Carillion halted stupid, unthinking outsourcing. Now it’s time for reform

Carillion is bust, leaving job losses, underfunded pension schemes and half-finished hospitals in its wake. The east coast mainline is a shambles – again. Interserve, a company with 25,000 staff in the UK supplying the public sector in health, education and defence, is being watched closely by the government in case the crisis in the outsourcing industry gets worse. Capita, which used to be seen as a source of stability, is trying to remove doubts about its own future by raising £700m via a rights issue. Its shares have collapsed from £13 to 175p in less than three years.

What happened? Is the outsourcing model now so broken that it is useless for both sides – government and providers? Is it time to return the delivery of public services to the public sector? Is Jeremy Corbyn right that Carillion’s failure was a watershed moment?

Carillion et al will, let’s hope, mark the end of stupid, unthinking outsourcing – and should certainly spell curtains for the most rotten PFI contracts that have undoubtedly proved a waste of money for the public purse. But the notion that outsourcing can be abolished altogether seems fanciful. About a million people are employed in the private sector providing public services. It is unrealistic to think the state can absorb such a sudden expansion easily or cheaply. Nor, surely, would it be desirable. Many outsourced contracts work well. A wholesale return to ministerial-directed services risks throwing out the good with the bad.

The first task is to understand what has gone wrong. Rupert Soames, chief executive of Serco, offered an excellent summary last week that should not be dismissed just because he is an interested party. Soames has spent four years cleaning up the mess at Serco, the result of corporate hubris and scandal, and is certainly not portraying the private sector as an innocent party.

Around 2010, argues Soames, the balance of power in the outsourcing market began to turn. Government, too often naive in its buying, sought to cut expenditure and put the squeeze on a sector that had attracted new entrants chasing fat profits.

“Feeling compelled to deliver the growth they had promised, suppliers competed fiercely for a reducing pool of new business,” he says. “Prices fell, and a newly savvy government discovered it had anxious suppliers prepared to accept risks and contract terms which in normal conditions they would not have agreed to. Sophisticated buying techniques were imported from the private sector; contracts for sensitive public services such as caring for asylum seekers were awarded to the lowest bidder by online auction.”

Nobody is blameless, he argues. Company boards should have made better assessments of risks, not dressed up their accounts with optimistic accounting wheezes, and they should have remembered that pension obligations are real. Government should not have pushed companies into accepting risks they couldn’t manage or hedge. “Sooner or later, some of those risks were bound to crystallise,” he says.

There ought to be a better middle way. Soames has four ideas, all of which deserve a hearing. First, insist on more transparency: open-book accounting would allow the Cabinet Office or National Audit Office to see what’s really happening with major contracts. Second, write contracts with break clauses on both sides, so government can escape overgenerous arrangements and firms can get out of life-threatening deals. Third, firms should write “living wills” so that contracts can be handed back safely and without disruption. Fourth, there should be a code of conduct: governments shouldn’t transfer unmanageable risks and firms should fund pensions properly, have strong balance sheets and pay their own suppliers promptly.

One could quibble with details in all four principles but, in the round, this sounds like a way forward. In practice, the state would probably end up doing more work – looking after asylum seekers or running prisons are not jobs for the private sector. But that would leave room for a smaller, healthier outsourcing sector – one that does not veer from boom to bust and is more likely to deliver a fairer deal for taxpayers.

It’s no surprise big firms are turned off by Brexit Britain

Unilever may be about to deal the government another symbolic blow over Brexit. The Anglo-Dutch consumer group behind Dove, Flora and PG Tips is said to be ready to choose Rotterdam over London for its unified headquarters, according to the Financial Times, and throw the consequences of the referendum result into stark relief once more.

There are a few non-Brexit reasons why Rotterdam should be the prime choice of Paul Polman, Unilever’s chief executive: moves by the Dutch government to liberalise the tax regime; better protection against takeovers; Unilever’s food R&D centre is in the Netherlands; cheaper housing for staff.

The case for London? It is still a centre of global finance, ideal for a multibillion-pound multinational; a much larger population from which to draw staff; a bigger workforce than Unilever’s Dutch operations; a pro-business political environment.

That, however, ignores Brexit. The Dutch prime minister, Mark Rutte, has been able to woo Polman while his British counterpart is distracted by Brexit. It would also be dangerous to place your company’s headquarters in a country whose trade and regulatory status will not be settled until well into the next decade.

There is also the issue of which country feels like the better fit for a business that proselytises about responsible capitalism. Brexit is the antithesis of what a multinational should want to be. It should come as no surprise to Theresa May if Unilever decamps to friendlier climes across the North Sea.