Government spends £284 billion a year on buying goods and services from external suppliers. This amounts to around a third of all public expenditure. The money is spent on everything from goods such as stationery and medicine, through to the construction of schools and roads, the daily delivery of back-office functions such as information technology and human resources, and front-line services such as probation and social care. This report provides a detailed analysis of how much different parts of government spend, what they buy, who their suppliers are and how they structure contracts.
The public sector has always bought from the private sector. But the introduction of compulsory competitive tendering in the 1980s led to a significant expansion of private contracting. Large parts of government began to outsource substantial responsibilities to businesses and charities.
Since then, there has been a broad political consensus that the application of market mechanisms to the work of government and the greater involvement of external providers would unlock savings and improve service performance. Both Conservative and Labour Governments have introduced policies to promote greater use of external suppliers. This has included significantly expanding the role of external suppliers in public services and the use of public–private partnerships, which includes the Private Finance Initiative (PFI). Under the PFI, private companies have designed, built, financed and operated UK infrastructure such as schools and hospitals.
But now that consensus is breaking up. While few question whether government should purchase goods such as stationery or IT hardware from private providers, there is an increasingly vigorous public debate about the supply of public services and other functions that were once the preserve of the public sector. The collapse of Carillion, one of the largest government contractors, highlighted some of the weaknesses of the model. It would be wrong for the failure of a company to be mistaken for the failure of the idea; companies fail for many reasons. But the episode revealed questions about the quality of government supervision, whether public services were adequately protected from a failure by a supplier and whether small suppliers of big contractors should carry as much risk as they do.
The industry was keen to suggest that government has driven down the pricing of contracts too far, while others questioned the adequacy of the protection of pensions and jobs for employees who were doing government work. The Labour leadership now argues that the outsourcing project has failed, presenting both ideological and practical objections.
The Institute for Government has already carried out a considerable amount of work on government contracting. We have found that certain conditions have to be met if it is to work well. These include the ease of measuring the value added by the provider, relative policy certainty in the service area and the service not being intrinsic to the nature of government.
In this report we look at the scale and nature of government procurement. There are so many definitions of procurement and outsourcing that critics and supporters often argue straight past each other, using data and examples that fit their side of the story. Our aim here is to map out the landscape of government procurement in the UK.
Our goal is also to provide clarity and a firm basis for the wider discussion. One conclusion is immediately apparent: procurement is the single biggest component of modern government and it cannot easily be unravelled. Our analysis also finds that:
- the UK’s procurement spending is not high by international standards
- the proportion of published procurement spending going to strategic suppliers – companies that receive over £100 million in revenue per year from government contracts – has grown over the past five years, yet some of the top strategic suppliers have experienced financial difficulties
- some government departments are beginning to take greater control of aspects of their IT.
This report is the first in a wider programme of work that will look at the record, successes and failures of government contracting in the UK (with reference to the experience of other countries). We will look at what has worked and what hasn’t, what lessons should be drawn, how contracts should be managed, and how activities should be taken back into the public sector if and where that is appropriate.
The key questions
In this report we answer some central questions about government spending with the private and voluntary sector:
- What is the scale of government procurement spending?
- What is government buying?
- Who supplies government?
- How many contracts are there, of what value and length?
These questions ought to be easy to answer – government itself should be able to answer them quickly and accurately if it is to ensure that it is effectively managing these markets and securing best value for money. But doing so is challenging because of the poor quality of government procurement data, which limits the analysis that we – or others – can undertake.
We have only been able to produce the results presented in this report after carrying out complex analysis of the data available from disparate government accounts, spending records and individual contracts. Our figures do not always match with those that government departments generate using internal or published data, which demonstrates the difficulty of getting the full picture from the patchy data available.
We therefore make recommendations to all levels of government about what they should do to build the world-leading data collection and publication systems needed to ensure that they can make informed procurement decisions, that public sector markets are more competitive and that the public can hold government and suppliers to account.
What do we mean by procurement?
Procurement is the purchase by government of the following from the private sector, charities and other organisations:
- goods – items such as pens, paper, laptops, desks, hospital beds and medicines
- works – the construction, repair and maintenance of assets such as roads, hospitals and military equipment
- services – the delivery of functions such as adult social care, IT support, human resources and consultancy.
When we refer to outsourcing in this report, we do so using the Organisation for Economic Co-operation and Development’s (OECD) definition. This definition includes the goods and services purchased by government either for its own consumption or for delivery directly to the end user. It does not include capital works, such as building new roads.
However, our interest in contracting includes outsourcing but extends to procurement in the wider sense, including works. Neither outsourcing nor procurement is synonymous with privatisation, which is the sale of publicly owned assets to private investors.
1. Gash T and Roos T, Choice and Competition in Public Services: Learning from history, Institute for Government, 2012, retrieved 12 September 2018, www.instituteforgovernment.org.uk/publications/choice-andcompetition-public-services
2. Twinch, E (2018) ‘Corbyn blasts outsourcing and pledges public service renaissance’, Public Finance, 26 September, www.publicfinance.co.uk/news/2018/09/corbyn-blasts-outsourcing-and-pledges-public-service-renaissance
3. Gash T and Panchamia N, When to Contract: Which service features affect the ease of government contracting? Institute for Government, 2013, retrieved 12 September 2018, www.instituteforgovernment.org.uk/publications/when-contract