Competition amongst alternative sources of supply, it is alleged, results
in improvements in efficiency. Quasi or internal markets have been introduced
to healthcare, housing and education in an attempt to simulate the competitive
forces of the market place. These surrogate markets replace the bureaucratic
and monopolistic system of administratively determined supply with a system based
upon a degree of competition and decentralised decision making (8). A network
of purchasers and suppliers is created in the internal market in an attempt to
obtain greater value for money. Alternative suppliers compete for the contract
to supply. These alternatives include public sector agencies; voluntary sector
agencies and private sector enterprises.
It would appear that the advocates of quasi markets had a somewhat rose-tinted perspective of the benefits of markets derived from an elementary reading of textbook economics without reading the fine print of the footnotes nor graduating to the intermediate class. Concentration upon the competitive and efficiency benefits of markets ignores the simple fact that markets are social inventions (social institutions) and their outcomes are to be judged against the prevailing social values of distributive justice.
In terms of values and value for money there still remains the problem of how to choose where we lie on the trade-off between efficiency and equity. The market solution might be efficient but is it acceptable? Markets will not solve that problem. So one issue is how should internal markets be regulated and who should do so?
But in what sense can internal markets even be thought to be efficient?
(a) differences in the scope of the unit of service
(b) differences in the costing methodologies used – eg how are capital charges dealt with?
(c) a lack of adequate data on activity cost drivers.
Research has shown that because of the difficulties of obtaining suitable cost information contract prices do not necessarily provide the signals that will result in efficiency gains. Relevant cost information is something of a will-o-the-wisp that we constantly chase but never catch. Moreover, as the service becomes more tightly defined ie as we move from specialty to specific procedures then the apportionment of costs becomes quite arbitrary. Activity based costing will of course provide this kind of information but it is very expensive to acquire. The question is - do the costs of obtaining better quality information for decision making outweigh the value of the benefits of improved efficiency?
Cream skimming serves to illustrate a more general set of problems that can arise when systems of administrative supply are replaced by contracts. There can also be a significant change in the values of the organisation. Organisations become networks of contractual relationships and, therefore, more fragmented with each party to the contract seeking to act in order to serve their own best interests. It is a strong presumption that local optimisation will result in optimisation of the whole system.
Public sector contracting appears to be predicated upon assumptions of competition which run counter to private sector management experience in which effective contractual relationships are based upon trust and co-operation. The purchaser and provider in the private sector work hard at establishing long term relationships and invest resources in ensuring that this will happen. Contractual relationships that are based upon the threat of competition can result in under investment and a lower quality of service (9).
Contracting can also make relationships, both between and within organisations,
more formal and hence less flexible. They can also heighten the conflict between
departments and organisations as each attempts to realise its performance targets.
Whilst these are difficulties and problems which the new management need to solve nevertheless the benefits of contracting should not be lost sight of. These can be considerable. Objectives, service specifications and the costs associated with specific activities become more transparent and hence easier to manage. Purchasers, the customers within the system, now have a greater sense of control and whilst that results in pain as the power base of providers is challenged nevertheless it is a step in the right direction.
Whether or not the providers reflect the preferences of the final users of the service still remains a contested issue. Nor is there strong evidence that the transactions costs of contracting are sufficiently high to erode the efficiency benefits.
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