EY report not a fix-all

| 05/10/2014

The Ernst & Young report (on the rationalisation of the civil service) has good and bad points and, despite whether or not I like Ezzard Miller, he has a very valid point (referring to Privatization will cost more). The editor of the Cayman Compass and many of the readers on CNS seem to think the content of the EY report will fix all and should be implemented ASAP. Well, as I wrote to the editor of the Compass website, which he/she refused to post,  many should note the following:

Recent research conducted by both academic scholars and business similar to E&Y actual DO NOT suggest that privatization has all the many benefit spoken of. One main argument is that the public sector service would improve because it is profit driven. However, this argument is flawed as recent research has emphasised the role of intrinsic motivation in public sector service. That is, most civil servants are civil servants not because of the wonderful great salary, but because they want to serve “intrinsic motivation”.

Contrary to belief, benefits aren't that great in the civil service/public service. Yes, they have 100% health coverage, but that is only for one health provider, the HSA. If they go elsewhere they pay 100%. And yes, they get full pension contribution, but that is in the absence of cost of living increase, no bonus and no annual increment, even if additional qualification have been earned. There is more to the pension story should someone wish to find out the truth as well.

According to Fehr and Falk, 2002, the standard assumption in economics is that only extrinsic motivation (money) matters: humans respond to the provision of pecuniary incentives. But by ignoring intrinsic motivation, reciprocity and fairness, economics has constrained itself to a narrow subset of human behaviours which may affect our understanding of contractual relationships. When services/companies go private or are outsourced, contract design will play an important role in determining the success of outsourcing arrangements.  Can we reallytrust the private sector to be fair to public servants, most of whom will be Caymanians?

Another caveat is that some public services may be less suited to outsourcing than others because the expectation that high-powered incentives generate improvements in productive efficiency may be flawed in instances where intrinsic motivation is important.  The fact is the public service provides a SERVICE to the entire country. Neither finance nor tourism do. Reports/studies also suggest that there is some evidence indicating that quality of service may suffer in certain circumstances as a result of outsourcing and that workers may be worse off (at least in terms of their real wage).

When privatizing or outsourcing, there may be savings but the savings may be transitory – although the empirical evidence is thin, there is some evidence to suggest that hold-up is a problem in outsourcing contracts.

Other studies have highlighted the following: READ AND TAKE NOTE

Private equity investors are increasingly banding together so that, either alone or with joint investors, they can privately provide public services. This is because public service incomes tend to be guaranteed by the national or local state and are thus less risky than in the purely private area and, once a long term contract is secured, the provider effectively acquires near monopoly status and the capacity to return very high returns on capital employed. 

This is a point Mr Miller was trying to make

Frequently outsourcing may effectively mean taking over a going concern without having to invest any capital at all, since the equipment and premises and initial staff may be provided by the host undertaking. Providing outsourcing to public services is thus less risky than venture capital, and provides much higher returns than building a company up from scratch.

What does that mean? It means, of course, EY would recommend that public services businesses should be sold/privatized as it would be easy pickings for the private sector to take over because they are buying a business that is already stable in terms of capital investment needed.

In the UK, too, there is evidence that outsourcing can compromise the quality of service and lead to a competitive race to the bottom for both terms and conditions of the employees and for the commitment these staff then have to providing high quality services. The sharpest example of the risks this strategy poses to the public has been the spread of the MRSA (meticillin-resistant Staphylococcus aureus) bacteria in hospitals where out-sourced contractor cleaning has not been of the same standards as the previous in-house cleaning (Davies, 2010). Another disturbing example from social care has been the very high levels of agency working that occurred in the London Borough of Haringey, adding to the problems of detecting child abuse in two very high profile cases.

More studies on intrinsic motivation: the economic theory behind the drive to outsource public services is based on the concept that the absence of competition means there is little or no incentive on those delivering the services to reduce costs. This assumption underplays the fact that many public service workers bring strong motivation and commitment to their work, often a reason, indeed, why they choose to work in the sector (not my words but taken from empirical study).

One study states that the advocates of outsourcing then argue three indirect benefits: 1) the public sector can concentrate on its ‘core’ business; 2) contracting out services assists with control over their level and quantity; and 3) private providers are more likely to introduce innovation (Domberger, 1998).

Yet the distinction between ‘core’ and ‘non-core’ is open to challenge; the issue of improving output and quality is about good and bad organization and management rather than public and private; and while innovation capacity is notoriously difficult to tie down to any single factor, public funding is undoubtedly one of them. The issue of how people can exercise democratic control over the public services they receive when they are run by private companies whose reach will become increasingly global is not addressed at all.

What was most interesting to read while doing my research was that “there is little evidence to actually prove the 'many' added benefits of outsourcing. (Taken from WLRI Working Paper 11, May 2012, Shared business services outsourcing: Progress at work or work in progress? Steve Jefferys Professor of European Employment Relations)

VERY INTERESTING POINT: Instead of simplifying operations, outsourcingoften introduces complexity, increased cost, and friction into the value chain, requiring more senior management attention and deeper management skills than anticipated. In addition, outsourcing has allowed organizations to transfer financial and operational risk to vendors, but organizations are discovering that their contracts will never fully protect them against customer damage and business losses caused by service disruption (Deloitte Consulting, 2005: 2).

As Danish study stated: Studies analysing the financial advantages of contracting out over longer periods tend to show that the relative advantage of using private companies disappears over time. NO evidence is given at all for the private sector cost reduction claim.

a. One quarter of the empirical studies showed no savings, and the best claim that can be made is that ‘half’ of the services examined showed that range of cost savings. But the real picture is much less clear.

b. The absence of clear measures to demonstrate success of outsourcing is of concern.

The pressures to outsource often arise from a sense of underperformance. Often, however, higher quality outputs and cost savings carried out in-house will result by removing the old managers and involving the staff in reorganizing their work and people interactions. This was also another point Mr. Miller was saying

This is what Deloitte Consulting had to say (Deloitte, 2005):

In today’s economy and labor market, organizations looking for differentiated growth solutions should avoid outsourcing when based solely on cost savings. Many organizations have been compelled to adopt outsourcing to improve their technical, operational, and process management skills. However, companies should outsource only commodity functions to guard against a loss of knowledge and should plan for short-term outsourcing to prevent vendor dependency…

An unfavorable mix of rising costs and increased demand will drive up the cost of outsourcing for organizations and vendors. Weaknesses in operational management will result in more deal failures, prompting organizations to bring more operations back in-house. In the long run, organizations that continue to outsource will experience a loss of bargaining power to vendors as the supply side consolidates.

Something to remember: 6,900 public servants and the effect of the EY report if implemented without careful thought is not about 6,900 individuals but a minimum of 13,800 people inclusive of the elderly and children under 5.

I am not a public servant nor would I want to be, but there is no way I could support the EY report in totality. There are some good points to consider, many of which I have heard the public service themselves put forward over the years.

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  1. Slowpoke says:

    PHHTT, who cares about facts and research and studies in Cayman?  This is about ideology.

    Privatization is a race to the bottom, with employees being paid less, receiving fewer benefits, while creating more wealth for management/shareholders.

    As long as we take care of the 1%'s all is good.

  2. Anonymous says:

    I agree here with Robbie also, and by extention, Mr. Miller's concerns.

    While some of the proposals in the E&Y report may have some merit, it is far too vague for the most part. 

  3. Anonymous says:

    Thanks for reading. My post was to provide another perspective to the report as the Caymanian Compass seems to think that the E&Y report is without flaw and should be accepted and implemented wholesale.

    However that is no surprise based on who holds shares in the Pinnacle, who has direct connection with the paper. 

    I find it interesting that it is ok for the private sector to own the media and push their own agenda, but it is not okay for the Government to own media that helps to preserve our Caymanian culture to have an avenue to air  government business (eg LA meetings, government community project press releases etc) readily available to the public for free.

    Clarifaction, pension contribution is covered fully by teh governemt, however it is my undertanding that this came about as a form of negoiation for the loss of annual increments.

    Regarding the comment ot breaking even, yes, government should break even and yes there must be accountability, however based on my understanding of the process accountability is lacking from the top within the Civil Service. The non performing small man can easility be removed, but teh non performing manager remains. The Civil Service themselves have commented on this issue.

    I will agree that the Civil Service probably does need more training in customer service and as a whole the entire population will interact with Government (veiw it as a large compnay with small divisions or sections) and  therefore more people will have comments about the bad and good.

    • Anonymous says:

      The pension contributions have always been paid by Government and have NOTHING to do with the loss of increments (which loss only began to be implemented in 2001 I believe it was). The system that appears on the payslips was introduced in the 1980s to reflect that Government was paying properly (for employer and employee) into the pension fund and, quite frankly, was also designed to show how generous it was as an employer.

  4. Anonymous says:

    What it really boils down to and we've been here before is accountability. For some reason known only to themselves governments, and by extension the civil service, perceive themselves as something different, or separate from the public. We are only needed for the initial votes to achieve office. After that, we are forgotten. The main preoccupation afterwards becomes continuing and building upon a bureaucracy or network. We have very little say in the process or the following productivity although we have ostensibly "hired" those involved and therefore are responsible for paying their wages. Not until four years later do we have any "input". A lot of damage and waste can be created during that time. In the private sector there are checks and balances which happen more frequently. IE if a company is ceasing to be profitable heads usually roll, or it goes out of business. Not so with government, or it's employees, because there is an endless cash flow and it does not have to be profitable and there do not appear to be any consequences for employees. We bitch and moan about this…to governments. And they just shrug or make promises to "tighten things up" or "streamline". And hire "consultants" to find out what it is they're doing wrong (on our dime).  That is like begging the fox to leave something in the henhouse and waiting for the results. Listen. We are the "stockholders". The country and it's economy is "our business". Government is an elected "Board of Directors". Accountable to us. Not to themselves. It should not just perpetuate itself. Government and the Civil Service must be made aware of this fact. And our "business" has to begin breaking even. If it can't do that with the amount of money we pour into it fire the lot and in the next election then demand personal accountability. And wages based as ours are. On productivity. Anything wrong with that concept. 

  5. Anonymous says:

    Thanks Robbie for an interesting Article.

    One mistake you have made which does not help the situation and perception of the Civil Service, is concerning Civil Service pensions.
    Civil Servants pay 1/2 of their monthly pensions.
    • Anonymous says:

      No, Anon 22:39, they do NOT pay half their pensions. It is paid for them on their behalf by the governmentin addition to the government's contribution. Nothing comes out of the civil servant's pay packet. You are confused by your payslip. Get Mr Manderson or Gloria McField Nixon to explain it to you.

      • Anonymous says:

        Just had a look at my friend's payslip and it shows a column on the left saying Total Earnings on the left, and on the right showing Total Deductions. Pension is a deduction from their earnings.

        • Anonymous says:

          But your friend's salary for the month was what the payscale says because the government pays his contribution not him. The salary slip is an accounting device. Please, bobo, ask Gloria McField to explain it to you and your friend. Civil servants do  NOT pay their penson contribution.

          • Anonymous says:

            They do. Allways have done. Government just fudges the numbers on the advertisements so it looks like you get paid more, then they take both your contribution and your employer's contribution from your advertised salary. Go ahead, ask Gloria or Franz to explain it. Just make sure to ask for the answer in writing, with documentary proof.

            • Anonymous says:

              Simply not true. I sincerely hope you are not a civil servant or it would explain a lot 8:56. If you get appointed to a post paying $50k a year, that is what you get in your take home pay. 6% of that is paid into the Pension Fund by Government as your employer and another 6% is paid in ALSO BY GOVERNMENT but it is said to be your contribution on your pay slip. You pay nothing.

              • Anonymous says:

                So it seems your argument is based on the concept that government advertised salary bands indicate NET salary and not GROSS salary? The whole argument about civil servants contributing to their pensions (or not) is just about semantics.

                • Anonymous says:

                  When you are employed by government you are put on one of the points on the advertised (with the job) scale. If that point is, say, $30,000, then $30,000 is what you take home. No deduction is made to that sum. BUT, you get a payslip which says that government has paid in a certain amount (6%) to the pension fund AND your payslip also says you have paid in 6%. In reality you have NOT paid anything, government has paid the full 12% in, 6% of it being as your employee contribution. It is a non contributory pension scheme.

                  • Anonymous says:

                    Right, so in your example you could say the salary advertised is $30k NET, since the gross salary (prior to pension) would have been $31,800. I totally get your argument, but it truly is the difference between saying net and gross salary.

                    • Anonymous says:

                      OK 6:45. Maybe what Government should do is advertise the gross pay scales and then tell employees they will not get that in their pay packet. They will lose a contribution to their pension plan. But your argument is not understood as such by many civil servants. They think that somehow, out of the established scales (net), they are paying their share. Trust me on this. I am a former civil servant in the know.

                    • Anonymous says:

                      I am not sure what the point of all this "net" v "gross" salary discussion is. In Friday's Compass on pages C12 and C 13 (the Classifieds) there are two advertisements for government jobs. One ad has the following:"Benefits will be determined in accordance with the Public Service Management Law and Regulations which includes non-contributory pension and health benefits and 25 days annual leave." The other ad has "Pension and health benefits are non-contributory". What could be clearer than that? Those civil servants who insist they contribute to their pension are just plain wrong.

                    • Anonymous says:

                      If I get a job in the private sector paying $30k, will I be able to take all 30k home with me? Do job ads in Cayman typically say the salary is net or gross? Which would be better in the purely take home pay/ financial sense -a job paying $30k in the private sector or one paying $30k in the government sector?

          • Anonymous says:

            Same as the private sector. They do not pay pension contribution as the employer takes it out and pays it for you. It's listed as part of your salary, but you never see it or get your hands on it.

  6. Anonymous says:

    Thanks Robbie for the well researched article. We need to be very selective about what gets outsourced. The good of the people can not be based solely on economics.

    • Anonymous says:

      If only the Civil Service was concerned with the good of the people instead of their personal economics…

  7. Michel says:

    Thank you Robbie for your viewpoint . I totally agree with you . It will invite more division and will create a huge burden for GOVT. and it local population. I can’t support E & Y report as well. Caymanians pay close attention to this. Do not allow our Crown lands to be sold. That was to be reserved for our future generations . I am so disappointed in this Government . Promises where just that. God Bless, Michel Lemay .

  8. Anonymous says:

    While I see many of the positive sentiments proposed here as nice, there is one question which has not been properly tackled:

    What is the motivation for so many locals to work for the public sector?

    If the public sector is indeed a “make work” institution as it is so commonly accused of being, then your research and the research you quote is heavily biased in the wrong direction.

    Maybe it is time for the truths to be discussed openly, and not in the back rooms as is the norm here.

    • Anonymous says:

      Thanks Robbie for your viewpoint. Very well put together. I agree with you fully.

      As for the comment posted; 13:34, I have a question you. Why does the private sector hate public servants/civil servants so much? It almost seems (in your eyes) as if they’re getting what deserve through this E&Y Report.

      Yea the report has its good but it has a lot of bad too. If this isn’t thought through properly this well have some serious consequences.

      • Anonymous says:

        Because the majority of front service staff are rude, ignorant, don't know what they are doing and did I say rude already?  These people who are the 'face' provide terrible service and that is where the opinion stems from. 

        • Anonymous says:

          Their office should get privatized because the front line staff are rude? That's why the private wants these offices sold? Are you serious?

          • Anonymous says:

            Yes!  Bad service is a sign of poor managment and something that needs to be fixed to drag Cayman isands out of the third world mentality.

            • Anonymous says:

              @ 11:53- You sound like an ignorant Caymanain who's always unhappy. I bet if you were a public servant and your office was being considered to be sold/privatized those statements would've have been mentioned as you would be fighting for your job. 


              You're probably just upset they never hired you for that post you applied for.

          • Anonymous says:

            Yes because then the private sector would fire all the rude people and then the service would improve. 

      • Anonymous says:

        You my friend are showing exactly what I was talking about.

        Nobody hates the Public Sector, we are very appreciative of all the positive created there, however, back to my point:

        Is the Public Sector a "make work" institution for many undeserving people?

        Why is it that you get to sit inside those pretty new buildings and complain when we Caymanians like me are out here losing houses, yes I am a born and bred on Crewe Road Caymanian, so put that silly expat argument away.

        Maybe when you can walk in my shoes for one month you can simply put my comment aside without proper answers, until then, let sensible people respond with sensible answers to my very valid question.

    • Anonymous says:

             13:34.There are also many expats working in the civil service..However the answer is the same for both groups,"To provide for themselves and their families",so why did you single out locals?

      • Anonymous says:

        I singled out locals because as a local who speaks to many locals I have heard many say that they are going to get a job with the Public Sector because they are tired of being treated poorly in the private sector.

        And so you calm down a bit, yes I am Caymanian both my parents are Caymanian, and their parents are all Caymanian.

        As is the norm around here, you simply choose to be prejudiced against me because you could not see the bigger picture.

        • Anonymous says:

           08:20.Sorry ,but you chose to single out locals ,when in fact the Civil Service is comprised of both locals and expatriates,therefore you are the one acting in a prejudiced manner. You repeat this when you sayin your reply "I singled out locals because as a local who speaks to many locals I have heard many say that they are going to get a job with the Public Sector because they are tired of being treated poorly in the private sector"Are you saying that you have never spoken to an expat about this? Incidentally, at no time was any suggestion made as to whether you were an expat or Caymanian.Like the saying goes "Guilty conscience ,neeeds no accuser" meaning ,your response was driven by your conscience.