When governments go shopping

OECD Observer

It started in the 1980s with privatisation, when state-run commercial services like telecoms were transferred to private ownership. Now an extension of this idea is to hire private sector businesses to deliver public services. The services remain public, the government remains responsible for regulation and oversight, but businesses either replace public authorities in carrying out the job or share the work with them. What are the reasons for introducing this notion, how does it operate in practice, and can it achieve its goals?

There is no single snappy way to describe the complex process of harnessing market mechanisms to deliver government services, and the procedure can take several different forms. These include outsourcing or sub-contracting, public/private partnerships or private finance initiatives, and the distribution of vouchers that citizens may use to buy services.

However it is named, the idea forms part of a wider, if diffuse, movement aimed at improving public sector performance and making government more open and responsive. According to a recent OECD study, Modernising Government: the Way Forward, the trend has been gathering momentum over the last 20 years or so. Key motives for tackling these issues include a belief that citizens expect more and more from their governments, but that they are unwilling to pay ever higher taxes to obtain it.

The extent to which governments involve the private sector differs from one country to another. Support services are commonly outsourced across OECD countries, as are back-office operations such as IT functions. Relatively few countries have so far been prepared to contract out activities traditionally viewed as inherently governmental. Some that have done so include Australia, Canada, the UK and the US with regard to prisons, Denmark for rescue and fire services, and New Zealand, where the audit office is subcontracted.

Public/private partnerships have most commonly been applied for road infrastructures, such as Portugal’s €5 billion national road programme, high-speed rail links in the Netherlands and the new airport in Athens. Governments have also turned to markets for delivery to ordinary people of services like housing, education, childcare and care for the elderly, with voucher schemes in particular gaining in use in OECD countries.

Governments clearly have a duty to provide universal public services at as low a cost as possible. In this context, hiving off service delivery to, or sharing delivery with, commercial providers can have a number of advantages. It may help to make the process more flexible and more readily able to respond in a timely fashion to changing public demands. Governments may find it easier to make adjustments in service provision when they have contractual arrangements with a range of suppliers, rather than long-term employment obligations towards their own personnel. It may also help reduce costs, so generating efficiencies for suppliers and consumers.

This is similar to the now firmly established trend in the corporate world towards subcontracting processes and operations that are not considered central to the company’s core business. Printing, secretarial services, marketing, accounting: almost any service can be contracted out, leaving companies to concentrate their energies on earning profits.

How far can these arguments be applied to public services? It is less simple to measure benefits in an activity where the core objective is not necessarily to make money. Also, governments of democratic countries who must keep a watchful eye on the ballot box may easily fall prey to the allurements of the short-term fix. For instance, when some public/private sector arrangements such as private finance initiatives allow governments to transfer capital investment to the business partner, there is a clear temptation to avoid vigorous self-questioning as to whether the immediate saving in the public borrowing requirement may be outweighed over time by the fees payable to the private sector contractor.

Also, while subcontracting can bring savings, it nonetheless demands dedicated resources both in the set-up phase and day-to-day running, which public managers must factor in from the start if the subcontract is to work smoothly and effectively.

So, what should governments do? According to Modernising Government, quite a lot, since experience to date shows that market-type mechanisms can be applied to a very wide range of government functions. These stretch from building cleaning and catering through highway structures to health service provision. The report points to evidence from several countries to show that outsourcing in particular can result both in satisfactory service quality and significant cost savings. For example, the report quotes a survey of 66 large cities in the US which found that 82% of the cities said they were satisfied or very satisfied with the resulting performance, and the remaining 18% were neutral. The OECD report also indicates that cost savings ranging from 5 to 33% have been recorded in respect of outsourcing operations carried out in Australia, Denmark, Iceland, the UK and the US.

Gains from initiatives such as public/private partnership operations, on the other hand, still remain limited. For instance, in the UK, which leads the field in this respect, public/private partnerships accounted for no more than 10% of total capital investments in public services in 2003-2004.

At the present stage in the game, it would be difficult to draw one simple lesson, though a number of key issues can be identified. On a technical level, one of these is the need for governments to consider involving the private sector on a case-by-case basis in order to determine whether the private sector approach produces the most effective and efficient solution. Moreover, since these procedures are relatively new, governments often lack the specialised expertise required for tasks such as assessing competing offers and setting parameters, including division of project risks. Accordingly, in many instances expert resources will have to be strengthened in these respects, while countries should seek to learn from the experiences of their peers.

It is early days, but the effects of such questions on public perceptions of government, including trust, will be crucial. Markets will probably continue playing a role in government, but adopting market principles to deliver public services, whatever the potential, is far more than a technical matter for officials. Indeed, because it raises a much larger set of issues concerning governance, citizens, civil society and even international market forces, clear political leadership will be needed as well.

Rory J. Clarke, Michael Rowe


OECD (2005), “The use of market-type mechanisms to provide government services,” in Modernising Government: The Way Forward, Paris, available at www.oecdbookshop.org

For more information, contact Teresa.Curristine@oecd.org.

©OECD Observer No 252, November 2005

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