Is outsourcing falling out of favour with local government?

11 Feb 20

After the collapse of private contractor Carillion and the failure of outsourced probation, is outsourcing out of vogue with local government? Neil Merrick reports.

Towards the end of last year, private contractor Interserve won more than £20m of public sector work – less than 12 months after it went into administration.

The company, whose financial problems followed the collapse of another major contractor, Carillion, is being paid £13.9m to refurbish Roseberry Park Hospital in Middlesbrough and £7.2m to build an extension at Colmers Sixth Form College in Birmingham.

Bailed out by lenders in what it terms a ‘deleverage transaction’, it now operates as Interserve Group Ltd. It is keen to attract more public sector work on top of the probation and other contracts it held when it ran into trouble during 2018.

Carillion, meanwhile, is no more. After the company was forced into liquidation at the start of 2018, its construction and other contracts were mostly taken over by other firms.

So, what are the prospects of outsourcing at the start of the 2020s? Are councils and other public sector bodies still inclined to award contracts to the private sector, or is there a stronger thirst for providing services inhouse?

A report last year by the Institute for Government rated the success of outsourcing in each public service since the 1990s. Just one, probation, was judged an outright failure. This was after the Ministry of Justice announced that all management of offenders will be brought inhouse by the end of 2020.

Following Carillion’s liquidation, private financing of construction received an amber/ red warning light. Sectors where the IfG rated outsourcing a qualified success included health, adult social care and employment services, while top marks went to waste collection, catering, cleaning and maintenance. Outsourcing works best, says the report, in support services that are fairly simple to contract for and deliver. When it fails, reasons include unrealistic pricing, unrealistic transfer of risk and weak contract management by councils or government departments.

Tom Sasse, the report’s main author, says the key objectives of outsourcing – saving money and improving efficiency – have largely been met. “The public sector has become more efficient,” he says. “The difference between inhouse and outsourced provision is not so great.”

The IfG report warns of the danger of becoming too dependent on one or two large suppliers in sectors with limited competition. But, at the same time, public sector bodies appear more commercially savvy in negotiating contracts.

The public sector has become more efficient. The difference between inhouse and outsourced provision is not so great Tom Sasse, Institute for Government

In some cases, the public sector can deliver a service at a similar or lower cost. “The success of outsourcing has eroded part of the argument for it,” adds Sasse. “Since 2010, there has been a concerted effort to bring commercial nous into government and squeeze private sector margins.” In local government, the picture is mixed. Some services, such as waste collection and leisure, are still overwhelmingly outsourced. But a minority of councils have brought a range of services back inhouse.

A report last year by the Association for Public Service Excellence, which promotes inhouse delivery, flagged up the success of councils such as Islington and Liverpool (see box), which have brought services inhouse during the past decade.

Mo Baines, author of the APSE report, says councils are essentially pragmatic. “The early tranche of outsourcing in local government and the NHS was ideologically driven,” she says. “Big policy issues have not been solved by market forces, and risk transfer has not worked.”

Services brought inhouse by Islington since 2010 include education, waste collection and housing maintenance. It spends £3m per year less on waste and recycling, and there is greater coherence across the borough.

“Insourcing opened the door to productivity deals [with trade unions],” says council leader Richard Watts. “Getting outsourced contractors to talk to one another is much more difficult.”

A survey of 60 English councils by PF in late 2018 found that, while the value of work awarded to private contractors was still growing, the rate of expansion had slowed markedly. Whereas the value of contracts increased by 39% between 2013-14 and 2014-15, growth between 2016-17 and 2017-18 was just 1.6%.

The survey, based on freedom of information requests, showed Derby saving more than £1m after bringing highways maintenance under council control after the collapse of Carillion. But other local authorities are happy to leave services in the private sector.

David Bittleston, leader of Woking Council, says outsourcing sports facilities to Freedom Leisure 10 years ago “changed the whole ambition of the leisure offering” locally, with gym membership virtually trebling. “You have got to make the deal work for all parties,” he says. “With waste, we must have got it 100% right. We got a fantastic price, and the contractor was able to make money out of it.”

For health, outsourcing or privatisation remains a thornier issue. According to the Nuffield Trust, about 22% of health spending in England goes to organisations other than NHS trusts and other statutory bodies. This includes GPs, dentists and pharmacists.

£3m Amount saved per year by Islington Council since 2010 by bringing waste and recycling inhouse

If these were removed from the equation, says Helen Buckingham, Nuffield’s director of strategy, the proportion of NHS spending outsourced to private contractors would be about 7% to 8%. This includes independent sector treatment centres, set up in the 2000s for elective or non-emergency surgery.

The IfG study concludes that ISTCs have generally been a success, reducing sums the NHS might have paid to private providers. Buckingham agrees, pointing to the extra capacity created. “In terms of the percentage spend [on ISTCs], it has stagnated or regressed slightly, which runs counter to the perception that the NHS is being privatised,” she says.

The long-term plan for the NHS, launched a year ago, emphasised co‑operation with integrated care systems throughout England by 2021. But commissioners still need to demonstrate value for money. Much may depend on new ‘best value’ tests, details of which remain sketchy, says Buckingham.

“Commissioners have often taken the competitive tendering route as the default where they see a need for service change, rather than considering whether they could work effectively with an incumbent provider.”

Following the collapse of Carillion and other outsourcing doubts, the Cabinet Office published new guidelines for government departments. The Outsourcing Playbook, unveiled last February, promised greater scrutiny of outsourcing, including key performance indicators and pilots before new contracts are awarded.

One year on, there is little evidence that it has made much difference. Helen Kenny, national officer at public service union FDA, which represents senior civil servants, says it feels like “business as usual”, although contracts may be looked at more rigorously when due for renewal.

The National Audit Office estimates the liquidation of Carillion cost taxpayers about £148m. The full cost of the botched outsourcing of probation contracts will not be known until the end of this year but is likely to be at least £476m.

Sasse is not convinced that reforms in the playbook have been implemented or that its guidelines are followed. “The idea is that commercial directors in every government department should be signed up to it and held to account,” he explains. “It will be difficult to do without a powerful minister in the Cabinet Office.”

Ultimately, further outsourcing may depend on the extent to which local and central government is willing to transfer risk after the Carillion and probation failures. Or is direct delivery of services more appealing? “It’s not a contradiction to say there were benefits from outsourcing, and there may now be benefits from insourcing,” says Sasse. 

Counting the beans

Nottingham City Council

Buy a coffee anywhere in Nottingham and there is an increasing chance it will be from a branch of Bean Culture, owned by the city council.

Six years ago, Nottingham brought its catering operation back inhouse and rebranded the service Eat Culture. Not only does this avoid paying a fee to Aramark, an outside contractor, but the catering service generates money for wider services.

At present, Eat Culture runs nine cafés as Bean Culture. This includes three in parks and two at leisure centres. A turnover of about £1.25m is expected in 2019-20, with two further cafés due to open later this year. “We are generating surpluses to combat pressures across the council,” says Lee Kimberley, Nottingham’s head of catering.

The roots of Eat Culture lie in the council’s school catering team, which has been in operation since the late 1990s. Prior to 2014, other catering outlets, mainly in council offices, had been outsourced for six years.

Initially, 15 staff were transferred back to the council, while, today, Eat Culture employs about 50 people. Cafés are run in partnership with 200 Degrees Coffee, a specialist coffee roasting firm.

A café at Gedling Country Park is run on a profit-sharing basis with neighbouring Gedling Borough Council. Eat Culture also operates a mobile café that is taken around the city for special events, including the annual triathlon.

Eat Culture, says Kimberley, shows the value of running a business with social and profit-making objectives. “We work very much as a business and put ourselves out to compete with the private sector. We have to be sharp on prices and efficient, but that’s no bad thing.”


Rags to riches?

Liverpool City Council

It is four years since Liverpool City Council set up its own company to manage refuse collection, street cleaning and grounds maintenance. Since 2018, Liverpool Streetscene Services Ltd has also taken charge of highways maintenance and parks.

LSSL is a Teckal company, owned by the council and set up to provide services for it. Having Teckal status means contracts can be awarded without competitive tendering. Prior to 2016, most contracts were held by Amey or Enterprise Liverpool Ltd, a joint venture between the council and Amey.

Mayor Joe Anderson says contracts were brought inhouse because of complaints over service quality and to gain better value for money. Since 2016, Liverpool has not just saved management fees but has also generated a further £2.6m in efficiencies.

Minor road repairs are timed to coincide with grass cutting and litter picking, so reducing disruption. Recycling rates are up, fewer bin collections are missed and the turnover of LSSL’s commercial waste division has doubled to £1.6m.

About 450 staff initially transferred to LSSL from outgoing providers and, since 2016, a further 250 staff have been taken on, including 100 new posts. Other staff switched when the highways and park services were taken back.

Trade unions welcomed the creation of LSSL, even though pensions depend on whether people worked for one of the contractors prior to 2016. “I believe we get better value 
from our workforce if they work for the city council and have great pride in working for the council,” says Anderson.

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