Gary Sturgess: a middle way for contestability

By Gary Sturgess

Wednesday April 15, 2015

The public don’t like monopolies. And they are suspicious of them in the public sector as well as the private sector. Sometimes there is no other way of organising the production and delivery of goods and services, but we all know from experience that monopolies are generally unresponsive to the needs of customers and service users, and they pay too much attention to the convenience of management and staff.

On the other hand, we are also worried 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 — Australians have made it clear that they value user choice. And where contracting has been done well, the public seem to be 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 public no longer care who is responsible for its operation.

But the public do want social services to be delivered by people who are motivated by a desire to serve. They worry about the profit motive. And they are concerned that public servants may be outwitted by commercially-savvy contractors.

The public have much greater confidence in those who deliver front-line services than those who manage the finances. Understandably, they identify more closely with those who care more about service quality than those whose care about cost. Front-line staff are much more likely to identify with service users, which is one of the reasons the public trusts them more. In short, the public wants social services to be delivered by people who are motivated by a ‘public service ethos’.

Monopolies are also a problem for those charged with delivering 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.

In general, front-line service providers are not resourced to deliver the wide range of outcomes they are required to deliver, with the result that it is impossible to hold management accountable for any failure to deliver. In too many cases, accountability is linked to process rather than performance.

Central government agencies charged with protecting public revenue and ensuring value for money in service delivery find it difficult to establish the relative efficiency of monopoly providers. This is one of the reasons they are more inclined to support market-testing and competitive tendering.

“It is possible to use performance benchmarking and the prospect of prompt intervention in case of underperformance to drive increased efficiency and effectiveness, while also recognising the importance of a public service ethos…”

However, there are limits to the use of market-testing in driving service improvement in government. In the short term, there are issues of capability – on the supply side as well as on the part of government. 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 that have 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.

Debate over the relative merits of outsourcing public services is not new. On one side there have been those, like Isaac Barré, a British Member of Parliament (and later Treasurer of the Navy), who argued in the House of Commons in 1778: “Contracts ought to be open, and offered to the lowest bidder”. On the other hand, there are those like the Irish MP and political philosopher Edmund Burke, who warned in 1780 that “The service of the public is a thing which cannot be put to auction, and struck down to those who will agree to execute it the cheapest”.

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 increased 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.

“Contestability” has become a buzzword in Australian policy circles in recent years, although little attempt has been made at definition. In many cases, the word has been used as a synonym for “competition” or “competitiveness”, and in some cases as a soft alternative to ‘outsourcing’, but the concept is much richer than that.

The New South Wales state government employed the term in 2012, referring to the outsourcing of road maintenance services in the south and west of Sydney. In this case, there were no in-house bids, and the word seems to have meant competitive tendering with a view to contracting out.

In 2013, the Queensland Commission of Audit argued that:

Better value for money in the delivery of front-line services can be achieved through contestability, as this will encourage more efficient and more innovative service delivery, whether by the public sector or the private sector (public sector service providers should not be immune from competitive pressures).

There was nothing in this paragraph to imply a program of outsourcing; rather that services should be subject to ‘competitive pressures’. The report did go on to recommend significant market-testing, although guidance documents subsequently released by the government seemed to suggest that contestability was little more than a process of strategic planning and review.

In 2014, the Australian National Commission of Audit used the term in conjunction with “competition” and “outsourcing”, but it was never defined. The 2014 federal budget documents announced a formal commitment to a process of contestability:

The Government will develop and implement a Contestability Framework to assess whether a government function should be open to competition and the appropriate means for this to occur. A contestable approach can come from outside Government or from other entities within the Government.

The Australian Department of Finance has been charged with establishing a three year program to review the functions of government against this framework, which is expected to “offer opportunities for identified functions to be delivered through alternative and contestable approaches”. This looks very much like a program of market-testing or outsourcing of support services. Certainly the public sector unions have come to see it as nothing more than outsourcing.

Contestability has a technical meaning in economics: it refers to potential rather than actual competition. This paper is concerned with contestability proper — it explores the origins of the concept, how it applies to the public service sector, and how contestability might be used to drive improvement in service delivery.

Essence of Contestability

It is evident that contestability in the public service economy is capable of being employed in a number of different ways. However, there seem to be some essential elements, without which contestability may be difficult to establish or maintain.

  1. Contestability works best where governments are willing and able to identify the front-line ‘firms’ through whom services will be delivered, and to devolve meaningful authority to the management teams responsible for those firms. There cannot be meaningful accountability if the responsibility for delivery is not clearly delegated.
  2. Contestability will be difficult to sustain where there are a small number of firms or potential competition points. Firms should be no larger than necessary. Contracts and deeds should be no longer than necessary. And claims of alleged economies of scale must be closely scrutinised.
  3. Unless there is a contractual or quasi-contractual relationship between service commissioners and these front-line firms, it will be impossible to hold managers to account for performance. Contracts or deeds must clearly specify measurable performance objectives (linked to agreed outcomes), a term of years within which to deliver, and a firm budget.
  4. There can be no real accountability for performance if policymakers and commissioners are not willing and/or able to prioritise outcomes, provide the resources necessary to deliver the agreed results, and allow front-line managers the freedom to innovate and the time to deliver.
  5. Performance of all providers (public, private and not-for-profit) must be benchmarked and tracked over time. This should be undertaken by a credible and independent team, and ideally results should be reported publicly.
  6. There cannot be meaningful accountability if the consequences for failure to deliver are not clearly understood from the outset. Consequences should be stable and predictable (reflecting the agreed outcomes), proportionate (reflecting agreed priorities), systemic rather than heroic (applying to senior management as a whole, not merely the Chief Executive), pragmatic (directed to improving services rather than inflicting punishment), and timely (applied within a relevant timeframe).
  7. Contestability will be severely weakened where there are no alternative sources of supply or management expertise capable of stepping in to take over a failing service at relatively short notice. In some cases, this will require commissioners to build alternative capacity over time.

While some politicians, policymakers and commentators will continue to use “contestability” as a convenient synonym for market-testing or outsourcing, the word has a specific meaning. The concept does have application in the public service sector, offering an alternative way of using competitive tension to drive substantially better value for money without the disruptive effects of widespread market-testing.

This is an extract from Gary L Sturgess’s new paper Contestability in the Public Services: An Alternative to Outsourcing, published this month by the Australian and New Zealand School of Government.

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