25 March 2019

Labour is right to identify outsourcing failures but its new policy risks creating more problems than it addresses, argues Tom Sasse

Labour has announced plans to significantly restrict the use of outsourcing. The policy marks a major break with 30 years of consensus – under Conservative and Labour governments – about the use of private companies to deliver public services. Labour is right to identify significant failures in government outsourcing, from the collapse of some of government’s biggest suppliers to failing services in areas like probation, but its plans risk throwing the good out with the bad. This could end up creating major implementation problems for itself in government, without improving services.

Government lacks the capacity to bring many services back in house

Government spends £284 billion a year – a third of all public spending – on buying goods and services from external suppliers. This covers everything from frontline services such as probation and social care, to back office functions like IT and human resources, to the construction and maintenance of schools, hospitals and roads.

Labour’s restrictions are loosely defined, but it is proposing to bring great swathes of activity back in house. It says it will make the public sector the default provider for services that involve “significant contact with ‘at risk’ groups, exercise of coercive powers, or risk of infringement of people’s rights”.

It is clear that this covers frontline services including welfare assessments, NHS care, prisons and probation. And government currently buys over £130 billion of goods and services in health and social protection alone. While Labour don’t say so explicitly, ‘at risk’ must also include social care, where much of the £20 billion spent by local government goes to private providers, which would be extremely difficult to replace. The announcement also highlights Capita’s failed army recruitment contract, and the restriction could easily extend further to people using court translation services, those calling the various telephone helplines that private companies run for government, or cleaning, catering and security in prisons and hospitals.

Bringing these services and associated activities back in house would be a huge challenge. Government would need to hire and train large numbers of staff and manage complicated transitions as contracts expire. In some areas, government has not delivered services itself for decades. As Amyas Morse, Head of the National Audit Office, has said: ‘Government just doesn’t have either the skill or the financial capacity to take back much delivery in house’.

A Labour government would be trying to do all this alongside other priorities: delivering Brexit; renationalising water, rail and other industries; and making changes to the structure of Whitehall departments. Any one of these could easily absorb a government for its whole term.

Bringing services back in house might not improve them

Many services were outsourced, at least in part, because the public sector was delivering them poorly. And the public sector still suffers its own failures: for instance, safety in prisons, the vast majority of which are public, has deteriorated sharply in recent years following cuts to spending and staff numbers. Our latest Performance Tracker also revealed serious concerns about the quality of neighbourhood services, such as bin collections and libraries.

Bringing these services back in house would not be an instant fix: Labour will face similar challenges to deliver efficient and effective services within the levels of public spending it can sustain through taxation. It will also have to ensure that new statutory providers, who may not have expertise, are given the required levels of oversight.

Making the public sector the default provider in a wide range of areas also risks losing the benefits of outsourcing where it has worked. There is evidence that outsourcing has improved efficiency and produced significant savings, including in prisons and healthcare, although more up to date studies are needed. Outsourcing has also created competition: for instance, a study found that creating private treatment centres for providing knee and hip replacements helped to improve the quality of provision in nearby hospitals. In many areas, the public sector has benefitted from bringing in specialist expertise.

Decisions about how to deliver services should be based on the evidence of what works

Rather than making services public or private sector by default, government should look hard at the experience of the past 30 years. To inform future decision-making on contracting it needs to develop a stronger sense of what has worked well in delivering better services or better value for money, and what has not been successful and why.

The Institute for Government has argued that outsourcing tends to work when there is a market for the service; the difference between good and bad performance can be measured; and the service isn’t integral to the purpose and reputation of government. When these conditions are met, contracting out can help government improve services and deliver cost savings. When they are not, outsourced services are likely to fail – as in the case of probation.

Outsourcing has been hit by a string of recent failures, but that does not mean that outsourcing has failed. Labour should focus on fixing the problems, rather than create more for itself.