Diversity and Contestability in the

Public Service Economy

- Gary L. Sturgess

NSW Premier’s ANZSOG Chair

of Public Service Delivery Copenhagen Business

School 30 September 2014

The public service economy

Vincent & Elinor Ostrom

The public service sector is an economy

“A public economy need

not be an exclusive

government monopoly. It

can be a mixed economy

with substantial private

participation in the delivery

of public services.”

- Vincent & Elinor Ostrom

Public service industries

“The water industry, for example, is composed of

a very large number of highly independent

federal, state and local government agencies,

operating side by side with large numbers of

private utility companies, cooperative

associations and individual proprietorships.

“The American educational system can be

conceptualized as an industry composed

predominantly of many independent public

enterprises and non-profit private enterprises. . .”

- Vincent & Elinor Ostrom

Supply side and demand side

“Governments, like

households, might be viewed

first as collective consumption

units.”

- Vincent Ostrom

Different scale & scope

“. . . a small collective consumption

unit might contract with a large

production unit and each might take

advantage of diverse scale

considerations in both the

consumption and production of a

public good or service.

“It may also happen that the collective

consumption unit is large but that

efficient production is realized on a

smaller scale.”

- Vincent Ostrom et al

A mixed economy

In Australia –

• 90% of residential aged care is

delivered by the private and third

sectors

• 40% of hospital inpatients are treated

in a private hospital

• 30% of school students attend a

private school

• 20% of prisoners are managed by a

private provider

What difference does this make?

• The public service economy represents

20-25% of the national economy.

• Productivity is poor – in fact, we don’t even

know how to measure productivity.

• Limited scope for ‘creative destruction’.

• Customers are denied choice (even where

it might be permitted).

What difference does this make?

• Services are producer-focused, not

customer-focused.

• Supply side is immune from contestability.

• Lack of diversity in supply.

• Lack of innovation in service delivery – no

search for ‘efficient boundaries’.

• Markets/supply chains are poorly designed

and managed.

Competition & Contestability

10

Choice Contracting Contestability

Choice: competition for services

• Medicare

• School education

• Vocational education

• Disability services

12

Through-

life support

Availability

contracting

Public-

private

partnerships

Alliance

contracting

GOCOs

Framework

contracting

Contingency

contracting

Public-private joint

ventures

Integration

contracts

Social

impact

bonds

Competitive tendering: competition for

the right to manage monopolies

Contestability: the credible threat of

competition

“The essence of contestability is that planning and

competition should be used together. . .

“In a contestable health service, it is the possibility that

contracts may move that creates an incentive within the

system, rather than the actual movement of contracts.

Of course, for this to be a real incentive, then contracts

must shift from time to time. . .”

- British health economist, Chris Ham, 1996

Contestability

‘Way Forward‘

Prisons

Parklea

Diversity

If the only tool you

have is a hammer,

then every problem

looks like a nail.

– Abraham Maslow

Diversity What makes the

craftsman is not the tool,

but the toolbox.

Our capacity to

understand a problem is

constrained by the

range of possible

solutions at our

command.

Diversity

Social Impact Bonds

Diversity

Public-private joint

ventures

Diversity

Public Service Mutuals

Discussion