Croatia: Outsourcing of non-core services to the private sector

The Government of Croatia announced a proposal to outsource non-core services to the private sector. After strong resistance by trade unions and others, the government then suggested the creation of a spin-off publicly owned company to take on the employees and deliver the services. In the face of continued opposition, the government finally withdrew both proposals.

Background

The general argument is that outsourcing – awarding service functions to external providers – and opening the public sector to competition enhances economic efficiency and output. There is concern, however, that outsourcing could lower service quality.

A survey of the literature concludes that the effect of public sector outsourcing on service quality depends on the type of service outsourced. Outsourcing generally reduces costs without harming quality for services that are easy to standardise. Public sector outsourcing is controversial, primarily because of its impact on employment, since job creation in the public sector is often used to reduce unemployment.

The most politicised argument concerning outsourcing is the fear of the loss of public sector jobs. However, the empirical evidence for this fear is vague. Most studies that focus on developing and transitional economies have concluded that the long-term effect on employment is either imperceptible or positive, although there might be short-term job losses from outsourcing public services and enterprises, which are frequently overstaffed. However, reducing employment in overstaffed sectors frees resources for more productive work. Also, as economic efficiency increases following privatisation, more jobs tend to be created than are lost in the initial switch to private provision, according to a report on the privatisation and outsourcing of public services (in Croatian, 904 KB PDF).

Transfer of non-core services to private sector proposed

In spring 2014, the Government of Croatia proposed that all non-core services – primarily cleaning/housekeeping, cooking and similar services – in the state and public sector be outsourced to the private sector. The government said outsourcing would bring significant cost savings, raise efficiency and enable a better focus on core competencies. The government suggested that outsourcing housekeeping services would be accompanied by several other very important reforms such as the reorganisation of hospitals, restructuring the schooling system and reorganising the judiciary to speed up processing of cases.

An article published by the online news service Jutarnji List suggested that outsourcing would affect more than 20,000 employees in the public sector. These are cleaners, launderers, cooks, housekeepers and other low-skilled staff who are paid from the state budget and whose labour contracts are subject to collective bargaining.

Deputy Prime Minister and Social Welfare Minister Milanka Opacic said that two other options were on the agenda: boosting the efficiency of the public sector, or creating spin-off state-owned companies to provide non-core services. She said she believed that the transfer of workers to private employers would be the best cost-cutting model, while those workers would retain their jobs. The minister pointed out that EU guidelines protect workers’ acquired rights and jobs for a period of between one and five years after transfer to a new employer. The savings would be between 10% and 30%, or up to €700 million annually.

Fear of job losses

Outsourcing in Croatia has negative connotations because of constant warnings by trade unionists and parts of the public sector that it will lead to the loss of many jobs. The main goal of the new employers would be profit, suggested an article (in Croatian) in online business magazine Business Diary, while workers' rights would be completely unimportant or neglected.

The major driver in the outsourcing decision-making process was acknowledged to be cost saving, but no cost–benefit analysis was done and additional/hidden costs for services were not considered. According to an article on cost cutting in the public sector (in Croatian), it was not made clear whether outsourcing would bring any savings, and whether the process itself would create additional costs. Trade unions claim that there is also no evidence that outsourcing would increase efficiency.

On the other hand, this kind of outsourcing requires a massive organisational effort and adherence to expensive and time-consuming legal procedures. Despite this, in early summer 2014 the government began outsourcing auxiliary jobs and submitted a draft agreement to the trade unions on the issue which gave few details about the scope and procedure of the outsourcing.

The outsourcing law was sent to Parliament for approval and 17 trade unions began collecting signatures for a referendum on outsourcing. They needed to achieve just under 400,000 signatures to trigger the referendum procedure. The President of the teachers’ union Preporod, Zeljko Stipic, speaking on behalf of public sector unions, called on the government to suspend its outsourcing of non-core services in the public sector until a referendum could be held. Stipic said that the unions had gathered 612,017 valid signatures for the referendum, far more than the statutory minimum, and would deliver them to Parliamentary Speaker Josip Leko. The Croatian public service unions campaigned for four weeks to collect more than 367,000 signatures (10% of the voting population) to defeat the outsourcing proposals.

As a result, and after extensive discussion, the government decided to opt for the spin-off model, establishing a large state-owned company to which all these housekeeping services would be transferred. According to reliable government sources the management structure of such a company has not been defined, but the company would have an exclusive contract with the state for providing ancillary services for a period of three to five years. Subsequently, the spin-off entity would be privatised under the ESOP (Employee Stock Ownership Plan) model giving workers a share of ownership.

The Croatian Employers Association (CEA) said this would be meaningless. Quoted in Jutarnji List, the CEA commented that it would not relieve the state budget in any way or make administration more efficient. The CEA criticised the government for its handling of the plan to outsource non-core services.

After extensive debate and feedback from its partners in the ruling coalition, the government finally decided to withdraw both outsourcing and the spin-off model. However, even if the government drops the idea of outsourcing non-core services altogether, the question of efficiency of public services will still be unresolved.

Commentary

Various authors and journalists note that the Croatian experience confirms how risky it is to try outsourcing without fully understanding the organisation's processes and cost structure. The success of outsourcing as a business strategy depends on an in-depth understanding of the current management system, timeliness and steadiness in the process of implementation. None of these factors was in place in the Croatian experience to help outsource non-core services from the public to the private sector.

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