Understanding the Public Services Industy

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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. 70
Public Services Industry Review 6.11 How much scope is there for such extension? This Review did not seek to identify specific opportunities. However, one way to address this question is to compare the current usage of the PSI in different central government departments and local authority activities. Charts 6.1 and 6.2 show the share of PSI in total government spending for public services (i.e. PSI procurement plus public sector pay). This could be considered an aggregate measure of the maturity of the PSI market. The theoretical extreme of 100 per cent would represent an activity or government department that had been completely outsourced. 67 Figure 6.1: The Use of PSI across selected Central Government Departments HM Revenue and Customs Northern Ireland Executive Agencies Scottish Executive National Assembly for Wales Department for the Environment, Food and Rural Affairs Department for Constitutional Affairs Other Departments Home Office PSI PAY TOTAL Department of Health Department for Work and Pensions Department for Culture, Media and Sport Ministry of Defence Department for Transport 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: HMT and PESA 2008 for outturn 2006/7 and review team calculations 67 These figures are drawn from slightly different sources and use slightly different approaches to determine service component to those presented in Section 2. Based on 2006/7 outturn figures, with GP salaries moved to pay, and using breakdown of PESA table 6.4 for Central Government expenditure and DCLG ‘Table C1h: Subjective Analysis (SAR) (grossed up all England) 2006-07 for Local Government expenditure. 71
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Understanding the Public Services Industy

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