Managing in a Mixed Economy - Coursework Example

Managing in a mixed economy Contents Contents 2 Introduction 3 Private finance initiative or PFI 5 PFI and NHS – strategic moves 6 Performance issuesand demands 8 Conclusion 12 References 13 Introduction The National Health Service (NHS) was launched in the year 1948 and over the years it has become one of the largest public funded health services in the world. The fundamental principle underlying the origins of healthcare is provision of good quality healthcare services to all irrespective of wealth differences. The NHS services are free of charge to any resident in UK. The NHS employs more than 1.7 million people constituting general practitioners, nurses, ambulance staff, and hospital medical and dental staff. The organization caters to the health services needs of the people in UK through its services in England, Scotland, Wales and Northern Ireland. According to estimates NHS deals with nearly 1 million patients every 36 hours (NHS website, 2013). The NHS has been rated as one of the best public health care services in terms of efficiency, cost of treatments, and effective health care (NHS website, 2013). NHS has undertaken the responsibility of re-modelling its hospital and a number of changes have been introduced over the period of last 11 years. Though the organization’s operations are largely funded by the government, almost 90 percent of the total funds committed to this project come from private finance accounts. Government gets revenue in various forms like taxes, debts, fines, inflation and more. All these different types of income come from the people of the country. Government is responsible to allocate these funds efficiently and thereby improve the economic and social well being of the country. This is one among the various common challenges faced by governments across the globe. They become accountable for their actions. They are expected and required to use the funds only for the purpose of the country’s benefit in terms of cost efficiency and service delivery. NHS has been working under pressure to meet the growing demands for quality health care services and adequate remuneration paid to its general practitioners and administrative staff. A recent article on the health service reforms initiative at NHS observes that “the demands of cash-strapped GP consortiums that are refusing patients treatments they cannot afford” places new challenges on the organization’s operational viability and ability to meet the desired quality standards (The guardian, 2011). Thus, NHS management faces distinctive challenges in retaining its market competitiveness in terms of quality of health care, sustaining community health objectives, managing financial constraints, ensuring high performance standards and providing the organization with an effective leadership (HSJ, 2009). The key requirement of the organization is the need to balance its finances, manage its operational risks, and deliver high quality health care services. Owing to the large size and complexity of demands of the public sector in UK, government faces distinctive financial constraints resulting in under-resourced institutions that require immediate up-liftment in terms of infrastructural capabilities and service delivery standards. “The UK public sector has been distinguished over the last decade by several features: large increases in cash spending; a significant increase in pay and employment; and a disappointing productivity performance in general and particularly in those areas most favoured such as health” (Lightfoot, 2010). The subsequent sections of the paper provide a deeper insight into financing issues and strategies adopted by NHS to meet its operational demands and achieve the goals and objectives of the hospital remodelling project initiatives. Private finance initiative or PFI The hospital remodelling scheme undertaken by the NHS addresses the demand for improvement in primary and acute health care facilities. The focus of this scheme is to reduce patient waiting times, provide high quality health care services, improve infrastructural capabilities and adopt innovative technologies for effective delivery of services. Capital investment from private financing sources guided the project outcomes and contributed to improved hospital facilities over the past few years. The Department of Health (DH) and NHS sought to design and construct a 800 bed hospital in the Watford area (EPSRC, 2013). The success of this project is defined by effective financing and governance strategies that control project outcomes in terms of delivery schedules and conformance to budgetary limits. One of the optimized methods to provide cost controlled services is through the Private Finance Initiation (PFI). This is similar to the Build Operate and Transfer (BOT) model, wherein the infrastructure is built, operated and transferred back to the principal who assigns the project to another sector. Generally, the government, who is the initiator, delegates to a private sector - to design, build, and maintain the proposed infrastructure till the private sector recovers the investment. This initiative may be used to develop new infrastructure or to renew an existing one. In 1992, John Major’s Conservative government made it possible for the UK’s public sector to use this initiation by making the necessary legal and official restructuring. This initiation has been extended to various government departments involving huge investments like healthcare, defence, transport, roads, education, social housing and waste management. In the financial year ending 2008, the government of UK initiated 627 PFI projects amounting to £58.2 billion of private finance (Hellowell and Pollock, 2009). PFI and NHS – strategic moves Since the service is being funded by private sectors, investments are relatively high in creating the facility, thus reducing the cost for the government. NHS was in a desperate need to improve its infrastructure, and hence sort for the PFI option to reduce investment and capital starvation. The investments made by the government reduced from 7% in 1970 to less than 1.6% in 1992 of the GDP (Clark et al., 2001). In the beginning of 1990s the investments in healthcare also differed between 0.2% and 0.4% and the NHS properties in England had a lot of pending investments to be made in maintenance and repairs (Gaffney et al., 1999). Nevertheless the Conservative government, at that time, aimed at reducing the loan requirements of the public sector while reducing the tax-rises to the lowest amount. Governments always have an upper hand while borrowing funds as they can get at cheaper rates as against their private counterparts. This is because of the fact that the government cannot go bankrupt and default payments unlike the private companies. The transaction costs of government financing are also low and the market in government debt is typically liquid and efficient (Yescombe, 2007). NHS – being the major public service available at subsidized rate to the citizens, relies highly on the PFI to reduce its cost incurrence. They create, develop, and maintain facilities, with a contract time period of 30 years, and returns them back to the public sector after the tenure. Though people believe that this initiation was introduced in 1992, it dates back to 1970’s Labour administration. US have been the pioneer in experimenting public private partnership to pull up the private investments in the up-liftment of the depressed communities. Then this was understood and made use of by the UK government in1978, by Peter shore, the then Environment Secretary, who happened to go to the US at that period of time. In 1990s there was a strong need for further funding in to both the existing and new facilities. This was felt equally at the central and local level. To quote few, the educational facilities in 1997 had an excess investment of £7 billion as against the NHS which required additional investment of £3 billion. These deficiencies affected the ability of the local authorities to meet the requirements for quality service provision (HM Treasury, 2003). In the early stages of introduction, PFI was largely involved in those projects that were funded by the central government. Its initial uptake was relatively low. According to the reports of Harding et al. (2000), between 1992 and 1994, only lesser amounts were allocated for projects other than central governments’. For example, allocation of funds for projects from other departments like healthcare and Docklands were less. The main focus of the government in PFI procurement is on deriving VFM or value for money. Government aims at gaining maximum advantage from the low cost investment. The government keeps a check on these procurements by taking up various VFM exercises such as the calculation of a Public Sector Comparator. Although government takes up different measures to maintain cost effectiveness, this type of procurement continues to attract criticism (Pollock, 2005). Though the early criticisms were on relative cost and outcome (Heald, 2003), the focus later on shifted to flexibility and accountability (Edwards and Shaoul, 2003). Researches show that the next main focus is on managerial and processing problems associated with the PFI procurement. Studies reveal that there is a lot of human resource mismatch in terms of lack of experience, cultural and social differences between the participants, from both the public and private sectors, who are involved in the development of the projects which in turn hinders the communication. Moreover they do not follow standardized procedures which in turn affect the very object of deriving VFM (Akintoye et al., 2001; Asenova and Beck, 2003). In order to close the loopholes of the PFI procurement and strengthen the investment needs of the poor state of existing primary care facilities, LIFT initiative was introduced. Though the PFI is cost effective for capital investment projects, there are lot of apprehensions about extending it to the smaller projects. Hence both the initiatives differed significantly in number of ways. Firstly, in contrary to the PFI, LIFT has a strong presence of the public sector in the form of local trust share ownership and PFH share ownership. Secondly, even the bureau structure aims for a teamwork effort from both the LIFTs and NHS partnering board and involves members from all the departments involved in the project. As there is inherent economic weakness in procuring the PFIs, there is a concern on the cost imposed on the healthcare systems and its direct effect on the ability of services to meet needs. Various studies reveal the inherent financial drawback NHS is facing, due to the high cost involved in procuring the PFIs and hence the optimised ways to come over this drawback are being formulated. Some of the in-house simple ways include rightsizing the employees thereby reducing cost involved in excess manpower and creating more funds by giving away NHS owned unused properties (Gaffney et al., 1999). Many such strategies have been put to use which have made it possible to reduce cost and provide better services. Performance issues and demands Due to heavy competition in the private sector, they are forced to provide quality and customized service which would give competitive edge over their peers. This has raised the bar even for public services. People across the globe, particularly in UK and other countries, expect the government to provide more customized services just like the private sector. But in reality, this theory does not directly correlate with cost benefit. Hence, governments come up with different strategies. They provide two options - one basic service and the other for users to pay for enhanced or personalized elements. Economic slowdown results in strict budgeting and compels the government for cost effective ways of providing public services. In the current scenario, though there is increased demand for public services, availability of limited resources, forces them to optimize the cost, but at the same time provide efficient performance. Standard, quality performance at any point of time provides the competitive edge for the government to gain public confidence. NHS over the past few decades has placed considerable efforts towards revamping its services and some of these include its modernization plans and rebuilding its hospital. As discussed in the previous sections PFI and PPP have contributed to the development and implementation of these plans. The number of NHS hospitals has risen in the UK. More and more NHS hospitals are being contracted under the PFI. The projects which functions under the PFI scheme have some shortcomings. These shortcomings or the challenges are quite visible and prominent in all the projects. The most challenging part of all these types of projects is the need to accomplish them on a strict budget structure. The projects have to achieve the value of money keeping the infrastructure and the amount of money invested constant. Here the value of money can be defined as the social services or the utility of the hospital to the human being of that area. Government aspires to undertake the projects these kinds of projects as the value of money can be improved or can be achieve higher as compared to the public sector enterprises (Grimsey and Lewis, 2005). Studies have proved that PFI will initiate the adoption of proper rules and regulations in the commercial sector. This can be called as maintaining commercial discipline. This will help to shorten the gap between the public sector and the private sector with respect to the project culture. The PFI will also enhance the return or the value of money in a positive way (Birnie, 1999). The PFI schemes, is however a new method or an approach which is yet to be developed fully. The need of the hour is the local governments should try to understand the underlying principle of PFI. The basic objective or the motive of the PFI is to enhance the value of money both to the users and the clients. According to Morgan and Mathiason (2001), the private sectors developers are trying to churn out a large sum of money in the process of constructing any public facility both for the government and the public utility. The private sector is able to nurture a huge sum of money when the construction is at the last stage of its completion. They refinance the deal at a low cost so as the churn out more money. There are many instances that the PFI contract has failed which has to be corrected by the public sector enterprises. This leads to more expenditure and less return on value of money. Some cases of the public finance schemes has failed to an extent that they could not be transferred to the private sector for correction or completion. The result proves detrimental for the taxpayers also as they have to shell out more money as tax. The benefit of the PFI method can be achieved if the government understands the basic and underlying requirement of any PFI procurement and can differentiate the risks which can be handled by the private sector. The shortcomings of the public sector initiative can be ruled out for the following reasons. There is a lack of predominant profit motive for the optimum utilisation and allocation of resources. The private sectors can have more easy method and technique to determine where to invest. The public sectors should aim to deliver services or to gain certain results. Politics also affect the nature and the working of the public sector project or any kind of government activity. The reason and the philosophy behind the acceptance or the rejection of any project differ from one politician to another. The public sectors often uses many stakeholders or other bodies to manage their activities which makes the whole process very complicated, for example, the funding or donation for a particular project many be decided at national level then it may have travel many levels to reach the end user. The results are delayed so much so that the actual need of the project loses its importance. Last but not the least the temperament, attitude of the people handling the projects also tends to hamper the project. The public sectors initiatives, if taken up and executed properly can contribute immensely towards the wellness of the society. The efficacy of PFI in the public sector such as NHS can be measured in terms of the cost overruns and the extent to which the health projects outcome contribute to value for money. The key drivers for improved performance in the public sector are governance capabilities, financing alternatives, and a constant focus on the development of its people, processes and services (Ross, 2011). While bringing about the desired changes is not an easy task the success of performance initiatives lies in shared commitment, shared understanding, and effective leadership, integration of performance management with organizational goals and objectives, and financial collaboration that contribute to strategy development and optimized use of resources (Public Service, 2011). Conclusion The report highlights the budgetary constraints and funding issues faced by the public sector, its impact on the organization’s performance and the role PFI can play in improving the managerial outcomes at NHS. The key to effective public sector performance lies in increased collaboration between public and private sector. The modernisation initiatives at NHS can be improved through improved knowledge sharing systems with its key stakeholders, public sector managers, and increased collaboration with the private financing sectors. Governance mechanisms are important drivers in instigating changes in work culture and adopting a more professional approach. The leaders at NHS must focus on installing a performance oriented culture that can be improved through increasing shift towards knowledge based systems. References Akintoye A., Beck M., Hardcastle C., Chinyio E. and Asenova D. 2001, Risk analysis and management in Private Finance Initiative projects. In: Montanheiro L. and Spiering K. (eds.), Public and Private Sector Partnerships: the enterprise governance, Sheffield Hallam University Press. Asenova D. and Beck M. 2003. Scottish Local Authorities and the procurement of Private Finance Initiative projects: a pattern of developing risk management expertise, Public Works Management and Policy, Vol 8(1), pp. 11-27. Birnie, J. 1999, Private Finance Initiative (PFI) – UK construction industry response, Journal of Construction Procurement, Vol. 5, Issue 1. Clark, T., M. Elsby and S. Love 2001, Twenty-five Years of Falling Investment? Trends in Capital Spending on Public Services, London: Institute for Fiscal Studies. Edwards P. and Shaoul J. 2003, Controlling the PFI process: the case of Pimlico school, Policy and Politics, 31(3): 371-385. EPSRC 2013, Details of grant, [online] available from http://gow.epsrc.ac.uk/NGBOViewGrant.aspx?GrantRef=EP/G061327/1 (accessed 23 March 2013). Gaffney,D., Pollock, M., Dunnigan, D., and Shaoul, J. 1999, PFI in the NHS: is there an economic case?, British Medical Journal, Vol 319, pp 48-51. Grimsey, D. and Lewis, M. 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HSJ 2009, Public private partnerships: getting NHS finance that adds up, [online] available from http://www.hsj.co.uk/resource-centre/best-practice/public-private-partnerships-getting-nhs-finance-that-adds-up/5006769.article Lightfoot, W. 2010, The public sector problem, [online] available from http://opinion.publicfinance.co.uk/2010/12/the-public-sector-problem-by-warwick-lightfoot/ Morgan, O. And Mathiason, N. 2001, PFIs boundary hunters: firms developing schools and prisons pocket millions as the ‘risk’ factor dwindles, The Observer. Pollock, A. M. 2000, PFI is bad for your health, Public Finance, 30–31. Public Service 2011, Doing more with less – the biggest challenge facing the public sector, [online] available from http://www.publicservice.co.uk/feature_story.asp?id=15872 Ross, L. 2011, Public sector performance – a global perspective, Chartered Institute of Management Accountants (CIMA) report. NHS website 2013, About the National Health Service (NHS), [online] available from http://www.nhs.uk/NHSEngland/thenhs/about/Pages/overview.aspx The guardian 2011, Health service reform: perils of the cut-price knife, [online] available from http://www.guardian.co.uk/commentisfree/2011/feb/23/nhs-reform-competition-quality Yescombe, E. 2007, Public Private Partnerships: Principles of Policy and Finance, London: Butterworth-Heinemann. Read More