Professor of Accounting and Public Management Robert Jupe, from Kent Business School comments on the latest collapse of a public sector outsourcing giant.
‘The downfall of Interserve, the government contractor which collapsed into administration last week, in the wake of the National Audit Office (NAO) investigation into the partial privatisation of the probation services, highlights the need to reassess the extensive use made of the outsourcing of public sector contracts to the private sector. This collapse comes just over one year after the collapse of Carillion, which had 19,000 UK employees and around 450 public sector contracts in the UK. Its failure cost taxpayers an estimated £150 million, nearly 2,000 employees were made redundant, and there were major delays to two substantial hospital construction projects. Despite its worsening financial position, Carillion had been awarded new public sector contracts, including a £1.4bn contract on High-Speed Rail 2, shortly before its collapse.
‘There are disturbing parallels between the collapse of Carillion and that of Interserve. Interserve has 45,000 UK employees and £2bn in government contracts. It provides cleaning services for schools and hospitals, manages construction projects, provides catering services, and manages probation services for 40,000 people. As in the case of Carillion, it appears that Interserve was awarded substantial new government contracts in the months leading up to its collapse. These included a £66m contract agreed in July 2018 with the Foreign Office to provide facilities management services.
‘The outsourcing of public services to companies like Interserve and Carillion is meant to provide several benefits: there is a transfer of risk to the private sector, and private sector businesses can operate more efficiently than the public sector thus providing better value for money. These alleged benefits have been called into question again, however, by the NAO report published at the beginning of March on the part-privatisation of probation services (Transforming Rehabilitation: Progress review). In 2015 probation services for low and medium risk offenders were transferred to eight, mainly private sector, suppliers working under contracts to run to 2021-2022. The aim was to reduce reoffending and so gain an estimated £10bn in net economic benefits to society.
‘The NAO found, however, that the Ministry of Justice did not achieve the objectives of its reforms. Although reoffending was reduced overall, there was a 22% overall increase in the number of reoffences per offender. Further, there was limited innovation, underinvestment and a lack of progress in transforming probation services, and significant increases in the number of people being recalled to prison. The NAO’s conclusion was that Transforming Rehabilitation “achieved poor value for money for the taxpayer”. The government decided to end the contracts early in 2020, meaning that at least £467m more than was required under the original contracts will be paid to the probation service providers. Rather than bring the contracts back to the public sector, however, the government aims to continue to outsource probation services with a new generation of contracts.
‘Instead of simply replacing private sector suppliers by establishing more outsourcing contracts, there needs to be a fundamental re-assessment of the principle and risks of outsourcing. Further, there should be an honest debate about level of taxation that is needed to support properly funded public services in the UK.’
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