Is government contracting private market dominance in public interest?

UK government auditor questions reliance on big contractors

Two NAO reports on government contractors, based largely on information from Capita, G4S, Serco and Atos, will form the basis of two Public Accounts Committee (PAC) hearings later this month. A review of Britain's use of big companies to run services from prisons to hospitals raised questions about whether the rise of a few major contractors was in the public interest, the National Audit Office (NAO) said on Tuesday.

In some markets, such as private prisons, child custody and medical assessments, there are only a few large providers which the NAO said could be considered "too big to fail". Some 3 billion pounds of the 40 billion spent by central government each year on suppliers is with the four firms in the report.

"I asked the NAO to carry out this work after looking at case after case of contract failure ... in each case we found poor service; poor value for money; and government departments completely out of their depth," Margaret Hodge, the lawmaker who chairs the PAC said. "These reports together raise some big concerns".

The political spotlight is firmly on Britain's 187 billion pound public sector contracting market after a series of high-profile contract failures. The NAO said transparency on profit made from government contracts was limited, with firms' tax affairs hard to understand, setting the agenda for a parliamentary grilling of some of the state's biggest suppliers next week.

James Moore: Now the Government’s outsourcing responsibility for contractor debacle

In the wake of the recent scandal involving accusations of overcharging by Serco and G4S, combined with numerous previous foul-ups, you might think the industry was due a zinger. The NAO doesn’t quite deliver one. Its tomes are lengthy, and discursive, and sometimes have the air of a concerned but benevolent schoolteacher telling Humphrey from the civil service and Harry from the contractor that they could perhaps see their way to doing a bit better.

In outsourcing services, the Government has sought to outsource its responsibility for them. That needs to end.

Has government become too aggressive with outsourcers?

The NAO notes that from 1 January 2006 to 30 September 2013, the value of these businesses on the stock market has risen much more than the value of FTSE 100 companies in general. In that period, the FTSE 100 index increased 26%, whereas Capita's share price rose 141% and G4S's 94%. That would suggest investors aren't remotely worried that the profitability of government contracts is too slim. It implies that the reliability of the revenues from these contracts is what matters, and that therefore the profit margins are quite satisfactory.

Or to put it another way, the perceived balance of risk on rewards on these outsourced deals is changing, to the detriment of the private sector businesses.

But, and this is quite important, the story of the relationship between the private-sector providers and the government is - ahem - evolving. Since the 2010 general election, the Cabinet Office has aggressively tried to exercise greater central control over the awarding of outsourcing contracts.There have been big management changes at Serco and G4S, and their share prices have both fallen by around a sixth since May.

So probably the most interesting conclusion by the NAO is the one that goes against the grain of typical political and public discourse about private sector providers. The NAO warns the Cabinet Office that there is a limit to the financial squeeze it can put on the likes of the big four, and that it may not be too long before there will be a loss of "innovation and investment" which "could pose a risk to value for money in the longer term".

The watchdog takes seriously the private sector providers when they say they may choose not to bid for future contracts in certain public services. And that could be a problem, because - with so much outsourced since the 1980s - it is not obvious that the public sector retains the competence and skills to take back some of these services.