Does (outsorcing) procurement contribute to public sector productivity? (Dunleavy, 2015)

I have recently read P Dunleavy. "Public Sector Productivity: Puzzles, Conundrums, Dilemmas and Their Solutions", in J Wanna, H-A Lee & S Yates (eds), Managing Under Austerity, Delivering Under Pressure: Performance and Productivity in Public Service (ANU Press, 2015) 25-42. I found Prof Dunleavy's piece highly thought-provoking and would recommend it to anyone interested in the working of the public sector and current outsourcing tendencies, including mutualisation of (spin-off) public services.

Dunleavy offers a very straightforward proposal to start cracking the problem of measuring public sector productivity and reports the findings of a larger study based on relatively simple indicators. Focusing on public procurement, Dunleavy offers some insights that are worth pondering. His paper reports findings concerning the outsourcing of services and the hiring of IT consultants and stresses the following:

So, why does outsourcing not work? It is because government service offices are highly imperfect and they are not going to stop being highly imperfect if two or three contractors are brought in. The markets created are oligopolistic. In Britain we have large problems with our IT sector—62 per cent of the market is dominated by the top contractor, and the top five contractors have 95 per cent of the market. There are usually only two or three tenders for any given contract, and the tenders are very expensive. The idea that more firms can bid is not feasible, because a firm needs to have a large governmental relations unit and a contracting unit just to understand the e-procurement system; this will always be the case. Contract specification works directly against productivity because an organisation needs to specify what it wants the contractor to do. It has to fix a whole service specification and then as needs change, and demand changes, and society changes, it has to go back to the contractor and renegotiate (p. 37).
Public servants also tend to use outsourcing in a very rational way—if we have better business to be attending to and there is something that we really hate doing, we tend to outsource it. This means that nothing changes in that area. The contractor will not want to change—as soon as we outsource it to them, they will want to freeze the technology and keep things exactly the same. This may seem irrational, because at the end of the contract they will have to re-tender, but it is actually cheaper for contractors to work that way (p. 38).
One final note—contestability is a great word, and it may do some good when trying to introduce product diversity, or when attempting to engage different kinds of contractors. The arrival of mutuals might make a difference, but keep in mind that mutuals only have 1/70th of the outsourcing market in the UK, so they are not a serious threat to the big outsourcers yet. On the whole, outsourcing contestability will not grow government productivity (p. 39). 

These are challenges and structural difficulties that do not only concern the UK. And they support a serious strategy to rethink the most productive way of structuring the public sector and deciding which activities to retain in house and which activities to outsource. Dunleavy's general recommendation for the future in that regard is to think about the following:

The question is, can we have genuine demand transfers across suppliers? Can we get genuine supplier succession, genuine competition or contestability? I think we could if we had public sector suppliers who could scale up their services; who could move from one area to another and enlarge. More mixed public/private competition could also improve the situation, and mutuals may help in a small way here (p. 41).

These are all very suggestive ideas, but all of them are based on structural changes in the supply side of the market. I would stress the need for demand side reforms, aimed at improving the way the procurement rules are used, so as to tender shorter-term, adaptive and flexible contracts that avoid lock-in and promote effective supplier competition in more dynamic procurement markets. It would also be worth reconsidering to what extent the creation of markets for some services is too expensive and inefficient, so as not to compensate the transaction costs implied--to that extent, a "rediscovery" of OE Williamson's work on markets and hierarchies (notably, in The Economic Institutions of Capitalism. Firms, Markets, Relational Contracting, NY: Free Press, 1985) and its application to the public sector would certainly be beneficial. Plenty food for thought.

In-house providing and (minimum) "effective" public control: Sunset or breaking dawn for purely public (commercial) service providers? (C‑182 and 183/11)

In its Judgment of 29 November 2012 in Joined Cases C‑182/11 and C‑183/11, Econord SpA v Comune di Cagno and Comune di Varese (C-182/11) and Comune di Solbiate and Comune di Varese (C-183/11), the Court of Justice of the EU has offered a succinct reminder of its case law on in-house providing as an exception to the applicability of the EU public procurement Directives.  

According to this line of case law, contracting entities can award contracts directly (ie without a competitive tender) where they exercise over the contractor a control similar to that which they have over their own departments, and the contractor carries out the essential part of its activities with the contracting authorities to which it belongs. In those cases, it is assumed that there is no potential for competition and that the market is not affected by the decision of the contracting authority to retain the activity "in-house".

However, in Econord, the CJEU has taken an additional step in the fine tuning of the concept of "similar control" required under the in-house providing exception. In its Judgment, the CJEU has stated that:
27 According to settled case-law, there is ‘similar control’ where the entity in question is subject to control enabling the contracting authority to influence that entity’s decisions. The power exercised must be a power of decisive influence over both the strategic objectives and the significant decisions of that entity (Parking Brixen, paragraph 65; Coditel Brabant, paragraph 28; and Sea, paragraph 65). In other words, the contracting authority must be able to exercise a structural and functional control over that entity (Commission v Italy, paragraph 26). The Court also requires that this control should be effective (Coditel Brabant, paragraph 46).
28 According to the case-law, where use is made of an entity jointly owned by a number of public authorities, the ‘similar control’ may be exercised jointly by those authorities, without it being essential for such control to be exercised individually by each of them (see, to that effect, Coditel Brabant, paragraphs 47 and 50, and Sea, para. 59). 
29 It follows that, if a public authority becomes a minority shareholder in a company limited by shares with wholly public capital for the purpose of awarding the management of a public service to that company, the control that the public authorities which are members of that company exercise over it may be categorised as similar to the control they exercise over their own departments when it is exercised by those authorities jointly (Sea, para. 63). 
30 In those circumstances, although, where a number of public authorities make use of a common entity for the purposes of carrying out a common public service task, it is certainly not essential that each of those authorities should in itself have an individual power of control over that entity, nevertheless, if the very concept of joint control is not to be rendered meaningless, the control exercised over that entity cannot be based solely on the controlling power of the public authority with a majority holding in the capital of the entity concerned
31 Where the position of a contracting authority within a jointly owned successful tenderer does not provide it with the slightest possibility of participating in the control of that tenderer, that would, in effect, open the way to circumvention of the application of the rules of EU law regarding public contracts or service concessions, since a purely formal affiliation to such an entity or to a joint body managing it would exempt the contracting authority from the obligation to initiate a tendering procedure in accordance with the EU rules, even though it would take no part in exercising the ‘similar control’ over that entity (see, to that effect, Case C-231/03 Coname [2005] ECR I-7287, paragraph 24).
32 Consequently, in the cases before the referring court, it is for that court to verify whether the signing, by the Comune di Cagno and the Comune di Solbiate, of a shareholders’ agreement conferring on them the right to be consulted, to appoint a member of the supervisory council and to nominate a member of the management board, in agreement with the other authorities concerned by that shareholders’ agreement, can enable those municipal councils to contribute effectively to the control of Aspem.
33 In the light of the foregoing, the answer to the question referred is that where, in their capacity as contracting authority, a number of public authorities jointly establish an entity with responsibility for carrying out their public service mission, or where a public authority subscribes to such an entity, the condition established by the case-law of the Court to the effect that, in order to be exempted from their obligation to initiate a public tendering procedure in accordance with the rules of EU law, those authorities must jointly exercise over that entity control similar to the control they exercise over their own departments, is fulfilled where each of those authorities not only holds capital in that entity, but also plays a role in its managing bodies. (Joined Cases C‑182/11 and C‑183/11, paras. 27 to 32, emphasis added).
In my view, the Judgment of the CJEU must be interpreted in a functional manner and has refined the requirement for similar control and transformed it into a requirement for "similar, active and effective control". The requirement for contracting authorities to "play a role" in the management bodies of the entities that are considered to remain "in-house" must be active and effective, and it will not suffice that they (jointly) "take a seat" in the relevant boards (as that would fall short for ensuring that they have (more than) "
the slightest possibility of participating in the control of that tenderer" and that they "
take [...] part in exercising the ‘similar control’ over that entity"
.

Therefore, the answer in view of the specific circumstances of the cases joined in Econord, where the contracting authorities merely entered into "a shareholders’ agreement conferring on them the right to be consulted, to appoint a member of the supervisory council and to nominate a member of the management board, in agreement with the other authorities concerned", should be that they do not exercise a similarly effective control over the contractor as they do with their own administrative units.

If that is the correct interpretation of the Econord Judgment, it would generate difficulty for the creation of purely public (commercial) service providers, whereby a public authority would create and retain majority control of an entity entrusted with the provision of SGEIs, SSGIs or other local services and then offer its services to other contracting entities that would acquire a minority stake and not get involved in its day to day operations. In my view, such development would be welcome and a consistent complement to the competition rules in articles 106 and 107 TFEU. If contracting authorities want to cooperate directly (thorugh public-public partnerships) or indirectly (through instrumental entities), they need to remain actively engaged in the provision of the services contracted out (in-house). 

Otherwise, if the contracting authorities want to disengage from the direct management of those services and take the back seat (eg in a board of directors), there is no reason to see why public contractors should be shielded from the competition of private contractors, since both would be offering a commercial relationship to the outsourcing contracting authority and there would be an effective risk of generating relevant distortions of competition [see Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, Hart Publishing, 2011) 240-242]. Therefore, in the lack of a sufficiently active involvement, in the absence of an actual organic link between the contracting authority and the "in-house" entity, there is no good reason to exclude the application of the EU public procurement rules, as the CJEU has quite clearly stressed.

Therefore, it will be interesting to see what is the final decision of the Italian courts in the domestic cases leading to Econord, but a decision that upheld the applicability of the in-house exception would be, in my opinion, an inappropriate reading of the CJEU's Judgment.