The significance of outsourcing

8. The UK Government has always purchased some assets and goods from the private sector. In the 18th and 19th Centuries, governments purchased some public services from the private and voluntary sectors: such as, criminal justice, defence and education.11 Although governments brought some services in house during the first three quarters of the 20th century, they still purchased a variety of goods and services from the private sector, including construction services and weapons systems.12

9. Since the 1970s, the UK has increasingly turned to the private sector to deliver public services.13 Professor Michael Moran, (University of Manchester), Professor Karel Williams (Manchester University) and Professor Sukhdev Johal (Queen Mary University) argued that current outsourcing is different in nature from what happened immediately prior to the 1970s: "modern outsourcing is more fundamental and more complex; it involves franchising or leasing complex sets of services to private contractors".14 The CBI agreed that this represents a starting point: "outsourcing, as we have been discussing it today, has been around for 30 or 40 years".15 There is evidence of this transformation in particular markets. For example, UNISON said that "in the early 1990s just 5% of home care was provided by private companies, today it is more than 80%."16 There are a number of markets which simply did not exist 30 to 40 years ago including prisons, probation services and support for unemployed people to return to work.

10. Now a wide variety of services and goods are purchased from the private sector. According to the NAO, these include:

• the construction of assets and infrastructure (e.g. the Ministry of Defence's new aircraft carriers);

• services delivered directly to the public (e.g. contracts for probation services);

• support services for Government (e.g. facilities management); and

• the goods required by government agencies to function or by the public as part of some government programme (e.g. pharmaceuticals).17

Local Government similarly purchases a diversity of services, ranging from contracts for IT to the provision of children's services.18 The diversity of service provision leads to a diversity of suppliers: George MacFarlane, Sectors Director at the CBI, told us that around 200,000 companies and charities now deliver services to or for the public sector across the country.19 Consequently, the Minister argues that "the private sector has a vital role to play in delivering public services".20

11. In 2015-16, central and local government spent a combined £251.5 billion with external suppliers of goods and services.21 The Government spends roughly as much on purchasing goods and services from the private sector (£192 billion in 2015-16) as it does on paying its own staff (£193bn).22 Most public services now include some element of outsourcing: Michael King, the Local Government and Social Care Ombudsman, told us "there are few areas now where we do not see some sort of externalisation through contracts".23 Often this will involve the public, private and voluntary sectors working together to deliver a social outcome. For example, in probation services, a public sector prison might release a former prisoner to a private sector community rehabilitation contractor who commissions a service for the prisoner from a charitable provider.24

12. The UK is not alone in this regard. The practice has "become commonplace across most EU countries".25 According to the OECD, government procurement accounts for "approximately 12% of OECD GDP".26 In 2015, the UK spent 13.7% of GDP on government procurement. This proportion has been consistent over the last ten years, with the UK spending at least 13% (2007) and at most 15.6% (2009).27 Internationally, this compares with 20.2% of GDP spent on government procurement in the Netherlands, 17.5% in Finland, 15.05% in Germany, 14.6% in France, 14.16% in Denmark and 9.4% in the United States of America.28 Professor Sturgess told us that different countries take very different decisions about what to purchase, based on cultural factors: in Denmark emergency services like the Fire Service are provided by a private firm which in the UK, he said, would be politically "unacceptable", whereas he said the UK has long contracted out the operation of its lighthouse service which would be "confounding" in countries such as the United States.29 It is not confined to the public sector only: as the Minister said recently "outsourcing is standard practice within the private sector".30

13. Despite this, recently public trust in outsourcing has declined. Margaret Stephens said that "trust has been lost in PFI" and warned the same lack of trust could extend to outsourcing in general.31 Paul Davies said that the public "simply do not trust that private ownership is in their interest."32 In the Minister's view, the Carillion failure has "crystallised issues which have, at times, informed that breakdown of trust".33

14. Government outsourcing is now more important than ever. This is true not only of the UK but also of most other advanced economies. The Government purchases almost as much from external providers as it spends on its own staff. There are few public services where the Government does not rely, to some extent, on some sort of contractual relationship.

________________________________________________________________________________

11 Richard Harding and Sergio Solbes Ferri (coords.), 'The Contractor State and Its Implications, 1659-1815', Universidad de Las Palmas de Gran Canaria, 2012, H. Midgley Payment by results in nineteenth century British education: a study in how priorities change Journal of Policy History Vol. 28 Issue 4 (2016) pp. 680-706, G. Sturgess, G. Argyrous and S. Rahman Commissioning human services: lessons from Australian convict contracting Australian Journal of Public Administration Vol. 76 Issue 4 (2017) pp. 457-69, Q404

12 J.F Flower, The Case of the Political Bloodhound Journal of Accounting Research Vol. 4 No. 1 (1966) p. 16. P. Smith, Procurement collaboration in the UK public sector Spend Matters November 2017

13 C. Hood and R. Dixon, A Government that worked better but cost less? Evaluating three decades of reform and change in UK central Government (Oxford 2015), p. 2; A. Bowman, I. Erturk et al. What a waste: outsourcing and how it goes wrong, Manchester University Press, 2015, p. 2

14 S. Johal, M. Moran and K. Williams Breaking the constitutional silence: the public services industry and the Government The political quarterly Vol. 87 Issue 3 (2016)

15 Q330

16 LCC0013 (UNISON)

17 National Audit Office, A Short Guide to Commercial Relations, December 2017, p. 8

18 Q239 (David Simmonds)

19 Q333

20 David Lidington, Chancellor of the Duchy of Lancaster speech to Reform, June 2018

21 National Audit Office A Short Guide to Commercial Relations December 2017 p. 4

22 HM Treasury, Whole of Government Accounts 2015-16, p. 13

23 Q239

24 Ministry of Justice Transforming Rehabilitation A revolution in the way we manage offenders, January 2013, p. 11

25 J.M. Alonso, J. Clifton and D. Diaz-Fuentes, Did new public management matter? An empirical analysis o the outsourcing and decentralising effects on public sector size, MPRA Paper No. 43255 (December 2012), p. 6