Carillion collapse: Can social enterprises offer an outsourcing alternative?

The full impact of Carillion’s collapse on public services, livelihoods and public finances will take months to unfold, but the early indications are bleak and depressingly familiar. Countless smaller firms are in jeopardy because they will not receive payment for work. Staff will go unpaid and the government will step in to continue essential services. Senior management paid themselves bonuses while the company disintegrated.

Carillion was founded on construction, leading projects including Heathrow Terminal 5, the Channel Tunnel and the M6 toll road. Yet over time more revenues were generated from their Support Services division. These were government contracts to build, manage and operate public services, from small cleaning and security jobs to running entire schools and hospitals. Carillion became entwined in the public sector, generating over £2.1 billion revenues from UK support services in 2016. Its collapse has jeopardised the smooth running of these roads, hospitals, schools and houses at a time when public services are already at breaking point.

Like many other outsourcing firms, Carillion was a private company with a duty to maximise shareholder return: putting profit first is simply what they do. They are not alone: whether it is healthy trees being felled in Sheffield to save money or inflated hospital car parking charges to make money from ill health, we see time and time again that outsourcing providers have little heed for social value.

So why did the government allow – even encourage – Carillion and its peers to develop this public services stranglehold? Why did it continue to give work to Carillion after the share price tanked due to losses from its international business, losses that even profits from the sale of PFI stakes at the expense of the taxpayer could not offset?

There are superficial answers about financial tests being met. But the problem with outsourcing has deep roots.

Rather than play a zero-sum-game of risk transfer – where the losers are the public and the winners are the shareholders – partnerships between the public and private sector need to create positive social value

It has become normal for government to provide few services itself and instead tender them out to the private sector. In theory this is reasonable: it would be inefficient and unrealistic for the state to control all the means of production for services to its citizens.

But over time the private sector has expanded from a supplier of goods to a supplier of services – of services provided to our neediest, most vulnerable citizens. And too often these services are being outsourced to cut costs because it is easier to expect a supplier to use zero-hour contracts and the minimum wage than force through swinging changes on your own workforce. Far too many social services are being tendered on the lowest price regardless of service quality and sustainability.

This trend creates repercussions that are seen in the Carillion chaos, the Grenfell tragedy and the social care crisis. Government departments tender out contracts to provide services and from there the successful bidders then sub-contract out the work to other organisations, who sub-contract their work and so on. As if transferring risk into ever decreasing parcels removes it entirely. Yet while risk can be transferred, accountability cannot – and the state retains the duty to provide services even after the private contractor hands back the contract or goes bust.

So where can we go from here? Taking delivery of all public services into state control is not a short-term option: even if the money was there, the staff, the buildings and the expertise went long ago. While we search for the long-term solution, a first step must be to reset the rules of engagement between the private sector and the state.

Rather than play a zero-sum-game of risk transfer – where the losers are the public and the winners are the shareholders – partnerships between the public and private sector need to create positive social value.

While we search for the long-term solution, a first step must be to reset the rules of engagement between the private sector and the state

This is not just wishful thinking. A huge number of charities and social enterprises deliver government contracts, competing with or being sub-contracted by companies like Carillion. These charities and social enterprises exist to deliver public good – not private profit – and there are countless examples of them exceeding contractual requirements rather than looking for ways to avoid them. Yet they struggle to compete with the private companies because they won’t compromise on quality or staff terms to cut costs. The playing field needs to be levelled.

This will not require another royal commission or new legislation or government to bring about. The Social Value Act was introduced in 2013 to require government departments to consider wider societal benefits when selecting providers, not just price. The tools exist today for government to move beyond a cut-price approach to buying in social services. Surely the first step in the journey towards fixing the broken outsourcing market is to use them?

How it can work

HCT Group is a social enterprise in the transport industry, safely providing over 20 million passenger trips every year. HCT delivers a range of transport services – from London red buses to social services transport, from school transport to Park and Ride, from community transport to education and training. HCT reinvests the profits from commercial work into further transport services or projects in communities.

HCT has partnered with the States of Jersey to provide its Liberty Bus service since 2013. The States wanted to move from a traditional cost-based outsourcing contract to a partnership that would increase use of public transport, improve service quality and at the same time reduce costs to the state.

The process was designed to select the bidder that offered quality and the potential to innovate rather than just the lowest bid. This resulted in HCT securing the contract. HCT is incentivised to deliver better services and invest in delivery rather than simply minimise costs, a good example of how outsourcing models can be effective if used well.