There are positive rationales for bringing the private sector into care and education. Subsidy allocation and efficient use of resources can not be accurately aligned in a public system. Market signals of what the service user wishes are only distantly correlated to the allocation of funding to and within a public hospital, school, or home.

To give the example of EU farm subsidies, roughly 40% of a farms revenues are subsidies. These are allocated based on the number of hectares farmed, and number of animals on the farm. These funds are so significant that farmers need to make land and herd size decisions, not based on signals from the market, but to a large extent based on maximising the subsidies.

How can we maximise the responsiveness of the care and education experience to the markets needs, without introducing the less savory elements of private ownership? The main problem with private ownership is that the net profit, the share of the pie which belongs to the business owners is unlimited and expectations of what that return on equity should be are always growing. Venture capital funds specialising in private old people’s homes are comfortable seeking and extracting returns on equity of 25% to 30%. By contrast, government owned old people’s homes are largely funded by the national debt. These funds are raised on long term treasury bonds of 2.5% – 3%. The debt providers are essentially offering to only extract one tenth of the value each year from the asset, a school, a hospital, a home, that the private equity owners demand. Therefore the private sector needs to be able to improve efficiency by atleast 20% before they even have the same pool of funds available to deliver their service as a government owned facility. This sadly, is rarely the case, and therefore they end up having to achieve their return by cutting the quality or quantity of services provided.

If we assume that getting better market signals into a care service will result in a 10% saving in costs it is still possible for a private/public partnership to produce a better service for the public and a return for the investor, but the more appropriate instrument is a debt structure rather than equity. individual or groups of homes or hospitals, or schools could seek mezzanine financing. Using the substantial collateral each site has, mezzanine financing, at rates of 8% – 10% would be available. This type of product would appeal to pension funds that are looking for income yielding products, and are currently struggling with options of low interest treasury bonds, highly volatile stocks and shares, or properties earning net yields of 4%. The need to annually refinance mezzanine debt will breathe the financial discipline and competition into the care business without allowing in the debilitating extraction of value of private ownership.

Better performing homes and hospitals will be able to secure better interest rates than worse performing ones much like the commercial bond market. Equity could be held by a local trust, with trustees elected with a mixture of retired business professionals and care professionals. When the equity is owned by the state it is a somewhat faceless entity, and there is little sense of ownership or responsibility. A trust structure linked to the local community and retired employees that have already invested their working lives in the project ensures a better sense of ownership and more concern for a positive outcome.