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Privatisation of Local Government Services

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Published: Mon, 13 Aug 2018

Privatisation in Local Government: Westminster City Council and Islington Council

Introduction

Privatisation is referred to as “the transfer of the transfer of ownership and control of State-owned enterprise (SOE)”, to the private sector. (Bortolotti et al., 2000; Siniscalo et al., 2001). Privatisation has become a major trend in the developed economies, the developing economies, as well as in emerging market economies. In Great Britain, privatisation began in the later 1970s during the reign of the Thatcher government. It later spread across other countries and continents to become a distinguishing feature of “fin de sicle capitalism”. (Bortolotti et al., 2000; Siniscalo et al., 2001).

Privatisations are now common to most countries taking place across geographical regions and economic sectors. The 20 year period 1977 to 1997 witnessed 1,865 deals in more than 100 countries worth approximately US$750billion. (Bortolotti et al., 2000). Between 1977 and 1999, the total deals reported amounted to 2,459 in 121 countries worth US$1,110billion. (Siniscalo et al., 2001). The The World Bank suggests that global SOE value added witnessed a decline from 9 percent of GDP in 1978 to 6 percent of GDP in the 1978-91 period. In addition, privatisation has also had a tremendous impact on financial markets. In July 1998 for example, privatised SOEs had a combined market capitalisation of US$1.5trillion. (Bortolotti et al., 2000) and by 2001 the combined market capitalisation had risen to $3.31 trillion. (Siniscalo et al., 2001; Megginsson and Netter, 2001).

It is often believed that privatisation leads to more efficient and effective management of the enterprise which should in turn generate superior shareholder value. However, Siniscalo et al. (2001) notes that few governments have completely transferred ownership of SOEs to the private sector. This is evidenced by the fact that only 30 percent of the 617 companies being considered sold the majority of stock in the reported public offerings between 1977-1999. In addition, there was no privatisation in 11 out of the 67 countries included in their study indicating that there is still greater control in the hands of the state. (Siniscalo et al., 2001). There are therefore a number of questions that need to be addressed including: why governments privatised; why some countries accomplish large scale privatisation while other never privatise at all; how governments privatise; why some governments privatise big stakes while others do it partially. (Siniscalo et al., 2001). In this, we provide an analysis of a Local Government – Westminster City Council and Islington Council in London and their agendas on privatisation.

Background

The U.K remains the leading country towards privatisation among European countries in terms of the amount of state assets that have been sold so far. (David, 2002). However, other European countries are making efforts to catch up with the U.K with their interest in privatisation driven mainly by the U.K example, technological change and the European single market programme aimed at removing non-tariff barriers to trade in the E.U. (David, 2002). The main assumption of privatisation is that competitive markets are more efficient than monopolies in managing the resources of the state. It is often assumed that SOEs can be better managed by the private sector. According to the Audit Commission, the market mechanism has reduced service costs and improve service quality. Approximately £80million has been saved as a result of recent efficiency improvements in corporate services as a result of the market mechanism. (Audit Commission, 2007). The concept of Privatisation was pioneered by the U.K through the introduction of the Compulsory Competitive Tendering (CCT) in 1981 allowing the private sector to compete to deliver public services, the objective was ‘…to improve the efficiency of services that had previously been provided by the councils themselves.’ (Audit Commission, 2008).

The Local Government Planning and Land Act (1980) and the Local Government Planning Act (1988) require local authorities to subject more and more of their services for competitive tendering. (Frederick, 1994). The services covered by the CCT can be performed by the local authority’s own employees only on the condition that the tender bid for the contract to provide those services is won by the in-house organisation. The services covered under CCT as defined by the 1980 Act include new construction; building maintenance; and some highway work. The 1988 Act extended the list to include refuse; building cleaning; street cleaning; schools and welfare catering; other catering; grounds maintenance; repair and maintenance of vehicles; and management of leisure facilities. The list was again extended through powers granted to the Secretary of State and the Local Government Act 1992 to include part or all of each of the following services: management; security; architectural; engineering; property management; finance; personnel; legal; computing; corporate and administrative; housing management; home-to-school transport; libraries and theatres. (Federick, 1994).

Since its institution, there have been significant benefits of CCT in terms of cost savings and in improvements in service quality. (Frederick, 1994). In-house organisations have often been supplemented by efficient private sector suppliers. Some of the contracts have been won by direct service organisations or direct labour organisations which c operate in very small sizes, are more cost conscious and responsive. These organisations have also improved the productivity and quality of service. (Frederick, 1994). Despite the benefit of CCT Federick (1994) observes one problems with the CCT. Under the CCT, local authorities are not allowed to undertake the provision of certain services in-house. Local authorities must therefore forgo the alternative of undertaking the activity in-house even if the in-house options turns out to be the most cost-effective approach. This is unlike the case for private sector organisations that can review the balance between organisation costs and transactions costs and decide, on the basis of cost-effectiveness, whether to outsource or to undertake the activity in-house. (Federick, 1994). The benefits of CCT can therefore be placed under two categories including; (i) improved organisational management ( resulting from clearer objectives, articulation of standards and setting of targets, better monitoring, reorganisation of work to improve productivity, reduction of waste, etc) achieved in response to the stimulus of competitive comparison (and thus the prospect of contracting out); (ii) substitution of (lower) transaction costs for (higher) organisational costs. (Frederick, 1994).

CCT encourages competition among service providers and thus ensures that local authority services are provided efficiently. Taxpayers therefore achieve greater value for their money. However, the main problem with CCT is that customer value requirements are determined by the local council or authority and not by the taxpayers (or consumers) of the services provided by the local authorities. The best CCT can do for consumers is that it is capable of securing the most efficient provision of the services that the local authorities deem as necessary to be provided, not those actually wanted by the consumers. (Frederick, 1994). CCT has also made councils to be more aware of the consumers of local authority services. Surveys are now conducted by many types of council to find out what the public thinks about its services and how they would like the services improved. However, this those not still amount to providing the services that the consumers actually need. The council simply improves those services that it feels are needed by the consumers without asking them what they actually need. By so doing, consumers continues paying for the services through taxes even though they may not be deriving any value from them.

Westminster City Council and Islington Council

Westminster City Council

In line with CCT West Minster City Council has been trying to improve on the services it provides to its consumers by soliciting the services of direct service or direct labour organisations. The objective of the Westminster City Council is to deliver a world class city, built on the delivery programmes of Order, Opportunity, Renewal and Enterprise. West Minster City Council was one of the councils to begin privatising its services even before the implementation of the CCT. For example, the council added the management of its indoor leisure centres to its list of services subject to CCT in advance of official government legislation with the objective of seeking tenders in early 1988 for contracts commencing in September 1988. (Prokopenko and Pavlin, 1991). The objective of the tender was for the management of one or all of the 5 leisure centres and was based on deficit financing. Contractors were expected to include alongside cost estimates in their prospectus methods that could be used to reduce the deficit while at the same time improving the service. The contract was awarded to City Centre Leisure (CCL) after severe competition with competitors. CCL was awarded a contract to manage two out of the five leisure centres including the Queen Mother Sports Centre in Victoria and the Seymour Leisure Centre in Marybone. The contract which with total cost £2,590,300 carried a term of five years. (Prokopenko and Pavlin, 1991). Following six months after the contract was awarded, there was an increase in the number of people who used the facilities by 27,000 as compared to the same period during the previous year. The factors that contributed to the increase in the use of the service include: increased opportunities to use the service such as increased opening hours, more flexible programs particularly in the mornings, evenings and weekends; user survey action, taken to improve certain aspects of the service; introduction of customer-care training and encouragement with further efforts planned. (Prokopenko and Pavlin, 1991).

More so, management was clearer and sharper about what they were trying to do than before. There was also an improvement in the attitude and interest levels of staff thereby leading to an increase in the quality of the service. (Prokopenko and Pavlin, 1991).

One can observe that by privatising the leisure services to CCL, West Minster City Council helped to improved the quality of the service to taxpayers. More people were now willing to use the service because it was available at more affordable prices. It was also available at flexible times. People could therefore use the service without having to make adjustments to their work schedules since it could be accessed at both morning and evening hours. People on morning shift duties could use the service in the afternoons or evenings, while those of on night shift duties could use the service during morning or afternoon hours. In addition, the improvement in staff attitude and interest increased the quality of the service since more people perceived it as being of a high quality.

Included in its business framework are: Obligations to improve; new audit and intervention arrangements; emphasis on accountability for decisions and performance; freedoms to trade and charge; freedoms to spend; and freedoms to invest.

The council adopted the project “Once City 2008” which its part of its vision to meet the aforementioned objective. The aim of this project is to deliver strong communities, with low taxes and services of the highest quality, which are easy to access and available when as and when necessary. First launched in November 2005, the Once City programme has achieved excellent progress. (City of Westminster, 2009). The Council has set out a total of 30 initiatives to improve lives of people living and working in Westminster City. (City of Westminster, 2009). The Council aims at building on its commitment to low tax, with a freeze in Westminster’s share of council tax; foster its “Go Green plans” to make Westminster one of the most sustainable cities in the U.K; spend over £150million to improve schools; and look at opportunities for new housing in the City. Another key priority for the new year is to work hard for the City’s younger and older residents, as well as speaking to parents about what more the council can do to support them as they manage their family role. The council launched its leading “Leading Older Person’s Matters” approach last year, which includes an enormously popular free tea dance at the Grosvenor House Hotel for over 1,000 old residents. (City of Westminster, 2009)

The council has a duty of securing and improving best value for taxpayers’ money where best value is defined as continuous improvement in the performance of authority’s functions. In securing best value, West Minster City Councils strikes an appropriate balance among: (i) the quality of its performance of its functions; (ii) the cost to the authority of that performance; and (iii) the cost to persons of any service provided by it for them on a wholly or partly rechargeable basis. The council performs its duties in a manner that contributes to the achievement of sustainable development. Performance improvement is measured with regard to the outcomes that have been improved.

Islington Council

LBI struggled for a number of years to manage and administrate the benefit service, in October 1998 the service was outsourced to ITNet under a 7 year contract to improve service performance and delivery. In 2002 the Benefit Fraud Inspectorate (BFI) inspected LBI and ITNet the findings were highly critical of the Council’s ability to manage the contract National press interest in ITNet grew during 2001-2002, as Hackney Council terminated it’s contract with ITNet in April 2001, over the proposed 17,000 claims awaiting assessment. The financial implications where catastrophic, estimated to rise to at least £11m to develop an in-house team to sort through the back log of claims. LBI decided to review it’s contract introducing new and stringent Key Performance Indicators (KPI) – incentives and harsh penalties linked to service delivery and performance. (LBI, 2003). LBI was still subject to political and public scrutiny and condemnation of ITNet’s performance, the Ombudsmen Office could not withstand the number of complaints received A report to LBI Executive dated 20th February 2003 detailed the plans to revert to an in-house service from 1st May 2003 concluding:

‘The service has continually received criticism from claimants, Councillors, M.P’s, outside agencies and in the local press. The recent Benefit Fraud Inspectorate report highlighted that whilst the quality of the contract and the client side had improved…there had been no real improvements to claimants…’ (LBI, 2003)

In May 2003 LBI reverted the provision of the Housing Benefit Service to ‘in-house’ – a year later the Audit Commission noted ‘Significant improvements have been achieved in previously weak areas, notably housing benefit services…’ (Audit, Commission, 2004). The LBI Executive agreed to exclude press and public knowledge in connection to ITNet to include ‘information relating to the financial or business affairs…or action taken in connection with legal proceedings, by or against the authority’. (LBI, 2003). The financial loses incurred by LBI from inception to termination of the contract have never been fully released. The service provision continued to improve by 2005 Housing Benefit had transformed from a one star service (weak) to a three star service (good), (Audit Commission, 2005).

The Audit Commission on behalf of the Government have undertaken intensive research in respect to the implementation of privatisation –detailing three specific areas where there appears to be a consistent lack of:

  1. ‘Sufficient people with the procurement , risk or management skills to make effective use of market mechanisms;
  2. Information about public service markets that would enable them to use or develop those markets; and
  3. Information about delivery costs, management costs or service performance to determine the best service delivery option and the best way to secure that option.’ (Audit Commission, 2007).

Lane, (2000) significantly highlights the complex issues regarding the ideology of privatisation: ‘…local governments…must learn to conduct processes of tendering/bidding in a transparent manner, as well as implementing contracts in an efficient manner, including the monitoring of fulfilment of the terms of a contract.’

A philosophy perhaps shared by Lynch (2006), suggesting the ‘transaction costs’ are a significant consideration of privatisation, highlighting:

‘There is a need to set standards, monitor progress, evaluate performance and other activities associated with giving former monopolies the freedom to undertake public services.’ (Lynch, 2006 )

The Benefit Fraud Inspectorate was highly critical of the contract that existed between LBI and ITNet suggesting is was ‘failing’ and ‘weak’ (BFI 0476/02. The contract specification had a detrimental affect on the Council’s ability to monitor the performance of ITNet ‘LBI…is unable to measure their effectiveness or success because it does not have monitoring in place…which it makes it difficult for LBI to take strategic decisions about how best to deal with the problems..’ (BFI 0476/02). The lack of skills to negotiate contracts in Local Government has been highlighted by the Audit Commission ‘Good service procurement requires accurate specification, and robust and clear negotiation, supported by sufficient technical knowledge to evaluate cost and quality’ (Audit Commission, 2007).

Conclusions and Recommendations

Privatisation is perceived to be a more efficient method of allocating the resources of the state. It encourages more efficient management and improves staff commitment and interest thereby increasing customer value. For example, Westminster’s privatisation of its leisure services led to improvement in the value of the service to consumers. However, privatisation of certain services may not lead to their efficient provision. As evidenced by the housing benefits case of Islington Council, not all local services can be provided efficiently by the private sector. It is therefore appropriate to carefully select the services that should be privatised before taking the decision. this should be done by weighing the costs and benefits. If benefits outweigh costs, then the service should be privatised. On the contrary, if costs outweigh the benefits of the service then it should be provided in-house.

BIBLIOGRAPHY

Prokopenko, J., Pavlin, I. (1991). Entrepreneurship Development in Public Enterprises International Labour Organization, 1991 ISBN 922107286X, 9789221072867 208 pages.

Bortolotti, Bernardo, Siniscalco, Domenico and Fantini, Marcella (2000). Privatisation and Institutions: A cross Country AnalysisCESifo Working Paper Series No. 375. Available at SSRN: http://ssrn.com/abstract=257773

Siniscalco, Domenico, Bortolotti, Bernardo and Fantini, Marcella (2001). Privatisation Around the World: New Evidence from Panel DataCESifo Working Paper Series No. 600; FEEM Working Paper No. 77.2001. Available at SSRN: http://ssrn.com/abstract=288530 or DOI: 10.2139/ssrn.288530

Frederick, d. (1994). Why Compulsory Competitive Tendering for Local Government Services is not as good as privatisation. Available online at: http://www.libertarian.co.uk/lapubs/econn/econn052.pdf

David, P. (2002). Privatisation in the European Union: Theory and Policy Perspectives. New York Routledge.

City of Westminster

http://www.westminster.gov.uk/


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