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PUBLIC SERVICES 44: Cutting back city hall Local service contracting The problem: expensive local services Where local government is both responsible for specifying and providing essential services such as street cleaning and refuse collection, there is a danger that they become heavily politicized and inefficient. As a result, local taxpayers are held to ransom. The idea: contract out Communities around the world have improved quality and lowered cost by contracting out local services. Under this model, local authorities are transformed into enabling authorities that assess local needs and then specify the service required. Bids are invited from in-house teams, voluntary organizations and commercial contractors. The emphasis shifts from the local council as monopoly provider and manager, to the council as enabler and monitor of high standards. Competition drives down costs and spurs innovation. Example: re-servicing Britain In the United Kingdom, the strongly unionized local government sector was notorious for go-slows, strikes and other forms of industrial disruption. This reached its nadir with the 'Winter of Discontent' in 1979 which helped topple James Callaghan's Labour government. Nicholas Ridley, the minister responsible for driving through compulsory competitive tendering (CCT) in the mid-1980s, wrote that: "The role of the local authority will no longer be that of the universal provider. But it will continue to have a key role in ensuring that there is adequate provision to meet needs, in encouraging the various providers to develop and maintain the necessary services, and where necessary in providing grant support or other assistance to get projects started, and to ensure that services are provided and affordable for the clients concerned." The results: compulsion and performance In the UK, which adopted contracting-out as a systematic national policy, the Local Government Planning and Land Act 1980 introduced compulsory competitive tendering. Under this Act, local authorities were obliged to put most new construction, building maintenance and highways work out to tender. The Local Government Act 1988 extended CCT to a range of services including office cleaning, grounds maintenance, leisure services and the management of sports centres, public libraries and arts centres. This enabled councils to test their existing arrangements against the best the private sector could offer. Most councils found that they could make substantial savings by contracting out to commercial firms. The efficiency savings and quality improvements generated by CCT led government to extend the programme to a range of professional services such as legal, audit and architectural advice and pension administration. A study undertaken by the Institute of Local Government Studies at Birmingham University revealed that the extension of CCT after 1988 led to average cost savings of seven per cent. (There had, of course, already been cost savings before that, deriving from local authorities that had voluntarily contracted out some of their services.) These savings were often accompanied by service-standard enhancements as well as productivity improvements in services where competition had been strongest. Many other academic studies have arrived at similar conclusions. For example, Professor Ken Young and Nirmala Rao, in a study for the Joseph Rowntree Foundation, concluded that "the dynamics of competition have proved powerful beyond all expectation". Their report went on to add that a "remarkable transformation in public service management had taken place", and that the culture of local authorities had changed, so they now treated recipients of services as "customers who were asked what they would like rather than being told what they could get.". "The success of the (CCT) policy is beyond dispute," commented The Times on 25 September 1985. "Basic services such as waste disposal have become more reliable. Efficiency has improved. Corruption, over staffing and restrictive practices have been eroded…even where in-house bids have been accepted the process of competition has raised standards." One of the most successful companies to emerge from the move towards contracting-out is France's utility group, Vivendi. The majority of its customers are local authorities throughout the world who make use of its package of services from water treatment and distribution (see separate entry), waste management, refuse collection as well as transport services. In France it has pioneered new methods for materials recovery and processing services. Through its subsidiary, Onyx, it manages household waste for 30 million people worldwide. But this is no mere European phenomenon. In Venezuela, Vivendi recently won a 20-year contract to develop and manage a state-of- the-art household waste landfill site that serves the 3.5 million residents of Caracas. But other examples abound. Cities in the United States have contracted out services as diverse as refuse collection, parks services, libraries, golf-course management, street maintenance, ambulances, and even fire-fighting (see the chapter Private Rescue Services). Over the last decade, indeed, the idea of contracting out has been extended to the idea of establishing small communities as self-contained cities. In southern California, for example, Leisure World on the edge of Laguna Hills has its own system of taxation with support services including a private security force, a television station and a network of bus routes. Ambulances and fire-fighting are also contracted out in Denmark. Townships in Germany saved money by contracting out city-run slaughterhouses. At the national government level too, the United Kingdom's schools and hospitals contract out the majority of their catering and cleaning, plus much of their courier services, record-keeping and other functions. And now a number of government departments have outsourced their property and estate management (see the chapter Prime Property) to professional private-sector managers. Assessment: delivering value Local government is big business. In the UK alone, this tier of government spent £75 billion in 1996 and employed over 2.6 million people. In the 1980s, the Audit Commission estimated that local authorities wasted £1.25 billion on unwanted school places, rent arrears and under-utilized buildings. Contracting out has saved huge sums of money, raised standards, introduced up-to-date equipment and encouraged local authorities to deliver services efficiently and attractively. Studies by the Audit Commission, delivered at an Adam Smith Institute conference, showed that the mere threat to contract out refuse-collection services prompted in-house workforces to come up with savings amounting to 17%. Those authorities which then actually went to tender and outsourced the service obtained savings averaging 22% for an identical level of service. Indeed, savings of this order seem to be a natural law. New York Professor E S (Steve) Savas has coined 'Savas's Law', stating that if any publicly provided service is contracted out, anywhere in the world, savings of 20%-40% can be gained. There have been wider financial gains too. The management of local authorities' substantial asset base has been transformed for the better. Competition, culture, innovation, devolved budgets, trading accounts, internal markets, and value for money have become common phrases - previously, such concepts were hardly mentioned. Contracting leads to better focus. The introduction of competition provides the opportunity to consider afresh what to do, how to do it and to what extent. To specify and agree a contract, both sides have to know what is to be provided at what cost: crucial questions which many local government authorities have never asked, being content merely to carry what they have always done in the past. And services can be detached from the politicization that often plagues local authorities. Contracting has been a very useful weapon with which to combat corruption, a problem that has often plagued local government politics. This tends to be particularly true where one political party has remained in power for many years. In the UK, however, a number of problems arose with the implementation of CCT. Trade unions have conspired with sympathetic local politicians to deter private firms from bidding for contracts. Over the last ten to fifteen years various devices were adopted by local authorities opposed politically to the principle of CCT. These ploys included rolling up several contracts into one in order to deter specialist companies from bidding. At the other extreme, contracts were also broken up to fall beneath the minimum compulsory tender threshold. Information was also denied to outside contractors on such vital information as staff numbers and remuneration rates, while some authorities denied contractors the use of local depots and other equipment. The most effective deterrent to outside contractors was to insist that the existing workforce was maintained on the same terms and conditions. Trades unions resorted to an obscure EU regulation known as the Transfer of Undertakings (Protection of Employment ) Regulation (TUPE) and employed it as an obstacle to the extension of competitive tendering. A legal case was brought by the trades union representing a group of directly employed local authority refuse collectors, made redundant by Eastbourne local authority on England's south coast. The former employees made a successful claim for unfair dismissal and loss of earnings when the local council appointed a rival contractor to undertake this role. Governments should also learn lessons from the private sector, which already contracts out non-core fuctions very widely. Firms have found that it can be unwise to contract out strategic decision-makng such as IT strategy, capital investment planning, or functions with a long investment cycle. The Blair Labour government, elected in 1977, though previously committed to abolishing CCT, has in fact maintained the system, but has renamed it "Best Value". This amended policy seeks to encourage local authorities to use a wider spread of measures than price alone to judge whether they, or outside contractors, are best qualified to deliver the required services. Yet there is a real danger that Best Value will simply lead to an inflationary surge in costs. For further information:
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Copyright 2002: Adam Smith Institute
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