Every cloud has a silver lining

Every cloud has a silver lining

The public sector offers a vibrant market opportunity for firms with appropriate levels of innovation and ambition that can help transform public services, says Mike Turner.

The current public sector recession is proving painful as spending cuts aim to eliminate by 2015-16 the UK’s structural deficit – the part that would exist even with our economy operating full-out. Moves to cut significantly a deficit estimated by the European Commission to be up to 12% of GDP in this financial year were always destined to prove challenging.

There could hardly be a greater contrast to the profile of public spending over much of the last decade. Significant growth was then the norm. But according to the Office for National Statistics, public sector productivity declined by more than 3% between 1997 and 2008, while among providers of private sector service it improved by more than 20% over the same period.

So the public sector recession can be viewed as a platform for greater efficiency, productivity and financial self-sufficiency, ultimately resulting in better outcomes for local residents. Implications of the spending cuts daily become clearer and more profound.

The challenge is twofold – for the public sector to provide effective, efficient and appropriate services, and for private sector to address the knock-on impact on the supply chain. As the public sector shrinks and becomes poorer in cash terms, its supply chain will continue to have difficulties finding alternative contracts.

Indeed, there may be more financial collapses of organisations within this supply chain. In parallel, some public services will be greatly reduced or cancelled as organisations prioritise their available funding. Given the scale of the public sector in the North East, our region is arguably at more risk than some. However, with these challenges come opportunities for the public, private and third sectors, and the interface and cooperation among the three will be critical to the solution.

This is a central theme of the Government’s determination to diversify the public sector economy. The shape of public service delivery is set to change considerably over the next few years, with the public sector delivering less itself, and commissioning much more from the private and third sectors. Further, where services are delivered by the public sector, there is an expectation of increased joining up and the removal of duplication.

Momentum behind this approach is growing and increasingly evident, as local government starts to outsource its activities with more pace and ambition. More prisons are being run by private contractors. GP consortiums – effectively SMEs – will run much of what happens in the Health Service. Police forces are procuring larger proportions of their back and middle office functions from the private sector, and finding work for the unemployed is now big business in the UK for commercial contractors. Across the public sector, the drive to “spin out” services to employee-owned mutuals is increasing.

Perhaps as a result, the march of private equity into the UK public sector is very loud and, even in difficult market conditions, we see new entrants to the public sector provider market.

The first step to successful collaboration is, of course, to recognise where opportunities for service improvement or business growth exist.

The more difficult agenda then is to turn that into new forms of service delivery that will provide sustainable public services and substantive new business growth. First, payment by results is fundamental. The public sector must ensure that service providers are incentivised and rewarded for delivering successful outcomes.

Businesses that rise to this challenge, and place their income at risk unless results are achieved, will take the largest share of the market. The more sophisticated the offer, incorporating for example some features of the social impact bond model, the higher the chances of success. Businesses should pursue the opportunity presented by diversifying within the public sector. Some existing players are trying to manage their risk of exposure in one area by exiting the public sector completely. This is often a mistake.

Many current private sector business models, skills and services can be profitably transferred in and out of various parts of the sector, with no need to effect such exits. The public sector stands to gain from the experience and expertise of providers, developed across a range of services, at a time when managing risk and quality is imperative.

All sectors must embrace the move to take key parts of the public sector out of wholesale into retail, putting purchasing power directly into the hands of individuals. Prime examples ofthis presently are IT firms getting large footholds in adult social care, helping councils to implement the move to give vulnerable adults their own personalised budgets for care, instead of the current wholesale system of budgets being spent by the council on their behalf.

Resources must be focused on areas that will survive political change at Westminster and locally. All the political parties are, for instance, committed to integrating health and social care pathways and services. This large-scale reform agenda will go on at pace in one way or another for at least 10 years, regardless of who is in power. The public, private and third sectors must all play their part in the success of these long-term agendas.

Finally, the private sector will need to provide the majority of any investment necessary for public sector reform.

All parts of the public service supply chain should take advantage now, before the moment passes, of the enormous amount of bank, equity and other finance available to invest in businesses providing services to and for the public sector. Supply of such finance is currently well ahead of demand, as too few businesses are moving sufficiently fast into this market. However, this situation will not last indefinitely. Certainly times are difficult for the public sector in our region and nationally.

Inevitably, some public sector organisations will struggle to manage the spending cuts. Some businesses implicated will continue to suffer. But the resilient and resourceful public sector in the North East also provides a vibrant market opportunity for those businesses with appropriate levels of innovation and ambition, to play their part in transforming the future of public service delivery.

Mike Turner is principal adviser in KPMG’s Newcastle public sector advisory practice.