds the most effective way of renewing the capital infrastructure of the National Health Service (NHS). It also explores the reasons for its adoption and focuses on the character and contours of the Third Way as New Labour's operational code. To New Labour a defining feature of the Third Way is its pragmatism, its commitment to evidence-based policy-making: in the pithy precept so often reiterated, 'What matters is what works'. The Third Way prescribes for the State a major role in social life, but less as a direct provider than as purchaser and regulator.

Introduction

There is a multitude of ways of defining and explicating the Third Way, and there is now an extensive literature on the matter. (See, in particular, chapters 1 and 8 in this volume.) I use the term ‘Third Way’ in a limited and, hopefully, precise manner. Policy-making is a complex and problematical matter, often entailing difficult choices in uncertain circumstances, selecting from a range of options whose consequences cannot be accurately predicted. To render the task more manageable all policy-makers inevitably rely on a cognitive map or frame of reference to help order their understanding of external reality, selecting, classifying and highlighting its most salient features, identifying those problems of social life deemed to require public intervention, explaining how they arose and providing recommendations as to how they may most effectively be remedied. They compose an ‘operational code’ – a set of goals and guidelines used by policy-makers to structure analysis, define priorities and set the policy agenda.1 My suggestion here is that the most useful way of approaching the problem of the Blair Government’s ‘Third Way’ is to apply the term to its ‘operational code’: the precepts, assumptions and ideas that actually inform policy choice. I propose to do this by selecting for more detailed analysis a policy strategy which has been presented by the Government as typifying the Third Way. My choice is the strategy of public–private partnership (PPP) or the Private Finance Initiative (PFI),2 as applied to health policy.

The PFI involves a separation between the role of commissioner of public services, which remains the responsibility of public authorities, and the role of provider of those services, which the private sector is encouraged to undertake. It has been described as the ‘key element in the Government’s strategy for delivering modern, high quality public services’.3 It is promoted as the most practicable and cost-effective way of remedying the country’s much-neglected public infrastructure, especially in the health service. But it is also commended as exemplifying New Labour’s ‘pragmatism’. The PPP strategy is presented as a ‘Third Way’ alternative to the ‘dogma of the Right’ that ‘insisted that the private sector should be the owner and provider of public services’ and the ‘dogma of the Left’ that insisted the State must be the sole provider. ‘The modern approach to public services’ contends, to the contrary, that ‘the best way forward is through new partnerships between the public and the private sectors’.4 By the same token, critics of the PFI are dismissed as hidebound traditionalists who allow ideology (or vested interest) to obscure the fact that this new mechanism alone can guarantee ‘value for money to the taxpayer’ and ‘the delivery of a higher sustainable level of public sector investment’.5

The Government’s case is that it opted for the PPP–PFI approach because it delivers the goods – it ‘works best’. There are indeed instances where the evidence points to one particular policy as unequivocally the most effective – in terms of meeting its objectives and serving the public good. As I hope to show, the PFI is not one such instance. Various factors other than its intrinsic merits – e.g. electoral issues – may persuade a government to select a policy, and I find some such reasons for the decision to back the PFI. Yet, the Government does appear to genuinely believe that it affords better value for money than any alternative. We need to know why – and in seeking the answer we are, by definition, uncovering the Third Way as operational code.

The chapter’s first section outlines the PFI and highlights its political and ideological importance. The second reviews research findings on the operation of the PFI in the health service. I find that there is little substance to the Government’s claim that the PFI is on strictly pragmatic grounds the most effective way of renewing the capital infrastructure of the NHS – the third section explains why. In the fourth section, by exploring the reasons for its adoption, I hope to shed some light on the character and contours of the Third Way as New Labour’s operational code.

The PFI and New Labour’s pragmatism

The Major Government launched the PFI in 1992. Under the PFI the public sector contracts to purchase services long-term from the private sector, which provides finance and accepts some of the venture’s risks in return for an operator’s license to provide the specified service. Within the NHS the PFI involves a consortia of construction companies, bankers and service providers contracting to finance, design, build, maintain and operate new hospital facilities which they then lease to the NHS, usually for periods of 25–35 years.6

Labour was from the start hostile to the PFI and as late as 1995 was still denouncing it as ‘totally unacceptable’ and ‘the thin end of the wedge of privatisation’ (Margaret Beckett, shadow health secretary, cited in Health Service Journal, 1 June 1995). Shortly afterwards Labour began to change its mind. In office Labour ministers found the PFI (in the words of Paymaster-General Geoffrey Robinson) to be ‘floundering’ – and they set about resuscitating it.7 By 1999, with far more PFI agreements being signed than under the Tories, the Government declared that a ‘revitalised PFI’ had become ‘a key tool in helping provide effective and good value public services’.8 It was ‘the only game in town’. The health research institute known as the King’s Fund calculated that by the close of 2002 the bulk of NHS capital investment projects would be financed and managed by the private sector.9

The creation of the NHS is still regarded as Labour’s crowning achievement. To the Government, the PFI is indispensable to NHS modernisation, indeed to its survival as a free and universal service providing health on the basis of clinical need. It has, however, provoked a storm of opposition among critics (especially, but by no means exclusively, the public sector unions) who claim that it amounts to ‘privatisation by stealth’. At its June 2001 annual conference, UNISON, the country’s largest union, announced a co-ordinated national campaign of strikes, demonstrations and lobbying against ‘the privatisation juggernaut’, with Dave Prentis, the union’s general secretary, accusing ministers of having a ‘depressing obsession and love affair with the private sector’ (Guardian, 21 June 2001). In January 2002 the General, Municipal and Boilermakers’ Union (GMB), a traditionally loyal union, announced that it would, in protest against the policy, cut affiliation fees by £500,000 in each of the next four years (Guardian, 3 January 2002). The issue threatens to be one of the most troubling in the Blair Government’s second term. Indeed John Edmonds, general secretary of the GMB, warned that, by his insistence on the PFI strategy, ‘Tony Blair threatens to crack the foundations of the Labour party. He has certainly tested the loyalty of Labour party members to destruction’ (Guardian, 10 September 2001).

How, then, can we account for the Government’s enthusiasm – overturning the reservations initially expressed while in opposition – for the PFI? The explanation put forward by the Government itself (and by a number of commentators) is that it reflects a crucial defining feature of New Labour – its pragmatism. Pragmatism has been defined by one sympathetic commentator as a ‘a technical and hands-on orientation’ focusing first on the detail of ‘what works’ and what can be achieved within ‘the constraints of empirical and political realities’.10 In the past (it is contended) Labour was, on grounds of dogma, stubbornly opposed to reliance on the private sector and market disciplines for supplying public services. This ‘old argument’ over the relative merits of public and private supply of goods and services is now dismissed as ‘simply outdated’, reflecting irrelevant battle lines which only distract from ‘the real challenge of improving our public service’.11 The Third Way’s pragmatism stipulates an approach to policy which makes decisions according to the merits of the case, the feasibility of a policy, and a careful and scrupulous investigation of its likely consequences – and not on the basis of fixed ideological formulae.12 According to Le Grand it reflects a Third Way agnosticism as to means: ‘the best means are whatever achieves the best combination of ends, whether the means concerned involve the market, the state or some combination’.13 In some areas the state should remain the direct provider of public goods; in an increasing number of areas, it should act in partnership with the private sector, purchasing and regulating services which the latter delivers. The great advantage of public–private partnerships is that they harness the strengths of the market – ‘dynamism, innovation and efficiencies’ – to the delivery of public services.

The PFI, in short, is New Labour pragmatism in action: ‘what matters is what works’. To what extent can that proposition be substantiated?

Choosing what works? The PFI balance sheet to date

PPP schemes, and most notably the PFI, are seen by the Government as ‘central to our drive to modernise our key services’. They have been pronounced ‘a huge UK success story. We are blazing a trail that others will undoubtedly follow’.14 Their success rests on their ability to deliver:

  • investment in the public infrastructure that would not otherwise have been possible;

  • higher quality projects; and

  • greater value for money.15

The Government acknowledges that public authorities can raise capital more cheaply in the financial markets than can private concerns, and therefore that the PFI carries an initially higher financial cost. This will be more than wiped out by the efficiency gains inherent in public–private partnerships procured by:

  • greater private sector access to relevant expertise and experience

  • the incentive to minimise costs imposed by operating within a commercial environment

  • significant performance improvement through private sector innovation and management skills.16

Therefore PFI deals promise ‘more essential services and to higher standard than would otherwise have been the case’.17

Is this claim justified? The impact of the PFI on the quality of service, usually understood to refer to the ability of the NHS to meet need through appropriate treatment, equitably delivered, is very difficult to operationalise and measure. Furthermore, evaluation of the impact of the PFI on the standard of service – on outcomes – has to be tentative since PFI-built hospitals are only now beginning to open and none has a track record on which to base a firm assessment. Rather than confronting the problem directly (though I do, from time to time, quote judgements by recognised authorities), I utilise two indicators as proxies:

  • staffing: the numbers of skilled personnel available to help in the delivery of health care; and

  • capacity: the number of beds (which includes appropriate equipment and facilities) available.

Both these indicators are, of course, inputs, but my working assumption (reflecting a broad consensus among practitioners and experts) is that a growth in these inputs is a necessary, though not a sufficient, condition for effective needs fulfillment.

The Government insists that the money to fund a PFI hospital will not be found ‘through shedding staff who are needed . . . A hospital that was not fully staffed would not be value for money and would not attract Health Authority support. In no way . . . are clinical services compromised or threatened’.18 A number of investigations suggest, however, that this is precisely what is happening. Pollock et al. (2000) report that ‘all of the first wave of PFI hospitals, for which figures are available, involve reductions in the number of beds’. The average reduction is of 31 per cent of current (1995–96) capacity.19 It is estimated that the burden of meeting the costs of the new PFI hospital in Carlisle will involve a 13 per cent cut in the clinical staffing budget between 1994 and 2000 with 88 per cent of the posts lost in nursing. Similarly, when the new Edinburgh Royal Infirmary opens in 2003 ‘the projected staff budget will be 23% less than 1996, and there will be almost 25% fewer staff, a greater proportion of whom will be untrained and unskilled’. The result of the PFI deal at the Worcester Royal Infirmary is expected to produce a 17 per cent cut in the number of nurses and a 31 per cent cut in the number of ancillary staff.20 This trend can be replicated elsewhere.21 The House of Commons Select Committee on Health reported in 1999 that ‘the evidence we have received leads us to conclude that on current trends the projected increases in the number of nurses and other clinical staff fall well short of what is required to deal with current shortages and future developments in the NHS’.22

But would these capital projects have fared any better under public procurement? The Government insists that the PFI is selected over public procurement only after a rigorous analysis of the relative costs. It is a comparative judgement: which promises better value for money, public procurement or PFI? All PFI schemes are compared against a notional publicly funded equivalent, the so-called ‘public sector comparator’ (PSC), using an appraisal method ‘under which the cash payments associated with each option are “discounted” and costs are adjusted to reflect “risk transfer”’. The PSC takes account ‘of risks which under public procurement the public sector carries itself, but which under private finance initiative it pays another agent, the private investor, to bear’.23 These include such risks as construction-cost overruns, design faults, higher than expected maintenance costs, unexpected variations in demand and so forth. In almost every case, the PSC judges the PFI option better value for money. The method used to assess risk is the crucial factor since, as the Department of Health acknowledged in its evidence to the Health Select Committee, ‘the majority of savings provided by PFI are due to risk transfer’.24 Without this, in most cases, outright public funding would provide better value for money. ‘If insufficient risk is transferred’, the Government holds, ‘a project will not represent value for money and will not be pursued under PFI.’25

A number of commentators have, however, cast doubt on the robustness of the appraisal methods used to determine risk responsibility under PFI. The best indicator of the extent of risk actually transferred is the rate of interest paid by consortia to their lenders, which reflect calculations by lending sources about their precise degree of risk exposure. In PFI schemes surveyed by Gaffney et al., it was found that borrowing terms were ‘extremely favourable’, implying modest vulnerability.26 Similarly, Hutton concludes that while the ‘whole purpose of the PFI is to off-load government borrowing and risk onto the private sector the private sector regards itself as accepting very little risk’. Indeed, the relatively low levels of risk have allowed some PFI firms to capitalise on a ‘risk premium’ through the development of new risk markets. PFI contractors are increasingly undertaking ‘refinancing’ deals which enable them to borrow at lower interest rates and pocket the difference between the original and new financing costs: PFI ‘risk’ has been converted into a commercial product, priced and traded (Observer, 13 December 1998). Furthermore, doubts have been raised about the degree to which, in the real world, risk in large-sale public sector capital projects can be moved to the private sector. A project – such as a new hospital – cannot be simply abandoned if the private consortium is unable to deliver on its contract. As the National Audit Office noted, ‘ultimate business risk cannot be transferred to the contractor because if the contractor fails to deliver the spec-ified project, the public sector still has the responsibility for delivering the required public service’.27

Public or PFI? What determines which works?

The King’s Fund report on the PFI, summarising existing findings, concludes that ‘the evidence on which individual decisions were made was insufficient to justify a wholesale switch from public to private financing of investment in NHS hospitals’.28 I would further suggest that the inadequacies of PFI funding arrangements reflect structural characteristics of the new health market. Economic theory allows us to have a stab at predicting or, at least, anticipating the circumstances and conditions in which goods and services are most efficiently and effectively supplied by the private sector. The indicators are:

  • where the market for goods and services is sufficiently open and competitive to ensure that producers provide value for money;

  • where transaction costs are low; and

  • where there are no major externalities involved and profit-maximisation by private firms responding to market incentives produces outcomes broadly congruent with the needs and well being of the relevant publics.29

Competition

In conventional markets, the degree of competition is seen as a key determinant of efficiency, responsiveness and choice. This entails multiple providers, none of which should be able to influence the market price by changing their output.30 ‘Competitive tension’ in the market for health contracts, the Public Accounts Select Committee stressed, ‘is the key both to obtaining and to demonstrating value for money in procurement’.31 Theoretically, PFI contracts involve the public sector client specifying the services which it wishes to purchase and, through competition, selecting private sector suppliers to provide them. However, because of the sheer magnitude of the costs incurred by a potential contractor, the number of bidders involved in any one set of project discussions is usually very small. In four of the first fifteen PFI schemes to reach financial closure there was only one final bid.32 The Treasury Select Committee acknowledged that, in the real world, ‘there is a trade-off between competition and the length and cost of [PFI] negotiations’. Few companies are large enough to cope with the size of the contracts and the complex negotiating processes involved in PFI, and the ongoing process of acquisitions and mergers is constantly reducing that number. Even where the procurement was competitive overall, the Treasury Select Committee added, the market ‘may be too immature for competitive tension to provide value for money . . . In these circumstances, it may not be sufficient to rely only on competitive pressure to secure reasonable financing arrangements.’33 In short, because of the highly imperfect operations of the competitive mechanism, there are grounds for the supposition that PFI procurement is unlikely to secure the kind of efficiency gains that may be anticipated in a more open and competitive market structure.

Transaction costs

Transaction costs are the costs involved in arranging contracts. They include ‘the costs encountered in drafting, negotiating and safeguarding an exchange agreement’ and ‘the costs of monitoring the outcomes of the exchange to check compliance with the exchange’s terms after the transaction has taken place’.34

Their magnitude has been recognised as a key issue in determining whether goods and services should be contracted out or handled in-house.35 The more effectively contractual performance can be monitored and the more effectively compliance enforced, the higher the chances of promised gains being made – a key point where contracts take the form of long-term binding agreements. Transaction costs vary according to the transparency and complexity of the services offered. If the delivery of a service or product can be easily prescribed and monitored contractually, and the standard of the service provided measured with some precision, outside tendering may well make sense.36

The negotiation and monitoring of contracts for NHS PFI projects is, however, complex, intricate and time-consuming, requiring a range of technical expertise. Generally speaking, NHS trusts have responded by buying-in services. But the expertise required – finance, law and accounting – is very expensive. Details obtained through Parliamentary Questions revealed that the advisors’ costs for the first fifteen NHS PFI hospitals represented between 2.4 per cent and 8.7 per cent of the capital cost of those projects.37 The Public Accounts Committee expressed ‘alarm’ in its report on the Dartford and Gravesham Hospital contract that the health trust incurred costs from its advisors, KPMG and Nabarro Nathanson, which exceeded the initial estimates by almost 700 per cent. Boyle and Harrison concluded that in the early stages of the PFI there was a substantial increase in transaction costs over the level of pre-PFI schemes.38 The NHS Confederation reported that NHS managers found the PFI to be slow and bureaucratic, requiring ‘us to put up a vast amount of management time and consultancy fees at risk without the certainty of success’.39 Heald and Geaughan also suggest that because the PFI process is so protracted delays longer than might have been expected under conventional procurement have occurred. Similarly, the National Audit Office found that ‘there have been notable cases where PFI projects have failed or been delayed with significant adverse consequences for the public sector’.40

Externalities

‘Externalities’ are costs (or benefits) external to the terms of a contract. Parties to a contract reach an agreement which is intended to bring mutual benefits, but they incur costs which are borne by others who are not party to it. As I use the term, it refers to the negative effects on the operations of the healthcare system as a whole which, directly or indirectly, flow from the terms of the contract. PFI contracts focus on how a set of discrete procedures, typically the responsibility of an NHS trust, can be carried out in the most cost-effective way. By encouraging a multiplicity of contractual arrangements among a host of autonomous units, the PFI contributes to a fragmentation of overall service provision and to a neglect of wider needs, formal responsibility for which lies with bodies or agencies not party to a contract. An example would be adequate provision for the elderly, which requires close collaboration between suppliers of both primary and community care, responsibility for which is divided between the NHS and local government social services departments. However, it may make financial sense for NHS commissioning bodies to make savings by off-loading responsibilities to other agencies. The effect has been to displace costs on to the local health economy, reducing the amount left to finance other aspects of healthcare such as mental health, community services and primary care – despite the fact that current Government policy is to encourage the integration of all aspects of health.41 As Boyle and Harrison comment, ‘the PFI in its existing form is not a suitable means of delivering on the Government agenda to rebuild the NHS around the planned delivery of health care across a full range of provision facilities’.42

There are also broader long-term externalities. The Government insists that, under PFI arrangements, ‘while responsibility for many elements of service delivery may transfer to the private sector the public sector remains responsible for deciding, as the collective purchaser of public services, on the level of services that are required, and the public sector resources which are available to pay for them’.43 In fact, the commitment of a growing slice of the health budget to meet public contractual responsibilities has quite serious implications for the ability to imprint national priorities, as registered in election contests, upon future spending patterns. A growing share of the resources set aside for healthcare will be pre-committed, leaving less and less to the discretion of public authorities and democratic choice.44 One of the first pieces of legislation passed by the new Government was the National Health Service (Private Finance) Act, which empowered NHS trusts to enter into PFI agreements and guarantee financial payments over the life of the contract, irrespective of public expenditure totals.45 The Financial Times (17 July 1997) noted that

future cash outflows under PFI/PPP contracts are analogous to future debt service requirements under the national debt, and, potentially, more onerous since they commit the public sector to procuring a specified service over a long period of time when it may well have changed its views on how or whether to provide certain core services of the welfare state.

Further PFI contracts will not only limit the ability to switch resources in the future but, in the event of a need to cut spending, will force non-PFI expenditure to carry proportionately deeper cuts. It is difficult to interpret this as anything other than a substantial constraint on the ability of a future government, ‘as the collective purchaser of public services’, to decide on how to respond to shifting social needs and new priorities. Changes in medical needs, technologies and treatments may, for instance, reduce demand for large acute PFI hospitals, but the public sector will be contractually bound to a pre-set schedule of payments.46 As Anthony Harrison of the King’s Fund points out:

If the demand for hospital services is reduced for any reason, the NHS trust is still tied into an agreement for maintenance, facilities, and management services over and above the cost of building the hospital. This would not be the case if the hospital was built with public funding.47

In short, though there may be short-term benefits in relying on the PFI – a more rapid commitment of funds – within the time-span of the contract as a whole the NHS is binding itself to a sup-optimal allocation of resources.

The PFI and the Third Way as operational code

To some commentators, the Blair Government’s backing of the PFI represents a ‘pluralist approach to the delivery of public services’, opening up ‘established hierarchies without fetishizing the market’. It is a Third Way since it rejects ‘Old Labour’s ‘centralism’ while remaining rooted in the socialist tradition.48 From that perspective, the Blair Government’s pursuit of the PFI testifies to a new open-mindedness and hard-headed realism – to a refusal to be distracted by ideological shibboleths from measures which promote the more efficient and effective delivery of services. But this line of reasoning presumes what needs to be demonstrated: that the PFI, as compared to public funding, promises more and higher quality public services. The evidence provides no solid substantiation for the proposition.49 Precisely for that reason, many within the medical profession and among health researchers have reacted with mounting apprehension. For the editor of the British Medical Journal ‘much evidence is accumulating to show that private finance initiative schemes are costing much more than traditional public funding of capital development’.50 Sir Peter Morris, president of the Royal College of Surgeons, warns that within a decade the cost of the PFI to the health service would land it ‘in desperate trouble’.51 Dr Peter Hawker, chairman of the British Medical Association’s Consultant’s Committee, expressed his anxiety about the PFI’s ‘poor use of public money’ and its ‘rash assumptions about work intensity’ (quoted on BBC website, accessed 19 May 1999). And, most recently, the country’s leading health research institute, the King’s Fund, has pronounced the PFI-driven hospital construction programme as one of the Blair Government’s ‘few outright errors of policy’ (Guardian, 9 May 2002).

What, then, does the Government’s zeal for the PFI tell us about the Third Way? One possibility is that it tells us little – that it was embarked upon for considerations apart from its intrinsic merits. There is some support for that view. In part it originated (in 1992) as a financial stratagem, an accounting device to allow for some investment in the UK’s decaying public infrastructure while maintaining a tight fiscal stance. While borrowing to fund conventional public procurement was counted as adding to the public sector borrowing requirement, borrowing by the private sector of the same amount of money to finance the same investment was not – even though the public body would be contractually bound to repay the private firm from its revenue budget. It was ‘off-balance sheet’.52 This had an obvious attraction for the incoming Labour Government, torn between its commitment to rigorous controls over public spending and borrowing, on the one hand, and its pledge to ‘save’ the NHS (and education), on the other (Guardian, 14 March 2000). It allowed the claim that the PFI provided for higher levels of public investment than would otherwise have been possible.53 However, this argument is now less frequently heard. The Accounting Standards Board objected that PFI spending had to be paid from the public purse in precisely the same way as standard public procurement and should no longer be treated as off-balance sheet, a criticism which the Government appears to have accepted54 (David Heald, Observer, 28 April 2002). Notwithstanding, this factor almost certainly weighed heavily in the Blair leadership’s initial decision to embrace the PFI.

A second consideration is, we can safely surmise, electoral. ‘Acquiring assets via the PFI is analogous to buying a house with a mortgage rather than paying cash for it up-front. You still have to pay for the house, one way or the other.’55 There is, however, a disjuncture between the repayment schedule and the electoral cycle, for long before the former has been completed the ministerial incumbents responsible will have departed the political scene. In short, it makes electoral sense to stretch out the payment of the bills even if the final total is much larger. So the Government can claim (credibly) to be embarking on the largest hospital building programme in history without placing unduly burdensome claims on the public purse. The real cost will bite only later.

However, these factors fall far short of fully explaining the Blair Government’s stance on the PFI, for it appears to genuinely believe that PFI offers a better deal. Why? It is rare for ‘the facts’ to point unequivocally in favour of any single policy. Decision-makers may vary in their willingness to take account of research findings, to engage in reasoned analysis and to question inherited policy stances. Similarly, they may differ in the flexibility and open-mindedness with which they tackle policy problems. But the stark contrast between a ‘pragmatic’ approach driven by an objective consideration of evidence systematically and comprehensively assembled and rationally evaluated, on the one hand, and an ‘ideological’ approach, on the other, is misleading. Persuasive evidence about the likely consequences of differing policies is difficult to obtain, even if commissioned; and wholly dispassionate analysis is rare. To this may be added the force of limited time and energy, of political exigencies demanding rapid action, the limited cognitive and information-processing abilities of decision-makers and the press of governmental business.56

As Lindblom, Simon and many other social scientists have shown, the claim that policy choice is based on ‘rational, synoptic’ analysis is rarely convincing. Decision-making is, at best, ‘boundedly rational’.57 All governments must, inevitably, rely upon selection principles – cognitive short cuts, criteria for determining what is feasible and practicable – for guidance in making policy decisions. As Hall suggests, they ‘customarily work within a framework of ideas and standards that specifies not only the goals of policy and the kind of instruments that can be used to attain them, but also the very nature of the problem they are to be addressing’.58 The key factor impelling policy-makers to opt for one line of action rather than another is less often a detached and meticulously analysed assessment of ‘what works best’ than their ‘subjective view of the situation’ and the way in which they ‘characterise the choice situations that face them’:59 in short, their assumptions and beliefs about why some things work better than others – their ‘operational code’. In essence, the argument here is that it is not ‘objective’ logic but the logic of the Blair Government’s ‘framework of ideas and standards’ which renders the choice of PFI intelligible.

New Labour’s support for greater private involvement in the provision of services is rooted in a diagnosis of the innate weakness of public sector service provision. As ‘monopolist providers’, one New Labour sympathiser commented, public institutions ‘grew fat and unwieldy’ and ‘ ran up uncontrollable bills’.60 All this reflected endemic public sector failure – a tendency to bureaucratic inertia, a wasteful use of resources, over-centralisation, incompetent management, poor motivation and low commitment. ‘Compared with the experience of the private sector’, one cabinet minister has written, ‘services in local hospitals, schools councils were often too slow and inadequate. Much of this was due to a bureaucratic and statist regime of control and command.’61 A major injection of private sector techniques and market disciplines was deemed to be vital precisely because these faults were seen to be inherent in public provision.

On what grounds is it anticipated that a greater commercial role in the organisation and provision of services will raise their quality and reduce costs? The Government’s reasoning is (as we have seen) based less on iron-clad evidence than on assumptions about the factors that ‘can lead to better value services, delivered more flexibly and to a higher standard’. Thus, it is held that the corporate imperative to expand markets and maximise profits ‘provides the private sector with an incentive to innovate and try out new ideas’. Equally, it renders businesses ‘more adept at looking for innovative ways of delivering their services, and adapting to changing requirements and expectations’.62 By its very nature, the public sector is less efficient and effective in managing large projects because it has ‘ no incentive to make a profit or recoup the cost of capital’. As a result there is an innate ‘temptation to over specify, leading to gold-plated projects’. In contrast, under PFI private firms have ‘every incentive for tight project management and the best use of capital’.63 In short, the presumption is made that market disciplines and the drive to boost profit will more or less guarantee both higher quality and cost efficiencies, as corporate interest can normally be expected to mesh with the public good.

Organisational efficiency, higher standards and responsive service delivery all require that appropriate institutional incentives and disciplines are in place to motivate the required commitment. Here it is assumed that profit maximisation and performance-related financial reward offer the most potent incentives for management and employees ‘to maximise efficiency and take full advantage of opportunities’.64 The beliefs about human behaviour underpinning the Government’s faith in market solutions are squarely rooted in classical political economy, with its conviction that people are by nature self-interested ‘utility maximisers’. As Tony Blair explained to the British Venture Capitalist Association, the pressures of the market stimulate entrepreneurial behaviour, a zeal to innovate and to eliminate waste. Lacking the spur of these pressures ‘people in the public sector’ tended to be sluggish, unimaginative and reluctant to experiment. Importing the rhythms of the private sector can enhance motivation and therefore performance. ‘Let’s be honest about it’, the prime minister declared, ‘the private sector, in its reward and motivation, has moved on apace.’ The same spirit must be instilled in the public sector.65

How dramatic a change in Labour’s creed does all this represent? It would be wrong to infer that the Blair Government has abandoned traditional Labour values. Thus the Government remains committed to a welfare state in which core services are freely provided and financed by taxation, just as – unlike its predecessor – it seeks to promote greater social justice and social cohesiveness. This is reflected in the Blair Government’s major expansion of health spending since 1999 and the great energy and political capital it is investing in building a streamlined and more effective NHS. In a sense the Third Way is, as it claims, pursuing traditional values in ‘a modern setting’. But that setting is a cognitive one: a revised operational code. The Third Way is a particular type of synthesis in that it seeks to yoke neo-liberal concepts and modes of analysis to the furtherance of public purposes. It has absorbed much (though by no means all) of the ‘new public management’ – in effect the infusion of market norms into public administration.66 It often takes as axiomatic that profit-maximising firms operating within market environments are a more natural repository of creativity, cost-savings and organisational dynamism than are their public sector counterparts. What has occurred is a transformation in the frame of reference that Labour’s leadership utilises to define and tackle political problems – in the manner in which it construes issues, in its preferred diagnoses, in its standards of judgement and in its notions of feasibility and efficacy.

What will be the impact of all this? For Will Hutton, the choice of the PFI is not, as its champions urge, simply a matter of means, for it amounts to ‘the enthronement of market values in public provision’. Patients’ interests have become secondary to those of ideological public accounting principles and a dynamic has been released in which ‘considerations of public health, clinical need and patient care’ will be progressively subordinated to the values of ‘cost reduction, operational efficiency and the need to reproduce the managerial culture of a privately-owned PLC’ (Observer,January 10, 1999).

The New Labour response is that the State should be a ‘steerer’ not a ‘rower’, a notion, Anna Coote tells us, that ‘is characteristic of “Third Way” politics’.67 In fact, this begs the crucial question: where the private sector (increasingly) owns and manages, who actually steers? In 1997 the health policy specialist Chris Ham, addressing the issue of PFI, pointed out that ‘investors who put their finance at risk will want to have a big say in how the hospitals are run . . . The end of the route will be increasing privatisation’ (Independent, 22 April 1997). There is an ‘institutional logic’ to the process in which the scale of private involvement steadily expands. Thus, initially, a distinction was made between core clinical and non-clinical services. In 1999 Alan Milburn reaffirmed the Government’s view that while the role of the private sector in the supply of ancillary services could be expected to grow, ‘clinical services are best delivered by public sector staff not least because the NHS is more efficient than the private sector alternative’.68 If public sector provision has the advantages attributed to it by ministers, logic dictated its application to core as well as secondary services. As Kelly and Le Grand noted, ‘ to confine the role of the private sector in this way may be to lose what are supposed to be its benefits’. Indeed (as proponents of PPPs) they suggested that that the most ‘impressive efficiency savings and innovations are made’ where private firms are able ‘to manage the whole service’.69 By 2000 the rule limiting the PFI to non-clinical services – which initially the Blair Government had adduced to demonstrate its commitment to the NHS ethos – was abandoned and Alan Milburn, the health secretary, announced that he wanted it extended ‘beyond the hospital gates to include GP surgeries, community pharmacies, health centres, intermediate and long-term care facilities’ (Observer, 19 November 2000). This process is set to continue.70

Government choice is reinforced by institutional dynamics. The relentless advance of PPPs through the NHS since 1997 has steadily increased the financial and organisational leverage available to private firms to advance the process still further. ‘Once the private sector controls the operational management of facilities [it] will be in a powerful position to influence service delivery policies.’71

Conclusion

To New Labour a defining feature of the Third Way is its pragmatism, its commitment to evidence-based policy-making: in the pithy precept so often reiterated, ‘What matters is what works.’ The case of the PFI casts a rather different light on the Third Way, since self-evidently it does not work. A paper produced jointly by the King’s Fund and the NHS Alliance (representing primary care groups – GPs and other community health providers) concluded that the evidence for public–private partnerships increasing funding and improving services within the NHS was ‘paltry’.72 Precisely for that reason, the case of the PFI is particularly instructive, since it affords insights into the Blair Government’s presumptions about ‘what works’ or, more precisely, why particular policies can be expected to work better than others. The Third Way, according to the interpretation proffered here, constitutes New Labour’s operational code: its cognitive structuring of the situation; its mental maps which help it clarify ‘the nature of the problem, relate it to [its] previous experience, and make it amenable to appropriate problem-solving activities’.73

From this perspective, the Government’s decision to rely upon the PFI as the main mechanism for renewing the UK’s public infrastructure reflects the Blair Government’s reappraisal of the appropriate role of the State. ‘A seismic switch in the business of government itself’, Milburn observed, has occurred. Governments are judged ‘not so much on what they own – or even what they spend – but more on what they do’.74 From this perspective the evolution of the State ‘from being an owner of capital assets and direct provider of services, into a purchaser of services from a private sector partner responsible for owning and operating the capital asset that is delivering the service’ seems a natural step.75 This may represent the ultimate thrust of the Third Way’s view on the future of public services. As operational code, it retains Labour’s traditional commitment to the free delivery of healthcare, but within the context of a commodification of service provision. It still upholds a large public sector, but one increasingly permeated by market arrangements and a more commercial ethos. The Third Way prescribes for the State a major role in social life, but less as a direct provider than as purchaser and regulator. It would retain responsibility for guaranteeing access to services free at the point of delivery, but these would be increasingly supplied, under contract, by private firms.

David Marquand has argued that the fate of ‘social democracy and the public domain are inextricably intertwined [for] without a vibrant public domain, ring-fenced from the market and private domains, social democratic politics cannot flourish’.76 If so, in this may lie the ultimate significance of the PFI for Labour in Britain.

Notes

1 George 1967: 13; March 1994: 14.
2 I use the terms PFI and PPP as synonyms. ‘PPP is a generic term used to describe partnerships, which involve more flexible methods of financing and operating facilities and/or services’, while PFI is ‘a particular method of financing private investment, which requires the private sector to design, build, finance and operate facilities’ (Centre for Public Services 2000).
3 HM Treasury 2000.
4 Milburn 1999a.
5 Robinson 1998.
6 Pollock, Price and Gaffney 1999; Gray 1997.
7 Robinson 1998.
8 Milburn 1999a; Smith, A. 1999.
9 Boyle and Harrison 2000: 24.
10 Halpern 1998.
11 HM Treasury 2000; Blair 2001.
12 Temple 2000: 320.
13 Le Grand 1998.
14 Milburn 1999b.
15 Robinson 1998.
16 Department of Health 1999.
17 HM Treasury 2000, Foreword by the chief secretary.
18 Department of Health 1999.
19 Pollock, Price and Gaffney 1999). In Hereford the number of beds available will fall from 351 to 250; in Norfolk, from 1,600 beds to 1,000; in Worcester, from 540 to 380, in Carlisle from 520 to 440, in Edinburgh from 1,300 beds to 800. The BMA estimates that 5,000 beds will be lost to the system once the 38 PFI hospitals, costing more than £3.6 billion, are built. Gaffney, Pollock, Price and Shaoul 1999a; Observer, 27 August 2000; Cohen 1999.
20 Pollock, Price and Gaffney 1999; Pollock, Price and Dunnigan 2000.
21 Gaffney, Pollock, Price and Shaoul 1999a.
22 Health Select Committee 1999.
23 Gaffney, Pollock, Price and Shaoul 1999b.
24 Boyle and Harrison 2000: 22.
25 HM Treasury 1999.
26 Gaffney, Pollock, Price and Shaoul 1999b; Shaoul 1999.
27 National Audit Office 2001.
28 Boyle and Harrison 2000: 34.
29 Buchanan 1985: 14–15; Bartlett and Le Grand 1993.
30 Bartlett and Le Grand 1993: 19.
31 Public Accounts Select Committee 1999.
32 Boyle and Harrison 2000: 19.
33 Treasury Select Committee 2000.
34 Bartlett and Le Grand 19993: 27.
35 Williamson 1985.
36 Coulson 1998: 30.
37 Hansard, written answer, 28 February 2000, quoted in Centre for Public Services 2000.
38 Public Accounts Select Committee 2000; Boyle and Harrison 2000: 19.
39 Health Select Committee 1999.
40 Heald and Geaughan 1997: 230; National Audit Office 2001.
41 Boyle and Harrison 2000: 34; Lister 2001; Will Hutton, Observer, 13 December 1998.
42 Boyle and Harrison 2000: 34.
43 HM Treasury 2000.
44 Pollock, Shaoul, Rowland and Player 2001.
45 Centre for Public Services 2000.
46 Dawson 2001.
47 Cited in MacDonald 2000. According to a King’s Fund report, Labour had ‘entered a massive building programme without an assessment of future requirements and without transferring any substantial risk from the public to the private sector’ (quoted, Guardian, 9 May 2002).
48 Bevir and O’Brien 2001.
49 See e.g. Boyle and Harrison 2000; Sussex 2001; Health Select Committee 1999.
50 Smith, R. 1999.
51 Revill 2001.
52 Centre for Public Services 2000.
53 ‘PFI is enabling Government to support a significant number of additional projects beyond what can be provided through the public purse’, according to Robinson 1998.
54 Smith 2000a: ‘Unlike the last Government, we use PFI where it offers best value for money – not to move public sector investment off balance sheet.’
55 Sussex 2001.
56 Simon 1985; March 1994.
57 See e.g. Lindblom 1979; Simon 1985; March 1994.
58 Hall 1993: 279.
59 Simon 1985: 300.
60 Coote 1999: 117.
61 Hewitt 2001.
62 Smith, A. 1999.
63 HM Treasury 1999. One of the Government’s main objections to public procurement schemes has been major cost overruns and the heart of its case for the PFI is that ‘it offers best value for money’ (Smith 2000b). In fact, the PFI has performed no better, as a clear pattern of serious cost escalation is now emerging. Among the more dramatic increases in prices from original plan to final PFI deals are: Greenwich: up from £35m in 1995 to £93m; UCLH, London: up from £115m to £404m; Leicester: up from £150m to £286m; South Tees: up from £65m to £122m; and Swindon: up from £45m to £96m (Lister 2001).
64 Smith, A. 1999.
65 Blair 1999.
66 Dunleavy 1994.
67 Coote 1999: 148.
68 Milburn 1999b.
69 Kelly and Le Grand 2000.
70 Notably via the ‘concordat’ under which the NHS contracts to buy services from commercial organisations.
71 Centre for Public Services 2000.
72 Kmietowicz 2001.
73 George 1967: 16.
74 Milburn 1999b.
75 HM Treasury 1999.
76 Marquand 2000.

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The Third Way and beyond

Criticisms, futures, alternatives

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