Use of Market-Type Mechanisms for Public Service Delivery:

Outsourcing

Jón Ragnar Blöndal

Head of Budgeting and Public Expenditures

8th Annual Meeting of OECD - MENA Senior Budget Officials

Doha, 15 December 2015

Agenda

•Why Outsourcing?

•Key Outsourcing Issues

Why Outsourcing ?

• Value-for-Money –15-25% Initial Cost Savings Common

–Challenge to Maintain and Increase Initial Savings

• Private Sector Development –Great Variance in Level of Outsourcing Among

Individual Countries

–Government is Largest Participants in Most Product and Service Markets

Outsourcing

Governments contracting with private sector providers for:

–the provision of services to government agencies, or –the provision of services directly to citizens on behalf of the government

Service previously performed in-house by the respective agency Competitive tendering, contracting, contracting out

Specific Rationale

• The primary objective of outsourcing is to increase efficiency by introducing a competitive environment for the provision of the services

• Specific “business cases” ‒ to reduce costs; ‒ to access expertise not available in-house to meet one-off

needs; ‒ to access expertise on a long-term basis in order to be

able to vary its quantity and mix over time; ‒ to replace current government provision in extreme cases

where their provision is unsatisfactory for an extended period of time.

Three Generations of Outsourcing

• “Blue collar” services ‒Building cleaning, canteens, security guards

• Professional services considered non-core

‒ Information technology

• Core services – Prisons, fire and rescue, enforcement activities,

employment placement services

Key Outsourcing Issues

• Accountability

• Government Capacity

• Contract Specificity

• Regularity

• Competitive Supplier Markets

• Transparency

• Redress Mechanisms

Accountability

• Traditional model – Hierarchical – Focused on inputs and processes

• Outsourcing model

– Separation of “purchaser” and “provider” – Explicit specification of services – Performance measures to monitor compliance

• Implications

– Increased transparency serves to foster accountability – Avoids conflicts of interests (in-house) – Multiple organizations can blur accountability – Political considerations: public pressure; minister always

responsible

Government Capacity

• Retain the technical skills of the function being outsourced – This may be lost as the government is no longer directly

involved in the provision of the service – May lead to dependence on the incumbent supplier when

re-tendered or may preclude taking the activity back in-house

• Acquire the commercial skills necessary to manage

outsourcing – Needs to become and established and on-gong function, not

“one-off” – Implications for career tracking policies and managerial

promotions

Contract Specificity

• Government contracts = prescriptive and process oriented Private sector contracts = more output (or outcome) oriented

• Reasons – Concern about accountability implications – Manifestation of resistance to outsourcing in agencies – May be difficult to specify outputs (or outcomes) effectively

• Possible solution – First round - agencies formally issues a tender offer but specifies its needs only in

general terms and contractors are invited to be creative in responding to those needs.

– Second round – agencies put out a more detailed tender offer based on the responses to the first round.

Regularity – Equal Treatment

• Discretion of a contractor needs to be weighed against the regularity principle

• Contractors can be accorded the “power of the state” in

determining eligibility or levels of eligibility for certain services –Case management in social services

• Similarly, contractors could offer services to different client

groups in different manners – Job placement services

• Agencies need to be clear in establishing the boundaries for

appropriate discretion in such cases

Competitive Supplier Markets

• Creation of such markets –Commodity-like services vs. highly specialised services –Government can exert tremendous influence through

it volume buying

• Maintaining such markets –Avoiding over-reliance on a single supplier –The length and size of individual contracts can impact

the number of potential suppliers –Policies against low-balling

• In short, the government needs to focus on the impact on

the supplier marketplace of individual outsourcing decisions

Transparency

• Information previously in the public domain is now in the hands of private contractors and the public’s right to access that information may be impaired.

• Contracts viewed as commercially sensitive. Aside from protection of intellectual property rights, this is generally inappropriate in the public sector context.

• Appropriate information needs to be publicly available in order for outsiders to be in a position to make an informed judgement about the contracting decision.

• Contract provisions need to ensure that sufficient information is turned over from the private provider to the purchaser organization in order for the latter to maintain up-to-date knowledge of the activity for future tendering, i.e. to maintaining capacity to avoid capture by the private provider.

Redress mechanisms

• Redress instruments for citizens –Laws on administrative procedure, Ombudsmen, Freedom

of Information, Whistle-blower protection

• The jurisdiction of such instruments does not extend to private sector providers.

• It is therefore important for contracts to incorporate appropriate redress mechanisms. These will of course vary on a case-by-case basis but are most applicable to where the contractor is exercising a degree of discretion.

• Appropriate mechanisms to protect the privacy of confidential information they acquire on individual citizens.

Overall Assessment

• Very positive – if designed correctly

• High entry barriers to introduce outsourcing

– Union resistance

– Building private sector expertise

• Can be expected to increase significantly

For Further Information

• www.oecd.org/gov/budgeting

• OECD Journal on Budgeting

• jon.blondal@oecd.org