Cost savings from contracting out public services

One of the issues of debate inspired by the Queensland Commission of Audit is the potential cost savings from outsourcing or contracting out public services. While there are risks to service quality if contract terms are not well specified and managed, the evidence is reasonably clear there can be signficant cost savings from contracting out. This has been well known to economists for a couple of decades now. The best analysis of the issues and summary of the evidence up to that point was made by Simon Domberger and Paul Jensen in a 1997 article in the Oxford Review of Economic Policy, Contracting out by the public sector: Theory, evidence, prospects, which unfortunately is pay-walled but is well worth reading in full if you can get your hands on it. The authors note international evidence on contracting out suggests:

…savings in the order of 20 per cent are achievable, without sacrificing the quality of service provided. In the UK, savings of between £240m and £280m have been estimated for contracts let at the central government level. Substantial savings have also been generated by contracting at the local government level.

Hence it’s certainly worth examining the contestability of Queensland public services and the potential for contracting out non-core services to the private sector. The savings that could be made on behalf of taxpayers are substantial. 

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