50.2 Incremental transition to privately operated public services

The final public-services model cannot be created merely by declaring existing government agencies to be private. Large agencies combine many services, assets, legal powers, dependencies, and cross-subsidies inside a single hierarchy. They must be decomposed into fine-grained public services, each governed by a clear service contract, operated by a private operator, and funded through tax choice. This conversion should occur incrementally so that essential services continue while each separable part of an agency is prepared and transferred.

The unit of transition is a service, not an entire department. Different services within the same agency may move at different times and by different methods. One service can be converted without waiting for every other part of government, while a function whose boundaries remain unclear can stay in its legacy form until a workable design exists.

Identify the services inside each agency

Restructuring requires a clear description of what an agency actually does. Its activities should be mapped into services received by the public, services supplied to other public services, regulatory or legal functions, shared internal capabilities, and ownership or maintenance of assets. Costs, staff, contracts, data, liabilities, dependencies, and sources of funding should be assigned to those activities as accurately as possible. Hidden cross-subsidies and obligations must be made visible before boundaries are changed.

This mapping should distinguish a public objective from the organisation currently used to achieve it. Supplying safe drinking water is an objective; preserving a particular department, reporting line, or job classification is not. Conversely, an activity should not be discarded merely because its beneficiaries are indirect. Planning, inspection, emergency preparation, maintenance, and record keeping may be essential inputs even though citizens do not request them individually.

Split government agencies

Large government agencies should be divided into smaller, focused organisations where their functions have high internal cohesion and can interact with other functions through clear, limited interfaces. This can make responsibilities, costs, and performance easier to identify, while reducing the complexity of managing a single large bureaucracy.

For example, a water utility might be divided into separate services responsible for individual water sources, such as dams and desalination plants, bulk-water coordination, the pipe network, water-quality testing, and retail service. Shared responsibilities, including system planning, emergency coordination, and environmental protection, would still require clearly defined arrangements between those services.

An agency should be split only where responsibilities can be clearly assigned and performance independently measured. Where functions are tightly interdependent, separation may duplicate administration, fragment expertise, or make system-wide coordination more difficult. Fine-grained does not mean arbitrarily small: the appropriate boundary is the smallest service that remains operationally coherent and can enter reliable contracts with the services around it.

Allow contractual hierarchies between services

Decomposition does not require a flat collection of independent operators. Services may retain hierarchical relationships where coordination and accountability make them useful. The hierarchy changes from an internal chain of command within a government agency into explicit contractual relationships between private service providers.

For example, the high-level management of an existing government service may itself be separated and sold as a private operating institution. It can hold the principal public-service contract and engage more specialised converted services as subcontractors. Those subcontractors might operate particular facilities, regions, networks, maintenance functions, or customer services while the prime operator coordinates the system and remains accountable for the overall contracted outcome.

Each boundary should still expose responsibilities, prices, performance, data, and liability. Subcontracting must not recreate an opaque government department under private ownership. Contracts should make it possible to replace a poorly performing subcontractor, or the prime operator itself, without unnecessarily dismantling competent services elsewhere in the hierarchy.

Develop a contract for each public service

Each proposed service needs a contract that states the work to be performed, who is eligible to use it, minimum availability and quality, prices or funding rules, reporting requirements, interfaces with other services, ownership and permitted use of data and assets, and procedures for emergencies, disputes, default, renewal, and termination. Requirements should describe outcomes wherever possible rather than preserving the internal procedures of the former agency.

Performance measures must be difficult to satisfy while degrading the real service. A hospital contract based only on the number of treatments could reward unnecessary treatment; a road contract based only on kilometres maintained could neglect safety and heavily used locations. Measures may therefore combine availability, quality, safety, timeliness, user experience, long-term asset condition, and total cost. Contract terms, payments, performance data, conflicts of interest, and material failures should be visible through the public-service portals.

Contracts between services are as important as contracts with citizens. One operator's output may be another's essential input. Technical standards, capacity commitments, notice periods, prices, liability, data exchange, and fallback arrangements should be specified before the services are separated. System-wide responsibilities that cannot yet be expressed through dependable interfaces should remain coordinated until that problem is solved.

Minimise disruption and preserve continuity

The immediate purpose of conversion is to change the institutional and contractual basis of a useful service, not to stop the service or redesign everything it does. Existing projects, implementation programs, maintenance schedules, supplier arrangements, and commitments should continue under the new operator unless there is a specific reason to change them. The service contract should carry those obligations across the transfer so users and dependent services do not experience an arbitrary break in delivery.

The same presumption of continuity applies to the workforce. Public servants working in the converted service can become employees of the private operator while initially continuing their existing duties, projects, remuneration, and employment conditions. Conversion is not intended as a device for suddenly putting useful employees out of work or reducing their income. Preserving the people who understand and operate the service is often the least disruptive way to preserve its competence.

Over longer periods, services will evolve. Competing providers may emerge, contracts and funding may change, projects will finish, technology will improve, and operators may restructure their work. These changes should occur prospectively through ordinary contractual processes, performance evidence, competition, and natural staff turnover rather than being imposed all at once as part of the ownership transfer. Incrementalism allows reform while retaining the value already present in existing institutions.

Phase in competitive discipline

Continuity at the time of transfer does not permanently preserve the security and institutional protection associated with public employment. Over perhaps a decade or several decades, workers and organisations become progressively exposed to profit and loss, competing providers, measurable performance, changing contracts, and funding directed by taxpayers. The long transition gives people time to develop the skills, judgement, and working practices needed to succeed on merit in that environment.

This adaptation occurs at both individual and organisational levels. Individual public servants initially continue familiar work within the converted institution, while teams may remain together as divisions, become subcontractors, participate in purchasing their service, or develop into independent private operators. Existing competence and cooperation are retained, but their value must increasingly be demonstrated to customers, contracting services, and taxpayers rather than assumed from their position within a government hierarchy.

The exposure should increase with the wider transition. Legacy budget support declines, tax-choice funding becomes more important, comparable performance becomes visible, alternative operators gain entry, and contracts become easier to contest or reassign. A service that taxpayers value and an operator that performs well can prosper; one that cannot attract support or meet its contract must adapt, contract, or ultimately fail. Phasing this discipline in gradually avoids an abrupt shock without denying the competitive accountability intended in the final system.

This is consistent with the wider funding transition. Discretionary government spending on public services is phased out as spending directed by the public through tax choice is phased in. Operators therefore move gradually from budgets allocated by government officials towards funding that depends on service contracts, demonstrated performance, and the choices of taxpayers.

Convert and sell each service as a going concern

Once a coherent service has been separated and its service contract defined, that part of the government agency can be established as an operating institution and sold on the open market as a going concern. The purchaser becomes the private operator, accepts the service contract, operates for profit, and receives the funding assigned to the service, including tax-choice funding as it is phased in.

Conversion need not substantially change the service's daily operation. Its existing workforce, management processes, equipment, premises, supplier relationships, and accumulated knowledge may transfer with it. Employees who previously worked for a government agency then work for the private operator. The immediate change is principally one of ownership, accountability, funding, and exposure to profit and loss rather than an unnecessary disruption of competent operational work.

Select private operators openly

The sale of each operating service should be open to competing purchasers. The assets and liabilities being transferred, the service contract, selection criteria, contractual commitments, beneficial ownership, and conflicts of interest should be disclosed. Bidders compete for ownership on the knowledge that the institution must continue meeting its public-service contract.

Assets needed to operate the service may be transferred with the institution, while assets shared between several services may first need to be assigned to a separate service or governed by access contracts. The agency should be decomposed before sale so that the State does not merely transfer an unnecessarily integrated monopoly to a private owner. Where several operators can serve users concurrently, later entry and user choice should remain possible under the public-services model.

No operator's public-service position is permanent because every service contract and subcontract has a defined term. At expiry, the contract may be renewed, revised, divided, combined, awarded to another operator, or allowed to end according to the public-services system. The incumbent may compete for the next contract, but ownership of the operating company or its assets does not create a permanent entitlement to the public role or its tax funding. Contract terms can be long enough to support continuity and investment without making the arrangement perpetual.

Phase in funding through tax choice

Each new service initially needs enough transitional funding to honour its contract while citizens learn how to evaluate and allocate tax to it. A predetermined portion of its legacy budget can be converted into baseline contractual funding, with an increasing portion determined through tax choice. The legacy portion declines as consumption tax and participation in tax choice grow. The funding path should be published so operators, workers, users, and suppliers can plan.

Tax choice should fund the service rather than grant money permanently to a particular operator. Where several operators satisfy the same public-service contract, citizen allocations and service use can influence how funding is divided among them. Comparable performance information must be available before allocations have large consequences. New services also need a defined way to seek initial support so that existing operators do not acquire a permanent advantage merely by being present at the beginning of the transition.

Funding cannot always track current approval immediately. Infrastructure maintenance, emergency capacity, and long-term commitments require predictable revenue. Service contracts may therefore use reserves, notice periods, multi-period commitments, or separately identified minimum capacity. These mechanisms should stabilise delivery without insulating an operator indefinitely from loss of public support.

Transfer workers, assets, records, and obligations

Conversion requires more than transferring a budget. Equipment, land, intellectual property, records, licences, supplier contracts, debts, legal claims, and responsibility for past decisions must be assigned explicitly. Public records and the information needed to continue a service should not become inaccessible private property. Asset registers and opening balance sheets should be published before transfer, with independent valuation where ownership is sold.

Existing workers hold much of an agency's operational knowledge. Private operators should be free to develop their organisations over time, but employees can initially move with the operating service on their existing duties, remuneration, and employment conditions so that their work and the service continue. The transition should provide adequate notice and preserve accrued contractual entitlements. Workers may also participate in bids or form an operator of their own. A staged conversion reduces the risk that specialised knowledge disappears when ownership and organisational boundaries change.

Preserve continuity and allow operator failure

A private operator must be allowed to make a loss and fail, but failure of an operator should not necessarily terminate an essential public service. Contracts should require current operational records, portable data, maintainable assets, and enough notice or contingency planning for another operator to take over. Critical services may need multiple operators, spare capacity, mutual-aid arrangements, or a temporary contract that activates automatically when the primary operator defaults.

Continuity arrangements must not become a disguised guarantee of the operator's investors or creditors. The objective is to preserve access to the service and its necessary assets and information, not to preserve the failed company. Shareholders and creditors remain exposed to the commercial risks they accepted, while replacement operators compete to continue the public function.

Transfer a functioning service

Before a service is sold, its operating boundaries, contract, funding, assets, liabilities, records, employees, and interfaces with dependent services should be sufficiently clear for it to continue under private ownership. Experience after transfer can inform later contracts and conversions. Incremental conversion means transferring functioning parts of an agency as they are ready, not constructing duplicate services alongside them.

This produces a gradual change in the character of the State. Public purposes and collective funding continue, but delivery moves from integrated government bureaucracies to fine-grained services operated under transparent contracts. Tax choice progressively replaces administrative budget allocation, and the government agency becomes smaller as each operating service passes into private ownership. The remaining shell can be closed after its final obligation, asset, record, employee, and dependency has been assigned.