Markets for good

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Without reform, Britain’s human public services are facing crisis. Budgets are falling, but demand is rising, driven by globalisation and ageing. Schools fail far too many pupils, the vocational system is more geared to producing nail technicians than nano-technicians, and the NHS is cracking under the strain of coping with, in particular, increasing levels of chronic conditions and ageing. The situation in services that receive less media attention is arguably even worse. There are tragic shortcomings in our mental health, addiction and prison rehabilitation services. Experts agree that more local, open, collaborative services are the answer, but even intermittent experiments in this direction often meet heavy opposition.

These challenges cannot be dealt with simply by spending more money. There isn’t any. Nor is it sufficient to follow business-as-usual attempts to reach slightly better value for money. We need a quantum leap in value for money and that means fundamental public service reform.  Unfortunately, the country is having totally the wrong sort of debate to deliver such a quantum leap. Public service reform, when actually discussed, is done so within a narrow framework of each particular service. It rarely arrives at the crucial topic of how these services fit together.

Whilst the problems faced by the socially excluded are overlapping and mutually reinforcing, for the most part the support they receive is not. Rather than solving social problems in full, billions are wasted on piecemeal interventions which only treat one aspect of the many barriers that some people face – for instance a drink problem, but not the connected debt problem; or a crime problem, but not the connected housing problem.

Successive governments have responded to the challenge by turning to private and third sector providers. However, with no clear, overarching vision, twenty years of stop-start change has left an incoherent hotchpotch of half-finished reforms, inconsistencies and exemptions. This is clearly demonstrated by the lack of join up between the departments covering work, skills and education on combating youth unemployment, or the failure to mesh the Coalition’s major justice and welfare reforms.

The predictable response has been to criticise the whole idea of competition and the use of markets in public services. Such criticism is misplaced. Its not that markets themselves are bad. Weak markets are bad, and human public service markets are weak. Indeed, they are scarcely markets at all. Providers only compete with one another at the outset in order to win a contract. Thereafter, they are commonly the monopoly local provider for the duration of the contract. In addition, government too often prioritises price over quality during the bidding process. When government does not get the results it expects, it steps in to micro-manage the process, only to throttle market forces further.

A revolution in public service delivery

Britain needs a new model for human public services – one that moves away from traditional contracting, towards a much more open model of licensing and payment for results. This report proposes breaking open the old monopolies of public and private provision. Instead it proposes contracting in a very different, more open way: using clear rules and strong incentives to harness the power of genuinely free and fair markets. It is not too much marketisation that is the problem – it is too little.

Almost all poverty-fighting public services, as well as education and health, should be opened up to non-state providers: schools, hospitals, vocational education, employment support, drug treatment, prisoner rehabilitation and more. Conventional commissioning, through bid rounds and time-limited contracts, should be replaced by a licensing model, under which any organisation is free to provide social public services, provided that it possesses a licence to operate. To gain the licence, providers would have to show they passed certain standards of managerial, operational and financial competency. Licensing would not be restricted to certain departments or regions, allowing providers to work across the siloes that currently hamper performance. A licence model would also make it much easier for new providers to enter the market, driving competition.

Incentives should be sharpened to drive performance. Government should set a smaller number of key outcomes that constitute the ultimate endpoints that we as a society want to see, paying providers for achieving them. A mature approach would also recognise that profit plays an important part in making a market work. Government should set an explicit target profit margin that it wants providers to achieve, making adjustments if profits are consistently under- or over-target to balance the need for well-functioning markets with taxpayer value for money.

Implementing Public Service Licensing would be a major shift, but that is what is needed. Doing nothing will only lead to the slow erosion of the quality of public services. Protecting public services means reforming them. A licence model builds on lessons from of our most advanced public services, in health, work, social impact bonds, complex needs and justice. Embracing these new models of delivery – and going further by truly integrating, not simply ‘joining up’, services – would benefit us all.  Better public services mean more impact for the money we spend, leading to a fairer and more economically competitive society, lower public expenditure and lower taxes.