Coin Towers
Dr DeAnne Julius’s recent review of the UK Public Services Industry (PSI) tells us that the outsourcing of government services is an industry which has grown to £80 billion of annual revenues and employs 1.2 million people. It concludes with “8 recommendations to tap the full potential of the PSI in its drive to provide world class public services for all.”

The launch of eight new school “academies” in London, sponsored by various institutions and entrepreneurs, including Lord Harris, makes this an appropriate time to consider the economic implications of such outsourcing.

We can accept for the sake of argument that outsourcing any given “public service” to private firms under a competitive process (unlikely for academies) should bring improvements. The primary reason is that such private firms are subject to the rigour of profit-loss accounting and its resulting disciplines. The problem, though, is the services themselves, which are not subject to such disciplines. The essence of private enterprise is that from conception through funding to delivery, all participants are acting voluntarily, and a net profit therefore means a net gain.  “Public services” do not have this feature; consumers may have preferred another “service” entirely.  What we need is not the outsourcing of given services, but exposing the services themselves to competition.

Without this, there are downsides to expanding PSI. The review calls for “clear and consistent objectives” and “long term commitments” which in effect mean tying down a new government to a predecessor’s “services” (e.g. identity cards). Any improvements achieved will encourage governments to expand the range of “public services” under the mantra that outsourcing gives greater efficiency.

Most important of all, the taxation to fund any public services will always cause a serious net loss of output – a subject to which I hope to return. The goal must be to remove government from the scene rather than to scale back the losses. Think of the military-industrial complex; yes, the weapons companies make the conduct of war more efficient, but they also make it more feasible in the first place.

Terry Arthur 154x154

IEA Pensions and Financial Regulation Fellow

Terry Arthur is a fellow of Pensions and Financial Regulation at the Institute of Economic Affairs and has written on this subject for a number of publications, working closely with Philip Booth, Editorial and Programme Director at the IEA.

4 thoughts on “Outsourcing public services: a good deal for taxpayers?”

  1. Posted 16/09/2008 at 20:56 | Permalink

    Spot on. Another point is that, once a service is outsourced, its providers look up to government for continued business rather than down to the consumer. The two might be linked – the government recently got fed up of the company that managed the education SATs and sacked it. However, the incentive to a company that is providing outsourced public services comes from keeping the politicians happy. When a service is financed and provided privately the customer is king.

  2. Posted 16/09/2008 at 20:56 | Permalink

    Spot on. Another point is that, once a service is outsourced, its providers look up to government for continued business rather than down to the consumer. The two might be linked – the government recently got fed up of the company that managed the education SATs and sacked it. However, the incentive to a company that is providing outsourced public services comes from keeping the politicians happy. When a service is financed and provided privately the customer is king.

  3. Posted 25/09/2008 at 20:04 | Permalink

    I suggest business thinking is not the answer to measuring the outsourcing of public services which usually involve people providing services to people rather than producing widgets.

    For a business, financial returns are a perfectly legitimate measure of performance.

    For a public services organisation, however, performance must be assessed relative to mission, not financial returns.

    A useful book exploring this concept is “Good to great and the social sectors” by Jim Collins ISBN 1-9052-1132-5

  4. Posted 25/09/2008 at 20:04 | Permalink

    I suggest business thinking is not the answer to measuring the outsourcing of public services which usually involve people providing services to people rather than producing widgets.

    For a business, financial returns are a perfectly legitimate measure of performance.

    For a public services organisation, however, performance must be assessed relative to mission, not financial returns.

    A useful book exploring this concept is “Good to great and the social sectors” by Jim Collins ISBN 1-9052-1132-5

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