Barriers to entry, exit and a level playing field
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The document summarizes key aspects of Australia's quasi-market for employment services that has developed over time. It notes the long-term trends of increasing standardization, loss of diversity in the market, and providers copying each other's approaches. Performance-based contracting and payment-by-results models have led to market consolidation among large, existing providers who can handle the financial risks. High transaction costs of compliance and monitoring also favor insiders and discourage new entrants. As a result, the quasi-market exhibits less variety and innovation over time as frontline work becomes more rule-focused than client-focused.
Barriers to entry, exit and a level playing field
- 1. Barriers to entry, exit and a level playing field OECD Workshop on Competition in Publicly Funded Markets 28 February 2019 Professor Jenny M. Lewis School of Social and Political Sciences, University of Melbourne 1
- 2. 1. Development of the Australian quasi-market in employment services 2. Long-term trends towards standardisation, loss of diversity, and market herding 3. Steering mechanisms influencing market consolidation A. Performance-based contracting (Star Ratings system) B. Transaction costs of tendering and managing the quasi-market C. Intensification of results-based payment model 4. Outcomes? 5. Summary 2 Overview
- 3. • Purchaser-provider split, commissioning began in 1994 • Federal Government pays around 1billion AUD annually • Completely delivered by private (for profit and not for profit) agencies since 2003 • Estimated 10,500 people work in employment services, some of these are also delivering other government-funded programs • Between July 2015 and May 2018, 0.3m people placed into work (6 month outcomes) – more than 2m participants in the program • For jobseekers, working with a provider has been mandatory since 2003 • Failure to undertake ‘mutual obligations’ results in sanctions – loss of payments 3 Australian system key facts:
- 4. 4 Minister Department Centrelink Private providers Jobseekers Responsible for provider contracts Work with jobseekers Assess and stream jobseekers Have mutual obligations as condition of receiving benefits
- 5. 5 Australia’s quasi-market in employment services Working Nation (1994 – 98) • 300 providers licensed to deliver case-management to the long-term unemployed alongside Commonwealth Employment Service • ~Third of employment services contracted out • Jobseekers could choose providers, who received a mix of servicing fees, commencement payments (training or work placements), and outcome fees (1998 – 2009) • JN1 + JN2 (1998 to 2003): largely a ‘black box’ approach and de-regulated welfare market in which agencies competed for contracts on price • JN3 (2003 to 2009): re-regulation of the quasi-market and emphasis on contracting services based on quality and past-performance (per Star Ratings) • Most delivery is outsourced, with the Australian market become entirely privatised in July 2003 • All jobseekers, not just the long-term unemployed, required to register with a provider (2009 – 15) • Consolidation of previous Job Network and six other specialist programmes (e.g. pre- complement programmes) into a single national employment services contract • Providers caseloads include more jobseekers with complex barriers to employment (e.g. mental health, substance dependency, homelessness, ex-prisoners) • Stronger payment incentives for agencies to focus on harder-to-help clients, and on placing clients into longer-term (i.e. +6 months) employment (2015 onwards) • Stronger emphasis on Payment-by-results and enforcing welfare conditionality (e.g. Work for the Dole, minimum job search requirements) • Larger contract areas (51 employment regions) • Fewer (44) providers with longer contracts (5 vs. 3 years)
- 6. • 4 major waves of reform, 5th is on the way • Government changes also spur reforms • Commitment to service privatization to address problems (rule-bound, one size fits all) endures • Each new wave attempts to rectify problems of previous wave (too much/too little flexibility => creaming, parking / transaction costs, red tape) • Little progress on ‘harder to help’ jobseekers • Next wave (but change of government?) digital for most, face to face for 20% with multiple & complex barriers 6 The reform that never ends…
- 7. Studying the reform of welfare to work Year Total Public Third-sector For-Profit Other/Unknown AUS - 1998 273 196 118 38 625 AUS – 2008 n/a 1056 392 64 1,512 AUS – 2012 n/a 882 316 66 1,264 AUS - 2016 n/a 799 393 41 1,233 Frontline of service delivery in Australia and the UK (and the Netherlands): Jobseeker activation Frontline staff activation • How have policy shifts resulted in changed behaviour at the frontline? • Is all this activity effective in getting people into sustainable employment? Partners
- 8. Long-term trends in Australia’s quasi-market Deepening standardisation and narrowing of discretion 1998 (%) 2008 (%) 2012 (%) 2016 (%) • When it comes to day-to-day work, I am free to decide for myself what I will do with each jobseeker (‘agree’ or ‘strongly agree’) 84.6 62.5 60.2 49.6 • ‘Our computer tells me what steps to take with clients/jobseekers and when to take them’ (‘agree’ or ‘strongly agree’) 17.4 47.4 50.4 48.3 • Decisions about job seekers (a ‘good’ or ‘great deal’) determined by standard program rules and regulations 56.9 71.7 76.7 81.9 Changing workforce (de-professionalised) • … % under 35 years of age 28.5 42.3 43.3 43.2 • … %with a university degree 39.2 23.7 19.7 25.6 MARKET STRUCTURE Dramatic consolidation: 300 providers in the late 1990s to ~100 by 2009 to 44 by 2015 Dominated by multinational firms (Max, APM) and transnational third-sector agencies (e.g. Salvation Army) Use of Payment-by-Results funding intensifies, shifting more risk onto providers FRONTLINE IMPACTS ON SERVICE DELIVERY
- 9. 2008 2012 2016 Caseload size X Jobseekers seen per day X X The influence of available labour market program vacancies X Time spent in direct contact with jobseekers X Time spent working with employers X X Time spent on contract compliance X Frequency of contact with another office in this organisation X Frequency of contact with officials from a government department X Frequency of contract with employers X Proportion of caseload follow somewhat X No. of jobseekers reported for sanctioning in the last two weeks X X More important agency goal: to help jobseekers get jobs quickly or raise skill levels X Degree to which office encourages staff to be lenient in the use of sanctions X X The lines of authority are not clear in my work X The main thing I have to do is gain the trust of the jobseeker X X Our computer system tells me what steps to take and when to take them X When you get a good result it’s usually a team effort X I use our IT system to track priority jobseekers X I do tend to take note of those actions that will generate a payable outcome X X Perception that many jobseekers are on benefits due to lack of effort X Proportion of recipients who are perceived as choosing benefits over work X Total sig. differences (not all differences are shown) across all survey items 24 8 11 FRONTLINE IMPACTS – MARKET ‘HERDING’ / LOSS OF DIVERSITY Not just through fewer providers, but increasingly similar practices across sectors
- 10. 10 Convergence Quasi-markets introduced as way of enhancing the efficiency of employment services delivery and of promoting more varied and innovative services. BUT Experience of countries such as Australia suggest tendencies, over time, towards market consolidation, herding and loss of diversity
- 11. • ‘Michelin guide’ system introduced to signal local agencies’ relative performance so that jobseekers could ‘meaningfully’ choose providers • Sites rated from 1 to 5, using a complicated regression analysis that incorporates local labour market and caseload factors • Local site rankings feed into provider evaluation at regional level Steering instruments / market herding in Australia A. (Past) Performance contracting and the cycle of recurrence Since 2003, prices for fees and outcome payments have been fixed meaning that bidders compete on ‘quality’ as determined by past performance according to agencies’ Star Rating Has become principal mechanism for awarding market share: • In contracting rounds: e.g. during JN3, ‘high performing’ providers (4 stars and above) had their contracts automatically renewed and only poor performers’ were required to competitively tender • Periodic (18-month) business reallocations during contracts, from ‘low’ to ‘high’ performers Promotes herding: • Favours ‘insiders’ resulting in fewer new entrants to the market over time • Focuses provider attention on strategies that achieve positive ratings, increases risk aversion to innovations that could jeopardise Star Ratings
- 12. 12 Steering instruments / market herding 1. (Ex ante) transaction costs for purchasers and bidders associated with bid preparation, evaluation, and vetting; writing and negotiating contracts 2. (Ex post) transaction costs of auditing providers’ contractual compliance, process delivery, and monitoring their performance Key tension of quasi-markets: Ensuring quality requires detailed oversight/regulation + creates transaction costs that undermine operational efficiencies High transaction costs can be minimised by: • Less frequent tendering and more stable purchaser-provider relations (e.g. repeat contracting with ‘trusted’ partners; licensing arrangements) - but this undermines the competition that proponents argue is fundamental for innovation • Minimal ‘hands off’ approach to vetting agencies, specifying service levels, and monitoring execution (e.g. ‘black box’ contracting) – but this increases principal/agent information asymmetry problems, aggravating risks of gaming behaviours (e.g. ‘creaming and parking’) and poor quality B. The (inescapable) problem of transaction costs (Bredgaard & Larsen 2007; Bennett 2017)
- 13. 13 Transaction costs: The Australian experience Early endemic gaming practices motivated subsequent ‘hard contracting’ approach in Australia: • Potential bidders vetted for supply chain management expertise, financial capability etc. • Processes and service levels highly specified in contracts, thousands of pages of guidelines • Providers must participate in a Quality Assurance Framework (QAF) process involving an independent certification audit, maintenance of QAF certification throughout the contract, and regular and extraordinary QAF surveillance audits (ANAO 2017) • Contract execution and fidelity to process guidelines are intensively and remotely monitored via mandatory IT systems – costing around $260m per year (or 21% of total program funding) (ANAO 2017)
- 14. 14 Insiders and new entries High business acquisition and market participation costs: Inhibits new (particularly small) organisations from entering the market • $$$ required on writing complex tenders + establishing QAF/Compliance/Administrative systems • In transition from JN to JSA, agencies who retained similar market shares still incurred $millions in re-contracting costs (Finn 2011) Locks existing ‘insider firms’ into the market, as they are unwilling to relinquish sunk costs (on contract management, compliance and QAF infrastructure) (Bennett 2017)
- 15. 15 What drives work on the frontline? 0 10 20 30 40 50 60 70 1998 2008 2012 2016 Australia Knowing the rules and official procedures (Procedural) Meeting the targets set by management (Corporate) Competing successfully with other service providers (Market) Having the best possible set of contacts outside the organization (Network) 0 10 20 30 40 50 60 70 80 90 100 1998 2008 2012 2016 UK Knowing the rules and official procedures (Procedural) Meeting the targets set by management (Corporate) Competing successfully with other service providers (Market) Having the best possible set of contacts outside the organization (Network)
- 16. 16 Steering instruments / market herding in Australia C. Payment-by-Results and debt financing • This transfer of risk makes it harder for smaller, community organisations – with less reserves/access to loan funds - to participate • Larger commercial organisations can ‘take on the significant financial risk’ of a delayed, outcome-based payment model (Shutes & Taylor 2014) • Increasing proportion of total provider funding now contingent on outcome payments (more than 50% of total under Jobactive, 30% under JSA) • Revenues less certain & initial service delivery funded upfront via capital investments or borrowing against market expectations of future returns (outcome payments) • Procurement frameworks that rely on up-front financing & require substantial investments in systems, promote consolidation in favour of larger commercial organisations and existing players • Aggravated by the trend towards larger contract areas, which require even more upfront capital or debt-financed investment to deliver contracts
- 17. • Are there a set of universal organizational and operational factors that are linked to achieving outcomes (into work or off benefits)? • PLS model and a pooled dataset (3 nations, 3 survey periods, n=3390) • Outcomes for jobseekers improve when frontline staff: have more of a work- first approach; are more informed about the service system; are more committed to/satisfied with the organization they work within; have more negative attitudes towards jobseekers; have either a stronger enterprise or network orientation, or less of a bureaucratic approach • Work-first approach (directed at getting people into work immediately rather than investing in training and skills or searching for longer to find a better job) most important predictor of outcomes (Lewis, Nguyen and Considine, under review) 17 What impacts outcomes for jobseekers?
- 18. • Solving one problem creates another – hardest to help left out • Market consolidation and concentration • Herding and loss of diversity • Increased copying and lock-in, less variety and innovation • Contracting favours insiders • Transaction costs need to be high to ensure quality • Following the rules becomes more important for frontline staff • Insiders locked in, new entrants face large barriers • Payment by results leads to debt financing and privileges larger, consolidated, and existing contractors • Outcomes for jobseekers most strongly linked to work-first approach 18 In summary:
- 19. Thank you The rest of the team: Mark Considine Jenny Lewis Siobhan O’Sullivan Phuc Nguyen Michael McGann + Australian Research Council + Partners