Public services contracting woes in UK

Even as Britain grapples the legacy of its Thatcherite privatizations, the National Audit Office (NAO) has an excellent report that questions the way public services are contracted out in UK. The report was commissioned by the government in the aftermath of several scandals of mis-reporting, over-billing, and fraud.

Two of the largest outsourcing contractors, Serco and G4S have been found guilty of over-charging and fraud (by way of billing dead individuals) in their contracts for electronic tagging of offenders. Another, Atos entrusted with the responsibility of testing whether disability living allowance claimants are entitled to a government benefit, was found to have denied benefits to large numbers of people with terminal cancer and other serious illness.

The NAO report looks at the market for outsourcing public services, valued at £93.5bn last year, by examining four largest public contractors in UK. It raises concern at the concentration of public contracting in a few large firms and also at whether the money is being well-spent and desired outcomes are being delivered. 

In particular, the report examines three questions - whether public contracting market is sufficiently competitive; whether contractors profits reflect a fair return; and whether contractors are delivering services to the desired standards. It writes, 

First, it raises questions about the way public service markets operate. This includes the need for scrutiny over whether public service contracts are sufficiently competitive and whether the rise of a few major contractors is in the public interest. Secondly, it highlights the issue of whether contractors’ profits reflect a fair return. Understanding contractors’ profits is important to ensure that their interests are aligned properly with that of the taxpayer. But transparency over rewards that contractors make is at present limited.

Thirdly, the report asks how we know that contractors are delivering services to the high standards expected. In particular, government needs to ensure that large companies with sprawling structures are not paying ‘lip-service’ to control and that they have the right culture and control environment across their group. This requires transparency over contractors’ performance and the use of contractual entitlement to information, audit and inspection. This should be backed up by the threat of financial penalties and being barred from future competitions if things are found to be wrong.

The FT has this to say about the state of many outsourcing contracts,

Recent research by the Institute for Government think-tank has raised questions about the capacity of civil servants to ensure this money is well spent. “Gaming” of contracts is far too common, with departments too rarely checking whether providers are hitting the targets but missing the point... Competition is often non-existent...

Contracts, meanwhile, are too long and inflexible. Providers offer big discounts in return for guaranteed income over a longer period - and ministers and officials are often tempted by this deal, knowing they are unlikely to be there five years later. Policy, demand for services and technology all change frequently, however. Nine-year tagging contracts looked good value when they were signed in 2005 but not once the price of tagging technology plummeted. Taxpayers are still paying the price of 25-year public finance initiative deals to build and maintain hospitals and other essential infrastructure.  

An FT editorial hits the nail on its head in its assessment of what is wrong with public sector outsourcing in UK,

First, there is too little competition. Ministers must do more to allow smaller providers to grow. Second, Whitehall needs to be smarter about how it bargains over contracts, especially those where quality of service is as important as price. Ministers often sign up for deals merely on the grounds that they save money. They also need to be more savvy about monitoring subsequent performance. Third, more transparency is needed. Taxpayers need to see in much greater detail how these companies make profits and who their suppliers are... the pace of outsourcing has far outstripped Whitehall's ability to manage it properly. 

In fact, following the outbreak of the scandal, the government has put on hold a wave of contracts, worth an estimated  £500m a year, to outsource management of prisons and lowering of recidivism among prisoners. Outsourcing prisoner probation work had become almost a fad following some boutique experiments on lowering recidivism through social impact funding based business model.

There is nothing surprising about UK's experience with public contracting. In a matter of two decades, public services contracting has grown from virtually nothing to nearly £100 bn a year market. Public systems, especially those at the cutting edge, barely have the capacity to manage complex contracts. This problem gets amplified when they are dealing with large contractors with the capability to 'game' the contracts. 

This assumes great significance for countries like India where too public services contracting has grown rapidly without public systems being equipped with the capacity to manage these contracts. A classic example of an activity which runs the risk of losing credibility is independent third party quality control contracts entrusted to monitor the quality of engineering works. It is commonplace to today find many routine services contracts like that for cleaning and sanitation in public institutions like hospitals having degenerated into being indistinguishable from their previous publicly managed avatars.

Update 1 (10/1/2014)
The UK Civil Aviation Authority (CAA) has proposed cutting the user charges collected by the operators of the three private airports at Heathrow, Gatwick, and Stanstead in real terms over the next five years. While Heathrow had proposed that the user charges should increase by inflation plus 4.2 percentage points over the next five years, the CAA has awarded an increase of inflation minus 9.8 percentage points. The operator claims that the CAA award would cut its return on investment from 5.6% to 5.35%. Apart from this, the CAA has also imposed a more rigorous monitoring framework. The operators have criticized the decision.