In times of severe financial stress, it is understandable that governments will feel the need to significantly reduce public spending. However, it is politically difficult to cut front-line services, and governments usually prefer to retrench policy capability and management overheads, defer repairs and maintenance, reduce support services, increase workloads and shade service quality. If public service contracting is employed to deliver these sorts of initiatives, then it is inevitable that it will suffer by association.
Competitive tendering is a highly-effective way of driving down the cost of a service to government, and in the short- to medium-term, this may appear to offer a convenient solution. But if providers sign up to outcomes that are undeliverable and/or if they agree to prices that are unsustainable, they may disappoint customers by providing services of lower quality and reliability and/or they may disappoint shareholders and investors by delivering unacceptable returns, causing them to surrender their contracts early. In either case, this may result in individual companies losing the trust of their customers (and the public at large), and ultimately it may contribute to a loss of confidence in public service contracting overall.
Private providers are usually involved in delivering support services, and in times of austerity, when these are targeted for greater retrenchment, contractors will find themselves at the cutting edge of controversial reforms. In particular, public service contracting may come to be linked in the public mind with low-price bidding and a 'race to the bottom': a senior union official observed in the course of this review, 'outsourcing is now inextricably linked to austerity'.
Public service contracts (which usually fund specified outputs) are less flexible than direct delivery (which has traditionally funded capability), and the consequences of unsustainable cost reductions tend to be apparent more quickly. In a highly changeable policy and funding environment, departments and agencies will be tempted to reduce the duration of contracts, making it more difficult for suppliers to make appropriate investments and deliver organisational transformation in realistic timeframes.
In times of austerity, there will also be less tolerance for corporate profits. Governments still have to cover the cost of capital and to compensate for the risks associated with innovation, even when services are delivered in-house, but these costs are much more obvious and much more difficult to justify when services are delivered by private providers.
It seems likely that each of these factors has contributed to a loss of confidence in public service contracting amongst politicians and civil servants. While there is no hard evidence to support it, a view has developed in government that public service providers were systematically overcharging. There is a view that 25-30% price reductions on mature contracts are sustainable and there is a reluctance to believe suppliers when they report that they are losing money.
There was deep disappointment in government when it was discovered that several large suppliers were charging for services not actually delivered (even though it would seem that some contract managers in government had long been aware of the arrangements). There is growing concern at the number of contracts where providers are failing to deliver what they have promised.