"Some countries have been actively commercialising their own public services, putting them in a much stronger position for export, and some have recognised there's a first mover advantage in this market."

Gary Sturgess, Executive Director, Serco Institute

Australia will be disadvantaged in emerging markets if it fails to open public services to competition, according to Gary Sturgess, Executive Director of the Serco Institute.

Sturgess vigorously put the case for the commercialisation of public services, at recent CEDA events in Melbourne, Sydney and Brisbane.

Having played an active role in Britain's debate about contestability and competition, Sturgess urged Australians to shed old assumptions, and view the public service industry as an export opportunity, even a market.

"Think of an industry that accounts for six per cent of GDP, but is regarded with suspicion and even hostility by the majority of Australian politicians. It makes a larger contribution than the telecommunications sector, but is largely ignored by mainstream media. That industry is the public services industry, where services are delivered by the private and voluntary sectors.

"To think of public services as a market, with discreet supply and demand sides, is profoundly challenging."

Sturgess heads the Serco Group’s research institution, based in London. However, he is perhaps best known here as a former Cabinet Secretary in the NSW government, and the architect of the NSW Independent Commission Against Corruption.

During his Australian visit, he drew on aspects of the British government's Julius Report, and Serco's research, to advocate "diversity, and choice-driven innovation" in public services. While the UK provides the bulk of its business, Serco operates globally - often in partnership with governments -  designing, operating and managing key services, including local government, transport, aviation, defence, health and education among others. "Commercial know-how with a deep public service ethos" is its company profile.

A mixed economy

In the UK, in a 12-year period under a Labor government, the public service industry grew 130 per cent, and former Prime Minister Tony Blair would come to speak of "a mixed economy", Sturgess said.

The Julius Review into the UK's public service industry found that in 2007-08, the total revenues of the industry were 79 billion pounds, and it directly employed more than 1.2 million people.

"This is significantly larger than the automotive, aerospace and pharmaceutical industries combined. In terms of absolute size, the public service in the UK is second only to that of the US. It accounts for one third of total expenditure on public services," said Sturgess.

"On the demand side, the fastest growing sectors have been education, environmental protection and health. On the supply side, the industry has been made up of broad sectors like running prisons, providing employment services and the like. As a result of this report, it is now universally accepted in the UK that this is a substantial industry.

"I think it's reasonable to conclude that Australia has a public service industry of broadly similar proportions to the UK as a percentage of GDP. What is significantly different  between Australia and Britain is the sophistication of market models, and the range of sectors that are involved. Depending on how you count them, the UK now has around 700 to 800 public-private partnerships.

"Fifteen years ago, when I started going to the UK regularly, Australia was well ahead in terms of the commercialisation of the public service. Today my guess is we're about five years behind, and that will be hard to make up."

First mover advantage

While Australia had commercialised one or two of its public services, for the most part it had proceeded with caution, in Sturgess's view.

"This diffidence is placing Australia at a serious disadvantage in emerging markets."

Such caution has a historical context. "We start with an assumption that vital goods and services are best provided by government. That's essentially the way you and I think about the public service sector today. In fact most public services, like policing , fire brigades, schools, and public utilities, were invented by the private and voluntary sectors, and only later taken over by the state. What government brought to the table was equity. But we leapt to the conclusion that equity could only be provided if these services were organised by way of a producer monopoly.

"That mindset is now changing. Some countries have recognised the benefits of choice and diversity in public services. Some countries have been actively commercialising their own public services, putting them in a much stronger position for export, and some have recognised there's a first mover advantage in this market."

Why commercialise?

Acknowledging there will be critics of such change, Sturgess addressed the potential benefits and drawbacks to a country of commercialising and internationalising public services. The main advantages he identified were productivity improvements and service innovation.

He pointed to evidence that competition, "and sometimes even just the threat of competition", could lead to significant improvements in efficiency.

"It isn't privatisation that delivers those benefits. The research tells us that in the vast majority of cases it's competition that makes the difference. The impact on quality is much more difficult to study, but the Julius Review found that in general these savings do not come at the expense of delivery."

He emphasised his position was not a criticism of government. "It is a commentary about producer monopolies, which are not great on innovation. Diversity and choice drive innovation."

Internationally, benefits would flow from export income, the transfer of skills and technology, and deeper markets, he said.

And the case against? Opponents have raised concerns about compromised equity, quality and capability, and the possible diminution of a public service ethos.

Sturgess' response was "to get the design right". For example, the public expects that some services, like education, will be the same right across the country.

As for scale, would Australia be too small to serve as an incubator for successful international public service companies?
 
Not in Sturgess' view: "The experience of Transurban and Macquarie Bank in overseas markets in PPP toll roads is proof  that Australia is not too small."

Export potential

The primary lesson to be learned from the Julius Review was the first mover advantage enjoyed by those who internationalise the public service, he said.

"Those countries that move first free up the vast pool of human capital tied up in the public service monopoly. The Americans dominated the first generation of  prison contracting because they moved first. The British have exported their model of public-private partnerships to the world.

"In failing to recognise the huge investment tied up in our public services and the capacity for commercial exploitation; in denying public service managers the opportunity to innovate through commercialisation and exposure to competition; and in refusing to restructure them so they’re in a position to take advantage of the internationalisation that’s going on, we deny this country a  significant source of export income," Sturgess concluded.

"We prevent the best of our public servants from reaching their full potential, and we close ourselves off from the international trade in best practice that will accompany this emerging industry."