This is not a question of the private sector providing services more cheaply than the public sector – there is little available international evidence that objectively compares cost-output between the two sectors. Rather, it is a question of governments knowing that payment by results enables them to agree a maximum budget ceiling with a provider for agreed outputs in the knowledge that they pay for what they get.
In the 1980s and 90s a general trend began for the outsourcing of public services with a view to creating efficiencies, cost effectiveness and accountability. With persistently high structural unemployment generated by the recessions during this time, governments increasingly began to enforce a rights and responsibilities agenda: the right for people to receive benefits, but the responsibility for them to improve their employability and to look for work. Linked to this we saw the development of more coherent active labour market measures together with training and other programmes. Public Employment Services (PES) were responsible for both policing the benefits system (‘responsibilities’) and for providing basic programmes to re-train the unemployed or support their efforts to find work (‘rights’). Measures such as CV writing services and Job Clubs were often run in house.
Continuing levels of high structural unemployment in the 1990s spurred a number of governments to fundamentally reform their welfare systems and, crucially, the business models for their PES (e.g. USA, UK and Netherlands). At the heart of these organisational reforms was the political realisation that additional flexibility and new, innovative ways of working were needed to tackle unemployment. This thinking was partly reflected in the European Employment Strategy which set out core policy menu items for national governments to report against. The strategy also recognized that labour market policy was increasingly driven by other factors like globalization, an ageing population and unsustainability of welfare and pensions. This was a turning point: the need to attain a 70% employment rate began to encourage employment policy to shift from simply tackling unemployment to growing employment.
Growing employment required PES to reach out to groups that had traditionally not been seen as part of the active labour force (e.g. those on disability or sickness benefits, women returners, and older workers). This explicitly required the development of a business model that was more responsive to individual needs and could overcome multiple barriers that these groups often faced to get into work. Whilst PES were often effective at dealing with large client flows many found it difficult to deliver a more personalised parallel service usually required for marginalised and disadvantaged job seekers.
In Europe, countries like the Netherlands, UK and Denmark led the way in contracting out non-core PES business to the private and voluntary sectors, drawing on lessons learned from the USA and Australia in particular. Since 2005, they have been followed by countries like France, Germany and Sweden. Although the fundamental delivery mechanisms remain fairly similar, each country has adapted a model of public-private partnership to suit its own political, economic and labour market systems. In some countries (e.g. UK) the central government is the main purchaser. In others (e.g. Denmark and the Netherlands), insurance bodies and municipalities are important purchasers.
PES in these countries have developed a professional business approach to their private sector partners based on the fact that they contribute to PES’s overall performance targets. They are therefore seen as complementary to PES services rather than competition. Client referrals from PES to private providers tend to be either based on duration of unemployment (e.g. 12 months or more) or where a person is deemed to be at particular disadvantage in the labour market and therefore requires extra personalised support (e.g. ex-offenders). A clear system of referrals between the public and private providers ensures smoother and more seamless handovers for the customer.
This is not a question of the public sector privatising itself. As the influential Freud Report in the UK argued, the public employment services remain at the centre of welfare to work delivery. The private sector adds value by supporting the hardest-to-help clients who require more hours of intervention than the PES can provide on a one-to-one basis. Indeed, customer satisfaction when it is measured tends to show that clients feel private providers meet their needs very well (ref 1,2 below). Additionally, new approaches to welfare to work used by private providers can also have a beneficial ‘knock on effect’ in the public sector due to the absorption of new methods and processes, potentially leading to greater innovation and efficiencies.
Payments are largely based on outcomes; hence private providers must deliver effective programmes, best practice and clients into work in order to receive remuneration. At a time of constrained national budgets this matters. Countries with effective PES, a flexible work-first plus approach and effective links between the public, private and third sectors tend to spend a comparatively lower percentage of GDP on active labour market policy (OECD).
Smart procurement and contract management are crucial if governments are to get the best out of a public private partnership. Over the past twenty or so years, a number of configurations have been tried – some more successful than others. Countries where small scale markets have developed have often seen services fragment with resulting difficulties in developing performance and evaluation benchmarks. There is an increasing recognition that bigger, longer contracts with better performance monitoring - such as the Work Programme being introduced by the UK Government in 2011 - can encourage greater levels of investment in quality services and improved customer service. Payment linked to results, can further encourage the behavior of providers to focus on sustained outcomes, providing an optimal result for job seekers.
Looking ahead, international trends clearly demonstrate that the general direction for employment services is a mix of public, private and voluntary delivery to best meet the needs of individual clients. The challenge for governments will increasingly centre on choreographing delivery across a range of stakeholders in order to best provide outcomes for both job seekers and taxpayers.
1 Vegeris, Sandra et al. 2010. Jobseekers Regime and Flexible New Deal evaluation: A report on qualitative research findings. Policy Studies Institute, Department for Work and Pensions, United Kingdom Government. Available at http://research.dwp.gov.uk/asd/asd5/rports2009-2010/rrep706.pdf
2 Nice, Katherine, Jacqueline Davidson and Roy Sainsbury. 2010. Provider-Led Pathways: Experiences and views of early implementation. Social Policy Research Unit, Department of Work and pensions, United Kingdom Government. Available at http://research.dwp.gov.uk/asd/asd5/rports2009-2010/rrep595.pdf