We need to talk about markets

Last week, it was revealed that two private security firms – G4S and Serco – have potentially overcharged taxpayers by up to £50 million on electronic monitoring contracts. In some cases, bills may have been charged for the tagging of offenders who had died, were in prison, had left the country – or for those who had never even been put on a tag in the first place. These revelations cast doubt on the outsourcing mantra that competing private sector organisations always deliver better services at a lower cost. But while the G4S and Serco case has grabbed the headlines for now, it is not the only example. Public service markets are developing rapidly in employment, health and care – indeed, most areas – and are estimated to be worth nearly £115 billion. The Institute for Government’s new report Making public service markets work: professionalising government’s approach to commissioning and market stewardship, released yesterday, found that government is struggling to get the results it wants in four key areas: employment services (the Work Programme), probation, schools and care for older people. Across all four sectors examined, ‘gaming’ was a recurrent problem with providers sometimes responding in undesirable ways to the reward structures created by commissioners. In the Work Programme, for instance, funding is calibrated in such a way that it actually encourages providers to ‘park’ users with complex needs and ‘cream’ those who are easier to support, and therefore more profitable to serve. In some sectors, we also noticed a reluctance to spot and manage underperformance. In probation, this is largely because local commissioners do not tend to robustly evaluate the effectiveness of different providers in reducing re-offending (or delivering other outcomes), which leads to the re-commissioning of the same providers regardless of performance. And a number of large providers now have the potential to dominate entire areas of service provision in particular regions – effectively replacing a public sector monopoly with a private one. Although this could drive economies of scale, it also weakens competition, leaving government vulnerable to price increases across a range of services in future. This does not mean that markets in public services cannot work – they can and have done in simpler areas – facilities management, waste collection and schools catering to name a few. But as outsourcing is pushed into more complex front-line service areas, the more difficult it is to get contracts and their management right from the start. This means officials need to be alert and act on emerging problems rather than (as they did in the tagging case) react only when they erupt into major difficulties. Our research concluded that government needs to stand back and think much more systematically about how its role and ways of working should adapt to the new landscape. We found that departments and agencies generally lacked the commercial skills and methods to identify in advance the risks of using markets in certain public services and ways of mitigating them; work collaboratively with providers to adjust system incentives; take decisive action to tackle under-performance; and monitor levels of provider competition in the market. Officials must see their role as promoting the long term health and effectiveness of the market – what we call ‘market stewardship’ – rather than narrowly focus on minimising upfront costs. Effective stewardship requires sufficient time for proper planning and testing. For example, commissioners could stress-test incentive systems with commercially-minded challenge boards to understand the likely impact on provider behaviours; use randomised controlled trials to assess the value-add of independent providers vis a vis in-house provision; and conduct market studies early on to assess provider characteristics and the likelihood of undesirable effects, as the Department for Education has commissioned for childcare and early-years services. This means slowing down, learning quickly from mistakes and adapting proposals before embarking on full-scale reform. This may be politically unattractive, but is critical, if government is to avoid the costly errors that can end up undermining its own reform agenda. It also means building greater flexibility into contracting models to allow for on-going learning and adaptation. One way to do this is to build in clear break clauses specifying the process by which changes to services or pricing can be agreed. Another route to this would be to contract on a rolling cycle, as happens in rail franchising, where commissioning models are gradually adapted over time so that failures tend to be confined to individual projects, rather than systematic. At a time when Whitehall officials are still developing their capability in designing and overseeing public service markets, it is critical to slow down, learn and adapt so that mistakes are corrected out of the system before they grab the headlines.