The contracting conundrum

By | May 9, 2018
Originally published:

The dawning realisation that public service contracting has had its day can only grow after 3 May. As new councillors settle in and town halls change political colour, they will further question the shibboleths of the post-1980 era of ‘new public management’ – especially the belief that outsourcing major services out to companies is necessarily cheaper. Some of outsourcing’s staunchest advocates will be swept from power. The principled case for contracting gets more uncertain. The collapse of Carillion sets the financial risk calculus on its head. Big contractors – notably Serco – are openly saying the business model no longer works. Political pressures also grow.

The Labour leaders, Jeremy Corbyn and John MacDonnell, have taken a strong line on private sector participation in public services. Tory-led councils have already been reassessing costs and benefits from contracts. Still, for many elected members, assailed by demand for services but with budgets more tightly constrained than ever, money and short term fixes will remain the clinchers. For years, conventional wisdom decreed that competitive bids delivered. Veolia, and Amey and NSL would – unquestionably — do bins or parking enforcement more cheaply.

The Thatcher administration forced through compulsory competitive tendering in the 1980s precisely to drive down costs (and to weaken municipal trade unions). But councils have since adapted; many are leaner and more efficient. Meanwhile it’s remarkable how little hard evidence there is in favour of contracting producing long run cost minimisation or service improvement.

Municipal arithmetic is getting subtler. Tory councils have been inhousing contracts because they value flexibility and realise (at last?) that the promise that contracting brings innovation and continuous cost improvement has not been realised. They, along with Labour-run authorities, have been eyeing Preston and listening to talk about ‘community wealth’ – councils can directly affect flows of income into and out of local economies andcontracting has to be understood as part of a dynamic local finance system. At its simplest, if workers are paid less, there is less income in the local economy. Contracting calculations have to include indirect monetary effects, such as increases in welfare benefit payments and the impact on the local economy. ‘Competitive’ bids often involved cuts in staffing. As jobs are lost and supply chains move out of areas, councils are less able to ‘shape place’.

Outsourcing fragments services and complex social, economic and environmental problems require joined up integrated solutions. Hardheaded councillors might say in response that their job is defending the bottom line – and that councils have to break even. We refer to HM Treasury, not best known as a den of faint hearts. It recently updated its Green Book, which officials are supposed to consult before making decisions on programmes and projects. It says definitively that relevant costs and benefits ‘are those for UK society overall, not just to the originating institution’. Calculations of cost and benefit should extend over the whole life of the contract, including costs of set up, contracting letting, recontracting and the costs of managing the contract.

No council, nor any Whitehall department for that matter, can in good conscience just say: this bid lowers our outlays and there’s an end to it. It matters – and should be part of due diligence – if contractors have large gender pay gaps or pay top directors excessively or sequester their profits in tax havens. New councillors and leaders – together with returning members – should urgently ask officers to marshal data on contracts. At the moment local data sets are hugely variable. In addition to understanding what is happening in their own authority councils need data on markets, whether they are competitive, and on prior performance by major contractors, including their work for other public bodies. Such information is hard to find, because the Local Government Association or NHS regulators or the Cabinet Office (or the devolved administrations) have thought to collect it.

New leaders should next begin to review. Do contracts offer public value; can they be renegotiated or terminated? Review should embrace the council’s procurement policy and practice. What criteria determine their ‘make or buy’ decisions, which must include the option of public provision of public service with outsourcing being the exception and based on overwhelming evidence of public interest.

The elections will bring renewal to council ranks. But councillors old and new realise that it’s time to unwind the contracting reflex. Outsourcing can no longer be business as usual.