What does the financial crash mean for the growing use of the private sector in the delivery of public services? One might assume after recent events that the public sector is looking rather more solid and reliable, and the market rather riskier and more volatile. Indeed, that seems to be the implication behind Peter Mandelson's apparent conversion to the view that the post office network should be treasured rather than closed down.
Yet the Sunday Times is tipping shares in Serco, the public sector outsourcing group that, among other things, drives prisoners to court. Its half-year results saw a 21 per cent rise in profits, driven by a new £266m contract with Glasgow city council. The markets seem to think that Serco—which operates the Docklands Light Railway in London—is "infrastructure" of the sort that may gain from Alistair Darling's rediscovery of the Keynesian virtues. Also, with public spending under pressure after the banking bailout, there's a view that councils and Whitehall departments may have to seek savings by putting more services out to tender. Bad times for Britain, it seems, could be good for Serco, Capita, Tata, Liberata and all the other outsourcers.
But the share tipsters may have got this wrong. A big rethink is underway at the public-private nexus, less because of a change of attitude in government than because of a less attractive risk:reward ratio for the outsourcers themselves. The plan of James Purnell, the work and pensions secretary, to contract out welfare-to-work services now looks in jeopardy. In America and Australia, the innovative answer has been big contracts for private companies but payment only for success: that is, when ex-claimants are placed in jobs for six months or more. In a tight labour market, profits from such schemes are assured. Now, however, the market's appetite for risk is much diminished and the latest negotiations show bidders demanding more: more than it costs the government's Jobcentre Plus to get people into work.
The post-crisis balance of risk, cost and public sector savings also makes the Private Finance Initiative (PFI) look even less attractive. The last treasury projection said £23bn worth of such projects will be signed in the next five years. That now seems unlikely, even given the presence in the government of Shriti Vadera, who is (along with Gordon Brown) a passionate advocate of the disastrous PFI scheme for refurbishing the London underground. It's partly that the big PFI players have been "crunched": PFI used to be a wholly owned subsidiary of Royal Bank of Scotland, HBOS and Lloyds TSB. Insuring future PFI deals is going to be much more difficult and, with the introduction of international accounting standards, it's not going to have any particular advantages in the way it appears on the state's balance sheet.
Certainly, there will be less grand talk of ministerial delegations selling Britain's outsourcing expertise abroad. But on the ground things may not change in a hurry. Even if future projects are put on ice, existing deals are unlikely to unravel. That's partly because Gordon Brown gave the public sector financial stability with its three-year spending plans, the latest of which runs to 2011. After April of that year all bets are off, especially if the Tories win the election.
And there are good reasons not to celebrate the troubles of the often unpopular outsourcers. For one thing, there is evidence that outsourcing does save public money. Moreover, many of the PFI schemes in the pipeline won't easily be re-procured under conventional methods. If the chancellor is now a neo-Keynesian, getting hospital schemes built—along with roads and waste disposal plants—may entail the sweetening of some PFI deals.
New Labour and the statist left turned the technicalities of outsourcing into a grand political battlefield. But recession or not, many vital services will be outsourced in future—and rightly so. We've learnt through trial and error that some functions can easily be split and outsourced—payroll is a good example.
Big problems remain in commissioning more complex public services. Knowledge asymmetries, professional discretion, and impossible contract specification make assessing risk a problem. Our faith in the private sector's ability to assess risk adequately must now be in question. And for all the state's inefficiencies, there isn't in practice enough slack for companies to make enough money—at least in a recession.
The credit crunch has so far produced neither an intellectual revolution nor a political backlash against established methods of calculating public and private interest. You don't see bonfires in the courtyard of the town halls burning copies of Osborne and Gaebler's Reinventing Government. Permanent secretaries and agency chiefs don't noticeably have a new spring in their step, thanks to the enfranchisement of state action in recent weeks. A paradoxical result of the treasury's surefootedness over the banks could even be an increase in its authority within the government machine and a renewal of its often crude search for the cost savings symbolised (but not always realised) by private contracting.
So, are the Serco shares a snip? The answer is probably yes. A Tory general election victory would keep the climate for contracting favourable and the status quo under Labour will keep the company's business bright, even as the Blairite drive for further reform dims. But mid-crunch, a certain modesty on the part of the marketeers is to be expected and, looking ahead, we're obliged to remind them of a fiscal fact of life. Rebalancing the public finances post-crash cannot mean a boom for outsourcing companies if public spending is going to be cut.
