Critical report provides cover for Blair to press ahead with his big idea

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PM and unions in 'privatisation' peace talks

Landmark hospital project led to rows, controversy and resignations

When a blueprint for greater private-sector involvement in public services was leaked on the morning that Tony Blair launched Labour's general election manifesto, opponents were convinced that the plan was so explosive that the Prime Minister would be forced to backtrack.

They were wrong. Mr Blair told a press conference in Birmingham there could be "no ideological bar" to the use of commercial firms in the public sector, echoing one finding of a two-year study by a commission set up by the Institute for Public Policy Research (IPPR), a think-tank with impeccable Downing Street links.

Mr Blair's reaction was not surprising, since his own aides are suspected to have been behind the initial leaks in an attempt to provide a much-needed "big idea" for Labour's election campaign. But the plan rebounded when trade unions and Labour MPs reacted angrily, forcing Mr Blair to soften his language.

"We went a bit over the top at the outset," one Labour source admitted.

Ministers admit they have a "selling job" to do, partly because of the initial "overspin".

In fact, yesterday's IPPR report painted a very different picture to the original leaks. Far from being a gung-ho charter for privateers, the most detailed study of public-private partnerships (PPPs) expressed strong criticism of the Government's record so far, as The Independent revealed in May.

The report suggested that PPPs provided value for money on roads and prisons but cast doubt that they were doing so in health and education – precisely the areas in which Mr Blair is keen to extend the private sector's role. It attacked "shortcomings" in the schemes to part-privatise the London Underground and Britain's air traffic control service, and warned that raising private cash for public building projects such as hospitals did not create "extra" investment, as ministers sometimes imply.

The commission also urged ministers not to adopt a "private sector good, public sector bad" approach. Their report issued a clear warning that the Government was in serious danger of going too far by adopting such a view.

"There has been a tendency to spray the demand for 'private sector involvement' across most new government initiatives without proper consideration of what the different partners would have to offer," the report says. "This has fuelled partnership fatigue rather than unleashing new energy and innovation."

The study concludes that the record of private finance initiatives has been "patchy" and that many offer "at best marginal value-for-money gains without delivering the promised innovation in design and organisation of services".

The link between some PPPs and part-privatisation of some public enterprises has also served to fuel suspicion that "partnership and privatisation are one and the same thing and that partnership is a step towards full privatisation". The commission demanded safeguards to prevent a "two-tier workforce" in which employees found their wages and conditions cut after transferring to the private sector. This was music to the ears of the unions, and the TUC was quick to call for legislation.

However, the report does give Mr Blair some cover to proceed with his big idea, reiterating that there should be no ideological barriers to the use of PPPs in the public services. After four years of struggling to reform the state sector, Mr Blair is convinced that commercial firms hold the key to clearing the logjam. Even if services are not handed over to private firms, the possibility that they could be will be a "spur" to greater efficiency in the state sector, he believes. When private firms do take over, under the Blair vision, it is more likely to involve managers rather than frontline staff.

The crucial test is whether Mr Blair has the stomach for a fight with the unions and many Labour MPs when legislation is published in the autumn. The Prime Minister believes that the public sector has one last chance to reform itself; if it fails to match the Government's extra billions with real change, then its very future will be imperilled. He believes that a future Government would then press ahead with full-scale privatisation, which would make the current proposals look modest.

In Mr Blair's eyes, the private sector could yet "save" public services. As Gavin Kelly, the commission's secretary, said: "If in five years' time, after a sustained period of strong funding, citizens feel that public services are still failing to deliver, those opposed to the principle of collective provision would find it easier to argue that public services are an anachronism. If the case for universal public services cannot be won now, it could soon be lost for ever."