The American political economist, Aaron Wildavsky once wrote: “No genius is required to make programs operative if we don’t care how long they take, how much money they require, how often the objectives are altered or the means for obtaining them are changed.”

In the real world – where public service managers grapple with scarce resources, short time horizons and escalating demand – value for money matters. The challenge lies not so much in discovering what must be done, as it does in understanding how to create powerful incentives to innovation and the implementation of reform.

A new study by the Serco Institute suggests that competition and contestability can play a major part in creating these incentives. Competitive Edge looks at almost 200 government and academic studies of contestability in public services over 30 years, covering 12 countries and five different sectors.

The Institute’s analysis of the published research found that financial benefits of 20% are not uncommon when public service monopolies are first exposed to competition and, in some cases, much more. While not all of these studies addressed the question of service standards, among those that did, there was little evidence that quality declined.

• In defence support, studies from Australia, New Zealand and the US reported savings in the range of 20-30%, although in some cases much higher. In the UK, financial benefits were in the region of 20-25%.
• In health support services, financial benefits in excess of 20% have been reported in England, Australia and Denmark. However, in other jurisdictions where competition had been pursued less vigorously, the savings had not been as great.
• The gains from prison contracting in the UK were probably in excess of 20% and, over time, they may have been as much as 30%. Of ten studies of US prison contracting, all but one found financial benefits, and these were mostly in the range of 5-15%.
• The most extensive research has been undertaken in refuse collection – across North America, the UK and various parts of continental Europe – with savings clustering around 20%.
• The results from the study of municipal services are more mixed, possibly because of the wider range of services involved.  The range extends from 5-25%, with results from the use of compulsory competitive tendering in the UK falling at the lower end of the range.

The impact of competition
While many of these studies had focused on the comparative efficiency of the public and private sectors, the Institute tried to identify the impact of competition. With few exceptions, it was competition that made the difference, rather than privatisation. Where an in-house team won the right to manage the service following competition, they delivered financial improvements that were comparable to those delivered by private and not-forprofit providers.

In several cases, the Institute was able to go further than this and look at the impact made by the mere threat of competition – referred to in the report as the contestability effect. There is evidence that public service managers are motivated to overhaul the design and delivery of public services when they are faced with a credible threat of competition. For example, in New South Wales, the state government used the prospect of competitive tendering to renegotiate the management for three new generation prisons. When two of these were studied by the Public Accounts Committee in 2005, it was found that sick leave and overtime levels were significantly lower than at traditional prisons. But there is a limit to how often the mere threat of competition can be used. It’s a bit like the boy who cried wolf – eventually you have to come good on the threat.