Carillion's collapse shows that we need an urgent review of outsourcing

Carillion’s cave-in isn’t the first nor will it be the last spectacular failure of a contractor. There are more to come – and soon – in social care, where private equity owned Four Seasons is in deep trouble and Scotland’s Bield is pulling out of its four residential homes.

But pundits predicted outsourcing was on its last legs when G4S failed to deliver at the 2012 Olympics and when several of the companies that had rushed into probation services arrived on the Ministry of Justice’s doorstep, begging bowls in hand.

Despite that, a significant proportion of clinical care contracts in the NHS in England last year went to outside companies; councils (Labour as well as Tory) are still pushing service contracts out and, under Tory ministers, Whitehall shows no hesitation in involving firms in defence, IT, back office, benefits assessment, school management and so on.

So it’s premature to declare an end to the 30-year triumphant growth of competitive bidding, leading to a “public service market” with a value estimated by the National Audit Office at £100bn a year. Yet that figure is oddly tentative. The auditors don’t know for sure. The Cabinet Office doesn’t bother counting contracts let or terminated. NHS regulators, the Local Government Association and the devolved bodies have not kept a tally of the number of contracts or which firms are involved in what and how well they have performed.

A major IT firm (foreign owned, as many contractors are) delivers indifferent service to an NHS trust and uses its size and leverage to manipulate the contract to maximise revenue and profitability. It bids for a £500m 10-year contract for a major local authority. The council and the trust have no means of knowing; no one collates performance data and passes it on. Things are shrouded in “commercial confidentiality”.

The Crown Commercial Service, part of the Cabinet Office, does good work trying to open up and improve contract letting in Whitehall. But what we need – have needed for years – is a strong central capacity to register, regulate and refine contracting, not just by departments but councils, the NHS, police commissioners and the rest of the public sector.

Next week the Smith Institute publishes a report that John Tizard and I produced, making the case for a thoroughgoing review of outsourcing. The last was under the Gordon Brown government and, in the spirit of those times, was breathlessly enthusiastic, without producing good evidence or numbers. Since Margaret Thatcher first forced councils to contract out services to firms, giant claims have been made without research or appraisal.

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.

Labour says it will commission no more private finance initiatives (PFIs), with talk of a windfall tax on PFI contractors. But that implies we know enough about the convoluted corporate structures that have been built up, often in order to avoid paying UK tax. We don’t. It’s asking a lot of an NHS finance director or council executive to understand the balance sheet of an entity headquartered in Dublin, Madrid or Paris that has spun out multiple shell companies, only one of which is responsible for trimming the shrubs in the local park – or, as with Amey in Sheffield, felling much-loved city trees.

The public sector will always buy things from firms, will use firms to build – as with Carillion – houses and railways. But bringing profit-seeking firms into policing and benefits assessment, into schools, clinics, and front as well as back offices, has changed the nature of the relationship. It’s time to stop, review and think again.

• Out of Contract – time to move on from the ‘love in’ with outsourcing and PFI, published by the Smith Institute on 22 January 2018.

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