To Join Interest with Duty

An Address delivered at a Dialogue,
Harnessing the Self-Interest of the Private Sector to Serve Public Ends
10 July 2003

1. "TO JOIN INTEREST WITH DUTY"

Around the same time as the Pitt administration in England decided that it would deal with its prison overcrowding by sending large numbers of convicts to Botany Bay, the political philosopher Jeremy Bentham came up with an alternative solution.

Bentham proposed that a prison be constructed in London using the very latest technology.  It would be commissioned by central government and managed by a private contractor.  The father of Utilitarianism named his imagined prison "Panopticon" and he recommended that Jeremy Bentham himself be appointed as its operator.

At the end of the eighteenth century, contracting (or "farming" as it was then known) was under increasing attack from those who argued that a strong centralised state would be fairer and more efficient.  Indeed, the Utilitarians themselves were arch-centralisers.

But as a classical political economist, Bentham argued that well-written and well-enforced contracts could be used to align the self-interest of the private sector with the public interest -- "to join interest with duty, and that by the strongest cement that can be found."

Two hundred years later, contracting has made a strong return.  Public private partnerships are now being actively pursued in much of the English-speaking world and in a number of countries in Europe and Asia as well.

And once again, among those who are ideologically opposed to private provision and among those concerned with ensuring high quality public services, the question is being asked:  Are private companies capable of having a public service ethos?

There are serious difficulties with using case studies, but since so much of this debate is conducted at an anecdotal level, I begin by responding with three recent examples.  I then list what I take to be some of the underlying concerns with the involvement of profit-making firms in the delivery of public services.

Although public private partnerships are a relatively recent innovation, there is a rich history of privately provided public services and I provide a brief account of some "public service companies", suggesting that we are not without precedents in this course of inquiry.  I conclude by asking what reasons private firms might have for seeking to do public good.

2. CAN PRIVATE COMPANIES HAVE A PUBLIC SERVICE ETHOS?

September 11:  Following the deaths of 343 firemen and 21 police officers in the World Trade Center on September 11, there was an upsurge in public sentiment.  Firemen became firefighters, Norman Rockwell figurines of firefighters appeared in shops across America, and three New York firefighters were photographed raising an American flag at Ground Zero in an image that echoed the 1945 flag-raising on Iwo Jima.

A week after 9/11, the general secretary of the First Division Association (a public service union in the UK) drew upon this courage and self-sacrifice in the debate over public private partnerships:

The public service ethos is hard to define, but easy to spot.  In the USA in the aftermath of the terrorist attacks, it was emergency workers that the country turned to, not just for their practical help, but for their selfless and tireless courage which was an inspiration for all.

True.  But what of the eight paramedics who also died in the World Trade Center that day?  Three of them were volunteers who happened to be nearby.  Three were from charitable hospitals or medical centres.  Two were from private, for-profit ambulance services that were among the first on the scene.

In fact, at 9.00 am -- fourteen minutes after AA Flight 11 hit the first tower and three minutes before UA Flight 175 hit the second tower -- 17 voluntary and private units and 19 municipal units were on their way to the scene.  Two hours later 55 municipal units and 42 voluntary and private units had been deployed.

There is no evidence that the private sector was lacking a public service ethos on 9/11.  (The larger number of fatalities among firefighters was a function of their role as first-responders and does not reflect a greater sense of public service than police officers or paramedics.)

SARS -- More recently, Hong Kong hospitals have been at the forefront of the battle with SARS, with 282 deaths in that country at the latest count.  Of the 1,746 people who were infected, 385 (or more than one in five) were hospital workers.

Serco has nearly 500 support staff working in four Hong Kong hospitals, who were positioned at the front line of the fight against SARS, moving patients, cleaning wards and converting normal wards into isolation units.

Subsequent interviews with our staff reveal that they were scared, particularly in the early days when information about the disease was limited and hospital instructions were confused.  But with only one exception, our staff put on their N95 masks and went about their duties.

There is no sign that these brave people were lacking a public service ethos just because they were employed by a private sector company.

Bentham's "sincere mourner":  Being a good utilitarian, Jeremy Bentham proposed that he should be penalised for non-performance in the management of "Panopticon", including a £100 fine for each death in custody (a huge sum in those days):

Make my contractor's allowance large enough, and you need not doubt of his fondness of these his adopted children:  of whom whosoever may chance while under his wing to depart this vale of tears, will be sure to leave one sincere mourner at least.

I have always thought this to be a clever line, but in the past month whilst undertaking detailed research on privately managed prisons in the UK, I have come across a real-world example of Bentham's "sincere mourner".

In one of the PFI prisons which has suffered significant financial penalties as a result of underperformance, the leading financier, a major British bank, has appointed monitors to prepare quarterly reports on operational performance.  The consultants report to the bank's corporate finance division about self-harm and suicide intervention, anti-bullying strategies and the purposeful activity regime.

The corporate finance division of a City bank is worrying about self-harm and anti-bullying strategies in prisons.  Who is going to tell me that the profit motive cannot be harnessed to serve the public interest?

3. TRUST IN PUBLIC SERVICES

So what are the concerns with private sector involvement in the delivery of public services?  By and large, the problem is not efficiency or effectiveness but public trust.  This is an extraordinarily complicated subject and not one that can be explored fully here, so let me simplify it massively by reducing it to three issues:

3.1 PEOPLE VERSUS SYSTEMS

The first of these arises from the natural tendency of human beings to recognise and identify with other human beings.  People are inclined to trust other people in preference to institutions or systems.  And they are more inclined to trust people who work with people (doctors and nurses) than people who work with systems (managers and bureaucrats).

As a result, individual public service workers are usually more trusted than the institutions for which they work -- in the UK, doctors are trusted much more than the National Health System, judges and police officers more than the criminal justice system.  And in the age-old struggle between front-line professionals and their line managers, the public tends to side with the professionals.

This preference for people over systems is probably very old, but over the past fifty years, right throughout the Western world, there has been a marked deterioration of trust in large-scale institutions and (in some countries) an increase in trust for other people.

This is not to say that systems don't matter.  To the contrary, in a modern society they are extraordinarily important and the vast majority of the service improvements over the past few decades have come from systemic reform rather than from hiring more people and training them better.

But it is not difficult to see how you could construct a campaign around this dichotomy.  In the United Kingdom, when public sector unions have been attacking private provision using the public service ethos, they do not speak out on behalf of public sector managers and back office workers.  They speak of teachers, nurses and firefighters -- front-line professionals engaged in delivering core public services.

And when they attack the private management companies, they make no mention of paramedics risking their lives at the World Trade Center or hospital workers coping with SARS.  They speak of big business and well-paid company executives -- back office workers who are mostly engaged in the reform of systems.

3.2 PERFORMANCE VERSUS MOTIVES

The public generally believes that the private sector is more efficient than the public sector.  By and large, they don't need to be convinced that -- where performance can be measured -- the private sector delivers better outcomes than government, particularly when it is exposed to competition.

But in many public services, judgements about performance are difficult for ordinary folk to make, since outcomes are complex, contingent or inherently conflictual.  How do we know whether our fire services are delivering value for money when an event like 9/11 only comes along once in a lifetime?

In these circumstances, the public tends to rely more on the motives of people and organisations rather than measured performance.  Monsanto may be highly effective in developing genetically-modified foods, but since it is virtually impossible for me to understand the long-term consequences, I am inclined to place much greater reliance upon their motives.  So I ask myself:  if Monsanto had to choose between corporate profits and the environmental impacts of genetically-modified soy beans, would they be on my side?

3.3 PUBLIC ACCOUNTABILITY

There is also a very close association between accountability and trust.  At the most basic level, the public sector is seen as being more transparent and more open to external scrutiny.  But government is also subject to a complex system of checks and balances which relies upon the self-interest of competing people and institutions to prevent abuses of power and to force issues into the open.

Public services are also thought to be more accountable because they simplify an otherwise complex world and, in some cases, provide us with agents to negotiate with the system on our behalf.  And finally, public services are seen as part of a wider democratic system which increases the likelihood that service providers will reflect the values of the diverse range of citizen/users.

We do understand that public service professionals are also motivated by self-interest.  In the UK, they have just had protracted disputes involving firefighters and hospital consultants where the naked self-interest of these two groups has been evident to all.  But we are also satisfied that longstanding accountability arrangements and a professional service ethos will generally keep the self-interest of these people in check.

It may be true that competition and contracting result in greater transparency and more effective checks and balances, but these accountability mechanisms have not been tested often enough for the public to be convinced that that is so.

4. THE PUBLIC SERVICE COMPANIES

And yet 24 year-old paramedics sacrifice their lives at the World Trade Center, and Hong Kong hospital workers quietly go about their jobs in the middle of a SARS epidemic.  Clearly some private sector companies (and their employees) are capable of having a public service ethos.  But anecdotes are not enough.

Nor is it enough for the opponents of private provision to rely on a handful

of examples where private sector companies have failed to pursue the public interest.  I could easily counter with my own examples where self-interest has triumphed over public interest within the public sector.  (You might recall that I am the person who created the NSW Independent Commission Against Corruption.)

The real question is whether it is possible to create conditions under which private sector providers will pursue the public good in the normal course of business.  Public private partnerships are such a recent phenomenon that one might conclude there are not enough case studies to undertake such an inquiry.  But there is a long history of what might be called "public service companies" throughout the Western world (and the English-speaking world in particular) from which lessons might be learned.  Time does not permit me to do more than mention some of these in passing:

Settlement companies:  Joint stock corporations were widely used in governing the British Empire, starting with the East India Company which from 1834 until 1858 had no business other that of public administration.  Many of the early settlements in North America -- Virginia, Plymouth, Massachusetts, Connecticut and Hudson's Bay -- were corporate colonies, while others were proprietary in nature.  And at the close of the nineteenth century, southern Africa, east Africa, the Niger and parts of Borneo were at different times administered by joint stock corporations under parliamentary supervision.  Within the United States, joint stock corporations were often used for the settlement and governance of new communities and in the governance of the larger wagon trains.

Company towns:  These experiences contributed to a rich British and North American tradition of proprietary towns and suburbs -- well-to-do urban communities (Leicester Square in London and Gramercy Park in New York), nineteenth century company towns (Bournville and Saltair in England and Pullman in North America), and the garden cities of early twentieth century England (Letchworth and Welwyn).  Since World War Two, we have seen a spectacular growth in the number of private communities (gated and ungated), particularly in the United States (with Reston, Virginia having a population of more than 60,000).

Infrastructure companies:  Throughout Britain and in parts of Europe and North America, private firms played the leading role in the development of urban gas and water, street lighting and lighthouses, roads and bridges, canals and waterways, railways and tramways, telegraphs and telephones.

In both Britain and the United States, it was soon evident that the vast majority of turnpikes would not return a profit and yet local business leaders continued to invest.  One nineteenth-century American judge said of the turnpike corporations that "though the ownership is private, the use is public".

The first public railway in the world -- privately owned but public in the sense of taking passengers for a fee -- was the Stockton and Darlington Railway in northern England.  The motto of the Stockton and Darlington was "periculum privatum, utilitas publica" ("at private risk for public service").

Public services:  It is harder to summarise the diverse range of public services that have been delivered by profit-making enterprises over the years or by non-profit organisations established by groups of profit-making firms.  But one can mention naval defence, policing patrols and criminal detection, fire-fighting and ambulance services, prison management, tax collection, road management and municipal services.

I would not want to defend all of these public service companies as representing best practice.  (Nor, for that matter, would I wish to defend all of the institutions used in governing nineteenth century England and Australia.)  We must study each of these examples in its historical and cultural context and seek to learn the lessons for today.

Few of us would now seek to defend British Imperialism  and yet in the middle of the nineteenth century, the East India Company was widely regarded as setting new benchmarks in public administration.  The term "civil service" is taken from the East India Company as are a number of the fundamental principles of the Northcote-Trevelyan model of public administration, such as merit selection.

5. WHY DO PRIVATE COMPANIES DO PUBLIC GOOD?

So what are the circumstances under which private companies will do public good?  Well, as it turns out, the notion that self-interest can be made to serve the public interest is not such an unfamiliar concept after all.

This was Adam Smith's great insight -- that when markets work well, self-interested individuals will serve the good of the wider community without ever intending to do so.  Of course, there are market failures but even among the most cynical, there is recognition that society as a whole profited from the self-interest of entrepreneurs such as Thomas Edison and John McAdam.

We are also familiar with this concept in government.  After all, the checks and balances of the Westminster system do not depend on a wide dissemination of the higher virtues, but merely on the self-interest of competing ministries, competing political parties and, in federal systems, competing governments.  Out of this contest and challenge comes greater transparency and a greater responsiveness to the rich variety of interests in society.

So what are the conditions under which the self-interest of the private sector can be harnessed to serve the public good?

A. MARKETS

• When the public interest largely coincides with the interests of the consumer or service user

  When the interests of the consumer or service user are dominant, then the wider public interest can be largely addressed through taxation and regulation.  The public does worry about the profit-motive even in market transactions, but in the UK, research has consistently shown that some private organisations (such as Halifax Building Society and Marks & Spencer) command higher levels of public trust than many governmental agencies.  One only needs to recall the response of Johnson & Johnson and the Australian biscuit-maker, Arnotts, to product adulteration crises, to appreciate the impact that corporate brand and reputation can have in aligning shareholder interest and consumer interest.

• When there is large-scale risk or investment in technological innovation

  There has also been much less concern about private sector involvement in the delivery of public services when bold technological innovations are being made and where these public service companies are prepared to accept high levels of risk.

  That is the reason why the private sector has played such an important role in the development of new infrastructure.  Today, we are inclined to take reliable street lighting and urban water supplies for granted, but in seventeenth century London, these were frontiers of technological innovation.

  I well remember the first private toll bridge that I encountered in modern Britain -- a bridge over the River Wye (in eastern Wales) that was owned and operated by the same family from the late eighteenth century through until the 1970s.  One might conclude that that was a fairly safe investment, until one realises that the first two bridges the family built were swept away by floods.

  Much the same was true of the settlement companies of the British Empire -- in the early years, the risk of failure was immense, so high that governments were unprepared to commit the taxpayer's resources (and their own political capital).

B. COMMUNITIES

• When the "public" consists of a small enough community to capture the benefits of investment indirectly

  In some cases, the "public" in question is a relatively small community and investors are able to capture sufficient returns through local economic growth.  This is the reason why local landowners, merchants and manufacturers were prepared to invest in turnpikes and railways, and urban gas and water supplies, particularly in the early years.

  It is also the reason why ship-owners invested in lighthouses, insurance companies set up their own fire brigades, and the West India merchants established their own police force.

• When free-riders can be excluded and costs can be recovered for public goods

  It has often been argued that local public services must be financed out of general taxation because of the problem of free-riding.  And yet there is a rich history of company towns and private neighbourhoods where remoteness (as in the case of mining towns), the capacity to exclude (as in gated communities) or the imposition of rental charges by a residual property owner have enabled communities to overcome these this problem.

  It is debatable whether the Business Improvement Districts of North America are a form of sub-local government or a kind of private self-governance financed by a surcharge on property taxes.  This illustrates the difficulty that we often encounter with public service companies -- the general public has difficulty knowing whether they are public or private.

C. CONTRACT

• When self interest happens to coincide with the public interest

  In some cases, the self-interest of a public service company just happens to coincide with the wider public interest.

  One of the best explanations as to why the management companies have had such a major positive impact on the "decency agenda" in UK prisons, is that it was in their commercial interest.  As it turns out, it is less expensive to treat prisoners decently.

  Let me give one simple example -- in the privately managed prisons, prisoners are given the keys to their own cell.  This increased the prisoners' sense of self-worth -- their privacy and security -- but it also brought down costs since officers did not have to spend as much time locking and unlocking cells.

  This alignment of public duty and private interest is perhaps serendipitous, but it has been such a significant factor in the introduction of the "decency agenda" in HM Prison Service and for that reason, that I do not believe that it should be ignored.

• When performance incentives work

  Performance incentives are what Jeremy Bentham was talking about when he wrote of joining interest with duty.  Through a well-written and well-managed contract, government can align the public interest very closely with my private interest.  The reason why the corporate finance division of a City bank is acutely interested in the welfare of prisoners hundreds of miles away is that there are serious financial consequences if their clients fail to measure up.

  I am aware of what the economic literature says about the difficulty of writing effective performance regimes for complex services.  But in my view, it is time that Oliver Williamson got out of his office and caught up with what has actually been happening with public private partnerships in the UK over the past decade or more.

• When there is commercial value in having a reputation for public service

  A company's stock market valuation consists of the sum of its book value and its goodwill (or reputation).  Public service companies tend to have little by way of tangible assets, so that to a very large extent, the value of the company is determined by its reputation.  If it were to compromise that reputation, the company would fail to win new contracts or renew existing ones and the capital markets would quickly discount the value of its shares.

  Reputation is particularly important in public sector markets, where there are often repeat plays with the same customer.  Game theory tells us that it is in those circumstances that players will be most inclined to take a long-term view.

  Governments need to pay greater attention to the incentivising effects of corporate reputation and how that can be used to improve the quality of public services.

• When employees are motivated by a professional ethos

  One of the mistakes that critics often make is to assume that front-line workers engaged by the private sector are strongly motivated in their day-to-day activities by concerns about profit and loss.

  A couple of years ago, the Institute for Public Policy Research (a centre-left think-tank in the UK), conducted qualitative research with a number of front-line workers in public and private hospitals, in an attempt to get a better understanding of the public service ethos.

  Nurses employed in private hospitals were deeply offended at the suggestion that they behaved differently because they were not working for the NHS -- "You nurse exactly the same in the private sector";  "To me the patients were patients, that's it.  You nurse them all the same";  "It doesn't matter where we work now -- a nurse is a nurse.  You're a caring professional."

  It is this sense of public service and professionalism that motivates the nurse in a private hospital (or in a privately-managed public hospital).  Quality private sector managers understand this and seek to harness that ethos to deliver better services.

  The self-sacrifice of private paramedics at the World Trade Center and the dedication of our hospital workers in Hong Kong during the SARS epidemic come from this same sense of professionalism.

6. CONCLUSION

One of the many reasons why governments have turned to the private sector over the centuries is "plausible deniability" -- government can take the credit, but if anything goes wrong then the private sector can wear the blame.  One can think of it as a form of political risk transfer.

This is certainly one of the reasons why British governments, from Elizabethan times down to the early nineteenth century, relied on privateers to supplement the Royal Navy in times of war.  It explains, in part, why the Crown relied on chartered companies to undertake overseas trade and settlement until the late nineteenth century.

Socially responsible public service companies are tired of being used by governments in this way.  In particular, they are tired of participating in lowest price tenders, where the second half of the cost reductions can only come through cutting terms and conditions.  They are sick and tired of being forced into competitions of this kind through government procurement processes and then being criticised by government for not having a public service ethos.

There is little doubt that profit-making firms are capable of having a public service ethos.  And there appear to be a number of conditions under which the self-interest of the private sector can be harnessed to serve the public interest.

But in order to capture these benefits, governments must step away from a narrow procurement agenda and look to the much more interesting challenge of building a diverse ecology of socially-responsible public service providers.  In the UK, the Blair government has signalled that it is ready to take up this challenge.