What risks did the NAO describe in its report about delivering public services through markets?

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The 2011 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”.