Applying overseas competition models to the public sector in Japan

Date June 25, 2002
Speaker Chris BOWMAN(Executive Director, Serco Group)


Why reform government? In 1979, the United Kingdom's per capita fell below Italy's. This was an embarrassment to the British people. In 1985, the Australian Treasurer warned that Australia would become like Argentina. These events helped stimulate a major reform processes. This year the UK has a higher GDP per capita than Germany has. Throughout the 1990s, the Australian economy grew 1.4 times faster than did the US economy.

The increased involvement of the private sector in delivering government services has been a key element in the UK's and Australia's recovery. The improvement came from the use of competition to make continuing improvements in the quality and cost of government services. In 2002, Japan's credit rating fell below Italy's. Will this event stimulate Japan to accept dramatic reform?

Since the 1980s, there has been in increase in privatization and outsourcing of government services, as well as an increase in public private partnerships, intervention models, and private finance initiatives in Australia and the UK. The Serco Group has been involved in all of these areas.

Serco's first contract was in 1964; it was to manage, operate, and maintain the ballistic missile early warning system in Yorkshire, UK. The success of this outsourcing contract is proof that the private sector can do important public-interest activities. Since Serco was contracted, it has been able to steadily reduce the staff size and increase the efficiency of the station.

Where do the savings come from when you involve the private sector in government services? Let's look at a Serco private finance initiative. The UK Ministry of Defense outsourced its defense helicopter training to Serco. First, Serco was able to produce savings in staff costs. In the second outsourcing, savings were produced by work practice innovation. By the third PFI, savings were captured by reducing the number of aircraft in the fleet, reducing the staff size, and by innovating equipment. Serco looked at inputs, outputs, and outcome in order to produce savings.

Serco business has been diverse: in Victoria, Australia, Serco was outsourced to manage the water and sewage network, treatment plants, and revenue collection; in London, England, Serco won a seven year contract to run the Docklands Light Rail system; in Nottingham, UK, Serco built and managed five prisons; in Aldemaston, UK, Serco was asked to build a new Defense University, provide the professors, and manage the school for 30 years.

An example of Serco's administrative reform model is the company's work with the National Physical Laboratory of the Department of Trade and Industry, in Teddington, UK. In 1993 and 1994, the DTI conducted a review of ten of their agencies to determine whether the agencies could be outsourced, privatized, or left in-house. Two agencies were merged and then privatized. The management of two was outsourced. And one was converted into a publicly owned company and later sold to a management buyout.

Why was the DTI contract a success? First of all, there was a clear political direction-there was political will. Second, a strategic approach was adopted based on well-defined management objectives and decision criteria. Third, control was placed with a strong, central implementation unit with direct access to the minister; and it was staffed by people who were not affected by the review's outcomes. Fourth, good quality external advisors supported the unit. Fifth, early discussions were held with potential private sector interests. Sixth, staff transfer issues were clearly dealt with by (European) legislation. Seventh, the entire process gave the private sector great confidence.

Questions and Answers

Q: What is the difference between PFI and the intervention model?

PFI refers to the creation of infrastructure (build and operate). Intervention may not provide infrastructure; it is more management focused.

Q: You have a diverse collection of contracts. Where is your expertise?

Serco does not have technical expertise: it has management principles. For example, operational change management is a way to think about groups of people. We have a process to continue our services; in other words, we deliver continuous improvement (annual reviews, etc.). The processes you apply are generic over many fields. As we grow, however, we have begun to form specialized groups. The market keeps us efficient.

Q: Do you have many competitors?

Yes, there are many in the UK and Australia. But there are few in Japan.

Q: What happens to the employees of the agencies you work with? Do you use many government employees?

Yes, in fact, 80 percent of our employees are former government officials. The government trains people well, but manages them poorly. Moreover, public accountability makes government agencies inflexible. Al Gore said of government workers, "They are good people trapped in a bad organization."

Q: Does Serco have a central structure?

All of our contracts are free standing companies. So the center of Serco is a small group of people with scarce skills. Divisions at the center include industrial relations, a research group, a process group, and finance and performance groups (audit). Half of Serco's center is marketing-getting the contracts. We review the projects before we bid tender because it is expensive to bid. We are in about 35 countries. We specialize in the more complex end of the market.

Q: Your company is performing the basic functions of the government. Serco started with a defense contract-the core business of the government. What is your secret to tapping into this sensitive sector?

That contract came almost by accident. Previously, Serco was part of RCA and they had won the contract to run the missile defense system. When General Electric bought RCA, GE offered its UK operation for sale. The British managers bought the stock and established Serco, whose stock is now publicly traded on the London Stock Exchange. Everyone had to pass security tests. The private and public sectors are subject to the same laws. If a private sector employee breaches a contract or secrecy, he could go to jail too.

Q: What are you doing to stem corruption?

Before we tender, we make sure that the selection is thorough and transparent.

Q: How do you deal with cultural differences?

It is hard work. But the Japanese that work with us tell us that the processes we use will work in Japan, just as they have worked everywhere else.

Q: Do you encounter nationalistic sentiments?

Yes, but when a government does reform, it needs the experience to manage change. Governments seek safe hands.

Q: Do you see your company as a bridge for government workers to cross over into the private sector? How do you manage corporate governance issues? What has the Enron fiasco done to Serco's business?

Public sector managers thrive when they move into the private sector. We were able to find good jobs for former military employees in companies that did business with the military. Since they were trained by the military, they did a brilliant job. Enron has left a cloud over organizations like ours. But we are subject to competition. Enron was about establishing private monopolies. Serco profits by providing services. Our auditors in the UK have kept us honest.

Q: The institution of permanent employment is an obstacle to reform in Japan. How do you suggest we could overcome this problem?

When a company's management really changes, the workers expect change. This is an opportunity to make improvements.

*This summary was compiled by RIETI Editorial staff.