Accountability in Public Services

Accountability in Public Services
About the Author
ABOUT ACCA ACCA is the largest and fastestgrowing international accounting body, with over 300,000 students and members in 160 countries. ACCA has an extensive network of over 70 staffed offices and other centres around the world.
Paul Gosling is a freelance journalist, author and consultant. He is news editor of ACCAs accounting & business magazine and contributes to The Independent, The Financial Times, The Times and various trade magazines including Public Finance and First Voice. Paul is author of ACCAs Partners in Progress, a guide to devolved government in Northern Ireland, and several books, including Changing Money and Government in the Digital Age. Before becoming a journalist, he was an adviser to social enterprises. Paul lives in County Donegal in the Irish Republic.
DISCLAIMER This booklet does not aim to be comprehensive or exhaustive in its treatment of the topics covered or to give specific legal or other advice. Any views expressed are those of the author. No part of this publication may be reproduced, in any format, without the prior written permission of ACCA.
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Introduction
Accountability in Public Services is a guide to assist readers to better understand the debate on how different public sector structures can help, or hinder, the provision of accountability. It tries to explain why accountability is important both in itself and as a means of improving the quality of public services. At the heart of the practice of accountability lies the way in which public bodies are directed and managed their corporate governance. The collapses of Enron and other very large businesses have led to new rules on corporate governance for the private sector. There has, as yet, been no similar process by which public sector practice is reviewed. Yet while some public bodies operate
very high standards of corporate governance, others are much weaker. We are in a prolonged period of public service reform. This began in the 1980s, when many service providers were privatised while others were converted into armslength executive agencies. The priorities at this stage were to improve efficiency and generate cash. Discussion of accountability tended to focus on the narrow issue of accountability to government departments and ministers, rather than to the public. Part of the intention of this earlier reform programme was to provide managers and agencies with a clearer understanding of what their responsibilities were. This was obviously a sensible objective, but in some instances it was pursued by
lengthening the chain of command which actually added to confusion over who was responsible for what. In more recent years, a second wave of public service reform has emerged. This process has involved an increase in expenditure, which the government has attempted to accompany by productivity improvements. The focus on productivity has again tended to promote the use of systems of accountability which have prioritised the link to government departments and ministers. This has been seen particularly through the heavy use of performance targets and league tables. As the latest reforms become embedded, so the debate on how to continue the process of
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improvement has matured. This has meant that a variety of structures is now used to deliver public services we examine nine different organisational forms. Some of these are new types of agency, designed specifically to improve the accountability function. It is assumed that making public service providers more accountable to their users will improve the quality of services and make them more responsive to users demands. This process is clearest in the use of public interest companies, such as for Network Rail and in the future for foundation hospitals, primary care trusts and childrens trusts. In each of these activity areas it is considered particularly important that services improve in ways that reflect what the public wants. There are other hybrid
organisational forms being used, such as the multistakeholder cooperative which brings together a variety of interest groups (service users, funders, staff and management) onto the board of directors. There is a parallel in the governments increased contracting-out of public service delivery to the voluntary sector. One of the strengths of the voluntary sector can be its involvement of service users in management and decision-taking. But with both public interest companies and voluntary groups there is no guarantee that their structures will effectively involve service users or the wider public. The move towards public participation models of service delivery raises the question of whether other organisational structures which do
not offer any method of direct public accountability can provide responsive public services. There are strong doubts over the performance of quangos, which remain in charge of a significant proportion of public expenditure. Some quangos have been strongly criticised for their weak management and ineffective corporate governance. Free market advocates have sometimes argued that privatisation or the contracting-out of services can introduce what may be termed as the accountability of the market place, by enabling the public to exercise choice between service providers. One problem is that with monopoly services such as the rail and water industries, or refuse collection there may not be any choice between providers. The efficiency of
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contracted-out services can depend on the accountability arrangements between contractor and funder, but in many cases this is weak because too many funding bodies have not put sufficient resources or skills into the contract awarding and contract monitoring functions. There have also been serious problems in some privatised services. While some privatised companies operate away from the heart of public service provision, others continue to provide what are essentially public services - services which the government in practice has to underwrite and ensure operate efficiently and safely. This is true of the rail network, the water supply system, the energy transmission network and nuclear power plants, for example. A
failure of companies in these sectors remains a political responsibility and financial liability for a government, despite privatisation. But the act of privatisation has removed the structures of accountability, other than to shareholders and regulators. The concerns of regulators may not totally coincide with the priorities of government, as has been illustrated by the collapse of British Energy. In practice, enforcing accountability can be very difficult. When the National Health Service was established the then health minister, Aneurin Bevan, boasted that he would be responsible for every broken bed pan. That concept of micro-management and micro-accountability has long since been abandoned. Today, rather, it
can be very difficult to pressure either a politician or official into resignation even for service failings which are clearly their responsibility. The pendulum has perhaps swung from it being too easy to force ministers to go, to a point where it is now too difficult. The uncomfortable truth is that accountability is a concept which is difficult to legislate into practice. It depends more on best practice and an open approach than on well defined rules and any particular organisational structure. The public should be aware who is to blame for what, but there is no simple means for putting this principle into practice. We have, though, drawn up 10 recommendations which we believe would markedly improve the accountability of public services.
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ACCA Recommendations
1 Public sector accounting standards should be reviewed. It should be recognised that because the aim of the public sector is different from that of the private sector, accounting standards also need to differ. Public sector accounting standards should aim to make the annual accounts of public bodies more easily understood by the electorate. 2 Public sector accounting standards need to be amended to prevent public borrowing being taken off-balance sheet. This should include the accounting treatment of Private Finance Initiative deals being made more transparent.
3 A code of corporate governance should be drawn up for the public sector, to apply in all public bodies. The code would apply not only to bodies that are currently recognised as public bodies and which appear on the governments accounts. It should also apply to not for profit organisations which are maintained by, and reliant on, public funds. The code should differ from the Combined Code used in the private sector, recognising the specific character and responsibilities of public bodies. 4 It is clear not only from the failure of Network Rail and British Energy that privatised companies in most cases continue to provide public
services which the government may have a political responsibility to underwrite and prevent from failure. These are effectively massive contingent liabilities which do not appear on the governments balance sheet. It is therefore essential that ministers regularly monitor the financial liabilities and performance of privatised enterprises. In turn, privatised companies must recognise that they have a duty to maintain close and open working relationships with government. 5 Regulation of public bodies should be reviewed just as it is in the private sector by the Better Regulation Task Force. The objective of the public sector review should be a reduction in
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the regulatory burden. This should not, of course, reduce agencies public accountability or undermine the primary roles of audit: confirming that accounts are accurate and that public money has been properly spent. 6 Performance targets should be used sparingly and only as indicators of success. Their primary use should be for internal reporting within the organisation and to its funding bodies. The excessive use of performance targets can produce perverse outcomes. Targets should be set in accordance with public expectations of service standards, providing these are reasonable. But they should also be agreed by negotiation with the funded body and its
staff. Groups of related targets should be assessed together, avoiding too much emphasis or reward being placed on particular targets. The publicly reported results of each public body should be agreed with its regulators and should provide a comprehensive rounded view of its overall success. 7 Rewarding those public bodies which best meet their performance targets should not be at the expense of weaker providers. The worst performing organisations require practical support and resources to improve and thus to move towards the achievement levels of the best performing bodies. Financing of public bodies should not based on a system of
rewards for the past provision of high quality services, but as part of a process of ensuring the highest quality services for all users in the future. 8 Too many quangos fail to directly involve service users in their decision-making. They are effectively unaccountable, other than to their funders civil servants in the relavant government department. It is important to phase-out quangos and replace them using more accountable structures of public service delivery. 9 Public interest companies need to take action to improve their structures of accountability to ensure they are distinctive from quangos. In particular, it is
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essential that they establish frameworks in which they are directly and openly accountable to parliament or the local authority and to their service users. The same point applies to some voluntary organisations, on whom the government is increasingly relying for public service delivery. 10 The government should sponsor a training programme to improve the skills and knowledge of directors, councillors and management committee members of public bodies. These are the people on whom we rely to hold services to account.
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Contents
PAGE 10 PAGE 15 PAGE 19 PAGE 23 PAGE 24 PAGE 26 PAGE 29 PAGE 31 PAGE 34 PAGE 37 PAGE 42 PAGE 46 PAGE 49 PAGE 51 PAGE 59
1 2 3 4 5 6 7 8 9 10 11 12 13 15
What is accountability? Public sector reform and accountability Performance targets Resignation Market choice Contracting-out Joint ventures PFI Quangos Public interest companies Arms length companies Trusts and co-operatives Privatisations Conclusions
Bibliography
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What is accountability?
Accountable: Bound to give account; responsible; explicable.

The Concise Oxford Dictionary
Under the unwritten British constitution, public accountability is by the: civil service to the government, government to Parliament, Parliament to the electorate. Accountability is one of those words more often used than understood. The political reality is that accountability means the government of the day justifying and explaining its actions to the public, in the hope of maintaining trust and being re-elected. Except, of course, that accountability applies (or should apply) not only to the government, but to all services provided from taxpayers money. The concept may sound simple, but the reality is complex. There are clear conflicts in the case of public
services as to whom a service should be accountable to and how. Is it the taxpayer, the wider public, the service user, or the funding body? What if there are several funding bodies? Can the roles of Parliament, elected representatives and appointed officials complement each other? Should the service provider be separately accountable to all the interest groups? What if their interests collide? And if the public does hold an organisation to account, how can this best be arranged? Many political commentators are unhappy about the governments use of a mechanistic approach to accountability in their wholehearted use of performance indicators, performance targets and league tables as a means of distilling a
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performance culture across the public sector. Targets have many drawbacks and it is very difficult to use them to measure the overall quality of a service. Greater public involvement in service provision would be ideal, but in practice this is problematic given an overall trend of public disenchantment in politics and a tendency for those who become involved to be selfappointed and unrepresentative. The government and its advisers continue to grapple with these concerns, as do the opposition parties. The subject is made more complicated because the concept of accountability is wider than just the electorate holding a publicly funded body to account for what it does. It also goes to the heart of the function of accountancy the proper recording of financial
activities. As accountancy itself becomes more complex for example through the use of resource accounting and budgeting in the public sector there is a closer relationship between the recording of what has been spent and what has been achieved. These considerations mean that the accounting officer of a government department or quango or responsible financial officer in local government has additional layers of responsibility in ensuring that the organisations activities and the way it conducts itself are transparent and proper, as well as ensuring that all expenditure and income is properly recorded and value for money is obtained. Accountability and governance were important issues even before the collapse of Enron, WorldCom and
Global Crossing, along with other corporate scandals in the United States and Europe. But the tremors felt throughout the commercial world in the wake of these failures are continuing to produce aftershocks in both the private and public sectors. There is more stress on the need for proper and effective governance, which is just as important for government bodies as it is for listed companies. Some of these failed corporations provided services such as energy and telecoms which in many parts of the world had until quite recently been provided by the public sector. As essential utilities they remain, at least in a sense, public services. These corporate failures raise their own set of questions about the accountability and probity of businesses providing
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essential services. A whole related set of questions arises from the failure of privatised companies, such as Railtrack and British Energy. Whether Europes stronger and more interventionist regulatory structure would have prevented an Enron-type collapse and its alleged market manipulation is an unanswerable question. There are, though, serious risks in taking private sector solutions to private sector problems and applying them without amendment to the public sector, which has its own and often very different practices, cultures, strengths and weaknesses. Corporate governance codes have been designed for corporations with shareholders. Even quangos, which might be considered independent businesses,
differ substantially from a PLC in the way they operate. Codes of governance in the public sector are needed, but must recognise structural differences from the private sector such as the absence of shareholders, the notfor-profit character, the ongoing need for co-operation with a range of partners and the very different role of the auditor. It is important to recognise that auditors play a much more important role in holding public bodies to account than auditors in the private sector play in holding private corporations to account. Public sector auditors tend to be more confident and demanding than are their relations working for private sector clients reflecting the independence of those operating in
the public sector. Even private sector firms auditing public bodies such as local authorities are appointed by the Audit Commission, so have more freedom to operate and to speak their mind. Both the Audit Commission and the National Audit Office produce value for money guidance to public bodies which they expect to influence management and corporate behaviour. Whether audit necessarily adds to accountability or distracts from it by diffusing it is a matter of opinion and may vary in practice. As has been strongly argued by, in particular, Professor Michael Power 1 there has been an explosion of audit in the public sector with the imposition of a variety of
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regulators and inspectors on top of the traditional audit regime which itself has been handed a new array of tasks and responsibilities. Many commentators argue that the public sector has become overregulated. Managers in the public sector are expected to respond to a range of instructions and guidance, such as the Treasurys Orange Book on the management of risk and the accounts and audit regulations for local government 2. This view has been endorsed by Steve Bundred, the new chief executive of the Audit Commission, the body which appoints auditors to local authorities and, until the new Commission for Health Improvement is fully functioning, NHS trusts, and which also produces value for money reports
for much of the public sector. Mr Bundred said most public services are over-regulated at the present time, and we have contributed to that. He went on to argue that public sector auditors should take a strategic approach to risk and regulation, focusing on the highest risk activities, while also considering how service users want services to improve 3. Mr Bundred added that, as has already happened in local government, the proven best public service providers should have the lightest regulation. It is about ensuring that the audit and inspection of public services makes an impact on the improvement of those services, rather than just adding to the bureaucracy and the burden of accountability, he said.
From 2005 there will be a further dimension to accountability when the Freedom of Information Act 4 comes into full force. Public bodies will then be obliged to release information on a range of decisions and disclose much personal information held on citizens. Services covered include education, health, local authorities and the police. While many campaigners are sceptical that the new law will bring about real changes in culture, the responsible minister, Lord Filkin, has said it will deliver real benefits to the public services and a strengthening relationship between government and the public 5. Responsibilities on the relevant public bodies will be backed by an enforcing Information Commissioner 6.
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We must not lose sight of the question: what do we mean by accountability? The Institute for Public Policy Research (IPPR) suggests that accountability consists of three strands. One is transparency: public service providers should be required to disclose important information, with decision-making open to public scrutiny. Secondly, there must be clarity of responsibility: which organisation or individual has taken what decision and how are they answerable for that. And thirdly, services must be responsive to citizens needs, priorities and expectations 7. IPPR argues that these concerns may be dealt with on a broader basis than merely considering the governance arrangements of a public service provider.
This appears to be an alternative to the traditional view of clear lines of accountability of public services to the relevant minister and so to Parliament. In local government the roles of minister and Parliament were fulfilled by committees and the council. In recent years elected mayors and cabinets have introduced a more Westminster-like arrangement of accountability into local government.
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Public sector reform and accountability
The principles behind the governments reform programme are to set minimum national standards, which should be met by all public service providers, operated within a system of clear accountability; devolution and delegation to the front line of staff and its leadership; greater flexibility in the way services are provided; and expanded choice for the customer. Objectives are not just to meet rising service expectations from the public. The government is also committed to squeezing greater value for money out of public services, including through the raising of productivity levels 8.
Events move fast, but the need for reform of the public services does not allow those in government to delay the programme of change to enable them to get the policies fully refined. And, Tony Blair has said, the right policy is the one that works. The government does not believe it has time to pilot innovation to see which models are most effective. Policy development must go hand in hand with the reform programme. An expanding element of the reform programme is the Private Finance Initiative 9. The attractions of the PFI are perceived to be the introduction of higher quality private sector management; tying in rewards to achievement; minimising cost and time over-runs on major capital projects; achieving economies of scale, in some
instances; and re-engineering traditional activity organisation. More controversially, it is also suggested that PFI is attractive because it enables the government to move borrowing off its balance sheet which may help it to meet the rules of the European Unions Stability and Growth Pact. In local government and health in many cases PFI is the only way to finance major capital projects. The use of PFI raises several issues about accountability, some of which are discussed later in this booklet. They are an inflexible form of long-term contracting, which commit future administrations to the political decisions taken by an earlier government and commit an element of their budgets. Fundamental changes to PFI
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contracts must be negotiated with providers and may prove expensive to agree. Governments may also have to live a long time with mistakes made by officials and politicians when agreeing initial contracts. But most of all, where PFI deals contract-out the provision of public services they create a barrier in the chain of accountability between the electorate and the provider. While politicians tend to see an increase in accountability through contracts that connect fees with performance, the public perception may be that they become more isolated and powerless to exercise influence. Despite the variation in services being reformed, there are some consistent characteristics in the way in which direct services to the
consumer are delivered. Probably the most significant of these is the use of third parties to deliver public services on behalf of government or local government. While attention has tended to focus on the aspect of privatisation or contracting-out of services, just as significant is the governments commitment to expanding the use of the voluntary sector to deliver service on contract. This might be considered to fit uneasily with the commitment of the current administration prior to election to the democratisation of public service delivery, most particularly by phasing out the use of quangos (quasi-autonomous non-governmental organisations, or more properly non-departmental public bodies). This was a promise that the government has failed to
meet: while the total number of quangos has fallen, the public spending they are responsible for has risen substantially. Whether the use of third parties improves the delivery of public services depends on many factors. One of the most important of these is the method of accountability used and its effectiveness. Accountability in this context works in two directions. One is the way in which the service provider reports to the service funder the government or its agency. The second direction is the way in which the service provider involves the service user, and amends services in line with the wishes of service users. Superficially it might seem that the use of the private and voluntary
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sectors to deliver services on behalf of government represents a consistent approach to improving public service delivery. Closer analysis suggests, though, that there is a serious contradiction, or at least a key difference, in the way in which services are made accountable to their users. Voluntary or community groups are accountable by virtue of their service users being involved in the provider organisation typically through membership of the organisation, or even of its management committee. The private sector, however, is normally accountable to consumers through the pressures of commercial life. Competition drives service improvement. It is not obvious that private sector delivery of
monopoly services is any more efficient or popular with users than is a monopoly public service. Consequently, simply bringing in the private sector to provide public services is no guaranteed panacea for improvement. An obvious example has been the franchising of rail services. Privatisation was carried out by selling off monopoly services, rather than by creating a comprehensive system of provider competition. A separate monopoly was sold to Railtrack to run the general infrastructure. New commercial management has had a positive impact in higher ticket sales, but very little else. There has been little or no improvement as regards the priorities for service users punctuality, cancellations and overcrowding.
It is too soon to conclude whether the replacement of the private sector infrastructure provider Railtrack by a not-for-profit company, Network Rail, will improve the situation markedly, and its system of accountability to funders and service users will be examined in detail later in this booklet. Significantly, the governments most important reform priority includes the use of both of these methods of accountability competition and user involvement backed by a third tactic which might be termed public shaming. Foundation trusts will run the best NHS hospitals. Indeed, eventually all NHS hospitals will have foundation status. These hospitals will be able to compete for business, primarily
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within the NHS system. They will be structured as not-for-profit companies, membership of which will be open to any local resident (paying a small fee), with some of these residents sitting on its board of governance 10.
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Performance targets
NHS hospital performance is assessed through the publication of league tables which show how hospitals compare in a variety of ways 11. These range from waiting times to standards of cleanliness. Theoretically this will, in future, act as a form of accountability by enabling patients and GPs to be better informed when choosing a hospital. It already produces considerable pressure for improvement from the public and the media, from the medical profession and from politicians, and establishes a system of priorities for internal management to focus on. Performance league tables complement performance indicators and performance targets as key tools in driving public service improvement.
Targets have many benefits. They are easy to explain to the public. They focus management attention on some key factors of importance to the public. Along with the introduction of resource accounting, they concentrate on outcomes and outputs, rather than on the traditional narrow Treasury view of inputs. And they might also be a clear way of assessing whether services are improving, except that annual variations in targets mean that year-by-year comparisons can be very difficult to make. The use of performance targets has been justified by the government on five grounds: providing a clear statement of what is trying to be achieved; a clear sense of direction and ambition; a focus on results delivery; a basis for assessing what
does and does not work; and better accountability. Yet, according to the House of Commons Public Administration Committee which examined the use of performance targets 12 five mirror failings have been introduced by targets: a lack of clarity about what the government is trying to achieve; a failure to provide a clear direction for service providers; a failure to focus on results, leading to perverse consequences and cheating; reporting failures; and confused accountability. Many observers argue that the use of performance targets is excessive and harmful, leading to a distortion of accountability. An example was provided by the Transport and General Workers Union in its submission to the Public
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Administration Committee. Where targets are effective in driving Whitehalls agenda in public service delivery, they make local organisations less accountable to their service users, voters and local taxpayers. The TGWU said that target setting reduces the ability of local people to set the agenda for their locally elected representatives, particularly in local government. It is now entirely legitimate to ask whether local authorities are fundamentally accountable to their voters through the ballot box, or to government via performance targets. The same question will arise with foundation hospitals, once they are established. In a sense, performance targets reflect the current administrations command and control instincts
implemented without directly managing most public services. Critics describe this as a form of neo-Stalinism which conflicts with the governments commitment to the administrative devolution termed new localism. Targets have other seriously damaging effects. This is particularly the case where the wrong targets have been set - the number of people on hospital waiting lists, for example, rather than the time spent on waiting lists. Or where they fail to distinguish, for example, between patients who await life-saving cardiac treatment compared with those requesting essentially cosmetic surgery. There is now a catalogue of unfortunate distortions produced by
targets. The most extreme is the simple fixing of systems by despairing executives. Hospitals have been caught by the Audit Commission after submitting dishonest returns to make their performance appear better than it is. These have included simply lying on returns, sending people home before a four hour accident and emergency waiting target has been breached and offering hospital appointments on dates when it is known that patients are away on holiday 13. This is on top of a range of perverse incentives inadvertently introduced by targets. This has included focusing on simpler nonemergency procedures over life and death operations. The Public Administration Committee report
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found that 25 people lost all or some of their sight because followup appointments were cancelled in the Bristol Eye Hospitals drive to meet targets for initial consultations 12 14. Performance targets at call centres of a maximum call length of four minutes have led some operators to cut calls off, or else to unnecessarily transfer calls to colleagues 15. Perverse outcomes are most likely where an organisation can nearly reach its target through legitimate means. The temptation to cheat to reach the finishing line can be irresistible. And the failure to succeed by a small margin can be very damaging to staff morale. Public perception may be simply of failure, unaware that the difference
between a good and poor grading may be slight. Just as significantly, priorities which do not appear in targets are not priorities at all. It can be extremely difficult to provide a performance target which covers something as nebulous yet essential as excellent quality. And in the NHS, in particular, there are arguably simply too many performance targets. The same applies in policing the Thames Valley force says it is assessed against 200 targets 16. Resources are, of course, directed towards those priorities recognised as targets. This is inevitable, but it can have unfortunate consequences. It means that innovative and experimental work, which may yield greater long-term
benefits, tends to be sidelined. There is evidence that capital expenditure such as agreed purchasing of cancer care equipment has been delayed so that short-term targets could be met. Linking resources to the achievement of targets can produce a spectacular misdirection of finance. The best are made better, while the worst are made worse. Poorer performers will almost certainly need greater resources to improve and invest, but the Treasury is concerned that only organisations demonstrating by a high level of managerial competence that they can be trusted should earn extra resources. This chicken and egg problem is illustrated by the first wave of
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foundation hospitals, which stand to earn greater operating flexibilities and income by already being the best. As a result, hospitals most in need of resources to improve service quality are denied resources and so deteriorate. Recommendations from the Public Administration Committee included the establishment of a system of independent verification by a credible outside body. But if the proper and effective auditing of performance targets were to happen, it would be a resources drain on bodies such as the National Audit Office, the Audit Commission and the Commission for Health Improvement. Significantly, though, the Select Committee did confirm that the establishment of a measurement
culture of performance targets league tables has created greater accountability and transparency to the public and Parliament. The widespread use of performance targets has arguably become the primary means of holding public services to account, both as a guarantee of service standard and to focus attention on the governments priorities. This has meant that targets have inevitably reduced the effectiveness of other forms of accountability, such as the election of councilors. Performance targets have been introduced in the public sector following their widespread adoption in the private sector. But their introduction has sometimes ignored the differences in culture and
organisational objectives between organisations that exist primarily to provide dividends for shareholders and organisations created as democratic entities providing services demanded by citizens. It is not to diminish the significance of performance indicators in driving service standard improvements to say that targets in the public sector have to recognise those cultural differences and must allow for the public, or their representatives, to be involved in setting their own priorities.
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Resignation
The Public Administration Committee suggested that targets could lead to a very distorted form of accountability, which it described as accountability gone mad and process taking over from reality. The classic example of this, it said, was the resignation of Estelle Morris as education secretary which was, in part, the result of a promise that literacy and numeracy targets would be met. These were not quite achieved, though major progress had been made, but Morris had made a clear promise to resign if the target was not reached. While the application of the accountability principle resign upon failure is to be applauded, it is difficult to see how Morris or her predecessor could be held directly responsible for the policy
implementation. Who, ultimately, is responsible for the improved performance of children at school? Is it the children, parents, teachers, headteachers, school governors, local education authorities, officials at the Department of Education, or ministers? It is, of course, all of them, but making just the ministers and headteachers resign when there is failure might be seen as a bit arbitrary. It remains unlikely that the government will meet its objective of half of all school leavers going to university. Where should the responsibility for this lie? Is it with the government and, if so, is it for failing to implement the policy, or for having the wrong policy? If the target is not met, should someone resign? If yes, should it be the prime minister, the education
secretary, a previous education secretary who set the target, the specific minister responsible, or the permanent secretary in the education department? Does the responsibility for any failure at secondary school or primary school level lie with the teachers or the headteachers or the parents? Do universities have the wrong policy requirements? Do examinations ask the wrong questions? Does the financial support policy do too little to support poorer families? And if the objective behind increased accountability is to empower the citizen, what hope does the public have when even well educated academics and politicians have little clue about the answers to this range of questions?
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Market choice
Is the assumption behind the use of performance targets itself a chimera? Performance targets exist, in part, to assist consumer choice. Yet there can only ever be limited consumer choice in the use of public services. Consumers may have a choice between using a private or public sector swimming pool or gym. But what choice does the 80-year-old living in rural Shropshire have, when waiting for a hip replacement operation? Will she really opt for treatment in either London or France, isolated from her friends and family and perhaps scared of dying a long way from home? Do we know to what extent consumers want choice, or whether they simply want a guarantee of good quality provision in all public services?
Yet the idea of consumer or market choice as an element of public service reform and as a method of making services accountable to their users has become deeply embedded in the contemporary political outlook. In all walks of life people act as consumers not just citizens, Tony Blair wrote in the governments first annual report in 1998. They want those providing a service to justify themselves 17. Refining the point in a later Fabian Society pamphlet, Blair explained that public services must be delivered in a modern, consumer-focused fashion 17. This view was reinforced by Chancellor Gordon Brown, when he spoke of greater consumer choice in public services 17. Even more explicitly, former health secretary Alan Milburn and education secretary
Charles Clarke have said that consumer choice in public services is a means of driving up standards 17. The same objectives underlay a previous raft of public sector reforms introduced in particular by Kenneth Clarke in the Thatcher administration, in which he was secretary of state for education and for health. His introduction of partial marketisation reforms increased the ability of GPs to select hospitals for patients, but did not necessarily do much for patient choice. At the same time, according to analysis from Bristol University, it increased mortality rates 18. Clarkes reforms in schooling, breaking down the rigid catchment areas from which children could attend schools, were
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widely perceived as being of greater help to headteachers in choosing children, than to parents in choosing schools. It can be tempting for Londonbased politicians to believe that a form of market choice in public services can work. The city is large enough that hospitals might compete for patients. In practice, London boroughs already compete for customers of their leisure centres. It is inconvenient but, providing the school accepts the pupil, a child can be transported across the city to go to a better school. But public services remain essentially monopoly services. There is a limit to consumer choice in hospitals, schools, libraries,
museums. Away from London, in rural areas, there may be zero choice. And someone still has to use the worst hospitals, schools, libraries, museums. Consumer choice may offer a way of increasing the difference between the best and worst providers and of helping the most articulate citizens locate the best services, but as a means of accountability it is deeply flawed. And for a vast range of public services it is simply inconceivable that the market offers a means of improvement or accountability. Foreign affairs, the armed services, prisons and police forces cannot be affected by consumer choice. Other methods of accountability are needed to achieve improvement.
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Contracting-out
Contracting-out public services now has a long history, but one still clouded by a lack of consensus on its effectiveness. It was championed by the Conservative government of the 1980s under Margaret Thatcher, and in particular by her one-time local government secretary Nicholas Ridley (later Lord Ridley, now deceased). Famously, Ridley once said that his vision of local government was of councillors attending just one meeting a year, in which the contracts were awarded to the private sector to deliver services on behalf of the local authority. Ridleys argument was that service accountability could be enhanced by the annual review and renewal of contracts, through which local authorities assessed performance
and cost. But the history of contracted-out services has been at best a mixed experience. In many cases, contracts such as those for refuse collection and street cleaning have been dogged by complaints about poor performance. In truth, many of the problems stemmed from client local authorities being guilty of poor contract design and weak contract monitoring. The primary mechanism for accountability in the case of contracted-out services lies in contract monitoring services. Many local authorities failed to invest adequately in these services, especially in the immediate aftermath of Ridleys imposition of Compulsory Competitive Tendering (CCT) on councils. The replacement of CCT by the current
governments preferred alternative of Best Value has apparently helped improve the situation. Local authority consultant Mick Taylor said: As CCT developed councils had a sharp learning curve, they had to rapidly develop both skills and systems from an often initial under-investment. Frequently the wrong people ended up in contract monitoring, people who had been managing the service and who found it difficult to make the transition to a hands-off approach. Some councils failed to see contract monitoring as an important discipline. They have had to develop that capability and resource it properly 19. Taylor recalled one authority where performance was taken on trust,
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with no independent data. The council simply paid all bills coming in from the contractor. Provider deficiencies only emerged by chance, when a service user complained. Authorities are now getting on top of this issue, Taylor added. Best Value has made a real difference there have been significant improvements in practice. People are starting to be aware of what they need to measure and how, and using performance data to not just assess contract delivery but to design and develop service improvements. Probably the worst contracting experiences have been in the delivery of housing benefits. Several local authorities including
Hackney and Lambeth contracted-out the delivery of housing benefit services to private contractors. Their experience was that a bad service deteriorated instead of improving as expected. Similar problems emerged elsewhere. The level of the challenge was illustrated by a table produced by the then Department of Local Government and the Regions which showed that of the 11 worst local authorities for housing benefits performance, nine were services provided by outside contractors 20. This was despite only about 10% of authorities having contracted-out the service 21. The problem appears to have originated in an under-assessment by contractors of the level of complexity of the process and of
the severity of the crisis that authorities were facing. The most serious effect of this was that the contracting companies failed to recruit adequate staff numbers to perform tasks or to invest sufficiently in new IT systems. Difficulties mushroomed as the process got into arrears, as the work involved in settling a claim snowballs as claimants begin to chase late payments. Just why contracts for housing benefit services perform worse than other contracts is not completely clear. In a sense the process of contract accountability could be argued to have worked effectively, as some of the worst performing contractors were sacked and had to pay compensation to clients. But the level of compensation was
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often inadequate and local authorities have had to invest heavily to resolve problems. Pioneering contracting-out councils, such as the London boroughs of Westminster and Wandsworth, claim to have had a much better success rate with contracting-out because of their commitment to the process, an open exchange of information with contractors and, they argue, better contract monitoring systems. But there is a recurrent problem with contracting-out in service areas closely associated with IT systems. The same issue emerged, even more dramatically, with a number of major central government contracts undertaken under PFI arrangements. Sadly, the system of contract accountability here does
not seem to have worked, with several major government contracts not delivering the service benefits expected. The lesson, it seems, is that contracting-out IT systems needs to be undertaken with the utmost care, if at all. The Treasury in recent guidelines has spelt out that PFI should not be used to obtain major new IT systems 9. There are particular issues about contracting with the voluntary sector. In principle, this should improve accountability, through many service users being members of the providing organisation. However, there are practical challenges in ensuring that voluntary groups meet the bureaucratic requirements of accountability, such as financial returns.
The House of Commons Public Accounts Committee identified this issue, saying that while it endorsed the use of the voluntary sector to deliver public services, it was concerned at the bureaucratic burden on small groups. It said that while expenditure records and performance data were an essential element of accountability, they could be a costly barrier to overcome. It said that statutory bodies should adopt a more flexible approach to reporting requirements for small community groups 22.
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Joint ventures
The record of success with joint ventures appears to be much better. Or, it might be said, if there are failures they are lower profile than those associated with contractingout, while the successes are better known. In local government, the most famous joint venture is probably Liverpool Direct a partnership deal between Liverpool City Council and BT to run IT and communications systems, including all revenue and benefits services and the councils call centre 23. The result, according to both partners, is a dramatic improvement in the councils communications services. A local call centre monitoring body says that Liverpool Direct is the only public sector call centre in Merseyside which abides by best practice 15 24. This suggests that it operates better working conditions
than those applied within the local public sector. David Henshaw, Liverpool City Councils chief executive, says that it consciously rejected the option of a conventional contracting-out relationship, where if something goes wrong you reach the lawyers. Its preferred alternative was what it termed co-sourcing 23. The council says that it has achieved major investment, big reductions in costs and the introduction of stronger management skills and gained from bringing together previously separated databases for example, by identifying older tenants on benefits who are entitled to meals on wheels. The government is committed to the use of joint ventures as one
approach to its fulfilment of what it terms joined-up government. The Audit Commission has repeatedly called for joint ventures between local authorities, including between district and county councils 25. Examples of joint ventures between public bodies can be seen in education, health and social services, and elsewhere. Care trusts have been established as partnership vehicles, in part to reduce bed blocking where social services authorities have not been sufficiently effective in taking elderly patients out of hospital into residential or intermediate care 26. Where they have been established, some problems have emerged. The Camden and Islington Mental Health and Social Care Trust found
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that the creation of joint budgets created challenges for financial accountability and financial management. Camdens social services director, Jane Held, asked: How do you manage a devolved organisation, which is accountable to the NHS and the Department of Health, to its own board and to two London boroughs? It is a question which does not have an immediate answer, just a need for a pragmatic approach the more so as there is no direct public representation. The issues were graphically illustrated at Bedfordshires Shared Services health care partnership, comprising five public bodies, which was unable to implement effective financial controls and accidentally made 800,000 of double payments 27.
The House of Commons Public Accounts Committee (PAC) examined the accountability of joint ventures 22. It approved the principle of joint working and noted that the Cabinet Office thought that traditional forms of accountability had contributed to departments silo mentality, and should be adapted to promote the delivery of cross-cutting programmes for which a number of departments had some responsibility ... there is still room for stronger joint accountability and reporting on the part of departments. Typically, departments promote joint working by formulating crosscutting Public Service Agreements which include joint targets, which several departments share
responsibility for achieving. It is not yet clear whether this establishes an effective form of accountability for joint venture bodies to report to their various funders, but the Treasury told the PAC that there was some evidence of success amongst the first crosscutting Public Service Agreements.
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PFI
More than 100 PFI schemes have been signed, committing departments to more than 100bn in future expenditure 28. Responsibility for a significant proportion of public sector activity for many years into the future has already been contracted for, with limited scope for amendment. In effect, the current government has already decided much of what future administrations budgets shall be spent on. Various evaluations have considered the effectiveness of PFI contracts, reaching differing conclusions. Prisons have tended to perform well under PFI contracts, though not always, as have solely capital projects. Major IT projects have performed very badly under PFI, to the extent that
the Treasury has now recognised that this is an inappropriate area for PFI contracting. The PAC has made the point that given that PFI terms are often of 30 years or more, value for money over the term requires a strong contractual framework allied with good relationship skills ... [and] a spirit of partnership. Key recommendations from the PAC were that there needs to be better evaluation of PFI projects in progress, that value for money must be obtained over the life of a contract (not just during an initial phase of contract delivery), that PFI project staff must have appropriate skills and that contractors must expect to lose their investment where a PFI project goes badly.
Part of the justification for involvement in the PFI is the concept of risk transfer that the private sector is inherently more capable of managing risk. This assertion has been to some extent undermined by experience, which suggests that risks are not always better managed in the private sector. If risk and responsibility are not truly transferred, then contract accountability is undermined. The reality is that risk sometimes cannot be truly transferred under a PFI contract because essential public services can simply not be allowed to fail as has been illustrated by some PFI contracts, such as the Royal Armouries Museum. (The same issue arose with the failed privatisations of Railtrack and British Energy.) The
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PAC report The Renegotiation of the PFI-type Deal for the Royal Armouries Museum in Leeds 29 concluded that the public sector had bailed out the private contractor facing insolvency with additional funds of 10m, because the service was an essential one which could not be allowed to fail. This goes to the heart of whether contractual accountability is possible with many (perhaps all) PFI contracts. If the client is not in practice able to enforce elements of the contract because of fears that it will lead to the loss of an essential service, then the contractor has the strongest position in the relationship. This is especially true where the contractor is not a preexisting company, but a special purpose vehicle established by a
group of service providers. Should the contract go disastrously wrong, the initiating companies may walk away from the contract, its obligations and the debts. The public sector may have to step in and rescue the service, virtually irrespective of the cost. A second PAC report 30 explained: Departments are too willing to bail out PFI contractors who get into trouble. Contractors should expect to lose out when things go wrong, just as they expect to be rewarded when projects are successful. Departments must ensure that PFI contracts safeguard the taxpayers position in circumstances where the contractor is no longer able to deliver what is required under the contract. Departments should consider in advance how they will
eventually exit from deals should this prove necessary and draw up contingency plans accordingly. When projects run into difficulties prompt action is necessary to prevent costs rising further. The taxpayer must not be expected to pick up the tab whenever a deal goes wrong. The Treasurys review of the PFI concluded that there were particular issues in the use of PFI for IT services. In general, said the Treasury, PFI projects are being delivered on time and on budget. But it added: IT projects were moderately successful and conventional procurement processes should be used for IT supply, which enabled a more flexible and responsive contracting relationship to be established. The
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majority of more successful [PFI] projects renegotiated their contracts after signature to achieve ongoing flexibility, moving away from the mainstream PFI focus on contractually defining outputs, said the report 9. There is also a striking issue of an accountability deficit in financial reporting. It is possible, even acting in accordance with accounting rules, for two parties in a contract for the supply of a service to both conclude that they have no responsibility to place the associated assets and liabilities on their balance sheet. This specifically happened with the supply of a Scottish prison, where neither supplier nor client accepted they owned or had responsibility for the prison 31. This would also have
been the case with HM Treasurys Whitehall headquarters, had it not been for the pressure placed on the department by the National Audit Office 32. Similar issues were responsible, in part, for the collapse of Enron. There third party special purpose vehicles were created, which appeared to take financial liabilities off Enrons balance sheet but in fact these just disguised the liabilities, not removed them 33. Some 40% of PFI contracts take public sector capital expenditure and associated debts off the governments balance sheet 9. The Treasurys review of PFI determined to improve the financial accounting of PFI projects and to produce more rigorous and
transparent financial statistics on the governments use of PFI. However, some critics remain concerned that one impact of PFI is to undermine the reliability of government accounts and prevent the government from being fully held to account for its level of borrowing and spending.
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Quangos
Quangos (quasi autonomous nongovernmental organisations, also called non-departmental public bodies) have become widely used by central government to deliver services at arms length. Their importance grew greatly under the Thatcher Conservative administration. However, they have been degraded in the public eye because of the heavy criticisms of their lack of accountability to the public and service users. They can even lack accountability to the public bodies which fund them. The public perception is that quangos are run by the great and the good and that board membership may be a reward for a political favour. It is not even clear in most cases what role individual board members play in the running of quangos.
While the Labour Party in opposition was heavily critical of quangos, their influence appears scarcely diminished. Although the total number of quangos has fallen since 1997 from 1,128 to 834, financial support from departments has actually risen dramatically from 207m to 377m 34. The role of quangos is especially important in Northern Ireland, where they have responsibility for 56% of public expenditure, including health, social services, education, museums and libraries, compared with just 2.8% by the directly accountable local authorities in the province 35. An example of where accountability was shown to have been eroded to gravely detrimental effect was the Teesside Development Corporation, a regeneration initiative for a part of
North East England. In its 11 years of existence until 1998, it received government grant of 354m in return for attracting 1.1bn of private investment, creating 12,000 new jobs and bringing back into use 1,300 acres of derelict land. But the House of Commons Public Accounts Committee found that, while these achievements were good, the same benefits could still have been achieved with greater regard to the principles of the proper conduct of public business and sound corporate governance 36. The corporation became involved in a series of improper activities selling land at below value, undertaking poor value for money transactions, signing contracts outside its powers and exchanging
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outline development rights for advance payments from developers. These produced a deficit of 23m when the corporation was wound up. The PAC found that the corporations chief executive did not properly fulfil his responsibilities as the organisations accounting officer and authorised transactions, such as granting a mortgage, in breach of guidance from the government. The funding department the then Department of the Environment in turn failed to take rigorous and timely action to put a halt to the ultra vires activities, despite warnings from the corporations auditors and creditors. Especially worrying was the weak governance at the corporation. The
chief executive was the only member of staff to regularly attend board meetings, with the effect that the finance director could not report directly to the board on the financial affairs of the organisation. The board placed undue reliance on the advice and recommendations of the chief executive, said the PAC. Some board members did not fully appreciate their responsibilities for the proper stewardship of public funds. Instead, board members assumed that if the sponsoring department and internal and external auditors were satisfied with corporate practice, then they had no need to question matters even though the external auditor did in fact raise serious concerns in its annual management letters. Nor did the board see full business
cases for major projects before approving them, relying on value for money assurances from the chief executive, without a full understanding of the risks associated with a project. There are other examples of weak governance within quangos. Northern Irelands PAC similarly criticised management practice at the Northern Ireland Tourist Board, where there was misuse of expense accounts, corporate credit cards, hospitality and overseas trips 37. This suggests more than simply weak accountability of quangos to sponsoring departments. At their worst and probably very frequently members of quango boards are part-time and lack expertise, allowing full time officials
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too much power. But just as significantly, financial accounts are not sufficiently used by funders as a means of exerting corporate accountability. The National Audit Office has implicitly recognised this with its campaign now successful to follow public money into all forms of arms length organisations paid to provide public services.
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Public interest companies
The theory of the public interest company is quite simple: it is a not-for-profit company, providing public services, which is accountable to its stakeholders. It is structured as a company limited by guarantee without shareholders, with activities entirely financed by debt and subsidy. It is similar to a public benefit corporation in the United States 38. It is the practice that is problematic. Who constitutes a stakeholder? What weighting in corporate governance should be given to each section of the stakeholder audience? How publicly accountable should the company be? How large can a board be to bring in all the stakeholder interests, without becoming unwieldy?
The PIC concept is new and still largely untested, so the answer to these questions remains unclear. But PICs are taking off. Network Rail is the most obvious example, but some observers argue that it was preceded by the mutualised Glas Cymru (Welsh Water) 39 and that housing associations and further education colleges are also de facto PICs. Other commentators describe housing associations and colleges as versions of quangos. Barriers between PICs and quangos and their operational distinctions are not as yet clear. Teething problems with Network Rail have certainly not put off the government from introducing PICs more widely. Foundation hospitals the new structure for NHS hospital
trusts primary care groups (which control 75% of NHS budgets) and childrens trusts (which are intended to take over childrens social services from local authorities) are all earmarked to become PICs. The origin of the PIC concept lies at the think-tank cum consultancy the Office for Public Management (OPM) and its disbanded associate body the Public Management Foundation. The leader of PIC thinking there was Paul Corrigan, who went on to become a special adviser at the Department of Health. Meanwhile, the OPM ideas were taken on by the even more influential think-tank the Institute for Public Policy Research (IPPR) which persuaded the government to use this structure for the Railtrack replacement body 40 41.
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In some respects, there is potential confusion between a PIC and a social enterprise a business which trades to fulfil social aims. The difference is probably about whether the public service involved is essentially a monopoly. So, a childrens trust which is responsible for providing all childrens services within a borough becomes a PIC. But a privatised residential care home which is run on a not-forprofit basis and which competes against other care homes will be a social enterprise. Definitions are more philosophical than a matter of company law. There have been some thoughtful criticisms of the PIC concept. Tom Winsor, the rail regulator, doubts that the governance structure is adequate to drive down costs, in the absence
of shareholders demanding increased shareholder value 42. IPPR, which is supportive of PICs with reservations, concedes that stakeholder governance can be a headache for managers if they receive conflicting signals about priorities, and also for lenders who can be suspicious of the ability of the board to take the tough financial decisions necessary to safeguard their funds. Because their own resources are not at risk, there may be a tendency for members to put off difficult decisions and to succumb to boardroom inertia 43. It also accepts that board members may fight for the status quo, rather than drive for reform. But IPPR believes that PICs could achieve major improvements to accountability in arms length
service provision. Its Paul Maltby says that stakeholder governance, particularly if it includes direct public involvement, can increase the accountability of public services and counter the potentially harmful profit-maximising influence of shareholders. To achieve this benevolent result, PICs will have to distinguish themselves more clearly not only from PLCs but also from quangos. Maltby suggests that co-governance arrangements embodied in PICs with staff, consumers, funders and management all represented at board level can lead to better management standards. Staff motivation, in particular, can be improved. There is a potential parallel here with governance arrangements for profit-oriented
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businesses in much of post-war continental Europe, such as under Germanys co-determination system. While this was credited as being a key factor in Germanys post-war growth, it has subsequently been criticised for failing to provide the same economic dynamism and entrepreneurism as is shown under the American economic model. It should be added, though, that German companies operating under co-determination have also not demonstrated the same corporate governance failings as have been seen in some of the highest flying American corporations. One reason for supporting PICs, says IPPRs Maltby, is that they are a structure for public service delivery under which leading
executives can be recruited on attractive pay terms, with a strong element of performance related pay. However, one of the strongest criticisms of Network Rail in the media has been precisely the size of its executives performance related pay incentives. IPPR has suggested that the PIC structure could also be used for not-for-profit PFI schemes. While the government is perceived to partly favour PICs because they can (in some circumstances) take public debt off the public balance sheet, IPPR has urged government not to use this as a reason for supporting PICs.
NETWORK RAIL Network Rail is a Public Interest Company, which could be the model for much arms length delivery of public services. The company has responsibility for running the infrastructure of the British rail industry, taking on the role previously undertaken by Railtrack placed in administration by the government for its corporate failures and need for greater funding. The new structure of the railway industry is extremely complex. Inevitably, this complexity means that the process of accountability is also confused. Rail routes are operated, mostly on a regional basis, by train operating companies which have successfully bid for franchises. They run on railway
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lines which are the responsibility of Network Rail, which is also responsible for major rail stations. Contracts for the maintenance of track are mostly sub-contracted out to companies such as Carillion. Decisions on the track access charges paid by train operating companies to Network Rail are made by the industry regulator, the Office of the Rail Regulator. The current regulator is Tom Winsor. Decisions on subsidy, major investment and the award of franchises are taken on behalf of the government by the Strategic Rail Authority, whose current chief executive is Richard Bowker. The SRA is subject to directions and guidance in England from the Secretary of State for Transport, in Scotland from the Scottish
transport minister within the Scottish Executive and from the Mayor of London in respect of services in London. In effect, the SRA is a government body. Financial accountability is just as confused. The Strategic Rail Authority is treated as part of the government in accounting terms, but while the National Audit Office also treats Network Rail as part of the government for accounting purposes, the governments Office of National Statistics does not. Train operating companies (TOCs) such as Virgin and Midland Mainline are clearly within the private sector, although in many cases they are sustained by large and continuing subsidies. About half of the TOCs operate under
management contracts which give them little operating flexibility. The complexity of these arrangements produces tensions, even between bodies operating on behalf of the government. In particular, there is the appearance of growing tension between the rail regulator and both the Strategic Rail Authority and Network Rail. One of the regulators responsibilities is to approve and publish the business plan of Network Rail. In July 2003 the regulator published an interim review of the funding of Network Rail and concluded that the companys spending, which was 6bn in 2002/3, was unsustainable and needed to be cut by about a third over five years. The company would have to cut its costs, warned the regulator. But
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the regulator also openly expressed great scepticism about Network Rails PIC structure. Although Tom Winsor a specialist rail industry lawyer was revealed as a Labour Party member at the time of his appointment 44, he has suggested that the use of the public interest company structure for Network Rail was wrong. He said that it is harder to regulate a company without shareholders, apparently believing that without shareholders and directors representing shareholders it is more difficult for a company to drive down costs. He doubted whether the system of volunteers serving as Network Rails stakeholders could be effective. But Mr Winsor also stressed that Railtrack had failed despite its shareholder structure.
The membership of Network Rail consists of a number of special interest groups. In total the company has a 115 member public interest board, with two thirds chosen from the public out of 1,200 applicants for the positions. The other third is from its member groups, such as regional development agencies, the National Farmers Union and the Royal Association for Disability and Rehabilitation 45. In addition to the public interest board of stakeholders, Network Rail has a board of directors consisting of conventional business people 46. Initially Network Rail wanted to prevent the media from attending its annual meeting, despite its aim of being a more accountable delivery mechanism than Railtrack, but it changed its mind under pressure from the SRA 47.
Rail analyst Christian Wolmar commented: NR is an untested experiment that does not seem to have been properly thought out. For such a system, you really need a dozen or so powerful directors, as with a housing association, not over 100 lay people who have no experience of holding a company to account. There is the added complication of a powerful regulator who performs much of that role 46.
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Arms length companies
Several public bodies have converted discrete service activities into arms length companies. Reasons for doing so have been to comply with pressure from government (housing), to attract private sector or equity finance (housing and executive agencies) and to improve accountability arrangements for service delivery by making clearer operational responsibilities (executive agencies). The creation of an arms length company is an important step for local authorities in obtaining major funding for comprehensive homes improvement the only alternative allowed by the Government is stock transfer to a housing association or other organisation, or a PFI deal. There are special arrangements for the establishment of Arms Length
Management Organisations (ALMOs) to take over local authorities housing stock 48. The government was persuaded to promote ALMOs to councils because of the resistance of many local authorities to transferring housing stock to housing associations, which were seen as outside the local authority sphere of influence and in some instances unaccountable to tenants. ALMO arrangements involve the transfer of a councils housing department to a not-for-profit company, which operates semiindependently. Ownership of the stock remains with the council and the company is also owned by the local authority. Tenants retain existing rights, including the right to buy, security of tenure and their
rights regarding management and repair. An ALMOs creation enables a council to receive additional government grant of 500 per dwelling. Borrowing is funded by the council through its Housing Revenue Account. The government and local authorities in favour of ALMOs argue that converting the housing department in this way is a major reform initiative, which can lead to modernisation and innovation in management approaches. The accountability of ALMOs is a contentious issue. Unison, the main public service union, says that tenants are given little option but to approve stock transfer to ALMOs 49, while Dexter Whitfield of the Centre for Public Services, in a
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research paper for Unison, argues that tenant involvement in ALMOs is often marginal 50. There is no legal requirement for a tenant ballot, with some authorities agreeing on their creation through a less formal consultation process. Tenants hold about one third of positions on an ALMO board: whether this represents an increase or reduction in tenant involvement depends on perception and opinion. About a third of members are independent, who may be brought in by a council for their management expertise. Unisons view is that the senior housing management becomes more powerful by the creation of an ALMO, while councillors despite holding one third of board positions have their influence reduced. But
Sarah Webb, policy director of the Chartered Institute of Housing, said: They do essentially provide tenants with an opportunity for enhanced involvement, which is the other side of accountability. Existing local authority housing departments are accountable through the ballot box, but not generally speaking primarily to tenants. They vote in elections, but lots of other people do and the majority of those are not tenants 51. There are other examples of arms length companies, for example Leeds City Council has established an arms length education company 50. In some instances the arms length companies may be a precursor to their privatisation, or lead to the eventual consideration
of privatisation. The parallel here is with the governments executive agencies which now employ the majority of civil servants which were always intended to introduce more commercial styles of operation and provide a possible basis for conversion into profit generating businesses. One of the largest of these was the Defence Evaluation and Research Agency, part of which has now been privatised as a Public Private Partnership, known as Qinetiq, and is currently one third owned by the Carlyle Group and intended to be subject to an Initial Public Offering in the future. The balance of the old DERA operates as part of the Ministry of Defence as DSTL 52. New initiatives pioneered by local authorities are often structured as
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arms length companies, which have a fairly independent relationship with the council. Urban regeneration companies can be seen in this light. If similar regeneration initiatives had been established during earlier periods, they would no doubt have been led by the local authority. Today they are structured as independent notfor-profit companies, which bring in private sector expertise and finance. But the downside is that, as far as residents are concerned, their influence is reduced compared with direct council initiatives, or community led schemes. Similarly, the involvement of the private sector at director level is likely to gear projects towards those which are commercially sustainable rather than in line with residents priorities.
The Royal Mail is another example, which illustrates some of the potential problems.
ROYAL MAIL HOLDINGS Royal Mail Holdings is the new name for Consignia, the group containing the Post Office, Royal Mail and Parcelforce, formerly known as the Royal Mail Group. Having been a state-owned corporation, it was converted into a state-owned PLC. For many years, Royal Mail contributed surpluses to the Treasury. Recent events have changed this. There is a new commercial environment, with prospects of competition in the delivery of letters following European Union legislation and the reality of intense competition in the delivery of parcels. It is now subject to price control by the new sector regulator, Postcomm. The arm of the business in most trouble is its monopoly public
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service the Post Office network. In an attempt to reduce costs, the Department of Work and Pensions (formerly the Department of Social Security) has encouraged benefits claimants to move to electronic payments, by-passing the Post Office network and thereby dramatically reducing income at branches. The company is now in the process of major reorganisation, which has already seen the loss of 16,600 jobs. This includes 6,500 staff who have transferred to other companies such as Capita, which has taken on 1,300 jobs to collect TV licence fees. The eventual goal is to shed one quarter of the companys workforce. Its financial situation has been made worse by pensions liabilities of possibly 4.6bn requiring an annual contribution of
100m shown up by the accounting standard FRS 17. The company is awaiting clearance from the European Commission for UK government support for a 450m funding package over three years, plus a 1.2bn working capital injection to compensate for the loss of DWP advance payments. The group had an operational loss of 197m (down from 318m the previous year) in 2002/3 on turnover of 8.3bn, which largely reflects a loss of 209m on the Post Office operations. All directors are appointed by the government, which must also approve the companys business plan and any amendments to it. A new management structure and a new team of senior executives have
been appointed 53. It is perhaps significant that the Department of Trade and Industry failed, despite repeated requests, to provide us with a description or explanation of how Royal Mail is accountable to ministers, Parliament or the public 54.
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Trusts and co-operatives
The striking success of Greenwich Leisure (see case study) has encouraged many local authorities to follow the example of the London Borough of Greenwich and externalise services to a third party, structured either as a multistakeholder co-operative or charitable trust. These are just two of a variety of different social enterprise structures which can be used to undertake straightforward business activities, or to provide social or public services on behalf of a community or the public sector. Greenwich Leisure itself earns much of its income from consultancy services to councils around the country which are interested in transferring the delivery of services to some form of social enterprise 55.
Benefits of the Greenwich-type arrangements are firstly financial: moving outside the corporate structure of a local authority while being a charity removes VAT liability and provides rate relief. They also become eligible for a range of grants which local authorities are excluded from applying for, such as lottery funding and Single Regeneration Budget 56. Initially, local authorities that adopted these models copied the Greenwich approach and transferred leisure services. Subsequently some libraries and museums have been externalised on similar terms. Typical governance arrangements involve councillors continuing to be board members beyond externalisation. The body taking
over the running of the centres may be a charitable trust, which owns the assets, or there may be a separate legal entity which runs the facilities while the trust owns the assets. One difference between the two structures may be the level of staff and user involvement in governance. Under the Greenwich model, staff and user representatives have reserved places on the board of management, making the facilitys management accountable to these groups. Some councils have concerns that this representation may distract the management team from commercial considerations and have instead used the trust model without staff and user involvement, but involving representatives from commercial
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bodies. The trust is likely to be required to permanently use the transferred assets for the benefit of the residents of the local authority area and is only permitted to dispose of assets with the approval of the local authority. There are various structures that can be used to provide services through a social enterprise. These include a company limited by guarantee and an industrial and provident society. The government intends to create new legal forms of community interest companies and co-operatives, in part to assist public bodies in contracting-out service delivery to social enterprises. Services provided by social enterprises include job creation and training for groups alienated from the labour market
which may be the long-term unemployed, those with learning disabilities or people who have been in prison or drug dependent. Social enterprises are businesses motivated by social objectives, which might include regeneration, job creation or the provision of social services, such as childcare 57. One of the attractions of using social enterprises for public service delivery is that many social enterprises make themselves directly accountable to service users, by having elected service users serve on their boards.
GREENWICH LEISURE LTD (GLL) Greenwich Leisure was created in 1993 as an outsource of the leisure services of the London Borough of Greenwich. It is now Londons most successful social enterprise a not-for-profit business motivated by social objectives. The initial spark for GLL was the borough councils concern at the rising cost of its swimming pools and gyms and an overall budget crisis which required cuts of 400,000 in one year. To avoid leisure services cuts it was agreed to externalise the service under the management of existing staff. A staff managed enterprise was perceived as having several benefits over the pre-existing council run operation: buildings attracted rate relief; revenue was VAT exempt; the costs of the then
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Compulsory Competitive Tendering regime were avoided; capital funding schemes operated by the Millennium Commission, the Single Regeneration Budget and the private sector were opened up; and the staff were expected to produce more imaginative and realistic proposals for revenue increases and cost cutting. It is a registered charity. GLL has a system of mixed accountability which uses a model sometimes referred to as multistakeholder. The companys board consists of councillors representing the interests of the London Borough of Greenwich, senior management and elected staff, a trade union representative and customers. Day to day management is in the hands of an experienced team of senior
managers. Objectives include both commercial sustainability (embracing continued investment) and affordable pricing to encourage the use of leisure facilities by low income families. It is also committed to employee participation and service expansion. GLL has been a major success, both commercially and in terms of its social achievements. In its first 10 years running costs have halved, while turnover in its Greenwich facilities has increased from 2.5m to over 8m. Total turnover is much higher as a result of its contractual running of leisure centres for other councils and consultancy services provided to local authorities interested in externalising facilities (mostly leisure and library) to staff groups.
It has won a number of public service awards, including the Charter Mark on three occasions. With more than 2,000 staff, the company describes itself as one of the capitals largest businesses 55 56.
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Privatisations
The ultimate in passing on responsibility for service delivery is privatisation. In many cases the privatisations undertaken by the Thatcher government have proved successful in terms of improving service standards while reducing costs to customers. Obvious examples are British Telecommunications, British Gas and the electricity companies. However, it should be noted that competitive pressure alone has not created lower prices it has been backed by strong regulatory regimes. Other privatisations have failed in terms of both improving services and removing the services from the responsibility of government. This has been true of British Energy (see case study), where a change in the operating environment greatly
reduced prices and consequently income, while long term liabilities have been shown to have been historically understated. Other examples of problem privatisations are Railtrack (see Network Rail case study), created under the Major administration and closed down by the current government. A slightly different example is Air Traffic Control, which was semi-privatised by the Blair administration (retaining a 49% shareholding) but, following the severe downturn in air passengers caused by the September 11th terrorist attacks and other events, the new company became short of cash and the government was forced to bail it out with an injection of an additional 60m 58.
The price of privatisation in political and social terms is the loss of accountability and influence, bar the legal environment imposed by Parliament and the regulatory regime established by Parliament. What, exactly, can a government do, other than bail out the company, when an operator of potentially dangerous nuclear facilities runs out of money and cannot safely maintain its plants, creating a risk for the public? There are particular issues thrown up where a public service operates within a competitive environment, and becomes vulnerable to market failure. But the essential problem illustrated by British Energy and Railtrack is that essential public services cannot be allowed to fail, whether they operate in the public or private sectors.
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BRITISH ENERGY British Energy is a public limited company (PLC) which operates the UKs newer nuclear plants. It was privatised during the reforms of the energy industry. The companys financial performance since privatisation has been awful. BE effectively collapsed after a new system NETA (New Electricity Trading Arrangements) was introduced to determine wholesale electricity prices. This greatly cut wholesale prices and had the effect of taking out surplus generating capacity. BE was tied into longterm supply contracts on what became unviable terms. The companys share price fell within months from 1.09 to just three pence.
It was reported that British Energys financial situation had been made worse as the true scale of its liabilities relating to nuclear decommissioning became clear. The company itself denied that this was a factor. The government was forced to rescue BE through a 5bn bail-out, with the government taking over responsibility for 3.9bn in plant and fuel decommissioning costs. Tax liabilities to local authorities will be deferred and debts to the state-owned BNFL (British Nuclear Fuels Ltd) are to be frozen, with some contracts with BNFL renegotiated in BEs favour. However, the arrangements are being reviewed by the European
Commission to consider whether they represent illegal state aid. The restructuring also involves a debtfor-equity swap, with new bonds issued to major creditors. There has also been a series of changes at board level, most notably the appointment of a new chairman who has a long history of close involvement with the governments relations with commercialising the public sector 59. While the government will own 65% of the restructured companys equity, it has agreed with creditors to limit its voting rights to 29.9%.
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Conclusions
It is clear that government is moving increasingly towards an enabler model of public service delivery, in which central and local government inspire and commission public services, without directly providing them. This model is being applied to social services, schools, further education, social housing and hospitals, where service provision has moved or is moving to a more arms length basis. Yet there is little evidence that this achieves better value for money or enhanced accountability. Indeed, there are tensions between value for money and accountability. Both terms need careful definition. Value for money is a concept that varies according to personal outlook and position in society.
Should a prison, for instance, be assessed on the cost of keeping inmates securely incarcerated, or should recognition also be given for the cost and effectiveness of training and education that reduces reoffending rates? Equally, to whom should a public service be accountable? Should mental health provision be accountable to those who use the service, carers with responsibility for the patients, the Treasury which funds the service, or to the wider citizenry who ultimately pay for the cost through taxation and to whom government is in the end responsible? The common sense answer is that accountability should be to all these groups. But devising a structure that meets these needs is challenging and can
lead to an unsatisfactorily messy solution. Critics say this is exactly what has happened with the Network Rail public interest company. Housing associations, which have been described as another form of public interest company, are often criticised by tenants as being insufficiently accountable to them. Greenwich Leisure has achieved what seems to be a more widely acceptable method, but it is probably much easier to do this within a social enterprise on this scale rather than an operation the size of Britains rail system. It is not always clear whether changes in structure lead to a loss or increase in accountability. British Energy was clearly less
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accountable after its privatisation and more accountable since its rescue made it beholden to the government. But BEs lack of real accountability before privatisation to government and subsequently to shareholders was in part a function of its failure to adopt an effective accounting methodology which would recognise the real level of its nuclear decommissioning liabilities. Is Network Rail more or less accountable to the public and politicians than the old British Rail? Do users of Greenwich Leisure feel more or less involved since it became a social enterprise rather than a local authority service? Will the answer depend on whether a user is involved in Greenwich Leisures governance and
consultation systems? There is no consensus on whether a local authority-led arms length housing company is more or less accountable to tenants than was the old council housing department. The situation may differ according to the local authority. Similarly, should we regard the independence of the Bank of England as a progressive or retrogressive move? It is clearly a better arrangement for the Chancellor of the Exchequer, who would claim that members of the Banks Monetary Policy Committee are responsible and accountable for interest rate decisions. But a cynic would respond that this provides cover for the Chancellor in evading responsibility for a decision that was traditionally one of the most
important that the Chancellor could take. In the real world of politics, is it helpful that the Chancellor is not accountable for a decision which can now be taken according to much clearer principles than which party will win the next election? It is just as important to ask about the purpose of accountability. As far as the Treasury is concerned, the justification will be to ensure value for money. For Members of Parliament, it will primarily be to influence services to be provided in line with their political objectives. Service users want to be involved so that services are delivered in the way that is most sensitive to their needs. Sometimes the issue of accountability appears, in practice,
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to be little more than a kick the cat process. When the boss has a bad day, he shouts at his manager, the manager shouts at her administrator, the administrator has a go at the filing clerk and the filing clerk goes home and kicks the cat. The risk is that the noble objective of political accountability in reality is played out on an unsophisticated level, with voters saying in opinion polls they are unhappy with the government, ministers demanding more of officials and departments pushing out even more rigorous but unachievable performance targets. The reality of cause and effect can get lost in this process. Given the absence of simple definitions for either value for money or accountability, it is
perhaps inevitable that a variety of arms length service delivery systems are being embarked on. This is especially true as one of the great political fads and this is not meant dismissively is that of joined-up government. If a third party delivers services on behalf of perhaps as many as eight statutory bodies, then it is obvious that a complex form of accountability to funders and users will be involved. The use of performance targets and performance indicators is seen by government as an essential tool of accountability in bringing about significantly better results in the public sector. In this it is building on decades of managerial development in the private sector, but it is widely believed that it has used targets excessively and
simplistically. Targets and league tables can, though, have an important role to play in enabling the public to understand how service standards are changing. More work is needed to reduce the perverse results of simplistic performance targets. It is inconceivable that the government will cease to use performance targets, not least because of their importance in explaining to the public that services have improved. The principles behind the governments reform programme are to set minimum national standards, which should be met by all public service providers, operated within a system of clear accountability; devolution and delegation to the front line of staff and its leadership; greater flexibility
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in the way services are provided; and expanded choice for the customer. But it can appear as if the government has little clear idea of how best to achieve accountability. It is notable that, in the Prime Ministers Office of Public Services Reform document Reforming our Public Services, in the chapter on standards and accountability there is no real discussion or explanation of how public services should be made accountable to the public. Instead, the nearest it comes is to say that citizens should be able to rely on good quality public services. They have a right to expect proper standards of reliability, choice, information, courtesy and accessibility, to know whether these standards are being achieved and
to identify who is responsible if they are not. It goes on to explain that performance targets enable the public to see whether standards are improving 60. Individual ministers in the current government have more ambitious ideas than this. Hazel Blears is outside the cabinet, but is an influential minister who seems likely to be promoted further. In her Fabian Society booklet Communities in Control 61, she writes: Governments need to be able to tell a story about where they are going and what they want to achieve. For Labour the narrative has to be more ambitious than just spending more money on public services than the Tories. We need to show that we trust local people to direct, own and manage their
local public services ... Decentralisation and mutualisation should be the guiding principles of public service reform. Key parts of the public services should be made into mutual organisations owned and controlled by local people and by their users. Blears goes on to argue that foundation hospitals are the beginning, not the end, of this process. For her, the aim of tighter accountability is not just to improve the performance of public services and to instil a greater sense of ownership by the public of their services. She also believes that such a move can tackle the democratic deficit which is evidenced by declining voter turn-outs and thereby increase the number of people participating in elections.
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Many other recent publications have addressed the issue of accountability in the context of the growing plethora of third way bodies run by volunteer governors. One of these is Rubber Stamped?, by Jane Steele and Greg Parston of the Office for Public Management 62. They estimate there are now 100,000 appointed governor positions in England and Wales, running schools, hospitals, police authorities, housing associations and other public bodies. After interviewing a variety of governors and senior managers in the governed body, the authors concluded that current systems of governance do not work well. The problem not to the same extent but in the same general direction as we have seen
illustrated at the Teesside Development Corporation is that volunteer governors tend to trust full time executives too much, while being more reactive than proactive and therefore unable to provide sufficient strategic direction for their organisation. This absence of strategic approach can be made worse when management provides governors with a surfeit of detailed information, discouraging them from taking a detached overview of events. The authors add that the approach of some executives is to keep apparently ineffective governors at a distance, in order to reduce their influence. As well as making a series of detailed recommendations for improving governance in the public and voluntary sectors, Steele and
Parston propose that the government sponsors the development of a code of good governance for public service, equivalent to the Higgs review of corporate governance for PLCs. Parston was also co-author of Accountability for Results, with Keith Burgess and Caroline Burton, for the Treasurys Public Services Productivity Panel 63. This argued a strong case for building accountability within and across an organisation by spreading understanding of objectives and responsibilities, including instilling a clear idea of what is meant by accountability. Because of the scale of the crisis in the private sector illustrated by Enron, WorldCom, Andersen and
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Ahold the public debate on corporate governance has largely focused on the commercial world. In recent years we have seen reports from Cadbury, Turnbull, Higgs and Smith and the overhaul of corporations legal framework in the United States under the Sarbanes-Oxley Act. This has had the effect of distracting attention from the problems of governance in public bodies. Yet in many cases similar issues are involved. Do directors and members of boards and management committees have the right mix of skills, any more than those who sat on Enrons various boards did? Equally, do the public and voluntary sectors invest sufficiently in the training of their own equivalents of non-executive directors? Almost
universally the answer must be no. And one of the key factors in Enrons collapse was the use of offbalance sheet financing and special purpose vehicles that have an uncomfortable similarity to the structuring of some Private Finance Initiative deals, not only in the UK but also in other countries, such as Italy. A much greater focus on risk management and more transparent decision-making is to be welcomed, as is the Freedom of Information Act and more open competition for jobs in the public services. Yet the key underlying issue remains unresolved how do all the various bodies and public service agents become fully and effectively accountable?
Even more fundamentally, we need to decide what we mean by accountability and how politicians should deal with conflicts in lines of accountability. Ministers have obviously found some of the contradictions involved in this extremely difficult to resolve. While their instincts are for a command and control structure to achieve improvements, they have found that this has tended not to work, with too many unintended perverse consequences flowing from the reliance on performance targets. Their move in the opposite direction to leave it to managers to manage, within the parameters of defined performance targets, is to a large extent a leap of faith. The new political orthodoxy is that public services have been degraded
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by a failure of providers to treat service users with the same respect as they would receive in a shop or other part of the commercial market. But the failure of the market in many instances to respect consumers and their rights excessive interest rates on stores charge cards and the lies told by some utility companies representatives to sign up customers are just two obvious examples is precisely why government has to ensure commercial services are effectively regulated. It is easy to argue that many businesses are held accountable at least as much by a regulator as they are by consumer pressure. The model of improving public service standards by introducing them into a competitive market can, at best, only work if it
is backed by rigorous regulatory structures. In financial terms, the replacement of cash accounting by resource (accruals) accounting across the public sector is another element of enhanced accountability arrangements. It aims to assess an organisation more by its outputs and outcomes, rather than just considering inputs. Resource accounts increase transparency by considering the use of working capital, fixed assets and stocks of goods. The Treasury explains: Under the new resource based approach, accounting officers have significantly increased responsibility for both the management of assets and the identification and reporting of liabilities 64. By including noncash items in financial reports,
Parliament and other stakeholders are given a fuller and more transparent picture of the departments activities. It adds: There is also a very real increase in accounting officers personal responsibility for completely and accurately identifying and reporting the assets and liabilities within the departmental boundary. None of this consideration of the technical forms and characteristics of accountability should divert us from the matter at the very core of accountability: how voters can hold politicians to account for their responsibilities. A very real risk is that the delivery of public services through arms length bodies dissolves the chain of accountability which underpins the constitutional arrangements. It
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should be recognised that some progress is being made, particularly through the new departmental code of conduct 65 under which ministers will be held accountable for the activities of their special advisers. This addresses the problems that most obviously arose at the Department of Transport, Local Government and the Regions under Stephen Byers leadership (the Jo Moore affair). Accountability is of course not a new political concern. When Aneuran Bevan launched the NHS as minister of health, he suggested that he would take responsibility for every broken bed pan. Such a detailed interpretation of ministerial accountability has gradually been eroded and modern political and management thought holds that
accountability is most effective where a person with direct responsibility for service delivery is held accountable for performance. Working against this, though, are some contradictory trends, notably devolution not just in the chain of management, but also through the legal separation of delivery mechanisms. Achieving real and improved accountability while creating a longer and more discrete chain of command is the perhaps the greatest challenge of modern public service reform.
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Bibliography
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ACCA UK 29 Lincolns Inn Fields London WC2A 3EE United Kingdom tel: +44 (0)20 7396 7000 fax: +44 (0)20 7396 7070 www.accaglobal.com The Association of Chartered Certified Accountants

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