Private sector running £80bn worth of public services

An interesting new government-sponsored report out today, written by a former member of the Monetary Policy Committee, reveals for the first time the extent of private provision of public services. In 2007-08 prices, private companies are now supplying almost £80 billion worth of public services, up from £42 billion in 2007-08 prices in 1995-96. A third of public services are now supplied by the private sector, which employs over 1 million people in this sector. 

The report also gives a breakdown of the private sector public services industry, including:

Health - £24 billion

Social protection (unemployment, housing, disability and old age) - £18 billion

Defence - £10 billion

Education - £7.5 billion

The report concludes that there are "clear benefits to both users and taxpayers in subjecting incumbent service providers to competition". The academic literature is dated, but typically finds cost savings of 10-30 per cent.

This is a fascinating report, and the fact that it was commissioned by Business Secretary John Hutton - one of the more reform-minded ministers - indicates that its aim is to provide back-up for greater private sector involvement in public services. However, the reality is not all rosy and bright:

• • Firstly, the report shows that the growth of the private sector public services market has slowed to an average of 3 per cent in real terms over the last few years, compared with an average of 7 per cent in real terms in the eight years from 1995-96, with recent cancelled bids a key factor. Given that overall public spending has increased faster than 3 per cent in real terms, over the last few years the private sector share of public services has actually fallen slightly. The report is clearly designed to reverse this trend of the last few years. 

• • Secondly, and this is the key point, the partial opening-up of the supply side has not been accompanied by changes to the demand side. If users of public services were genuinely free to choose between competing public and private providers, the whole sector could be revolutionised. As it is, choice is still very limited.

• • Thirdly, private companies have limited freedom to design services to suit the needs and wishes of users, as they are constrained by tight government specifications. So even if there was genuine choice for users, the scope for public service innovation would be severely limited.

• Fourthly, we know that the Government is a "simple shopper", and has a poor record of getting value for taxpayers. The high cost of PFI and the enormous cost overruns on many privately-delivered government IT projects are just two examples.

So overall, while the report contains much to be positive about, the current pattern of private involvement in public services leaves much to be desired. The market is currently constrained on both the supply and the demand sides and until that changes, the much-needed revolution in public services will not occur.