Contestability in the public sector

Meet the market, beat the market

by Gary Sturgess

The public don’t like monopolies. And we’re suspicious of them in the public sector almost as much as in the private sector.

Sometimes there’s no other way of organising the production and delivery of goods and services, but we all know from experience that monopolies tend to be unresponsive to the needs of customers and service users, and they pay too much attention to the convenience of management and staff.

But we’re not inspired by about the alternatives. We worry about the use of competition and outsourcing in the delivery of public services. In certain parts of the public sector — in primary health care; primary, secondary and higher education; and now in disability care — we have made it clear that we value user choice. And where contracting has been done well, it seems that we are more relaxed about the private management of public services. Sydney Ferries is an example of a public service that has been recently franchised, where service quality remains high and the people of Sydney simply don’t care who is responsible for its operation.

But we do want social services to be delivered by people who are motivated by a desire to serve the public. We understand the powerful incentives created by the profit motive. And we’re concerned that public servants might be outwitted by commercially-savvy private contractors.

In general, we have much greater confidence in those who deliver front-line services than those who manage the finances. Understandably, we identify more closely with those who care more about service quality than cost. Front-line staff are much more likely to share the interests of service users, which is one of the reasons we generally trust them more. In short, we want social services to be delivered by people who are motivated by a ‘public service ethos’. (At the same time as we grumble about their inefficiency.)

Monopolies are also a problem for those public servants who are charged with ensuring value for money in public services. With rare exceptions — mostly in the management of public utilities — governments have not employed robust performance benchmarking to ascertain whether services are being delivered well. In many cases, there are no agreed performance standards, so it is impossible to know whether providers are delivering value for money.

Front-line service providers are not usually resourced to deliver the full range of outcomes they are required to deliver, with the result that it is impossible to hold management to account for any failure to deliver. In too many cases, accountability is linked to process rather than performance.
Central government agencies charged with protecting the public fisc and ensuring value for money in service delivery find it difficult to establish the relative efficiency of monopoly providers — which is one of the reasons they are more inclined to support market-testing and competitive tendering.

However, there are limits to the use of market-testing in driving service improvement. In the short term, there are issues of capability — on the supply side as well as on the demand side. Ongoing programs of market-testing are deeply disruptive. The fragmentation of delivery networks into a multitude of unrelated suppliers, as well as the replacement of incumbents with new entrants with limited understanding of the service in question, have the potential to seriously weaken delivery systems.

In too many cases, market-testing has been used to drive down cost without due regard to service standards and workforce relations, so that instead of being a process for exploring real value for money, it turns into a race to the bottom.

Understandably, staff find the process of outsourcing and market-testing deeply distressing, with a short-term impact on the quality of service delivered to the public.

In a paper recently published by the Australia and New Zealand School of Government, I have argued that there is a middle way between monopoly and market-testing. It is possible to use performance benchmarking and the prospect of prompt intervention in case of underperformance to drive improved efficiency and effectiveness, while also recognising the importance of a public service ethos, and the value embedded in many of the systems, processes and relationships through which these services are currently delivered. That middle way is contestability.

We’ve heard a lot about contestability in recent years. The NSW government started using the term in 2012; it appeared in the report of the Queensland Commission of Audit, undertaken for the previous government; it featured in the National Commission of Audit and the 2013–24 federal budget; and it is turns up in the Harper review of competition policy.

In some of these documents, the term seems to mean little more than outsourcing, but in economics, contestability refers to potential as opposed to actual competition. Some 30 years ago, an American economist, William Baumol realised that it was not necessary for firms to be actually exposed to competition for them to behave competitively — it was sufficient that they were faced with the credible threat of competition. For the most part, this was about barriers to entry and exit.

In the public sector, contestability lies robust performance benchmarking, combined with an intervention regime for the failure to perform which includes the prospect of bringing in an alternative management team. This may involve some outsourcing at the margin, but success lies in motivating the existing organisation to engage in the process of challenge and reform.

Over the years, a number of governments have employed contestability as a way of reforming different public services — waste collection in Vancouver in the 1980s; aged care in Stockholm in the 1990s; NSW prisons in the 1990s and 2000s under Labor; UK prisons under the current Justice Secretary, Chris Grayling; civil maintenance in Sydney Water over the past couple of years — but to date, there has been no serious study of the conditions necessary to establish contestability in the public service sector.

There seem to be a number of conditions that are necessary for it to succeed — a number of distinct service units or ‘firms’; a contractual relationship between those who commission and fund public services and those who deliver; realistic budgets; respect for and responsible management of the systems through which services are delivered; independent performance benchmarking; an intervention regime; and alternative providers or management teams that can replace the incumbents at short notice.

Contestability has a number of potential benefits over a comprehensive programme of market-testing. It makes it easier for governments to plan and manage public services as a system — too often in the past, outsourcing has resulted in a fragmentation of services that need to be integrated. Outsourcing can be deeply disruptive, and while there are conditions under which it may be the preferable option, it would be better to avoid that disruption if possible.

A policy of outsourcing implies that the private sector is inherently superior to the public sector.

The evidence does not support that proposition, although competition (or rather, contestability) is generally better than monopoly. Ideological outsourcing is also offensive to the vast majority of public sector managers and staff.

Of course, contestability is deeply challenging. It demands that management, staff and unions undertake deep and painful reforms, and it does under the threat that if they do not perform as well as their peers, senior management will be replaced. But it is pragmatic not ideological. It is founded on the belief that the public sector can deliver public services at least as well as the private sector, as long as it is presented with a serious challenge and given the opportunity to respond.


Photo by Berym

Gary Sturgess is Professor of Public Service Innovation within the School of Government and International Relations at Griffith University.

Gary has worked at the forefront of public sector reform for the past three decades, making significant contributions in the fields of operational federalism, the design and management of public service markets, the commercialisation and regulation of government business enterprises and the use of economic instruments in environmental protection, among others.

In the late 1980s and early 1990s, he served as Director-General of the NSW Cabinet Office under Premier Nick Greiner, and is credited with creating the Independent Commission Against Corruption (ICAC) and the Independent Pricing and Regulatory Tribunal. He played a leading role behind the scenes in the Special Premiers Conferences of the early 1990s that led to the establishment of the Council of Australian Governments.

He returned home in 2011 after ten years based in London, where he was Executive Director of the Serco Institute, a research institution established by the FTSE100 public service company, Serco Group plc.

Gary was appointed as an Adjunct Professor at the Centre for Governance and Public Policy at Griffith University in June 2011, and as the NSW Premier’s Australia and New Zealand School of Government (ANZSOG) Chair of Public Service Delivery the following month, based at the University of New South Wales. He serves on the Public Sector Renewal Board in Queensland and a number of other committees in various states concerned with the re-commissioning of public services.

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