Public service outsourcing: criminal ignorance?

5 Jan 16

Enthusiasm for the outsourcing of public services is growing, despite the absence of reliable evidence about the implications for costs and quality

Outsourcing of public services has been a dominant feature of UK political life for three decades, under all governments – and is accelerating. Outsourcing doubled under the coalition government and has been forecast to extend to one third of all service by value under the current one.

We should, then, surely know a great deal about the comparative cost and quality of publicly and privately provided services, about their respective strengths and weaknesses, and how to get best value out of outsourcing. Research in my own field, detention services, shows that this is absolutely not the case. We know, and government itself knows, remarkably little. That is all the more astonishing because competition to run prisons has been going on longer than for any other complex public service (a quarter of a century now), remains highly controversial and involves direct commercial competition between sectors. Yet the last full comprehensive comparative study was carried out 15 years ago – and was limited and unsatisfactory even then.

Service quality can be compared since the mid-2000s, when quantified assessment of prison performance was introduced. The evidence is that neither the private nor the public sector has consistently outperformed the other. Rather, they developed in tandem: both sectors operated some appalling prisons at the turn of the century, improved greatly during the 2000s, but deteriorated again after 2010, reflecting a 24% cut in spending without a reduction in demand.

Astonishingly little is known about comparative costs. There are the usual difficulties of comparing like with like – finding prisons of comparable size, type and age – and adjustments between sectors. For example, the private sector buys insurance commercially, the public sector does not.

A more fundamental obstacle is the existence of two schemes, one in each sector, that render cost comparison all but impossible. Most privately managed prisons were built through PFI and the Public Sector Comparators (PSCs) devised during procurement, as a means of assessing the value of the PFI route, are subject to so many long term assumptions and adjustments as to lack credibility, except in very broad terms. Moreover, the value of PFI contracts has changed radically over the years, as service requirements and costs constantly change. Government is unable to compare contract costs as they stand now to the price as bid, and likewise for the PSC. On the public side, the Civil Service Pension Scheme is unfunded. There is no credible means of relating contributions paid now to the eventual cost of pensions paid, and many independent observers believe that contributions fall short of likely future costs by as much as 15-20% of pay (one only has to look at final-salary pension schemes that are funded).

The cost issue is crucial, given current pressures. My own assessment is that there has been a large, perhaps 30%, cost gap between sectors. The public sector operator – uncomfortably combining dual roles of customer and competitor – claims to have all but bridged the cost gap, and on this basis, shut competition down (the only prison being built, Wrexham, was given to the public sector without competition). I am dubious. True, the coalition government made radical changes to pay, pensions and staffing levels in the public sector. But some of these changes take a long time to work through a very static workforce, the pension scheme still looks grossly underfunded, and the public sector retains terms and conditions that mean staff work fewer hours per year.

Probably the biggest benefit of competition has been driving improvement in the public sector operation. At the start of the period it was badly managed, hugely wasteful and dominated by a reactionary union. However, many other factors were also pressing in the same direction. As for innovation, although the private sector has innovated in various ways, it has not done so on a transformative scale, party because the customer has been so conservative, partly because prisons perhaps do not lend themselves to radically new approaches. The exception is building timescales and costs under PFI. However the public sector, using conventional contracts, has since greatly improved.

On balance, it is clear that competition has brought significant benefits, though fewer than sometimes claimed. It should be maintained and developed, not shut down. But there are bigger issues, notably our excessive, indiscriminate and very costly use of custody. Does a left-wing Labour party, no longer threatening to outbid the Tories on incarceration, provide this government with the political cover to tackle this issue at long last?

My conclusions, though, are as much about government-as-customer as the performance of operators, public or private sector. It is a sorry tale: of long-term competition strategies grandly announced, but dead in the water within a year or two, competitions repeatedly cancelled mid-stream, constant policy change or policy indecision, and an extraordinary lack of interest in learning from experience or even of clarity about why government is doing what it does, and what it hopes to achieve. Is this, perhaps, the Catch 22 of outsourcing: that government may not be very good at managing services, but is also not very good at managing outsourcing?

 Julian Le Vay is the author of Competition for prisons: public or private?, published by The Policy Press.

  • Julian Le Vay

    Former finance director of HM Prison Service, responsible for competitions to build and run prisons, then director for competition in the National Offender Management Service. Subsequently, Le Vay worked for two providers of criminal justice services to government.

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