Should we all be buying shares in Serco, the public sector out sourcing giant? David Walker's recent article ("Out with the out sourcers?" Prospect, December 2008) is right that recent moves towards greater outsourcing in the public sector are currently under pressure. But what will actually happen in the coming recession remains an open question. The recent pre-budget report reveals the full, sorry state of the government's finances, and analysis of the document clearly shows that whichever party is in power is going to have to find savings of £37bn on the Treasury's own figures. Against such a background, the downturn may well provide an impetus for more outsourcing, not less. And this would be no bad thing.
Let us start with the facts. Walker is correct to note that Blair-era promises of public sector outsourcing are currently going up in smoke. Only as recently as 2004, John Reid was speaking of 15 per cent of NHS operations being carried out by private sector companies. In fact (while the figures are complicated) it is now no more than two per cent and probably falling. Brave promises on initiatives like independent sector treatment centers were quietly cut back under Gordon Brown.
At a recent HealthInvestor round table, Mark Adams of VirginHealthcare said that his local health commissioner, the public body which buys healthcare in local areas, had promised him that £700m of services would become subject to open competition in due course. It finally tendered a £50,000 contract for vasectomies. As Mark said: "You go to your board of directors and say, 'I know we've heard all this before, but this is the scale of the new opportunity' ... when you tell them it's turned into a £50,000 vasectomy contract you don't look too clever." This cut in previously bold Blairite plans for the use of the private sector is rather different from the of snip to the one that David mentioned, namely the value of Serco shares.
For now, competition is still a dirty word in much of the NHS and school system. In the NHS, in particular the imbalance in the playing field between private and public sectors remains. The cost of tendering for the private sector is large, especially for small businesses who have to jump through complicated procurement hoops. The cost for the public sector can be negligible, especially for those bodies who have done it before.
The point Walker's piece failed to grasp, however, is that the credit crunch changes all of this. The government and the Bank of England are trying to stave off a recession. The pre-budget report cut VAT by 2.5%, and lowered other taxes on consumers in the short-term. But everyone knows this won't work on its own. Borrowing will eventually have to be brought under control. The only way to do this will be to make public spending more efficient.
The recession will ultimately re-focus whitehall's mind on the need to tackle the basic inflexibility in public services, in particular, the workforce agreements for public sector staff. Much of the public sector—hospital doctors, GPs, other NHS workers, teachers, police officers—agreed pay deals over recent years predicated on strong economic growth. It has been boom time for public sector pay. Those conditions have now evaporated.
The best thing that the chancellor could have done in his pre-budget report was to republish the comprehensive spending review, including a commitment to renegotiate the terms and conditions of public sector staff in order to bring them into line with the private sector. Despite some briefing on the need for public sector pay restraint, this did not happen. But in a world of low inflation, it may be that public sector salaries will need to fall in the future. In any case, bringing public sector pay back in line with the private sector would create the conditions for outsourcing to flourish.
The recession should give ministers the moral courage to tackle our public finances, clearly a major political challenge. Private companies, meanwhile, should seize the opportunity to explain how their knowledge and techniques can genuinely improve services, while cutting costs. We are entering a phase in which the Government should be wide open for advice on better efficiency and higher performance. The private sector has to make its case with confidence. Improving public sector productivity will be especially important. Only over the last week, I was briefed about major improvements in productivity following outsourcing projects at the UK Border Agency, national savings and the Foreign Office. There is no reason to stop here.
Ultimately the credit crunch will do for outsourcing what the blairites could never push through. Even in an environment of medium-term falling public spending, in the aftermath of Britain's November tax giveaway, the new drive for efficiency will create an outsourcing boom. On this, I am with David Walker all the way. And I will be buying Serco shares too.
