Is Public Service Delivery Obsolete?

Given the billions of dollars we invest in the operations of government each year, it is a shame that there is very little public discussion about public services in Canada. Public services are mostly taken for granted until they are interrupted by a labour dispute or natural disaster. A garbage workers’ strike in the middle of summer tends to focus the public’s mind and nose on public services fairly quickly.

In the case of disruptive strikes, it is common for the media, politicians and the public to call for a move to private sector delivery or for taking away the right to strike. Toronto’s new mayor, Rob Ford, is doing both. He has ridden a wave of public concern in moving to contract out a large swath of garbage collection in Toronto while also convincing the government of Ontario to remove the right to strike for Toronto’s transit workers. Contracting out and privatization are incendiary for the trade union movement. The Canadian Union of Public Employees sees this as a life or death issue for its membership. This is reflected in local negotiations with employers and is central to its political agenda.

A significant portion of CUPE’s website is devoted to challenging privatization of government services. It cites a 2010 Environics poll showing that 81 percent of respondents trust the public sector more than the private sector to provide drinking water treatment and delivery. CUPE works with unions in other countries and this past summer ran an online campaign encouraging Italian expatriates in Canada to vote against a referendum proposing privatization of Italian water services. The referendum went against privatization.

Other polls tell a more mixed story. A recent Ipsos Reid study commissioned by the Canadian Council for Public-Private Partnerships found that two thirds of Canadians support the use of public-private arrangements to deliver infrastructure and a range of public services. The highest levels of support for private involvements were in the construction and operation of public recreation facilities (74 percent), the operation of non–health-related services in public hospitals (73 percent) and in the construction and maintenance of roads (72 percent).

The poll found that more than half of unionized workers in the public sector support a public-private delivery mix.

It also suggests a generational rift: 74 percent of Canadians between the ages of 18 and 29 support more private involvement in service delivery, compared to just over 60 percent support among Canadians aged 60 or older.

Often missing from this discussion is the complexity wrapped up in our notions of what is public and what is private. It is helpful to make an upfront distinction between what is publicly funded and how it is delivered. In a paper written for the Romanow Commission on the Future of Health Care in Canada, Raisa Deber, a health policy expert at the University of Toronto, emphasized that “private delivery” is not a homogeneous category. Private providers can be not-for-profit or for-profit, and the “for-profit” category ranges from small businesses such as physicians’ offices to corporate organizations that are expected to provide returns on investment to their shareholders. Although about 70 percent of Canadian health care is financed publicly, almost all of it is already delivered by private (usually not-for-profit) providers. Deber concluded that this can make comparisons between different types of delivery difficult since for-profit providers will often focus on the more profitable services and clients.

So behind the polls and intermittent headline stories there is already a lot of private delivery of public services in Canada. This is part of a global trend toward increased private delivery, contracting public services out to private and not-for-profit delivery agents and the development of public-private partnerships to build new infrastructure. It is worth exploring why this is happening, the arguments for and against, how Canada compares with its major counterparts and what this means for the future of public services in Canada. Is public sector service delivery becoming obsolete? Or are repetitive and simplistic debates about privatizing garbage collection being overtaken by a more fundamental shift in the delivery of more complex health and social services?

Until the 1970s it was assumed that government held a natural monopoly on public service delivery and in many cases it truly was the only game in town. There were very few alternative providers. As the scope of government services grew with the birth of the post-war welfare state, so did the size of government and the number of public servants at the federal and provincial levels. Governments grew to become some of the largest employers in the country, as they still are today. This was paralleled by similar growth in other sectors. Manufacturers and international corporations grew by leaps and bounds. The economy was growing and the public sector did not stand out as being unusual.

Enter the economic turbulence of the 1970s and early ’80s, with oil price shocks, runaway inflation and the rise of fiscal deficits. Manufacturers were forced to downsize, innovate and relocate in the face of growing foreign competition—a change that has become permanent in the private sector. The public sector was at first shielded from the turbulence in the economy, a hiatus that saw significant growth in public sector unionization. Two massive shifts on either side of the Atlantic changed all of this in a hurry.

In the United Kingdom in 1979, Margaret Thatcher was elected prime minister with a promise to make Britain great again by getting its economic house in order and curbing trade union power. This meant an end to government service monopoly and a shift to a smaller and more cost-effective government that was more responsive to citizens.

Thatcher set in motion an unprecedented wave of privatization, contracting out and restructuring that changed the shape and nature of public services. Publicly owned enterprises in coal, iron and steel, gas, electricity, water supply, railways, trucking, airlines and telecommunications were privatized, along with public housing. Legislation required that the delivery of many other publicly funded services should be subjected to compulsory competitive tendering. This mixed public-private model of delivery has continued under successive Conservative and New Labour governments, albeit with different labels. Tony Blair’s Labour government passed legislation requiring local councils to take a “Best Value” approach in commissioning for garbage collection—a market-based approach that left the door open to extensive private delivery. In last year’s UK election, the public services platform of Blair’s Labour successor, Prime Minister Gordon Brown, was almost indistinguishable from that of the current Conservative prime minister, David Cameron.

Today in the UK, private hospitals deliver private health care alongside publicly funded care, and “free schools” funded by government but run by parents’ groups and charities (similar to what North Americans would call charter schools) coexist alongside traditional state schools. Policing is now supplemented by significant numbers of community volunteers. Private providers are bidding on a new works program targeted at the long-term unemployed, which will pay for outcomes rather than inputs; in other words, payments to providers will be based on the actual employment of clients as opposed to the number counselled or retrained.

This intensification of private delivery has been paralleled in the United States. In 1978, Proposition 13, or “The People’s Initiative to Limit Property Taxation,” was approved in California. This is regarded as part of the American taxpayer revolt that swept Ronald Reagan to the presidency in 1980. Proposition 13 also required a two-thirds majority of legislators to approve increases in state taxes. Similar to today’s Tea Party slogan, “Hands off my Medicare,” the taxpayer revolt was not accompanied by reduced expectations about government services and entitlements. With revenues tightly squeezed, the tide turned against public sector workers and public sector service delivery with a vengeance. As in the UK, this resulted in a dramatic reshaping of the public sector with widespread contracting out of public services for private sector delivery.

These dramatic shifts in the UK and America were, and continue to be, underpinned by the belief that government monopolies are by nature bloated, inefficient and undermined by the absence of competition. Critics reckoned that government had lost sight of its “core” business, and that public services would be better provided by private operators. Or that, at the very least, private sector business practices should be adopted by public service managers.

This shift in thinking, labelled as the “New Public Management,” was popularized by David Osborne and Ted Gaebler’s wildly successful 1992 Reinventing Government: How the Entrepreneurial Spirit Is Transforming the Public Sector. The book was a game changer, making a compelling case for a shakeup of public sector organizations and offering plenty of evidence on how and where this had already been successfully done. It has had a widespread impact on political leaders, including Tony Blair and Bill Clinton. Osborne and Gaebler importantly distinguished between government’s “steering” role (policy and oversight) and “rowing” (the actual delivery of public services). They also talked about bringing more rigour to measuring what government does and the results it gets for money invested (“what gets measured gets done”).

The book also discussed breaking down government monopolies, focusing on customers’ needs as opposed to government plans and the potential for more decentralized and integrated forms of government. Some or all of these elements can be found in every public service reform plan anywhere on the globe. A game changer indeed. It has been estimated that by 2003 several trillions of dollars in spending on delivering public services had shifted to the private sector.

So what is the picture in Canada? Big deficits have returned and revenues are declining. But public expectations for publicly funded services continue to grow, especially in the high-growth and high-cost areas of health, social and children’s services. The pressure for efficiencies and for cheaper and better publicly funded services is greater than ever. Political leaders are once again talking about the need for small and more efficient government, which usually goes hand in hand with moving some public services to lower cost service providers.

Like other countries, Canada has considerable experience with public service reform. Governments at all levels have experimented with privatization, public-private partnerships and contracting out.

Privatization involves a permanent transfer of assets to private sector owners, often with ongoing government regulation. This commonly involves the sale of large-scale enterprises such as power generation companies, water treatment plants and government-run transportation services. Large-scale privatization has not been prevalent in Canada, although notable examples are Air Canada in 1988, Petro-Canada in 1991 and Canadian National Railways in 1995.

Canada is relatively conservative in the world of policy making—a cautious follower of big trends (which is of course the main reason the country was spared from the worst of the recent international banking crisis). Instead, Canadian governments have experimented widely with special operating agencies. These see large operational or “rowing” functions transferred from government departments to arm’s-length agencies that are supposed to operate more along the lines of a private undertaking. The Canada Revenue Agency, Canada Post, and provincial lottery and gaming agencies are prime examples, but they are far from private.

The other two high-impact areas of public service transformation involve public-private partnerships and contracting out to alternative service providers. With infrastructure spending increasingly crowded out by escalating spending on health and education, PPPs focus on generating private sector investment and expertise to support large public infrastructure projects such as highways. Examples are the 407 toll highway in Toronto, hospitals, university buildings and treatment plants for water, drainage and sewage. These projects can involve design only or both design and construction, and can include maintenance and operations of the new structures. It is the operating part of these deals that most concerns public sector unions.

Studies have shown that PPPs might not significantly reduce the upfront cost of infrastructure projects, but they do come in on time and stay on budget, thus avoiding some of the notorious cost escalation seen in many projects led by the public sector. The assets remain in public hands or revert to full public ownership once a negotiated lease or concession expires.

Contracting out, which is also known as alternative service delivery, involves subjecting in-house work to competitive tendering. Common examples are food preparation and cleaning in public sector institutions such as hospitals and universities, waste management at the municipal level, and highway maintenance at municipal and provincial levels. In Ontario, driver’s licence testing is contracted out to UK-based Serco, which in its home country is also regularly hired to manage failing public schools. Serco is one of a number of private sector companies that provide services to both public and private sector clients. Serco is sophisticated and highly efficient; its core business is being a really good alternative service provider.

There is a ton of literature on the benefits and downsides of alternative service delivery. A good measure of it seems to be self-serving and the balance sounds about half right. Advocates say that competition creates pressure for efficiency, cost reduction and innovation as well as adding specialist expertise, management and monitoring of outcomes. Somewhat unfairly, this is contrasted with perceptions of government as slow, inflexible and wasteful, and more interested in self-preservation than in innovation.

Critics say that competitive tendering often moves public sector work to non-union employers, drives down wages and benefits, and opens the door to corruption and bid rigging. It is a lightning rod for unions, and they have made substantial efforts to get prohibitions or expensive penalties into their agreements to deter the practice. Efforts by the Mike Harris government in Ontario to aggressively pursue alternative service delivery were stiffly resisted by the Ontario Public Service Employees Union. In 1997, long and costly delays in plans to contract out highway maintenance led to greater government efforts to find jobs for affected OPSEU members. In some cases, expensive and time-consuming hearings at labour tribunals and in the courts can negate the benefits of alternative service delivery. Effective union lobbying campaigns can raise public concern about loss of service quality and sour the employer’s relationship with the balance of the government workforce—both of which have offsetting costs against the benefits.

Economists have had a field day figuring out the potential and actual savings of alternative service delivery. The data vary widely, with most studies landing on savings of 15 percent to 20 percent. But this is an area in which generalization is tricky and everything is contested. Outcomes are situational and vary considerably both within and between industries. Three striking conclusions jump out of the research.

First, neither cost reductions nor quality improvements are guaranteed by the transfer of work to private sector providers. Achieving these outcomes requires tight descriptions of performance expectations and rigorous monitoring and performance management. Even then, researchers have found that in many cases efficiencies are diminished over time as costs and wages escalate.

Second, because measurement and evaluation are important, activities that are easiest to cost, measure and evaluate tend to be the best candidates for contracting out—for example, garbage collection, hospital and university food preparation, cleaning, laundry and some routine maintenance tasks. The same can be true for routinized high-volume work such as laboratory testing and some aspects of home care in the health sector, payroll services and some lower-level human resources tasks (many employers have contracted out the initial processing and screening of job applicants to recruitment companies).

Success in using alternative service delivery in more complex areas of delivery in health, social services and the justice system has proven to be more elusive—and yet this is where the big money is. In Ontario, for example, almost 80 percent of the $100 billion provincial budget is transferred to hospitals, social service, community care and children’s service organizations, schools and universities. More than half of these transfers are spent on wages and benefits.

It is simply not possible to outline in a contract the service requirements associated with the care of complex-needs individuals and families. Instead, these services tend to be provided better by a mix of public providers and community-based not-for-profit agencies, social enterprises and voluntary organizations. As the complexity of care increases, it seems that the intrinsic values and motivation found in public or not-for-profit delivery organizations are better suited to meeting individual client needs. It might also be the case that in view of the degree of cross-organizational collaboration required in this field, competition among providers could be counterproductive.

Third, the introduction of competition into the world of public service delivery has had precisely the effect that Osborne and Gaebler suggested in Reinventing Government. The presence of competition is the single largest driver of cost reductions and quality improvement in both the public and private sectors. A study of compulsory tendering for municipal garbage collection in the UK found that average cost reductions of 22 percent occurred where work was moved out to private providers. Over the same period, average cost reductions of 17 percent resulted where the winning bid came from existing public service staff, with presumably far less organizational disruption.

The City of Ottawa recently announced that a productivity deal with its CUPE local has resulted in lower costs for garbage collection than contracting the work out. An independent audit found that the in-house service was on average $900,000 cheaper than the lowest private sector bid. There are also examples of contracted out work returning in-house in subsequent tendering.

What are we to draw from all of this? First of all, moving relatively straightforward public sector work like garbage collection to cheaper private sector companies seems like a no-brainer, but it can end up being more expensive than providing the service in-house. If it is moved out, savings and quality are much more likely to accrue if service expectations are very clear and rigorous monitoring, accountability and performance management systems are put in place. More importantly, the introduction of competition appears to be the most significant factor in driving cost reduction and quality improvement. Where competition is injected, efficiencies, innovation and cost savings result in both public and private delivery.

The message in this for politicians and public service leaders is that, holding the private sector aside, introducing competition between public service providers probably makes good sense. Right now there are three levels of government involved in various forms of food inspection in Canada—why not put this work up for a uniquely public sector tender and have it all provided by one level of government?

Second, the distinction between public and private funding and delivery is not clear, particularly in the more complex world of health and social service delivery. Home care, for example, can be funded both privately and publicly and can be delivered privately and publicly. As Deber has noted, a large part even of the publicly funded services provided under the Canada Health Act is provided by for-profit physicians’ offices and a range of not-for-profit organizations. Public servants employed directly by government represent a small minority of providers.

Finally, it is likely that the focus on privatization and contracting out is diverting attention from an entirely new frontier in service delivery. Jurisdictions such as New Zealand and the UK are shifting the focus of social services, children’s services and some justice services toward much more localized and community-sensitive service models. Previously siloed funding from multiple government departments and agencies is being consolidated and focused on addressing complex and expensive social challenges such as homelessness, domestic violence and long-term unemployment. This does not involve public versus private debates—it focuses on the needs of vulnerable adults and children and the broad range of health and social services necessary to respond to complex needs. The result is a collaborative mix of public, not-for-profit, private and community-based, voluntary organizations as well as emerging “social enterprises.”

There continues to be a role for government in funding, developing policies in concert with local leaders and monitoring outcomes, but delivery and the lion’s share of accountability for outcomes are being moved to the local level.

As part of this shift more professionals are working across organizational boundaries toward commonly agreed goals. The artificial barriers between health and community care and mental health and addictions are dissolving. Delivery siloes that make no sense to special needs clients or their families are being integrated.

Some early efforts of this sort are emerging in Canada. The high cost of hospital care and emergency room overcrowding is causing considerable cost and service pressure. Some hospitals are merging with rehabilitation centres, while others are working with community care organizations to better organize patient pathways through the health system. Services are being aligned and case managers (or “system navigators”) are being assigned to patients and their families. This new focus is evidenced by a recent strategic alliance in Ontario between the Ontario Hospital Association and the Ontario Association of Community Care Access Centres. This is designed to put patients’ needs in front of those of the organizations. It recognizes that delivery should be designed with a focus on service users, clients and patients—and not by what works best for government, the private sector or unions.

Public service delivery is not becoming obsolete. It is evolving and adapting to the changing needs of citizens. On the other hand, old ways of thinking about public services are in danger of obsolescence, and deservedly so.