Public services contracting out

Why rural areas fall off the end when public services are contracted.

The current trend is for the public sector to deliver less itself and instead to contract out delivery to commercial or charitable organisations. This leaves democratically accountable organisations to focus on strategy rather than delivery and make use of the efficiencies that the market will generate. It is believed, rightly or wrongly, that even though an element of the money used will end up as profits to shareholders, the improved quality of management will more than offset this. So far, so good, even if this is a rather depressing assessment of the quality of management in the public sector!

However, there are some consequences to contracting out services in this way. The first is that you have to be able to define what you want to achieve in advance; you then have to be able to cost it accurately and you have to commit significant resource to making sure you are not contractually taken to the cleaners by people who better at operating in this way than you are. To do this you will probably have improved the quality of your management, which rather begs the question – why are you doing this in the first place?

Nevertheless, the trend exists and so do the consequences. Once you decide to package up a service in order to offer it out to external contractors then you have to decide the scope of the package. This not only includes the definition of the service but also the geographic area it will cover. The service could be widely defined, encompassing a number of smaller services or it could be quite narrow. For example, it could be all publicly funded care services for older people in a particular town or it could be just dementia day care for the most vulnerable. The service could include an extensive hinterland around the town or be very tightly drawn on the town itself.

Whichever approach is taken, the private contractor looking to tender will make a decision on their offer based on how they can maximise their profits. So, when it comes to commissioning a service for a rural area what are the options that tend to be followed and what are the outcomes of following them?:

  1. Include a wide rural area in the same tender as its nearby major town based on the overall population
  2. Contract the rural areas separately to the nearby major town and assess the tender offers accordingly
  3. Include the rural area with the town, but stipulate equity of access to the service from the whole area.

And the outcome of these three? In the first, an average cost to deliver for the whole area will end up being used and the result will be that the target outputs stipulated in the contract will be achieved in the urban areas where it is cheapest to achieve them. The opportunity cost of reaching the service will be passed on to the rural potential users and they will get a poorer service as a result. Or they will simply get nothing, because the targets can be met without bothering with them.

In the second, the public authority will be faced with tenders for the urban area but not for the rural one, as the private contractors will not see any scope to make a profit. If the authority makes it clear that a substantial rural premium can be added there will be interest. In the current climate few authorities will have the resource or the appetite to do this. Others may not even understand that the cost of delivering in a rural area are different and will try to make contractors use the same unit costings for both.  Hard to believe, but true.

The third scenario passes the problem on to the contractors to find a way of achieving equity of access from within a price that is acceptable to the authority. If the authority has understood well the additional cost of delivering to a rural area it may accept the high priced offers it receives. On the other hand, it is more likely that neither the authority nor the contractors will understand the cost of rural delivery, the contract will be let under-priced and the resulting service will not be accessible. Alternatively, the contractor or the authority will quickly head for the voluntary / community sector in the rural hinterland and see if the gaps can be plugged through community effort.

What is the solution?

  1. Recognise properly that the cost of delivering almost all public services is greater in rural areas as there are fewer economies of scale to be found.
  2. Educate legal and procurement staff in this fundamental truth as well as service commissioners and managers.
  3. Start by building a relationship with the communities that are being served rather than ending up doing this when the commercial solution breaks down.
  4. For rural areas aggregate services that are broadly aimed at the same client groups, even if this means joint commissioning by different departments or authorities. By doing this economies of scope can be found, even if economies of scale cannot.  This is a hard route as it threatens commissioning fiefdoms.
  5. Talk to your Rural Community Council – in Sussex this is AirS – as they will be able to assist with the first four steps and with delivery to rural communities.

Jeremy Leggett

“Supporting rural communities in Sussex to be vibrant and diverse places in which to live and work.”