Public Sector Problems

For its part, the public sector in many countries still wants to do everything itself. Surprisingly, America, the country that has preached the Washington consensus of privatisation to the world, still owns a lot of its railways, ports and water systems; it also makes less use of for-profit schools than does Sweden. And if Britain’s gargantuan NHS were to contract out as much of its business as the French and Dutch health services do, it would be a lot more efficient. The District of Columbia has shown how much can be saved by outsourcing: it has reduced its e-mail costs by 80% and its video-hosting costs by 90% by moving them to Google and YouTube respectively.

The huge variance in performance between different bits of the public sector that do the same thing is shocking. Sweden spends half as much on health care per person as America does, yet Swedes live longer. Research on degree courses at public universities shows that some Western countries spend 30% above the average on a degree whereas others remain 70% below it, says Lenny Mendonca, a public-sector expert at McKinsey. “In anything even resembling a free market, many of the best-performing public institutions would have wiped out all the others,” he adds.

Variance within countries is harder for public-sector unions and other local vested interests to ignore. Sir John Oldham, an expert in health productivity, points to two similar adjacent areas in southern England where “unscheduled admissions” to hospitals (ie, the expensive sort) vary by a factor of eight; in another there is a 13-fold difference in the number of hospital referrals from similar doctors’ practices.

By reducing these variances, quality would be improved and a huge amount of cash could be saved. Sir John has calculated that if every NHS organisation in Britain currently operating at costs one standard deviation above the mean were to improve its performance to the mean level, the NHS would save somewhere close to the £15 billion it is...