After Carillion: Public sector outsourcing and contracting Contents

2How appropriate is it for public services or projects to be run by the private sector?

The significance of outsourcing

8.The UK Government has always purchased some assets and goods from the private sector. In the 18th and 19th Centuries, governments purchased some public services from the private and voluntary sectors: such as, criminal justice, defence and education.11 Although governments brought some services in house during the first three quarters of the 20th century, they still purchased a variety of goods and services from the private sector, including construction services and weapons systems.12

9.Since the 1970s, the UK has increasingly turned to the private sector to deliver public services.13 Professor Michael Moran, (University of Manchester), Professor Karel Williams (Manchester University) and Professor Sukhdev Johal (Queen Mary University) argued that current outsourcing is different in nature from what happened immediately prior to the 1970s: “modern outsourcing is more fundamental and more complex; it involves franchising or leasing complex sets of services to private contractors”.14 The CBI agreed that this represents a starting point: “outsourcing, as we have been discussing it today, has been around for 30 or 40 years”.15 There is evidence of this transformation in particular markets. For example, UNISON said that “in the early 1990s just 5% of home care was provided by private companies, today it is more than 80%.”16 There are a number of markets which simply did not exist 30 to 40 years ago including prisons, probation services and support for unemployed people to return to work.

10.Now a wide variety of services and goods are purchased from the private sector. According to the NAO, these include:

Local Government similarly purchases a diversity of services, ranging from contracts for IT to the provision of children’s services.18 The diversity of service provision leads to a diversity of suppliers: George MacFarlane, Sectors Director at the CBI, told us that around 200,000 companies and charities now deliver services to or for the public sector across the country.19 Consequently, the Minister argues that “the private sector has a vital role to play in delivering public services”.20

11.In 2015–16, central and local government spent a combined £251.5 billion with external suppliers of goods and services.21 The Government spends roughly as much on purchasing goods and services from the private sector (£192 billion in 2015–16) as it does on paying its own staff (£193bn).22 Most public services now include some element of outsourcing: Michael King, the Local Government and Social Care Ombudsman, told us “there are few areas now where we do not see some sort of externalisation through contracts”.23 Often this will involve the public, private and voluntary sectors working together to deliver a social outcome. For example, in probation services, a public sector prison might release a former prisoner to a private sector community rehabilitation contractor who commissions a service for the prisoner from a charitable provider.24

12.The UK is not alone in this regard. The practice has “become commonplace across most EU countries”.25 According to the OECD, government procurement accounts for “approximately 12% of OECD GDP”.26 In 2015, the UK spent 13.7% of GDP on government procurement. This proportion has been consistent over the last ten years, with the UK spending at least 13% (2007) and at most 15.6% (2009).27 Internationally, this compares with 20.2% of GDP spent on government procurement in the Netherlands, 17.5% in Finland, 15.05% in Germany, 14.6% in France, 14.16% in Denmark and 9.4% in the United States of America.28 Professor Sturgess told us that different countries take very different decisions about what to purchase, based on cultural factors: in Denmark emergency services like the Fire Service are provided by a private firm which in the UK, he said, would be politically “unacceptable”, whereas he said the UK has long contracted out the operation of its lighthouse service which would be “confounding” in countries such as the United States.29 It is not confined to the public sector only: as the Minister said recently “outsourcing is standard practice within the private sector”.30

13.Despite this, recently public trust in outsourcing has declined. Margaret Stephens said that “trust has been lost in PFI” and warned the same lack of trust could extend to outsourcing in general.31 Paul Davies said that the public “simply do not trust that private ownership is in their interest.”32 In the Minister’s view, the Carillion failure has “crystallised issues which have, at times, informed that breakdown of trust”.33

14.Government outsourcing is now more important than ever. This is true not only of the UK but also of most other advanced economies. The Government purchases almost as much from external providers as it spends on its own staff. There are few public services where the Government does not rely, to some extent, on some sort of contractual relationship.

The case for outsourcing

15.Despite the extent and importance of the UK’s use of the private and voluntary sectors to deliver public services, it has been controversial. This section lays out the arguments that we heard in favour of and against outsourcing.

16.Numerous witnesses told us that purchasing services from the private sector reduced costs for the taxpayer by as much as 10–30%.34 The Minister justified this claim by referring to economies of scale resulting from the use of the same company to serve different clients, greater freedom to access specialist knowledge and the imposition of cost discipline.35 His arguments were supported elsewhere by Serco and Mitie.36 These arguments have academic support: John Manzoni, the Chief Executive of the Civil Service, supported the Minister’s claim by pointing to studies which say that savings of “about 20%” are achieved when a service is first exposed to competition.37

17.The Global Sourcing Association told us that purchasing services allows the government to access “talent on a global basis”.38 Serco agreed, saying that outsourcing enables the Government to bring in new talent with “new ideas” about how to run services.39 Mitie mentioned that bringing in private sector expertise enables the Government to take advantage of the “innovation and leading-edge technology” which companies bring with them.40 The Minister agreed, citing the “range of specialist skills, world class expertise and deeper knowledge” the private sector can bring to problems.41 Paul Davies, an independent infrastructure advisor, said that private companies bring “cost skills and project management skills for implementation” as they are “often doing the same job outside of the public sector”.42 Peter Smith, a former government procurement director, argued that it is important to remember that the state often failed to deliver the services that companies now successfully deliver.43

18.The points raised in favour of outsourcing have not gone without challenge. Professor Haslam (Queen Mary University) told us that purchased services could sometimes be more expensive.44 Local Authorities have recently argued that providing services themselves is both cheaper and produces better quality services.45 The Unite Union argued that far from reducing costs, these contracts give “public assets and resources to private individuals or companies that make huge profits”.46

19.Critics argue that where there are reduced costs, these “come from driving lower pay, worse terms and conditions”.47 The TUC said that private contractors offer worse terms to workers than the public sector for similar jobs.48 This is contested. Rupert Soames, CEO of Serco, “vigorously” denied that they offered worse working conditions than the public sector and said that they “specialise in organising our people well” and hence run services with fewer staff.49 Phil Bentley, CEO of Mitie, said that while some conditions such as pensions might not be as favourable to the employee in the private sector, there might be more career progression.50

20.There is a consensus that the private sector should be able to provide some goods to the public sector. Even opponents of the private sector’s involvement in the public sector acknowledge that the public sector should buy goods from the private sector.51 On the other hand, supporters of using the private sector acknowledge that there are some areas (for example, policy analysis by the civil service or decision making) which should not be outsourced and that some contracts have gone badly wrong in the past.52 Opponents of using the private sector tend to extend this boundary. For example, the Scottish Refugee Council “question whether outsourcing to non-public or charitable bodies or the possibility of profit can ever be appropriate in complex services” such as immigration centres.53

21.Public sector capacity limits what can immediately be brought back in house. We were told that it would be difficult to bring services back in house, at least in the short-term. Sir Amyas Morse, the Comptroller and Auditor General, told us that “there are a lot of areas where Government does not have the capacity to do anything else but outsource” and that in some parts of government, “the capability of even acting as a prime contractor is not necessarily there.”54 David Walker, a Guardian Journalist and former Audit Commission official, agreed that “within the short run many services could not overnight be switched back”.55 As the Institute for Government (IfG) said in advance of the 2015 General Election, “however desirable it might be to act quickly, switching from in-house to outsourced provision (or vice-versa) is not a trivial undertaking”.56

22.Most of the witnesses to our inquiry endorsed the conclusion of Professor Simon Wren-Lewis of Oxford University that the right answer to whether the Government should purchase services or goods from outside companies or charities is “it depends”.57 Nick Davies from the IfG said that “there is broad agreement that there is probably not a hard line about what should be insourced or outsourced, but there are certain services that are more likely to be able to be outsourced successfully”.58 David Walker, from a different perspective, agreed: he told us that, while “public-facing services” should always be in the public sector, it would be “dogmatic to say at any given point that there is a hard and fast division”.59

23.At different times, private, charitable and public providers have both succeeded and failed to contribute to successful public services. All the witnesses to our inquiry accepted that the public sector should buy in some goods or services from the private sector, and should insist on providing others internally. The public sector should not contract out the final decision making about policy. The public sector always retains responsibility for the entitlement of individuals to benefits or services. Whether ordinary services should be outsourced though will depend upon the capacity of the public sector, private sector or voluntary sector to deliver them, the comparative cost, and ultimately, the value that each provider can produce.

The Decision to outsource

24.Consequently, most witnesses to our inquiry argued that decisions to outsource or not should be made on a programme-by-programme basis. Serco advocated “a robust, rational, documented … ‘make-or-buy’ decision-making process” for each potential outsourced or insourced contract.60 John Tizard, a former executive at Capita, called for this process to be mandatory across the public sector.61 Sir Amyas Morse said that “there should be a business case” explaining the rationale for purchasing a good or service, rather than producing it internally.62

25.The IfG has set out ten questions which it considers should guide public sector managers in making decisions about whether to procure or not from the private sector. These include questions about the complexity, uncertainty and supply of provision.63

26.The Government has also advocated a pragmatic, evidence-based approach. John Manzoni reaffirmed to us the principle set out the Civil Service Reform Plan in 2012 that “Departments will commission services from others where this achieves a better service to the public or better value to the taxpayer”.64 The Minister said that “what matters is that the service works for the people who use it in their everyday needs. While at the same time providing value for money for the taxpayer”.65

27.The Treasury issues guidance to departments on this evaluation in a document called the Green Book. The Green Book sets out the Government’s approach to evaluation and appraisal of projects. The process for approving new projects covers what the Government describes as the strategic case, the economic case, the commercial case, the financial case and the management case for the project.66 The Government supplies supporting detail of what it means by each of these cases: in the analysis for the economic case, for example, the Government says it analyses whether “the spending proposal optimises public value (to the UK as a whole)”.67 During this process, a proposal goes through various checkpoints. At one of those checkpoints, the Outline Business Case (OBC), the department is supposed to set out a “’preferred option’ which demonstrably optimises value for money”, including a strategy for procurement.68 The department does not just evaluate in deciding on this preferred option between a public and private sector route: but also evaluates what kind of public or private sector arrangement it needs to deliver services. The Government told us that it is currently updating the Green Book guidance on business cases to reflect changes in legislation and “better thinking about how we do the things that we are doing”.69

28.However, we have received evidence that this is not the process that the Government currently follows. The Trade Union Congress criticised the Government for not following the IfG’s guidelines.70 Nick Davies said that the Government “has tended to rush into outsourcing approaches” without evaluating whether they are appropriate or how to mitigate any risks if they are not appropriate.71 There are examples in which decisions about whether and how to procure were made before a formal business case process was concluded.72 Sir Amyas Morse agreed that “there are, no doubt, cases where I would not be happy with the amount of logic or consideration that had gone in” to the decision.73 The CBI and David Walker both criticised this decision making.74

29.The Government rejected this criticism. John Manzoni told us that all decisions to purchase a good or service “go through that scaffolding, they go through those decision points and they are examined and scrutinised and a decision is taken.”75 Rupert Soames said that while the Government might assert it did this well, “we never see the grounds for that—it is shrouded in opaqueness, on what grounds the Government decide to put something out or not. I think that that should be a transparent process”.76 When asked whether the Government should be more “open about… [its] logic” on this kind of decision, the Minister replied that he could see “no objection to that in principle”.77

30.There was a consensus among the witnesses to our inquiry that the Government should be taking a reasoned, evidence based make-or-buy decision. The Government has set out criteria for this in its Green Book guidance. This decision is not binary between private provision and public provision but should include a number of alternative methods of provision, several of which might involve commissioning the service or providing the service in-house. We heard conflicting evidence about whether the Government consistently follows its own guidance in this respect. It is impossible to tell from the outside whether decisions have been made appropriately.

31.It is intolerable that the Government is spending £250 billion with little evidence that it is currently following its own procedures to secure value for money. The business case procedure set out in the Treasury’s Green Book provides a suitable basis for making decisions about whether and how to let contracts. However, we are concerned by the evidence of the Comptroller and Auditor General that this is not always followed. The Cabinet Office and Treasury should ensure that all contractual decisions are based on a sound business case and in accordance with the guidance laid out in the Green Book.

32.Public trust in outsourcing has been seriously damaged recently. This is due to a number of high profile failures–including most recently the failure of Carillion. The Government needs to rebuild trust in the process by which it makes decisions about outsourcing. The Government can only achieve this by being transparent about how and why it decides to purchase a good or service. Especially in cases where private sector involvement or the type of commissioning is novel, the Government should publish its rationale for the decision and notify the relevant select committee. This might take the form of a published business case, for example.

Evidence Base

33.The Government’s lack of evidence about when and whether using the private sector or voluntary sector will be more successful than using the public sector underpins this lack of a structured business case. Nick Davies told us that, while evidence on buying goods was unambiguous, on purchasing services it was “a lot patchier”.78 Margaret Stephens told us that “there is a case for gathering much more evidence to inform better decision-making.”79 The union UNISON complained about a “lack of hard data”.80 Professor Sturgess noted that, while some research had been done on the merits of purchasing goods or services externally, it was “nowhere near enough”.81

34.Professor Sturgess told us that, given the complexity of each decision about purchasing services, more work should be done in evaluating case studies of contracting.82 In the Government’s manual for handling money, Managing Public Money, it endorses the principle that programmes should have evaluations designed into them at the start.83 There are examples of evaluations within central government that examine novel procurement structures. For example, the Department for Work and Pensions commissioned an evaluation of the Work Programme in 2014 which pointed out that incentives to help the hardest-to-help claimants had “a limited impact in driving provider behaviour.”84

35.Professor Sturgess recommended that, in addition to evaluations published by departments, the Government should consider the “establishment of a centre of excellence for the study of applied public service contracting, and the design and operation of public service markets.”85 In other areas, the Government has established what it calls “What Works Centres”: these currently focus on issues like educational attainment or local economic growth.86

36.The Government must produce evidence about the advantages and disadvantages of purchasing from the private or third sector in different public services. This should include an assessment of the cost and quality advantages and disadvantages of purchasing services. The Government should establish a centre of excellence for research into applied contracting (for example, through establishing a new “What Works Centre”).

11 Richard Harding and Sergio Solbes Ferri (coords.), ‘The Contractor State and Its Implications, 1659–1815’, Universidad de Las Palmas de Gran Canaria, 2012, H. Midgley Payment by results in nineteenth century British education: a study in how priorities change Journal of Policy History Vol. 28 Issue 4 (2016) pp. 680–706, G. Sturgess, G. Argyrous and S. Rahman Commissioning human services: lessons from Australian convict contracting Australian Journal of Public Administration Vol. 76 Issue 4 (2017) pp. 457–69, Q404

12 J.F Flower, The Case of the Political Bloodhound Journal of Accounting Research Vol. 4 No. 1 (1966) p. 16. P. Smith, Procurement collaboration in the UK public sector Spend Matters November 2017

13 C. Hood and R. Dixon, A Government that worked better but cost less? Evaluating three decades of reform and change in UK central Government (Oxford 2015), p. 2; A. Bowman, I. Erturk et al. What a waste: outsourcing and how it goes wrong, Manchester University Press, 2015, p. 2

14 S. Johal, M. Moran and K. Williams Breaking the constitutional silence: the public services industry and the Government The political quarterly Vol. 87 Issue 3 (2016)

16 LCC0013 (UNISON)

17 National Audit Office, A Short Guide to Commercial Relations, December 2017, p. 8

18 Q239 (David Simmonds)

21 National Audit Office A Short Guide to Commercial Relations December 2017 p. 4

25 J.M. Alonso, J. Clifton and D. Diaz-Fuentes, Did new public management matter? An empirical analysis o the outsourcing and decentralising effects on public sector size, MPRA Paper No. 43255 (December 2012), p. 6

34 Q240 (David Simmonds), Q333 (George MacFarlane)

36 Mitie LCC0039, Serco LCC0022

37 Q743. S. Domberger and S. Rimmer, Competitive tendering and contracting in the public sector: a survey International Journal of the Economics of Business Vol. 1 Issue 43 (1994) pp. 439–53. DeAnne Julius, Public services industry review: understanding the Public Services Industry: How big, how good, where next? July 2008. Confederation of British Industry Open Access: Delivering Quality and Value in Our Public Services, September 2012

39 LCC0022 (Serco)

40 LCC0039 (Mitie)

42 Q561

43 LCC0007 (Peter Smith)

44 Q402)

45 G. Plimmer, How outsourcing fell out of fashion in the UK, Financial Times, February 9 2018

46 Unite LCC0011

47 Unite LCC0011. See also David Walker Q707

48 TUC LCC0018, Q707 (Matt Dykes)

51 Q685 (David Walker), We own it LCC0038

52 Q563 (Margaret Stephens); Q568 (Paul Davies); Q744 (David Lidington MP), LCC0007 (Peter Smith). The Government in 2012 did consider outsourcing some policy development. HM Government The Civil service reform plan (2012) p. 16

53 LCC0016 (Scottish Refugee Council)

56 Institute for Government, Getting a better deal in outsourced services, 2015

57 Simon Wren-Lewis, What Carillion’s collapse tells us about public sector outsourcing, London School of Economics British Policy and Politics, January 2018

60 Serco LCC0022

61 (John Tizard) LCC0005

63 Institute for Government LCC0040

64 Q746, (John Manzoni); The Civil Service Reform Plan, June 2012, p. 8

67 Ibid. p. 12

68 Ibid. p. 19

69 Q748 (Gareth Rhys Williams)

70 LCC0018 (Trade Union Congress)

72 National Audit Office, The introduction of the Work Programme, 2012, p. 7

75 Q747, LCC0002 (David Walker)

78 Q399, see also Q412

79 Q572

80 LCC0013 (UNISON)

83 HM Treasury, Managing Public Money, Box 4.8

85 Professor Gary Sturgess LCC0023

86 For a full description of “What Works Centres” and description of their function see Government What Works Network (2018)

Published: 9 July 2018