Stop using Carillion as a pawn in the nationalisation crusade
Here’s a topical question: if you need nurses uniforms, is it better to buy them from a company that..
Here’s a topical question: if you need nurses uniforms, is it better to buy them from a company that makes uniforms, or launch a fully state-run government agency to start a uniform factory from scratch?
If you are Labour leader Jeremy Corbyn, basking in the failure of public services giant Carillion and its struggling fellow Capita, the answer is apparently the latter.
Outsourcing contracts have, he said, “fleeced the public”, and it’s time to bring all services back under state control.
Read more: After recent profit warnings, could Capita be the next Carillion?
To explain just how absurd such a suggestion is, let’s start with when and why private sector involvement sometimes doesn’t make sense.
Often, the issue is one of incentives. If private prisons are paid purely based on how many prisoners they hold, they have an incentive to maximise population, leading to overcrowding, and little reason to invest in rehabilitation and education, which would be in the long-term interests of the country.
On a much smaller scale, we saw this dilemma this week, when a private “environmental and civil enforcement services” firm in Brighton employed by the council fined a woman £600 for disposing of a cardboard box in a communal recycling bin.
No one can really argue this is fair, but firms with a mandate to raise as much money for the council as possible will act accordingly. The same is true of disability assessors who are paid based on how many individuals they deem fit for work.
But if that’s one extreme end of the public versus private spectrum, what’s the other?
In 1948, as part of the then Labour government’s rail nationalisation agenda, 55 private hotels and one golf course were passed into state ownership. Even the likes of the Labour frontbench would find it hard to argue that it is the government’s role to run a golf course.
The outsourced services that Corbyn would bring back under state control today include some equally bizarre examples.
Should the state design and manufacture uniforms, police cars, and school whiteboards? What about running services like catering, cleaning, and IT? Why would the government be better at building a hospital than a construction firm?
If a company wanted to procure these services, it would shop around for the best quote, rather than try to build an in-house team for everything. Theoretically, competition keeps costs down and standards up.
It is therefore completely unhelpful to frame this debate – as Labour has done – around how much money the government spends on these contracts. The headline number of £242bn is profoundly misleading – what matters is how much the government saves from not doing everything itself.
That’s hard to measure overall, with so many varied contracts, but as an example of what’s possible, a report from the think tank Reform shows that the Department for Work and Pensions was able to cut its web-hosting costs by 90 per cent by using a new digital procurement system to get the best-value deal.
Obviously, as Carillion and now Capita show, the problem comes when bloated and mismanaged outsourcing companies are relied upon to the point where the state has no choice but to step in during difficulties, or risk crucial services.
There are so many issues with how the government handled these contracts – from prioritising “favoured firms” over smaller businesses at the expense of competition, to offering £1.3bn of contracts to Carillion despite its obvious weaknesses. Taxpayers want value for money, and are justifiably concerned at the potential price tag of dealing with collapsed outsourcing giants.
But another mistake may be that the government is too cost-focused.
A Business Services Association report from March 2017 found that just one of the five biggest private-public service providers had made a commercial return in the previous five years. The stereotype trumpeted by Corbyn of “rip-off” companies that are “creaming off profits” just doesn’t hold up.
An over-emphasis on price rather than quality and reliability, encouraged by a barrage of criticism against outsourcing, may have led to an unsustainable cycle whereby big companies underprice contracts to win new work in order to fund existing projects.
Again, the issue is incentives – we need a way to ensure companies focus on the desired outcomes, rather than just winning contracts
Regardless of the mistakes made, it is the application of outsourcing that is the problem, not the concept. And the public mostly agree. A poll from Reform found that 60 per cent don’t mind who provides a service, as long as the system works.
Essentially, the issues over Carillion and Capita are a matter of management and bidding practices, but these have been hijacked by ideologues who believe that everything should be centrally run and have whipped up a state of moral panic.
Unfortunately, yet again the far left is winning the argument.
If market advocates don’t start addressing the problems with the current outsourcing system and making the case for it in principle – as a practical and cost-effective way of delivering services – we may be back to the days of state-manufactured uniforms and government-run golf courses sooner than we realise.
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