Risks, as well as opportunities, in delivering services through markets, says NAO

Janet Downs's picture
The Government White Paper, Open Public Services, makes it clear that the Government prefers to deliver public services via user choice and competition. This method of delivery, says a recent National Audit Office (NAO) report, depends on market forces which are “generally considered effective at promoting efficient outcomes” when the market functions well.

However, the NAO warns that markets can fail for reasons which include users being poorly informed about providers, their quality and prices, or if providers form a cartel to keep prices high. “Left to their own devices, markets may also not be effective at delivering wider policy outcomes such as equity and universal services.”

NAO warned that commissioning services from the private or not-for-profit sector was different from “traditional ways” of delivering public sector services. Government departments and authorities would, therefore, need to have new skills because commissioning brought risks. These dangers are summarised below:

1 Markets can lead to fragmentation which reduces economies of scale.

2 This could result in higher costs if competition is ineffective.

3 Additional costs must be justified by “efficiency gains”.

4 Private provision can bring efficiency but it doesn’t “naturally provide universal services or equity of provision.”

5 Private providers will not offer a service if the cost to the provider is uneconomic.

6 Where end users purchase their own services through direct cash payments there may be an increased risk of mistakes and systematic fraud.

7 The Government retains responsibility if services fail but has less ability to intervene than when providing services directly.

Delivering public services through markets needed:

1 Rules, monitoring, enforcement and remedies when things go wrong.

2 Demand-side effectiveness. Demand relies on reliable information, efficient forecasting and accurate estimation of future demand. Service users need to be willing and able to make informed choices.

3 Supply-side effectiveness. Supply relies on having effective commercial, economic and analytical skills, an understanding of how to enter a market, expand or leave and a knowledge of effective marketing which includes setting fair prices which represent value for money.

4 Continuity – this requires financial and business skills. These include minimising taxpayers’ risk and limiting the dangers associated with interrupting services to vulnerable people.

5 Outcome monitoring - this requires analytical and economic skills.

The report makes it clear that government departments must effectively check how well the market is “delivering the required outcomes”. They must put ensure they have the power and ability to intervene when necessary.

The NAO concludes, “Finally, if after the market has operated for a period, it is not delivering cost-efficient outcomes that represent value for money, the oversight body may wish to consider ways it can move away from a market delivery mechanism”.

This warning should be heeded by ministers, like Education Secretary Michael Gove, who are known to be sympathetic to profit-making organisations providing public services.

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Ben Taylor's picture
Sat, 03/11/2012 - 18:20

There is a lot of sensible comment by the NAO but also an unstated reciprocal which could be;

“Finally, if after a state monopoly has operated for a period, it is not delivering cost-efficient outcomes that represent value for money, the oversight body may wish to consider ways it can move away from a state monopoly delivery mechanism”.

Where in the above oversight authority could be: Gove; Young; A N Other parent.
State monopoly = particular school, LA.

Which Gove said in his own way about NAO reagarding state provision as;

"And yet at the same time it treats the faults of current provision as unalterable facts of nature"

The particular mix of public/private provision is very varied and probably best approached with a pragmatic view.

What you shouldn't do is remove choice from parents and children just because of the idea of a private service provider. In fact we are not really considering that currently since the operation of schools for profit which are state funded is extremely limited.

Would you remove the right of under 16 children with Gillick competence to receive reproductive medical treatment from self-employed GPs delivering NHS services? If not then why would you remove the right of under 16 children to make choices about their education by academies and free schools - where the ability to make and distribute profit does not even exist in the same way as a GP practice.

Janet Downs's picture
Sun, 04/11/2012 - 08:58

Ben - your "unstated reciprocal" isn't implied in the NAO report. You are putting words in the auditors' mouths.

You keep repeating your mantra that "user choice" should trump anything else without realising that "user choice" can mean trampling on someone's else's choice. Take the situation in Beccles, for example, where the establishment of a free school is likely to end with there being two small secondaries in Beccles which offer less choice than one large secondary would.

As usual you end with a rhetorical question which actually has little to do with this thread: the National Audit Office has listed risks that come with outsourcing. Problems with outsourcing have been the subject of recent TV and radio programmes and these have been highlighted on this site (see side panel).

But on the point of GPs commissioning their own services - Channel 4 Dispatches found a possible conflict of interest when GPs had a financial stake in the services they were offering patients - see my comment 30/10/12 on the thread linked below. "User choice" may be impeded when those offering the "choice" stand to make money by steering the choosers towards a decision which will benefit the adviser.


The evidence linking educational outcomes and market forces are "fragmented" and "inconclusive" (see faqs above). And as the NAO pointed out, it's found no evidence yet that savings can be made through outsourcing - see my newest thread:


Ben Taylor's picture
Sun, 04/11/2012 - 14:38

I actually agree with a lot of what the NAO says.

You are correct to identify potential conflicts of interest as risks and identify GPs with financial conflicts. However you ignore the relevant example and reality of mainly outsourced GPs successfully providing publically funded services to children possessing mental capacity, for the profit of the GP. Therefore you do not respond to the point about how and why childen might choose their schools in an equivalent manner.

There are some very interesting developments in balancing the nature of competition and collaboration in construction, and you can see some ideas about that in the Government Construction Strategy. These ideas span several decades and are not party political (see the Latham and Egan reports);


In particular the occasions and mechanisms for using competiton and when collaboration have been really thought about based on a lot of practical experience. The key is that there is always some freedom for the client, and futher down the supply chain e.g from contractor to subcontractor, for choice to occur.

We can apply these principles in a similar but not identical manner to schooling. The alternative is a return to monolithic state systems which do not provide choice and sometimes perform very badly.

The example is still valid and I wonder why you would trample on the ability of under 16 children to choose condoms or other contraception, even while I acknowledge that such a choice might trample on the choice of the parent or guardian? In the case of school choice we are not seeking such a zero sum gain, but win-win for every child. Given our technology and mobility in these times these things are achievable.

Janet Downs's picture
Sun, 04/11/2012 - 15:44

Ben - it does not follow that because I summarised the risks identified by the NAO that I "would trample on the ability of under 16 children to choose condoms or other contraceptive."

You say that "monolithic state systems" perform badly "sometimes". In the USSR it was all the time. But the UK isn't the USSR - local government acts as a buffer between centralised control and ordinary people. But this Government is dismantling local government by reducing its funding while at the same time promoting outsourcing as its preferred method of delivery. This gives rise to some ridiculous situations including these:

1 A hospital trust having to pay an outside firm to use the vehicles that the trust itself is leasing.
2 The Court system being thrown into chaos because interpreters from the outsourced company weren't turning up.
3 The firm hired to provide security at the Olympics at a cost of millions of pounds failing to do so.
4 Ofsted finding that subcontracting training has ‘diluted accountability’”.
5 The cost of tagging offenders is 60% higher than a similar contract in Florida while at the same time offering an inferior service.
6 A firm outsourced to do screening of medical conditions trying to hit its target by asking employees to screen their families and friends.
7 Many newly-converted academies having to pay considerably more for their IT contracts than they did when maintained by their LA.

And sometimes these situations go beyond ridicule and concerns about value for money. They threaten life:

1 Outsourced NHS surgeries offering reduced opening times and fewer permanent doctors.
2 So-called care workers abusing vulnerable young adults in a home, now closed, which a judge described as being by a firm which put profit before humanity.
3 When a chain of private retirement homes collapses, who picks up the pieces?

These situations certainly are not "win-win". This is why the NAO highlighted risks as well as opportunities. It is simplistic to say that "user choice" will eliminate these risks.

Ben Taylor's picture
Sun, 04/11/2012 - 17:28

I don't claim that risks are eliminated by choice, but choice can certainly help. As a social mechanism it is useful to be able to choose in order to try and reduce risks. That is by the way just one benefit of choice.

I am also not a defender of companies who perform badly in contract or commit crimes. They should be exposed and pay accordingly, for example by changing their performance, paying damages, individuals being criminally charged.

I could equally write out a list of public sector failures similar to your own private sector examples, such as the recent coming to light of the BBC and several NHS institutions harbouring a serial paedophile and sexual abuser for several decades.

There is no guarantee of performance with any particular type of procurement. But we can identify systems that work and try to reuse them and ones that don't and disrupt them with alternatives. We can do this as often as necessary, hopefully with periods when a stable, successful system operates for a considerable time until it needs to be reinvented.

Thank you for confirming that you would not trample on the rights of people under 16 to make their own capable choices.

Can I take this to mean that it is a priniciple that children can choose their schools?

Does this mean that the status of the provider as public or private is actually irrelevant, providing that they are compliant with the constraints of the law such as safety, admissions, duty of care etc.?

Leonard James's picture
Mon, 05/11/2012 - 05:37

A few points about Saville.

1. I'm pretty sure it remains to be seen whether the BBC knowingly harboured Saville.

2. If they did do nothing about Saville was the motivation for said behaviour anything to do with putting profits first?

3. Thirdly the BBC have handled the whole affair poorly but, as a public broadcaster, they have been obliged to attempt to present coverage of the affair in a balanced way. Contrast this to News International's coverage of the phone hacking scandal.

Janet Downs's picture
Mon, 05/11/2012 - 09:59

Ben - the NAO report identified possible opportunities as well as possible risks in outsourcing. You are building a straw man when you say that anyone highlighting these risks wants to "trample on the rights of people under 16 to make their own capable choices." Neither can you imply that anyone knocking down your straw man is "in principle" in favour of children choosing their schools especially when listing schools in order of preference usually lies with parents particularly with young children.

You are correct in saying that there are flaws in all organisations. However, the situations I listed were all connected with the need to make profit. You mention the Saville case but, as Leonard says in his post, there is nothing that links Saville's behaviour with profit-making. And it was a BBC programme, Panorama, that broadcast the failings of its own organisation.


It does not follow that the status of the provider of public services is irrelevant. All of the situations listed in my post above except the abuse of vulnerable adults were legal. However, the service provided was poor and was not value-for-money.

Andy V's picture
Wed, 07/11/2012 - 12:50

Not sure where the connection is between Saville and the main thread but a couple of additional observations:

1. It is equally possible that the standard legal advice applied at the time: you can't say or do anything without evidence or you wide open to litigation
2. Telling questions for anyone who employed the services of Saville is: If you knew of rumours why continue with the contract? If you found out about the rumours after entering a contract, why did you extend/re-new the contract rather than let it run out let him go?
3. One needs to be wary of those with vested interests in attacking and undermining the BBC for their own ends
4. Not only the BBC but all organisation that employed Saville have questions to answer
5. Why did no other media sources not publish and be damned about Saville?

There should be no cover-up but neither should there be any scapegoats.

Janet Downs's picture
Mon, 05/11/2012 - 11:13

An editorial in today’s Independent about the paper’s investigation into the top organisations running care homes for the elderly calls for greater financial scrutiny. The Independent’s investigation revealed that the financial structure of many of these firms was complex and “sometimes risky”. Issues around transparency, tax havens, overleveraging and debts had not been resolved despite Government promises last year after the collapse of Southern Cross.

The Independent found that the debts of some of these firms have been rated as “risky” ie they have the status of “junk bonds”. And scrutiny of five of these biggest firms was made difficult because they were owned by offshore parent companies.





Ben Taylor's picture
Mon, 05/11/2012 - 21:16

You are making one of my points for me. You don't need to have a formal profit making function in order to screw up badly as in the case of Saville. There is still self interest at work. You can give as many examples as you like but the point is about finding successful ways of government buying public services.

I have given you an example of how public services are delivered for profit to children. I do not claim that all instances will be successful professionally or subjectively to the recipient of a service. I have described a mechanism for enabling choice for a competent child which is a dynamic for circling towards success.

The NAO are correct in identifying risk but they are not prescribing rather they are identifying what needs to be managed.

Leonard James's picture
Mon, 05/11/2012 - 23:04

No Janet's examples were all about the taxpayer paying private firms a lot of money for poor services that might be better if they were reinvesting the money taken out of the system as profit - you really ought to provide evidence of public sector companies fleecing the taxpayer in this manner instead of using Saville to argue against the strawman position that the public sector can do no wrong.

Ben Taylor's picture
Tue, 06/11/2012 - 13:28

You could equally be said to have the straw man of the private sector never being able to do better than the public sector.

If you look at the various PFI reports by the NAO over years, they have a mixed bag of reports and their latest summary report said there was more infromation that needed to be recorded in order for a proper assessment to be made. Sometimes such as with PFI prisons they said overall that these had been overall beneficial, other times projects have failed completely such as Metronet for the tube.

The equivalent of unearned profit by private sector bodies is waste in the public sector. Examples of this are up to an estimate of a fifth of social housing illegally sublet by tenants and the failure of councils to collect rent and maintain their stock (housing associations usually do better). These are properties which our poorest people are supposed to be living in.

I am not dogmatic about the nature of the provider but I do insist on choice. I am not a serf. Neither are LAs or schools lords over their children and parents. Schools have to earn their respect and attendance by children.

Maybe you should ask Henry why he does not nationalise all or part of his limited company which provides services some of the time to the public sector? I have no objection at all to his business and its contracts, I am making a point that it is possible to provide services successfully as a private body and be publically funded. What are the prinicples which make it ok or not ok to do this? For me it is whether they are value for money and that includes whether people want to use them. I am not clear what the principles are that mean we should never have profit making state funded schools - although I think it is unlikely that we would ever have many of them for various reasons.

Andy V's picture
Wed, 07/11/2012 - 13:00

Some of the risks also rest firmly at the door of successive governments.

Take the perpetual MoD procurement practices that have wreaked havoc on the defence budget or the last governments financial pit relating to national ID cards and centralised computer health records. An impending one is the HS2 project. The history government contracting is littered with disasters and woefully inaccurate project costs (Defence, IDs and Health records are but 3) and these tend to come in anywhere from 2-3 times the original estimate. On that basis the HS2 estimate of £32 billion is likely to reach £64-96 billions. Who foots the bill, why us the taxpayer. Who takes the financial rewards why the contractors followed by the rail operator.

No government of any colour has ever acquitted itself well when it comes to contracting.

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