Understanding the Public Services Industy

Public Services Industry Review
be employed to help the public services market function in a more flexible and
user-focussed way.
The role of the Public Services Industry
6.6 Government bears the responsibility for creating a policy environment that enables
high quality public services to be provided at acceptable cost to the taxpayer. The
question of who delivers them – whether it be the public, private or third sector – is
essentially a practical one, that needs to be based on evidence, experimentation and
fair competition. The UK has a longer history of innovation in this area than most other
countries and this Review has tried to draw lessons from the accumulated experience.
6.7 The evidence shows that there are clear benefits, both to users and to taxpayers, in
subjecting incumbent service providers to competition (Section 3). The potential for
cost savings is well documented, as are the shorter time to completion of construction
projects and the benefits of tapping private financial resources to accelerate public
investment programmes; e.g., for schools. There is less evidence on the PSI impact
on service quality, but the studies that have attempted to measure this generally find
that quality has either improved or remained the same. Perhaps this is unsurprising
since most contracts have shifted the cost risk onto providers – where it is carefully
controlled – but they have not provided incentives for improving service quality. This
will need to change if Britain is to aim for world-class quality in its public services
(Recommendation 2).
6.8 For many public services, quality means different things to different users. Rather
than try to capture this in detailed contract specifications, it will often be better
to incorporate user surveys directly into the contract monitoring and payment
mechanisms. The private sector has developed sophisticated customer survey
techniques which it uses to drive continuous improvement and product development.
These could be adapted for public services and tied to bonus and penalty payments
to incentivise higher quality as defined by the user (Recommendation 2), as well as to
provide useful comparative data on the effects of different modes of service provision.
6.9 Cost savings appear to be achieved by the contractual process regardless of which
sector wins the contract, so it is the challenge and the spur of contestability that
produce the gains. This implies that it would be wrong to set a target, or indeed a
limit, for the role of the PSI in public service provision. The role of government policy
should instead be to ensure that the competitive process takes account of the inherent
differences between public, private and third sectors in order to provide a level playing
field when their bids are compared; whilst ensuring that they are still able to bring the
benefits of their distinctive backgrounds to the table (Recommendation 3).
6.10 Evidence also suggests that the gains from competition to provide a service are
largest in the early years of its outsourcing. This is perhaps to be expected since that
is when the scope for innovation and change is greatest. This implies that government
departments and local authorities should seek to introduce competitive challenge
into areas of service delivery where it has not yet been tried and consider how best to
incentivise further innovation in sectors where it already exists.
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