Public service and private enterprise : what do we mean by efficiency?

 Private business ultimately judges that by profit. But is profit a good indicator of efficiency generally? More particularly, does it have any place in public service?

Many a company does well for a period because it strikes lucky with a product and then plummets when the good luck runs out. Or a company may have a good profits run simply because there is a general boom in the economy and it is easy to make profits.

Then there are businesses where it is virtually impossible not to make large and regular profits, for example, the clearing banks, because the goods or services they are supplying are too essential for people not to purchase them and the number of competing companies is small, either because a few companies have been able to destroy the competition or because the cost of getting in the business is too great for new competitors to emerge. The problem of greatly reduced competition through expansion of an existing company rather than takeover of other companies is a growing one, a problem exemplified by the relentless march of Tesco in Britain – in practice British anti-monopoly law only deals with takeovers – the only thing which  halts Tesco is planning permission. Once a company has a really large share of a market efficiency becomes less of a pressing problem because customers in an area dominated by the likes of Tesco often have little choice but to use the dominant company because it has destroyed local competitors.

It can also be very difficult to find out from the published accounts the true state of a company, vide Enron and WorldCom. Even where outright fraud is not practised there is still a great deal of scope for accountants to engage in “creative accounting” and massage accounts to inflate the profit in a given year. As directors are commonly paid a large part of their remuneration in the form of shares which they can purchase at a later date at a discounted price (share options), companies have every incentive to inflate the share price in the year when the share option can be exercised.

But even if it is allowed that profit is a good yardstick of efficiency for most enterprises, a highly debatable proposition, it does not follow that it is a good yardstick for all enterprises. The provision of universal public services is by its nature not susceptible to the notion of profit because the unprofitable work must be undertaken as well as the profitable, for example the Post Office delivers letters to hideously costly rural addresses as well as to highly profitable city haunts for the same price (that service incidentally subsidises all private business in the UK because they can deliver anywhere for the same price).

If profit is not the yardstick what should be? I suggest that the real tests for public service competence should be (1) is the service being delivered to all who need it? and (2) is the cost reasonable in comparison with equivalent operations in other countries? By these tests, the NHS, for example, still compares well with the health care in other advanced countries, providing both a universal service for the vast majority of treatments and operations and doing so at a significantly cheaper cost than most, despite the great amounts of extra money pumped into it since May 1997.

What is rarely if ever taken into account when complaints about the inefficiency of public bodies are considered is how efficient private enterprise will be or is when it is offered the opportunity to provide a public service. Take the Post Office as an example. For a century and a half it has turned a profit and ensured a level of universal service well nigh unique in the world. It has done this because it is a state monopoly.

No private company would ever provide a universal one-price service without massive public subsidy and the halfway house of part private part public merely weakens the public provider. The government first loosened the rules governing private delivery of parcel, then bulk letter mail went to full competition and in 2006 private companies moved into the delivery of letters over a certain weight. That competition alone will cripple the universal post. The Post Office has already been forced to drop the second delivery as a general service and will now provide it only for a fee, whilst the last time for collection has become earlier and earlier in the day and the single free delivery later and later.

As a second example take the BBC. Suppose the licence fee was abolished  or reduced and the BBC had to introduce private finance on a large or an entire scale. The inevitable result of that would be the BBC increasingly turning from its public service role, not immediately but in time, towards commercial programming. The dismal example of how commercial terrestrial television “meets” the public service obligations written into their prospectuses when they bid for licences shows you what the BBC would rapidly become (the obligations/promises made when gaining licences are substantially ignored once the licences are granted).

There is nothing wrong with employing private businesses to perform specific functions such as road building because that does not produce a conflict between public service and profit. A road is simply a road, which will be used regardless of who built it. Once it is built, there is no ongoing direct service to the public beyond whatever maintenance is required and the maintenance of roads is completely different from the maintenance of railways, because the use of roads is free in all but a few instances and the safety issue is nothing like so important for a car can be driven on a potholed road while a train cannot be run on a faulty piece of track. Where conflict arises between the provision of a general service and the profit motive is in cases such as the NHS where the delivery of the service is directly to the public.

Private business is poor at providing services where there is no direct link between the provision of the service and the payment for it. If a service is provided to a person and they pay the provider, private enterprise will generally do a decent job if the customer has a reasonable choice of provider. Where a private business provides a service on the basis of a contract signed with a contractor, ie, it is a sub-contractor, the relationship between the customer and the provider becomes nebulous. It is true that the sub-contractor may have a contract cancelled or not have a contract renewed if too many complaints are received by the contractor, but often enough the contractor will wear any number of complaints provided profits remain healthy.

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