The Use of Market-Type Mechanisms in the Provision of

Public Services

Jón R. BlöndalDeputy Head of Division

Budgeting and Management Division

Santiago de Chile, 24 January 2005

Agenda

Outsourcing

Public-Private Partnerships

Agenda

DefinitionRationale Prevalence Examples

Key design and implementation factorsGovernance challenges

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

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.

Examples of savings

United States: 33% United Kingdom: 20%

Australia: 15-20%

Denmark: 5-30% Iceland: 20-25%

Outsourcing of Government Services

Purchase of Goods and Services vs. In-house Provision

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

United

King

dom

United

Sta

tes

Norway

Switzer

land

Sweden

New Z

ealan

d

Austra

lia

Finlan

d

Nethe

rland

s

Icelan

d

Germ

any

Canad

a

Denm

ark

Austri

a

Luxe

mbo

urg

Belgium

Irelan

d

Spain

Franc

eIta

ly

Portu

gal

G&S %

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

Key Issues

Accountability

Government capacity

Contract specificity

Regularity

Competitive supplier markets

Transparency

Redress mechanisms

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

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

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.

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

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

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.

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.

Overall assessment

Very positive – if designed correctly

High entry barriers to introduce outsourcing– Union resitance

Can be expected to increase significantly

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

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

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

Examples

Highway infrastructure (roads, bridges, tunnels) Railways Airports Ports

Schools Hospitals and health care facilities Central accommodations Prisons

Water and sewage

Key Issues

Same issues as for outsourcing

Transfer of risk Cost of capital

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

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

Overall assessment

Sceptical !

For further information

www.oecd.org/gov/budget

OECD Journal on Budgeting

jon.blondal@oecd.org