Rail crashes remind us that public services can pose a risk to the public. Steve McKenzie and Daniel Ratchford investigate ways of entrusting private companies with these high-risk tasks.
The October 1999 Paddington rail disaster led to renewed questions about how seriously private companies take public safety. The public's perception of the competence of private operators and the judgement of the government took a serious knock, and this led many to ask whether the profit motive leads to a reduced emphasis on - and investment in – the safety of service users.
But there are many other services which have safety implications and are also politically sensitive. Identifying the size of the safety risk, and whether it can be managed effectively in the event of service failure, must be a key priority for the government when considering whether it is appropriate to outsource or privatise these services.
Problems with Private Finance Initiative (PFI) projects such as the IT systems for the Passport Agency and Benefits Agency show how the failure of services that are otherwise virtually invisible to the public and to politicians can lead to political embarrassment and major public inconvenience. However, in a safety context, service failure can be more than inconvenient - it can be potentially disastrous for the users and for the reputation of the government.
At a time when governments are looking to involve the private sector more in public projects, and in some cases are testing the boundaries of what is acceptable, they increasingly expose themselves to safety and political profile risk. The proposed London Underground and National Air Traffic Services (Nats) privatisations are good examples. Given this, it is our view that a `safety feasibility test' should be applied to services by policy makers, in addition to standard financial tests such as value-for-money and the effect on the public sector borrowing requirement. Where this safety test identifies a high risk, alternatives to wholesale outsourcing should be considered or, if outsourcing is appropriate, specific risk mitigation strategies should be formulated.
The contracting out of `non-core' public services to the private sector has been a major plank of government strategy since the early 1980s, and its benefits are well rehearsed.
As this programme has progressed and the constraints on the public purse have increased, a new - and more challenging - set of services have come to be considered suitable for partnerships with the private sector. These services, which include the maintenance of some transport infrastructure, the delivery of elements of operational policing, and the management of prisons, combine a high public and political profile with major implications for safety.
The privatisation of prisons and the prisoner escort services was the first successful attempt at outsourcing one of these riskier services. Nevertheless, the government was left tarnished by the public perception of high numbers of prisoners escaping (although private operator Group 4 actually lost fewer prisoners than the Prison Service before it).
The government is now confidently moving forward with PFI deals for more prisons and for some mainstream policing functions. For example, the Metropolitan Police Service in London is outsourcing its 999 emergency call service and the management of some of its police stations.
In Australia, the Government of Victoria has already outsourced its entire police and fire brigade emergency call-taking service, so the private sector not only takes emergency calls, but also decides whether they should be responded to and which resources to send to an incident. Outsourcing these services carries a number of risks for the government, which is still ultimately responsible for service failures and is blamed by the public when things go wrong.
The privatisation of Nats is probably the best example of how important it is for the government to handle carefully those services that have a high safety profile in the national psyche. Although the Exchequer would gain £500m from the privatisation, there are real concerns over the risks involved. The likely outcome is a deal that allows for private sector investment that is off the public sector's `balance sheet', but which leaves some of the safety responsibilities in the hands of the public sector. After all, when welfare benefits systems crash, people invariably still get their benefits, if a little late. But service failure by a private air traffic control supplier has acute human and political risks.
The government has now shelved plans to open up competition in the water industry because of the furore over the safety implications arising from increased fragmentation. Fears that it would be impossible to ensure sufficient purity levels in water supplies have made this a political no-go area - for the time being.
And the government faces similar concerns about the public-private partnership (PPP) that it is proposing for the London Underground. Indeed, London's mayor may well be chosen on the basis of his or her views on whether this is the most efficient way to deliver new investment in the Tube. The aim of the deal is to bring in private investment without adversely affecting the public sector borrowing requirement. However, in the wake of Paddington, the way in which the safety risk is assessed and mitigated must also be key factors in the success or otherwise of such private sector proposals.
The dominant theme for a wide range of services is that while the public sector can outsource services effectively, it cannot completely externalise safety risks. So should these services be outsourced at all, or is it safer to keep them under the protective wings of the public sector? There is no doubt that although outsourcing has obvious benefits, there needs to be a careful analysis of the safety and political profile risks before policy decisions are taken to involve the private sector.
For those services that are assessed as having high safety profiles, there needs to be a tailored set of procurement tools and techniques, introduced to mitigate these risks through to implementation, possibly including ongoing safety monitoring by the public sector. The government needs to have a means of determining whether services are unsafe to outsource - or at least whether specialist attention is required to deliver an outsourced deal.
Two critical criteria identify which services are a high risk to outsource. The first is the public and political profile of a service. Its public profile - its visibility to people, its impact on their everyday lives, and the importance they place in it - is obviously important.
Equally important is the political profile - its overall cost, any manifesto commitments that relate to it, and the extent to which political parties have different policies for its future. A good measure of both of these elements is the amount of press coverage a service receives - particularly if it shows it in a bad light.
On these measures, policing and transport have high profiles, as do schools and hospitals. The Passport Agency has a relatively high profile, but only when things really go wrong. Meanwhile, systems and infrastructure supporting welfare support and taxation are of little real interest to the general public, and therefore have relatively low profiles.
The second criterion is the potential safety impact. This includes the impact on public health and the potential for injury and death when things go wrong. On these measures, utilities, defence systems, the emergency services and the transport of prisoners all have a high safety impact. And the implications of a failure in the contracts for the maintenance and operation of the rail networks are all too well known.
To identify the risks associated with outsourcing or privatisation, the public sector needs to review how highly services score in relation to both their public profile and safety impact. This can be achieved by developing an understanding of the service and its specialist risks, a prediction of potential changes in the service, an analysis of precedent in the industry and the wider environment, and an assessment of political exposure.
Having undertaken sufficient analysis to understand the risks, these criteria can be plotted against each other to identify the areas of most concern (see diagram above). This identifies four service types - `invisible and safe' (with a low profile and a low safety impact), `visible and safe' (with a high profile and low safety impact), `invisible and unsafe' (with a high safety impact, but low profile) and `visible and unsafe' (combining a high safety impact with a high profile).
These categories are then used to show the potential safety profiles of service areas that have already been outsourced to the private sector, alongside some others where public-private partnerships are currently being considered.
Services with a low public/political profile and low safety risk include postal services, welfare services and – moving towards a medium safety risk - roads. These services all fall within our definition of `invisible and safe' services.
Services with low to medium public/political profiles, with the potential for major safety risks, include non-operational policing, bridges and defence systems. These are critical services, but with little visibility to the public.
The arrow in the diagram points towards the services we are concerned with here, and represents the ambitious direction the UK government is taking in its approach to outsourcing. These are services that combine a high public/political profile with a potentially high safety risk. We describe these as the `visible and unsafe' services and they include the delivery of elements of operational policing, the management of air traffic control systems, and the maintenance of parts of the transport infrastructure.
The profile of these services can change over time, so they need to be monitored regularly to ensure that the mitigation strategy is still appropriate and to allow for alternative approaches to be developed where necessary.
However, the government still needs to improve its understanding of the specialist risks, and the profile for specific services, before it can determine whether outsourcing is an appropriate course of action. Once the political and safety risks are understood, it becomes possible to determine whether the services are unsafe to outsource and, if not, to identify appropriate risk mitigation and management strategies.
The risks inherent in outsourcing services with high safety profiles mean they require a tailored procurement and management approach, which must recognise and mitigate the risks involved. This approach will be different for each procurement/privatisation, depending on the specific nature of the risks. And it must satisfy the fears and concerns of a number of stakeholders including the government, the public and the potential supplier:
- The government will require more transparency and evidence of risk control and mitigation. It will also want to see clear decision points built in and will want the ability to review service delivery options given key events or changes in the operating environment.
- The public will want to be assured that the public sector has reached a reasonable balance between achieving financial benefits and keeping people safe. This will mean ensuring safety commitments are enshrined in the contract.
- The private sector will not wish to take on risks that it is not equipped to handle and similarly will be wary of risk mitigation strategies that, for example, impose large burdens or financial penalties on the supplier. The result of imposing unmanageable risks on bidders is invariably reflected in the service price.
In our view, outsourcing will continue to offer major benefits to the public sector, but safety risk mitigation is likely to mean it will have a more hands-on involvement.
This will probably be the case both during and after the procurement and certainly more so than is currently recognised as good practice in conventional output-based service contracts and under the PFI. New systems and services will be required to undergo more rigorous testing and piloting before they are put into effect. Financial incentives will need to be geared more towards maintenance and enhancement of safety and ongoing risk mitigation. And safety risk mitigation will have to become a priority of the private supplier.
But such a risk mitigation strategy still has to be shared and managed between the private and public sector, and this will require careful planning. The safety profile of services needs to be understood better by the government if such services are to be effectively and safely outsourced.
Although some risks can be transferred successfully to the private sector, where services are high profile and involve safety, the public sector will continue to carry the can.
|
A tailored approach to mitigating risk
- The procuring authority should take a more active involvement in defining the exact service it requires, and should potentially maintain a more active role in service management than would be appropriate for other outsourced contracts
- There should be greater levels of involvement and commitment by bidders at an earlier stage of contract development, so they can gain a more sophisticated understanding of the service risks and demonstrate their risk mitigation strategies
- The payment and performance mechanism should be developed to ensure that safety issues are prioritised and that the cost to the provider of performance failure is proportionate to the increased level of public-safety risk
- Novel payment approaches should be developed for the procurement, development and implementation phases, to provide incentives for bidders to develop public safety risk mitigation strategies
- There should be continuous testing of public safety impact scenarios as the proposed service solution evolves
- Proposed innovations should be assessed in relation to the increased risk of service failure
- Business continuity plans should be evaluated throughout the process
- There should be a phased implementation based on testing and piloting of systems and processes against public safety criteria
- The Public Safety Management Strategy should be `signed off' by the organisation and - potentially - politicians, prior to awarding a contract
- Managers on all sides should develop plans to manage public and political perceptions as the programme progresses
|
