Commercialising Northern Ireland’s public sector

Posted on August 4, 2015 · Posted in Business Month

Initial attention to the Stormont House Agreement focused, understandably, on welfare reform and other contentious items such as dealing with flags, parades and investigating Troubles-related violence. Consideration with regard to the economy has been dominated by the intended devolution of corporation tax.

Careful reading of the Agreement, though, suggests a raft of other measures that have the potential to fundamentally reshape not just our public sector, but also the Northern Ireland economy. At the head of these is the decision to permit borrowings that might otherwise have been available to spend on capital projects, such as roads, to instead make redundancy payments to staff who agree to retire early.

Trade unions calculate that the money available – £700m – equates to about 20,000 job losses. This will reduce the number of people in employment in Northern Ireland – which in fact actually fell by a thousand in the last quarter. While claimant count unemployment continues to fall, this has been more than balanced by economic inactivity rising even faster in recent weeks.

Various measures outlined in the Agreement suggest other key reforms are likely. The Agreement states “there is a need for measures to improve the efficiency of the civil service and wider public sector and reduce administrative costs”. In part this is to be achieved by “the extension of shared services”.

Other measures hinted at are introducing new charges and selling public assets. The Agreement specifies: “Executive departments should also consider how best to realise the value of their capital assets through reform or restructuring to realise income and longer term savings…. Revenue raising measures may be considered if cost reductions cannot be achieved quickly enough or if there is a decision to run an enhanced provision of public services.”

In addition, the annex to the Agreement spells out that the proceeds of asset sales can be retained by the Executive and made available potentially for both capital and revenue expenditure. Normally the proceeds of sales of assets are spent on capital projects, or used to reduce debt. The Agreement specifies that money borrowed from the UK Treasury and the costs of not fully implementing welfare reform can also be covered through the proceeds of asset sales.

Taken together, the Stormont Agreement provides major incentives to sell-off public assets. Through the promotion of shared services, it may also generate a substantial outsourcing of back office services.

Experience in England demonstrates that shared services can be arranged within the public sector, in order to achieve efficiencies. Research by the Local Government Association found that 337 councils in England – 95% of English local authorities – are engaged in some shared service activity. In addition, shared services operate in the NHS and central government.

Shared services range across back office activities. They can include revenue collection, telephony services, personnel management, payroll administration, procurement and IT support. The logic is simple – the IT systems and personnel used to collect business rates in one area, for example, can be used elsewhere as well. That same rationale can be applied across much of the public sector. It has even been applied at senior management level – some local authorities jointly appoint chief executives with neighbouring councils, as do some NHS and local government bodies.

According to the Cabinet Office, sharing back office services across the public sector could save 20% of revenue costs. A report from the Audit Commission suggested this could be an underestimate, with private sector experience indicating savings could come in at between 25% and 40%.

While much of the service sharing takes place within the public sector, much of it is privatised. Capita is one of the most successful businesses undertaking outsourcing for public bodies and it already has operating bases in Belfast and Newtownabbey. Capita was established in 1984 as a small division of the Chartered Institute of Public Finance and Accountancy, was spun-off as a management buy-out and is now a plc with a turnover of £3.9bn and 64,000 employees.

Equally, or perhaps more, significant for the future of Northern Ireland’s economy is the prospect of asset sales. If we are to judge by the experience of England, potential targets are Translink, the ports and NI Water. Various small scale asset sales are already underway, including sales of former PSNI stations and pockets of surplus land owned by Translink and NI Water. There might also be opportunities for the sale and leaseback of government buildings – such as the Invest NI headquarters. But sale and leaseback schemes in GB have not always been effective in saving money.

There has already been speculation that Translink could be privatised and there are media reports that some members of the Assembly’s Regional Development Committee support this option. But the experience of privatisation of the bus industry in England is not promising. The House of Commons Transport Committee has complained that the system of private sector competition in the bus sector is not effective, with in effect local monopolies operating rather than real competition. A report from the House of Commons library stated that the system had led to fewer passengers and higher fares.

The situation with the privatised rail industry is different. There has been a substantial increase in passenger numbers since privatisation in 1994. Passenger numbers have doubled, while the use of rail for freight transportation has risen by 60%.

Revenues for rail operators have increased substantially over the years since privatisation, while some fares have also risen. Analysis conducted for Rail magazine found that season ticket prices have risen slightly above the rate of inflation. Some off-peak fares have fallen in real terms, encouraging greater use of lower demand services. Advance purchased tickets have also been heavily discounted. But some longer distance journeys, especially single tickets and those bought on the day of travel, have risen by as much as three times the rate of inflation.

NI Water is another target for privatisation. Given the recent industrial dispute, the sale of NI Water might seem particularly attractive to some politicians. But the scale of political unrest in the Republic over the introduction of water charges demonstrates the risks of a privatisation that is linked to the introduction of water charges. It has been suggested that water charges could generate around £300m a year in revenues, assuming the charges are set at a break-even level. But the Assembly has agreed that water charges will not be imposed until 2015, at the earliest.

The ports and harbours are another favoured potential privatisation and there has been repeated speculation about the potential sale of Belfast Port. With an operating profit of £37m in 2013 and a substantial valuable land holding, its sale would be likely to generate a large windfall.

While there are several opportunities for asset sales, it seems inevitable that the big projects would lead to severe resistance. This is especially true with water. But public transport privatisation is also unlikely to be popular, especially as fares in Northern Ireland are substantially below those imposed in England. While the public sector has been put on the road towards greater efficiency and commercialisation, it is a journey that is likely to involve significant dispute.