3.5.3.6 The Role of Profit in Public-Service Delivery

As described above (3.5.3.3), the private sector can sometimes deliver public services at a lower cost than public sector employees and it can also offer people a choice.  There are circumstances, though, where private companies offer no advantage to the taxpayer.

One common argument is 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 can be the case, for example, when the service is a natural monopoly (3.5.3.4).

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’.  In one example, a New Statesman article, Why privatisation makes railways unsafe, itemised some of the problems which led to fatal accidents after the UK rail network had been privatised, to a company called Railtrack.  It was argued that Railtrack had prioritised profit over safety.  There are two 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 might 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 insurers and private health providers might decide to offer drug treatments, or 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 might explain the findings in a BBC Reality Check, Does UK spend half as much on health as US?:

“If you look at all healthcare spending, including treatment funded privately by individuals, the US spent 17.2% of its GDP on healthcare in 2016, compared with 9.7% in the UK”

“…in 2014, average life expectancy at birth in the USA was 78.8, compared with 81.4 in the UK according to the Office for National Statistics (ONS).”

Given the fact that the UK National Health Service is also free to every citizen at the point of use, it offers much better value to the taxpayer than the American dependence on private providers.

Despite the many advantages of using private companies to provide some public services, they are clearly not the best choice in all cases.

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