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IfG -Institute calls for major contracts review

Whitehall must slow down its plans to expand markets in public services because it lacks the expertise to design and manage complex contracts effectively, says the Institute for Government (IfG) in its new report Making Public Service Markets Work.

New research has found mistakes in the design and management of public service markets in areas such as care for older people, schools, probation and employment services.

Public service markets are now estimated to be worth nearly £100bn, and growing. The pace of the current shift towards using markets to deliver key services, however, outstrips the ability of those in Whitehall charged with designing and implementing them, the report concludes.

The Institute identified poor behaviours by service providers and poor outcomes for service users across all types of providers - public, private and voluntary.

Making public service markets work: Professionalising government’s approach to commissioning and market stewardship’  is an in-depth study, which involved over 80 interviews with senior figures throughout the commissioning, design and supply chain of public services.

The report looks at four key services that are largely reliant on markets to deliver them: employment services (the Work Programme), care for older people, schools (including academies and free schools) and probation services.

The report has found that markets can work well in some services, such as refuse collection, but complex areas need much more thought about design. It concludes that implementing too many market reforms at once is a ‘high risk’ strategy.

The report gives examples of bad market design, which has led to some providers ‘gaming’ the system for their own advantage and ‘parking’ the hardest to help.

Government also needs to ensure that there is genuine competition, with enough providers competing, that it can identify who is doing well (or badly), and that good performance is rewarded and underperformance penalised.  Designing and overseeing public service markets requires Whitehall to acquire a different set of skills; civil servants and local commissioners need to professionalise their approach to market design and oversight urgently, the report says.

The Institute makes radical but necessary recommendations to get the programme on track and on to a more sustainable footing. In order to implement them and avoid future mistakes the government should fix the flaws rather than accelerate this agenda.

Recommendations include:                                                          

  • The Treasury or the Cabinet Office should conduct an urgent cross-government review to ensure public service markets are truly competitive - and not dominated by a few providers.
  • Government should introduce a statutory obligation to publish a compulsory ‘competition impact assessment’ to be conducted by the OfT (or similar body) before implementing outsourcing programmes worth more than £100million.
  • Full transparency on the contracts, income, performance and sub-contracting arrangements of all private, voluntary and public sector service providers. We are pursuing this recommendation with the Information Commissioner.
  • A lead official (Senior Responsible Owner) to be placed in charge of each public service market worth over £100 million p.a. – to stay in post for at least 3-5 years.
  • More thorough testing of new market models, using high-powered commercial advisory boards excluding those with a specific commercial interest and scenario and simulation exercises to predict potential pitfalls.
  • Increased flexibility in contracts - for example, through introducing performance-related break clauses. This might cost more in the short run but will save money in the longer term.

Some of the most commonly experienced problems were:

  • barriers to informed choice: in secondary education and social care for older people, we found that users and commissioners often lack the information they need to make informed choices – steps like the removal of star ratings (which may now be reversed) did not help.
  • ‘gaming’: in all areas, we found providers sometimes responded in undesirable ways to the reward structures created by commissioners and regulators. Such ‘gaming’ behaviours included excessive ‘parking’ of service users with complex needs and ‘creaming’ of users who are easier to support, and therefore more profitable to serve.
  • barriers to exit: in some sectors, we saw reluctance to force underperforming public, private and voluntary sector providers out of these markets in service provision. This can leave users – including school children - experiencing poor quality services for too long.
  • funding imbalances: providers often competed on an uneven playing field. For example, schools with overlapping catchment areas on different sides of a county boundary can receive significantly different levels of funding for each pupil they teach – a problem that the Government has now promised to address

Report lead author, Director of Research at the Institute for Government, Tom Gash, said:

“Markets in public services can and do often work, but our research shows that mistakes can have a real impact on people’s lives and value for money. Unless Whitehall and other agencies improve their skills and techniques for ensuring public service markets work, mistakes will be made and the public may lose confidence in this approach to reform.

“The current pace and scale of reform is a clear risk and we’re calling for government to think carefully about how fast it is going. We want to see government carry out external reviews of all new outsourcing programmes worth over £100m per year to assure themselves and the public that they will work.”

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