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Monday, May 12, 2003

A rocky British partnership

LONDON -- Prime Minister Tony Blair has staked his reputation on achieving a significant improvement in British public services. Under previous Conservative Party administrations, public services were allowed to run down as public expenditures were reduced.

With the same end in mind, attempts were also made to privatize the delivery of many public services. A major effort was put into developing public-private partnerships under PFI (private finance initiative) projects.

While the provision of some services improved as private enterprise was introduced, investment in the public sector and the quality of service provided declined. Former Prime Minister Margaret Thatcher notoriously never traveled by train, and a lack of overall investment in public transport resulted in Britain having what many regarded as a Third World public-transport system.

When the Labour Party came to power in 1997, the government gave first priority to establishing its reputation for prudent public finance. Until the general election in 2001, investment in public services was held in check. Dissatisfaction with the standard of public services in Britain, however, continued to grow until the government was forced by public and party opinion to allocate considerably increased sums to public services with the main emphasis placed on education and health.

So far, though, the extra sums allocated, despite the establishment of rigorous targets, have not resulted in significant improvements in performance, especially in health service. There has also been continuing widespread dissatisfaction over public transport as congestion and delays have increased.

The Labour government has enthusiastically taken up PFI projects. The failures, delays and cost overruns in bringing publicly financed and managed capital projects to fruition were major factors in the government's espousal of PFI, but it was also influenced by the fact that PFI projects were paid for essentially by annual charges or rents that appeared on government books as current expenditure and did not, unlike capital expenditure, count against the public-sector borrowing requirement, which in turn affected the government's credit rating.

Unfortunately, PFI projects, which were intended to transfer the risks in managing major projects from the public to the private sector, have often turned out to be less efficient than expected and sometimes more expensive. The costs of borrowing by the private sector are higher than those of the government.

Moreover, costly incentives have had to be offered to induce the private sector to accept the risks of management. To provide guarantees of performance, contracts for PFI projects have become very complicated. This has delayed the conclusion of contracts, as the law firms involved produce, at vast expense, documents running into thousands of pages.

On the one hand, the government faces growing demands from the public for real improvements in the quality of public services while, on the other, public-sector unions are becoming more vocal in their opposition to what they see as privatization by the back door.

At times, ministers lambaste public-sector workers, from teachers and doctors to firefighters and hospital staff, for waste and an inadequate public service ethos. At other times, recognizing that most public servants are trying their best much of the time and, in any case, cannot be replaced by a wave of the wand, ministers praise their dedication. They also have to accept that the profit motive, valuable though it may be, is not the beginning and end of all life: Private sector employers will do their best to pay minimum wages and provide only the services for which they have been legally contracted.

Other major problems over the provision of public services in Britain are the division of responsibility between central and local government and to what extent responsibility for delivery of improvements can be delegated from the center. Increased allocations for education have been made by the education department to local education authorities, who in turn are responsible for allocations to individual schools.

As allocations depend on assessments of need, increased allocations for what may be seen as particularly deprived areas can lead to cuts in allocations to other areas and schools. The latest round of allocations has aroused the fury of some teachers and local governments, while the central government has been quick to blame local governments for keeping too much of increased allocations in the hands of local education authorities.

There has been disagreement within the Cabinet over the development of so-called foundation hospitals. Under this scheme hospitals, deemed to be among the more efficient, will be allowed to borrow and will be given increased freedom to recruit and pay staff. They will, however, remain subject to central control, particularly over standards of health care, and their borrowing will count against the overall health budget. Gordon Brown, the chancellor of the Exchequer, and many members of the Labour Party are unhappy about the development of foundation hospitals, which some fear will lead to a two-tier health service, but the prime minister and the secretary of state for health are pressing ahead with this proposal.

While the British electorate have accepted tax increases, even if these have taken the form of what the Conservatives term "stealth taxes," the electorate will increasingly demand value for money. They will ask, ever more insistently, when throwing money at education and health will bring real improvements.

Are there any lessons for Japan? Japanese public services and bureaucracy are different. Japan has been attracted to PFI projects. It should look carefully at the costs and implications before displaying too much enthusiasm for this gimmick, but there is room in Japan for a bigger role for private enterprise, including joint stock companies in both education and health services, if only ministry bureaucrats would be more liberal-minded.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.

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