Can we make things again?

Denis MacShane on a challenge for Labour's second term.

hen Labour came to power in 1997, it promised to abolish compulsory competitive tendering (CCT) and to end the ideology of private good/public bad. Instead it has argued that "what matters is what works". Unfortunately, four years later, local government is facing the greatest pressure for privatisation that it has ever experienced and the ideology seems to be "what matters is what works but the private sector works better". This is not an evidence-based ideology. It reflects the persuasiveness of Thatcherism and the growing influence of corporate Britain on the Labour Government.

The pressure to privatise comes in four forms. Firstly CCT has been replaced by Best Value. The best value regime, drafted by civil servants who are still influenced by Thatcherism, emphasises the third 'c' in the regime, 'compete'. Under best value there is no obligation to accept the cheapest option - an improvement on CCT- but local authorities have to deliver 2% savings a year; they have to go through an expensive and bureaucratic process of best value review on all their services not just the ones that were subject to CCT; and where services are deemed to be "failing", the council can be ordered to outsource them. It is all too easy to read into the best value process an obligation, not just to keep an open mind about who might deliver the services, but positively to prefer the private sector option to any in-house alternative.

The second pressure comes from financial controls. 75% of council funding comes from central government increasingly in the form of special grants with funding tied to particular forms of spending. Capital spending remains tightly controlled. In the Finance Green Paper issued last year, the government proposed a prudential framework which would allow local authorities greater freedom to borrow where, through the investment, they would generate sufficient revenue streams to cover the cost of borrowing. But we are still waiting for the details and implementation of this reform. If the proposal is not in the Queen's Speech immediately after the election, it will be 2004 before it is implemented. In the meantime, money is freely available under the Private Finance Initiative scheme and PFI has become "the only game in town" despite serious doubts as to whether it represents value for money and the question of its longer-term affordability.

The third pressure is political support for public/private partnerships (PPPs). While critics of PFI have questioned the economic case for PFI, it is becoming increasingly clear that the political and public policy case for public/private partnerships is now being promoted. We already have had the bizarre spectacle of the failed privatisation of British Rail being used as a model to develop a public/private partnership for the London Underground. Meanwhile the IPPR set up a commission in 1999 to explore PPPs that will report immediately after the election. It looks like this will conclude that there is no macro-economic case for PFI and that there are some doubts about the value for money of some of the large schemes in health and education. But far from seeing this as the end of privatisation, the commission is likely to argue that partnership would work better if it had a wider remit and if there are no boundaries between the public and private sector. Could PFI be expanded into areas currently excluded such as clinical services in the NHS or the management and employment of teachers? The Commission is funded by corporations such as KPMG, Norwich Union PPPs and BT so it is hardly surprising that it will be looking for new markets for the private sector.

Finally, the three core services of local authorities, education housing and social services, are being targeted directly. For sometime Ministers have been openly supporting and encouraging the development of a market in education services, in particular, those which have up to now been provided largely by local authorities. "Failed" local authorities have been pushed into outsourcing at least parts of their education service. IPPR, the New Local Government Network and Chris Woodhead have all been arguing for the end of LEAs, with the latter two seeing clusters of schools buying services direct from the private sector.

In housing the government has been pushing local authorities into large scale voluntary sector transfer of their housing stock to housing associations and 130 local authorities have now complied. Almost no new central government money is available for new council housing - money for new-build comes through the Housing Corporation. And, in social care, the market grew by 50% between 1992-97 under Conservative legislation. Now the NHS Bill is promoting new health bodies - care trust - to take over local authority health-related services which will mean that elected and accountable councillors will have less control over budgets and services for which local authority has a statutory responsibility. There is a reserve power in the Bill for the Secretary of State to set up such trusts compulsorily where local authorities are deemed to be performing inadequately. Such trusts could commission from the private sector services that are currently provided by local authority staff.

Does all this matter? The LGIU would argue that it does and has recently published a special issue of its 'Briefing' magazine on these issues, (issue 138). This makes the following arguments. Firstly the private sector is not necessarily more efficient than the public sector. For example, in 1999/2000, 65% of the complaints to the Local Government Ombudsmen about the administration of housing benefit in London came from just 4 councils; Lambeth, Hackney, Islington and Southwark. These 4 councils had contracted out the administration of their housing benefit to 3 different, large private sector companies. Meanwhile, in next door Camden, the local authority has beacon status for this service.

Secondly, there is evidence that what "productivity" gains are achieved are mostly due to savings on labour costs. Even with TUPE workers are not fully protected and new staff are usually employed with cuts in pensions and conditions. None of the companies currently bidding for PFI contracts offer a defined pension scheme to new employees. Unison has been documenting the growth of a two-tier workforce with women particularly affected. Privatisation is building up problems of pensioner poverty and social exclusion.

Thirdly, a private sector contractor will operate to the terms of their contract, maximising return on investment rather than operating in the public interest. It is very difficult for the public sector to draw up a contract that has incentives in it to deliver to public agenda, particularly where that agenda changes over time. An example of the problems that are caused can be given by the private sector companies which led on the New Deal for Young People in 10 areas. The incentives in the contract encouraged the providers to push the young people into unsubsidised jobs rather than subsidised jobs or training. So the providers did this despite the fact that nationally 44% of unemployed young New Dealers in unsubsidised jobs are back on the dole in 13 weeks - double the rate for subsidised jobs. And despite the private providers' so called good relationship with the private sector, they were unable to improve on the retention rate.

A key argument against privatisation is that there are many reasons why local authorities will not be able to play their new community leadership role if they do not deliver services. Experience has shown how well authorities with directly provided services can respond to emergencies and disasters; the same may not be true of a council that does not have its own staff. Providing services allows local authorities to 'learn' what works and what doesn't. If a local authority is tied into many contracts with limited flexibility to change direction, it may have problems meeting needs identified from its community leadership. Crucially a local authority's track record and knowledge of service delivery can carry weight in negotiations over community leadership and enables it to deal with fragmentation by joining up different services in a holistic way. As George Jones and John Stewart recently argued in the Local Government Chronicle, cumulative privatisation could leave local authorities with the rhetoric of community leadership but without the means to make it effective.

And finally there is the issue of accountability. If a council service does not work you go to your local councillor to complain. You know who is responsible. Furthermore an elected local authority ensures that accountability of services is to the communities that are served. A voice is given to the poor and disadvantaged - the market does not give them this voice. Privatisation is undermining the councillor's role, which is to ensure that local government provides goods and services, develops democracy and citizenship and promotes justice and equality.

Local authorities are not perfect bodies but there are other ways than privatisation to get improvement. Increasing participation, developing peer review and support, supporting the public sector ethos, spreading good practice, and openness, transparency and accountability can all yield rich dividends. This should be what "new" Labour is all about.