A Conversation with Nick Newton

Media Appearances, Transportation, Frontier Centre

Frontier Centre: What is the purchaser-provider split?

Nick Newton: It’s really recognizing what the public sector and private sector are best at. The public sector is best at specifying what it needs in terms of funding, controlling, coordinating and the private sector are best at driving efficiencies in operations and improving customer service.

FC: What savings did it produce with London Transport?

NN: London Transport started as a competitive tendering system for buses in 1985 and over the next 14 or 15 years it reduced costs per vehicle kilometer by over 50% whilst ridership went up significantly and mileage went up significantly. Overall, over that period we estimate that London Transport saved around $11 billion.

FC: Did service levels increase or decrease?

NN: They increased by about a third and ridership responded positively to that. It increased to levels that historically hadn’t been achieved for twenty-odd years. Before tendering, bus ridership was declining year after year.

FC: How did this process of introducing competition into transit start?

NN: It really started with the Thatcher government requiring London Transport to involve the private operators in the provision of services. We started small and devised a system where we generated competition between small operators and our own in-house provider.

FC: I understand that in-house providers were set up to compete for routes. How successful were they?

NN: They organized into twelve locally based companies and they weren’t very successful initially. After all, they came from a background of fifty-odd years of monopoly; the industrial relations were bedded in that they had high overhead and no competitive pressure to become more efficient.

FC: Did the government assist any insider workers to set up their own operations and bid for routes?

NN: Not particularly, but certainly the objective was to make the in-house provider more efficient and to prepare them for privatization as efficient businesses which was achieved after about six or seven years.

FC: What happened to drivers who were with the public operator? Did they become unemployed as the system shifted over?

NN: No, one of the key factors was the availability of bus drivers in London – there were traditionally shortages – they were a scarce commodity and so, because we started small (about one percent of the network), the private operators had to employ drivers and they were, therefore, driven to paying the market rate which is what the public provider pays. So, hourly rates and wages didn’t change, what did change was the efficiency and the effectiveness of the job they actually did.

FC: Did the driver union oppose the model?

NN: The driver union found it difficult to oppose initially, because it was so small, but they started to oppose when they were faced with the fact that their members were getting jobs with new operators but also being paid off if the public sector lost. These guys were getting lumps of money and continued employment. So actually the union found it very difficult to encourage their members to object.

FC: Does the union still oppose it?

NN: No, I think the unions have come to accept it. The other thing is, back to the numbers about increased mileage and increased ridership — what we have actually got is an increase in driving jobs so union membership if increased and certainly, generally speaking, all the operators including the private operators have drivers who are members of the same union.

FC: What happened to the size of management at the old London Transport?

NN: Layers of management were stripped out – significant layers. What we found was that there was probably an optimum size of business – thirty or forty buses and a very low number of managers and the business was run on the basis that everyone knew everyone. So layers of management were stripped out significantly.

FC: Do you have any numbers?

NN: Probably 30 or 40 percent of management were stripped out.

FC: Traditionalists will say that the savings were bought with slashed wages of the bus drivers. Is this true?

NN: Absolutely not, in fact, because as I said there was a scarcity of drivers what we were able to do was establish drivers wages to reflect the market position they were in. So, wages certainly didn’t go down – efficiencies did go up.

FC: Where then did these massive savings come from?

NN: Layers of management stripped out, efficiency in terms of running the same number of miles with the same number of drivers and over the period of thirty, forty or fifty years the public provider had learned to appease drivers to retain them so they had things like company canteens, colored televisions and they weren’t generally encouraged to go out and drive the buses and provide the service. So it was savings through driven efficiencies.

FC: What about the use of capital?

NN: Well certainly the overheads in terms of operating garages fell. Again, traditionally the public sector provider had very large, very expensive architecturally-designed garages. What the private sector operator realized was that this wasn’t necessary to run the service. The vehicles should have been out on the road providing service most of the day – you didn’t need to keep them in comfort. They actually utilized existing supermarket car parks and that sort of thing and only had covered accommodation to maintain the vehicles — some of which are contracted out anyway.

FC: How do you maintain a so-called social route, which can never make money but serves some broader community purpose if it is delivered by a private contractor?

NN: The system in London is still on the basis of the public sector setting the fares and controlling the fares and so the price we pay the operator to provide the service and make a margin with the revenue all accruing to the authority so the issue of the subsidy of the social route is one for the authority to determine through the political process. It is not for the commercial operator to determine. They simply run the service specified.

FC: So they didn’t get a subsidy then to run the route?

NN: No, they just get a price to run the route. The question of subsidies is managed centrally by the authority.

FC: How did you accurately compare in-house costs with those of the private competitors?

NN: This was a problem initially but what we did is we had a system where in evaluating the revenue all accruing to the authority so the issue of the subsidy of the social route is one for the authority to determine through the political process. It is not for the commercial operator to determine. They simply run the service specified.

FC: How did you accurately compare in-house costs with those of the private competitors?

NN: This was a problem initially but what we did is we had a system where in evaluating the public provider, if we were concerned about the legitimacy of the bid we had a facility to put auditors in and of the first twelve routes we tendered, six went to the public provider. We subsequently put auditors in and three of the routes had to be surrendered because they had actually been tendered at less than cost. So we established that process and very quickly, not surprisingly, the public provider started to put legitimate costs in.

FC: Winnipeg Transit believes it is efficient because its costs are rising at only 1% a year. Do you have a view about that?

NN: They are benchmarking themselves against other public monopolies. Our costs fell by 51% in the competitive model.

FC: Why did the New Labour Government of Tony Blair embrace, extend, and complete this process of the purchaser-provider split at London Transport?

NN: I think the difference was that the Thatcher government probably drove this initiative through ideology – they generally believed that private was good and public was bad. I think the comparison with the New Labour Government is that they aren’t driven by ideology – they have a more pragmatic approach and they believe that in order to maximize the amount of public service provided in any field that you need to establish a competitive rate at which you buy it. So they take a more pragmatic view and so it is back to the public-private split that we discussed earlier.

FC: So, if they can get it cheaper -they have money for other services?

NN: Yes, they can either decide that the same level of service costs less or they can actually buy more service for the same money. So, they get choices and they optimize the use of public expenditure.

FC: Our Labour Party is closely aligned with the interests of unions here. Why does Tony Blair seem so detached from the traditional union interests in Britain?

NN: I think he has taken a pragmatic, what you might call “middle” view where at the end of the day I think the unions have understood that their interests are very much in line with those of business – where, together, employees and employers prosper and I think that is generally being demonstrated by the number of successes of privatization so this is no longer a major issue.

FC: So public ownership is not a driving issue anymore?

NN: It’s not about ownership, it’s about control and we retain control of key social services but you procure them through various forms of ownership – making sure that you get the best value for money.

FC: So there is no interest in re-nationalizing buses or electric power or telephones or anything like that?

NN: There are still one or two remnants of the old union view that public ownership is best but I think that one of the other benefits you get from contracting out is that you remove the funding of the public service from the vagaries of fiscal policy and you can have a much longer term view on the necessary capital investments so I think even the “die-hards” are beginning to realize the value of that.

FC: Will Blair win the next election?

NN: The opinion polls certainly suggest that – I couldn’t possibly comment.

FC: Do you see him extending the competitive model into other areas of British public policy like healthcare?

NN: Yes, certainly. I mean, only recently in the media there is a clear view that the national health services is going to contract out a number of the key services to private sector where there is capacity – it’s not where it’s done or by whom – it’s how it’s done and how it’s funded.

FC: Our politicians are not exactly policy innovators, improving services here usually means throwing money at old methods… how can Canada begin the purchaser-provider split model here?

NN: I think that politicians need to trust the public servants. One of the things that drives it all is that the public service is full of people who are committed to public service and when given the opportunity will develop innovative ways of maximizing value. That is exactly what we did in London – there was one sentence in the legislation to include private operators and after that came the system that saved $11 billion.