Week 2 Notes- Contracting Out (Outsourcing) of Public Services PDF

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Lecture notes by student, lecturer Martin Kelly...

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Today’s topic ‘Contracting out’ is also called ‘outsourcing’ – the terms are used interchangeably. We will look at a few theories which will be useful for your tool kit. Recap on last week We will do this also in the tutorials. We talked about the 3 sectors. We talked about the public sector, not for profit and private sectors – maybe they are not separate. During the pandemic the public sector has been an enabler to use the private sector to deliver services. That is fine when things are going well but today we will examine when things go wrong. It is very difficult to separate the sectors especially in PFI contracts and during the pandemic. The point is the importance of the public sector and the not-for-profit sector. We will not cover much of the public sector. We will bring in new public management [NPM]. The private sector does everything brilliantly [?] so let’s bring it into the public sector! The public sector is seen as an enabler rather than a provider.

Note the articles – Brown and Potoski and be able to quote them. We will spend the workshop looking at a case study. Given the current circumstances slides not covered in the lecture are not that important.

Contracting out is where profit goes back into the community – these organisations are not charities, but this is social enterprise – there are no shareholders here, but they are there for the public good. Most of the course will have a UK perspective. We do not have enough money anymore, so we put public services out into the private sector, but companies have taken this on – many have been a disaster.

Contracting Out in the Public Sector – SCANDALS G4S is a private company which does a lot of public sector services – they tagged criminals but G4S and Serco were tagging and charging for people for who did not exist. You can describe this as PFI, but it is more about financing say, one hospital. G4S is taking on all of tagging prisoners in England. This is about delivering a service. This is outsourcing but the amount of money spent by the government appears to be shrinking the state – the government is laden with debt and so contract out these services. Some not

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for profit organisations also take on these types of contracts. ATOS is another multimillion-pound organisation with shareholders who also want a profit while delivering public services. According to the NAO, in 2014-15, 31 per cent of total government spending, or £242bn, was spent on external suppliers, including capital spending through those suppliers, compared with £194bn on staff costs and £218bn on benefits.

The public sector has been cut back because of austerity measures. This has impacted on many of the topics that we will discuss. It is important to see the practical implications. G4S were supposed to do the contract security at the Olympics but they couldn’t do it and the government had to bring in the army to take over. They needed thousands of employees, but they couldn’t do it – the army had to be brought in to take up the slack. The private sector could not deliver.

Tagging of offenders was put out to contract to SERCO but they managed to tag people who did not exist. These are big money contracts but we as taxpayers want value for money – why can’t the government do it?

The public sector no longer has the capacity – these firms are all about maximising profit and not service. Government is all about meeting social need – can these two opposing ideals be satisfied? PFIs are now down the agenda as they haven’t worked politically but contracting out continues to be popular.

Learning outcomes By the end of the lecture students will be able to: •

Understand what is meant by contracting out/outsourcing of public services and why it is important - Outsourcing is at 14 billion. The scandal most notable is Carillion who delivered a lot of public services, but they ended up in trouble owing £7 billion.

There are pressures for contracting out. The private sector is supposed to do things more

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effectively and efficiently. •

Evaluate the pressures for contracting out –’contract state’

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Debate the role of the NPM paradigm – efficiency / effectiveness in public services

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Contracting out ‘Management Model’

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Critically discuss the theoretical concepts underlying the decision to contract out: Transaction Cost Economics and Principal Agency Theory

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Describe other factors relevant to the co-ordination and control of contracting out; and

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Have an understanding of contracting out (outsourcing) in the real world –case study for workshop

We have the idea of using theories to explain contracting out – these theories don’t tell us about value or money. This is the thing which is missing in the literature – what do we mean about public value or value for money? There are no mechanisms in place here. Carillion supposedly cared about its shareholders and not about the public. Some of the problems come from lack of control of provision of services by companies like Carillion. In the real world we have had problems with other areas such as in prisons.

Risk transfer When you outsource to the private sector – who bears the risk? But when Carillion went bust the taxpayer suffered the risk. Who is accountable? We downsize the public sector and outsource – we have a paradox to resolve.

Carillion was a huge company employing 19,000 people in the UK. They did everything from prisons to provision of school meals. Carillion took on very low cost contracts and were not able to provide the service at a profit and took on too many of these contracts. The government were too keen to allow Carillion to take on these contracts. Where is the accountability both to shareholders and the public? It is a real problem. In the pandemic there is more insourcing now.

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Why not give it all to the not-for-profit sector? But charities cannot do everything.

ACTIVITY 1 Name some services that are provided by private sector? •

NHS

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Royal Mail – many small offices are closing in rural areas

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Railways

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Buses

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Bus services are often not on profitable routes, so no one wants to run these routes, so communities lose out.

Why would the government want to contract out (outsource) key public services? Prisons – this seems an odd service to outsource. Defence and security seem to be difficult to outsource. Are there some services that you think should never be outsourced and why? NHS [National Health Service] does do some outsourcing.

There are right and left wing political views on these subjects.

A private finance initiative [PFI] built the Erne Hospital and to operate some of the key services. This is a 25 or 30 year contract, but this is expensive. If the company fails the government still has to run the schools, prisons and hospitals. The reason the government wanted to do it was because it was off balance sheet.

Don’t forget – Public, For-profit and Not-for-profit sectors which interlink – see diagram. Street lighting, health, justice and Olympics used all to be done by government, the not for profit charities took up the slack with homeless. There is now a blurring of the boundaries. The public sector is shrinking – the non-for-profit or for-profit are stepping up. Public/private partnerships are on the up – and not-for-profit organisations cannot really take on everything. For-profit arguably do have the capacity but do they have the best interests of the public at heart? They only care about their shareholders and not the Page 4

public. All these areas are now working together – the public sector is now working as an enabler – but the taxpayer will have to still pick up the pieces when things go wrong.

How do we enforce accountability with these organisations? The public sector should be accountable to the taxpayer.

Outsourcing of UK Jails needs to be rethought…………[Insert slide] Outsourcing of UK jails needs to be rethought: Failure of HMP Birmingham experiment raises broader questions [FT- 09 April 2019, p. 8) •

The UK government's decision to strip security contractor G4S of its deal to run Birmingham prison was inevitable. So acute was the crisis that staff lived in fear and inspectors described it as a "war zone". As the first pre-existing, Victorian-era prison handed to a private company for management, HMP Birmingham was in essence always an experiment. But its failure raises broader questions about the current model of prison outsourcing. In prisons, the government needs to shake off a single-minded focus on cost savings and unyielding faith in private sector efficiency.

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Private prison providers will argue that HMP Birmingham was uniquely challenging from the start. G4S inherited a dilapidated building, too many prisoners and staff resistant to their new bosses. The record of prison privatisation has been stronger where contractors have built their own new facilities. But there have been problems even here. Oakwood prison, also operated by G4S, had its share of troubles when it opened in 2012.

The idea is that there will be less bureaucracy. In Birmingham prison in 2019 – G4S was running it. The inspectors arrived and described it as a ‘war zone’. G4S wanted the contract to make profit – they cut costs and the service suffered. The public sector has to take over the prison again from G4S – this is probably a case of a service which should never have been outsourced. It was about austerity and the government was trying to save money. It is an example of when outsourcing fails – the public has to pick up the bill.

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We have a House of Lords in the UK. After Carillion: Public Sector Outsourcing and Contracting (HoL, 2018) They found that the government did not check up on the contracts. They have not learnt from repeated mistakes. What happens when you downsize public services? Maybe you need more partnerships. The report that contracts were not monitored. There was not much choice in many cases. It is an irony in the pandemic in that the government has to really extend the public services. •

Government outsourcing and contracting has become a very significant part of the delivery of central and local government services throughout the world. The UK Government spends £251.5 billion per year on outsourcing and contracting. The UK spends 13.7% of GDP on public procurement, which is not significantly different from countries such as Denmark (14.16%) or Germany (15.05%). Despite the UK leading innovation in this field for some 30–40 years, there has been a depressing inability of central government to learn from repeated mistakes and to some extent the collapse of Carillion and the state of the sector reflect this.

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Our report finds that government ineffectiveness has contributed to the problems that Carillion and other companies have faced.

https://www.theguardian.com/society/2016/dec/27/private-firms-500mgovernments-fit-to-work-scheme

Note the Grenfell tragedy- where there was probably an accountability deficit.

The private sector is running public services as the government have handed over a lot of

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contracts. The NHS continues to be threatened. We want efficiency and effectiveness, but we don’t want to hand over profits to the private sector.

See Headline – Private firms earn £500m form disability benefit assessments – the government feel that too many people are disabled. They got the private firm ATOS to assess these people to decide if they are fit to work – they will offer people work that they feel they should be able to do. ATOS and CAPITA did this and made lots of money but lots of people ended up with no benefits who should have. Lots of vulnerable people were wrongly assessed. ATOS and CAPITA made lots of money.

See You Tube Clip: Nick Buckles G4S boss, appears before the government select committee on the failure of the company to deliver security to Olympics. The company failed to deliver and did not bother to inform government until a few days before the Olympics started. Who is accountable for this waste of government money? Nick Buckles, chief executive of G4S: We felt ... it would be a tremendous boost to our business to actually be an essential part in delivering the games” Asked why he had not resigned: “It’s not about me; it’s about delivering the contract. I’m the right person to ensure that happens” On staff not turning up: “Our normal show rate is about 90 per cent” “Our problem at the moment is a shortage of staff ... That shortage is going to manifest itself from today to the games” Asked if his company’s reputation was “in tatters’’ over the “humiliating shambles’’, he said: “I cannot disagree with you” But G4S have recovered from this debacle and their share price has increased.

A Return to ‘Insourcing’ of Public Services There might be insourcing scandals in the future – but maybe the government should now extend the public sector. •

The coronavirus pandemic has forced government to intervene in several areas. The NHS has negotiated an agreement with private hospitals under which their entire capacity will be used to treat coronavirus patients, in effect “putting the whole private hospital sector under government contract”.

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Ministry of Justice’s decision, in June 2020, to bring probation services in England and Wales fully back in-house from June 2021; the justice secretary, Robert Buckland, cited the need for greater “flexibility, control and resilience” to manage the impacts of the virus.

Hopefully, we will go back to INSOURCING in public services.

See word document which will be on Canvas – OUTSOURCING OF PRISONS NEEDS TO BE RETHOUGHT. This is an opinion piece on the problems of the prison in Birmingham. Why did Carillion take it on? Was it as a loss leader? Why did they want to be involved in such a difficult contract? It was doomed to failure as it could never be profitable.

IMPORTANT! The political ideology is NEOLIBERALISM. This is about the market and profit and freedom of choice. Neoliberalism tells us that we should be happy to make profit – the economics of markets work. If you have competition between companies they will be efficient but at what cost? In the NHS you will not be treated by the consultant but only by a junior doctor if the NHS becomes even more privatised. Public needs and services We have more needs than we can provide for.

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From late 1980s through the 1990s the World Bank and the governments of United States ( Ronald Reagan) and the United Kingdom (Margaret Thatcher) began to group rules and concepts for creating a new type of management in public administration not only to be applied in industrialized countries but also in developing countries.

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By 1994, the new administrative gospel was in place. P. Dunleavy and C. Hood published “From Old Administration to New Public Management”, in “Public Money and Management”, July/Sept. 1994

Services had become very inefficient and overly bureaucratic and so needed REFORM.

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The answer then was to move to private sector ideas – this is NEOLIBERALISM or NEW PUBLIC MANAGEMENT. They wanted a more lean organisation which was fit for purpose. Accruals accounting was introduced along with performance management. The public sector started to produce more along private sector lines.

PUBLIC NEEDS AND SERVICES – new public management [ NPM] It was from moving from the public sector which was over administrative and bureaucratic to the private sector. The private sector can do things more efficiently and effectively. But can they? From late 1980s through the 1990s the World Bank and the governments of United States (Ronald Reagan) and the United Kingdom (Margaret Thatcher) began to group rules and concept for creating a new type of management in public administration not only to be applied in industrialized countries but also in developing countries. This is the concept of free markets and competition – if we let the private sector work then free markets will emerge and work more efficiently. By 1994, the new administrative gospel was in place. P. Dunleavy and C. Hood published “From Old Administration to New Public Management”, in “Public Money and Management”, July/Sept. 1994

P. Dunleavy and C. Hood wrote five principles for NPM (new public management) ** key points 1) Reworking budgets to be transparent in accounting terms, with costs attributed to outputs not inputs, and outputs measured by quantitative performance indicators; accruals accounting came into the public sector – it had previously been in cash. We should account for the public sector the same way as in the private sector. 2) **Viewing organisations as a chain of low-trust principal/agent relationships (rather than fiduciary or trustee-beneficiary ones), a network of contracts linking incentives to performance; The public sector is broken down into smaller units – it is no longer one giant but now has smaller agencies which contract for different

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services. It has become more like the private sector. KPIs will become more important. 3) Disaggregating separable functions into quasi-contractual or quasi-market forms, particularly by introducing purchaser/provider distinctions, replacing previously unified functional planning-and-provision structures. 4) **Opening up provider roles to competition between agencies [Such as Her Majesty’s Prisons] or between public agencies, firms and not-for profits bodies; [if we can’t do it then get someone else to do it.] The market is good. This is similar to divisions in the private sector. The NHS has lots of agencies attached such as Public Health England [note in the press re pandemic rules]. 5) Deconcentrating provider roles to the minimum feasibly sized agency, allowing users more scope to ‘exit’ from one provider to another, rather than relying on ‘voice’ options to influence how public service provision affects them.

The “3 Ms” Heuristic of NPM and Some U.K. Examples 1. Markets 2. Management - leaders 3. Measurement Examples: Think about the Universities (League Tables????) Where is Queen’s in the league tables. Russell Groups – this is all about measurement.

KNOW THIS SLIDE ABOVE. Can education be marketed? You are paying fees.

Comparison - ** key points are circled on the slides. Dimensions

Public Administration

NPM – language of maximising wealth – self expression

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1.- Agency

Emphasis on Laws, Institutions Environment, Political Processes

Emphasis on Competitive Markets, Individualistic Self Interests, Customer Orientation – even in education pupils and students are regarded as being customers.

This is private sector ‘speak’ here 2. Key Success

Equity, Responsiveness, Political Factors Prominence

Efficiency, Effectiveness, [Think of prisons here or railways] Customer Satisfaction, Adaptation to Change [this is NPM speak – compare to balanced score card]

3.- Information Processing

Low-Minimal Computerization

Computerized Information Management (Object- Oriented Databases, Expert Systems, Networked Information Systems)

4.- Financial ManagementMeasures and Controls

Spending Plans, Cash- Based Accounting Models, Input & Process- Based Measures of Performance, Ex-Ante Controls (based on forecasts rather than actual results)

**Responsibility Centred, CostBased Accountancy, ...