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John Tizard and David Walker: Time to stop the ‘love-in’ with public service outsourcing

Monday January 22nd, 2018

In a new Smith Institute report, Out of contract: Time to move on from the ‘love in’ with outsourcing and PFI, we are calling for an immediate pause in all public service contracting followed by a root-and-branch review of all existing deals. David Walker

This report, published on 22 January. comes in the wake of the Carillion debacle which has shown the serious risks and excessive costs to the taxpayer when government becomes reliant on outsourcing companies. It also follows the publication of the National Audit Office (NAO)’s report on PFI and PF2 (https://www.nao.org.uk/report/pfi-and-pf2/), which has demonstrated the significant failure of PFI and PF2 to achieve value for money.

We estimate that public sector outsourcing contracts are currently valued at around £100bn a year but no one actually knows because, in spite of the rapid growth of outsourcing and PFI, the data is lacking and Whitehall is failing to properly scrutinise outsourcing and PFI deals.

We argue that the Government should urgently create a ‘Domesday Book’ listing details of all significant public sector contracts, including contractors, the value of contracts and their performance. This could be led by the Crown Commercial Service within the Cabinet Office but will need to involve local government, the NHS and collaborate with the devolved administrations.

Gathering and analysing the data and information about contracts is essential but is not sufficient. Given the lack of systematic evidence about outsourcing and in the face of the spectacular collapse of Carillion and other well reported failures of outsourced services and outsourcers, we are all also calling for an immediate comprehensive examination and ‘open book’ audit of all significant outsourcing and PFI deals. This, they argue, could lead to many contracts being abandoned and public delivery of public services reinstated.

Carillion shows that government can never outsource risk. If a contractor fails, it’s the public sector that carries the can and, as with probation, may bail it out. That is a form of implicit assurance that should be priced into contracts. Similarly, if a contractor wins by cutting staff costs and employees then resort to tax credits to survive, the aggregate public purse may even be worse off

Unfortunately, Carillion is unlikely to be the only company to fail and leave the public sector with all the risks and responsibility for ensuring that services are sustained. The current situation is not itself sustainable.

We strongly believe that public delivery rather than outsourcing should again be the norm in government, policing, the NHS and other services. This means moving away from the pursuit of a smaller state and from the New Public Management commitment to competition and markets ahead of social purpose.

There are increasing numbers of examples indicating that local government (of all political persuasions), the devolved administrations and some NHS trusts are already turning back from outsourcing towards ‘in sourcing’. They are finding publicly run services can be cheaper, better quality, more flexible and more accountable.

In terms of PFI, we agree with the demand that there should be no new PFI projects, that all existing projects should be reexamined and, where possible, renegotiated or even terminated. This is will require public sector capacity and expertise and renegotiation and termination should only apply when this is in the public interest and offers value for money.

The Smith Institute report documents the deep flaws in many outsourcing and PFI deals, which the Carillion debacle shows are being overlooked by a Government which is severely ideologically biased in favour of private provision. Many outsourcing contracts are not just poor value for money, but carry huge social costs to communities too.

There is a need for better regulation of outsourcing – and there will always be some outsourcing where this is in the public interest. Such regulation should require the public sector client to take into account the bidders’ previous performance, company ownership, tax practices, how much directors are paid, as well as staff employment and conditions and union recognition. These criteria should be included in any future contracts, which should be as open as possible and no longer be concealed behind ‘commercial confidentiality’.

Public bodies should be required to adopt transparent ‘make or buy’ criteria if they are considering outsourcing. These would include the whole social, economic, environmental and financial cost of outsourcing, in-house and market capacity and expertise, wider policy considerations, experience of outsourcing of similar services by others and local considerations. And public bodies should be required to consult on the application of these criteria and the business case prior to any procurement process.

This is a pivotal moment for public services – the love-in with the private sector, PFI and outsourcing is certainly cooling and could be about to end – with or without tears. However, there is much evidence to suggest that if it continues there will be more tears.

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