6 Public vs private delivery of public services
6.1 Introduction
In Chapter 4, we considered the literature on the ownership of facilities that deliver public services. In this chapter, we consider the literature that has focused only on the question of private versus public delivery of services where it is assumed that the party delivering the service does not need to consider substantial facilities investment.
The literature on the allocation of ownership rights in the presence of incomplete contracts has provided a number of important explanations for the organisation of services firms. Given that contracts are incomplete, direct and/or complete incentive contracts will not produce the optimal level of effort in providing the required services. For service firms in particular, the customer base is a critical asset that will determine the success of the firm, especially where long-term customer relationships are important. In this context, the literature on incomplete contracts suggests that the allocation of residual ownership rights over assets such as the customer base of a service firm may be a critical determinant of the success of the firm.
In this chapter, we explore the allocation of ownership rights in the context of services delivered to customers, and explain how this literature may be relevant to the delivery of services by the public sector. The fact that services are publicly funded does not necessarily make delivery of those services by government departments or Crown entities the optimal form of organisation of service delivery. Where it is possible to increase investment in the provision of public services by making a private, community or other NGO entity the residual claimant in the value obtained from the delivery of those services, then traditional public-sector service delivery may be inferior.
