18 July 2008
Outsourced public services are big business. DeAnne Julius's landmark review last week valued this relatively young sector at £79bn, with the potential to keep on growing. Business Secretary John Hutton declared himself the 'champion' of the report within government, putting Labour even more at odds with the unions. But will their opposition matter when ministers claim the argument has already been won?
Unveiling the results of her Public Services Industry Review on July 10, Julius said services provided by the private and third sectors had grown in value by 130% in the past 12 years, delivering good value for the taxpayer.
Julius, an economist and chair of international affairs think-tank Chatham House, was commissioned last December by the Department for Business, Enterprise and Regulatory Reform to assess the condition and potential of outsourced services. Her review said the UK is the world leader in contracting out service delivery. With a 5.7% share of gross domestic product, the public services 'industry' in Britain now constitutes a greater proportion of national productivity than it does in the US.
'This is an industry whose growth is entirely government determined,' Julius said. 'It's not to say that it is a matter of ideology, and, indeed, all three political parties support this mixed economy model in the provision of public services. But it does mean that it is important the government understands where and to what extent the benefits are being achieved through the use of the public service industry.'
Julius found the process of competition itself had led to 'significant benefits', whether contracts were won by the public, private or third sector. However, while competitive tendering had delivered 20%–30% savings in areas such as refuse collection or prisons, there was little evidence to suggest that there are always significant cost reductions.
The review also found that partnership models such as the Private Finance Initiative and public-private partnerships had a better record of delivering projects on time and on budget than public sector provision.
The CBI business lobby has been pushing for public services delivered by the private and third sector to be more formally recognised as an 'industry'. It welcomed the review, calling on ministers to 'ensure that every part of the government machine is geared to selling our expertise and allowing the PPP market to flourish'.
Julius said it was inappropriate to set a target for growth or a limit for the sector, but added that the industry could be worth more than £90bn in three years' time, with high growth. While 'the evidence isn't quite conclusive' that service quality improves, she said, user satisfaction surveys by the National Consumer Council showed a preference for private and third sector providers in some areas.
Predictably, the review provoked fiery reactions from trade unions. The Trades Union Congress and others had already criticised the review for being dominated by private sector interests. Following its publication, the TUC – along with public sector unions Unite, the Public and Commercial Services union, the GMB and Unison – condemned its conclusions. PCS general secretary Mark Serwotka said the government is more interested in 'selling off' services than caring about those who rely on them. The union said there is still no evidence to support claims about the benefits of outsourcing.
TUC general secretary Brendan Barber said voters expect public services to be accountable, but that 'lawyer-driven contracts with private companies' prevent democratic accountability. 'Value for money is important, but it can be achieved within the public sector without sacrificing its inherent advantages,' he said.
Unison released some findings of a parallel report it will publish shortly, suggesting the 'economic bad weather' was having a negative effect on public services because of outsourcing. The union has called for a review of the impact of the PFI on workers' pay and conditions.
Hutton, however, said the 'ideological battle over using private and third sector providers is over', adding: 'What matters to the public is not who provides but how well a service is provided.'
At the review's launch, he said the argument over outsourcing had 'been resolved', and there had been a cultural shift in attitudes towards charities and other not-for-profit organisations, making them a provider of 'first resort'.
'This does not carry with it the suggestion that every public sector provider is poor… that argument is completely false. There are some outstanding examples of public sector provision in this country.'
If Hutton is right, calls to halt outsourcing do not have any popular support, which could embolden a currently unpopular government to keep up the reform agenda. A public services user satisfaction survey carried out by the National Consumer Council in 2007 found third sector providers scored the highest in delivering employment services and the private sector scored highest in delivering domiciliary care.
In social housing provision, both public and third sector providers scored poorly, giving an inconclusive snapshot of how providers are received.
Anthony Noun, public affairs consultant at the NCC, told Public Finance that people are generally more concerned about the quality of services than they are about who provides them, but confusion over who is accountable for a service can affect user satisfaction.
The Julius review proposals included appointing a senior director of service delivery in Whitehall departments and local authorities with large contracting functions, with the aim of increasing commissioning skills.
Other recommendations included reducing bid costs, ensuring long-term government commitment to the public service industry and improving competitive neutrality for all bidders. Hutton said Berr would soon publish plans to take the recommendations forward.
One proposal receiving attention is the need to raise the profile of what Hutton calls a 'valuable economic sector'. The public service industry should promote its 'export potential', said the review.
On July 15, Hutton led a UK trade and investment mission to the US, accompanied by public service companies, to discuss opportunities for UK companies to enter the US market at state or federal level. This trip – the first of its kind, according to Berr – was warmly welcomed by the CBI, which said it should be just the start of promoting the industry.
Julius noted that growth in the public service industry has slowed since 2003/04, partly as a result of lower public spending and partly because of less spending on outsourcing. As spending slows, whether the newly defined public service industry bucks this recent trend and continues to grow will, as Julius said, be down to the government.
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