11 June 2019

A new deal for public services

By George Freeman MP

Public service reform has never been more urgent: economically, socially and politically.

Economically, it is the key to tackling the structural deficit – “the bonfire in the basement of the UK economy” which means we now spend more on public services than we earn every year, not just in recession. It is how we will cope with the effects of an ageing society and a low-wage service economy – and the fact that spending on health, social care, benefits, public sector pensions and debt interest continues to grow faster than the economy.

We need to increase our rate of growth and the efficiency of our public services. If we don’t, we risk a serious crisis of public sector debt that will bankrupt us when interest rates return to a normal level. This is a structural challenge to our public sector and public finances which nobody in Parliament is talking about.

It also matters socially. Our old-fashioned 1940s model of public services based on strict functional and financial silos is no longer appropriate for the users of services or in addressing the most serious and costly challenges of our ageing society – like dementia, obesity and mental illness.

And it matters politically. After eight years of challenging post-crisis spending restraint the Conservatives are in danger of looking again like the party of “private sector good, public sector bad”.

The Thatcher revolution in the 1980s involved a necessary rejection of failed corporatism, and the unleashing of the enterprise economy. But despite continual funding increases – the Conservative Party has always prioritised and increased NHS spending, in particular – we often sound like we didn’t “get” the public sector.

This is a disaster, for three reasons. First, we will never tackle public sector reform without supporting inspired public sector leaders. Second, we will never become an innovation economy without public sector partnership. Third, politically, millions of people work in the public services and really believe in them. We need to realise and celebrate that. To many people, public services are their lifeline in times of need and also a route to a purposive and fulfilling career. They have committed their lives to public service. But, too often, the Conservative Party looks like it doesn’t value that.

If we fail to unleash a bold new era of public service reform and innovation, we risk post-crash and post-Brexit Britain becoming an increasingly indebted, impoverished ol people’s home off the coast of Europe.

The challenges of economics and globalisation mean that the debate is now no longer between small government and big government. It is between the “smart state” and the bankrupt state.

Public sector reform

If we are to tackle the structural deficit in the public finances and modernise our public services, we must embrace public sector innovation. It is the key to both unleashing the efficiency and productivity we need to tackle the structural deficit, but also the key to renewing a modern social contract in 21st-century Britain.

So how can we achieve it?

First, by recognising what approaches have not worked. Endless tinkering and top-down reorganisations dreamt up by the latest minister or Civil Service ‘tsar’ don’t work. Press releases are issued. Announcements are made. Strategies launched. And, all too often, very little changes on the ground.

Second, we must recognise that the most entrenched public service policy challenges require an integrated place- and person-centred approach, in direct contrast to the traditional Whitehall model of Treasury allocating money in silos, with strict restraints on how it can be spent. If anyone delivers more for less they are given… less. Failure is bailed out. Integration and spending on prevention blocked.

It’s madness. We are literally rewarding failure and punishing success. If you ran a business like this, you would go bust. And lose all your best people.

But public sector modernisation won’t just happen. It will need real political commitment from the top and a serious New Deal for public sector leaders.

We have to accept that, after eight years of tough austerity, our people in the public services are exhausted and need a boost. It’s time for a bold New Deal, based on some key principles: inspiration, prevention, incentivisation, localisation and integration.

By public sector enterprise, I do not mean privatisation. I mean a new “contract” in which both central government and local agencies agree the following as part of a New Deal:

First, local agencies would come together with a clear plan – and crucially a joint governance structure – to prevent cost and demand by intervening earlier. This would be based on better service integration, reduced administrative duplication and moving  resources to prevention rather than treatment.

Second, the Government would publish the long-term Treasury forecast of the growth and deficit in the area. This would determine its allocation of spending for five years.

Third, local agencies would be given new freedoms to move money between the usual silos – and retain 50 per cent of the savings to reinvest in local services.

This isn’t privatisation. It’s a radical new approach to promote and support local public sector innovation, enterprise and leadership. So, what might this look like?

The “new deal” in health and social care

Health and social care are the two biggest drivers of the structural deficit. With an ageing population and ever-increasing cost of treatment, the spiralling cost of NHS hospitalisation and community care are  bankrupting our public finances.

It shouldn’t be any surprise when you think about how our system works. We fund in strict silos. We incentivise failure and reward failure. And we prioritise (expensive) treatment in NHS hospitals over (lower cost) prevention in community facilities.

In my county of Norfolk – set to be the first to have more pensioners than working-age people – we have a total population of 850,000, and spend circa £1 billion a year on the NHS. In addition, we spend roughly the same on social care, which now makes up 85 per cent of the county council budget.

This money is allocated between three hospitals, five CCGs, NHS Trusts for Ambulance, Mental Health and Community nursing, and Norfolk County Council. That’s 12 organisations – with the Sustainability and Transformation Partnership trying to work out how to do it better.

Of the 12 organisations, five are in special measures. And the social care sector is on its knees.

This is a serious crisis, repeated across the country, which is about to blow up in our faces. And most of the reforms announced from Whitehall over the last 20 years have made the situation worse.

Unsurprisingly, local leaders are exhausted by the old model. They know we need, and are desperate to try, a different approach, based on cost and disease-prevention rather than late-stage treatment.

Imagine if the Treasury issued a New Deal to all the health and care organisations across UK cities and counties: if you can reduce the rate of increase of the HMT forecast deficit, we will let you keep a proportion of the savings (say 30-50 per cent), provided you put them back into your economy and public services. We will also give you total freedom on how you spend the money.

Overnight, local leaders in Norfolk would begin investing in community health facilities to reduce demand for in-patient beds at the Norfolk & Norwich hospital which costs £5,000 a week. The New Deal would free hospital managers from the existing incentives under the internal market which mean they are incentivised to keep hospitals full.

The New Deal would only work by creating a shared incentive for the 12 agencies to come together to form a true partnership, focusing together on prevention rather than treatment and sharing the savings that resulted.

All my experience setting up similar research partnerships in NHS research suggests you would see local leadership galvanised. Bold initiatives would lead to investment in better community care and keep people out of hospital. (What would they do with spare hospital space? Make it available to revenue-generating research work as part of the  Norwich Biomedical Campus. And across the UK – where we have a systemic lack of clinical research beds and facilities.)

Imagine if you took the same approach to growth. If you can get the rate of growth in Norfolk up beyond the trend rate, we’ll let you keep the additional tax revenue. Suddenly, councils would have tangible incentives to attract businesses and promote innovation.

This approach would lead naturally to other innovations too: Social Impact Bonds, real economic localisation, earned freedoms for proven leaders, payment on results, incentives for prevention of cost and  incentives for retaining savings and growth.

In welfare – imagine if we allowed new Social Welfare Partnerships to invest in preventing crime and welfare dependency, keeping 50 per cent of the savings on Treasury spending forecasts?

Imagine if we allowed not-for-profit social enterprises – set up by demoralised frontline staff fed up with bad management in creaking and over-managed public services – to take over the contracts for services they know they could run better as not-for-profit mutuals far better than the top-down state from Whitehall?

I have spent my life putting together partnerships in the public sector, both in my previous career and as an MP and minister. I know this approach would galvanise local leadership, accelerate deficit reduction, local growth and public service reform.

Innovation economy

Public sector enterprise is also key to the UK’s ability to become a genuine innovation economy.

The UK is a global leader in invention and early innovation. But we are terrible at commercialising successfully. That’s due in no small part to the fact that our public sector is a slow adopter, low price and a slow payer.

We will never create an innovation economy without a more innovative public sector. That means the public sector doing the opposite of what it usually does. Fundamentally, we need to use public sector procurement to test and develop new approaches.

The biggest barrier to public sector innovation uptake is the initial cost of procuring and installing an innovation in an existing public service delivery system. In healthcare, for example, there are myriad healthtech innovations which can save the system a lot of money over 12-72 months, but which are rendered non-viable because of the initial cost, and the fact that savings typically credit another department’s budget.

By guaranteeing a public sector agency a percentage of the savings, we would create the conditions where the public sector can get innovation like healthtech paid for by the providers, from the future dividend stream.

The New Deal model provides exactly that. The first thing a Local Prevention Partnership would do to find and demonstrate savings is invest in the suite of technologies which can deliver those savings. That means earlier detection, intervention and prevention – whether in health, crime, addiction, welfare or education.

The costs of our current model of late diagnosis and treatment is bankrupting us. In health, it’s literally killing us.

Regional infrastructure

Nowhere has the lack of incentives for investment in new facilities been more obvious than in regional infrastructure.

While the Treasury has all too often been able to fund big-ticket projects like HS2 and Crossrail (usually with massive cost over-runs), slow investment in regional and local infrastructure has been a major source of resentment at distant Big Government and insult to struggling commuters on the frontline of gridlock Britain.

This unfairness fuels a sense of disconnection, isolates people from opportunity and concentrates growth in a few main clusters. Added to that, taxpayers face massive subsided house-dumping without infrastructure by developers, putting huge pressure on local services. Lack of good regional infrastructure slows down growth in marginal areas and creates an unfair tax burden.

The current model in which regional infrastructure all has to be funded by the Treasury needs to stop.

What if we applied the same New Deal logic above to infrastructure and gave Mayors, cities and regions the freedoms, currently denied by the Treasury, to raise infrastructure bonds to finance major local infrastructure for growth of their own? By freeing them from the dead hand of the Treasury, we could unlock a new cycle of infrastructure – with the added discipline imposed by the markets instead of bureaucrats.

So too on housing. Instead of subsidising massive developers to dump housing estates on every town and village in the South-East (often without infrastructure – incubating massive problems downstream) how about a new town for every home county? This could be done through development corporations with the freedom to raise infrastructure bonds and equipped with powers of fair-value compulsory purchase and land value capture gain to fund the infrastructure.

If structured correctly, the subsequent increase in land value would accrue to the Kent Development Company or the Surrey Development Company. This could then be re-invested in those new towns and infrastructure. The millennial housing crisis is mainly in London and the South-East. Imagine a ring of new towns around London. It would be a totemic move that would speak directly to our urgent generational challenge. And a major spur to UK growth and economic renewal when we urgently need it.

And, as elsewhere, local agencies would be given the incentives to come together to unlock infrastructure bottlenecks. In my area of East Anglia, we have about 20 examples: the Ely rail junction bottleneck, Norwich-Cambridge railway electrification, the A47 New Town, Wisbech rail link and so on. All are financially viable. But all are being stopped by Treasury obstruction of local financing.

Mutual rail

Rail is another key area where the ongoing under-investment in local and regional infrastructure, coupled with rising numbers of commuters, contractual complexity, fragmentation and rising costs mean Corbyn’s mad idea of renationalisation is cutting through.

This is a failure of Conservative imagination in opening up the conditions for new investment.

The old model of nationalisation was a joke. No one who lived through the nightmare of British Rail would ever want to return to those bad days.

However, the model of privatisation that replaced it has been plagued by problems too. Up and down the country, people are paying through the nose for trains that are late and chronically overcrowded. The dysfunction of our rail system – and litany of contractual and procurement disasters from DfT – has become symbolic of a wider malaise.

How can we apply public sector innovation to the rail system? Simple. We stop being torn between the old binary choice of privatisation or nationalisation and instead look at new models of mutualisation and community and regional rail.

Why not create some Regional Rail Companies which combine track and train operating companies into a new company running an integrated service? Why not give them powers to raise finance for development of stations and new towns to finance rail upgrades, like the Victorian railway companies? Why not let season ticket-holders own shares?

In Norfolk – only 40 miles from Cambridge, where housing demand has exploded, but still a rural backwater – good fast rail links to Cambridge would be transformative. So why don’t we allow local Rail Partnerships and Development Companies to finance infrastructure from the growth it unlocks? We could complete the £100 million upgrade of the Cambridge-Norwich line through bond financing. This would link two great innovation hubs, drive growth into marginal rural areas, cut congestion and create a renaissance of local economic growth and leadership.

Or we can continue to defend slow, bureaucratic top-down Whitehall rationing of infrastructure investment – and see public frustration deliver Corbyn.

Leadership development

To drive a renaissance of public sector reform and enterprise, we need to support, incentivise, equip, train and reward our best public sector leaders. This requires a quiet revolution in public sector leadership.

The UK has a world-class reputation for public administration and a huge pool of talent. But we need to support the most able people and managers within the system. Across health, education and all our public
services we know that there are some brilliant leaders as well as many mediocre ones.

In health, we have around 200 hospitals. How many have really top CEOs? About 50. Why don’t we identify the top 50, recognise them properly and make them the equivalent of three-star generals? Give them new freedoms, allow them to take over failing hospitals or other public sector agencies? Why not do the same with great head teachers? With our best social services managers and council CEOs?

We should be rewarding the best to inspire the rest. That’s why I was delighted the Chancellor recently launched my idea of the Public Sector Leadership Academy. Now we need to put in place the reforms to give leaders more freedom to drive efficiency, productivity and modernisation.

Major reform of Treasury funding

Fundamentally, at the heart of any serious agenda for public sector enterprise and innovation there must be a radical change in the way the Treasury works.

We have to end the Stalinist top-down Whitehall-knows-best financial centralisation which is holding back local regeneration and investment.

It is the only way to escape the debt hangover from the financial crash, unleash public sector enterprise and leadership, and incentivise local economic growth.

The Treasury has taken the crisis of 2008 as an excuse to massively tighten its grip on every aspect of expenditure. It is currently operating like a financial control department at a failing company with a lack of a serious strategy for recovery. Its response to the structural deficit has been to take iron control of every line-item of expenditure and cut each by as much as it can – regardless of the impact on longer-term costs. The cutting of SureStart, school playing fields and council sports facilities are all examples of short-term cuts which are leading to higher costs elsewhere.

Of course, we need financial rigour. But no company facing a serious crisis of debt, lack of revenues and investor confidence thinks the answer is in cost control on the P and L. It’s in the balance sheet. We should be looking to unlock the energy and potential of the real assets in this country.

Mrs Thatcher famously once said: “There is no such thing as ‘society’ – only people, families and communities”. The equivalent is true today  economically. I would argue that there is no such thing as “the  economy”. Instead, there are thousands of local, regional and sectoral economies. Unleash them and we will get overall growth up dramatically.

There is only one solution to balancing the books. We need to get public spending increases to go slower than private sector growth. Fundamentally, that means getting growth up quicker than public sector spending.

What policy could incentivise public sector workers to drive growth up, while also restraining public spending and reforming services? The answer is built on the same principles as the New Deal: embracing the power of tax increment financing.

Tax increment financing was first put in place in the US. Cities approached Washington and laid out a basic proposal. Would the federal government give them a share of the tax revenue for major infrastructure projects?

When they got approval, the local developer went off to get the capital for the new development. The developer would pay the interest on the capital upfront and finance the infrastructure upfront, safe in the knowledge that there was going to be revenue flowing in later.

It’s a brilliantly simple principle, but also a truly radical one: funding today’s infrastructure via tomorrow’s growth.

This would be a bold change in the Treasury model of command and control. It is the key to unlocking growth. By changing the orthodoxy in public financing, we can help solve the deepening crisis of leadership in our local government and public services – the braindrain of top leaders out of local public services, which has only been accentuated in recent years as local government has borne the majority of the cuts.

Conclusion

Every political age has its defining challenge. Many commentators would view ours as Brexit. But I would argue that Brexit is a symptom of a much wider challenge: the tectonic rupture in our current model of political economy, driven by a perfect storm of grievances and economic insecurity and a pathology of powerlessness through post-crash austerity, globalisation and economic centralisation.

People voted to take back control. Not just from Brussels but from Whitehall.

To make Brexit a genuine moment of national renewal we need a new model of decentralised, incentivised, integrated, participative and place-based innovation.

That means being as bold and innovative as the pioneers before us.

We don’t honour the great institutions of our public realm – whether the NHS, the BBC, the Civil Service or government itself – by viewing them as monuments to the past, but as inspiration to the future.

Whether on genomics, digital health, mutual rail, housebuilding, life sciences or international aid, we have the chance to put in place reforms that are the equal of those that went before us.

The welfare state was created by changes to taxation. So too with the smart state. New models of financing can support new incentives in our public sector. We can unlock a renaissance of leadership and ambition that makes our public sector the envy of the world.

Brexit was a roar for change. The pace of globalisation, technological innovation and the pressure on our public services from an ageing society demand a new economic model. We have to move from dependency on top-down Treasury hand-outs to a bold set of incentives for public sector leadership. Entrepreneurial, place-based, rewarding success.

To unlock a real Innovation Economy and Opportunity Society, we must tackle the grievances of Brexit and harness the demand for a more inspiring programme of leadership. A New Conservatism to offer a New Deal for our public services.

Let us make the Conservative Party the party of the public as well as the private sector.

This article first appeared in ‘Britain Beyond Brexit’, a collection of essays published by the Centre for Policy Studies. You can purchase a copy of the book HERE.

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George Freeman is the Conservative Member of Parliament for Mid Norfolk.