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Outsourcing and Our Hollowed-Out State: A Story of Dependency Without Delivery

Scratch the surface of just about any public service failure of recent years and outsourcing features as a key cause, writes Chris Grey

A Carillion tower crane in London in 2018. Photo: Tim Ayers/Alamy

This article was first published in the March 2024 monthly print edition of Byline Times.

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A major part of the pervasive sense that ‘nothing works in Britain anymore’ is that public services don’t work – meaning not just that they are crumbling under pressure, but that they are systemically dysfunctional and crisis-ridden. 

So whichever party wins the next election will face demands to fix them, while being constrained by tight ‘fiscal rules’. Whether those constraints are regarded as self-imposed or necessary, their consequences are real. 

It’s a lazy cliché to say the solution isn’t just to ‘throw more money’ at public services, which readily morphs into the implication that it isn’t about money at all. That’s absurd.

The cumulative impact of underfunding is undeniable, especially in the austerity years, which saw public spending as a percentage of GDP fall from 46.3% in 2009-2010 to 39.5% in 2019-2020 just before the pandemic. 

Yet those figures don’t tell us everything, as they start from the high caused by the financial crisis, whereas it had been 40% for the previous three years. Now, following another large spike caused by the pandemic, public spending stands at about 45% of GDP. That’s less than Germany (49.7%) and much less than France (58.5%), but similar to the Netherlands (44.6%) and Japan (44%), and more than Norway (38.5%). 

So, while recognising that international comparisons are tricky, because there are many variables, it is legitimate to ask: why do we have a relatively large state but public services which are widely regarded as inadequate?

Typically, politicians of all governments ascribe this to public sector inefficiency. But this both ignores and justifies the way the British state, including local government, has come to rely on outsourcing public services to the private sector. 

Outsourcing has always happened to an extent, as it does in most countries. However, since the 1980s, it has increased precisely as a result of the ideology that the private sector is definitionally more efficient, with market competition the key to making it so.

Crucially, the state has increasingly become a commissioner and regulator of services, rather than a provider – a hollowed-out state rather than a smaller state.

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According to an Institute for Government report, there’s no reliable measure of total public services subcontracting, but public sector procurement spending, which includes such subcontracting, now accounts for about a third of total public spending. 

The early Thatcher years saw many ancillary services, such as hospital cleaning and council waste collection, outsourced. This intensified under the Major and New Labour Governments, not just in scale but in depth and complexity, so that outsourcing came to include core state functions such as running prisons and hospitals. Some local councils, such as Barnet and Northamptonshire, adopted a model of near-total outsourcing. Even policy-making, the very epicentre of state administration, has become increasingly reliant on consultancy firms.

Some argue this doesn’t matter to the public if the outcome is high quality services. As the New Labour slogan had it, “what matters is what works”. But far too often it doesn’t work. 

There have been a litany of scandals and failures in outsourcing – from Army recruitment to the probation service – in every public service sector. Even if not ending in abject collapse, the quality of provision is often poor in the most essential of ways. A recent study in the Lancet, for instance, showed that the outsourcing of NHS services was associated with increases in treatable mortality rates. 

Indeed, scratch the surface of just about any public service failure of recent years and outsourcing features as a key cause. The National Audit Office endlessly produces reports documenting the waste involved, which may be ‘only’ a few million pounds here, or a billion there, but it cumulatively adds up to a constant drain on effective service delivery. On top of that, billions end up in the coffers of the super-wealthy, regardless of service failures.

These multiple shortcomings aren’t coincidental or inexplicable.

The fundamental reason for them is that outsourcing is predicated on the free-market theories that profit is a payment for risk and that competition between contractors ensures high standards. In practice, neither is the case.

Risk is never really transferred to the contractor when it relates to core public services, which the Government will always, ultimately, have to deliver. A high-profile example was the need to use troops to provide security at the 2012 London Olympics because the contractor, G4S, failed to provide enough staff. In less high-profile cases, the risk is borne by users, who have to cope when services aren’t delivered to a decent standard.

Equally, the market isn’t really a competitive one. It is an oligopoly whereby a handful of firms, despite their repeated service failures, continue to be awarded new contracts. That’s partly because of the byzantine nature of the bidding processes, which effectively excludes all but the big outsourcing specialists.

It’s also because of cronyism and the quasi-corruption of a weakly-policed ‘revolving door’ between the politicians and civil servants who commission services and the firms that bid for contracts. This not only means that service delivery is more likely to be inadequate, it also reduces political accountability for such inadequacy. It makes blame-shifting easier, while making it harder to know what is being done with public money because contracts are typically shrouded in commercial confidentiality.

Many of these deficiencies were exposed by the spectacular collapse of outsourcing giant Carillion in 2018. Some thought this would be a turning point and, to a limited extent, it was. Since then, the Government has been more cautious about outsourcing, and there has even been a degree of insourcing, with the reversal of the disastrous outsourcing of the probation service being a major example. 


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But the Carillion debacle also revealed just how reliant the British state has become on the remaining few large firms, some of which are even more deeply embedded than it was in service delivery. What may have started as a convenience has become a dependence.

Certainly, for all that the shine may have come off it, outsourcing continues across a whole swathe of public services.

The Conservatives had a chance to address some of these issues when the party passed last year’s Procurement Act. This, for once, was accurately billed as an opportunity to use post-Brexit freedoms because the UK has left the EU public procurement framework. However, the Government refused to make private contractors liable to Freedom of Information requests or to create an independent body to evaluate the value for money of contracts awarded. It also ignored demands for a public interest test to be applied to public service outsourcing. 

So there is now both an opportunity and a challenge for the expected incoming Labour government. 

Locally, when Labour took control of Barnet in 2022, it comprehensively reversed the “failed experiment” of its ‘EasyCouncil’ model. Nationally, in her conference speech the same year, Deputy Leader Angela Rayner promised “the biggest wave of insourcing for a generation” if Labour comes to power, and there have been suggestions of reforms to the procurement system. Sticking to this in government may be another matter. 

Outsourcing can be tempting as it sometimes creates superficial savings in departmental budgets, even if it displaces costs elsewhere. Moreover, there are already reports of outsourcing firms lobbying the party.

There will always be a place for outsourcing some public services to private contractors. But, some recent reversals notwithstanding, the scale and depth of its use over the past four decades has created the worst of all worlds: the inefficiency and lack of market accountability which the right associate with the public sector, and the greed and lack of public accountability which the left associate with the private sector. 

That won’t be easy to unpick, but doing so would go some way to resolving the paradox of having an ostensibly relatively large state and yet public services which do not work.

Chris Grey is Emeritus Professor of Business and Management Studies at Royal Holloway, University of London. He writes the Brexit & Beyond blog and is the author of Brexit Unfolded

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