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Tom Gash is Director of Research at the Institute for Government

Screen shot 2013-07-18 at 07.04.15Last week, Chris Grayling, the Justice Secretary, launched an attack on G4S and Serco for alleged overcharging for tagging criminals and criticised his own department’s commercial skills. He kicked off an internal enquiry to discover why billing oddities were not spotted and corrected sooner, and announced that Serco would be withdrawing from bidding for future tagging contracts. G4S are refusing to withdraw, perhaps less easily swayed by government due to the fact that they are far less reliant than Serco on government business.

The case has raised questions about the government’s outsourcing agenda – and a new report today from the Institute for Government raises many more. Independent providers now compete to provide public services across vast swathes of government. The public service industry is worth nearly £100 billion per year and growing. But there are questions about how well equipped Whitehall is to manage the shift from direct delivery to the design and oversight of new public service ‘markets’ – particularly in complex areas such as schooling, care and probation.

There is a general lack of evidence about whether in-house provision is better than commissioning services from competing providers. The evidence that does exist suggests the approach has worked in areas like waste management but that in other, more complicated areas, government rarely evaluates the impact of changing approach. In some, such as electronic tagging, government has never actually provided the service itself. In general, we simply don’t know whether outsourcing is better in some instances – and decisions on whether to outsource end up relying on theory and belief.

There have traditionally been three big reasons for outsourcing public services.

    • As a means of reducing the size of the state.

    • The belief that private and/or voluntary sector providers are inherently more effective.

    • To drive efficiency, effectiveness and innovation.

The Institute’s research shows clearly that there is no automatic association between outsourcing and a smaller state. A smaller public sector, perhaps, but it is noticeable that as Secretary of State for Education, Michael Gove is creating a far more market-like system of school provision; he is also protecting spending levels. Public spending grew during the 2000s at the same time as private and voluntary sector service provision became more and more popular.

The research also shows that the stereotypes about different sectors are rarely deserved. Public and voluntary sector providers will game incentives when under threat of exit, just as private sector ones will. Indeed, it was largely the response of public sector professionals to central targets that brought the phrase ‘hitting the target but missing the point’ into the media lexicon. Private sector providers, meanwhile, do not appear to be inherently more efficient – instead it is the fact of competition that matters. As one private provider, who sub-contracts lots of services to voluntary, private and former public sector providers, told us: “what sector you are in makes no difference to how you deliver the service”.

As noted, the evidence on efficiency, effectiveness, and innovation is patchy. But the main finding of the Institute’s research is that what matters is how well public service markets are designed and managed. Bad management of contracts and public service markets has real consequences – both in terms of how efficiently our taxes are spent and the quality of services for our children or parents, for example. Ironically, to get services into the private and voluntary sectors, public sector managers must demonstrate their worth. Designing and stewarding public service markets is tricky, and Whitehall does not yet, in the words of John Cridland, Director General of the CBI in The Times (£) yesterday, have “sufficient skills and sufficient capability (in) the big spending departments”.

Given that currently Whitehall lacks the skills to do some of this market design and oversight work, government faces a huge dilemma. Should it slow down in order to minimise errors – or push as much change as possible through quickly before the next election? We argue the former – not because reform isn’t needed but because of the risks attached to mistakes.

Apart from the practical consequences (and these are serious) there is a risk that the public will withdraw support for reforms. This support is more fragile than some think. A Populus survey published in July 2012 found that 75 per cent of people agree that ‘the most important thing is to have high-quality, free, public services not who is involved in running them’. But the same survey also showed that only 50 per cent agreed with the statement that ‘public services have more to gain than lose from making use of the expertise of private and voluntary sector organisations’.

If the public turn against this agenda, the cross-party consensus that public service markets can work will collapse. In the wake of a series of contracting difficulties, Sadiq Khan. the Shadow Justice Secretary is now opposing the plans to privatise probation, while a decade earlier some of his Labour predecessors created the National Offender Management Service partly because it would create opportunities for more probation outsourcing.

Providers may also turn against government. Many providers are frustrated by the bashing they often receive from Ministers for errors that are at least partly government’s fault – and feel that any good work done is too often taken for granted. Providers overseas are not hugely impressed by the UK operating environment either – or at least aren’t flooding to these shores to compete for work, which undermines competition and value for taxpayers. Some providers are also clearly concerned themselves about their ability to take on more and more new areas of work. Learning how to provide probation services, manage legal aid, and work with ever-more complex ‘payment by results’ contracts all at once is not an easy task – and if providers see huge reputational costs from errors they may withdraw from competing.

These costs of moving too quickly should not be ignored, and Ministers should focus on fixing problems found in the tagging case and those highlighted in the Institute’s research before cracking on. Government urgently needs to ensure that existing public service markets are truly competitive and delivering results, to make much more transparent how much providers are being paid and what they are delivering and to ensure that rewards and sanctions genuinely follow success and failure. Fix the Whitehall machine before driving it – and our services – to breaking point.

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