How to create 2m new private sector jobs in the lowest performing regions – in just 3 years


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. 
















Radical reform of the Police …. and anyone it works with.

Everyone is agreed that we need radical reform in our public services. There are still years of major cuts to come. Digital technology should be turning everything on its head. Long-standing performance issues seem intractable in some services. In some cases, the demand for services has changed entirely. But there is little radical reform. In fact, most services have not fundamentally changed in nearly 200 years! The key reason for that is that we allow individual professions to be inviolable. Each one not only is above change, but has its own separate service and institution, e.g. the Police versus Fire versus Social Services versus Probation, etc. But if reform cannot cut across these silos, then the options for change are limited. We can make the organisations bigger or smaller. We can contract them out, or bring them back in-house. We can put them online, or deliver them face to face. Often such reforms although within-the-box are massive in scale and create lots of upset – all sorts of restructuring and privatisation, for example. But essentially, the service carries on as before, hopefully doing the same thing a bit cheaper or a bit better. But still the same thing. Real reform has got to give someone the chance to rethink “What outcome does the public want and what’s the best way to deliver it?” The only way to get at this is to overcome the professional silos – partly by merging professions together and partly by getting the public to deliver more of the service themselves. To make such an omelette, lots of eggs need breaking first. By way of example, I want to explore what this could mean for the Police and the professions its works alongside.But first, let’s reflect on what we’re up against.

Why have our public services hardly changed in nearly 200 years? Well, most of them were fundamentally shaped at the time of Queen Victoria taking up the throne. Not even at the end of that long reign, but at the beginning! That is when most of the professions were defined and various demarcations emerged. The police force was created by Robert Peel in 1829. The first fire brigade was set up in Edinburgh in 1824. The first medical degrees were awarded in 1826, by when the apothecaries (who became our GPs) had been defined (1815) and split from the surgeons. The surgeons themselves had made the final split from the barbers in 1745! The first social workers were seen in Paris in 1833. The Institute of Civil Engineers was set up in 1818. I could go on. And on. It’s remarkable that almost two hundred years later – after the development of electricity, telephones, cars, computers, etc – that this professional structure in our public services is almost entirely unchanged. Indeed, not only have the professional boundaries remained fixed, but each profession usually has its own separate service. Our public services are in reality just a set of separate, historic professions. For example, the surgeons and the apothecaries (GPs) are still utterly separate services, in spite of perpetual revolution in clinical technology. The way in which these professions have been funded and politically controlled has changed. The largely charitable basis to public services was gradually replaced by taxpayer funding, culminating in the 1945 welfare state. The largely local control of services was increasingly nationalised to a high watermark in the 1990s and 2000s, but is now being localised again. However, the basic shape of the services today would look surprisingly familiar to those who attended Victoria’s coronation. The turnpike engineers are still there, even if the turnpikes no longer collect the money. So, if we’re looking for radical reforms, it is imperative that look at reshaping the rigid professions and the silos in which they exist.

Police reform is a great case study. The Peelers comprise three in four of the quarter of million police staff. They are still more of a force than a service in many cases. The Police is currently being cut by unprecedented amounts – a 20% reduction in this Parliament, including the loss of thousands of sworn police officers. As in other public services, there is often talk of radical change but only within the police silo. One option is changing the scale – e.g. merging police forces, or creating neighbourhood policing. Another option is to contract out certain services – e.g. managing custody suites. Or to create para-professionals (e.g. PCSOs) who are almost the same as police officers but not quite. Or to, belatedly, grasp the power of IT to make policing more efficient. But what about getting out of the silo?

Firstly, let’s look at integration across professions. The way to do this is to focus on a big outcome we’re trying to achieve. For the Police this might be “Keeping the local area safe and bringing criminals to justice”. Then we should think of all the other professional services which are also trying to deliver this outcome. The next step is the bold one. Rather than exhorting everyone to work together (hasn’t worked so far), we could merge a wide range of other bodies into the Police. Firstly, we could merge the Fire Services into their local Police Forces. Fire Services should not exist as separate bodies. Demand for their services has fallen away. Even in the last decade, the number of incidents they attend has nearly halved. That comes on top of even greater long term decline in fires. And yet the level of resources has grown over much of this period until very recently. The operational utilisation of the 28,000 full time firefighters is between 3 and 10%. There have to be better ways to use the £2 billion plus of spending and the 40,000 staff. Just imagine what the individual Police Service could do if they had control. For example, they could use the down-time of firefighters as PCSOs, rather than just doing fire safety visits. Or they could create a new type of traffic service that attends road accidents, rather than police and fire engines going separately. Or they could find a low cost way to verify that a fire alarm is false (as nearly half are) rather than sending out fire engines and full crews. Similarly, we could take the new National Probation Service (the 6,000 staff who are not being contracted out and who manage the most serious offenders) and put them into the Police. The public expects the Police to be monitoring and managing those at a high risk of offending. So it makes sense. Then, we could be more ambitious still and put Child Protection into the Police. The Police is heavily involved in this area and the core skill sets in child protection are policing skills. This would greatly reduce the infamous problems of multi-agency working in this area. The Police would be accountable for investigating and acting upon threats to children’s safety. Tens of thousands of social workers would be in the Police. We could take other investigation and enforcement services (e.g. tax and benefit fraud, immigration enforcement teams, etc) and put them into the Police. There is a wide range of services that could be added – e.g. road safety teams in highway authorities, street wardens, environmental health officers dealing with noise and disputes, etc. Some will argue for the ambulance service too, but I’m less convinced about that. (Let’s return to what radical reform in health might involve in another post). The point is that we are putting on the table, under the control of one organisation, a big range of services and professions to be reshaped. There would be lots of common overheads to rationalise (HQs, vehicles, IT systems, offices, etc). But more importantly, it would be a chance to reshape the professions. By putting all these previously separate candles into the melting pot, there’s the chance to reshape the wax into new forms. This might be a large group of white collar investigators (for fraud, cyber crime, intelligence gatherers, etc). Or a new service to investigate and manage the troubled families, who blight communities, swamp the justice system and also endanger their own children. Or specialised functions for preparing court cases or customer contact. By pooling the resources, there would be the chance to prioritise resources for public safety and bringing people to justice – to decide what matters most to a local area at anyone time, e.g. fire threats, prolific offenders, overstaying illegal immigrants, knife crime, children at risk, etc. And of course this should be a way to save lots of money.

The second strand of reform is to give the public a greater role in delivering the services, rather than leaving it as the preserve of professionals. This gets straight into the Big Society debate. The cynics may well say “But surely, if there’s one area where the Big Society doesn’t work it is protecting the public and bringing criminals to justice?” In fact, it is one of the most developed areas. Let’s look at what already exists. We have 19,000 Special Constables (albeit down from well over 30,000 40 years ago). There are 12,000 Retained Firefighters who respond to emergencies as and when needed. St John’s Ambulance has 44,000 volunteers attending public events. Beyond this, there are 236 lifeboat stations manned by volunteers, alongside 48 mountain rescue teams. In fact, given this evidence, I wonder how there is any room for cynicism about the Big Society? This is it. Given the proven enthusiasm, what else could be done in this scenario? At its simplest, we could boost the numbers, e.g. doubling the numbers of Special Constables. Then we should change the balance between full-time and retained firefighters, to have a lot more of the latter, as recommended in the Knight Review. We could create a massive Police Cadet Service, to mirror what we have for each of the Armed Forces, engaging our young people. Then we could tap into the huge number of Silver Fox volunteers, who could use their retired skills (as accountants, as administrators, etc) to be non uniformed Specials helping in desk roles. As the new professional groupings begin to emerge from the melting down of the old, there could be big new volunteer opportunities – e.g. being mentors to the troubled families or prolific individuals. Or new local watch volunteers – e.g. to check out false alarms or to monitor high risk premises for illegal immigrant employees.

Grasping the potential of such radical reforms requires three key ingredients. Firstly, some disruptive technologies. This area has plenty – the new analytics are transforming intelligence, GPS systems track masses of activity, social media are becoming the norm, etc. (I am looking forward to Policy Exchange’s “Smart on Crime” report). Secondly, there is a need for strong leadership. There is no point putting a range of Victorian services into a single organisation unless someone is prepared to break down the barriers. Indeed, local authorities are the one multi-disciplinary public body already. But rarely are the professional silos mixed. They just co-exist. But the services going into the Police in this scenario now often have very strong leaders, who have been implementing major change in their own silo. For example, most police forces have made their cuts faster and deeper than they needed to. The leadership cadre exists. And thirdly, there is a need for a local democratic figure to take the tough decisions and to set the local priorities for the newly merged organisation. We now have that in the Police and Crime Commissioners. This bigger remit should make that job even more important and contested at future elections.

So if we are up for radical reform, we need to create some fresh opportunities for our public service leaders to reshape the professions. That means upsetting a lot of people. It also means acting boldly and with speed. The sooner the new opportunities are created through imaginative mergers, the sooner we will get the most effective cuts in spending and the most inspiring improvements in performance. The Police and its related services is just one area to be reshaped. I was going to say that it’s time to move on from Victorian Public Services. But I was recently working in Australia when I walked into a very different debate about “Victorian Public Services”. People wearing badges saying “Proud to Deliver Victorian Public Services” offered me a brochure titled “Victorian IT Strategy for Public Services”. Thoroughly confused, it was politely explained that the people of Melbourne are Victorians. So perhaps it’s best to avoid confusion and just hope that we change quickly enough to cancel the impending bicentenary celebrations of our enduring professions.