Supply Side
What Makes Public Service Markets Work Well? A View from the Institute for Government (part 2)

Last week, we covered the report by the UK’s Institute for Government titled “Making Public Service Markets Work” – available here. It looks at the conditions and factors that help to create successful, vibrant public sector markets. We are talking principally about markets where private firms (or perhaps a mix of private, third and public sector organisations), provide services that are “consumed” in some sense by the citizen, but funded by the state.

The first of the two key factors for IfG is “choice”, which we discussed here in our first article. Their second factor is “competition”. That seems fairly obvious, you might think, but the IfG analysis goes beyond the obvious thoughts we might have about the need for multiple suppliers competing strongly for the work.

There are three key elements that go to defining healthy competition according to the IfG; new providers can / do enter the market; healthy competition in the market; and providers can exit the market in an orderly fashion. Let’s look at each of those in more detail.

New providers can / do enter the market; much of this is to do with barriers to entry of various sorts, although there are other factors such as the availability of information about the market such that organisations can make a rational decision about whether to participate. The barriers can come in the form of poor procurement processes; for instance, if procurement is heavily biased towards incumbents, that will obviously disadvantage and discourage new entrants.

Often regulations restrict competition, sometimes unintentionally. We have seen examples where governments with the best possible intentions require certifications, qualifications or approvals in order for market participation. There may be good reasons for doing that, including protecting the public; but it can also lead to insurmountable barriers to entry and fewer and fewer firms being qualified and able to win work.

Healthy competition in the market; this is the core of the competition argument. We need vigorous competition, and competition on the “desired dimensions” as IfG put it – we will come back to that in a moment. Vigorous competition comes when organisations find a market attractive, with reasonable levels of profit available. It comes from having a good number of competing entities, rather than a monopoly or oligopoly, and when competition is fair i.e. without cartels or other constructs that act against the buyer’s interest.

The “desired dimensions” point is an interesting one. A case study might illustrate that best. At one point, the UK government introduced a scheme to encourage adult training and skills development. But training providers were paid on getting people to sign up for the training. So the “competition” was very vigorous in terms of advertising and even fraudulent “sign-ups” because that was how providers made money! But there was no real incentivisation to compete on actually providing top quality training and making sure the participants saw the process through to the end. So there was competition – but not on the “desired dimensions” i.e. high quality, value for money training provision.

Providers can exit in an orderly fashion; finally, we need a market where providers can decide they no longer wish to participate, without causing major problems for the consumers of the service or indeed the government commissioners. This has been an issue in various health and social care markets, where providers going out of business or simply pulling out can cause severe problems to the recipients of the service. A healthy market is one where provider market share can change over time based on supplier performance and strategy, without harming the basic service provision and the overall dynamics of the market.

Now all of this can sound a little theoretical, but it is a very useful checklist in many situations – just how healthy are the markets from which your organisation is buying? That does lead onto another set of questions around what can be done if the situation is less than acceptable, but that is for another day!