There is no end of debate about how could the rest of the UK’s economy perform as well as London and the South East? Here’s a simple, but bold idea to transform the under-performing areas of our country within 5 years, changing both the culture and economic structure of those areas. The key thing with this idea is that, unlike most economic development, the levers of change really do sit with local and central government – but whether they are prepared to pull those levers is the issue.
In half of the country, less than half of working age adults (18-64) have jobs in the private sector economy. In the most successful areas (e.g. the South East counties), the figure is two-thirds. In the least successful areas, it is little more than a third (e.g. in South Wales) . Throughout our major Northern England cities (and our biggest Midlands cities) only 4 out of 10 working age people are employed in the private economy. This includes large cities with major central business districts and big private employers like Birmingham and Manchester. It is slightly hard to believe that in one of the world’s most established market economies, the majority of working age adults in large swathes of the country are not employed in the private sector.
Does this matter? Well, low levels of employment in the private economy appear almost always to mean a weak local economy. For these areas with low levels of private employment and a weak economy, there are typically four problems:
Firstly, not enough people have jobs in any sector – private, public or voluntary. More people working means richer regions and richer households. The most prosperous economies in Europe have high rates of economic activity in their population – much of Scandinavia’s success, for example, comes from the very high levels of female employment. This is true within in the UK. Some areas of the South East have nearly 9 out of 10 working age adults in employment; some of our biggest cities in the North and Midlands have less than 6 in 10 people in employment. The gap between the two is a mixture of fewer people seeking employment and higher rates of unemployment.
Secondly, of those who work, not enough people work in the private sector. This matters because the most successful areas have far more of their residents in private than public sector jobs. The average ratio of private sector to public sector employment is 3:1, i.e. 3 times as many people are employed in the private rather the public sector. In the most successful parts of the country, this rises to 6:1. In Cardiff and Swansea this falls to 1:1.5, i.e. there are only 50% more people employed in the private than the public sector. There are many places (e.g. Glasgow, York, Newcastle, Sheffield) which only just manage 2:1 and the biggest northern cities (e.g. Leeds and Liverpool) are well below average. This is not an ideological concern. Private sector businesses can grow the local economy – they are able to compete regionally, nationally and internationally to bring new revenue into the local area, generating extra wages and profits for the local economy. In most cases, the public sector can’t do this. Local public bodies mostly only provide for local needs and are constrained by the size of that local market. They mostly don’t sell their services to other areas or pull external revenues into their local area. Local economies get rich by specialisation and exchange – doing what they are best at and trading those services with other areas. People working in the public sector largely can’t do this. They can be world class at what they do, but are mostly unable to grow their market share. Where public services have moved to the private sector, they have a track record of growing the local economy. A good example is the Teachers’ Pension Agency in Darlington, which since it was privatised in 1996 has diversified into processing services for the life insurance industry, importing work from London and elsewhere into Darlington. Similarly, some of London’s best health providers attract custom from all over the world. It’s worth noting that the most successful areas of the country have the highest proportion of outsourced services. Outsourced services are 10% of the economy. (Two-thirds of outsourcing is between private sector companies. Contrary to what many on the left assert, outsourcing is a pragmatic, not political, way for organisations to focus on their core activities and only one-third is from the public sector). The economy in London and the South East has twice as much of its income (wages and profits) from outsourcing companies as the most deprived parts of the North West, Wales and Northern Ireland. Given the lower employment costs and higher unemployment rates in these more deprived areas, one would expect the opposite.
Thirdly, this is not a simple story of the public sector being too big in the less successful areas. Some of the places with the lowest private sector employment rates also have the lowest public sector rates as well. For example, Birmingham, Middlesborough and the Welsh Valleys all have below average percentages of the working age population employed in the public sector. The problem is not that there are too many public sector jobs, but that there aren’t enough people in private sector jobs. For example, Copeland in Cumbria has the highest proportion of its local jobs in the public sector (at 52%) but only 14% of the working age population are employed in the public sector. The problem in too many areas is that not enough people are in work – for anyone. The areas with relatively few people employed in the private sector are the areas which struggle to grow new enterprises. The birthrate for new businesses in the South East is double that in the North East, whilst the London business birthrate is three times higher than the North East or Wales. London’s birthrate is typically more than double the rate across the whole of the North and Midlands. Given that it is young businesses which generate jobs and growth, this matters hugely.
Fourthly, public sector employment currently looks under threat in many of the areas with limited private sector jobs. As one city leader said to me recently, the public sector looks like the new declining industry. After the loss of jobs in manufacturing, shipbuilding, coal mining, textiles, etc, public sector jobs face two big threats. The first threat is fiscal. Cuts in spending have necessarily hit the areas with the highest public spending. Given that spending is highest in areas of deprivation, the cuts have been felt hard in areas with low levels of private sector employment. It’s hard to see this getting easier for some time to come. The second threat is technology change. As government goes digital, there will be much less need for large administrative processing centres. This is a particular threat to areas (e.g. Liverpool, South Wales, Newcastle, Sheffield) where previous governments relocated civil service jobs to mitigate the effect of other declining industries.
Most of the areas with these problems have plans to tackle them. Their economic plans commonly focus on three big actions: to attract private sector employers to the area; to develop a more entrepreneurial culture and increase the formation of new businesses; to skill up the local workforce to improve its access to employment and to attract employers. But I think that most of these plans are missing a big opportunity to transform these local economies – and an opportunity which is, unusually for economic development, entirely within the control of local and national governments. A simple way to rapidly increase the level of private sector employment in these areas is to transfer public sector jobs to the private sector. Done in the right way, this could transform the economic culture and employment opportunities of many of our struggling cities, towns and counties. But it must be done in the right way. My proposal is this:
1) By 2017, all areas of England and Wales with below average rates of employment in the private sector would be legally required to reduce their public sector employment to meet a set of very demanding quotas (outlined below). By definition, this would impact on half of the country. It would mostly affect the North, Midlands and Wales. But there would be a number of other areas affected, e.g. some East London boroughs. The quotas would cover the whole public sector in the selected areas – central government, local government, education and health. Up to 2 million jobs could transfer to the private sector. Why quotas? Well, they have worked well when used. Three examples from the early 1990s are instructive. For example, 20 years ago legal supply quotas were introduced in community care – 80% of all new spend had to go to the “independent sector” (either private or voluntary sector). From almost nothing, an independent sector was created which has since grown to see hundreds of thousands of staff employed in businesses and charities (big and small) delivering social and community services. Without this legal requirement, it is almost certain that all of these jobs would be in the public sector. Similarly, quotas were introduced for public service broadcasting. The BBC was required to buy a quarter of its output from an independent sector and the new Channel 4 was designed to buy 100% of its programmes from the new “indies”. Since then a vibrant indie sector has grown up and the BBC has opened up a further 25% of its output to competition. The third example is FE colleges which were all transferred into private companies in the 1990s. Since then, there has been an active programme of mergers and acquisitions within the sector. One example of the entrepreneurial spirit is that 2 Northern FE colleges (Newcastle and Manchester) have between them won the majority of contracts for prison education across the whole country. By contrast, when legal requirements to privatise are withdrawn the public sector has tended to re-grow its own employment, e.g. after Compulsory Competitive Tendering was ended, a range of local government services were brought back in-house. One example is that just over half of refuse collection is now back in-house. Personally, I think quotas for the whole of the country would be a good thing. But this proposal deliberately applies just to the areas with limited private sector employment – it is intended to give those areas a headstart on the rest of the country, creating businesses which can then sell themselves to the rest of the country, given that the non-quota areas have less dependency on / expertise in the public sector and are likely to buy-in services from the new businesses.
2) My way to reduce public sector employment (and increase private sector jobs) would be to transfer existing staff and services to employee-owned companies. This is an essential part of transforming the economic culture of the areas affected. There are many benefits of transferring functions to large existing corporations. But that misses the point. We want traditional public service staff (and areas) to become entrepreneurs, shareholders and commercial successes. That is what will empower them to take control of their own destiny and to win market share to benefit their local area. Employee-owned companies are not a wacky, hippy idea. Some of our most successful companies are employee-owned – John Lewis in retail and Arup in construction. Much of the resistance to privatisation has come from staff who do not want to be taken over by an existing company or public bodies who do not want a small number of existing managers to make themselves rich through “fat cat” wages or profits. Employee ownership addresses both issues. Indeed, it has a growing track record in the public sector, with some 30,000 staff having moved into employee owned companies in recent years. There can be many forms of employee ownership, including involving a minority stake for existing private companies and financial backers. Should staff not be willing to take ownership of their organisation / service, then the fall-back could be a traditional outsourcing.
3) There could be different quotas for different types of service. For services with a well developed market already, the quota would be 90% in each service. This would include services which are heavily outsourced (in the economy as a whole at least) by the private and public sector (e.g. IT, construction, property management, call centres, back office functions, etc). The 90% also include services where there is a strong mixed economy in public services (e.g. social care, special education, prisons, hospital labs, social housing, highways management, early years, etc). I think there is a strong case to set a similar quota for most other local government services in these areas (e.g. planning services) and central government administration (e.g. benefits administration, court services and job centres). By contrast, I would exempt the uniformed part of the military, police and fire services. In all these cases, their business support functions ought to be subject to the 90% quota. That leaves two major services which will be seen to be especially sensitive – health and schools. But how sensitive are they really, if we are talking about employee-ownership? The idea of mixing the private sector and the NHS gets people very agitated. But actually the great majority of NHS organisations are profit-making businesses, most of them owned by their employees already. Really? Yes, really. Firstly, there are the thousands of dentists, opticians and pharmacists who provide NHS funded services – from their profit making businesses. Some are huge (e.g. Boots the Chemist) and most are small enterprises. Secondly, there are the GP practices. In most cases, GPs are not employees of the NHS, or any other part of government. They are the owners of small businesses and instead of a salary their personal income comes exclusively from the profit they make from running their own surgery – the profit being the difference between the prices the NHS pays their business and the costs they incur (premises, staffing, etc) in delivering the required services. GPs are regularly named by the public as the most trusted and valued public servants, irrespective of their long-term determination not to be public sector staff and to stay as profit-making business men and women. So if they can run successful NHS businesses, what is to stop medics in hospitals doing the same? Most hospitals have become more like businesses in recent years – as independent foundation trusts. But the ownership of these trusts is not really clear. Making them employee-owned businesses would seem like a logical next step. Within this move, many medics may wish, and could be supported, to spin-out smaller businesses, typically in their own specialism. Similarly, the transfer of state-funded schools from the public to the independent sector is well underway. We now have thousands of academies and a growing number of free schools. We have now had 25 years of giving schools autonomy. The model works – dramatically well. We could now push this to a conclusion in the quota areas – completing the transfer of state schools to academy or free school status and giving employees ownership of their schools. In both health and education, there is already a system of minimum standards, inspection, public data on performance, money following customer choice and a system for dealing with failed organisations. This could easily apply to the newly employee-owned hospitals and schools – if they fail to meet minimum standards and / or attract enough customers to be viable, the regulators could (as now) transfer ownership of the assets to another organisation. Given all these points on education and health, there is a strong argument to apply high quotas for transfer to the private sector of hospitals and schools in the selected areas.
4) Where the new businesses get contracts, the initial contracts would only be given for 3 years. (In other cases, such as schools, money would follow customer choice as it does now). The initial contracts would give them time to sort themselves into shape, on their own, or through mergers, acquisitions or divestments. At the end of the 3 years, customers for their services (be they individual consumers or public procurers) would have full discretion about the sort of services and providers they want in the future. At this point, the new businesses would have marketed themselves to other areas, both locally and nationally, which, along with the entry of new entrants to the market, would create healthy competition. The ex public sector businesses would be free to sell their services to the private sector, as they wished.
The key to these changes is: achieving them fast (to focus on action, not debate); making them happen on a mass scale (so that they change the economy, not just create individual case studies); creating big new markets (to inspire entrepreneurial endeavour amongst former public servants who can see a way to grow their market share); mandating action (to align public sector reform with the economic and fiscal urgency facing these areas of the country). If national politicians are unwilling to impose quotas, there is nothing to stop one or more of the new city regions applying the quotas to themselves. But local action isn’t as useful as national. Turning up to 2m public sector staff into shareholders in their own businesses, competing for demand and innovating to be the best, is a bold ambition. But I think the time is right – for both local economies and public services.