The Role of Profit in Public-Service Delivery

 (This is a current extract from the Patterns of Power Repository.  An archived copy of this page is held at http://www.patternsofpower.org/edition02/3536.htm)

A common argument against using the commercial sector for public-service delivery is based on the assertion that private profit is incompatible with public benefit:

·      It can be argued that a company’s profit is merely an additional cost to the taxpayer, so it should be cheaper for the State to recruit its own employees.  This argument is invalid if the efficiency gains made by private companies exceed the profits they make – as was the case in the example quoted above, when Britain privatised its telecommunications.

·      It can also be argued that there might be a conflict of interest between making a profit and providing an adequate service or, to put it another way, that employees in private companies lack the 'public service ethos'.  For example, after the UK rail network had been privatised, to a company called Railtrack, there were several fatal accidents and the company was penalised – resulting in its liquidation.[1]  People argued that Railtrack had prioritised profit over safety.  There are interesting aspects of this case:

      A private company ought, in theory, to have prioritised safety in order to avoid losing its reputation and losing the business.  In practice, though, the mistakes were made, its shareholders lost their money and lives were lost.  It appears that the management team was unable to act according to its own best long-term interests, whether through incompetence, short-termism, or there being no obvious competitor who would take over the business.

      Another argument is that the mistakes would have been made anyway, whether the company was private or not.  Public employees have to decide what work to carry out when there are budget limitations, and they may make mistakes.  Whilst the employees’ motivation cannot be either proved or disproved, there is no suspicion of profit motive in a public service – so people's perceptions of the reasons for the accidents would have been different (a political benefit of public ownership). 

·      A different aspect of the conflict-of-interest argument is exemplified by the allegation that private health providers might decide to carry out the operations which were most profitable rather than those which maximised quality of life and life expectancy for the patients.  There is a suspicion that this may be happening with (private) American healthcare – which compares badly to other countries when relating costs to life-expectancy.[2]  This problem can be overcome if the providers aren’t the decision-makers.  A patient’s doctor can act as a personal adviser who is independent from the providers of clinics, hospitals and care homes.  The doctors could be public servants in this model with a 'public service ethos' and, as with the UK ‘Internal Health Market’ in the early 1990s,[3] the other providers could be a mix of private and public – to gain the benefits of competition.  Similar structures can be devised for other public services.

These concerns about profits and conflicts of interest can be avoided by giving a role to civil society, rather than either the commercial sector or government.  After the liquidation of Railtrack, for example, the rail network was transferred to a non-profit-making organisation: Network Rail.[4]  This approach allowed the government to set objectives and apply regulation, whilst keeping the management of the rail network separate from national politics and budgets – but it has been argued that it still lacks accountability to the public, who own it and who are its customers.[5] 

© PatternsofPower.org, 2014

[1] During Railtrack's management of the network, from 1994 to 2002, there were fatal accidents at Southall in 1997, Ladbroke Grove in 1999 and Hatfield in 2000.  The New Statesman published an article on 20 May 2002, entitled Why privatisation makes railways unsafe, which was available in April 2014 at http://www.newstatesman.com/node/142975

[2] Wilkinson & Pickett, in The Spirit Level, pp. 79-81, show that Americans spend more than twice as much on healthcare than the average of 19 other wealthy countries who are all listed as having a higher life-expectancy.

[3] Civitas produced a report in February 2010, entitled The impact of the NHS market, which was available in April 2014 at http://www.civitas.org.uk/nhs/download/Civitas_LiteratureReview_NHS_market_Feb10.pdf.

[4] The legal and financial structure of Network Rail was described on its website in April 2014, at http://www.networkrail.co.uk/aspx/713.aspx, as being a “not for shareholder dividend” company, whose “profits go straight back into improving the railway”.  It has board members drawn from government, industry and the public.

[5] On 17 August 2013, The Spectator published an article entitled This is no way to run a railway; it questioned both the localised monopolies of the rail operating companies and the track monopoly of Network Rail:

“As for Network Rail, putting the entire rail network into the hands of one company which seems to be accountable to nobody makes no sense. If rail lines cannot be divided in such a way that obliges the operators of different lines to compete for business, then they should be owned by a public body which is accountable to the Transport Secretary, and for which he cannot escape responsibility.”

This article was available in April 2014 at http://www.spectator.co.uk/the-week/leading-article/8995031/this-is-no-way-to-run-a-railway/.