The UK public sector spends more through contracting than it does on providing services itself. In 2014-15, government spent £242 billion - almost one-third of total government expenditure - on external suppliers, compared with £194 billion on staff.1
Of course, the majority of this is spent on the purchase of highly-commodified goods and in the construction of public facilities, but according to the NAO, around £100 billion is spent on the delivery of services by external providers.2 The available evidence suggests that the proportion of expenditure on non-employee costs is higher in local government.
Public sector employees carry out the strategic functions of government - policy advice, financial control, contract management and delivery of the majority of front-line services - but it is clear that the way in which the public sector manages its supply chain is extraordinarily important to the efficiency and effectiveness of government.
Private and not-for-profit providers have long played a role in the public sector, but the scale and complexity of public service contracting has grown significantly since the introduction of compulsory competitive tendering in local government and the NHS in the late 1980s and early 1990s. Successive governments have expanded the role of external providers in the delivery of business support and front-line services.
As a result, the UK public service economy is today the largest and most sophisticated in the world. Some other countries have engaged the private sector more extensively in certain sectors - Australia and the Netherlands in education, France and Germany in healthcare, Denmark in emergency services - but unquestionably, the UK has been the world leader in opening the delivery of public services to delivery by private and not-for-profit providers.
However, the past five years have seen a radical transformation in the way central government engages with its supply chain, with ministers driving a process of standardisation and centralisation, pushing out the boundary between public and private, and actively using competitive tendering to drive down price.
At the same time, there has been a noticeable decline of trust on both sides of the market - questions have been raised about the competence and the integrity of major providers, and suppliers are deeply concerned about the 'race to the bottom' that has been provoked by low-price tenders and the aggressive approach taken by some departments and agencies to risk transfer and performance management.
Industry has become increasingly concerned about the health of the market under such conditions, particularly for complex and front line services. This report was commissioned by the Business Services Association, the industry body which represents companies involved in the provision of public services, to reflect upon the conditions that are necessary for political and commercial sustainability.
The focus is on what government might do to improve the state of the market. This is for two reasons: (i) providers are prohibited from collaborating in bidding for government business, so there are severe limitations as to what they can do to correct these problems; and (ii) this is government's supply chain, and ultimately, it is government that will be held responsible for the outcomes.