Today National released their corrections policy, which would allow the private sector to tender for the management of prisons.

Although not a completely ‘new’ concept for New Zealand (Auckland Central Remand Prison was privately run under the last National Government) it nonetheless raises the issue of when is it appropriate for such services to be ‘contracted out’ rather than provided ‘in-house’ by the government.

Hart, Schleifer and Vishny’s “The Proper Scope of Government: Theory and Application to Prisons” asks the question when should a government provide a service in-house, and when should it contract out provision? (Anyone interested in the full article may be able to locate it here).

The authors’ develop a model for asset ownership (in this instance a prison), which can be owned by the private sector, who contract back to the government, or alternatively can be owned outright by the government.

The central finding of the paper is that the private sector has relatively stronger, but seemingly contradictory, incentives to both reduce costs (driven by a profit motive, which comes at the expense of quality) and increase quality (to get a higher price from the government, who is an ongoing buyer of the service). In this instance the quality of a prison entails order in the prison, amenities that prisoners receive and rehabilitation.

The case for in-house provision is generally stronger when:

1. non-contractible cost reductions have large deleterious effects on quality;
2. quality innovations are unimportant; and
3. corruption in government procurement is a severe problem.

In contrast, the case for privatisation is stronger when:

1. quality reducing cost reductions can be controlled through contract;
2. quality innovations are important; and
3. patronage and powerful unions are a severe problem inside the government.

The authors conclude that there may be a case against prisons being managed privately on the grounds above.

From John Key’s perspective, it’s clear that he is concerned with the quality of the current service provision in-house. Indeed, a couple of his quotes are particularly interesting:

1. “There have been too many examples of poor management and of Corrections acting without the necessary regard for the safety of the public.”
2. “There is also widespread public scepticism resulting from facilities such as under-floor heating and flat screen televisions now available to prisoners, especially in the new prisons”.

Quote 1 suggests that under current in-house arrangements, the quality of service provision is poor. In this instance, it’s possible that private provision might not lead to lower quality services (even in the face of contractual incompleteness). Quote 2 suggests that there is large scope for cost cutting in prison provision, without necessarily undermining the ‘quality’ that we are referring to (although I’m sure the prisoners will be disappointed).

If Key’s claims are to be believed then there might be a reasonable case to use contracting out of prison services given the current low quality provision of service in-house and the opportunity for contracting out of such services to cut costs.

Goonix