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Public service markets: Overprescribed medicine

Chris Painter, Emeritus professor at Birmingham City University, critically evaluates public service markets in the context of a current albeit faltering UK premiership less dogmatically opposed to the role of the state.

Markets at their best bring greater efficiency, responsiveness and customer satisfaction. However, unlike the abstract concept lauded in economic textbooks, real-world markets display many different characteristics. They are socially constructed rather than pre-ordained, their precise features shaping resulting outcomes, positive or otherwise.

Making markets a cardinal organising principle for public services was fundamental to neoliberal ideology influencing public policy from the 1980s. The fragmentation it has led to raises profound questions for strategic planning and co-ordination of those services.

Real-world markets

Well-functioning markets require effective competition, therefore a diversity of suppliers and low barriers to market entry, as well as information symmetry so that purchasers of goods and services are not disadvantaged. Even if markets work for both providers and customers, transactions may adversely affect third parties. There are externalities or spill-over effects left out of market pricing.

Another risk is that choices in the marketplace are manipulated by those in possession of economic and social capital. Lightly regulated markets produce a trajectory, moreover, in which the distribution of income and wealth becomes cumulatively more skewed.

Regulatory failure also contributed to the 2007-08 financial crisis and macroeconomic instability that ensued. It all goes a long way to explaining recent political volatility.

A balance therefore needs to be struck. Move too far towards state intervention and dynamic properties of markets are sacrificed. Move too far in the opposite direction and market dysfunctions become pronounced. This was the classic argument for the post-1945 ‘mixed economy’ prised apart by the Thatcher governments during the 1980s.

Temporally – and internationally – boundaries between state and markets are a moveable feast. When the state withdraws, civil society through the voluntary and charitable sectors often fills the vacuum.

It is no coincidence that alongside the post-2010 austerity agenda David Cameron espoused the virtues of ‘big society’ (not that it ever developed much traction!). Academic taxonomies capture contrasts, then, between ‘hands-on’ and ‘stand-off’ states, and many shades of grey in between.  

Since Theresa May moved into Downing Street in July 2016, there has been acceptance in principle that the state can be a force for good (albeit simultaneously lauding ‘the free market economy’). The 2017 Conservative election manifesto was widely interpreted as a departure from the Cameron-Osborne legacy in this respect.

But how much substance lies behind that declaratory principle, and what of public service markets?

Interventionist policy armoury      

May’s more interventionist instincts were seen early on in her statements on corporate governance in response to soaring executive pay. A green paper in November 2016 considered ways of strengthening shareholder influence, transparency in remuneration practices – including pay ratios – and bringing the voices of other stakeholders into the boardroom. The contents of the August 2017 white paper – with the exception of metrics comparing chief executive with average company worker pay – turned out to be a pale shadow of earlier rhetoric.

Following a poor general election, the prime minister had insufficient command over her own party to secure enough support for radical corporate governance reform.

Another government discussion paper in January 2017 rehabilitated industrial strategy in preparation for a post-Brexit economy.

The ‘10 pillars’ for rectifying longstanding structural weaknesses included prioritising improvements in infrastructure; investing in research and innovation; specialist institutes delivering high-level training in STEM, along with upgraded skills and vocational education more generally; and fostering of world-leading business sectors.

Even before release of the follow-up white paper, initial impact was seen for example in government support for transition to a low-carbon economy, notably development of electric cars, battery technology and smarter, more flexible electricity grids, forming part of its clean growth strategy published in October this year.  

The changing nature of employment in the ‘gig economy’ also exercised policymakers. Apart from a new director of labour market enforcement, in July 2017 came publication of the Taylor Review of Modern Working Practices commissioned by May. Setting out seven principles essential to fair and fulfilling work, it sought to reconcile the flexibility and innovation afforded by new technology and digital platforms with protections against workforce exploitation. No promise of new primary legislation extending statutory rights was forthcoming pending a full government response.

Broken markets

Former public utilities provide leading examples of poorly functioning markets because of regional monopoly or over-dominance by a few large suppliers. Thus, failings in the energy market brought the saga of an ‘on-off-on’ Conservative pledge for a standard variable tariff price cap, with the regulator Ofgem now being statutorily compelled to act. The independent government-commissioned Helm’s cost of energy review in October 2017 envisaged more fundamental market restructuring.

Public services have themselves become overdependent on a small number of large outsourcing companies. IT procurement especially is a field where asymmetrical expertise between purchasers and providers dogged technically complex contracts.

So many of the projects suffered from inflated budgets, delays and even failure to achieve intended purposes – ‘buying lemons,’ in the words of Anthony King and Ivor Crewe in The Blunders of Our Governments!

Another badly malfunctioning market is housing, seen in persistent undersupply of affordable housing to buy or rent. Changing patterns of occupation meant greater reliance on a weakly-regulated private rented sector, and local councils also forced to place more families in temporary accommodation. The impression grew that public authorities prioritised the interests of developers over the housing needs of communities.

The extent of the problem was acknowledged in the February 2017 government white paper, ‘Fixing Our Broken Housing Market.’ The ‘broken’ part of the equation was, however, more conspicuous than the ‘fixing.’

A series of modest policy measures announced since the general election including in the November Budget – given previous political priorities, most interesting of which are more receptive stances towards council house investment and the social rented sector – show ministers struggling to catch up with the scale of a multifaceted supply crisis. 

So, the pendulum is patently swinging towards greater intervention in markets. Another pattern can be discerned, however: some substance to this process when the state is a facilitator or pump-priming funder, yet greater reluctance to act when taking on powerful corporate interests.

A prime casualty: strategic co-ordination 

School education is replete with market downsides. Parental choice spills over into other public policy goals such as transportation and travel congestion. Economic and social capital confers advantages in pupil access to stronger-performing institutions. Nor is it unknown for schools themselves to game the system for competitive advantage!

The Conservative Party’s flagship programme of free schools, integral to the diversity and choice agenda, demonstrated barriers to market entry were not insurmountable; yet disproportionate start-up costs adversely affected mainstream education investment.

Despite mass academisation, clustered increasingly in locally autonomous chains, the poor performance of so-called ‘orphaned’ institutions made them unattractive to sponsors. This policy also undermined the ability to strategically plan at a time when demographic trends mean expanding school populations.

Viable free school proposals suffer from a degree of randomness, creating surplus capacity in some areas and shortage of pupil places elsewhere. Yet local authorities lack powers to require academies (a majority in the secondary sector) to expand where a need exists, at the same time prevented from opening their own new maintained schools.

Little wonder the Public Accounts Committee questioned the coherence and cost-effectiveness of current policies.

In the health service the market ethos gained a foothold from the 1980s, initially through internal markets then increasingly involvement of private providers, culminating in the commissioning model and open competition obligations enshrined in the 2012 Health and Social Care Act.

NHS England’s 44 sustainability and transformation partnerships (STPs) are, in effect, attempts to unwind the structural fragmentation induced by reforms over the last 30 years, reconfiguring provision accordingly for a growing and ageing population.

The accountable care systems/organisations into which STPs are morphing, operational in pathfinder areas from 2018-19, are voluntary partnerships of clinical commissioning groups, health trusts and local councils.

Uncertain in legal status, differences of culture between the NHS and local authority social care in any case persist, amplified by concerns about lack of inclusivity in the processes through which local plans have evolved, and not necessarily therefore laying foundations for a more creative interface.

There are even disputes over the role that targets for reducing hospital discharges should play in determining allocations from the Better Care Fund, as cumulative financial pressures on both services take their toll.

Holistic place-based delivery has brighter prospects where built into local authority devolution deals, notably Greater Manchester’s Health and Social Care Partnership. 

Conclusion

Markets in public services sit awkwardly with the strategic planning and service co-ordination required if social needs are to be met. At times they can appear almost anarchic. Some ministers after 2010 even saw it as a badge of honour to embrace ‘disruptive’ models of change.

At the very least, market forces introduce complex hybrid institutional logics which, as Chris Skelcher and Steven Rathgeb Smith point out in the September 2017 edition of the Public Money & Management journal, demand very sophisticated performance management regimes.

It is not difficult, therefore, to understand why architects of the post-1945 welfare state removed core public services from the marketplace (or heavy reliance upon philanthropic activity) and celebrate the insight embodied in that settlement. It is as if we have to learn those lessons all over again. Fundamental policy challenges are similar to then, albeit requiring solutions fit for purpose in contemporary society.

And by turning it into a pervasive organising principle, market fundamentalists jeopardise the very freedoms they espouse. Divisive identity politics provide ample opportunity for leaders with authoritarian instincts to exploit the social discontent thereby sown. Warning signs are indeed already legion!