This view of contracting has received some support following the award of the 2016 Nobel Prize in Economics to the British-born economist Oliver Hart, whose work on incomplete contracts asserts that the separation of ownership and control is problematic when services are difficult to specify in advance. In a paper published in 2003, Hart used prison contracting as an illustration of his thesis:
. . . ownership does matter when contracts are incomplete: the owner of an asset or firm can then make all decisions concerning the asset or firm that are not included in an initial contract (the owner has 'residual control rights').
Applying this insight to the privatisation context yields the conclusion that in a complete contracting world the government does not need to own a firm to control its behaviour: any goals - economic or otherwise - can be achieved via a detailed initial contract. However, if contracts are incomplete, as they are in practice, there is a case for the government to own an electricity company or prison since ownership gives the government special powers in the form of residual control rights.97
When they announced Hart's Nobel Prize in October 2016, the Royal Swedish Academy of Sciences linked their decision to the recent announcement of the Obama administration that it was terminating its contracts for the management of custodial institutions in the Federal Bureau of Prisons.
The problem with Hart's thesis is that in the UK and Australia, responsibility for the management of some prisons has been contracted to private providers for almost 30 years, with a great deal of success and few significant failures. Indeed, a body of academic literature has emerged which argues that the process of designing, negotiating and managing contracts has contributed a great deal to the policy and practice of performance management within the wider prison systems in these two countries.98 As it turns out, the vast majority of the outcomes involved in managing a well-performing prison can be specified in advance as well as measured (although work is still underway on the objective of reducing reoffending, which has only recently been added to the list of key outcomes).
Hart has had a significant impact on the understanding of public service contracting by academic economists. Unfortunately, this has weakened their appreciation of the challenges involved in contracting for complex services, even where researchers have been granted extraordinary access to public officials and private executives responsible for the procurement and execution of major contracts.99
One of the problems with this view of contracting is that it divides the field of potentially contractible services into the known ('paperclips') and the unknowable (complex public services) - or more strictly, the readily specified and the unspecifiable. It excludes a vast middle ground - the unknown but potentially knowable - where, done well, commissioning and contracting have a huge amount to contribute.
One of the great benefits of commissioning is that when it is done well, policymakers are obliged to be clear about their intended outcomes and (given scarce resources) to prioritise them, to specify how success will be measured, to allocate resources capable of delivering those results, to delegate authority to identified delivery agents, and to commit to an intervention regime should the intended results not be delivered.
This is necessarily a voyage of discovery, and experience has shown that (done well) the process of negotiating and executing a contract is useful in turning the unknown (and the hitherto unspecified) into the known (which is capable of specification).
In the prisons sector, it is interesting to note that the original report commissioned by the Home Office from Deloitte Haskin and Sells in 1988 - at a time when the prospect of prison contracting was first being considered - explicitly refers to the role that contract specification would play in defining prison regime and standards across the entire system:
. . . contracts would set, for the first time, enforceable standards of security and regime. . .
There is [currently] no consolidated document outlining Prison Department policy on the conditions under which remand prisoners are kept. We therefore used a number of individual documents as a basis for constructing a list of areas for which standards would need to be considered. . .
Where possible, we propose that standards should relate to results to be achieved (outputs) rather than to resources or methods to be used (inputs).100
Given that public service contracting is often a process of discovery, it is important that government employ appropriate contractual tools. A highly transactional form of contracting might be suitable for the procurement of paperclips through an e-auction, but it will not be appropriate for complex human services. Contract form must follow service function.