Diversity and Contestability in the Public Service Economy Gary L. Sturgess Invigorating business Call 13 26 96 nswbusinesschamber.com.au NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND PUBLIC SERVICE ECONOMY NSW BUSINESS CHAMBER DIVERSITY DIVERSITY AND CONTESTABILITY PUBLIC SERVICE ECONOMY NS NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND PUBLIC SERVICE ECONOMY NSW BUSINESS CHAMBER DIVERSITY DIVERSITY AND CONTESTABILITY PUBLIC SERVICE ECONOMY NS NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND PUBLIC SERVICE ECONOMY NSW BUSINESS CHAMBER DIVERSITY DIVERSITY AND CONTESTABILITY PUBLIC SERVICE ECONOMY NS NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND PUBLIC SERVICE ECONOMY NSW BUSINESS CHAMBER DIVERSITY DIVERSITY AND CONTESTABILITY PUBLIC SERVICE ECONOMY NS NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND PUBLIC SERVICE ECONOMY NSW BUSINESS CHAMBER DIVERSITY DIVERSITY AND CONTESTABILITY PUBLIC SERVICE ECONOMY NS NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND PUBLIC SERVICE ECONOMY NSW BUSINESS CHAMBER DIVERSITY DIVERSITY AND CONTESTABILITY PUBLIC SERVICE ECONOMY NS NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND PUBLIC SERVICE ECONOMY NSW BUSINESS CHAMBER DIVERSITY DIVERSITY AND CONTESTABILITY PUBLIC SERVICE ECONOMY NS OLIVIER JOB INDEX NSW BUSINESS CHAMBER OLIVIER JOB INDEX NSW NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND PUBLIC SERVICE ECONOMY NSW BUSINESS CHAMBER DIVERSITY DIVERSITY AND CONTESTABILITY PUBLIC SERVICE ECONOMY NS NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND Gary L. Sturgess is Adjunct Professor of Public Service Delivery at the Australian School PUBLICof SERVICE Business (University ECONOMY of NSW), based NSW at the Australia BUSINESS and New Zealand CHAMBER School of DIVERSITY Government. He also holds an Adjunct Professorship with the School of Government DIVERSITYand Public AND Policy CONTESTABILITY at Griffith University. PUBLIC SERVICE ECONOMY NS NSW BUSINESSGary has previously CHAMBER been Executive DIVERSITY Director of the Serco AND Institute, CONTESTABILITY a corporate think PUB AND tank established by the British public service company, Serco Group plc. Before that he PUBLICwas SERVICE the Director-General ECONOMY of the NSW CabinetNSW Office. BUSINESS CHAMBER DIVERSITY DIVERSITY AND CONTESTABILITY PUBLIC SERVICE ECONOMY NS NSW BUSINESS CHAMBER DIVERSITY AND CONTESTABILITY PUB AND PUBLIC SERVICE ECONOMY NSW BUSINESS CHAMBER DIVERSITY Contents Foreword 6 Executive Summary 7 1. A Public Service Economy 10 1.1 Conceiving a Public Service Economy 10 1.2 Economic Importance 11 1.3 Productivity 11 1.4 Diversity 12 1.5 Innovation in Scale and Scope 13 1.6 Customer Focus 13 1.7 Internationalisation 14 1.8 Cross-Fertilisation 15 1.9 Benefits of this Approach 15 2. Diversity and Contestability 17 2.1 Competition on the Supply Side 17 2.2 Competition in the Service 17 2.3 Competition for the Service 18 2.4 Contestability in the Service 18 2.5 Diversity on the Supply Side 18 2.6 Diversity on the Demand Side 20 3. The Benefits of a Mixed Economy 21 3.1 Value for Money 21 3.2 Improved Quality 21 3.3 Better Customer Service 22 3.4 Enhanced Accountability 22 3.5 Transfer of Risk 24 3.6 Core Business 25 3.7 Increased Innovation 25 3.8 Importing Best Practice 25 3.9 System Effects 26 Call 13 26 96 3 nswbusinesschamber.com.au 4. The Limits of Competition 28 4.1 The Inherently Governmental 28 4.2 Market Depth 30 4.3 The Winner’s Curse 31 4.4 The Contractor’s Art 32 4.5 Kelman’s Paradox and Other Pathologies 32 4.6 Total Service Failure 33 4.7 Corruption 33 5. Commissioned Services 35 5.1 Input-Output-Outcome 35 5.2 Back Office-Front Office 37 5.3 Diversity in Market Models 38 5.4 Diversity in Contracting Models 38 6. How Competition Works 46 6.1 Better Management 46 6.2 Competition 48 6.3 Contracting 50 6.4 Commercialisation 52 6.5 Other Explanations 53 7. Chosen Services 54 7.1 Public Service Vouchers 54 7.2 Australian Case Studies 55 7.3 Diversity in Choice-based Models 56 8. Contestable Services 57 8.1 Contestability in the Public Sector 57 8.2 Contestability as Benchmarking 58 8.3 Benchmarking Case Studies 58 8.4 Intervention 59 8.5 Contestability Case Studies 65 8.6 A Contestability Framework 67 Call 13 26 96 4 nswbusinesschamber.com.au 9. Building a Mixed Economy 69 9.1 Mandatory Outsourcing 69 9.2 Mandatory Competition 70 9.3 Incentives to Competition 72 9.4 Competition Policy 73 9.5 Supply-Side Initiatives 75 9.6 Supplier Initiation 76 9.7 Conclusions 76 10. Effective Commissioning 78 10.1 The Demand Side 78 10.2 The Supply Side 80 10.3 Transition Issues 81 10.4 Accountability and Integrity 86 Appendix A: Evidence of Productivity Gains 87 A.1 Benchmarking Alternative Providers 87 A.2 The Competition Effect 88 A.3 The Contestability Effect 90 A.4 Qualitative Issues and Transaction Costs 92 Appendix B: The Mixed Economy 93 B.1 Criminal Justice 93 B.2 Health 97 B.3 Education 101 B.4 Social Housing 103 B.5 Community Services 104 B.6 Municipal Services 105 B.7 Emergency Services 106 B.8 Research Establishments 108 B.9 Public Transport 109 B.10 Road Services 109 B.11 Urban Water Supply 109 B.12 Other Services 110 Endnotes 111 Call 13 26 96 5 nswbusinesschamber.com.au Foreword Governments across the globe are facing tougher public sector which could be open to competition, economic times, and NSW is no exception. Traditionally, forming new and viable markets, and improving service the policy solution has been one of reduced spending, delivery for all NSW citizens. reduced services, and/or increased fees, taxes and The NSW Business Chamber has commissioned Gary charges. Sturgess (a thought leader in public sector reform and The NSW Business Chamber thinks it’s time to change the innovation), to examine the different models of approach, and to challenge the seemingly unavoidable contestability and competition that might be applied in trade-off between getting less or paying more. The call on the NSW public sector. Treasury’s coffers is set to increase in coming decades and This paper does not provide a prescriptive set of with the high cost portfolios of health and education recommendations, but is, rather, a discussion starter. In the taking more than half the total budget, something needs context of both the O’Farrell Government’s second to be done, and now. budget, and the final report of the Commission of Audit In our 10 Big Ideas to Grow NSW advocacy campaign, we into government expenditure, we believe debate can: called for reforms to improve the efficiency and effectiveness of the NSW government’s economic • help improve the prospects of more competition in performance, starting with an audit of government service delivery; services and performance. The first phase of that audit • enhance the quality of service delivery for all NSW found a low level of importance had been given to citizens; financial, people and asset management; a situation, • improve successful delivery by identifying which which if continued, would hinder the government’s long contestability models work for different services; term strategic planning. In addition, there are a number of related activities that • expand the thinking of policy makers to the range of could contribute to the increased effectiveness and activities where contestability can deliver benefits; and efficiency of the NSW public sector, resulting in • reduce the call on tax revenues and deliver a more improvements to the overall performance of the NSW productive NSW economy. economy. The key question in relation to the We need a debate about the means to build a diverse, government’s record in service delivery remains mixed and sustainable NSW economy, by providing unanswered. Are we getting what we need, and at a competition and capacity building for private, not-for- reasonable cost? profit/non-government, and contracted service providers Over the past two decades, governments have opened to engage in service delivery. some of their services to competition and contracting, Ultimately, the government will decide which services and with recent research indicating that competition has made portfolios are more amenable to competition than others, a positive difference in financial performance and and their decision will undoubtedly be based on the productivity across a number of portfolios, including complex mix of social, economic and political health, defence, prisons, the collection of household considerations. The debate is critical. We encourage the waste, transport and infrastructure. Government to be brave and determined. It is time to The debate should now be taken further. While public- move the NSW economy forward. private partnerships have been around for a while, the delivery of services should be about more than the building of roads and rail. It should also reflect a broader ambition than government simply outsourcing so-called back office functions. Is it right that government continues to be a monopoly provider of all public services? We think Stephen Cartwright it’s time to start the conversation about other areas of the Chief Executive Officer Call 13 26 96 6 nswbusinesschamber.com.au Executive Summary Few public services in Australia are delivered exclusively The Public Service Economy through a government monopoly. In most sectors, there is This report proposes that the NSW government must a mixed economy of public, private and third sector undergo a similar shift in thinking across the entire public providers, supplying services to government and direct to service sector. Politicians and public servants should the public through a variety of different arrangements. embrace the concept of a ‘public service economy’. They The question for state and federal governments today is should plan for greater innovation and contestability in not whether they should engage with external providers the design and management of public services for the delivery of public services, but how.