Policy & Politics Journal Blog

By Tom Entwistle and Rhys Andrews

Caught between falling tax revenues and increasing expenditures, governments across the world are looking for new ways of extracting economy and efficiency from the public sector. As in the past, the claim that business can deliver public services more efficiently than the state, provides a key inspiration for reform.

Governments can engage the private sector in public service delivery in a number of different ways. They can open clearly specified functions – like cleaning, refuse collection or grounds maintenance – to a competitive tendering process and then contract with the organisation which promises best value.  Alternatively, they may externalise – or, in more loaded terms, ‘privatise’ – the delivery of a whole service, making it the responsibility of business rather than government.  Finally, governments may seek to negotiate a hybrid form of organisation which is based on mixed ownership and a high level of trust. In truth, of course, the distinctions between these approaches are fuzzy and resistant to hard and fast categorisation. Increasingly, governments, and commentators, use the public private partnership tag to describe all of these relationships.

Economists give us three reasons to think that public private partnerships might be more efficient than the state alternative. The first – a contestability effect – might result from procurement processes which put suppliers into competitive or potentially competitive situations. The second – an ownership effect – suggests that the private stewardship of resources means a keener eye for value for money. The third – a scale effect – may result from the fact that private contractors tend to have a narrow focus or scope but a broad and, more economical, scale of operation.  Evidence of these efficiency gains is however thin on the ground and mixed in its nature. As is so often the case in public policy, the fortunes of a particular partnership depend upon the circumstances. We can all think of public private partnerships which work well and others that are a disaster. That is to say performance is, as the management theorists put it, contingent upon the capacity of the partnering agency to manage its partner.

By matching a survey of partnering activity in English local governments with publicly available performance and financial information, we test whether partnerships deliver an efficiency dividend and whether or not this depends upon their management. Overall, our analysis suggests that public private partnerships do not deliver improved productive efficiency. However efficiency gains from partnership are positively correlated with the capacity for monitoring and management. With appropriate levels of management capacity, governments can make sure partnerships do not damage efficiency. Extremely high levels of capacity – seen in local governments which spend more than twice the average on central administration – can enable the realisation of the efficiency gains that partnership promises.

Our findings provide food for thought for those determined to promote the efficiency case for the involvement of the private sector in public service delivery.  They suggest that efficiency savings are far from guaranteed by these arrangements. Rather, the efficiency dividend of public private partnerships is contingent on the capacity of the organisation to manage the relationship and extract efficiency savings from it. Organisations considering these types of reform need to devote as much priority to the development of their management capacity as they do to the selection of the right partner.