The debate over choosing in-house or contractor-provided services has reopened after high-profile suppliers encountered trouble. Chris Buss concludes there is a case for services supplied directly by councils where existing markets have failed.
The recent demise of Carillion, and the travails of Capita, have led some commentators to observe that outsourcing of services is yesterday’s business and that the future is directly provided amenities.
This is a conclusion that some of those on the left of politics see as a good thing because it gives, in theory, local political control of services.
However, are we seeing a step change in which we return to services delivered directly by council staff while the use of private sector suppliers is viewed as an aberration? Or, are we seeing a natural swing of the pendulum from contractors back to directly provided services which will, over time, swing back again?
Markets
When I started in local government in the 1970s many services were assumed to be provided in-house as a matter of course. An unfortunate side effect was that services were delivered as much for the convenience of the workforce as for those to whom facilities were being provided.
If innovation in technology meant the loss of jobs or potentially lower earnings, even if it provided a better service to the public, then innovation often didn’t occur. The public sector was much like a monopoly provider and could, and often did, use monopoly power.
The advent of market testing, when used in its purest form, meant that monopoly suppliers were challenged. Looking back at old market testing committee reports from the early 1980s (for facilities such as refuse and rates collection) reveals there was often more than a dozen tenderers willing to enter into what were, at that time, new markets.
The impact on cost was correspondingly large with significant price cuts due to the more efficient use of resources and in some cases — before the protection afforded by TUPE — reductions in terms and conditions of service.
However, retendering for the same services — the third or fourth round of tenders some 15-20 years later — shows a much smaller range of tenderers, the impact of which was that savings reduced or, in same cases, prices even increased.
Any economist will recognise this as the result of reducing potential suppliers to a market, cutting competition and, as a result, causing prices to rise. In some areas the old monopoly of direct labour had within a generation, or so, been replaced by a monopoly, or oligopoly, of the private sector.
The result? The market often no longer worked efficiently and the service user was, again, at the mercy of the provider.
Savings
In those circumstances, is it any surprise that councils and other parts of the public sector are again looking at providing services in-house? After all, there are a number of potential savings, comparing like-with-like, that an in-house service should offer.
These include no need to make a profit; no need for a significant client monitoring service; and no need to offer full pension deficits under IAS19. Assuming terms and conditions for staff are the same, a service delivered in-house should be possible at a lower cost than the private sector.
On the other hand, the private sector may have the advantage of economies of scale or access to technology that the individual council may not have.
The point is that — depending on individual circumstances at any particular point in time — the decision whether a service is most economically furnished in-house, or by a contractor, will vary.
There is no overriding golden rule that says that the private sector, or public sector, is best placed to provide a particular service. It will literally be horses for courses and will vary not just between parts of the sector but between councils.
However, one thing we should all beware — whether a service is in-house or outsourced — is the provider who dictates how the service is provided at the expense of those to whom the service is being supplied. If we’ve learnt anything from the past, it must be that it is those who use, or receive, a service who remain the most important.
Oligopoly
Turning back to my original question, I suspect we are seeing a pendulum swing back towards directly provided services, largely because the market, in many areas, is in an oligopoly situation. It’s time for councils to see if they can gain a competitive advantage by reintroducing a directly employed labour force.
Personally, I believe this should only be done in areas where the market has failed, or is failing, and where councils have the expertise to undertake the services in an efficient, effective and economic manner rather than as a doctrinaire view.
There is no divine right for the public sector workforce to provide a service just like there is no inherent correctness in a private sector workforce providing a service.
They each have their place, and that place will vary from council to council and service to service. There is no one-size-fits-all solution.
Chris Buss is executive director resources and assets at the Royal Borough of Kensington and Chelsea
The views in this article are those of the author and may not reflect those of his employer.
As a postscript, some may wonder about the title of this article. Go to Youtube and listen to the Byrds’ interpretation of Ecclesiastes chapter 3 . There is a time and a season for everything.
