Understanding the Public Services Industy

Public Services Industry Review
provision raises consumer welfare (Gersbach, 2005). Evidence in Grace et al (2007)
based on local government experience supported the view that under the right
conditions, competition and contestability secure better performance. The important
conditions included good performance management, positive partnership and
acceptance across the political spectrum.
Cost savings can be significant
3.5 Much of the rigorous work on cost savings relates to the early experiences with
contracting. It shows savings of around 20 per cent from competitive tendering and
contracting, including when the in-house team wins the bid. Domberger et al (1987)
found that in the health sector costs were reduced by as much as 34 per cent by
introducing competitive tendering. Elsewhere, the prison sector has experienced cost
savings of over 20 per cent (CBI, 2003) and internationally, across sectors, savings are
found to be between 10-30 per cent (Australian Industry Commission, 1996). Recent
UK experience in contracting alternative providers of medical services found similar
results.
Service quality does not appear to suffer
3.6 The evidence on quality change is weaker and more limited than that on cost savings.
However, the few rigorous studies available (some of which are rather dated), point
to similar or improved service quality from contracting out. This is particularly the
case when increased attention has been paid to quality issues during the contracting
process with an explicit focus on output and outcomes. Domberger et al (1995) showed
that performance was maintained or even enhanced when achieving cost savings
through contracting; results that were similarly reflected in Domberger and Jensen’s
1997 review of the international evidence. The Australian Industry Commission (1996)
showed that improvements in quality were reported due to competitive tendering
enabling a better understanding of requirements, improved performance monitoring
and an increased scope for consumer choice. Walsh (1991) also supported these
conclusions when assessing competitive tendering of local authority services in the
UK.
Using Partnership Models produces real benefits
3.7 Evidence demonstrates that partnerships typically deliver on time and although at first
glance may appear more expensive than public provision this is mitigated when public
sector cost overruns are taken into account. The National Audit Office (2003) found that
89 per cent of PFI construction projects up to 2002 delivered on time or early, whereas
75 per cent of traditionally procured hospitals were delivered late. The long-run
nature of these relationships also helps to ensure high quality services are provided
throughout the length of the contract (Grout, 1997, for example, attributes this to clear
investment incentives).
Does contracting out deliver cost savings?
3.8 The early impetus and justification for contracting out public service delivery was
to achieve cost savings so inevitably there is stronger evidence in this area than in
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