Thursday, December 23, 2021

When the State pays to disappear…




For those who aren’t aware, « Le Monde Diplomatique » is one of the few independent French journals that are left. In its edition of November 2021, I read a very informative article titled “Quand l’Etat paie pour disparaître” (when The State pays to disappear) [1].  The article talks about how the French government is externalizing (hiring consulting and service companies) many of its public services, at their own detriment, often promoting the myth: "for better quality, more flexibility and less cost".  Here’s a summary.

Historical Background and Scope

The practice of hiring external or private entities to deliver public services dates back to the times of the French Royalty. For instance, in the 17th century the French Monarchy hired private services for the  construction of navigation canals while later in the 19th century it was for the construction of railways, public street lighting, drinking water supply, etc.

This trend got reversed during the years 1930-1950 when new public sector companies took over the administration and marketing of services such as electricity grid, gas, railways, etc. However, inspired by the “New Public Management” trend of the 1970s in United States as well as in United Kingdom, privatization resurfaced in France during the years of 1980. The popular term that was coined to promote this strategy was “State Reforms”. This included major privatization projects from 1997 onwards such as Air France and highways as well as implementation of the electoral promise of the French President Nicolas Sarkozy (2007-2012) of non-replacement of 50% of the retired civil servants.

Dominance of American Consulting Companies

In recent years, international companies, notably major American companies such as McKinsey & Company and Boston Consulting Group (BCG) have been preferentially engaged by the French State. Interestingly, all these previous years these companies were accustomed to offer services to countries that do not have a robust administration. Initially welcomed with a bit of reticence the presence of the private consulting companies in the public sector has now become commonplace. Their major activities involve formulation of strategies and action plans for state missions, drafting of laws, the operational activities related to the reform of the driving license, change of software for the salary slips of the military staff, procurement of masks and organization of vaccine campaigns, etc. Almost no domain is an exception that is not entrusted to the private consulting companies. This in the backdrop of the public sector administration that is deliberately under equipped and which is thus easily overwhelmed.

Huge cost to the Exchequer

For the year 2019, when one adds the amount paid by the French State, including the one paid by the  territorial collectivities and the public hospitals to the external entities, then the sum leads to a whopping 160 billion Euros which is equivalent to 7% of the GDP or 25% of the annual state budget [2]! Two third of this sum went to delegate the public services e.g. public transport, water management, etc. while the rest was spent to hire consulting services such as expert advice, management, cleaning, etc. However, such an enormous amount never became a topic of public debate neither was this information provided to French parliamentarians. More strangely, it hasn’t yet become an electoral topic, even when Presidential elections are due in April 2022.

Moreover, for a public operator, the fees paid to private sector undertakings are liable for VAT, the standard rate of which is 20%, a cost which does not apply to services carried out internally [2]. Most outsourcing contracts also generate so-called "transfer" costs of knowledge from internal to external or between service providers [2]. Finally, there are many cases where advisory missions conducted from one territory to another could give rise to pooling of skills or expertise between territories, but the use of the private sector prevents this [2].

Conclusion

  • Hiring of private consulting companies for key sectors such as health, security and administration has major adverse implications such as loss of state independence as well as autonomy. Further, these sectors and thus the state lose precious know-how, experienced personnel and strategic planning.

  • Since the public sector is deliberately neglected and deprived of key expertise, it often hampers their ability (both technical and managerial) to monitor the delegation of missions to the private sector. This in turn results into substandard and inefficient services offered to the citizens.
  • For public operators, outsourcing to the private sector involves paying VAT of 20%, generates costs of "knowledge transfer" from internal to external or between service providers, and prevents the possibility of pooling of expertise between territories.

  • The citizens often find themselves dealing with customer care center personnel that operate from a foreign country. They usually have no possibility to engage with staff that has any decision making powers for the exact service that they seek.

  • The multiplication of intermediate private entities greatly hampers efficiency and reactivity of the public sector. This adversely affects the motivation of the employees.

  • The choice of externalization has both technical as well as budgetary implications, prohibiting a return to the initial situation. In reality, once the choice of externalization is made for a particular service through requisite budget cut, it then becomes quasi impossible to allocate more budget in the successive years to come back to the original situation.

  • “Re-internalisation” often means rebuilding the know-how and skills from the scratch, and thus a major loss to the State. This becomes more complicated if the externalization dates back to 10, 15 or in some cases even 40 years.

References:

[1] https://www.monde-diplomatique.fr/2021/11/BONTEMPS/64030

[2] «160 Md€ d’externalisation par an : comment la puissance publique sape sa capacité d’agir [https://lib.umso.co/lib_ufoFEvhlRMwflNFx/6qxn1ssrizzmsk3b.pdf]» (PDF), Nos services publics, avril 2021.

 

 

 


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