Facility management firm Carillion’s recent collapse was one of epic proportions, casting 450 public-sector contracts into doubt, dragging down thousands of small businesses and leaving tens of thousands of employees with an uncertain few weeks ahead. As a gargantuan enterprise with a vast web of projects, services and indeed debt (around £1.5bn), you’d be forgiven for believing it was too big a company to fail.
The search for blame has begun in earnest. The government is a clear target; after Carillion issued a profit warning in July last year, the government continued to award it contracts, notably the £1.4bn HS2 contract. Surely the profit warning should have been a red flag, signalling that Carillion was bidding too aggressively, making heroic assumptions about its expense on public projects and not leaving enough margin to cope with unexpected cost overruns. In short, the government should have realised sooner that they were dealing with a gambler who was taking on risky and potentially unprofitable contracts. The lowest bid is not always the best bid.
The immediate political implications are clear. After Grenfell and the recent Virgin Trains bailout, Carillion will come as another blow for advocates of PFI and outsourcing. It gives Corbyn and Labour more ammunition to fire at May’s already embattled government, as it seems to be evidence that the Tory model of public service provision is broken and that outsourcing doesn’t work.
However, to have a proper discussion about this issue we need to distinguish between the failure of outsourcing and the failure of the bidding process for contracts. Where contracts have been handed out wisely, the evidence does point to good outcomes. Studies of hospital domestic services, refuse collection and buses show that competitive tendering can deliver significant cost reductions, and that after being burned by an over-optimistic bid firms learn and will bid more conservatively in future.
A common objection is that this cost-cutting comes from underinvestment and a reduction in service quality, but the evidence on service quality is not conclusive enough to say that outsourcing necessarily leads to poor service provision. For example, consider that from 1998 to 2016, the Public Performance Measure – a metric for the punctuality and reliability of train services – has remained at a constant level, even while the rail network has expanded greatly. In short, the jury is still out on this question.
The issue then is not whether outsourcing works but under what conditions it works. If we are to avoid another Carillion-style calamity the government needs to address its obsession with cheap bids by giving a bid’s quality and sustainability much more weighting. Bids need to be more competitive; many tendering processes attract only one or two bidders, which makes identifying the most efficient firm much harder. There needs to be a recognition that competitive tendering will work in some markets better than others; some activities are just downright unprofitable whether the public or private sector manages them, while some services need tailored contracts and effective regulation to set the franchise on the right path.
The mistake of the government is not its belief in outsourcing, but its belief that it is a magic bullet which automatically delivers results. For an issue with such nuance, we deserve a debate with nuance to match, because a one-size-fits-all approach simply doesn’t fit reality.
[Image: Food Service Equipment Journal]