Why does it occur, when does it work? 

Allow me to share a puzzle. Public sector outsourcing (a.k.a. ‘contracting out’) has been increasing in recent decades. It is not the same as ‘privatisation’ because the government retains the role as a funder but it outsources the task to a private provider – which may be a corporation or non-government organisation.

 A recent prominent example has been the outsourcing of Mt Eden prison to SERCO. But it is happening elsewhere including charter schools and NGOs operating in the health and social services sector.

 The proposed disposal of some of the stock of state housing is not outsourcing – it is really old-fashioned privatisation, although there is a funding dimension via housing allowances. Neither, strictly, are public private partnerships which tend to be (not always successful) funding operations, although there may some consequent outsourcing (as in a BOOT – build, own, operate, transfer – operation). I acknowledge that private businesses outsource too but not their core business. Yet the public sector on occasions seems to.

 (Social bonds are a form of outsourcing in which are payments by results. However they are so weird that they require a separate column; an issue is whether the government can specify the ‘results’ sufficiently precisely to get what it wants, and if it does whether anyone would be foolish enough to invest in the scheme. We shall see.)

 Why is outsourcing happening? One answer is that it is all ideology. Certainly, governments of the right are more prone to outsourcing than governments of the left. It is difficult to deal with ideological taste – you like coffee, I like tea. If ideology is all there is,  we are going to get a yo-yoing back and forth as the political pendulum swings.

 Of course each side argues there are gains from their options. Typically there are, but they are offset by downsides which advocates are less likely to mention. The tradeoff is often not carefully evaluated.

 Outsourcing sometimes appears to be used to weaken a public sector union. (Legislation and privatisation have also weakened unions over the last thirty years, so it is a part of a trend.) Probably unions improve the conditions of their members, in the case of public sector adding to the cost to the taxpayer. But usually they add to the professional quality of the service that the taxpayer gets. (Sometimes they forget the latter. I was struck a few years back by press releases put out by the PSA that whined – yes, that is the correct word – about government measures reducing their members’ working conditions; and so they were. But there was nary a word of how the public service was suffering.)

 As a result, there is often a deterioration in the quality of the service provided. Sometimes it may be deliberate, but often it seems unintentional. In principle the contract between the government and the provider will specify the quality of service but, in practice, ways can be found around the contractual specification. (My favourite example – although not involving outsourcing – was the case of the British target for accident and emergency departments to process victims from the time of arrival. When overburdened, some departments left the patients in ambulances outside, thereby delaying the time they ‘arrived’ in order to shorten the time they were processed.)

 The bureaucrats monitoring the contracts keep adding extra rules. For instance some years ago there were small Private Training Establishments in receipt of government funding which paid their principals (who were the owners) salaries in excess of those of the vice-chancellors. So the Tertiary Education Commission limited their top salaries. There appears to be an ongoing cat and mouse game as the public sector sets rules and the private sector finds its way around them.

 The rules and form filling (does anyone look at them?) are not only onerous but presumably generate quite a bureaucratic monitoring cost. An explicit one was when the head of the Department of Corrections had to turn up at the Mt Eden prison himself after allegations of slackness there. One would like to believe he had more valuable things to do than sorting out a failed outsourcing.

 One of the consequences of these rules is to reduce the effect of professionalism, which while not a perfect regulatory system served us well in the past. The replacement system of accountability via contractualism probably reduces professionalism’s effectiveness. Weakened it may be, but very often it generates the whistle blowing identifying poor quality services; even with lay whistle-blowers there is often a professional lurking behind (fearful that if he or she is too prominent they will lose the career to which they are dedicated).

 The notion of outsourcing to charter schools seems to have been imported from America. There is some evidence that the US ones get superior educational outcomes although this is contested. An international survey found that our 15-year-olds are a year ahead of American 15-year-olds on some measurable educational attainments. Suppose that American charter schools added a year to their student attainments. Hooray, but they would only be catching up to the average New Zealand school.

Apologies for this being a list of loose thoughts – more a blog than a column. I have not been able to find much rigorous thinking about outsourcing – is there a government manual which describes when it should be used and when it should not? Contributions welcome but, please, not ideological rants; I have read too many of those already.

Comments (5)

by Murray Grimwood on August 03, 2015
Murray Grimwood

Outsourcing is just a deckchair – one of many – on a sloping deck. Yes, it is ideologically-driven, but the bigger question is why that ideology surfaced when it did.

If unlimited growth-possibilities had been forever-available, the wave of ‘onomics’ which broke in the ‘80’s wouldn’t have happened. What drove it was us running into global limits (Catton wrote Overshoot in 1980) and those who needed to ‘bigger’ themselves turned to the global commons for lack of better opportunity.

The public-owned commons-divestment was initially by fire-sale sell-off, often after pre-‘investment’ by the tax/rate payer. It is easy to divest the mass when they don’t realise ‘the Government’ is actually them, think the PM commenting recently on Pharmac/TPP. It all results in the same desired result; an upward migration of the loot. Obviously those who desired the opportunity sought to control governance; either by direct intrusion, by lobbying, or by propaganda (easy with an acquiescent media). One way to divest the 'value' of that which is still in public ownership is to outsource, which transfers ownership of any profit and saddles the tax/rate payer with the profit-demands of the private sector.

All things being equally well-run, the private should always be the more expensive by the margin of profit; which a social service can be entirely legitimate without (the Left don't dare say that, though, the 'speak' has been too well captured). An interesting contra-view comparison of the two is the R100 vs R101 saga - Nevil (Shute) Norway covers it in ‘Slide Rule’ - although Wallis might just have been the deciding factor.  

The approach of the limits to growth also signalled the pending end to the Left/Right yin/yang debate; something folk still seem to think of as a permanent and spectrum-encompassing scope. Actually, Left/Right has really been a scrap over who got which size slice of an ever-growing cake, and only in the global North (affluent/empire). From about 1980, globally, there has been less cake per head, and we are now entering the period of less available cake per year in absolute terms.

Whereas the Neo-lib ideology is single-track (and therefore lacks in-house debate) the Left is actually a cross-section, divided and therefore easier conquered. The political portion has doggedly refused to adapt, and is predictably floundering. If we were to have the discussion about the sloping deck – why, and what to do – then they might find a reason to continue.

by James Green on August 03, 2015
James Green

From my experience ownership really matters as to how a service/factory is run. And such things like calling the Secretary of Education the CEO of Education can have negative effects on the mindsets of workers. Reminding them that they can't be trusted to work for the common good, but only their own self-interest and so they sometimes do.

I think all infrastructure should be government owned, if there are benefits to outsourcing let the outsourcing be to provincial or district/city government.

Society would benefit from having all other large enterprises owned by their employees. Small businesses of course work well as capitalist endeavours and would do best to remain so.

by barry on August 03, 2015

There may be a number of reasons.

The primary one seems to be that the Government know that they are hopeless managers and therefore think they should bring someone else in to run the country. :)

You can't help feeling that they current lot have an irrational fear of the public sector unions, and want to find ways to minimise their involvement.

In many small organisations it makes sense to bring an expert to do some functions (e.g accounts, cleaning) that are outside their expertise.  The extra cost is justified by the opportunity cost that would be incurred by taking people away from more important/lucrative tasks.  They trust the contractor/professional to do a good job at a reasonable price.

Larger organisations (not just government) tend to yoyo between outsourcing and inhousing depending on the skills/experience/history/ideology of the management.  Obviously outsourcing comes with costs. 

In some cases the costs of monitoring and managing contracts are higher than the cost of actually doing the work (let along the profit that you are expecting the third party to receive).  It comes down to trust.  A large organisation can't trust their vendors and they have to have contracts/penalties etc.  In reality they just want the problems to go away, so they don't like to push too hard.


by Megan Pledger on August 04, 2015
Megan Pledger

Don't believe the American charter school propaganda about their great results that pass through media channels unfiltered.  Very few charter schools outperform public schools and those that do are ones that tend to get extra funding from non-tax sources. 

by Megan Pledger on August 05, 2015
Megan Pledger

 I was going to mention the perverse incentives with charter schools where getting rid of children with high resource needs increases Charter School* profits and increases scores on the equivalent on National Standards enhancing their reputation.  I gave up because I couldn't put it well but this blog talks about it...




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