05 April 2004
In an address to the Social Market Foundation, David Willetts illustrates a Conservative vision of 21st century public services.
HOW TO REFORM THE PUBLIC SERVICES
Speech by David Willetts MP to the Social Market Foundation on Monday, 5th April 2004
This is a Conference explicitly about what one might call the demand side of public services. There has been a lively debate in our country for 25 years now about how we can give financial power to the individual user of public services without them having to pay – or pay too much - themselves. It's what vouchers are about. It is also the crucial thought behind the pupil and patient passports.
Policy wonks have debated these demand side issues obsessively for years. But little progress has been made in actually empowering the user of public services. Why is this? I am increasingly convinced that the problem is the failure to look at the supply side. There is no point in having ingenious schemes to empower the users of services if there is no way in which the services that they want to consume can then be provided. Capacity matters.
This is I believe the single most important reason why so much of the money the Government has put into public services has disappeared in more waste and higher costs. If you throw large amounts of public money at a service whilst it remains very difficult to increase supply, then inevitably the money will be frittered away in higher costs and fringe jobs with little practical value. Reorganising a hospital so that you can get more patients through the operating theatre is so much more difficult than spending the money recruiting another anti-smoking adviser.
Limitations on supply is why spending more money hasn’t worked. But equally such limitations would obstruct our agenda for spreading choice. Choice needs more capacity too. If you promise people choice but no more school places or better hospitals are provided then you end up with frustrated consumers. MPs have a stream of people coming to their surgeries saying 'you promised that I could choose the school my child goes to but the school I have chosen is full so I can’t get my child there.' That is why the crucial feature of the new Conservative agenda for reforming the public services is that we are committed to liberating providers at the same time as strengthening choice. Empowering the users of services and liberating the providers have to go together.
New New Labour?
There are now people in the government – especially some advisers in No. 10 – who claim to understand the need for choice and the importance of capacity. In his excellent recent book Motivation, Agency and Public Policy: Of Knights and Knaves, Pawns and Queens, Professor Julian Le Grand, who is now an adviser in Number 10, agrees with the last Conservative government’s reforms in health and education and urges Labour to go further. Blairite advisers might now regret that the government dismantled our GM schools and our GP budget holders. After spending 5 years dismantling these reforms they are now trying to introduce something similar of their own. It is ironic that, contrary to his grandiose claims, the most sophisticated defence of this Prime Minister is that he does after all have a reverse gear.
I welcome this apparent shift in thinking at Number 10. I hope it leads to real reform. As a politician I welcome it because it means Labour can’t react with horror to our proposals if what we are doing is having the courage to follow through what they just talk about. It will be absurd if during the months ahead Ian MacCartney tries to run scares about policies which everyone suspects Tony Blair’s advisers at Number 10 would rather like to implement themselves.
Labour’s problem is that an enormous gap has opened up between the thinking of a small number of sophisticated advisers at Number 10 and the reality of policy as implemented under this Government. The public sector machine carries on with its old top-down approach even whilst Blairite advisers may privately recognise that it doesn’t work. It is as if the men at the top of Gosplan have lost confidence in central planning but can’t dismantle the structures they themselves have created. This explains the extraordinary loss of momentum which the Government is now suffering from.
If we look at the reality under this Government we see limits on the supply side and frustration on the demand side. Let me give you two examples of measures which are claimed to be examples of the new Blairite approach to public services which turn out in reality to offer much less than they promise.
Last week we saw the official launch of the first round of Foundation Hospitals. When Foundation Hospitals were first mooted they sounded like exactly the sort of thing Conservatives have been arguing for for years – a degree of independence for NHS hospitals to try to rival the independence of private providers in this country and of course providers in most European systems. Over the last year the proposals have been so watered down as to be largely meaningless. They will not, as originally envisaged, have flexibility over staff pay, borrowing, or private income, and they will be subjected to NHS performance management and the Secretary of State’s regulator. In fact they are not a foot in the door: they are a step in the wrong direction. The freedom to raise private finance is a good example: borrowing must fall within NHS departmental budgets so that what is gained by one hospital is lost to another. When Old Labour critics of the government claim that Foundation Trusts will lead to unfair competition between hospitals they are quite right. In this case partial reform is worse than no reform at all.
That was an example from the supply side. The second example is from the demand side. The Labour Party has launched a deliberate attempt to capture from Conservatives the language of ‘choice’ within the NHS. But again, the reality falls short of the rhetoric. Choice of hospital is available only once you have already been failed by the NHS – after a six months wait. By 2006, we are told, this six month precondition will be abolished, and choice will be available from the point of referral. But even then it will be a choice of only ‘four or five’ hospitals – chosen by the bureaucracy. And you can be sure the bureaucracy will see its responsibility as ensuring different hospitals all get a “fair share” of demand. It will have regard not for individual patients but for the providers. This ‘choice’ programme’ is simply another way of fitting demand into the existing supply.
There is one reform of theirs, however, which is a very useful pre-condition for our reforms of healthcare. We welcome the treatment tariff, or payment-by-results system. It helps lay the ground for the introduction of our Patient Passport policy. It sets a standard price for treatment around the NHS which we can use as a base for setting the value of our Patient Passport. We urge the government to adopt a similar approach in education. They should begin to rationalise the current unfair, and wildly varying funding of different schools and pupils.
Our Policy
Tim Yeo, Tim Collins and Andrew Lansley have taken the lead in developing our innovative policies in health and education. Our Passports will carry a cash value, and follow patients and parents to the school or hospital of their choice. So long as providers meet basic standards they will be able to receive the Passports.
The Pupil Passport can be used to meet the full cost of education in any school. It cannot be used as a contribution to higher fees already being charged by private schools. We want users of Pupils Passports to help encourage a different sort of independent education – which comes in to match the cost of the state sector.
The Patient Passport can be used either in the NHS or as a contribution to the costs of certain treatments in the independent sector. Again, we hope that it will help encourage a new, lower cost independent healthcare sector. But there is, I freely recognise, a difference between allowing the Patient Passport to be used as a contribution to costs outside the NHS and saying that the Pupil Passport can only be used to meet the full cost. There is a crucial reason for this difference. Healthcare is delivered to one individual at a time. If one individual goes for private healthcare treatment that is one less NHS patient and one more NHS patient moves up the waiting list. There is not the same direct link between an individual pupil being educated privately and improved access to state education.
It is sometimes said, as a criticism of our policies that people don’t want choice – they just want a decent school or hospital in their neighbourhood. Well of course they do. The objective of our policies is to provide just this. It is ultimately choice, rather than government dictat that will deliver that decent school or hospital. We recognise, to use the language of Alfred Hirschman, that the power of ‘voice’ is greater if there is also the power of ‘exit’. Providers listen if parents and patients can walk as well as talk.
Where schools have to compete for enrolments they respond to parents. Any good head teacher knows that parents are the best advertisers for their schools. And where parents have made a conscious choice to send there children to a particular school, they are more likely to want to become involved.
Similarly in health, greater choice will mean greater ‘voice’ for patients. If patients place a high priority on hospital cleanliness and single sex wards these will be provided.
Opening up supply
This is why our policy will work best with a revolution in the supply of services. The greater the opportunity for competition between suppliers, the greater the incentive for providers to listen to their customers. This is why removing the obstacles to supply is so important.
One of the shrewdest investigations of the problems of the Third World is Hernando de Soto’s book ‘The Other Path.’ It was an account of what it was like to try to set up a legitimate small business in Peru. The story was appalling. There were so many different permits, rules and regulations that it was virtually impossible to create a new business within the legitimate economy. You could only really function if you paid bribes and kickbacks or just went straight into the black economy. If Hernando de Soto visited Britain today he could write a similar book on the obstacles in the way of someone trying to supply those key services that people most demand. How long would it take you to set up a new nursery anywhere in the South East? What if you did want to open a new school in Birmingham? What if you did wish to treat patients as a new GP practice in Manchester? The obstacles to supply are enormous. Tackling them is the solid unglamorous task of looking at how planning rules work or how long it takes to get people’s names cleared by the Criminal Records Bureau or how many different inspectors to call. Yet it is an important part of reforming our great public services.
At last a very limited ‘de Soto revolution’ is stirring in Britain. A diversity of school models have managed to survive the vicissitudes of post-war education policy. The London Oratory, for instance, where the Blair children go, is a private institution, run by a religious foundation where the governors are the priests. Private companies are beginning to invest in education. Some are home-grown, like 3E’s, a private subsidiary of a Technology College in Birmingham, which has taken over three state schools in Surrey. I should also pay tribute to your rival think-tank, Civitas, which is opening a private primary school in London this year with fees comparable to the cost of a state education. Other providers are foreign, like GEMS, the Dubai-based company run by the entrepreneur Sunny Varkey, who is looking to create a chain of cut-price private schools in this country. But this is by no means enough. Too many independent providers are still deterred by the enormous obstacles in their path. Indeed last year, one of the largest American education companies, Edison, came to Britain, had a look, and went away again. We need to work out why Edison didn’t want to come – and why other providers are not leaping into the market.
The burden of regulations is an appalling obstacle. You will be hearing more about our Conservative approach to tackling the burden of regulation tomorrow. It is easy to think of it as just a business issue. But deregulation is also essential for any programme for reforming the public services.
Last September, for instance, the government issued new rules for independent schools. New schools must now submit to an Ofsted inspection before they open. They used to be inspected after a year or so of operations. Now they must have their premises, curriculum and staff vetted before they have enrolled a single child. Ofsted provides only one such illustration. The Health and Safety requirements. The LEA requirements. The DfES requirements. The burdens are so multifarious that Civitas are now in the process of hiring a compliance officer to ensure they have jumped through all the legal hoops – and this before they’ve hired even a single teacher. Another problem is getting planning permission. It can be very difficult to get permission to open a new school or a childcare facility. This is the real agenda for public service reform. Imagine an SMF conference not on vouchers and smartcards but on planning rules and health and safety rules. That might not get so much attention but it would be equally important for the reform of public services.
Then there is perhaps the most egregious barrier to entry in education – what is called the Surplus Places Rule, by which councils prevent good school expanding and new schools opening on the grounds that a school in the area – no matter how bad or unpopular with parents – has spare places. It is as if we said that a hotel couldn’t expand unless planners had already forced another hotel somewhere else to close rooms at the same time.
Liberating Schools
I want to tear down these barriers to entry. I want to see more schools like the Civitas one. I want to see SMF schools competing with them! And I want to see good schools plant new schools. No-one thinks that when a shop is successful its expansion is constrained by the size of its original premises. A successful shop-owner builds his or her business by opening new branches. Yet people often think it odd that successful schools might operate in the same way.
What sort of school’s will these new schools be? The Civitas school is explicitly dedicated to traditional teaching methods, to strict discipline and a culture of high academic expectations. But that’s just one model – I like it, but then I’m a Conservative. New schools don’t have to follow the traditional pattern – they simply have to satisfy parents. Parents might not want a traditional education for their children. Indeed, progressive education in Britain started in the independent sector before making the leap – much to be regretted in my opinion – into state schools. But if that’s what parents want… In Spain, school choice is an article of faith among progressive liberals: independent education began life as a protest against what teachers and parents saw as the stifling conformity of Franco’s state education system.
Liberating health
I’ve been talking about education. But the same arguments apply in healthcare. The fundamental problem the NHS faces is that supply is limited by government spending decisions. But demand is limited only by patient need, and this, while not unlimited, is considerably larger than the available supply. We need to allow new entrants in. Let’s see new chains of Clinics opening across Britain. We could really tackle waiting lists if we allowed alternative providers to relieve the pressure on the NHS.
The Government is already treading cautiously in this direction, of course, by contracting with private companies to provide high-volume procedures in mobile treatment centres. The problem with this approach is that the private companies are coming under the public sector umbrella – block-contracted to the NHS. As such they are simply extending the demand-management, the planning and regulating of the current system – patients must still go where they are told.
So far the use of private provision has not increased freedom for patients. We need to allow patients themselves, and their commissioning agents, the Primary Care Trusts, to contract with private providers directly. Thus we will allow supply to seek out demand in a natural, not an artificial manner. And we will find that the supply constraints will start to disappear of their own accord.
Ministers say the crucial constraint is getting the trained staff. Indeed, one of the Government’s main defences now for their failure to improve the public services is that it takes so long to train new doctors or nurses and teachers. This is an unbelievably feeble excuse It is as if you went to a furniture shop that had no chairs and when you complained the assistant said rather shirtily – don’t you realise how long it takes to grow timber. There are large numbers of qualified doctors, teachers and nurses who either aren’t being employed at all in their professions or who are being employed badly. I am confident that one of the many benefits of opening up supply would be much more imaginative ways of recruiting and training staff.
The government is investing millions of pounds in training new doctors and nurses. But the real problem is not the number of people going into training. It is the number of people dropping out soon after they start work. 30,000 nurses left the register last year – almost as many as joined it. The government’s much vaunted ‘investment’ in new staff is only just keeping pace with attrition. The Kings Fund has found that the problem is particularly acute in London where some major hospitals lose a third of their nursing staff a year. More NHS-trained nurses are not working as nurses than there are nurses in the NHS.
We have a retention, not a recruitment crisis. Our focus should not be on endless training of new recruits – any more than we should try to churn out more and more graduates with paper qualifications. The major supply constraint is not lack of professionals in training. It is the conditions of work endured by those who have done the training. Our emphasis should be on improving those conditions – not simply pumping more people into them.
Liberating Nurseries
There are other opportunities for new providers. Before 1997 the majority of childcare was provided privately. The system was by no means perfect but it had the opportunity for growth.
Since then, the government has spent enormous sums on childcare. As they like to boast, they have created 626,000 new places. They rarely mention that half as many places, 301,000, have closed over the same period, with over-regulation cited as the principal reason for many of the closures.
Moreover, many of the new places are in areas, and for age-groups, where demand is low. The National Audit Office reports that places at play-groups, pre-schools and childminders have fallen by nearly a quarter. Most new places are created for older children in after-school clubs. The Government’s failings in pre-school provision are being hidden by increases in out of school childcare provision for older children and the creation of places in areas where there is no demand.
It is not surprising to find that supply is not sufficient to cater for actual demand, with around a quarter of parents typically reporting that they have found difficulty in finding suitable childcare.
Federalism
I was educated at King Edward IV School in Birmingham. My thinking has been profoundly influenced by my upbringing in that great dynamic industrial city. Originally, after the Reformation, there was one King Edward VI Grammar School. Then during the 19th century Birmingham expanded incredibly fast as it was at the heart of the industrial revolution. But King Edward’s School didn’t just stay as one school selecting an ever more exclusive group from a closed elite. That was not the spirit of the Birmingham city fathers. As Birmingham expanded so the King Edward Foundation expanded as well. By the end of the 19th century there were six different King Edward’s Schools dotted around Birmingham. Only a few years ago they seriously considered offering to take over a failing inner city comprehensive and bring it into the Foundation to try to turn it round.
What I learnt from that is that we must not always regard schools and hospitals as having to be individually run as completely freestanding institutions. They can form part of a wider grouping – a franchise if you like – that is one way in which successful models expand and spread their benefits more widely.
The Girls Day School Trust is often described as the perfect LEA – so much so that many other independent schools are applying to join the Trust simply to avail themselves of its head office. It takes care of payroll, large contracts for school buildings and repair, and even the hiring of supply teachers during a vacancy. Rather than centralisation or localism, perhaps a better word for our model is federalism. Schools or hospitals could be independent but supported by a central unit and bearing - importantly – a brand name.
Brands are vital, as they represent the elusive ‘trust factor’ which is so central to the success of service businesses. In healthcare, we are familiar with the big brand names: BUPA, PPP and Axa. James Tooley’s work looking at private education abroad confirms this. Educor in South Africa, Objectivo in Brazil, NIIT in India – all mainstream education providers who advertise ferociously. We need more of this in Britain. I am glad that Civitas are planning to franchise their school model. I would like to see other successful schools franchise their models and spread some of the value of their brands around the country. We should not depend on exceptional and charismatic headteachers to deliver high quality education.
Consumer Choice and Social Justice
I believe this choice agenda is fundamental to achieving social justice. Many people fear the opposite. The most persistent critique of school choice has been that it will rob the state sector of its best pupils and most involved parents, leaving the children who are left behind worse off. This hypothetical phenomenon is known as ‘skimming’. I understand this fear but it is misplaced.
For a start, this critique rests on an assumption which pertains only in the present model – and which we are committed to changing: I mean a fixed lump of supply. It is only when supply is fixed that what is gained by one user – often the most pushy or lucky – is lost to others. It is the Surplus Places Scheme in education, or the waiting list in the NHS which creates this problem. Spare capacity is anathema to statist systems – demand must be squeezed ever more tightly into the available supply. Conservatives want to break open this fixed lump, enabling alternative providers to enter the game and relieve pressure on the public services.
In healthcare, we want to see an influx of alternative providers to boost the number of beds, doctors and equipment available. If these resources are not used the whole time then solve it. I would rather see an MRI scanner idle, than a patient waiting months for a scan. Supply must pursue demand, not the other way around.
Similarly, in education, if we want choice, then we will need more spare capacity. Currently capacity utilisation in British schools runs at 92%. This is much too high to allow real mobility and choice. In pursuing so-called efficiency and eliminating surplus places we have been undermining choice. We will scrap the surplus places rule and allow for an expansion of school places. We are providing the money so that what parents choose can be realised. That’s why our funding plans assume that as many as 10% more places would be demanded by parents. Under the Conservatives these places can be created as parents demand. This is evidence of how serious we are about choice. Some of our critics are shocked that we have not said that we would reduce Labour’s planned growth in spending on health and schools. They point out, quite rightly, that there is lots of waste and inefficiency there. It is not that we are not serious about waste. It’s that we are just as serious about choice.
Advocates of statist systems argue that it will be the middle classes who will exploit the extra opportunities afforded by additional supply. This reveals a patronising attitude towards the poor. Look at the evidence. Almost a fifth of parents appealed against admissions decision in the English inner cities last year. Four fifths of those appeals, by the way, were rejected.
A similar pattern is increasingly evident in healthcare. People are less and less prepared to get what they’re given. They demand second opinions. They shop around. They look at websites like Dr Foster, a sort of league table of hospitals and consultants in the NHS. And increasingly, they go private even if they do not have insurance. In 2002 300,000 people paid for operations out of their own pockets, three times as many as in 1997.
It is only by liberalising the system – enabling market signals to send information openly to all players – that we will end the elitism which characterises our current system.
This is not just a theoretical argument. The hard evidence assembled by one of today’s speakers, Caroline Hoxby, has demonstrated that the really wonderful thing about school choice is its effect on the schools which caused the need for it: the failing or mediocre schools which parents wanted to escape from. In Milwaukee, Arizona and Michigan, where choice has been introduced, education productivity – the attainment-to-spending ratio – has risen 28%. Deregulation and competition has improved standards in all schools. Choice, in Caroline’s telling phrase, is ‘the rising tide that lifts all boats.’
Conclusion
It used to be thought that the Conservatives could not win votes on education and healthcare – only lose them. Therefore the political task was to minimise them as issues. Today things are different. I passionately believe that we can win votes on these topics. People are no longer satisfied with the standards of the state monopoly – and no longer convinced by the arguments for it.
Back in the 1990s the Labour Party launched the so-called ‘prawn cocktail offensive’ to persuade business that Labour could be trusted to run the economy. Conservatives are now embarking on a ‘waiting room offensive’ and ‘school gate offensive’ to persuade both patients and parents of the wisdom of our proposals. I believe people are looking to the Conservatives for an alternative – it is our duty to explain how it will bring benefits for all.
David Willetts MP
5th April 2004
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