Tories' public services plan 'will save billions'

Conservatives propose to transform public sector with payment-by-results scheme

Public services would be paid by results rather than by receiving an automatic budget increase each year, if the Conservative Party wins the general election.

The Tories will today spell out how they would "transform the culture" of the public sector to save billions of pounds. They will accuse Labour of wasting £60bn a year since 1997 – the "productivity gap" between the state and private sector, which has secured bigger efficiency gains.

Philip Hammond, the shadow Chief Treasury Secretary, will announce plans for a Tory government to make payment-by-results the norm unless there are compelling reasons why it would not work. "Schools will be paid for each pupil they attract, hospitals for the treatments they deliver. Our welfare-to-work programme will pay providers only if they succeed in getting someone into a sustainable job," he will tell the Policy Exchange think tank.

"If you don't deliver, you don't get paid. A payment-by-results structure means that waste is never funded. This is the best way of protecting output and ensuring that organisations cut waste rather than front-line service."

Properties owned by central government would be put into an asset company and departments would have to pay "rent" to give them an incentive to become more efficient. There would be a pro-active approach to selling off surplus assets.

Mr Hammond will acknowledge the need for a "hearts and minds" approach to persuade civil servants to embrace the new agenda. "Coercion is hard work and can only be maintained for a limited period of time," he will say. The Tories would embed a culture of efficiency, instead of trying to drive it against the grain through Labour's endless top down initiatives, he will promise.

He will call for a new generation of public sector entrepreneurs who would compete for contracts under a "right to bid" policy to open up competition within the sector.

Public bodies would be encouraged to take over services run by others. For example, local authorities with spare buildings could house courtrooms, and successful town hall planning departments could do the planning work of other councils.

Mr Hammond will say: "Why can't high-performing public sector businesses themselves act as the new entrants, challenging other providers to up their game? Why shouldn't an agency with outstanding track record bid for work from other government departments?"

A Tory source said last night: "Funding on the basis of retrospective budgets rather than anticipated demand means that some public services are chronically over-funded while others are actually under-funded."