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27 November 2000

Sir Humphrey needs venture capital

A civil servant with a bright new idea will keep quiet - nobody will fund it and he'll get the blame

By Charles Leadbeater

One Monday earlier this year, I spent a lunchtime with ten venture capitalists reviewing their portfolio of 140 investments in high-tech companies on both sides of the Atlantic. Many of these companies – working on speech recognition or technologies to improve drug research or ways to teach English through the internet – would have a profound bearing on public services: health, education, transport, crime prevention. Some of the companies were bound to fail, but others will be huge successes. These venture capitalists were each responsible for investing about $60m a year in four or five start-ups with high growth potential.

I left that meeting to go to Whitehall. There, I talked to a group of very senior civil servants about the potential for public services to be transformed by the application of e-government, from the way people fill out forms to the delivery of education, from making it easier for patients to book appointments to the way the Treasury auctions bonds. These civil servants controlled, between them, budgets running into the billions. They were responsible for some of the most important services in the country. I asked them how many new projects they had under review, how many entrepreneurial initiatives they had under way, how much money they were investing to create the next generation of public services. They shook their heads and mumbled.

In the past, Labour politicians have criticised the private sector for investing too little in research and development. Yet the public sector would score very poorly on research and development, compared with most large private sector companies. Where are the public sector’s innovation centres, its business incubators, the science parks developing the public services of the future?

Imagine you are a small, private entrepreneur in the UK, with a bright idea for applying new technology. You can pitch your idea to a venture capitalist and – although many small businesses still find it harder to raise finance than they should – you will get funding for the idea if it is very good. Now put yourself in the shoes of an imaginative civil servant who has an idea for a new, web-based service for people applying for fishing licences. It would cut costs, give anglers more choice and allow staff to be redeployed from processing paper to dealing with customers face to face. Where does this civil servant go to “pitch” the idea for funding? Where is the public sector equivalent of the venture capital fund? (The fishing licence idea was developed from scratch by Impower, a company specialising in e-government services and software.)

Economic growth today is being driven by innovation. New products, services, businesses and entire industries are being created. Yet the public sector has no means of promoting creative, ingenious problem-solving to complement its traditional virtues of honesty, fairness, efficiency and accountability.

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The popular image of the entrepreneur is a false one. For example, he or she is rarely a lone hero, acting on a flash of genius. The basic entrepreneurial unit is a partnership or a team that combines different talents, and takes a long time to develop a business from an idea. Successive business plans get thrown out; people drop in and out of the team. We should focus not on entrepreneurs as special, charismatic individuals who may come and go, but on fostering entrepreneurship as an activity.

We already have social entrepreneurs, many of them mobilised by the Community Action Network. They often work on run-down housing estates and in disinvested communities to provide education, health, social security and jobs. They excel at mobilising under-utilised resources: people who have been written off by the education system or buildings written off by business. They have gone beyond the traditional divisions of left and right, market and state. Although their language is caring, compassionate and moral, they are highly critical of the statism of the old left and of sentimentalised versions of working-class communities. They reject radical individualism, yet they accept much of the right’s critique of how the welfare state has helped to create a culture of dependency. They believe in individuals taking responsibility for shaping their own lives, and that welfare should be active.

Entrepreneurs within the public sector face a different challenge from these social and community entrepreneurs. Their task is not to create services from scratch, but to remake an existing organisation that has ingrained procedures and established programmes. For “civic entrepreneurs”, the risks and obstacles are far greater. They need to win a public mandate to take risks, to change how a police force issues cautions or how a school teaches children. Such innovation requires autonomy and decentralisation, financed by risk capital.

Yet traditional methods of holding civil servants to account for how they spend public money stress the virtues of predictability and standardisation. A fair and honest Civil Service depends upon people following rules, not bending them. We do not want tax officials or prison officers making discretionary judgements. Even the smallest mistakes in the public sector can be magnified into an embarrassment at least, a scandal at worst. Political leaders have much lower tolerance levels for failure than their counterparts in business.

Equally, the public sector does not reward success. Public service innovators who find, say, a cheaper way to deliver a service may be rewarded with lower budgets or more work for the same pay. It is little wonder that innovation in the public sector lags so far behind the private sphere: the space for innovation is minimal, the costs of failure alarming, the incentives feeble, the personal rewards uncertain.

That is why we need a string of new business incubators across the public sector. They do not need large budgets, but time and the right kind of people. We need a dedicated innovation and venture fund for the public sector; we need all public sector budgets to include some provision for research and development; we need an annual public sector business plan competition, inviting civil servants to come up with new ideas to improve public services, the best five of these to be guaranteed funding for development. In sum, we need new rewards of time and money for civil servants who come up with really valuable ideas.

Only when those Whitehall men in grey suits have a list of new ideas and projects as long as the venture capitalists’ will we have a public sector capable of moving at the speed of the society around it.

Charles Leadbeater’s The Weightless Society has just been published in the US and is available from online bookstores. He is a judge in the first Centrica-New Statesman Upstarts Awards

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