Thursday, 19 November 2015

Public Sector Outsourcing: Governmentality or the loss of power and control? - Colin Haslam, Professor of Accounting and Finance at Queen Mary

Over the last two decades British central and local government authorities have pursued a revolutionary strategy that has progressively outsourced the provision of public services to the private sector. This transfer of public resources to the private sector is founded upon a simple good-bad typology. Supposedly, the public sector is inefficient because it lacks incentives and a profit motive, whereas because profit-driven private firms compete in competitive markets inefficiency is driven out and value for money delivered.  

In recent years outsourcing contracts with the private sector have increased as a share of total government external procurement from 34% to roughly 60% (see figure 1). The outsourcing relationship between central and local government agencies and private sector counterparties is mediated through the ‘outsourcing contract’. These contracts represent a form of decentralised, capillary power capable of reinforcing ‘governmentality’, a term coined by Michel Foucault and referring to the way in which the state can exercise indirect control at a distance.

Information Services Group (ISG) and Government Accounts, ONS

A recent National Audit Office (NAO) report on government outsourcing raised questions about the nature of government outsourcing contracts. Are they transparent? Do they provide value for money? What profits are being extracted by private firms running these contracts? (NAO). The NAO’s recommendations are that government and local authorities must endeavour to better control how their contracts in terms of: how they are written up, how they are monitored for performance and how public authorities manage them to promote competitiveness.

Contracts for public services are bundled up within large national and multi-national firms including private equity partnerships.  These firms include both specialist providers such as with household waste management services and huge conglomerates which manage a diverse range of public sector contracts and services. The outsourcing revolution has given rise to the large outsourcing firm, which now constitutes a new governing institution, which makes it harder for public authorities to exert constitutional control, frame national policy and generate accountability.

A growth in arm’s-length delivery will bring less openness, a reduced ability in introduce change, increased difficulties in implementing national campaigns and confused accountability (Isonomia)

Yet these outsourcing firms are also prone to financial instability and even to collapse. They chase increased revenue and profits not only by competing for new contracts but also by acquiring other firms which already manage a bundle of public sector contracts. This strategy of chasing revenues and profit inflates their balance sheets. They now often have very large liabilities of outstanding debt. Moreover, their own valuations are inflated by “goodwill”, which represents a big difference between the market and book value of acquisitions for many of them. In 2014, SERCO, a major conglomerate providing public sector services in countries across the globe, announced balance sheet write downs of ‘around £1.5bn, although the range of possible outcomes is still wide’ (SERCO). Specialists too are also not immune to financial instability. Biffa a household waste management company under private equity ownership had to restructure its balance sheet to write off over £500 million of debt in 2012 and is still not making a profit in 2014 (Biffa).

If the objective of public sector outsourcing was to extend indirect power and control, or governmentality through contracts, then the programme is not working out as planned. Instead, outsourcing of public services is creating new problems and risks. Public sector expertise and knowledge about the delivery of essential services are being hollowed out making it difficult for central and local government to monitor contracts. The firms which are consolidating public services are a new form of governing institution with power and control of their own over the provision of basic, essential services, upon which we all depend. Yet, this new corporate power is also fragile. For the very firms which have secured that control from their public sector clients are themselves prone to financial instability and collapse.

This blog post draws on Andrew Bowman, Ismail Ertürk, Peter Folkman, Julie Froud, Colin Haslam, Sukhdev Johal, Adam Leaver, Michael Moran, Nick Tsitsianis and Karel Williams, 2015, What a waste: outsourcing and how it goes wrong, Manchester University Press (MUP).