Contestability assumes that, wherever possible, the ultimate intervention should consist of the right to manage the service being exposed to competition. If this threat is to be credible, there must be a pool of alternative managers capable of stepping in, at relatively short notice, to contest the right to manage the service and assume responsibility for its delivery. If there is no alternative pool of management, then the threat of competition will not be credible.
Where a service has not traditionally been open to delivery by external providers, this will require commissioners to consciously develop such capability over time. Successful management of complex public services often requires a great deal of domain-specific knowledge, which serves as a formidable barrier to entry when external providers are invited to participate.
However, what is necessary to ensure contestability will differ from one service to another. There may be private providers of similar services who could quickly step in. In Australia, large private companies provide laundry services to private hospitals and nursing homes. Major Australian corporations already provide some (though by no means all) of the pathology services required by public hospitals.
In some cases, public enterprises from other jurisdictions might provide the contestability. The Australian state governments have not generally chosen to operate beyond their geographic boundaries, but state-owned enterprises from New Zealand provide weather forecasting and land valuation services in the Australian market. A commissioner might introduce contestability by sourcing management expertise from other governments.” … if management fails to deliver the agreed outcomes on time and within budget, then it is management that should be held to account.”
In some states, private and not-for-profit providers have long been accepted as trusted suppliers of key social services, and there may be scope for them to move interstate.
In other cases, however, it may be necessary for government to build alternative capacity (and reduce barriers to entry caused by domain knowledge) by deliberately opening up a proportion of the services to external providers. This might be achieved through the entry of international providers (as has happened with prisons, where four overseas companies now operate in the Australian market); by encouraging existing suppliers in related markets to acquire new capabilities (as has happened in the UK and Australia when engineering support, facilities management and consulting firms have moved into service delivery); or through the transfer of skills from the public sector (which has happened through public-private joint ventures and management buy-outs).
Contestability in management
For the most part, contestability in public service delivery is contestability in management. If there is to be intervention in a failing public service, it is senior management that will be replaced, with staff continuing to deliver services under new leadership.
And this should be true, even where public services are delivered by private or not-for-profit providers. To avoid loss of corporate memory and monopoly problems caused by human asset specificity, it is usually desirable for key staff to transfer to the new employer. This should be the case not only with the initial contracting out, but with any subsequent changes of provider. British laws relating to the transfer of business undertakings protect employees better than Australian transfer provisions, although state governments have often introduced specific arrangements to ensure that key employees are retained.
If the arrangements to protect the workforce in the process of transition are effective, competitive tendering largely amounts to a competition for management. And this is even more the case under some of the new contracting models, such as public-private joint ventures and GOCOs (government-owned-contractor-operated), which ensure that competitive tendering does amount to a competition for management.
One of the benefits of contestability over market-testing or outsourcing is that it seeks to protect the investment in organisational systems, processes and relationships, whilst exposing providers to the threat of competition. It seeks to give the management of front-line firms greater authority to manage, so they can properly be held to account for failure to deliver (and given credit for success in meeting objectives). It follows that if management fails to deliver the agreed outcomes on time and within budget, then it is management that should be held to account.
Benefits of Contestability
Contestability seems to offer a number of advantages over reform initiatives that are heavily reliant on market-testing or outsourcing:
- As Chris Ham recognised in 1996, contestability better enables commissioners to plan and manage public service systems as a whole, at the same time as they draw upon the benefits of potential competition. Too often in the past, outsourcing has focused on driving cost reduction in the individual service units, without reference to the performance of the system as a whole.
- A comprehensive program of outsourcing or market-testing will disrupt the ongoing operation of the public sector provider, and have a serious impact on morale (and thus on performance and the retention of key staff). Contestability is challenging, but it does allow reform to take place within the existing organisation, which is provided with the opportunity to deliver services at industry benchmarks.
- Outsourcing (which precludes the possibility of an in-house bid) amounts to a declaration that the private sector is inherently better than the public sector, a proposition that is not supported by the evidence and is deeply offensive to most public sector employees. Contestability is founded on the principle that competition (or the credible threat of competition) is better than monopoly, whether the provider is public, private or not-for-profit. That will certainly be challenging for incumbents, but it is not inherently offensive.
- Contestability recognises the importance of relational aspects in social and economic organisation. Successful management of a corporate supply chain, particularly in the delivery of complex services, cannot occur if there is excessive churn among suppliers. Success lies in getting the best out of the incumbents. The investments that commissioners make in personal and institutional relationships with their suppliers are a valuable asset that should not be discarded without good reason. Contestability offers a way for public service commissioners to ensure that existing providers are delivering value for money without scrapping the value that lies in interpersonal and inter-organisational relationships.
- In complex public services, successful reform relies heavily on the cooperation of front-line management, staff and unions. Of course, incumbent providers must be challenged so that they will cooperate in the difficult process of transformation, and they must understand that there are viable alternatives. But the process of reform will be easier, and the process of transition somewhat less expensive, if management, staff and unions can be meaningfully engaged. Contestability seems to offer a way of challenging the incumbents to engage in the process of reform.
Challenges of Contestability
Of course, there are also challenges involved in adopting a contestability approach. While the following issues are deserving of serious consideration, none of them should be regarded as an insuperable barrier to reform:
- Intentionally or unintentionally, contestability is often confused with market-testing and outsourcing. It is an unfamiliar concept, and it will take time to explain how it works, how it is different from actual competition and how it might be used to deliver better public services.
- Governments have become addicted to policy innovation, and it will take effort for them to understand the heavy cost that society pays for this churn — lack of innovation in service delivery, loss of meaningful accountability, and much less efficient and effective public services.
- The American political scientist Aaron Wildavsky observed: “No genius is required to make programs operative if we don’t care how long they take, how much money they require, how often the objectives are altered or the means for obtaining them are changed.” To be effective, contestability demands that politicians and policymakers understand that outcomes must be prioritised, and resources must be proportionate. This will be difficult.
- Accountability means little if the consequences for failure are not predictable and proportionate. It is difficult but necessary to establish a system of escalating interventions for public sector providers, so that management has room for innovation and improvement over time.
- It will be just as important to find ways of identifying and honouring excellent performance on the part of public service providers.
- The concept of an alternative pool of management expertise within the public sector is new, and it will require some work to explore what this means, and how it might be delivered in practice.
- Contestability will place new demands on those commissioning public services, and require new capabilities, which will take time to develop.
- A contestability approach demands that managers engage with the workforce and the unions in the process of reform. This requires them to be credible in their benchmarking methodologies, clear in their commitment to quality, and honest about the challenges involved.
This is an extract from Gary 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.
Read more at The Mandarin: Gary Sturgess puts the case for contestability’s middle way