Anti-Privatisation

I was thinking a little about why I’m so anti privatisation of public sector services. It’s certainly not that I’m anti the private sector and I’m certainly not anti private sector involvement in the public sector. The public sector clearly buys a lot of private sector products and services, and this is entirely reasonable. Essentially, they way I think the private sector should work is that investors should be rewarded for making wise and sensible investments and that the reward should be related to the risk that they’ve taken (given that the higher the risk the more often they will lose their investment). If someone sees an opportunity, gets some investment and starts providing a service or a product that has some demand, they will want (and deserve) to gain from this investment. Given that inflation is normally 2% and, in good times in a decent economy, GDP grows at 2%, they will probably want 5% annual growth to make their investment worthwhile. If they could do better in a zero-risk bank account, why would they bother investing in something that carries risk.

I think my issue is that the above scenario is not what is happening when the private sector starts running public sector services (as opposed to providing a product or a service to the public sector). I would argue in the case of the NHS, state education, and other public services, the taxpayer is effectively the investor. When a private company starts running a hospital (for example) – as has happened with Circle Healthcare and Hitchingbrook hospital – people seem to feel that this company making a profit that is a few percent of the running costs is reasonable. In the case of Circle Healthcare and Hitchingbrook hospital, the annual running costs are about £100 million and Circle Healthcare gets all of the first £2 million surplus, a quarter of anything between £2 million and £6 million, and a third of anything between £6 million and £10 million. They could potentially make £4.3 million per year. Sounds reasonable; the running costs are £100 million. However, as far as I can tell, the taxpayer is still effectively the investor. Circle hasn’t bought the hospital and it’s assets. It’s simply running the hospital. They’re providing a service that they should be paid for, rather than effectively taking a profit out of the running costs.

It would be very different if Circle had bought the hospital and all its assets or had invested in its own hospital and assets. Then they would want to get a return on their investments. What they’re doing here (I think) is providing a service that manages the hospital, but are pretending that they’re actually providing a hospital and associated medical services. One might argue that if the private company can save many millions of pounds, then they deserve some large fraction of what they’ve saved. I would argue that this goes against what those who support the private sector involvement are arguing. They suggest that involving the private sector will allow for competition that will drive down costs. If one company does it for £4 million a year, another might come along and offer to do it for £2 million per year if that would still provide a decent return for their investors. It should be the return for the investors that determines the cost, not some fraction of the running costs or some fraction of the savings.

Essentially, if we’re going to involve the private sector we should do so in a manner that’s consistent with a private sector model (i.e., the returns are based on the investment made, not on the amount of money in the system). If we don’t, we’ll end up giving much more money to the private sector than might be regarded as reasonable (although some might argue that whatever they can get is reasonable). The Private Finance Initiative is a classic example, and we should be careful not to make the same kind of mistake again.

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