Public service outsourcing: Putting people first

Giving a private seminar in Westminster this week Jon Trickett said:

On Monday, Ed Miliband said that the times we live in demand “a new culture in our public services. Not old-style, top-down central control, with users as passive recipients of services. Nor a market-based individualism which says we can simply transplant the principles of the private sector lock, stock and barrel into the public sector.”

In so doing he set a clear direction for how the next Labour government will govern. In place of the Coalition’s ideological dogma that the only answer to the challenge of delivering public services is always to outsource, his is a call to look at the evidence in front of us and ask the question: How do we ensure that the public interest lies at the heart of how we provide public services.

And a one nation Labour government will always start with what is in the public interest. This requires a new framework for our services.

Let me begin with my own story, a story which changed my views fundamentally. I don’t know if you remember a few months ago the nation was shocked to learn that care providers were reduced to spending only 15 minutes with each elderly person in their charge.

There was barely enough time for the carer to get in the house, take off their coat and put the kettle on before it was time to leave for the next visit.

I have been told that disciplinary action has been taken against staff that stay longer than 15 minutes, even if the elderly person needs more care. It’s no way to care for our parents and grandparents.

Is it a future we would choose for any one of us? I don’t think so. And the public services do not need to be like this. Britain can do better. Public services can be both cost effective and caring.

Seven years ago I went to visit my Dad in hospital. I had no idea when I went that they would say to me that he was in the final phase of heart failure. I went home, got my tools out of the garage and we installed a shower, basin and wc downstairs next to a little bedroom which we made in our house for him.

He moved in only a few days later. I took a large amount of time off work to look after him and he died there three months afterwards. Every day it seemed like the sun shone in through the windows. It was a golden summer which I will never forget. And it was made even more golden by the women who worked for the council who came to care for him. They seemed to care for me too.

A middle aged man looking after his dad, with the help of other family members. Nothing seemed too much trouble for those women and I will never forget the love and compassion which they showed us. After my Dad had died a number of them came back to see me and shed genuine tears over what had happened. But they were not subject to a limit of 15 minutes with each person.

Those women exemplify the public service which a one nation Labour government wants to see, with the patient, the parent, the user of whichever service being at the core of what happens.

In place of such an approach, at present we are seeing a public service of a simplistic Tory type. An approach which seeks to replace the wonderful care given to my Dad and my family, with tickboxes and bean counters.

This article starts from that point and examines some of the central ideological assumptions of the Tory approach. In particular the Tory claim that public service provision is always worse than private sector.

This is an ideological claim, but it’s weakness as a statement of truth is that there is no body of evidence which shows conclusively that  outsourcing public services is the most cost effective for the taxpayer.

Prioritising the public interest means rejecting the Tories’ ideological approach. Indeed, the cost to the taxpayer of a privatised service is often much more than the price of the successful tender. And there are several reasons why I say this is the case.

Let me mention four. First, there are what are called transaction costs. These are the costs to the taxpayer of preparing, letting, evaluating and then monitoring the tenders. For example, there are several thousand civil servants whose full or part time task is simply to process procurement issues. This costs tens of millions of pounds per year and should properly be added to the price of the tender, in order to calculate the total cost of outsourcing.

Equally there can be a price to pay if there are insufficient numbers of civil servants managing the procurement process.

The best known example of this is the West Coast mainline franchise. This was a £50 billion contract, managed by only three civil servants. The result was a disastrous tendering exercise culminating in litigation and an additional and unnecessary cost to the taxpayer of £50 million.

The second hidden cost is the price of post tender contractual variations. The infamous G4S Olympic contract reportedly increased their administrative costs by over 800% from £7.3 million in their tender to a final outcome of around £60 million.

In some cases, the post tender contractual variations are quite extraordinary. Now the public sector too can see major cost over-runs, but there is transparency about where the risks for such failures lie.

Third, it is worth noting that the risk almost invariably remains with the taxpayer. Let me explain. Within weeks of signing the Olympic security contract, G4S announced that it could not recruit sufficient numbers of security staff.

The possibility of catastrophe at the Olympics meant the government was left with no choice other than to deploy 3,400 troops in order to make the events secure. Risk and its financial consequences had remained with the taxpayer.

A similar situation occurs where an outsourced activity has clear knock on impacts on costs for the wider public sector. The ATOS capability tests valued at £110 m per annum were designed to move people from disability benefits into work. ATOS failed. 200,000 people successfully contested their decisions. The cost to the taxpayer of appealing ATOS’ bad decisions was £60 million on top of the contract.

As can be seen the costs of each of the above points can be substantial. They should at a minimum cause us to rethink the simplistic assertion that on value for money grounds all services should be outsourced.

And indeed, this is exactly what is starting to happen.

Ten years ago now, a landmark report from consultants Deloitte noted how large corporations were beginning increasingly to bring services back in-house as the promised benefits of outsourcing had failed to materialise. Costs had often been higher than anticipated, flexibility had been reduced, and risk could never fully be transferred.

A 2011 survey revealed that over half of councils are “insourcing” services which were previously outsourced frequently citing poor value for money. Many Tory councils have done so, including Essex, Basildon and Surrey.

In 2012, Deloitte’s survey of private sector outsourcing concluded that that 48% of outsourced contracts in the private sector had been terminated and of those, at least a third had been terminated for price reasons.

The next Labour government will comprehensively review the full life costs of tax payer funded contracts and will apply the lessons of the review before decisions are made to outsource. At a time of public spending pressures, nothing less is required.

So far I have only referred to cost; I want to turn now to quality and ethos.

The 2011 report already referred to discovered that reasons given for insourcing included: greater accountability, identifiable opportunities for performance management, improved public engagement, better strategic governance and an improved public service ethos.

Let me turn to accountability and public service ethos. As we saw earlier, Ed Miliband has already indicated that he is opposed to a simple wholesale importing of an ethos of “market-based individualism” into our public services.

Beyond this individualism is a second issue of ethos which relates to the way in which public services need to be integrated together in order to provide a holistic approach to social issues. Outsourcing can lead to fragmentation of services thereby undermining a core value at the heart of the public service ethos.

Any public authority which provides a service is required to respond to Freedom of Information requests by law and their actions can be subject to judicial review.

This is because we take a view as a society that a service commissioned in the public interest should be accountable. But if the same service is outsourced these legal obligations do not apply.

For example, Hinchingbrooke Hospital was the first NHS hospital to have its management taken over by a private company after a 13 month procurement process.

When academics at a university sought key information about the contract the government refused to release information on the financial modelling which lies at the heart of the contract.

The government has rested its case for exempting such information on Section 43 of the FoI Act which deals with commercially sensitive information.

Acting on behalf of tax payers Labour will ensure the public interest logic that underpins the FoI act applies whoever provides a public service.

This lack of accountability also relates to the bigger issue of public service ethos. When FOI is denied it suggests that the commercial interests of the operator are more powerful than the public interest. It raises the question, in whose interests are public service providers working?

In some cases, it has become evident that the central imperative was profit or value maximisation rather than on service delivery.

One clear example of this occurred with Southern Cross. They were the largest UK private provider of health and social care primarily to older people with over 750 care homes. The firm was acquired by Blackstone Capital Partners who then acquired a second business, NHP. The company stripped out the land and buildings which were put into NHP. NHP then leased back the buildings to Southern Cross which continued with the task of providing the care. When NHP was sold off it left Southern Cross as a purely operating company with no assets, and a very high rent bill.

The total rents being paid amounted to over £240 million per year which had to be financed from the income which was meant primarily to provide care services to the elderly residents. Rent levels of this level became unsustainable and the share value of the company fell from £1.1 billion to £12 million.

The first port of call for the management was then to approach the government for financial assistance, and the losers of course where the users of this service who no-one had considered when making decisions about it being bought and sold.

It serves as a reminder that even where we decide to outsource services, we cannot simply forget about our responsibilities to the service users, and to the public interest.

Labour will place a public service ethos at the heart of all our services.

Our decisions about whether or not to outsource a service will be guided by the need both to secure competitive prices but equally the drive to deliver the highest standards.

At the heart of our approach must be strong performance management of contracts designed to secure the public interest in high quality, responsive services.

Labour in office will work in partnership alongside users to drive up standards of service.

In doing so there will be a community right to challenge service providers. This right to challenge may ultimately result in termination of contracts, and either re-tendering or services being brought back in-house where there is breach of contract conditions.

Beyond the questions of accountability and public service ethos, there are questions about social value.

Social value was incorporated into law in 2012 and is intended to guide procurement officers in their decisions about outsourcing. It should provide them with more confidence in putting the public interest first, for example ensuring the wider economic benefits of specific contracts are maximised, but the law may need to be strengthened.

One element of social value is whether the private operators of tax payer funded services pay their fair share of UK tax on their profits.

Too often the public are unable to satisfactorily access information in detail, through FoI or otherwise, about how these companies conduct their business models and whether any of them are in fact operating aggressive tax avoidance schemes using their corporate footprint in tax havens.

It is interesting to note that the cross party Public Accounts Committee has already indicated their belief that those who benefit from large tax payer funded contracts should contribute fairly to the tax which makes those contracts possible.

Labour will need to do better at ensuring those who benefit from large public contracts contribute fairly to the tax that makes such contracts possible.

The new incoming EU Public Procurement Directives support this view.

Fraud is another issue that needs to be looked at. There have been cases where there has been an apparent criminal intent by the contractor to defraud the public sector.

An example of this is when charged with tagging criminals, both SERCO and G4S admitted overcharging the taxpayer.

They appear to have deliberately delayed court appearances of criminals under their charge in order to maximise their revenue and even charged for individuals who were in fact dead.

G4S overcharged to the value of £24 million and are now being investigated by the Serious Fraud Office. One nation Labour would ensure that no company in engaged in fraudulent behaviour should expect to receive public service contracts.]

To achieve social value it is surely essential that the whole of the workforce providing a service is focused on delivering the service and this requires decent 21^st century employment practices.

As Ed Miliband has said, we believe in not just a minimum wage, but want the foundation of our economy in the future to be a living wage. And that’s why Labour has said we would look for national government to follow the lead of Labour Councils in taking the living wage into account when awarding procurement contracts.

It is right too that we must act to end the abuse of zero hours based contracts and exploitation of loopholes on agency labour that avoid equal pay requirements.

Within the public sector there remains a substantial emphasis on education and training of employees, thereby driving quality of service and delivering career progression. This ensures the continuity and availability of a skilled workforce in future contracts.

The government abandoned the notion of apprenticeships being secured through outsourced contracts. We will require large companies delivering goods and services worth over £1 million to offer apprenticeships.

It is essential that this type of social value, which is already a feature of the public procurement landscape in Wales, is rolled out across the UK.

One related matter which has not been widely discussed is the impact of government procurement on the growing gap between rich and poor. The normal ratio within the public sector between the highest paid employee and lowest paid employee is in the order of 15:1.

However, as soon as taxpayer services are outsourced an entirely different process often emerges with an explosion in executive pay. For example the CEO of SERCO is reported as earning 276 times as much as the National Minimum Wage, six times higher than the highest paid public sector employee and 22 times higher than the Prime Minister.

It is noteworthy that The government has already introduced a public value test for public sector pay which ensure that no public sector employee can earn more tha the PM without express ministerial approval. The Conservatives do not apply this same rule when a tax payer funded service is outsourced.

And while the gap between executive and employee pay rises when services are contracted out, so employees’ rights often become much weaker. The government has made this more likely with changes to TUPE regulations which allow the erosion of employment rights, including pay and conditions for staff.

But the public interest requires a motivated, properly rewarded and fully engaged work force that can deliver the high quality services the public expects. The precise opposite of what the Tories’ workforce reforms will achieve. Let me briefly reiterate that we believe.

One nation Labour is committed to delivering the highest quality of public services possible, within tight budget frameworks and delivering value for money to taxpayers. There can be no more lax arrangements within the public service and the process of outsourcing must itself be submitted to the same levels of rigour as other elements of the wider public sector.

For us it is the public interest that must come first. It is the guide to how a service should be provided, not an ideology that says at all times and in all places a service should be provided by the public, private or voluntary sector.

The task for the next Labour government is to reject the easy answers peddled by this government and ensure that all services put their users at the centre of what they do.

That is what Ed Miliband was setting out this week, and that is what the next Labour government will do.

Jon Trickett is the MP for Hemsworth. He is also deputy chair of the Labour party and shadow minister without Portfolio with responsibility for procurement policy.