Competitive Tension
Introducing a competitive edge to public sector service delivery improves productivity, customer satisfaction and employment opportunities. By Nick Cater.
“Competitive Tension: The value of contestable public services in a post-pandemic world”, a new report by the MRC in conjunction with the Serco Institute, is available for download here.
Watch the launch of this report here.
The Covid-19 pandemic has placed exceptional demands on government service providers stretching their capacity to the limit. The provision of protective equipment and vaccines, contact tracing systems, border security, policing, the isolation of nursing homes and the management of quarantine facilities are just some of the novel tasks government agencies have been required to undertake.
Urgency and uncertainty have called for agencies to adapt quickly and take calculated risks, skills not always in abundance in the public sector. Elevated public scrutiny has further intensified the pressure on service providers, removing the cloak of anonymity under which they customarily operate.
The pandemic has served as a stress test for government service delivery. The variation in the performance across state governments in the management of Covid-19 is a measure of their capacity to deliver services efficiently and to respond to changing circumstances. The evidence that governments that have invested most in public service delivery reform, such as the NSW State Government, have performed relatively well in exceptionally challenging circumstances should prompt all governments to do better.
In this report we re-examine one of the most effective means of improving public service delivery: contestability. We consider how the introduction of competitive tension might be further employed to ensure that every government serve its citizens more effectively, whether in normal times or in times of crisis.
The report assesses the impact of competitive tension on the delivery of government services around the world, acknowledging that the principle of contestability must always remain open to improvement. We assess the outcome of projects to establish empirical evidence on which they may be judged. Our recommendations and conclusions will offer guidance to the broader adoption and improvement of contestability reform across jurisdictions and service sectors.
We begin by re-examining the theory of contestability and the reasons why it was seen as a better path to reform than outsourcing and market testing alone. We offer an overview of the range of government activities in which the strategy has been introduced, the relative success and public and political reaction.
In particular, we draw on Gary Sturgess’ report ‘Diversity and Contestability in the Public Service Economy’ which was commissioned by the NSW Business Chamber in 2012 with the intention of provoking policy discussion about the role of the private sector in delivering public services. The report outlined how public sector productivity could be raised by an estimated 20-25 per cent in newly contested service areas. In view of what the Chamber described as the tougher economic conditions being faced by governments around the globe, it encouraged governments to build on existing examples of competitive tension to expand the opportunities to deliver even greater benefits to taxpayers, customers and citizens.
While circumstances have changed in the last nine years, notably over the last 18 months, the economic challenges as we emerge from the COVID-19 recession are exceptional only for their size. Our report concludes that if anything, Sturgess’ 2012 findings have even greater relevance at a time when governments have taken on greater tasks that they may find hard to relinquish.
In our July 2020 report, ‘COVID-19: Getting Australia Safely Back to Work’, authored by Henry Ergas, we recommended the swift winding back of emergency government measures and the establishment of Post-implementation Reviews (PIR) of emergency measures taken in response to the virus. The lens of contestability is an important tool in assessing the efficiency and effectiveness of those measures. It should also determine which additional functions governments should retain and which responsibilities they should abdicate once the pandemic has been controlled.
Sturgess has been a leader in the field of contestability since the late 1980s and his 2012 report is a rich trove of case studies, data, and assessment of the methodology and tools available to governments around the world. It is not the intention of this paper to update the data in this depth, but those interested in public sector service delivery will be rewarded by revisiting that work. Those newer to the field will find it a valuable resource: its analysis stands on its own and its detail is readily available.
Covid-challenged public sector policy makers would also do well to reacquaint themselves with the warnings of philosopher and economist Friedrich Hayek who foresaw the disastrous trend of post war polities towards centralised planned industrial and government monopolies.
This report aspires to provide the foundation for more sophisticated debate in responding to the eternal challenge of public sector productivity. Regrettably, the arguments are too often reduced to an either/or choice between reducing services, or increasing spending and debt. Building on the work of Sturgess, we believe there are sound alternatives that will produce better services, greater public and private productivity, lower costs, and ways for decision makers to balance social, economic and political expectations.
Importantly, the application of contestability can demonstrate that an efficient and innovative public sector can prevail and ‘win’ a contest against external competitors. Experience has shown that far from eliminating public sector jobs, the application of contestability can make those jobs more creative, rewarding and frequently better remunerated. It can illuminate better ways to design services, allocate risk, and diversify the market for public sector services and suppliers.
This MRC analysis confirms that careful use of contestability by the public sector could realistically be expected to improve public sector productivity by 10-20% in newly contested service areas whilst also improving customer experience, choice, and growth in sustainable and quality employment opportunities. Contestability can also help build a diverse public sector economy, which has been crucial during the pandemic in helping government and business pivot quickly.
The MRC believes it is timely and responsible to re-engage conversation and evidence about public sector service contestability and its contribution to contemporary public sector service delivery and outcome opportunities. Despite significant learnings and gains for service users, taxpayers, and public sector staff, in the last decade, public and political attention on these issues has waned. This is despite the successful ongoing use of contestability and public private partnerships by some governments in some sectors, particularly in infrastructure delivery.
In re-booting this conversation, the MRC goes further with specific recommendations to governments to lay a pathway to success, by:
Identifying the approaches within jurisdictions which enabled the principle of contestability to be successfully applied;
Providing data through case studies which will be hard to ignore by public sector decision-makers; and
Offering guidance on the broader adoption and improvement of contestability reform application across jurisdictions and service sectors.
We assess the effectiveness of common benchmarks, incentives and penalties to provide a broad framework of best practice. The recommendations emphasise the benefits of a collaborative model, highlighting the importance of political leadership and public service capability.
We identify best practice design and management of the overall system, including procurement processes, size and length of contracts, and transfer of physical and human assets. We identify system-wide benchmarks other than cost that can be applied across the full range of government services and serve as a reference to compare service delivery in different jurisdictions.
A key recommendation is that contestability should be the default setting for all public service provision. The onus should be to show why services should not be subject to the credible threat of competition, rather than why they should. Covid-19 has demonstrated the benefits of introducing a contestable mindset to all government service provision in challenging circumstances. Our hope is that it will prove to be a lasting legacy of the pandemic.
The Menzies Research Centre is grateful to the Serco Institute for its input and advice in the compilation of this report. We also acknowledge the work of Gary Sturgess whose thinking has been pivotal to the provision of government services in NSW and further afield. Dr Peta Seaton, a former member of the NSW Legislative Assembly and more recently an MRC board member, gave birth to the idea that led to this research paper and lent her considerable expertise and experience to the project. We are indebted to her and Matt Crocker for compiling the bulk of the report.
Our hope is that it will inspire governments of every political persuasion, present and emerging, to better serve the citizens by whose votes they were elected.
