29 April 2014

G4S and Serco have hit the headlines again – this time in relation to asylum seeker housing contracts – raising fresh concerns about whether the Government is too ‘hands-off’ in its approach to outsourcing key public services.

Last week, the Public Accounts Committee criticised the Government for ‘poor planning and bad management’ following changes to asylum seeker accommodation contracts in March 2012. Three providers – G4S, Serco and Clearel – took over the contracts from social landlords, including councils. The intention was to increase competition between them and make savings of £140 million over seven years.

Two out of three of these providers – G4S and Serco – had no previous experience of providing the service at all. Yet the Home Office reportedly took a ‘hands-off approach' – taking only three months to negotiate the contracts and failing to impose penalties on providers for poor performance. The result was unsurprising. Neither G4S nor Serco inspected the housing stock they inherited, leaving thousands of asylum seekers in unsuitable or squalid properties. Local councils were forced to step in as ‘providers of last resort’ even though they no longer had a statutory obligation to deliver the service.

This should be a cautionary tale for those engaged in current, and future, market based reform programmes. In an effort to make upfront savings (in this case, £8m in the first year), the Home Office outsourced the service to a few, large providers. The expectation was that competition between these providers would lead to a better service at a lower cost. But too often government overestimates the extent to which these markets in public services are ‘self-managing’ – with the result that the service is neither better nor cheaper.

Given the ambitious and far-reaching reform programme underway in the probation service, it is a critical time to reflect on this. Later this year, the Ministry of Justice will outsource 70 per cent of the service to a range of voluntary and private sector providers. Of the 21 potential prime contractors, none have experience in providing the full array of probation services.

Our research on the history of contracting in public services has found that contracting out to providers that do not yet have the capacity to deliver a public service is particularly difficult. It takes time for providers to develop their service offering, attract financial investors and establish supply chains. Even in more established markets, there is a risk that existing and, in particular, new service providers will not perform well when transitioning to a new contracting model – as in the Work Programme. Rapid reforms only increase this risk further. That’s why the Institute has previously suggested phasing the probation reforms so that the government can learn from early mistakes and refine their contracting and market oversight models.

However, the Government has decided to award all the contracts in one go by the end of this year for a period of 7-10 years. Given this, what can the MoJ do to mitigate the risk of a severe performance dip and ensure that it achieves both diversity and quality of supply in the provision of probation services?

One option would be to deliver training and support for providers transitioning to new roles in the market. We welcome the department’s package of support for potential voluntary sector providers, but suggest that elements of it are extended for all potential providers – regardless of sector – who have limited experience in delivering the service.

More importantly, the MoJ should actively monitor providers throughout the life of the contract – something that is particularly critical given the long length of the contracts. One way of doing this is to build flexibility into the contract design – for example, performance related break clauses which trigger another competition if performance dips below a certain level. Another way would be to increase transparency around provider performance, profits and supply chains – as is currently being explored by the IfG, CBI and Information Commissioner.

To be clear, this change in approach would add costs – however, it would be money worth spending to ensure that, this time round, government bucks the trend and gets the results it wants.

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