Slimmer governments under pressure to do more with less
Tuesday 18 March 1997
Several OECD countries have cut the size of their public sectors much more dramatically than the UK. Government outlays as a percentage of GDP peaked in the UK in 1976 at just over 48 per cent, while now they are 42 per cent, a six- point fall. But in the Netherlands the fall has been 10 points, from a peak of 60 per cent in 1983 to 50 per cent this year; and in Ireland it has been 13 points, from over 53 per cent, also in 1983, to under 40 per cent this year. Other countries which have made significant, though slightly smaller, cuts include Belgium and New Zealand.
Interestingly, both the Netherlands and Ireland are now cited as examples to the rest of the EU: people talk of the Netherlands as an example to Germany and France, while Eire has become the European "tiger" economy. Of course there is a virtuous circle here, for rapidly growing economies see a fall in the share of public spending to GDP simply because the GDP is growing quickly. But the restraint of public spending has been substantial in both cases.
In the majority of countries, though, public spending has tended to rise, so anyone arguing that a sea-change has taken place in the perception of the appropriate size of the state is premature. Such a change may have happened - I happen to think it has - but the evidence is thin.
There is much more evidence of the durability of that other aspect of downsizing of the state, privatisation. The chart, from the latest OECD Financial Market Trends, shows how the global momentum has been building through the 1990s. More money will be raised this year by privatisation, not just on the developed countries but also in the developing ones, than ever before in history: something like $100bn.
Associated with privatisation has been another parallel phenomenon, outsourcing. Contracting out services has become one of the main ways in which developed countries have introduced market disciplines to public services. Tracking this is more difficult than tracking privatisation, for instead of there being a series of highly publicised share sales, there have been thousands of often unnoticed experiments. Contracting out public sector services may even have a larger impact on the overall quality of these services than privatisation, since it has a wider reach.
This pressure on government to do more with less - to give better value - will surely grow. You can see it here in the UK political debate, with the assertions that the present Government's public spending plans are somehow too tight to be credible. Yet both parties declare they will not be exceeded. Labour has accepted the Government plans for the first two years were it to win office, while both parties are making cutting taxation a central point of their election campaign.
This raises the central question: what tools are available to help governments do more with less? Privatisation shifts responsibility away from government, and regulation of privatised services can be sub-contracted to independent regulators, but what of the functions where responsibility is retained?
The OECD has publishedguidelines on how to identify best practices for evaluating whether such services should be contracted out, and how the process can be managed once the decision has been made. It selected eight points.
First, top management should use contracting out to re-evaluate why various tasks are carried out and the way they are done. In other words, one should not contract out the same job done in the same way but think through how the job can be done better.
Two, recognise that people matter: it is not just a financial and performance exercise but one where individual staff performance is crucial. So staff should be brought on board.
Three, specify service in terms of outputs, not inputs. You still hear politicians talking of the amount of money spent on a service rather than the quality of the service. The rhetoric ought to be the other way round: politicians ought to be proud when the public sector can obtain as good or a better service at a lower cost.
Four, monitor performance and foster co-operation. Contracting out an activity should not diminish the responsibility of the state to make sure it is performed to the appropriate standard. So there needs to be a formal but non-confrontational relationship which includes a provision to pass across the contract to another supplier if it is taken away.
Five, make sure comparisons are valid. Very often, when a service is outsourced, there are changes to the way it is done. That may be desirable, for it is a good opportunity to rethink a service. But you need to compare before and after in a valid way, so that an improved or slimmed-down service is allowed for in any comparisons.
Six, in-house bids should be treated in the same way as outside ones, and if a contract is granted, performance monitored in the same way.
Seven, governments should foster competitive markets. That is a key to achieving the full benefit of contracting out: contracts have to be of the right size - not too small to fail to attract interest or so large that only a tiny handful of suppliers could provide it.
And finally, governmentsneed to acquire new skills to manage contracted- out services. It is a different job running an internal team from obtaining the best from an outside one.
It is a thought-provoking litany: in many ways self-evident, but not when you listen to the way many politicians still express themselves. And it matters. There may or may not be a sea-change taking place in the size of government, but there is a certainly a redefinition taking place in what government itself does, and what it gets outside contractors to do for it. Just as companies are learning new skills at managing a network of suppliers rather than a large in-house bureaucracy, so too are governments. This is happening the world over. And it will go on, as the pressure not for more government, but for better government, builds up.
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