A local industrial policy for public services

The next few months will be critical for the government’s public sector reform agenda. In February, the prime minister identified the ‘imminent’ Open Services white paper as signalling ‘the decisive end of the old-fashioned, top-down, take-what-you’re given model of public services’.

The government wants to open up the market, giving charities, social enterprises, private companies and employee-owned co-operatives the opportunity to compete, with the aim of offering higher quality services. The release of the white paper has now been delayed, it appears, until July, and could be contested as vigorously by the coalition partners as the current health and social care bill is currently.

Given the perceived lack of quality public services and the wider deficit reduction narrative, the appeal of opening up the market for public services as a political strategy makes sense. It has the ultimate virtue of being able to reduce costs and improve quality through competition. Even better, it is linked to privatisation, a policy that actually produces revenue with no visible cost to the taxpayer. A political liability becomes an asset.

But what about local communities? How confident can they be that such a strategy will lead to higher quality and lower cost public services? Recent government policy papers have emphasised the importance of smaller, locally oriented organisations providing people centred, preventative services in the community. The contribution of such small and medium sized and social enterprises to the health of the economy has also been identified in recent local growth policy papers.

In the same policy documents, we see policy initiatives that will disincentivise these types of organisations from entering the market. Payment by results and outcome based commissioning are examples. Organisations without significant cash flow will be unable to compete. And consider the ability of local authorities to commission and procure on the basis of social and environmental value, where smaller, local organisations can innovate, and not just economic value. Putting aside capacity issues, local authorities are not currently duty bound to include criteria linked to anything other than economic value within their procurement process.

But more fundamentally, why wouldn’t local authorities procure on the basis of cost alone, given the massive financial pressures they are under?

If public sector reform is to produce stable and genuinely competitive markets for local public services, such that result in quality public services, the government must create and implement an industrial policy for the sector. Such a policy would enable central and local government to make strategic interventions to manage markets, the demand and supply side, rather than simply removing barriers to entry.

As Vogel outlined, history tells us that in this country we tend to opt for a form of ‘pro-competitive disengagement’, removing those barriers and letting ‘market forces’ dictate. Instead, we should introduce a set of policy instruments that can both facilitate the provision of the services our communities really need, and contribute to the health of our local economies.