Innovations in Financing Public Services

Taking a narrow view, public finance means the provision of money for public expenditures by taxation, charges and borrowing (Bannock and Manser 1999). Public finance can also be conceptualised in a more functional way to include drafting and implementing relevant tax laws, safeguarding public money, managing public budgets, selling government bonds and assessing financial aspects of public policy programmes.

The ‘credit binge’ of the 1990s and early 2000s facilitated the use of private finance for public services. However, this ‘easy money’ debtfuelled period of economic growth was followed by the ‘credit crunch’ beginning in 2007. Combined with the 2009 economic recession, the UK government faced a pronounced dilemma because its plans for increased spending on public service infrastructures were increasingly undermined by difficulties faced by Private Finance Initiatives (PFIs) and similar ventures in obtaining commercial bank loans. Many private companies involved in the construction and management of Public-Private Partnerships (PPPs) facilities also experienced severe financial problems. In the changing macroeconomic and microeconomic conditions, it therefore became essential for public sector departments to identify the most effective and efficient methods for the financing and delivery of public services and related physical infrastructure.

The growth of the Korean economy has necessitated a continuous investment in infrastructure facilities. However, limited resources in the pubic sector have led the Korean government to utilise private capital investment in infrastructure facilities. Since the introduction of Public-Private Partnerships (PPPs) in 1994, private participation in infrastructure (PPI) projects has been growing rapidly to meet current infrastructure demands.

In Spain, as in the majority of Western countries, the development of transport infrastructures, especially roads, has been dependent on public authorities. Nevertheless, the participation of private partners in the construction, financing and management of transport infrastructures is an ‘old friend’.

Public-Private Partnership (PPP) is a broad term which covers a comprehensive range of private involvement in the provision of public services or services of general social interest, and involves quite a wide range of cooperation between the public and private sectors. In the broadest sense, it pertains also to privatisation, although in fact in the view of experts in the field this is a misconception, since the private sector does not buy an asset, but rather ‘purchases a stream of services under specified conditions’ (Grimsey and Lewis 2004, 6). This may also include private financing of public infrastructure, although the emphasis is on the private provision of services which may, of course, also involve construction. Participation of a private party in the project design, construction and management of project delivery and the collection of financial streams (including risk bearing) is a distinctive feature of PPP versus the traditional procurement type of contractual agreements.

Governments have traditionally used bond markets to finance their huge infrastructure investments. These markets are the largest branch of the global financial markets. Institutional investors invest substantial amounts of pension funds and other longterm savings in these markets. Financial intermediaries and companies also use these markets to take and hedge risks. Bond markets are a cornerstone of the financial markets because government bonds:

Key developments in the public sectors of many countries over the past two decades have been the notion of ‘modernisation’, generally meaning a shift from a traditional public sector ethos to a more private sector approach, and its corollary ‘innovation’ (Bovaird and Löffler 2003; Flynn 2007). Innovation was, in the past, anathema to many in the public sector as, by its very nature, it introduced risk into what was a risk-averse environment. For example, in the UK, central government does not wish to see other parts of the public sector taking excessive risks, or taking risks which may be acceptable in the private sector but are regarded as not being within the public domain. The mantra is one of ‘balanced’ or ‘well managed’ risk taking. How, therefore, can public bodies construct a system to exploit fully private sector knowledge of the possibilities for the management of risk, especially for the financing of risk, yet comply with rules and regulations relating to the risks they are allowed to take? Risk financing, in this context, refers to the mechanisms in place to ensure that funds are available to meet the financial consequences of unforeseen losses.

In the developed countries, higher education has been in continuous flux for decades, and the speed of change has accelerated in recent years. Increases in student numbers, observed in many developed countries in the 1990s and 2000s have created unprecedented demand for higher education, but also unprecedented pressures on the institutions themselves and the public purse that traditionally financed most of the cost in all but few OECD countries. As higher education and its costs grew, so too did concerns about its efficiency and outcomes. The general tendency in post-industrial societies to emphasise individual needs and client orientation in public services also contributed to the changing environment of higher education financing and organisation.

This chapter focuses on how charges to service users that recover less than the full costs of services can be used as an innovative way of part-financing public services. It focuses on the UK and, specifically on local government services. However, it excludes charges for trading services provided by municipal companies, irrespective of whether they are subsidised by the state or not.

The aim of this chapter is to map out an overall picture of the use and applications of public service vouchers in the UK and Finland. We will also describe the forms of vouchers in use in the both countries. The analytical framework for this practice-based discussion is provided in Chapter 11.