The Use of Market-Type Mechanisms in the Provision of Public Services

1. The Use of Market-Type Mechanisms in the Provision of Public Services Santiago de Chile, 24 January 2005 Jón R. Blöndal Deputy Head of Division Budgeting and Management Division

2. Agenda Outsourcing Public-Private Partnerships

3. Agenda Definition Rationale Prevalence Examples Key design and implementation factors Governance challenges

4. Outsourcing Governments contracting with private sector providers for the provision of services to government agencies, or the provision of services directly to citizens on behalf of the government Service previously performed in-house by the respective agency Competitive tendering, contracting, contracting out

5. Rationale The primary objective of outsourcing is to increase efficiency by introducing a competitive environment for the provision of the services. Specific “business cases” to reduce costs; to access expertise not available in-house to meet one-off needs; to access expertise on a long-term basis in order to be able to vary its quantity and mix over time; to replace current government provision in extreme cases where their provision is unsatisfactory for an extended period of time.

6. Examples of savings United States: 33% United Kingdom: 20% Australia: 15-20% Denmark: 5-30% Iceland: 20-25%

8. Three Generations of Outsourcing • “Blue collar” services • Building cleaning, canteens, security guards • Professional services considered non-core • Information technology • Core services • Prisons, fire and rescue, enforcement activities, employment placement services

9. Key Issues • Accountability • Government capacity • Contract specificity • Regularity • Competitive supplier markets • Transparency • Redress mechanisms

10. Accountability • Traditional model • Hierarchical • Focused on inputs and processes • Outsourcing model • Separation of “purchaser” and “provider” • Explicit specification of services • Performance measures to monitor compliance • Implications • Increased transparency serves to foster accountability • Avoids conflicts of interests (in-house) • Multiple organizations can blur accountability • Political considerations: public pressure; minister always responsible

11. Government capacity • Retain the technical skills of the function being outsourced • This may be lost as the government is no longer directly involved in the provision of the service • May lead to dependence on the incumbent supplier when re-tendered or may preclude taking the activity back in-house • Acquire the commercial skills necessary to manage outsourcing • Needs to become and established and on-gong function, not “one-off” • Implications for career tracking policies and managerial promotions

12. Contract specificity • Government contracts = prescriptive and process oriented Private sector contracts = more output (or outcome) oriented • Reasons: • Concern about accountability implications • Manifestation of resistance to outsourcing in agencies • May be difficult to specify outputs (or outcomes) effectively • Possible solution: • First round - agencies formally issues a tender offer but specifies its needs only in general terms and contractors are invited to be creative in responding to those needs. • Second round – agencies put out a more detailed tender offer based on the responses to the first round.

13. Regularity – equal treatment • Discretion of a contractor needs to be weighed against the regularity principle • Contractors can be accorded the “power of the state” in determining eligibility or levels of eligibility for certain services • Case management in social services • Similarly, contractors could offer services to different client groups in different manners • Job placement services • Agencies need to be clear in establishing the boundaries for appropriate discretion in such cases

14. Competitive supplier markets • Creation of such markets • Commodity-like services vs. highly specialised services • Government can exert tremendous influence through it volume buying • Maintaining such markets • Avoiding over-reliance on a single supplier • The length and size of individual contracts can impact the number of potential suppliers • Policies against low-balling • In short, the government needs to focus on the impact on the supplier marketplace of individual outsourcing decisions

15. Transparency • Information previously in the public domain is now in the hands of private contractors and the public’s right to access that information may be impaired. • Contracts viewed as commercially sensitive. Aside from protection of intellectual property rights, this is generally inappropriate in the public sector context. • Appropriate information needs to be publicly available in order for outsiders to be in a position to make an informed judgement about the contracting decision. • Contract provisions need to ensure that sufficient information is turned over from the private provider to the purchaser organization in order for the latter to maintain up-to-date knowledge of the activity for future tendering, i.e. to maintaining capacity to avoid capture by the private provider.

16. Redress mechanisms • Redress instruments for citizens • Laws on administrative procedure, Ombudsmen, Freedom of Information, Whistleblower protection and the like. • The jurisdiction of such instruments does not extend to private sector providers. • It is therefore important for contracts to incorporate appropriate redress mechanisms. These will of course vary on a case-by-case basis but are most applicable to where the contractor is exercising a degree of discretion. • Appropriate mechanisms to protect the privacy of confidential information they acquire on individual citizens.

17. Overall assessment • Very positive – if designed correctly • High entry barriers to introduce outsourcing • Union resitance • Can be expected to increase significantly

18. Public-private partnerships • The private sector financing, designing, building, maintaining, and operating infrastructure assets traditionally provided by the public sector (or redeveloping existing ones) • Public-private partnerships bring a single private sector entity to undertake to provide public infrastructure assets for their “whole-of-life”, generally 20-30 years. • The private sector partner then charges an annual fee for the use of the infrastructure assets. • Private Finance Initiatives (PFI), Projects for Public Services, and Private Projects

19. Rationale • Whole-of-life perspective can potentially lead to efficiency gains • Financing • Off-balance sheet funding • Upfront vs. annual funding • Responding to dysfunctional aspects of the public sector • A history of overruns, delays with traditional procurements • Others

20. Prevalence of use • Not as much as one might think • In OECD countries, the UK has the highest share of it’s use = less than 10% of total

21. Examples • Highway infrastructure (roads, bridges, tunnels) • Railways • Airports • Ports • Schools • Hospitals and health care facilities • Central accommodations • Prisons • Water and sewage

22. Key Issues • Same issues as for outsourcing • Transfer of risk • Cost of capital

23. Transfer of Risk • Construction risk • Late delivery, additional costs, and technical deficiency • Availability risk • Volume that was contractually agreed is not delivered • Fails to meet specified quality, safety or certification standards • Demand Risk • Higher or lower demand than originally expected • Due to business cycle, new market trends, direct competition or technological obsolescence

24. Cost of capital • Governments enjoy “risk-free” cost of capital • It is not related to the underlying risks in individual projects • Private sector borrowing will by definition be higher • But it should reflect the risk of the project • Difficult to demonstrate efficiency gains / risk transfer as outweighing higher cost of capital

25. Overall assessment • Sceptical !

26. For further information • www.oecd.org/gov/budget • OECD Journal on Budgeting • jon.blondal@oecd.org