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Liberal Democrats have launched the initial findings of the party's public services policy review. ...
Liberal Democrats have launched the initial findings of the party's public services policy review.

Liberal Democrat leader Charles Kennedy and Liberal Democrat MEP Chris Huhne, chair of the working group, outlined the major themes which have emerged from the group's debates so far.

Mr Kennedy said:

'Liberal Democrats are having an open, thorough and wide-ranging debate on how best to deliver high-quality, accessible public services.

'The working group has risen to the challenge of looking at all the options for reform of public services.

'This is a very positive paper and will provide a good platform for debate at our spring conference in Manchester.'

Chris Huhne said:

'The working group was asked to look fearlessly at all the options for reform and improvement of public services. No totems, no shibboleths, no taboos.

'Four main themes have emerged from our debates, which we will be taking to the party in Manchester.

'We have looked at the possibility of an NHS tax to solve the present funding shortfall. Liberal Democrats are concerned to preserve access for all, especially the elderly and the low paid. Proper funding will also enable patients to have a degree of choice.

'The recent case of Rose Addis demonstrated the urgent need for decentralisation of public services. It is a ridiculous situation when people feel that the only effective complaint can be made in prime minister's questions. The buck has to stop closer to people who use public services.

'Effective decentralisation will allow public sector pay to keep pace with regional economies. The 'one size fits all' policy has led to the present problems in recruitment and retention for teachers, police and NHS staff.

'In addition, groups of public service employees should be encouraged to establish mutuals or co-operatives and provide services.'

Chris Huhne added:

'We make an important distinction between funders and those who deliver services.

'The paper is clear that the public sector is certainly not the second best option for delivery, indeed, it has considerable ability to absorb and implement reform. Private sector involvement must avoid locking-in policy decisions for long periods.

'The policy review recognises that we must adopt a culture of the best solution for our public services. That means allowing the public sector, the private sector and not-for-profit organisations all to play a role in ensuring high quality public services.'


Public Services Consultation Paper: Summary

The consultation paper sets out some of the debates that the Liberal Democrat Public Services Working Group has been having about the key issues in public services provision. It also draws on findings about the experience of other countries, an important part of the group's remit.

This document does not represent any firm conclusions and will be subject to further input from both within and outside the party.

The paper first defines terms and principles. It then looks at some key problems - over-centralisation, lack of funding, pay - and discusses solutions. The largest part of the paper then turns to a menu of options by which those responsible for public services - whether locally, regionally or still nationally - could improve them. The group's remit does not ask us to produce detailed policy in each area, but to examine issues that cut across the public services. Moreover, one of the advantages of decentralisation is that different areas would experiment with different solutions, leading to a process of learning by doing. Some key issues on which we will be inviting feedback are:

A. Funding. How should we pay for higher levels of funding for public services? Could taxes linked to services - such as an NHS tax - make it easier to obtain agreement for higher levels of funding? Are there ways of funding services other than through general taxation that we should pursue?

B. Decentralisation. How far can we devolve particular services? Should we seek to have groups of services under the democratic supervision of local or regional tiers, or is there scope for directly democratising particular services? How do we make corresponding cuts in Whitehall?

C. National Standards. How important is it to retain some minimum standards across the board? How and by whom should such standards be set?

D. Non-traditional providers. How far and on what basis can providers from the mutual/not-for-profit sector and the private sector play a role in public services provision? Can we encourage old-fashioned state-owned units to transform themselves into co-operatives and mutuals?

E. Improved management. How can we improve morale and the performance of management within the public sector? How can the budgeting process be made better? Are the reporting data sensible for proper accountability?

More detail on all of these topics is given in relevant chapters of the paper. We will also be happy to receive submissions on topics that we have not specifically addressed.

Christopher Huhne MEP, February 2002.

This consultation paper is presented as the first stage in the development of Party policy on Reform of Public Services. It does not represent agreed Party policy. It is designed to stimulate debate and discussion within the Party and outside; based on the responses generated and on the deliberations of the working group, a full Reform of Public Services policy paper will be drawn up and presented to Conference for debate.

The paper has been drawn up by a working group appointed by the Federal Policy Committee and chaired by Christopher Huhne MEP. Members of the group are prepared to speak on the paper to outside bodies and to discussion meetings organised within the Party.

Comments on the paper, and requests for speakers, should be addressed to: Christopher Huhne MEP, Public Services Policy Working Group, Policy Unit, Liberal Democrats, 4 Cowley Street, London SW1P 3NB. Email Comments should reach us as soon as possible, and in any event no later than 5th April 2002.

Federal Policy Consultation Paper No. 58

ISBN1 85187 678 2(Reg.) February 2002

Further copies of this paper can be obtained, price£2.00 inc. p&p, from:

Liberal Democrat Image, 11 High Street, Aldershot, Hampshire

GU11 1BH

Tel: 01252 408 282

Copies in large print and on audio tape are available from the Policy Unit, Liberal Democrats, 4 Cowley Street, London, SW1P 3NB

Published by the Policy Unit, Liberal Democrats, 4 Cowley Street, London SW1P 3NB.

Layout and Design by Helen Belcher.

Printed by Contract Printing, 1 St James Road, St James Industrial Estate, Corby, Northants NN18 8AL.

Printed on 100% Recycled Paper


Chair's Introduction 5

1. Public Service Definitions and Principles 6

2. Devolution and Decision-Making 10

3. Funding 16

4. Public Sector Pay and Conditions 21

5. Funders and Providers 26

6. Measuring Value for Money 35

7. The Public Servant as Controller 38

8. Better Providers 38

Annexe One: Group Remit 44

Chair's Introduction

This consultation paper sets out some of the debates that the group has been having about the key issues in public services provision. It also draws on findings about the experience of other countries, an important part of our remit (see Annexe One). We have yet to reach any firm conclusions and very much welcome input from both within and outside the party.

This paper first defines terms and principles, as we were asked to do. It then looks at some key problems - over-centralisation, lack of funding, pay - and discusses solutions. The largest part of the paper then turns to a menu of options by which those responsible for public services - whether locally, regionally or still nationally - could improve them. Our remit does not ask us to produce detailed policy in each area, but to examine issues that cut across the public services. Moreover, one of the advantages of decentralisation is that different areas would experiment with different solutions, leading to a process of learning by doing. Here are some key issues on which we hope for feedback:

A. Funding. How should we pay for higher levels of funding for public services? Could taxes linked to services - such as an NHS tax - make it easier to obtain agreement for higher levels of funding? Are there ways of funding services other than through general taxation that we should pursue?

B. Decentralisation. How far can we devolve particular services? Should we seek to have groups of services under the democratic supervision of local or regional tiers, or is there scope for directly democratising particular services? How do we make corresponding cuts in Whitehall?

C. National Standards. How important is it to retain some minimum standards across the board? How and by whom should such standards be set?

D. Non-traditional providers. How far and on what basis can providers from the mutual/not-for-profit sector and the private sector play a role in public services provision? Can we encourage old-fashioned state-owned units to transform themselves into co-operatives and mutuals?

E. Improved management. How can we improve morale and the performance of management within the public sector? How can the budgeting process be made better? Are the reporting data sensible for proper accountability?

More detail on all of these topics is given in relevant chapters of the paper. We are also happy to receive submissions on topics that we have not specifically addressed.

Christopher Huhne MEP

Public Service Definitions & Principles

1.1What is a Public Service?

1.1.1Public services are any service provided by, or paid for by, the public sector directly to members of the public.

1.1.2The term 'public service' has generally applied to education, health, social services, the police and public transport. 'Public service' is not applied to transfer payments such as the payment of pensions or benefits which simply involve the payment of money, or to services such as DTI export promotion programmes which do not directly benefit the ordinary citizen.

1.1.3The areas which are described as public services share one overall characteristic: society has decided that the market will fail to provide such services adequately, and that government intervention will result in a better outcome. They are also areas where simply giving the poor more money is not a realistic way of addressing the market failure. We do not have a public food service because the levels of benefits are supposedly set at a level which should allow everyone to eat properly. We cannot rely on housing benefit to solve all housing need, however, because of the structure of the housing market. For each public service, normal market mechanisms are not appropriate for all or some of the following reasons:

Access: the service is considered one that all people should have access to if they need it, and the market cannot deliver that service without charging at a rate that would make it inaccessible to many, for example, health care.

Public good: the service benefits society as a whole, and consumption by one user does not reduce the amount of the service available to others, for example street lighting or national defence. Society as a whole should therefore bear the cost.

Merit good: a service which people would not be likely to pay for individually, but which people are willing to make a small contribution to pay for collectively because they think it is in some sense 'a good thing', for example, the arts, preserving ancient monuments.

Market inapplicability: Markets require competition and risk to operate effectively. Competition means that there must be two or more entities seeking to provide a similar service, and that people must be able to choose and change between them. Risk means that there must be a chance of a provider becoming bankrupt if they do not provide a service that attracts enough customers. Without those conditions existing, markets cannot operate effectively. Public services are different because it is often the case that those conditions do not exist, for three main reasons. First, where a service benefits society as a whole, it is often not efficient for a market mechanism to charge individual users. Second, bankruptcy is not a tolerable option for many public services. Third, some services are natural monopolies and competition is not possible. The police force is an example where all three apply.

1.1.4Failure of the private sector to deliver a service in normal market conditions does not mean that it cannot deliver that service at all. Either regulation or subsidy may help the private sector provide a public service. Regulation may be particularly appropriate if the existence of a monopoly is perceived to be a problem. Also, the circumstances of market failure may change over time. For example, it is now much easier to charge road users per mile travelled using modern technology than it was in the days of toll booths. On the other hand, the advance of genetic technology may make it increasingly difficult to pool medical risk through private insurance.

1.1.5Their specific functions can all be divided, in one form or other, into the following categories:

Funding: many are funded by government using the revenue from taxation. If they are funded other than out of taxation, financing covers the real cost - on the basis of a true comparison as to both capital and income - to the public purse of any private finance.

Procurement: the purchase/leasing of, for example, buildings and equipment. Particularly where capital assets or high-value consumables are purchased, this involves assessing the cost-effectiveness of procurement.

Internal systems: the management and administration of the service, including the management of any contracted-out functions; and

Delivery: the service that the public actually receives, for example, medical treatment.

1.2Liberal Democrat Principles on Public Services

1.2.1Choice: People should be able to choose who will deliver their services wherever practicable. Individuals could, for example, have a choice of providers within the public sector, or of co-operative ventures, volunteering and mutualism, as well as the classical choice of public versus private. Some choices which contradict general principles of non-discrimination are not desirable however (eg, freedom to choose not to be treated by medical staff of a particular race). We must be clear that effective choice implies that there are enough resources to ensure some spare capacity.

1.2.2Decentralisation: Where government runs public services, decisions should be made at the most local effective level. Giantism and Whitehall's control freak tendencies are a besetting problem.

1.2.3Quality: Choice between providers can help to ensure quality. However, the quality of all public services depends partly upon adequatelevels of funding, which must be decided by political representatives. Proper funding should go hand in hand with regular and impartial inspection and monitoring (whether led nationally or by local authorities) by those who are competent to perform it.

1.2.4Fairness: The burden of paying for a public service should be as equitably distributed as possible, according to ability to pay, and there should be access to high quality services regardless of individual financial circumstances. It follows that the tax system should be progressive, and that where user charges are imposed (eg. for home care) these too should be geared to ability to pay.

1.2.5Accountability: Public services should be democratically accountable, and should have speedy, independent and impartial complaints procedures at a local level, with rights of appeal. Lines of responsibility must be clear and uncontestable so that blame cannot be deflected (eg Railtrack).

1.2.6Transparency: The public should be able to know who is making decisions, and how well their services are performing, the rate of improvement and the realism of targets. This will involve professionally competent bodies independent of government developing information systems to allow sensible comparisons to be made, and to ensure targets do not distort provision.

1.2.7Efficiency/Value for Money: Given the large sums of public money involved and the pressures on budgets, value for money is essential. Indeed, the public case for high public service levels will only be successful if there is confidence that money will be used wisely and that there is a constant striving for improvement.

1.2.8Valuing public service: There is a strong element of altruism in many of Britain's public servants. This means that people are willing to work in difficult conditions for relatively small financial rewards. We value that commitment. Our public servants should not be exploited. They should be paid adequately and have relevant training for their job. We also remember that those working in the private sector may also offer a service ethos.

1.2.9Professional responsibility: Public service professionals should be as free as possible to carry out their jobs within the context of public and/or democratic accountability. That is the best way to promote innovation.

1.3Current Problems in Public Services

1.3.1Lack of choice: there is not enough choice within the public sector over the nature of public service provision, and people do not have affordable alternatives if they are dissatisfied with public services. In addition, while people have become accustomed to being able to access private sector services and facilities at flexible times and through flexible mechanisms, for example late night-shopping and 24 hour helplines, public services are seen to lag behind in their 'user-friendliness'.

1.3.2Centralisation: too many decisions are taken in Westminster or Whitehall, when they should be made by more local levels of government or by professionals.

1.3.3Poor quality: public services in the UK do not deliver such good results as many of our European neighbours. One reason for that is that they are severely underfunded in comparison to other countries. A second reason is poor standards of training and supervision of staff. A third is inefficient use of funding through financial barriers between government agencies. A fourth is the UK's comparatively high degree of centralisation.

1.3.4Unfairness: too often, the best or quickest facilities are only open to those who can afford to pay for them or are adept at working the system.

1.3.5Lack of accountability: many people do not feel that they have an effective voice when public services fail to deliver. Lines of complaint and control are too long.

1.3.6Lack of transparency: central government is good at shuffling off responsibility for poor services while retaining the reality of control. Perfomance targets are often political instruments designed to confuse as much as to enlighten. Decision making, for example by NHS Trust Boards, is not conducted in an open manner.

1.3.7Poor value for money: poor management can lead to significant waste eg. on IT systems that don't work (of course, budget overruns are not unknown in private sector projects). There are also wide variations in the costs of running services between different providers - the variation in the costs of nursing services between different Critical Care Units can be as much as 60%, and the consultancy costs in such units can vary by a factor of three.

1.3.8Poor pay and low morale: many public servants are underpaid and many more are demoralised by their workload and bureaucratic interference.

1.3.9Professional responsibility: lack of professional freedom has meant that public servants are overly constrained by central controls and cannot innovate.

Issues to Consider

1. What are the key public services which should be our priority for attention (eg health care, education, social services, housing, transport, policing)?

2. What should be the principles we should apply to reform of all public services?

3. What are the main current problems with the public services?

Devolution and

Decision - Making

2.1The Case for Greater Devolution

2.1.1The public services in the United Kingdom, and particularly in England, are characterised by a high degree of centralised control, particularly over financial matters.

2.1.2Whereas in the UK 78 per cent of all government revenue is raised by central government, in Scandinavia the percentage is generally in the twenties, in Germany it is 29 per cent and even in supposedly centralist France it is still only 44 per cent. Revenue-raising often determines responsibility and control. Where more revenue is raised by lower tiers of government, they have proportionately more power.

2.1.3Political control over public services is much more decentralised in most of Europe. Although Denmark has a population of just 5.3 million - far smaller than the 8 million people in South East England - its popular and tax-funded health service is run by its 14 Counties and two cities. Denmark spends modestly more than we do as a proportion of national income - about 1.2 per cent - but has the highest satisfaction ratings in Europe. In Germany, the Länder (regions) have complete control over their own school systems.

2.1.4Within the UK, the Scottish Parliament now has complete control over management (although not funding) of public services in Scotland.

2.1.5Liberal Democrats have always been committed to the principle of taking decisions at the lowest effective level. Devolution brings a number of clear advantages:

Democracy: Each elector's vote and voice has a greater weight in smaller political unit.

Accountability: Access to political representatives is easier at lower levels, and new centres of political decision-making tend to promote a 'civil society' around them, eg through local/regional pressure groups. Comparison between performance in different regions or localities can promote political debate and give a spur to improvements.

Responsiveness: The lower the level of government, the greater the sensitivity to particular local needs, conditions and preferences (as opposed to a Whitehall 'one size fits all' approach).

Manageability: Public services run on smaller scales are generally easier to manage than large national scale operations. The NHS in September 2000 employed a total of 990,940 staff, far more than any private-sector employer in Europe.

Experimentation: Innovations can be tried out at local level. If they work, they can spread rapidly, particularly if the centre gathers, analyses and publicises information on performance.

2.1.6With a strong measure of devolution, including more devolution in Scotland, Northern Ireland and Wales, it would be possible to merge Whitehall departments and cut the number of ministers. For example, the existing territorial departments could be replaced by a single Department for the Nations and Regions. The Departments of Health and Education could be merged into a leaner Department of Public Services. This would involve national tax cuts to offset increased revenue-raising in the regions.

2.1.7We must recognise, though, that devolution can conflict with other policy goals. It will almost certainly result in different standards in different parts of the country. This is problematic for national minimum standards. If such standards are set at a high level, all the resources of a devolved government may be taken in delivering them, leaving little freedom to innovate. But if such standards are set at a low level, then there may be great differences in entitlements across the country, leading to phenomena such as the 'postcode lottery'. Against that, however, centralised Whitehall control is clearly incapable of delivering common standards because of its remoteness.

2.2Devolution of Functions

2.2.1Within the UK, Scotland has achieved substantially devolved control over public services. Other than in financial matters there is little further devolution we would wish to see. In Northern Ireland, subject to cross-community support, we would also wish to see greater fiscal devolution, along with matters such as policing. In Wales, there is a considerable degree of devolution in matters that require only ministerial decision or secondary legislation, but no control over issues where change requires primary legislation. There is also no tax-varying power. Liberal Democrats support giving primary legislative powers to the National Assembly for Wales. Issues of devolution below the Parliament/Assembly level are for the Scottish, Welsh and Northern Ireland parties to decide. Financial issues are considered below.

2.2.2In England, regional devolution is much less advanced at the political level, although there is a range of regional quangos. Liberal Democrats have consistently supported elected regional assemblies in England to take over the existing regional quangos, and in the longer term both to adopt further powers drawn down from the centre, including primary legislative powers, and take tax-raising powers.

2.2.3There remains scope for debate over exactly what functions are best devolved to regional (or indeed local) level, and what role should be retained at the Westminster level.

2.2.4There are some very obvious ways in which bodies currently accountable to a Secretary of State could be democratised at the regional level - for example, the existing NHS Regional executives could readily come under the authority of the relevant Regional Assembly. On this model, the centre could be left essentially with a public health co-ordination role. Equally, regions could take over strategic management of education at a regional level, co-ordinating and linking secondary education, further and higher education and work-based training schemes.

2.2.5However, there remain issues to be resolved. There is a case for retaining some kind of national minimum standard setting role. Do we need to retain something like the NHS National Service Frameworks, for example ? If so, is there some way in which national minimums could be agreed by local authorities and devolved tiers ? One way of doing this might be to use the same procedure that we have advocated for agreeing a needs-based formula to distribute central grants within the UK. This involves a Finance Commission for the Nations and Regions, comprising representatives from those nations and regions, reaching agreement. Whether or not nationwide standards are set, there is a strong case for having an agreed system for collecting and reporting information on public services, so that clear comparisons can be made between performance in different areas and best practice can be spread quickly.

2.2.6If we contemplate the most radical degree of regional decentralisation, are we prepared to live with the possible consequences, eg. some regions choosing not to allow particular treatments on the public health service?

2.2.7If standards of medical care, for example, were to vary between regions, would it be necessary to link entitlement to residence or tax-paying? Clearly, there would have to be agreement on the provision of emergency services. However, other services might be linked to residence. This is the case in the United States, where Vermont charges 7 cents in the dollar more income tax than neighbouring New Hampshire, but the population chooses it willingly for better services.

2.2.8It is also likely that English Regions would wish to move towards devolution at different paces. This raises the issue of how we could deliver greater local autonomy and flexibility even in those areas in which there was not full regional devolution for some time. Would it be better to try and achieve a large minimum measure of devolution to all regions in the initial phase ?

2.2.9Even in the absence of full-blooded regional devolution, in some existing highly centralised services there could be more local autonomy or community input. The King's Fund has recently published interesting ideas along these lines for the Health Service. We could also look at the elected school boards in the USA, and perhaps apply a similar model to NHS Trusts. Employee representatives on boards are also possible. In the longer term, however, devolution to a democratic body with responsibility for a wide range of services is probably preferable as it allows a broad view to be taken on shifting resources between services and building strategies to ensure services work coherently together.

2.2.10If the full advantages of decentralisation are to be won - particularly the likely increase in experimentation and social entrepreneurship - one central function may need to be reinforced, namely information-gathering and analysis. This is the way to spread best practice and enable an informed political debate in each region. The Audit commission could be given an expanded remit to report annually on the effectiveness of decentralised public service delivery.

Issues to Consider

4. What existing government functions could or should be devolved to the regional level?

5. What role should central government retain in setting minimum standards even in areas where management was devolved? Would it be possible to for nations and regions within the UK to negotiate on this issue?

6. Are there interim solutions to deliver a greater regional responsiveness in the absence of elected regional assemblies?

7. What functions could be devolved all the way from central to local government?

8. What changes to the Audit Commission and other institutions need to be made to ensure the information and analysis function of the centre performs well?

2.3Financial Devolution

2.3.1Liberal Democrats have a long standing commitment to giving local and devolved tiers of government greater freedom to control their own destiny in financial matters. Since finance often determines choices, this is essential for meaningful decentralisation.

2.3.2Necessary financial reforms fall into three broad categories: borrowing powers, distribution of central grant and revenue-raising freedom.

2.3.3First, central government controls over investment and expenditure by lower tiers (ostensibly justified by the need to control the Public Sector Borrowing Requirement) should be relaxed. Lower tiers should be free to raise money. This would have a major impact on the ability of local government and devolved tiers to invest in projects that they are currently unable to support. If prudential controls are thought necessary, projects might be subject to approval in a local referendum.

2.3.4There are two options for decentralised borrowing. Either local authorities could be free to borrow from banks or the capital markets (e.g. through bond issues) to finance investment but not current spending. They would do so on market terms, paying a risk premium according to their perceived responsibility and safety.

2.3.5Alternatively, local and regional authorities could borrow for investment from the Treasury, with a 'shadow' credit rating to fix their interest rate premium over the rate that the Treasury pays the market for the money. This second scheme would allow the public sector to continue to borrow overall on the most advantageous terms (with local authorities paying an average risk premium for their rating level to the Treasury), but would leave the Treasury with the temptation to intervene and regulate the flow.

2.3.6In either case, it is possible that the aggregate of local borrowing decisions at any one time would not be compatible with optimal macro-economic management or our EU commitments to a 3 per cent of GDP limit on overall borrowing. Should the Treasury have the right to set up and police a queue to determine the timing of borrowing?

2.3.7Secondly, we should reform the existing system for distributing central government grant to devolved bodies. It is current Liberal Democrat policy to replace the existing Barnett arrangements (which are based on applying a simple per capita formula to annual changes, while preserving historic anomalies) with a needs-based formula, to be devised by a new Finance Commission of the Nations and Regions. Such a formula should be set for a period of years to allow a reasonable basis for planning programmes and avoid arbitrary changes from the centre designed to influence local decisions.

2.3.8Thirdly, although central taxes and grants will continue to be needed to take account of differing tax bases and needs, we should in the longer term give all devolved tiers and local government greater freedom to raise their own revenues directly. Without this power, representative bodies cannot truly reflect the preferences and priorities of their populations in the level of services which they deliver. Nor can they be properly held accountable. At the local level in England, we support replacing council tax with local income tax (LIT), and giving local authorities the power to replace the business rate with Site Value Rating (SVR). Regional tiers could have a regional element of LIT, SVR or business rates. They would therefore have a menu of revenue-raising options. As the proportion of regional and local spending met from these sources rose, the amount of central taxation would fall.

2.3.9A substantial exercise in pruning Whitehall functions and spending would be important if decentralisation is to work. It must not be seen as a recipe for more government overall, but merely for more responsive and local government. This exercise should involve zero-based budgeting - reconsidering the essential functions that need to be retained in London. In an incoming administration, ministers might be invited to decide collectively on public spending priorities before knowing which ministries were theirs. This system for ensuring an unbiased collective judgement and a radical change in priorities was used effectively by the new Finnish 5-party coalition government in 1995 .

Issues to Consider

9. What prudential regulations should remain to prevent excessive borrowing by lower tiers of government? Should major borrowing be subject to referenda?

10. What other options are there for local and regional revenue raising?

11. Would voters be more prepared to support local tax increases to fund local health facilities, for example, than national tax increase for the NHS as a whole?

12. What is the best means of ensuring that Whitehall functions are cut back as regional and devolved functions grow?


3.0.1This chapter considers the scale and source of funding for public services. How to use the funding to procure services and assets is considered in chapters 5 to 8.

3.1The Scale of Funding

3.1.1The UK's public services are generally less well funded than in most comparable countries. The shortfall in health spending is about 1.3 per cent of GDP compared with the EU average (On OECD figures, UK spent 6.7 % of GDP in 1998 compared to 8.0% for the EU average). In education, the UK spent a lower share of Gross Domestic Product on education (at 5.3%) than eleven European countries, including Austria (5.4%), Belgium (5.6%) Portugal (5.8%) and the Republic of Ireland (6%), as well as obvious high-spenders such as Sweden (7.8%).

3.1.2Public sector investment, a key factor in the provision of services, has been particularly low in the UK for many years as it was perceived as an easy political cut. Public sector net investment fell from 5% of GDP in the mid 1970s to slightly more than 2% in the late 1970s to a 1-2% range from the early 1980s to 1995. Since then it has consistently been below 1% of GDP - although it is forecast to rise to 1.8% of GDP in 2003/4. This is only partially accounted for by privatisation.

3.1.3Lower funding is reflected in lower levels of service. For example, Britain has approximately 1.7 physicians per thousand population, compared with 2.9 in France and 3.4 in Germany. Interestingly, within Britain Scotland (2.25) does much better than England & Wales (1.6). Britain also does badly in a comparison of pupil/teacher teacher ratios - for primary schools, Britain's ratio is worse than in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, the Netherlands, Norway, Spain, Sweden and Switzerland.

3.1.4Would more funding help? It is possible to pay more for less. The USA for example has 2.6 physicians per thousand population, but worse infant mortality and life expectancy than Britain. But it is usually possible to deliver a better service with higher funding levels, and those countries with more public service professionals usually perform better on relevant outcome indicators.

3.1.5Liberal Democrats have consistently called for targeted additional investment in the public services to address this funding issue. Any shortfall in capital spending may appropriately be met by additional government borrowing, but current spending can only be responsibly financed through taxation. The 2001 General Election Manifesto called for approximately£8.5 billion additional expenditure in the first full year of a new Parliament.

3.1.6Funding is intimately related to choice, a key Liberal Democrat theme. If there are no spare beds or pupil places in the hospital or school that you want, you have no effective choice. So proper funding is essential to achieve a key Liberal Democrat objective. Funding may also in time follow the choices that patients and parents make, introducing an element of internal market discipline into the public services.

Issues to Consider:

13. How important is funding as opposed to structural reform in delivering better public services?

14. Should additional funding come only from general taxation?

15. Are increases on the scale previously proposed pitched at the right level?

16. What areas should be priorities for additional funding? Are there any parts of the overall budget which should be cut?

3.2General Taxation and Hypothecation

3.2.1Planned increases in the last Manifesto were funded from general taxation, in the form of a 1p increase in basic income tax, a new higher rate of income tax at 50% for incomes over£100,000 pa, and changes to Capital Gains Tax.

3.2.2There was an element of hypothecation - the linking of revenue to a service - in the proposals: all the revenue from the 1p increase was allocated to education. This made the manifesto pledge on education more credible. Voters knew what they would be getting in return for their extra taxes.

3.2.3Other forms of hypothecation are possible. The whole of a particular service could be funded by an earmarked tax. For example, the existing employee National Insurance Contributions could fund the NHS (fortuitously they come to approximately the same amount as the NHS budget at present),and be redesignated a Health Contribution. There might have to be some reforms of the existing NICs to make the tax more progressive, but the principle is clear. Alternatively, a share of existing income tax could be used instead, for example, by splitting current income tax into a health tax and a general tax.

3.2.4Further use of hypothecation would have advantages:

Political. It would underline the commitment to the relevant public service.

Transparency. It would make decisions about tax rates at budget and election time clearer in their practical consequences, helping accountability.

Revenue. The electorate might be more willing to contemplate tax increases if they had a guarantee of how the money would be spent.

3.2.5There are however disadvantages:

Volatility. Any particular tax stream will vary in the amount of revenue it generates year to year. If a single tax was used to fund a single service, such fluctuations would make planning a service and maintaining service levels difficult on a year by year basis, so a smoothing mechanism would be needed. This could cloud the transparency which is one of the key attractions of hypothecation.

Devolution. If the health tax were devolved, and could be varied locally, some extra central redistribution of resources might be necessary to match the initial regional spending to its regional health tax revenue.

Pressure on other services. If any particularly popular service (e.g. education) were given a hypothecated tax, it might make it more difficult to generate public support to fund other areas of public expenditure. The more services which had a hypothecated tax, the more strongly this argument would apply to the remaining services.

Issues to Consider

17. Is any form of hypothecation desirable?

18. If so, is 'tax rise' hypothecation (earmarking simply an increase in certain taxes for enhanced spending on a certain service, eg the penny in the pound for education) or 'whole tax' hypothecation (funding the whole of a particular service from a designated tax) preferable?

19. What public services are the best candidates for funding through a hypothecated tax?

20. Would the public be willing to pay more tax under a system of hypothecation?

3.3Charging, Top-Ups, Personal Funding

3.3.1In addition to funding services through general taxation, it is possible to fund them through a variety of other mechanisms.

3.3.2Those who advocate charging do so for particular services (usually with exemptions for categories including children, the unemployed, pensioners and others). Charging users directly currently exists on quite a large scale in the public services.

3.3.3Existing Liberal Democrat policy is generally in the direction of removing charges. Indeed, if we see public services as by definition those services which for a variety of reasons it is not desirable to leave to individuals to purchase for themselves even with an element of public subsidy (see definitions section), then charging would seem logically inconsistent. We are committed to ending charges for personal care, as recommended by the Royal Commission on Long-Term Care, to abolishing university tuition fees, and charges for eye and dental checks, and initially to freezing and in the longer term phasing out prescription charges. (Liberal Democrats in devolved bodies have been able to put some of these commitments into action.) The last Health Policy Working Group (which produced the policy paper A Clean Bill of Health in 2000) looked into the option of charging for 'hotel costs' in NHS hospitals but quickly concluded that, given the large number of exemptions that would be essential, the money to be raised would not justify the administrative and other problems involved.

3.3.4It is difficult to see, however, how all remaining charges could be removed without large extra revenues from general taxation, and there may be some instances of charges which many would consider it reasonable to continue to levy, e.g. those social services charges not covered by the Royal Commission recommendations.

3.3.5There is also an argument for a basic level of service provided free to the user from general taxation, but which allows for top-up payments to obtain service of a quality beyond that which universal provision can supply. This might take the form of allowing for extra payments for better meals in hospitals, for example. Such schemes could encourage some affluent individuals to stay in the state system rather than choosing to make private provision. They might also get more revenue into public services, and allow for greater scope for the individual to 'shop around' to find the best service.

3.3 6Some existing Liberal Democrat policy allows for elements of personally tailored funding schemes, for example the Individual Learning Account which can be used to buy Further and Higher Education, and to which family, individuals and employers can make additional contributions beyond the basic state contribution (recent problems with the Government's ILA scheme are administrative only - the basic concept is sound). There is the also example of personal funds in our policy for Owned Second Pension Accounts.

3.3.7The 'social insurance model' applied in many European health systems is another variation on this theme. Individuals pay contributions into a fund, which then purchases services (usually healthcare) on their behalf. Contributions are generally linked to income. Funds are sometimes geographically based, but the individual usually has some choice between funds and can change fund if not satisfied. Everyone in a fund gets the same level of service.

3.3.8Potential advantages of social insurance are that the individual has a greater sense of ownership of their own contributions, and has the power to change fund. However, the recent Centre for Reform paper Universal Access, Individual Choice in comparing health systems reached sceptical conclusions as to whether there were any more than cosmetic differences between the more comprehensive and compulsory social insurance schemes and straightforward funding from general taxation. What is the difference between a compulsory insurance contribution and a tax? It also found no evidence that at the same absolute level of funding social insurance schemes deliver any better outcomes overall, particularly since administrative costs are higher.

Issues to Consider

21. What place is there for charging users in any of the public services?

22. Are top-up charges for 'extras' desirable?

23. Can funding schemes be designed to empower the service user without simply subsidising the better off or creating two-tier systems?

24. Can the Individual Learning Account model be applied successfully in other aspects of the public services?

25. Does the social insurance model have any advantages over funding from general taxation?

Public Sector Pay and Conditions

4.1Vacancies, Recruitment and Retention

4.1.1As outlined in Chapter 3 above , there is a general problem of underfunding across the public sector which leaves the UK with lower staffing levels in most key public services relative to comparable OECD countries.

4.1.2Yet even in the context of existing relatively low staff establishments, there is a clear and growing problem in recruiting and retaining public service workers:

- There are currently 22,000 nurse vacancies, a shortage of 10,000 doctors and significant shortages of physiotherapists, radiographers and occupational therapists.

- Teacher vacancies in England in nursery, primary, secondary and special schools rose by 2,070 to reach 4,980 in January 2001, the worst figure for a decade.

- The overall vacancy rate in nursery, primary, secondary and special schools in England in January 2001 was 1.4 per cent. The vacancy rate was 1.2 per cent in nursery and primary schools, and 1.4 per cent in secondary schools. Special schools had a vacancy rate of 2.2 per cent.

- Of every 100 trainee teachers, 40 do not make it into the classroom and a further 18 leave within the first three years.

- Vacancy rates for full-time local authority social workers in England & Wales were 8.6% in September 1999.

4.1.3These growing vacancies are worrying on three counts:

- They show services are overstretched and citizens are not getting public services to the standards they expect.

- They place a question mark over the quality of some of the staff, as clearly the public service professions are not attractive to work in for many who have alternative options.

- They mean that it will be very difficult to significantly improve services from the current base.

4.2Regional Variations in Living Costs

4.2.1Although there are key worker shortages across the country, there are strong regional variations. The latest DFES figures reveal that teacher vacancies in London run at seven times the level of the North West and Yorkshire & Humberside.

Table 1: Teacher Vacancy Rates (per one thousand teachers)


North East538

North West335

Yorkshire & the Humber235

East Midlands357

West Midlands569

East of England7917


South East81019

South West466

England exc London5610

Source: DfEE (20 April 2001). Teachers in Service and Teacher Vacancies: January 2001 (Provisional). Note that similar patterns of vacancy rates are apparent for nursery and primary, and secondary teachers considered separately.

4.2.2These figures map very closely onto the regions in which the private sector has to pay relatively higher wages to attract staff, as revealed in a National Economic Research Associates Study of 1998:

Table 2: How Much More Do Workers Earn in the South East ?

All local

Authority WorkersPoliceTeachersPrivate Sector

'Elliott numbers'

% above average

Inner London30.42&.95%36.15%46.62%

Outer London21.30%24.76%15.59%28.11%

Rest of SE9.07%8.86%9.50%13.15%

East Anglia-3.28%4.19%-1.78%2.70%

4.2.3This means that the private sector generally pays about 47% more to attract staff in Central London than is paid by the private sector in an 'average' region. Public sector professionals are not paid the same level of regional premium, and this failure to meet higher living costs must be seen as one of the main reasons for special recruitment and retention difficulties. However, the gap between public sector and private sector levels in a particular region is not as high as would be implied by purely national public sector pay rates. In Inner London the gap is around 15%, and in the South-East outside London it is only 4%. This reflects some pay flexibility (London weighting), unfilled low wage vacancies, and grade inflation as inexperienced staff are accelerated into higher paid jobs to retain them.

4.2.4The use of agency nurses in the NHS is also a much greater problem in London and the South East than other parts of the country. NHS Trusts in London spend more of their pay bill on bank and agency staff than elsewhere in England. London is the only region where Trusts spend more on agency nurse staff than bank staff. Half of national spending on agency staff is spent in London. There is a much higher vacancy rate (6.5% compared to 3.4%).

4.2.5Within an area at the 'devolved' level, such as Wales, there can be striking variations in vacancy rates. Vacancies for all NHS Trust staff range from 4.0% at the worst (Bro Morgannwg) to 0.9% at the best (Ceredigion & Mid-Wales).

4.2.6Excessive central government interference and bureaucratic burdens are often cited as a cause of low morale and retention problems in the public services. While these are real problems, and may have a serious effect on the quality of service being delivered, the fact that vacancies are so strongly related regionally to high cost of living areas suggests that a one-size-fits-all pay structure is more important.

4.2.7There are of course local reasons unrelated to cost of living why it might be difficult to attract staff to a particular location with low living costs. It has proved very difficult for the authorities to recruit sufficient GPs in rural Argyll, for example. Research into the problem has indicated a major factor is the difficulty for the partners/spouses of GPs, who will usually have professional careers of their own, in finding suitable jobs in locations with a lack of major commercial or public sector employers.

4.3More Locally Varied Pay in the Public Services?

4.3.1Whatever the adequacy of absolute public sector pay levels, it is clear that the current situation does not give public service employers enough flexibility to pay more to attract staff in high cost areas or to unattractive jobs.

4.3.2One possible answer is to allow public sector employers greater freedom to pay whatever they need to recruit and retain staff. This approach would be in harmony with our general philosophy of local empowerment and decision-making. If our agenda of granting greater financial freedoms to local (and later regional) authorities were followed through (see Chapter 2 on devolution), this would be administratively straightforward. The relevant tier of local government would be raising approximately 80% of its revenue from its own taxation, and local electors could simply choose to have well-paid, high quality public servants and the necessary tax level, or lower taxes and poorer funded services. As long as higher local pay is funded from local tax payers and not out of central grants, the increased taxation will counter-act any overheating effect in local economies from the increased pay levels.

4.3.3School teachers and local government workers are already administered at the local level and their pay is therefore channelled through local authorities already (although pay scales are set nationally). Other public services which do not already have such a degree of local accountability, e.g. the NHS, would have to be devolved to allow this approach to work.

4.3.4Greater freedom to increase pay levels in high cost areas could be done within the context of a continuing national framework of minimum pay levels which should apply in every region, but with scope for top-ups where local or regional employers so chose. This would give some sense of security to low cost areas that they would not get left behind. Alternatively, in conditions of fully developed financial devolution, it could be argued there is no need for a national scale, as any low-paying local or regional authority would obviously lose out in competition for quality staff.

4.3.5Pay top-ups could also be used in low cost areas where it was difficult to attract good staff for other reasons, eg. high crime areas or extremely remote rural areas.

4.3.6Nationally determined public sector pay with only limited local variations can be seen as a countervailing mechanism against regional inequalities driven by market forces inthe private sector economy. However, seriously undermining the quality of basic public services in some parts of the country is not acceptable as a by-product of regional policy. In London and South East, for example, it is leading to dramatic growth of private education which in the long run may have even more divisive effects. A better approach is to give full weight to the available tax base of each region in distributing equalisation block grant, as would happen in the Revenue Distribution Formula we propose to replace the Barnett Formula, and to take other policy measures to regenerate depressed regions - including relocating central government offices.

4.4Housing and Transport Allowances

4.4.1As the main (although not only) components of higher living costs in high cost areas are housing and transport, it would be possible directly to assist public sector workers with one or both of these, as an alternative to giving higher pay. The Government have in fact recently proposed a 'Starter Home Initiative'. This particular scheme which is aimed at new entrants will obviously do nothing to help retain existing staff.

4.4.2As with pay top-ups, any housing or transport subsidies which were funded from central funds rather than local taxes would tend to exacerbate overheating in high cost areas. However, measures which would increase the available stock of accommodation (eg. building accommodation blocks for student nurses) will take pressure off the general housing market.

4.4.3Housing and transport allowances could not of course deal with the problems of public sector employers who had difficulty attracting staff for reasons unrelated to these costs.

4.4.4Whether we prefer regional pay variation or housing allowances, we should also advocate the publication of official regional cost of living indices which would inform debate and pay-bargaining.

Issues to Consider

26. In which public services are pay levels most inadequate? Are there areas of the

public services in which pay is not a problem?

27. What is the level of government at which pay in different public services can most appropriately be set?

28. Is it preferable to retain national basic scales of pay with local top-ups, or to completely decentralise pay issues?

29. How important are non-pay issues in creating recruitment and retention difficulties?

30. Are housing or other allowances preferable to pay variations in dealing with variations in local costs of living? What categories of worker should be eligible for any such allowances?

Funders and Providers

5.1.1Liberal Democrats are known for championing extra investment in public services, especially education and health. We are equally committed to improving how public money is spent. We will only secure a public consensus for a high provision of services if the public is confident that we are constantly striving to get better value for money.

5.1.2Certain services and goods such as education and health have to be financed primarily by the state both on grounds of efficiency and fairness. We reiterate the importance of the right to health care and education, funded by the state, while being enthusiastic about change and reform in how public services are provided. The key distinction is between the universal entitlement to the service and the diversity of the organisations and people that may provide it.

5.1.3Apart from the Private Finance Initiative (PFI) and Public-Private Partnerships (PPPs), the main processes of public service procurement rarely attract interest. This is surprising since, even now, PFI spending has not reached even one fifth of traditional capital procurement expenditure. Liberal Democrat public service reforms should therefore include a wide-ranging overview of all Government procurement.

Table 3: Public sector capital expenditure - Traditional and PFI Procurement (£ billion)

Outturn Projections

2000/01 2001/02 2002/03 2003/04

Total public sector capital expenditurea 19.0 26.0 28.8 33.2

(As % of GDP) 2.0% 2.6% 2.8% 3.0%

Estimated capital expenditure under PFI 3.9 3.5 3.1 2.4

(As % of total public capital expenditure) 17.0% 11.9% 9.7% 6.7%

Total publicly sponsored 22.9 29.5 31.9 35.6

capital expenditure (As % of GDP) 2.4% 3.0% 3.0% 3.2%

Note: aNet of asset sales. Sources: Derived from HM Treasury, Pre-Budget Report, Cm 5318, Nov 2001 & FSBR 2001 , HC 279, 2000/01

5.1.4In the procurement field, it is important to harness the benefits of competition (within the public sector, with the private and mutual sectors) where possible. Greater diversity in the suppliers of public services can act as a quasi-competitive force to ensure that extra Government money leads to higher standards. New public service providers may range from reformed public bodies to private sector companies and include Not-for-Profit (NFP) organisations such as voluntary organisations and other mutual bodies.

5.1.5The growing Not-for-Profit sector is an increasingly attractive alternative to either state or private provision. Public services depend so much for their quality on the commitment and dedication of their workforce, and NFPs are potentially a structure which empowers the workforce more than any other. If the workforce feels that they 'own' their institution, it seems likely that they will also be more committed to their task. Therefore NFPs may have particular natural advantages in the provision of public services. We believe that NFPs may also help to engender greater community support for local providers, as well as providing more freedom for the organisation's own development, both in terms of innovation and financial support.

5.1.6The NFP sector includes voluntary and charity providers ranging from emergency services such as the national lifeboat service provided by the RNLI to organisations caring for people with mental health problems or running hospices that have led the way in patient-focused care. Social enterprises based on principles from the mutuality and co-operative movements often achieve high standards and genuine innovation, for example in tenant-led housing co-operatives and in pre-school childcare. The not-for-profit sector is extremely varied: as well as small-scale, community organisations charging small or no fees, there are other not-for-profit organisations which are huge and some, such as private schools and some private health schemes, where high fees are charged. Nevertheless, this sector could be a major source of new suppliers of public services.

5.1.7Liberal Democrats strongly believe that the 'public sector' option must never be dismissed as some relic of the past, as too many on the Right appear to do. Many public sector providers offer extremely high standards of service, at extremely good value for money, including many of our state schools and NHS hospitals. In the past, failing public sector providers have been reformed and turned round into successes. Therefore, the Liberal Democrat approach to public service procurement should continue to look to the public sector itself as a major provider of services.

5.1.8Equally, those who seek to champion purely public sector provision appear to forget that the private sector have long been involved with providing public services, whether as suppliers of intermediate goods to Whitehall Departments, or contractors in major construction projects, self-employed staff (such as General Practitioners) or as front-line providers such as pharmacists or nursing homes for the elderly. Already many schools and hospitals are reliant on private sector agency staff. Such private sector involvement may not always represent good value for money, especially as it has tended to come about in an unplanned way. Yet it is there, and new procurement policies must address that reality.

5.1.9Table 4 over the following two pages seeks to provide a full set of options for the providers of publicly-funded services which Liberal Democrats wish to explore in this consultation exercise. It begins to set out our perceived strengths and weaknesses of different provider options and begins to identify critical success factors for each option. The working group would particularly invite comments on this very schematic and inevitably broad-brush tabulation. It is this existing diversity that Liberal Democrats should develop and build on.

Table 4: Advantages and Disadvantages of Options for Delivering Public Services

1. Public Sector Managed2. Public Sector managed Partnerships with Profit making Companies (PPPs)

ProsEconomies of scale

Political will can provide security

Cost of money for investment lower

Assets remain in public sector

Accountable to electorate

Can adapt to changes in requirements

Can be an attractive employer to those with a public service ethicOutcomes must be clear for a contract to be agreed

Pressure forprofits reduces waste

Competitive tendering can increase cost effectiveness

Can be effective if company is willing to 'go native' (eg Docklands Light Railway)

A broad shareholder base can create extra stability

ConsLess incentive to minimise waste and improve efficiency

Historically problems specifying and sticking to outcomes can lead to a lack of clarity in prioritizing objectives as requirements change

Ultimately dependent upon quality of people willing to stand for election

System should be flexibleIf required outcomes change it can be expensive to renegotiate the contract

Partnerships are inherently unstable over time

Profit-making companies can go into liquidation and leave no service provider

Cost of money is higher

Lack of electoral accountability

Suspicion that profit motive will lead to lower service levels

Often government investment is needed to create a viable organisation/provider

As negotiations near completion government tends to become the weaker partner because of financial pressures on the provider

Commercial confidentiality can prohibit transparency

To be

effectiveNeed to find a suitable efficiency mechanism and get feedback on service levels

Tests government management skillsNeed to ensure cost of money appropriate

Do suitable providers exist?

Tests government skills as a negotiator

Table 4: Advantages and Disadvantages of Options for Delivering Public Services (contd.)

3. Private Sector Financed

Initiatives (PFI)4. Public Sector Partnerships with Not for Profit companies

ProsShort-term off balance sheet funding available

Other advantages as for PPPOutcomes must be clear for a contract to be agreed

Can be effective if company is willing to 'go native'

No concern about profit motive compromising service

Can include services of volunteers

Relatively independent

Can be an attractive employer to those with a public service ethic

Trustees provide monitoring

ConsCan mean loss/sale of public assets

Other disadvantages as for PPPLack of security over income can make planning difficult

May need significant££s to create a suitable organisation - source and cost of money?

Not for Profit companies can fail and leave no service provider

Monitoring only as good as the quality of the Trustees

Lack of electoral accountability

Vulnerable to changes in government's plans

Lack of clarity over what should/could drive change

To be

effectiveAs for PPPsNeed to find suitable efficiency measures and feedback on service

Do suitable providers exist?

Tests government skills as a negotiator

5.1.10If we accept that diversity of provision is an advantage, then it is also crucial to get the relationship between funder and provider right. One key issue is the nature and length of the agreements. These can fundamentally alter the sense of any particular procurement option, irrespective of the sector the provider represents.

5.1.11Some agreements are effectively commitments, where the funder would rarely, if ever, consider removing financial support. Thus, a local education authority or a health authority looks to develop long term relationships with their schools or hospitals. The agreements operate best through trust and close working relationships, with control and monitoring as an incremental issue, exercised through a variety of ways, for example in schools through central government regulation, LEA education committees, inspectors, governing bodies and employee contracts. Indeed, the solution to efficient procurement in schools and hospitals has increasingly been to push as much of the budget down to the organisations themselves.

5.1.12These commitments - or less specified contracts - are underpinned with an expectation of commitment to service delivery whatever that takes, and are often regarded as supporting an ethos of public service more than a highly specified, rigidly contractual approach. Such commitments are most often open-ended agreement, normally implicitly so. The perceived longevity of such an agreement can facilitate trust and commitment to the long term on the one hand, but can in some cases also lead to complacency. By sometimes failing to clarify duties and responsibilities, not to mention risks and contingent liabilities, such arrangements can create difficulties.

5.1.13Commitments, as described, are more common with public sector providers than with not-for-profit or private sector providers, but that is not always the case or indeed inevitable.

5.1.14The other class of agreements between a funder and a provider are more formal contracts. The less specified and more time open-ended the contract, the more it resembles the type of commitment previously described. However, in most cases, such formal contracts are highly specified and are more typically used with not-for-profit and private sector providers for services that can range from refuse collection to meals-on-wheels social services.

5.1.15For a procuring authority, a formal contractual relationship is very different from the commitment relationship described. The process is different, involving initial negotiation, explicit legal agreements and then continual monitoring. The skills required by the procuring authority to negotiate or monitor a contract - including legal ones - are often very different from those needed to develop a commitment. The explicit nature of the contracting process can have advantages that may range from cost control to careful clarification of responsibilities and risks. A successful process can build the trust and partnership that is necessary for such contracts to work. However, at other times, this legalistic approach can simply reflect a lack of trust between the procuring authority and the provider, resulting in over complex, costly performance agreements.

5.1.16Contracts are also normally time limited. For a procuring authority, this is a fundamental difference from the commitment relationship described. A short term contract with a private sector provider, for example, might enhance accountability, so that a newly elected administration could alter the agreement and the underlying policy. However, shorter period contracts may also reduce the incentive to invest.

5.1.17Conversely, a major concern with some PFIs and PPPs has been the extreme length of the contract involved, locking in future Governments and procuring authorities to policies and agreements they might have wished to change, having received a democratic mandate so to do. Such long term contracts, or franchises, solve the investment incentive problem, whilst creating an accountability issue.

5.1.18Long-term contracts may, though, be a necessary price for the involvement not only of private companies but also of not-for-profit organisations.. In both cases, some legal certainty is required for them to invest in public provision. Moreover, it is arguable that employment custom and practice within the traditional public sector also imposes limits on the capacity to change.

5.1.19We turn to some of the detailed contract issues in the section on private providers.

Issues to Consider

31. Do you agree with the distinction made between government funding of services, and diversity in the provision of services? When and why are different providers appropriate?

32. Should any other principles guide Liberal Democrat reforms of the procurement of public services other than those listed?

33. Is this a complete range of public service procurement options? Should any be excluded, if so, why?

34. What changes or additions would you wish to make to the 'broad-brush' tabulation of the strengths and weaknesses of different provider groups in Table 4?

35. Do you agree with the distinction made between 'commitment' and 'contract' relationships? What advantages and disadvantages do you see for each?

36. Could public service procurers get more flexibility to choose between these types of agreements?

37. Could more public sector providers be procured by contractual agreement? Could more not-for-profit and private sector providers be procured by commitment-type agreements?

38. When should commitments and contracts be more specified, and when should they be less?

39. In what circumstances should contracts/franchises tend to be longer (i.e., more than five to ten years) and when should they tend to be shorter?

40. What policy changes should we consider to improve the overall options facing any particular procuring authority - whether it is a Whitehall Department, local council, local NHS Trust or other public sector body? e.g., should we press for changes to EU procurement law?

Measuring Value for Money

6.1.1A prerequisite of an efficient and effective public service procurement process is a sensible financial and evaluation framework.

6.1.2Irrespective of the actual amounts available for procurement, the planning and accounting framework must be stable to aid planning but flexible enough to allow change through circumstance or political choice, transparent to ensure accountability, and must not be biased or designed deliberately to favour one type of provider or financial approach. Moreover, policy and budgeting must not simply be focused on cash inputs, but must take full account of the final objectives of procurement - the outcomes that the public wants.

6.1.3Public sector accounting and financial rules have in the past been a major obstacle to sensible public service procurement. The problems with the system have included perverse fiscal rules, a public expenditure planning process focused on only one year ahead, a lack of a modern system of accounting for capital assets and future liabilities, and financial restrictions on some procuring authorities that bias decisions in one way or another, to name just a few. Moreover, until relatively recent times, there has also been little systematic measurement of the effectiveness of public spending.

6.1.4However, there have been a recent series of welcome, radical reforms in the public sector's financial and evaluation framework. Taken together, and with some additional reforms set out below, these have the potential of significantly improving overall public service procurement.

6.1.5The regular Comprehensive Spending Review, and new freedoms for departments to carry forward unspent balances, should gradually help reduce short-termism in Whitehall spending. However, Labour's failure to carry this long-termism into its cash allocation for health, education and local government, with excessive ring-fencing and in-year, last minute allocations, has so far undermined the benefits of these important reforms. As a first step towards greater decentralisation, should we extend both the new bi-annual CSR public spending process and the freedoms to carry forward unspent balances to all public procuring authorities, to ensure central cash allocations get to front-line services such as schools ?

6.1.6Labour's new fiscal rules for a stable macroeconomic framework make more sense than previous rules, such as the Conservatives' over-emphasis of the public sector borrowing requirement. Both the so-called 'golden rule' and the 'sustainable investment rule' bring important fiscal disciplines. However, such disciplines are in danger of being undermined by the failure to include the impact of PFI and PPPs within the rules. This is because PFI and PPPs, while they reduce the short term funding required for investment, also simultaneously produce a new long-term set of liabilities for the public sector in terms of future charges. However, Labour's fiscal rules deliberately omit this revenue impact of the PFI and PPPs, and therefore not only present misleading information, but also bias Government in favour of PFI schemes. Should we revise fiscal rules so that privately financed public investment is counted when measuring the 'sustainability' of public finances? Should we ensure that capital spending budgets of central Government departments were set to include all forms of funding capital expenditure, to remove the bias towards a PFI or PPP approach caused by measurement rules?

6.1.7The most radical set of reforms to the public sector's financial framework however was first proposed by the Liberal Democrats, introduced by the Conservatives and implemented by Labour. This is the move to a proper and quasi-commercial system of accounting known as 'Resource Accounting and Budgeting'. This system of financial accounting will for the first time in the public sector remove the bias that previously existed against capital investment, by introducing accruals accounting and capital depreciation. This year (2001/2) is its first year of implementation, after almost a decade in planning. There are still some weaknesses in the new system, for example, how it deals with certain liabilities, especially contingent liabilities. Moreover, it does not yet apply to local government. Liberal Democrats would want a period of stability to give it a chance to bed down before reviewing this new and welcome accounting system.

6.1.8Over recent years, the public sector has begun several radical experiments with measuring performance of public services. While Liberal Democrats broadly support the development of performance measures to identify the key outputs and outcomes we seek from public services, there have been some serious weaknesses in the approach adopted. These weaknesses include: the failure to consult widely on what to measure, especially with Parliament; the production of too many targets, as opposed to the most relevant targets; the failure to link target setting and budget setting in any meaningful way; the over-reliance on crude, one-dimensional measures (eg hospital waiting lists, 5 grade A-C GCSEs) and the central setting of unrealistic productivity growth targets. Should there be a review of the whole structure of Public Service Agreements, in full consultation with departmental select committees, to produce an agreed set of measures that could be used directly to inform and shape the procurement process?

Issues to Consider

41. What problems do you see with the current public sector accounting and financial framework that inhibit good decision-making for public service procurement?

42. Should Liberal Democrats welcome a bi-annual spending round with the Comprehensive Spending Review process? Or should we either return to an annual spending round or develop it into a tri-annual process?

43. Should bi-annual expenditure setting be extended to local authorities and other procurement bodies to give them independence and planning certainty?

44. Should Liberal Democrats seek to reduce ring-fencing and in-year budget adjustments?

45. Should Liberal Democrats reform the Government's fiscal rules to account for PFI and PPP expenditures?

46. What reforms should we consider to the Government's system of Public Service Agreements?

The Public Servant as Controller

7.1.1Perhaps themost crucial reform needed to improve public service procurement is to enhance the status of procurement officers. It is often forgotten that whichever sector ends up providing a public service - public, not-for-profit or private - the procurement process must inevitably be led by public servants. The quality of their input in turn informs the choices made by elected representatives. Yet during both the Conservative push for privatisation and Labour's emphasis on PFI and PPPs these key public sector players have not received the support they need. Too often Government have brought in outside advisers for major procurement exercises, at huge public expense, and failed to design a long term strategy to enhance the public sector's own in-house competence.

7.1.2Liberal Democrats will therefore implement an urgent strategy to increase the skill base available to the public sector for procurement. This strategy will include:

- An audit of the procurement skill base in the public sector to identify unexploited skills within the sector, to ensure existing skilled professionals are fully recognised and to establish the areas of greatest skill shortage

- Significant salary increases for senior public service procurement officers, financed partly by reductions in the use of external consultants

- Significant new expenditure on training for excellence in procurement and contract management

- New career structures tailored to promote excellence in public service procurement, including a re-grading exercise and new secondment opportunities between public, not-for-profit and private sectors, as well as the major accounting and auditing organisations

7.1.3However, it will be impossible for each and every public sector procuring authority to have all the skills and experience it might need at any one time. There is therefore a role for additional institutions to provide greater expertise from within the public sector. Both the Conservative and Labour Governments recognised this, to varying degrees, and there are currently four main institutions supporting public sector procurement. These are:

The Public-Private Partnerships Programme: established in 1996, the 4Ps aims to support local government in developing PFIs and PPPs.

The Improvement and Development Agency: established in 1999, the IDeA assists local government to improve service delivery generally, including advice on procurement

The Office of Government Commerce: established in April 2000, the OGC is focused on central government procurement, currently estimated at£13 billion per annum

Partnerships UK: established in June 2000, PUK is itself a PPP, helping both central and local government to undertake PPPs

7.1.4The above institutional structure is a considerable improvement on what has gone before, but there remain significant omissions and a range of necessary reforms for providing greater support for public service procurement.

7.1.5The most obvious omission to the institutional framework of procurement support is the NHS. Procurement in the NHS is mainly supported through the Department of Health itself or the regional office. Recent Government reviews of NHS procurement have not led to any institutional change. While there is a good case to extend the support given to procurement officers in the NHS, the best route for this is not clear. Options include the creation of a totally new body (which we do NOT favour), a remit extension of a body such as the Office of Government Commerce to incorporate the NHS or more internal support. The working group would therefore particularly welcome comments on what improvements are needed to improve procurement by the NHS.

7.1.6It is sometimes argued that the UK's current funding systems for services like health and education, where, for example, schools receive budgets significantly based on age-related per capita payments, manage to achieve the benefits of user-led procurement without the disadvantages of vouchers (which would encourage the better-off to opt out and have proved impractical). A variation on this theme is the Dutch system whereby each pupil carries a grant with them that depends on their special educational needs: immigrant children whose first language is not Dutch bring more resources to the school they attend. Even in the UK, the independent living allowances, whereby some disabled people now receive cash to buy their own care, rather than relying on council provision, are an example of entitlements without any prescription on the type of provider.

7.1.7Indeed, since the working group believes enhancing the procurement processes and performance of public servants is so fundamental to public service reform, we wish to make a general invitation for comments and advice on this issue. To stimulate debate, we provide not only a set of questions for the consultation session at Conference at the end of this chapter, but also a 'menu of ideas' below, for possible ways forward:

- Enabling legislation to provide new legal entities to facilitate procurement partnerships between different public sector funders, e.g., health and social services, neighbouring LEAs

- A web-based information bank to spread 'best practice' and to share information on providers between all public service procuring authorities

- Joint development by the 4Ps, IDeA, OGC and PUK of a database of accredited not-for-profit and private sector organisations that offer procurement training and specialised legal and financial advice for commissioning

- A new Queen's Award for Innovative Public Service Procurement

Issues to Consider

47. What do you think is the best way to improve public servants' ability to procure public services effectively?

48. Do you agree that the overall skills base of the public sector in procurement needs to be enhanced? Do you agree with the types of solutions proposed?

49. How, in particular, could we improve procurement within the NHS?

50. Should Liberal Democrats welcome to a bi-annual spending round with the Comprehensive Spending Review process? Or should we either return to an annual spending round or develop it into a tri-annual process?

51. What options do you see for greater individual choice through involvement in procuring public services? Where could these work in the UK system? What changes would need to occur within the public sector funding bodies to make these effective?

Better Providers

8.0.1The provision of public services will continue to come from the traditional public sector, the not-for-profit sector and the private sector. This diversity is a positive feature, encouraging innovation and experimentation which are the sources of continuous improvement. For each type of provider, there are potential performance issues to address to which we now turn.

8.1Public Sector Providers

8.1.1Public sector providers are likely to continue to dominate in most areas of delivering public service. The ability of the public sector to improve and modernise effectively is often not appreciated widely enough. However, there are a number of areas worth exploring where public sector providers could improve performance.

8.1.2Public sector providers inevitably operate in a different financial culture from private sector bodies or even not-for-profit. The challenge for public sector providers therefore is often to develop greater financial awareness, without sacrificing the public service culture. Options might range from new professional qualifications or grades to encourage or recognise financial know-how within traditional public sector posts to new arrangements to second or sponsor external advice.

8.1.3Public sector providers can often be limited by the size or structure of the institutions they are in: sometimes they are too small, other times too large, and it can be difficult to make changes. This is especially the case when successful providers want to expand or take on new challenges. The public sector as provider needs to develop new, practical ways to spread success and enable high performing providers to take on greater responsibility.

8.1.4Some examples, mostly based on some existing practice, can provide insights into the possibilities. In education, senior teachers could form leadership teams across a number of schools or consortia of schools could co-operate to develop jointly new services. In the emergency services, regional fire and ambulance services might pool resources, from communication systems and buildings, to training courses and career structures. Health and social service providers could be further enabled to form partnerships to improve services and win new contracts. However, we must be wary of allowing new local monopolies to develop.

8.1.5The wider local community remains one of the most untapped areas of support for local public services. Such participation could be practical support for the provider, such as parents helping out in a classroom, the local neighbourhood watch or a hospital's League of Friends. At another extreme, if there is very active local support, the public sector provider can effectively change its nature, for example with the formation of a new social enterprise, co-operative or mutuality.

8.1.6The working group would also welcome thoughts on encouraging public sector entrepreneurialism and performance skills. There is evidence from past initiatives like competitive tendering and the current best value regime that performance skills can improve sharply in the public sector. A strategy to secure continuous improvement in productivity might include a major audit of the performance management skill base to identify unexploited skills, and to ensure existing skilled professionals are fully recognised. This would also establish on an on-going basis areas of greatest skill shortage. There might also be earmarked funding of training in performance management disciplines to raise public sector performance capability and spread best practice. The Cabinet Office 'Quality Schemes' should include more continuous improvement topics.

8.1.7We are also considering how public sector providers can improve their media relations and wider image, as perception of performance and actual performance can all too often be at great variance. Clearly, a greater political lead from politicians perceived to be responsible for local services will be an improvement. But in general, the public sector spends very little time or effort on a function that, in the private sector, is key: marketing. The working group welcomes comments on these and other related issues.

8.2Not-for-Profit Providers

8.2.1We believe there is huge potential for the Not-for-Profit (NFP) sector to grow as a public service provider. Public services depend so much for their quality on the commitment and dedication of their workforce, and NFPs are potentially a structure which empowers the workforce more than any other. If the workforce feels that they 'own' their institution, it seems likely that they will also be more committed to their task. Therefore NFPs may have particular natural advantages in the provision of public services. We believe that NFPS may also help to engender greater community support for local providers, as well as providing more freedom for the organisation's own development, both in terms of innovation and financial support.

8.2.2NFP models already exist extensively in housing, and housing associations provide one template for the extension of NFPs to other traditional areas of provision in the public sector. By the very nature of the NFP sector, however, it is difficult for the state artificially to drive its development. One of its essential advantages is its ability to build commitment from the bottom up. However, we would like to see gateways so that traditional public sector provider units can, if employees, managers and customers want, elect to establish themselves as co-operatives or mutual societies. Nor should we exclude the setting up of new NFPs. The working group would therefore welcome a broad range of submissions about the practice and possibilities of the NFP sector for future improved public service provision.

8.2.3If the state is to be involved with this process in any way, and if NFPs are to receive public money, there has to be clarity about their legal status. The Company Limited by Guarantee is currently the preferred vehicle for most large charities, but there are a range of other possibilities, and the New Economics Foundation has advocated the creation of a new Public Interest Corporation. And it has to be remembered that the NFP sector is not directly accountable to the public. The working group therefore wishes to explore the scope for improving the legal framework for NFP organisations. Naturally, we hope existing UK NFPs will respond. Such a framework would have to include strict limits on demutualisation (this must not be or even be perceived to be a backdoor route to privatisation) and clarity on the powers of such bodies to raise finance, how they are held to account and how social objectives such as equity and access are guaranteed. It will also have to allow for existing public sector bodies converting to NFP status (see below).

8.2.4If the NFP sector is to expand, we must also have clear state rules on funding that will not disadvantage NFP organisations compared with traditional public sector provides or private companies. We must also consider legislation to permit certain existing public sector providers - hospitals, schools or groups of either - to migrate to NFP status if the staff vote that they wish to do so. We would also consider ideas of how the state might encourage private companies to convert to NFP status. The working group wishes to explore all the practical implications of NFP expansion in areas like health and education and invites comments.

8.3Private Sector Providers

8.3.1The private sector is already a major provider of public services in the UK. The contracts it has from public sector procurers vary dramatically in length and nature depending on the service. Thus, a company may contract with a council for street-cleaning for a four year period or, in the case of recent experiments under the PFI and PPP policies, the contract may be much longer and involve more complex financial arrangements. Liberal Democrats in government are committed to working with private sector companies providing public services, as one of the possible ways of driving up standards.

8.3.2All policy experiments with private sector provision such as competitive tendering, franchising, the Private Finance Initiative and Public-Private Partnerships have had mixed results. While each initiative can show examples of huge cost savings and significant quality improvements, equally there are counter examples of significant failures.

8.3.4During this policy review therefore the working group wish to explore when and why these different examples of private sector provision has succeeded and failed. We wish to identify where such experiments work best and where they rarely work well. By establishing the key critical success factors, we wish to decide where Liberal Democrats should advocate significant expansion in the use of private sector provision, and where we should be more cautious and perhaps even recommend a reduction in the use of private sector providers. We have discussed some of the lessons from existing contractual relationships in Chapter 5.

8.3.5PFI and PPPs can provide excellent opportunities for innovative private sector involvement in the provision of public services, but just like previous experiments with private sector provision there have been examples of serious and expensive mistakes in their usage.

8.3.6The main problem has been that, far too frequently, public sector procurers have been forced to opt for PFIs or PPPs rather than the best solution. This has been done through restrictions on other forms of public service procurement resulting in there being no alternative way of undertaking an investment or developing a new service other than PFI or PPP. This method of procurement has been used in some extremely unsuitable situations, with the worst example being that of London Underground.

8.3.7Criteria for PFI/PPP should include an analysis of which risks can be sensibly transferred to the private sector, and the development of the PFI/PPP programme should usefully have been accompanied by a more controlled set of pilot projects to test the boundaries of possibilities.

8.3.8 The lack of proper analysis behind the development of the PFI/PPP programme may partly stem from a major misunderstanding by successive politicians of what it actually represented. For some politicians, it seemed that PFI/PPP was a clever way of levering-in new private money into public investment, and that therefore the prime motivation was financial.

8.3.9However, PFI/PPP procurement does not result in new extra money: it just changes the time profile and nature of the public sector's payments. Particularly with contracts involving significant capital investment, the public purse 'saves' the initial, upfront costs, but the public service procurer then has to make payments to the private provider over the lifetime of the contract.

8.3.10The real benefit of the PFI/PPP approach to procurement has been to bring more private sector management know-how into public service provision. Indeed, some have suggested the label 'Private Finance Initiative' was itself a misnomer, and that it should have been called a 'Private Management Initiative'.

8.3.11Once the real advantage of PFI/PPP is understood, it is easier to have a more rational discussion on where and when it is appropriate. Chapter 6 set out various accounting reforms which Liberal Democrats would introduce to remove the existing financial biases towards a PFI/PPP approach. Liberal Democrats believe that if a PFI/PPP procurement approach is to make sense for improving public service provision, it should do so in its own terms, not because the system has been rigged.

8.3.12However, in addition to these accounting reforms, we believe a variety of changes and reforms to the PFI/PPP system of procurement are needed to make it more effective. These include:

- A review of the tendering and negotiations for PFI/PPPs, to prevent public sector procurers becoming 'prisoners' of the dynamics of any particular deal process and to ensure that genuine competition can be kept within the process to the latest possible moment. The exclusion of bidders at too early a stage negates the essential advantage of private providers - competition - and has become a concern to the EU Commission because of its potentially protectionist implications.

- A review of the high transaction costs associated with PFI/PPP, in particular during the bidding stages, to establish how these can be reduced. We would also establish more robust systems for monitoring such costs.

- Greater transparency in the publication of contract details. In cases where commercial confidentiality has to be maintained to a greater degree than usual, we would augment the use of internal peer review processes within government and external independent audits. We would also seek to increase the involvement and consultation of stakeholders, including employees, users and local communities.

- Improving Public Sector Comparators (PSCs), to make them more transparent and ensuring that the public sector has the capacity to develop adequate PSCs.

- More robust sensitivity analysis of PFI/PPPs, for example with respect to risk allocation, when they are assessed for value-for-money against PSCs.

- Clearer mapping of risk within contracts and consideration of the issue of non transferable political risk.

- A review of the problems caused by long contract periods for PFI/PPPs, particularly in terms of reduced political accountability and in terms of technological change. This would, for example, consider whether standard 'break' or 'change' clauses should be required for contracts over a certain period. It would also consider how the public sector procurer can ensure its benefits from any 'refinancing' of a PFI/PPP agreement.

8.3.13The working group would welcome comments on these proposed reforms to PFI/PPP and submissions for other possible reforms. Equally, we would welcome ideas for improving other ways in which public sector procurers can benefit from private sector provision.

Issues to consider

52. What is the best way of improving public sector providers' competence in financial planning, budgeting and performance management?

53. How could we support public sector providers wishing to expand or to innovate beyond their own traditional boundaries?

54. How could user and community participation help improve public sector providers?

55. How could the legal framework for not for profit organisations be improved?

56. Is it practical to help existing public sector providers to transform themselves into not-for-profit organisations?

57. What examples are there of good and bad experiences with PFI/PPP projects, and what lessons can be drawn for the future?

58. What particular types of project or service are suitable for different providers (public sector, not-for-profit, private companies)?

Annexe One

Remit of the Public Services Working Group

We must continuously re-examine our policies on public services to ensure that they remain ahead of the game. There may also be lessons to learn from how other countries fund and deliver public services.

The remit of the Working Group is to review party policy on public services and develop proposals on reform of public services. It will hold a consultation session at party conference in March 2002, with a view to producing a paper of no more than 15,000 words for the September 2002 conference. The group will particularly need to:

- Examine the fundamental aims of public services, including the definition of a public service and which ones should have the highest priority. This will include examining whether the term 'public service' is appropriately applied to services as diverse as health, education, pensions, police and defence.

- Establish the most appropriate ways of funding public services, through, for example, general taxation, hypothecated taxation, and mutual or insurance schemes (whether privately or publicly run).

- Determine the appropriate role for government in providing or regulating public services.

- Establish which level of government is most appropriate for provision, regulation and funding of public services.

- Decide whether national standards have any role in public services, or whether they hinder decentralisation.

- Consider methods of raising productivity and ensuring value for money in delivery of public services.

- Explore how to make public services more directly responsive to the needs and preferences of individual users.

- Examine the role of volunteering and NGOs in public services.

- Draw on specific examples of successful public services from other countries.

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