Brief Deep Dive - Outsourcing by Max Harris

A really fascinating paper came out this week on outsourcing in the Quarterly Journal of Economics (thanks to Wilbur Townsend for flagging to me - who’s worth a follow on Twitter for good tweets, especially on economic policy). It compares private and public ambulance performance in Sweden. It found a few things. First, the evidence on the merits of ‘outsourcing’ - the process where the state contracts out key services to private (often for-profit) providers - is very thin. Second, private ambulances perform worse than public ambulances in Sweden on mortality outcomes. Thirdly, private ambulances “cost innovate” by driving down labour costs, resulting in the employment of staff with less experience and less training, who work longer hours with greater use of overtime.

Sound technical? Maybe. But it’s incredibly relevant to policy in New Zealand. Lots of local councils outsource services - such as park management, parking, or recycling services - and there’s been a big swing towards outsourcing over the last 20-30 years, as there has been in many parts of the world. Many bus services in New Zealand are outsourced or contracted-out. New Zealand also contracts its ambulance service to the St John’s charity, and has recently paid nearly 100% of its service. However, as the paper on Sweden reminds us, decisions to outsource are often based on not very good evidence - they can be based on dogmas or assumptions that the private sector knows best, though the outcomes don’t always show this to be the case. A lot of water management services in New Zealand are increasingly outsourced; part of what is important about the Three Waters reforms is that they will consolidate water infrastructure and (I hope) restrict this for-profit contracting-out of an essential service.

So what can be done about outsourcing? One option, as was suggested in the UK in recent years, is for councils and central government to adopt an ‘insourcing-first’ policy: to say that as contracts expire, the default should be that the service is brought ‘inhouse’. This can bring a range of benefits for citizens, workers, and societies (as the UK paper linked to above demonstrates): including the building-up of knowledge and capacity in the public service, improved protection of workers’ rights, and services focused on people rather than profit.