Understanding the Public Services Industy

Public Services Industry Review
3.31 The evidence reviewed above has shown that significant cost savings are generally
achieved when services are opened up to competition, and this itself is indicative
of innovation. Domberger et al (2002) provide a good example of the way that
outsourcing led to a number of work and process innovations in New Zealand. Indeed,
Domberger and Jensen (1997) note ‘the bulk of the savings are accounted for by better
management, more flexible working practices, more efficient use of capital and greater
innovation spurred by competition’. Cubbin et al (1987) and AIC (1996) support this
view. KPMG (2007) found that innovation in PFI contracts can be an important driver
behind contract performance improvements: new ways of working helped 60 per cent
of the UK’s PFI contracts in place at the end of 2006 over-deliver.
What are the benefits of a partnership approach?
3.32 A strong theme across submissions to the Review’s call for evidence (Annex B) was
the importance of a collaborative approach between the commissioning agent and
the provider in order to deliver best value for money. There are a number of empirical
studies that support the case for partnership approaches to public service delivery. The
particular types of formalised partnership embodied in PFIs and PPPs have received
most attention. The National Audit Office (NAO, 2003) surveyed the PFI projects up to
2002 and assessed these against comparable traditionally procured projects. The NAO
found that nine out of the eleven PFI hospitals and all seven PFI prisons were delivered
on time or early. This compared very favourably with the 61 traditionally procured
hospitals, of which 75 per cent were delivered late. Mott MacDonald (2002) looked at
39 UK infrastructure projects procured by conventional and PPP methods. It found
that the conventionally procured projects had an average of 17 per cent overrun on
completion time whereas the PPPs on average were delivered before their contractual
completion dates. The conventional projects’ cost overrun averaged 47 per cent while
the PPPs were delivered almost exactly on budget.
3.33 Comparable results are found internationally. Thomson (2005) found in a European
Investment Bank (EIB) study, that of 50 public infrastructure projects under
conventional procurement, 60 per cent were more than one year late. This compared
with 33 per cent of the 10 PPP projects financed by the EIB. Blanc-Brude, Goldsmith
and Valila (2006) found in a study of 200 roads funded by the EIB that PPP projects
were costed 24 per cent higher than the traditionally procured roads at contract
signing. However, this figure is roughly equal to the expected value of cost overruns
in traditional projects. This suggests that the build part of PPPs reflects actual risks
incurred whereas traditional projects have been overly optimistic in their cost
estimates.
33