"If your customers are forced by power of law to buy your services, then your incentive to keep them satisfied is weaker than it would be if they were to take their business elsewhere should you fail to do so."

Who's incentive exactly? Do you mean council front-line staff? You must be pretty niaive if you think that most employees are motivated by, or would perform better if there was, a risk of people taking their business elsewhere. Do you mean the incentive will affect supervisors or managers? Well, why should they care any more/less about the service they provide with your system? You assume that the council would want to run these services. They might be happy to run them all down and let private companies deal with all the hassle. Equally, I think it's just simplistic to think that council employees at any level would only want to do a good job if the council would lose money otherwise. There are plenty of facets that affect an individual's motivation/performance, and trying to weigh up whether people are going to opt out of council-run services is not going to figure heavily for most front-line staff. An ever-ready threat of being sacked isn't going to improve matters either.
James Fenton