Issues in Market Testing

The Introduction of the Market Testing Law

Market testing means that general public services that had previously been handled by the government sector will be competed for at an equal level by both the government and private sectors through competitive bidding. This kind of system for determining who will provide services is called “government-and-private-sector competitive bidding”. Furthermore, this system differs from previous systems, such as PFI, designated supervisors, and special deregulation zones, in four important ways: 1) National and independent administrative institutions are subject to market testing, not just regional institutions; 2) Not just the administration and management of facilities but also general public services are subject to market testing; 3) The competition process is supervised by impartial third parties; 4) There are instances when government bidders are not awarded contracts. In other words, the bill is part of Prime Minister Koizumi's basic positions of “Leave to the private sector what it can do”, sustaining and improving the quality of public services and reducing expenses. In this way, the Market Testing Law is one concrete step toward introducing competition into the government sector, changing the way government sector jobs are handled, and reconfiguring the provision of public services. To this end, the government has adopted three goals for the Market Testing Law: 1) To improve the quality of public services, 2) To make public services more efficient (by reducing expenditures and personnel), 3) Expand business opportunities for the private sector.

Market testing has already been implemented as a model program in eight kinds of operations stretching across three fields, including some public projects at unemployment offices, social insurance agency-related projects, correctional facilities (prisons, etc.), and others. Following the enactment of the bill, however, the government is making preparations to expand market testing every year to include three more fields, including local government office counter work, statistics surveys and independent administrative institutions (Nikkei Shimbun, February 11, 2006 Edition).

Issues in Market Testing

The Market Testing Law is receiving strong resistance from government agencies and labor unions that have vested interests in the current system. In addition to overcoming these obstacles, the following issues must also be solved in order to proceed with market testing.

First, a system for third-party evaluation must be established. Though the Market Testing Law stipulates the creation of a mechanism for impartial and accurate screening and appraisal of the cost and quality of services provided by government enterprises, the method for ensuring impartiality and accuracy is not defined. Therefore, such a methodology must be established as quickly as possible.

Second, the fields (projects) to be targeted by the Market Testing Law must be determined. Until now, the fields (projects) covered by market testing have included a wide variety from the private sector. The Market Testing Law must go a step further to select fields (projects) based on research into the potential for contributing to the improvement and efficiency of public services.

Third, the new law must respond to the treatment of public servants who have come to handle the projects up until now. Market testing will give public servants whose projects have been shifted to the private sector the choice to transfer to the private sector with their jobs. In such cases, however, laws, systems and new schemes must be prepared to establish employment conditions and allow for smooth transfers for transferred individuals. In answer to this issue the government is pursuing policies that help public servants who have lost bids for providing public services to transfer easily and that provide preferential treatment when calculating retirement benefits for public servants based on their years of service. It will take more than this to earn the understanding of public servants, however.

Fourth, it is important for the new system to be consistent in both efficiency and in fair coverage for users. Market testing is predicted to improve efficiency in public services, such as in park supervision and management, for example, by calling for appropriate burden-sharing by users of the services and thereby preventing “free-rides”. However, this same system means that low-income individuals will become unable to use the services, thereby triggering problems in fair coverage. It is thus necessary to look into how to match the efficiency-seeking logic of the private sector with the ideal of providing fair public services.

Preliminary Issues before Implementing Market Testing

Aside from the above-mentioned issues, another major issue from an administrative perspective that must be addressed before implementing market testing is whether the government should really be handling certain public services that it is currently providing-in other words, how administrative boundaries should be defined. Market testing is a measure intended to re-examine those in charge of public services. In cases where public services shift from the government sector to the private sector, the bounds of certain public services may be premised upon previous bounds used by the government. Thus, though implementing market testing for public services may improve efficiency by reducing costs, there is also a danger that previous, inefficient bounds of public services may become entrenched.

Dr. Naohiro Yashiro, visiting professor at International Christian University and a member of the Council for Promoting the Opening up to the Private Sector which has promoted the implementation of market testing, responded that “the issue of what the government should do and which public services it should provide is a question of the range of government jurisdiction, and thus it is thought of as a separate issue from that of implementing market testing.” However, re-examining the bounds of government-provided public services is something that should be conducted before implementing market testing. It is thus necessary to sort out which services must really be provided by the government in advance.

Furthermore, in the private sector it is anticipated that the liberalization of government enterprises, including the implementation of market testing, will offer growing business chances in the “public business” market. At the same time, there is also a possibility that this way of thinking could instead lead to increased dependence on government enterprises for private finance, and could thus produce private businesses that are dependent on public projects.

The Japanese economy has finally escaped from long years of deflation, and new roots for economic growth are beginning to spread. The private sector is now demanding economic dependence from government enterprises under the slogan of “Leave to the private sector what it can do.” In implementing market testing, what is necessary is not the expectation of expanded businesses chances for the private sector, but rather the need for the private sector to demonstrate improved efficiency and quality in providing public services as representatives of the government.