IS THIS GOVERNMENT HOSTILE TO THE PROFIT MOTIVE?

IS THIS GOVERNMENT HOSTILE TO THE PROFIT MOTIVE?

Private sector confidence threatened, while not for profit sector suffers too

Mixed signals from Ministers perplexes  many managers

Comment

Is the Coalition Government against profitmaking?

It seems a ludicrous question on the face of it. But some in the private sector are now beginning to ask it.  The Coalition Government is dominated by the Tories. Central to Tory thinking is the paramountcy of  regulated free markets ,enterprise  and wealth creation ,with a  small state and low taxes ,all tempered by a belief in strong local communities. In practice it doesn’t always work out that way, particularly with respect to a small state and low taxes.   Liberal Democrats too want wealth creators to thrive, (although  are keen to limit profitmaking to prescribed areas)  with a focus on a fairer tax system and more equal distribution of wealth, throughout  society .But talk to businessmen and entrepreneurs, the wealth creators, and you might get a surprise. Many actually believe that this Government is hostile to the private sector and the profit motive. Does this perception stack up?  You have got to look at the Governments main big idea to begin to understand why some hold this perception.  So keen is this Government in promoting the Big Society that its rhetoric is almost entirely focused on championing the third sector, social enterprises, co-ops and mutuals.  Phillip Blonds ideas about mutualisation and localism  have not only caught their eye but are integral to many of their policies.

Indeed even when it talks about business models its not Marks and Spencer or Virgin, for that matter, but the John Lewis Partnership it references. Successful though this Partnership clearly is, it has an almost unique ownership structure and is hardly mainstream. More co-op, than bog standard corporate.

Its worth asking what profit is, as its become  something of a  dirty word for some  politicians (look at the polarised  debate over the NHS).  A profit  is financial benefit that is realized when the amount of revenue gained from a business activity or enterprise  exceeds the expenses, costs and taxes needed to sustain the activity. Any profit  that is gained goes to the business’s owners, who may or may not decide to spend it on the business.  So a profit is actually a surplus. Any sustainable business, or indeed any enterprise including a charity, has to aim to generate a surplus or ‘margin’. Not to do so over time is unsustainable. One American charity head involved in Healthcare summed it up succinctly as ‘No margin, no mission’.  What happens to that surplus and how it is managed and distributed is what differentiates the private sector from the charity sector (although not obviously the only difference).  However, regardless of the type of service provided or goods sold or traded, all companies, enterprises and charities, whether pursuing public benefit or not,   have as their goal making a surplus (profit).Indeed if you look at the way charities are structured and operate  they,  to a considerable extent, imitate the way a profit making company operates, although there are clear differences in governance. They have to project manage, control costs, plan ahead, invest in research, train and assess  staff, recruit experienced managers, bid for contracts, market their services and  above all compete.

All the public services we cherish depend on profitable enterprises. If they don’t make a profit there is nothing, or rather not much to tax to fund services. Indeed it is strange for this Government, which is relying on profit making companies and an export led recovery,  to get us out of the economic mess we are in,  remains so ambiguous  in its attitude to the private sector, when market confidence is so important and by the same token  so low.  It suggest a lack of strategic nous. A weak private sector, self- evidently, also means a weak charity sector. It is perverse in the extreme that the governments mood music is perceived as so hostile, therefore, to profitmaking. The private sector offers important skills, innovation, creativity, and capital. It also exerts a downward pressure on costs and prices, if it operates in a competitive market and responds quickly to shifting demand. Clearly profit companies are already delivering many high quality support services in health, education, prisons and other public services.

The Cabinet Office is the Department driving, overall, Public Sector reforms. It is  supposed to be rationalising procurement, cutting red tape, cutting contract costs,  culling quangos, encouraging more public service delivery from the private and not for profit sectors,  encouraging SMEs to have a greater share of public  sector contracts,  ending  late payment    and, of course, crucially  it  is also championing the Big Society. The Tories  and particularly so under Camerons leadership, stress  that individual freedom is only half the story. Cameron has said “Tradition, community, family, faith, the space between the market and the state: this is the ground where our philosophy is planted.”

The Cabinet Offices Business Plan says that ‘ We will change structures so that public sector provision is more  open to voluntary organisations, social enterprises and small businesses.’ Certainly the third sector can make a strong case to be given a greater slice of the public sector pie.

However, according to Education Investor,  Francis Maude, a Cabinet Office Minister,  was sent a letter last year  by five  leading education  companies which expressed concerns over the fairness of the education market and the anti-competitive conduct of subsidised education  quangos ,  offering constructive  recommendations about how to make the market fairer and more transparent. It took the Minister almost five months to reply, (Cabinet Office guidelines encourage reply to letters within 20 working days) . Was his reply worth waiting for? Apparently, not. In his reply (only secured after the journalist rang his office) he was entirely dismissive of the managers complaints, implying that everything was hunky-dory while failing to address a single  one of   their recommendations. These are companies, by the way, seeking to make inroads into the international education market, which will help UK Plc. Clearly they can expect little support in this from HMG in the future. They certainly haven’t in the past.  Why, one has to ask, would they have bothered to write to Maude in the first place  if there were no  legitimate issues to address. These were competitors agreeing that there were substantive issues of shared  concern, and which merited a response and action from the Government. Such cavalier and discourteous behaviour from a Government Department responsible for important reforms hardly inspires confidence. No wonder the private sector (and in this case not for profit too) is miffed. The fact that Maudes Department sent the letter initially to the Health Department, for answer, rather suggests a Department in some disarray and under- resourced. One hopes for the reforms sake that this is not the case. But this episode surely reveals three truths. A considerable degree of complacency from Ministers and senior officials  , a lack of concern or interest in   issues affecting our exporters  in the education market and   a lack of willingness to engage with  key stakeholders on matters of crucial concern to them.

A white paper on public-service reform that Mr Cameron said would lead to a “range of providers competing to offer a better service” has now been delayed. According to a leaked memo of their meeting acquired by the BBC ,  Francis Maude, recently told John Cridland of the Confederation of British Industry that there was to be no “wholesale outsourcing” of public services. The note was marked “strictly private and confidential” and was drawn up by the CBI as a record of the meeting. It said: “The minister’s messages were clear cut… the government is committed to transforming services, but this would not be a return to the 1990s with wholesale outsourcing to the private sector – this would be unpalatable to the present administration. “The government was not prepared to run the political risk of fully transferring services to the private sector with the result that they could be accused of being naive or allowing excess profit making by private sector firms.” Private sector involvement would be limited to joint ventures with not-for-profit groups.

The note adds: “Government is very open to ideas for services currently provided within the public sector to be delivered under a private/government joint venture. Government is committed to new models of partnership, and private sector organisations need to offer joint ventures – joint ventures between a new mutualised public sector organisation and a ‘for profit’ organisation would be very attractive. ”Government… was very interested in turning existing services into government companies. These would avoid the downsides of ‘hassle’ and adverse political reaction.”

The third sector and not for profits clearly have an important role in public service delivery and indeed arguably   deserve a greater role. But we need a diversified supply side bringing each sectors strengths into play. The Private Sector has access to capital and capacity that the not for profit operators could only dream of .The Governments job is to provide an enabling environment within which there is a diversified, fair, regulated  supply market but  does  little  to deliver this ,ignoring among other things , the  market activity of  subsidised quangos which increase the risks and costs to other suppliers, while  obstructing the development of the market both here and abroad. (and yes  they do cross-subsidise!)

 

Michael Gove the Education Secretary, at the forefront of public sector reforms introducing “free schools” inspired by the Swedish system and US Charter schools has rebuffed suggestions that education companies should be able to make a profit from them, as firms can in Sweden and the United States.  Some  advisers have even briefed against profit making Charter schools in the States suggesting they were less impressive than not for profits, while studiously ignoring the fact that the most successful Swedish Free schools tend to be privately operated. Its a desperately naïve and counterproductive approach. Its not either or, but both sectors that are needed in the supply mix. Nobody would claim that the private sector is a panacea for public service delivery but the best in the private sector has much to offer  public services.   He insists that he has enough not-for-profit providers: “We don’t need the profit motive,” Mr Gove has said. . He obviously hasn’t clocked yet that the state education system relies on companies driven by the profit motive whether its building the schools, providing ICT,   school books, inspecting the schools, providing specialist support, training and improvement services, running local education departments  managing special schools and so on. Indeed isn’t it distinctly odd that there is no need of ‘profiteers’  managing state schools   but there is a need for them apparently   in managing our most vulnerable pupils  in special schools .  The mood music if not hostile to the private sector is decidedly lukewarm.

So, given this policy backdrop you would have thought, wouldn’t you, that not for profits are optimistic and gung-ho about the future and their role in support of the Big Society and looking forward to more public service contracts.   Well no, actually they are not.  The truth is its pretty cold out there .Not for profits are having a hard time of it. Many are restructuring or merging, income and donations are reducing, there are much fewer big ticket contracts available and those that are left are subject to increased competition   with contracts smaller in scope and value, while many fine charities are haemorrhaging capacity and manpower.

 

The Economist recently pointed out that Britain is unusual among rich democracies not in how much private involvement there is in its public services, but how little.

 

It also pointed out that profiteers are cold shouldered when it comes to education but welfare…. now that’s a different matter. In welfare there are no such qualms about profitmaking. A new scheme, the Work Programme, offers payment by results to providers for placing the long-term unemployed in jobs and keeping them there.

 

There is much muddled, incoherent and contradictory thinking going on which could well derail the reforms. The Government needs a long hard look at what it wants to achieve against the backdrop of straitened economic circumstances and work out how both the private and not profit sectors can deliver reforms for them. It is managing to upset large numbers of stakeholders (whom it needs to keep on board), and for no conceivable gain. Its spending too much time listening to policy wonks and woolly, pie in the sky theorising about the Big Society and too little time working out the practicalities, and the change drivers including the provision of incentives   to harness both the market and the third and voluntary sectors to deliver its public reforms, focused on raising productivity and improving efficiency. And time is running out.