STEERING Britain’s new aircraft-carrier into its home base at Portsmouth is a delicate business. There is little room to spare at the mouth of the base, so the 65,000-tonne behemoth, HMS Queen Elizabeth, is nudged along by a specially commissioned tug, SD Tempest. Despite the sensitivity of the task, this is not a Royal Navy vessel. The tug was built and is operated by Serco, a private company, which also tows the country’s nuclear submarines out to sea from their base at Faslane.

This is testimony to the range of work that Britain’s outsourcing companies do for the government, from serving school meals to serving up Armageddon. Serco also runs six prisons, an immigration removal centre and the sleeper-train from London to Scotland, among other things. So big has the sector become that government spending on outsourcing now accounts for about 11% of GDP.

With size has come controversy, particularly since the collapse of Carillion, a big outsourcer, in January. The repercussions of that company’s demise are still being felt; its myriad subcontractors are thought to be £2bn ($2.6bn) out of pocket. Almost all the big outsourcers have seen their share price tumble in the past year, with a spate of profit warnings. In April Capita reported an annual loss of £513m, while Interserve reported a loss of £244m.

These commercial crises follow a slew of fiascos. Everyone has their favourite outsourcing blunder. G4S won the contract to provide security for the Olympic games in London in 2012, but failed to rustle up enough personnel, so 3,500 troops had to be deployed just before the opening ceremony. G4S was the culprit again, together with Serco, when in 2014 the two companies were found to have overcharged for the electronic tagging of offenders on parole, some of whom had already died. Last year the government had to bail out the 21 private companies set up to administer the probation service, to the tune of £342m. Only two of the companies had met their targets to reduce recidivism.

Consequently, the outsourcing model is under fire as never before. Jeremy Corbyn’s Labour Party has seized on the woes of Carillion and others to argue that “rip-off” private companies should not be allowed to “fleece” the public. Labour’s hostility dates back to the 1980s, when Margaret Thatcher developed “compulsory competitive tendering” as both a way to save money and a means to break the power of the public-sector unions (and with them the Labour Party). Although Labour became an enthusiastic outsourcer under Tony Blair in the 1990s, Mr Corbyn now promises to “take back control of public services”. On June 25th Labour promised that, if elected, it would re-examine all outsourced defence contracts.

Dismantling the outsourcing model would represent a revolution, as outsourcing has come to occupy a central position in how the state works—and not just in Britain. Since the 1980s Britain’s big idea has been exported around the world. Outsourcing now accounts for 6% of GDP in America, 11% in France and 16% in the Netherlands. Is it now failing in the country that invented it—and if so, can it be fixed?

Promises, promises

There are three broad areas of outsourcing, says Nick Davies of the Institute for Government think-tank: goods, works and services. Goods, such as hospital beds, are uncontroversial; no one thinks the government should manufacture them itself. Works means chiefly the construction of schools, prisons, roads and the like. This, too, has long been done by private firms, but since the 1990s companies have taken on more responsibility for their financing, via the Private Finance Initiative. PFI contracts run for up to 30 years, during which time the government repays a firm that stumps up the cash for the project.

Services covers everything else, from organising councils’ payrolls to cleaning hospitals. Operating trains also comes under this heading, as the government owns the physical infrastructure (the track and signals) but leaves the train service itself to competing private companies. Privatisation is different, as it involves an asset (such as British Airways) being transferred from the state to the private sector.

Outsourcing is supposed to deliver several benefits. Transferring work from the public sector to better-managed private businesses should reduce costs and improve quality, its proponents argue. On the costs front, outsourcers have often managed to save the taxpayer money by trimming payrolls. For example, National Savings & Investments, a state-owned bank, contracted out the entire operation of its organisation in 1999 to Siemens Business Services. The company took on 4,200 NS&I staff, which it reduced to fewer than 1,700, including 480 in India. In other cases private companies have saved money by innovating. The Forth Valley Royal Hospital, run by Serco, was the first in Britain to use automated guided vehicles to move laundry and waste around in the basement, saving about 40 menial jobs. In 2000 a survey of evidence from around the world, by Graeme Hodge of Monash University, found that outsourcing had resulted in an overall saving in government expenditure of between 6 and 12%.

But the savings to be had from outsourcing have decreased over time. A recent paper by a group of researchers from Denmark estimates that the average cost savings from private contracting across several countries fell from 8.5% in 2004 to just 0.4% in 2014. One reason is that over the past couple of decades, successive private contractors have cut nearly all the fat off the public services they operate.

Another reason is a dramatic improvement in the efficiency of public providers, spurred on by competition from the private sector. Profound changes in political culture since the 1980s have helped, in particular the weakening of the once-powerful trade unions. Richard Watts, the leader of Islington Council, once a byword for loony-leftism, argues that over the past decade or so “councils have significantly overtaken the outsourcers in management competence.” The decline in unions’ power meant that Islington could drive a harder bargain with workers when it ended the outsourcing of rubbish collection in 2012, bringing it back in house and saving £3m a year. Michael Guy, the director of Kilmarnock prison, run by Serco, concedes that the latest public prisons will be as good as his own. “Public service has caught up and sometimes overtaken us,” he agrees.

Furthermore, PFI contracts, the first of which were signed in 1992, have turned out to be costlier than they looked. Although PFI lets the government keep big projects off its books, prettifying the public finances, in the long run the costs add up. In January the National Audit Office (NAO), a spending watchdog, found that “overall cash spending on PFI and PF2 projects is higher than publicly financed alternatives,” mainly because the rate at which private contractors borrow is higher than the rate at which government can borrow. The NAO’s analysis of one group of schools found that those financed privately cost about 40% more than those financed by government borrowing. Little wonder that PFI has fallen out of favour with procurement departments. The use of PFI deals peaked in 2007-08, with over £8bn worth of new work. Now they amount to less than £1bn a year.

PFI in the sky

Evaluating whether outsourcing delivers higher-quality services is much harder. In cases where public services used to be particularly bad, contracting out has made a clear difference. Mr Watts says that in Islington, “we saw a basic improvement from a very bad set of services to an average set of services.” A review of international evidence by Fredrik Andersson of Lund University and colleagues finds that, for services that are easy to contract out, like waste collection, outsourcing typically causes quality to improve or stay the same.

However, the review argues that for services with complicated performance standards the evidence is more mixed. Measuring a company’s effectiveness at rubbish collection is one thing; assessing how it runs a jail, say, is far harder. The performance of Kilmarnock prison is judged by 42 indicators, none of which measures reoffending rates. In some industries, complex contracts have proved easy to game. The NAO politely observes that “we rarely see performance management measures …working as intended”.

A related problem is the rigidity of the contracts. Purchasers, such as councils, are locked into deals for years, giving them little flexibility to respond to external shocks, such as the slashing of their budgets under the Conservatives’ austerity programme after 2010. Increasingly, councils have taken contracts back in-house to give them more control of their costs. This is as true of Tory-dominated councils, such as Cumbria and Bournemouth, which have brought housing services and road-building back under their control, as it is of the likes of Islington.

Judging the quality of outsourcing is made still harder by a lack of information. Contracts are rarely made public—due, it is claimed, to commercial confidentiality. Thus few comparisons can be made between what a contractor promised and what is delivered. The NAO argues that Britain lags behind G7 countries such as America on transparency.

If outsourcing looks less good than it once did to the taxpayer, much the same is true for the outsourcing firms themselves. Since the onset of austerity, local and central government have driven ever-harder deals with their contractors. Tenders that were supposed to be judged on both price and quality have, it is generally acknowledged, come to be awarded to the lowest bidder. As a representative of Serco testified to a committee of MPs recently, “the British government is the most aggressive on contractual terms…and it does not hesitate to use its position as the only buyer in the market to insist on conditions which in other markets suppliers would simply refuse to accept.” Though they are criticised for “ripping off” the taxpayer, outsourcers these days have lower margins than most FTSE 100 companies (see chart). Fearing that austerity would slash the number of contracts on offer, outsourcers have engaged in a race to the bottom. Underbidding, known in the trade as “suicide bidding”, has become common, as companies try to keep shareholders happy with the promise of new business. Outsourcers underbid in the hope that subsequent amendments to the contract—extra charges here and there—will eventually yield some profits. But often they don’t. On June 26th Rory Stewart, a justice minister, told MPs that his department had learned “a real, real lesson” after signing a deal with Carillion that was too good to be true. “We did not get the deal that Carillion was proposing to give us, because it turned out that what Carillion was proposing to us was completely unsustainable,” he said. Austerity has had other perverse effects. To cut procurement costs, the government has preferred to negotiate single big contracts rather than lots of small ones. Outsourcers have thus bought up lots of smaller businesses, to cater for a wide range of functions. This has led to market concentration, undermining the principle of competition that outsourcing is supposed to introduce. In total, there are about 200,000 providers to government. Yet according to Tussell, a firm that analyses public procurement, last year about a quarter of the value of the 60,940 outsourcing contracts signed by the government went to just 29 big companies. Some services are provided by only a handful of firms. Only Sodexo, Serco and G4S run prisons; only the latter two provide child custody. And although 27% of government procurement goes to small businesses, most of that goes via the big operators subcontracting their own work. The number of single-bid tenders more than quadrupled between 2012 and 2017. Reduced competition, it has been calculated, can lead to an increase in costs of 2-15%.

Contracting, expanding

It may be no tragedy that Carillion’s shareholders lost their shirts, nor that other outsourcers are walking away from an industry they no longer find attractive. But as Rupert Soames, the head of Serco, has argued, “The objective of government procurement should not be to create a market in which the only bidders are the dumb or the desperate.” Few bidders means bad deals. And clearing up the mess left by Carillion has already cost taxpayers £148m, as well as causing delays to the projects it left half-finished.

Given that part of the problem is a lack of competition, it would be a mistake to give the state back its monopolies, as Mr Corbyn suggests. Better for the government to award contracts with more emphasis on quality, rather than simply using them as a way to cut costs. Still, experience has shown that some public services are easier to outsource than others. One of outsourcing’s most important effects has been to force public providers to up their game. If councils are now better able to run their own efficient services, that is a sign of the policy’s success, not a failure.