As the likes of Serco and G4S grab the headlines with increasing regularity we’re reminded that over the last decade or so, swathes of the public sector have been outsourced — mostly to a handful of private sector providers. The outsourcing of services — from waste management to children’s homes and prisons — has gathered pace in recent years and the market is now worth somewhere in the region of £100bn per year.

While a small number of large providers are dominating, creating dependency and have significant power over procurement teams and commissioners, evidence shows that smaller providers — social enterprises and charities — are being squeezed out of contracts.

Giant private sector providers tell taxpayers that they’re getting a good deal1, but the evidence points to the degradation of vital public services under their management. The conflict between short-term financial rewards and a long-term public service ethos often appear to be irreconcilable.

In children’s care, the private sector runs two-thirds (65 per cent) of residential homes but a third do not meet the Government’s minimum standards, with private sector providers more likely to be rated as inadequate2.

In adult social care, 1 in 3 patients in care homes fear physical abuse or harm and 65 per cent of jobs are in the private sector3. We now have the most privatised prison system in Europe but services have been taken back into the public sector following serious failings in provision, criminal investigations and scandals. In Welfare to Work services, private providers have been assessed as ‘unacceptably poor’ and Work Programme providers come under sustained attack.

Mixed picture

All the while, it is a mixed picture for social enterprises and trading charities, who were assured open markets in which they could compete for contracts. Some are faring better than others, performing well against the odds, delivering effective local services, delivering value for money for the taxpayer and reducing demands on the public finances. Healthcare spin-outs, co-operative schools, social care spin-outs, housing associations and leisure trusts have thrived since leaving the statutory sector.

The market share of these models is growing, as they deliver against the expectations of commissioners, regulators and service users. Health and social care ‘spin-out’ social enterprises are expanding, winning contracts and diversifying income sources. Social enterprise and employee-owned mutuals are picking up an astonishing array of awards for outstanding service.

Turning Point, for instance, runs a model of community led commissioning which enables local people to design and deliver local health and social care services in partnership with commissioners. This has delivered improved health outcomes through service redesign, greater focus on early intervention and prevention, and reduced costs of service delivery by tackling duplication, development of low cost community-led service models, and stronger accountability and trust between commissioners and communities.

But experiences on the frontline differ. Other charities and social enterprises are taking a hit, struggling to access and win contracts. Research by Social Enterprise UK reveals that social enterprises cite procurement policy as one of the top three barriers to their growth and sustainability4. And 27 per cent of social enterprises whose main source of income is trade with the public sector have made redundancies, compared with 14 per cent of social enterprises operating in other sectors5.

Ineffective market

One of the key problems is that where competition has been introduced, the markets are not at all effective. A handful of providers are now too big to fail and many markets lack any diversity. In prisons, for example, just three firms dominate the market. Barriers to entry are high and transaction costs are considerable — procurement in the UK is the most expensive in the EU at twice the average.

The oligopolies hold the power while the social enterprises and charities (sometimes referred to as bid candy) are subcontracted. Reports from the ground indicate that some partnerships are running smoothly after initial teething problems, other social enterprises and charities have been forced to withdraw from programmes, citing the contracts financially unviable.

This is not all the fault of the profiteers. Commissioning and procurement is too often disjointed within the public sector. Artificial administrative boundaries prevent joined-up services and integration.

KPIs and contractual terms are often complex, clumsy, inflexible and excessive which only adds to costs and shifts them around the system. The scale at which services are commissioned is often unmanageable, with decision-making opaque, removed and distant from the very people who rely on the services.

The problems are complex, and so what are the answers if the UK is to be home to truly plural public service markets made up of mixed providers?

The public sector needs to take on greater responsibility as a market shaper and market steward to ensure more joined-up services, better contract management and greater diversity. Most of all, improved co-operation between government departments is needed. The government must start acting as a single buyer to get a better deal for taxpayers and public service users.

The new Competition and Markets Authority should be given greater powers to intervene in public service markets, to scrutinise contracting decisions and prevent unfair competition, with sufficient weight and power to challenge and overturn departmental decisions and to issue penalties.

Social value

Perhaps most importantly, the government can develop a market of more socially responsible public service providers through applying the Social Value Act to the purchasing of goods and works and the management of assets, including investments and disposals of capital and land. We would like to see public bodies obliged to include social value in their commissioning and procurement and for it to be supported with Statutory Guidance.

The Act is ground-breaking legislation and has the potential to transform the way public services are commissioned. If properly implemented, it can unleash billions of pounds-worth of public spending power to benefit whole communities. Traditionally, the immediate financial cost of services has been the focus — added social cost or benefit has been factored out.

Many argue this has led to a perverse climate in public service markets, where the winners are companies that degrade the quality of services and in some cases fuel further social problems. You only have to look to the crumbling care markets that plunge workers into poverty and spread costs to other parts of the public purse, which must foot the bill with in-work benefits just to sustain the workforce.

Finally, greater transparency is urgently needed — we would like to see the government require public bodies to release data on financial flows to providers and how much is directed towards VCSEs, SMEs, private providers, overseas providers and local providers.

Peter Holbrook is chief executive for Social Enterprise UK, the national body for social enterprise

1 www.independent.co.uk/news/business/news/serco-says-government-keen-to-put-tagging-scandal-to-rest-9663262.html
2 www.socialenterprise.org.uk/uploads/files/2013/10/out_of_the_shadows_report.pdf
3 www.socialenterprise.org.uk/uploads/files/2013/10/out_of_the_shadows_report.pdf
4 www.socialenterprise.org.uk/uploads/files/2013/07/the_peoples_business.pdf
5 www.socialenterprise.org.uk/uploads/files/2013/07/the_peoples_business.pdf

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