public interest companies

1. 1 Public Interest Companies Paul Maltby Research Fellow on Public Private Partnerships The Institute for Public Policy Research www.ippr.org What I�m going to do today is to run through some of the findings from our major report on Public Interest Companies, called In the Public Interest (question mark), which was published at the end of April Give some context, explain what they are, suggest what advantage they might provide, and highlight some potential difficulties with the model. Will talk very briefly about a new legal form � in my opinion its somewhat of a red herring in this debate. What I�m going to do today is to run through some of the findings from our major report on Public Interest Companies, called In the Public Interest (question mark), which was published at the end of April Give some context, explain what they are, suggest what advantage they might provide, and highlight some potential difficulties with the model. Will talk very briefly about a new legal form � in my opinion its somewhat of a red herring in this debate.

2. 2 Heard a lot about PICs lately: foundation hospitals, network rail main examples. Useful to think about PICs within context of PPPs: Think you can see a progression in governments attitude: In 1997 were concerned with dilapidated schools and hospitals: PFI was a way to deal with that. In 2001 general election was about public services: reform of public services is at core of new Labour project. Question is how far can contracting with the private sector for public services take us? Can we use PFI like models for everything, or are alternative models useful. Also: Utilities � debate about about nationalisation or privatisation hasn�t entirely gone away Privatisation had relative success for companies operating in a market � but still unease about how to organise essential monopoly utilities. Very public debate about Network Rail in this context. Heard a lot about PICs lately: foundation hospitals, network rail main examples. Useful to think about PICs within context of PPPs: Think you can see a progression in governments attitude: In 1997 were concerned with dilapidated schools and hospitals: PFI was a way to deal with that. In 2001 general election was about public services: reform of public services is at core of new Labour project. Question is how far can contracting with the private sector for public services take us? Can we use PFI like models for everything, or are alternative models useful. Also: Utilities � debate about about nationalisation or privatisation hasn�t entirely gone away Privatisation had relative success for companies operating in a market � but still unease about how to organise essential monopoly utilities. Very public debate about Network Rail in this context.

3. 3 What are Public Interest Companies (PICs)? Broad definition: Organisations that deliver a public service that do not usually have shareholders that are independent from the state PICs can take a range of organisational forms, including: Company limited by guarantee Industrial and provident society PLC where users or government own all shares In the future a �Community Interest Company� too? The Public Interest Company is a new name for an old idea. No hard and fast definitions: We use the term very broadly About delivering public services with organisations that are formally independent of government, but which are not subject to the normal profit motives of companies. Because they don�t distribute profits to shareholders they are commonly called �not for profits� although in my view this is highly misleading. Important to realise that PICs are not a separate legal form - they are incorporated in a range of ways: CLGs are where appointed �members� carry out the governance role of shareholders. Apart from that v similar to typical companies. - IPS; mutuals and co-operatives - Companies such as Post Office and BNFL where gov retains shares. Government currently consulting on whether to establish a new company format. They hope this will (1) end possibility of demutualisation, and (2) help publicise social enterprise. Legislating for a new legal form seems an odd way to publicise the social enterprise sector. threat of demutualisation is more theoretical than real. Would like to see the model designed for public services, not just social enterprises But won�t do any harm: may simplify start up for social enterprisesThe Public Interest Company is a new name for an old idea. No hard and fast definitions: We use the term very broadly About delivering public services with organisations that are formally independent of government, but which are not subject to the normal profit motives of companies. Because they don�t distribute profits to shareholders they are commonly called �not for profits� although in my view this is highly misleading. Important to realise that PICs are not a separate legal form - they are incorporated in a range of ways: CLGs are where appointed �members� carry out the governance role of shareholders. Apart from that v similar to typical companies. - IPS; mutuals and co-operatives - Companies such as Post Office and BNFL where gov retains shares. Government currently consulting on whether to establish a new company format. They hope this will (1) end possibility of demutualisation, and (2) help publicise social enterprise. Legislating for a new legal form seems an odd way to publicise the social enterprise sector. threat of demutualisation is more theoretical than real. Would like to see the model designed for public services, not just social enterprises But won�t do any harm: may simplify start up for social enterprises

4. 4 Examples of PICs Utilities: NATS, Network Rail, Glas Cymru Public services: Foundation Hospitals, housing associations, further education colleges Charities: Turning point, Help the aged Funding intermediaries: Housing finance corporation, Education capital finance Commissioning bodies: Primary Care Trusts? More examples than you might expect involving a range of different uses Housing associations oldest example Utilities, including Welsh water utility Glas cymru Would include charities as a sub-section: eg social care provision Other specialist uses eg funding intermediaries (to help develop the capital market) Also we�ve recommended and Department of Health are sympathetic to using PICs for the commissioning of services through Primary Care Trusts More examples than you might expect involving a range of different uses Housing associations oldest example Utilities, including Welsh water utility Glas cymru Would include charities as a sub-section: eg social care provision Other specialist uses eg funding intermediaries (to help develop the capital market) Also we�ve recommended and Department of Health are sympathetic to using PICs for the commissioning of services through Primary Care Trusts

5. 5 Potential benefits of PICs Avoiding the problems of incomplete contracts Decentralisation Protecting government subsidies Aligning interests of owners and users in monopoly utilities PICs have a potential role for: taxpayer-funded public services enterprises dependent on user charges. There are four main areas where believe PICs might provide an advantage and have a role to play. Important to make distinction between taxpayer funded services and enterprises dependent on user charges. Contracting and decentralisation mostly apply to general public services, funded by taxation Subsidy and monopolies applies to enterprises reliant on user charge, such as utilities.There are four main areas where believe PICs might provide an advantage and have a role to play. Important to make distinction between taxpayer funded services and enterprises dependent on user charges. Contracting and decentralisation mostly apply to general public services, funded by taxation Subsidy and monopolies applies to enterprises reliant on user charge, such as utilities.

6. 6 1. Incomplete contracts Purchaser / provider split can provide greater clarity over what services are to be delivered Relatively easy to specify contracts for new roads, but difficult for complex public services, eg clinical care PICs provide an additional safeguard for the public interest through stakeholder governance There are potential benefits from contracting: helps clarify lines of accountability; avoids the risk aversion evident in government bureaucracy. Specifying what public sector requires in a contract is easy for relatively simple infrastructure projects, eg roads, schools. But much more complex for key public services � especially where face to face contact between staff and users. Eg, trying to write a contract for clinical care in large hospital Danger in areas where contracts are incomplete and there are significant ramifications for desired services not being delivered. PICs aren�t owned by shareholders. Automatically reduces push for profits at all cost. Range of stakeholders such as staff, users, financiers, local community, government can ensure other priorities are addressed Hope is that PICs can provide best of both worlds � clarity of contracts, without fear of shareholder pressure in sensitive and complex areas.There are potential benefits from contracting: helps clarify lines of accountability; avoids the risk aversion evident in government bureaucracy. Specifying what public sector requires in a contract is easy for relatively simple infrastructure projects, eg roads, schools. But much more complex for key public services � especially where face to face contact between staff and users. Eg, trying to write a contract for clinical care in large hospital Danger in areas where contracts are incomplete and there are significant ramifications for desired services not being delivered. PICs aren�t owned by shareholders. Automatically reduces push for profits at all cost. Range of stakeholders such as staff, users, financiers, local community, government can ensure other priorities are addressed Hope is that PICs can provide best of both worlds � clarity of contracts, without fear of shareholder pressure in sensitive and complex areas.

7. 7 2. Decentralisation Command and control in public services becoming discredited. �New Localism�. Purchaser / provider split gives service providers greater autonomy Citizens could get involved in the governance of PICs. Issues of trust are important Public involvement particularly suitable where increasing social capital is the main policy aim, eg, regeneration Potential for localised services and local public involvement seen as primary benefit of PICs by some. Think it can play an important role, but for me, the ultimate concern has to be quality governance. If can�t provide that then will run into problems. Think have to be cautious about public involvement. Stakeholder membership is an obvious choice for services where main aim is public involvemetn � eg regeneration projects designed to build a sense of community. For other types of services, PICs need to demonstrate some other policy benefits before public involvement is considered a justification. Potential for localised services and local public involvement seen as primary benefit of PICs by some. Think it can play an important role, but for me, the ultimate concern has to be quality governance. If can�t provide that then will run into problems. Think have to be cautious about public involvement. Stakeholder membership is an obvious choice for services where main aim is public involvemetn � eg regeneration projects designed to build a sense of community. For other types of services, PICs need to demonstrate some other policy benefits before public involvement is considered a justification.

8. 8 3. Subsidies Potentially suitable for private enterprises that depend on large amounts of government subsidy Railtrack demonstrated how shareholders are adept at extracting and distributing additional subsidy from government. PICs could reduce gaming in such circumstances For utilities and other public enterprises dependent upon user charges. Issue is where private company is heavily dependent on public subsidy. Shareholders become adept at getting more resources from government, rather than improving efficiency. Also, shareholders manage to distribute this subsidy in dividends, regardless of performance of company. Railtrack a good example. In this situation, ,PICs aren�t guaranteed to solve underlying problems of these industries. However, they can reduce the scope for game playing between government, regulators and companies. For utilities and other public enterprises dependent upon user charges. Issue is where private company is heavily dependent on public subsidy. Shareholders become adept at getting more resources from government, rather than improving efficiency. Also, shareholders manage to distribute this subsidy in dividends, regardless of performance of company. Railtrack a good example. In this situation, ,PICs aren�t guaranteed to solve underlying problems of these industries. However, they can reduce the scope for game playing between government, regulators and companies.

9. 9 4. An alternative for monopoly enterprises There is an inherent conflict of interests between users and owners in privatised monopoly essential enterprises Independent regulators usually arbitrate where there are public interest issues If users of the service can become effective governors this can eliminate the conflict of interest and the need for price regulation Effective governance will usually imply a serious financial commitment to the industry, eg NATS More fundamental issue in relation to monopoly enterprises, where there is a basic conflict of interests between shareholders and users. Users have to buy the service regardless of cost or quality. Whereas its in companies interest to raise cost and reduce quality, users desire the opposite. Usually an independent regulator acts as arbiter between the two groups where there are public interest concerns, But suffer from asymmetric information. Also price regulation is seen as one of the riskiest elements of such services, results in expensive capital. If users can be effective governors � and an important IF � then get a better aligned business through a PIC. Can also eliminate need for price regulation, which can reduce risk and therefore the costs of capital. But need to be serious about governance. Not talking about the general public. Talking about groups who have a real financial interest in the success of the monopoly � eg airlines and NATS: Canadian Air Traffic Control company � Nav Canada � shows a way forward on this, rather than messy compromise of NATSMore fundamental issue in relation to monopoly enterprises, where there is a basic conflict of interests between shareholders and users. Users have to buy the service regardless of cost or quality. Whereas its in companies interest to raise cost and reduce quality, users desire the opposite. Usually an independent regulator acts as arbiter between the two groups where there are public interest concerns, But suffer from asymmetric information. Also price regulation is seen as one of the riskiest elements of such services, results in expensive capital. If users can be effective governors � and an important IF � then get a better aligned business through a PIC. Can also eliminate need for price regulation, which can reduce risk and therefore the costs of capital. But need to be serious about governance. Not talking about the general public. Talking about groups who have a real financial interest in the success of the monopoly � eg airlines and NATS: Canadian Air Traffic Control company � Nav Canada � shows a way forward on this, rather than messy compromise of NATS

10. 10 Difficult issues for PICs Finance and Risk Accountability and Governance Politics But PICs are complex organisations: main difficulties result from being private companies without shareholders � shareholders play 2 important roles in typical business � bearing risk (getting rewards, but potentially losing their investment) - and providing corporate governance (ability to appoint directors and auditors) - Major finance issue is how do you deal with risk in the absence of shareholders. 6 options available, but overall it tends to lead to the conclusion that PICs are more suitable for lower risk projects. critics of stakeholder governance say they would be rainbow coalitions, unable to agree on priorities, and would lack the complex technical skills needed to support the board if and when the PIC got into difficulties. Is there a great demand for the public to get involved in running bureaucracies? Would they be representative? Skew priorities between classes? However, shouldn�t underestimate potential of the public. Think it can open up politics (avoids waste) and likely to put users views at heart of the bureaucracy Also view of PICs as �not for profits� means any discussion takes place within a complex political environment, especially given controversial debates surrounding PPPs in general. But PICs are complex organisations: main difficulties result from being private companies without shareholders � shareholders play 2 important roles in typical business � bearing risk (getting rewards, but potentially losing their investment) - and providing corporate governance (ability to appoint directors and auditors) - Major finance issue is how do you deal with risk in the absence of shareholders. 6 options available, but overall it tends to lead to the conclusion that PICs are more suitable for lower risk projects. critics of stakeholder governance say they would be rainbow coalitions, unable to agree on priorities, and would lack the complex technical skills needed to support the board if and when the PIC got into difficulties. Is there a great demand for the public to get involved in running bureaucracies? Would they be representative? Skew priorities between classes? However, shouldn�t underestimate potential of the public. Think it can open up politics (avoids waste) and likely to put users views at heart of the bureaucracy Also view of PICs as �not for profits� means any discussion takes place within a complex political environment, especially given controversial debates surrounding PPPs in general.

11. 11 �Not-for-profit PFIs� Term �not-for-profit� is misleading: people will make surpluses, but these will not be distributed to shareholders PICs can be seen as �politically correct� PPPs Argyle and Bute Council �Not for profit� PFI: same as a normal PFI except 100% debt financed (rather than a mixture of equity and debt) Few obvious policy benefits (besides some diversity in PFI models): driven instead by antipathy to �profit� High risk that this approach could backfire PICs can be seen as �politically correct� PPPs, because of �not for profit� label. Reason behind PIC PFI in Scotland � subject of controversy between SNP and Labour in the recent elections there But only difference is financed by 100% debt, not mixture of debt and equity. Although I welcome innovation and diversity in PPP infrastructure field, I struggle to see where real benefits are expected to come from. Unlike contracting for key NHS services, we understand school infrastructure deals. Relatively easy to put required services into a contract. In fact may risk a serious backlash when they find out that all the service provision is contracted out to FOR PROFIT comopanies in the normal way. If anything there may be more �profit� made by companies than in typical PFI because of having to use untested strategies to cope with risk. PICs can be seen as �politically correct� PPPs, because of �not for profit� label. Reason behind PIC PFI in Scotland � subject of controversy between SNP and Labour in the recent elections there But only difference is financed by 100% debt, not mixture of debt and equity. Although I welcome innovation and diversity in PPP infrastructure field, I struggle to see where real benefits are expected to come from. Unlike contracting for key NHS services, we understand school infrastructure deals. Relatively easy to put required services into a contract. In fact may risk a serious backlash when they find out that all the service provision is contracted out to FOR PROFIT comopanies in the normal way. If anything there may be more �profit� made by companies than in typical PFI because of having to use untested strategies to cope with risk.

12. 12 Conclusion PICs can be of potential use for: contracting for complex public services local regeneration projects or services where public involvement is key monopoly utilities where users can be effective governors For enterprises dependent on significant public subsidy Difficult issues remain about risk and governance A new legal form is not really necessary, but will do no harm Government should exercise caution but should consider PICs alongside other organisational forms www.ippr.org Believe that PICs can over a real advantage over other types of PPP in certain specific situations But difficult issues remain about governance and risk especially. These are both areas that government has not been strong on historically. Face danger from two sides: one hand may become a new fad. On other side political opposition means won�t be considered even though might be of use. Need to be cautious, but Government should give serious consideration to PICs alongside other altnerative options. But should remember that organisational reform is only one way in which to achieve public service reform. Might be simpler ways to reform � eg workforce reorganisation (consultant contracts in NHS). Also remember that without adequate levels of funding, service unlikely to improve regardless of structural and contractual models. Believe that PICs can over a real advantage over other types of PPP in certain specific situations But difficult issues remain about governance and risk especially. These are both areas that government has not been strong on historically. Face danger from two sides: one hand may become a new fad. On other side political opposition means won�t be considered even though might be of use. Need to be cautious, but Government should give serious consideration to PICs alongside other altnerative options. But should remember that organisational reform is only one way in which to achieve public service reform. Might be simpler ways to reform � eg workforce reorganisation (consultant contracts in NHS). Also remember that without adequate levels of funding, service unlikely to improve regardless of structural and contractual models.