Giving Privatisation A Bad Name

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WEDNESDAY, JULY 08, 2009

Giving Privatisation A Bad Name

Don't judge privatisation by the results of PFI

We've blogged the disaster of PFI many times. In principle, it sounds like a great way for taxpayers to get better value for money, but in practice, it's been an horrific saga of overpaying, perverse incentives, and downright failure.

An interesting paper by Ted Bromund of the US Heritage Foundation takes a close look at how it's been used by the Ministry of Defence. And as you'd expect with that particular money-pit, it's not a very pretty picture.

Ted gives a good account of the dismal story for his US audience, who apparently still harbour some delusion that Labour's use of PFI was for genuine efficiency reasons. But he also draws out some broader conclusions that are well worth summarising:

• Risks cannot be wholly transferred to the private sector - that's because in some areas - certainly defence, but also key infrastructure - outright failure is not an option for government.
• Contracting out should promote efficiency and improved quality, not hide spending - Labour's Enron approach to PFI has been costly and inefficient, and PFI contracts have also been used to meet top-down targets for "staff cuts".
• Contracts with the private sector require effective government contractors - as we've seen over and over again, the public sector simply does not have the staff to negotiate and manage cost effective contracts.

But the Big Point we should take from Ted's paper is this:

"Contracting out [such as PFI] is not privatization because it does not reduce the government’s responsibilities: it increases them.

The government must decide what it wants to buy, negotiate the contract, and then—like any other buyer—ensure that the other party fulfills its side of the bargain."

So let's just take that in.

When government enters into a PFI deal, it is not offloading its reponsibilities. Instead, it's delegating some operational authority, while retaining the overallresponsibility for delivery to the final customers (ie us taxpayers). It is also adding a new responsibility to manage the PFI contractor. It has not privatisedanything, any more than a company does when it hires contract cleaners.

Compare that to real privatisation. With real privatisation, the government takes itself out of the loop altogether.

For example, let's say Gove really does take us down the school voucher route. He dishes out the vouchers, and then he sits back. The privatised schools are now responsible directly to parents for providing good education, not the government. It's just like... well, it's just like the existing private school system.

That is completely different to a local council entering into a contract for a new PFI school. With real privatisation, the Simple Shopper is no longer intermediating his hopeless bungling presence between the customer and the supplier.

Unfortunately, the manifest failure of PFI under Labour has got real privatisation a bad name. It has allowed the left to claim that the fault lies with greedy private sector providers - the very same people who would run privatised schools 'n' hospitals.

Ted's risk transfer point is also a crucial one. There is absolutely no point in taxpayers paying a private sector provider to assume risks it is not capable of assuming. As we saw with the Metronet disaster (eg see this blog), thinly capitalised PFI contractors can prove to be very expensive if they collapse.

And even where a private sector counterparty does have deeper pockets, they are useless if the terms of the contract allow it to walk away when the going gets rough (as National Express has just done with the East Coast rail franchise).

Whether for PFI or private rail franchises, the Simple Shopper's inability to manage contracts has done serious damage to the cause of privatisation.

Somehow we've got to find a way of explaining that such bungles are nothing to do with real privatisation.

PS Talking of risk transfer, today's waffly proposals on bank regulation leave me feeling distinctly queazy. What the banking crisis has put up in lights is that we taxpayers are currently guaranteeing the banks without limit. And like St Vince says, we're taking these risks of catastrophic failure even though it's the bankers who take the upside. So just why aren't we separating the high street banks from the casinos, Glass-Steagall style? Yeah, sure, if we had superb regulators and superhuman bank boards we wouldn't need to. But we don't. And we do.

More On Public Sector Pay

Public sector ahead for two decades

In the comments on yesterday's post DM Andy accused Tyler of cherry-picking his evidence on public sector pay, by only showing the last decade:

"That's a rather cherry picked graph there Tyler. The ONS data goes back to 1990 and shows the private sector started off lagging behind the public sector during the early 90s recession, the private sector moving into the lead in the boom years and now the public sector catching up again in another recession."

Now, Tyler can stand many things, but being accused of picking cherries is not one of them. So the above chart puts things right by showing the entire data period right back to 1990.

However, although the ONS average earnings indices show relative movementover time, they give no indication of relative earnings levels between the two sectors. So we've translated everything into cash terms (ie average full-time weekly earnings including bonuses) on the basis of the average earnings in April 2008 as recorded in the ONS's Annual Survey of Hours and Earnings (ASHE).

What do we conclude?

First, as Andy says, the public sector did pretty well in the early 90s recession. But then as the Major/Clarke golden decade got going, the private sector caught up, so that by the turn of the Millenium, it was roughly level pegging. Since then, the public sector has more than kept pace, latterly pulling strongly ahead again - just like in the last recession.

Second, for virtually the entire period, average full-time earnings in the public sector have been ahead of the private. The gap was highest in the early nineties, peaking at over 10% in 1992-93. Today, it is once again increasing (and on themedian measure of pay it is even higher - at over 13%).

But what does this actually mean?

Well, that's when we get into all those apples and pears issues. For example, public sector unions (and Pol) argue that average public sector earnings have been artificially inflated by the privatisation of low-paid jobs such as cleaning. Others (such as HJ) point out that average public sector earnings are artificallydeflated by excluding some high income groups like GPs, who are counted as being in the private sector even though the vast bulk of their pay comes from the NHS.

So these long-term trends do need to be treated with caution.

Nevertheless, the data certainly do not tell us the public sector has fallen behind in some way. If anything, they suggest the opposite.

Of course, we might be able to get a clearer fix by looking at the public/private comparison in more detail, for example by specific occupational group.

We don't have time to dig out all that data at present, but just as a taster, here's a chart on state teachers' pay relative to "other professional occupations" as recorded in ASHE. It's taken from the most recent report of the School Teachers’ Review Body:

As we can see, teachers pay is shy of the overall average for "professional occupations" (which you could easily argue is down to their holidays and final salary pensions). But over the last ten years, the percentage gap has been closing.

And the teachers illustrate something else we've blogged many times - the inefficency and unfairness of national pay scales. Whereas in London and the South East teachers might well argue they are underpaid, elsewhere - relative tolocal pay rates - they do very well:

So if you want to teach, go North or West. On no account choose London.

(Yet another reason for breaking up our huge national public service monoliths).

TUESDAY, JULY 07, 2009

Insulating The Lazy Scapegoat With Rubbish

Swivel eyes not required to see this one

Unlike Tyler, Steve Bundred is no swivel-eyed small government zealot. He is a senior public servant, the head of the government's Audit Commission.

Yet on Sunday he told us:

"At a time when inflation is likely to be between 2% and 3%, a pain-free way of cutting public spending would be to freeze public sector pay, or at least impose severe pay restraint. This is especially true if real wages in the private sector are still falling. 

Health and education will not be immune, partly for reasons of fairness to others, partly because the NHS is the world's third largest employer, and also because ministers will correctly assume that as public sector workers have done well over the past decade, they will tolerate some modest real reduction in earnings.

So whichever party wins the next election, we can expect a reduction of £5bn or more in real terms from public sector pay."

All eminently reasonable.

But needless to say, he has run into heavy flak from the promoters of Big Government. Pol says public sector workers should not be made a "lazy scapegoat":

"... just hold on to the basic fact that it is rare to find people who are not paid less by the state than in the commercial world. So when the cry goes up for all these feather-bedded public workers to "share the pain", will there be some idea that they should share in the good years too?

... If there must be spending cuts, don't let public sector pay be a lazy scapegoat for the nation's increasingly distorted pay structures."

According to Pol - and we've covered her arguments before - public sector workers are poorly rewarded relative to the private sector, so should not be penalised simply because we need to make savings and private sector pay is falling. In fact she reckons the entire argument is based on "rubbish statistics" cooked up by... well, waddyaknow - the TaxPayers' Alliance. She says:

"A rumbling campaign to squeeze the gold-plated, feather-bedded public workforce has been led until now by the TaxPayers' Alliance, using conveniently deceptive figures.

The TaxPayers' Alliance came up with the rubbish statistic that "state workers now earn an average of £62 a week more than their private sector counterparts," adding in the comment: "We cannot pay these enormous bills for people who are not creating wealth."

Conveniently deceptive? Rubbish statistics?

Pol may not have grasped this, but the TPA numbers are actually the official figures for median pay in the private and public sectors taken directly from the ONS's most recent Annual Survey of Hours and Earnings (ASHE), the definitive source of earnings data across the economy. And they show median pay of £523pw in the public sector, compared to £461pw in the private - so the typical public sector worker was £62pw, or 13%, ahead.

And remember that figure relates to April 2008. Since then, public sector earnings have increased by 3.6%, against only 3.1% in the private sector (see here). So the public sector has pulled further ahead.

And this is no short-term effect - here's the longer term perspective:

So public sector pay has more than kept pace under Labour.

Ah, says Pol, even if that's true, on a like-for-like basis, public employees are stillunderpaid relative to the private sector, because on average they are more professional. Whereas the private sector mainly employs the flotsam and jetsam of society, no fewer than a quarter of public sector employees are "professionals".

Now as we all understand, it's a mug's game trying to work out precise job comparibilities between the public and the private sectors - the patterns of business and employment are so different. But just so we know, here are the facts as the ONS records them:

So as we can see, the public sector does indeed employ more "professionals" than the private sector - in 2006 it was 22.5% vs 10.3%.

But at the same time, it employs far fewer "managers and senior officials", and virtually no "skilled trades" (aka highly paid professional plumbers).

Meanwhile at the bottom end of the scale, there is virtually no difference in public and private sector employment of "elementary occupations" (ie Pol's cleaners).

Or to put it another way, Pol's argument is conveniently deceptive. Not for the first time, she has been highly economical avec l'actualité.

So just to recap:

• Public sector pay is currently running at about £160bn pa
• Present plans are factoring in 2-3% pa pay increases
• Implementing a freeze would save us £4-5bn pa - cumulative

Now all we need is the will to face down the strikes...