Understanding the Public Services Industy

Public Services Industry Review
3.19 Several studies have shown the benefits of long term partnerships - for example
through PFI or PPP – in delivering quality improvements. In these cases the public
sector purchases a flow of services from the private partner under a long term contract
which has an explicit emphasis on risk sharing. The long run nature of the relationship
and payment provides an incentive for the private partner to design and monitor
its investments carefully to ensure that they will provide high quality services for
the length of the contract (Grout, 1997, Grout and Stephens, 2003, and Hart, 2003).
KPMG (2008) found that PFI-funded schools achieved 92 per cent faster educational
improvements than schools rebuilt with conventional public financing. There is also
some evidence to support the view that improving quality is a key factor behind the
use of PPPs (Domberger and Fernandez, 1999 and Grimsey and Lewis, 2007), but little
that examines whether this is actually happening in practice.
3.20 There is also some evidence of wider benefits from the use of PFI. NAO (2003)
suggests that the comparative operational data from PFI prisons has encouraged the
public sector to improve its performance. This may be reflected by Prison Service
management teams recently winning competitions with the private sector for the
operation of prisons.
What are the effects of contracting out on employees?
3.21 Public sector unions and others have consistently raised the concern that much of the
cost savings achieved through contracting comes at the expense of workers (TUC,
2008). This concern can be separated into short-term effects, such as the impact
on wages and the terms and conditions of employment, and the long-run impact,
particularly on long-term unemployment.
3.22 On short-term effects, some early sector-specific research supports these concerns.
For example, with support services in the defence industry, a survey by Uttley in 1993
found the primary source of cost savings to be labour cuts. Ascher (1987) argued
more generally that contracting has resulted in reduced pay rates and worsened
employment conditions. Other studies contend that there has been little impact on
terms and conditions of employment (Walsh, 1991). In local government, Walsh and
Davis (1993) associated the introduction of competitive tendering with an increase
in productivity, largely brought about by staff reduction but also due to increased
working hour flexibility. Cubbin et al. (1987) attributed savings to improved technical
efficiency.
3.23 Internationally, the evidence continues to be mixed. Martin and Stein (1992) found no
significant association in the US between contracting and employment in the provision
of local government services. In New Zealand, Domberger et al (2002) attributed 58 per
cent of cost savings from government outsourcing to labour cuts.
3.24 An important recent study by the UK National Audit Office (2008) looks specifically at
the question of whether the terms and conditions of staff who moved from the public
to the private sector when their function was contracted out worsened over time. It
also considers the effect on overall employment levels for the contracted out service.
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