Private companies providing public services are routinely “gaming the system” to make money for their shareholders at the expense of the taxpayer, a major new study finds today.

An analysis of the Government’s controversial £100bn “outsourcing” programmes, such as its scheme to help the unemployed back into work, found private firms “creaming off” easy cases where they could make profits while “parking” problematic ones.

Civil servants also suggested that big outsourcing companies were monopolising services in certain parts of the country – making it harder for smaller companies to compete and potentially pushing up costs to the taxpayer. The Government currently keeps no central record of the contracts it awards which would identify if this is happening.

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The report, by the independent think-tank the Institute for Government (IfG), concluded that the Government still did not have the skills to manage private sector contracts effectively. It called on ministers to slow down plans for further outsourcing – including handing over the probation service to outside providers – and carry out a review of all major new contracts.

“Too often the focus of Government is on getting the deal out of the door and not thinking about how it will work in the long term,” said the report’s author Tom Gash. “There is also a reluctance to penalise companies that under-perform, meaning there are no consequences for failure.”

The report, which conducted anonymous interviews with dozens of senior civil servants, found:

* Private care companies sending residents to hospital for minor conditions – developing a mentality of “just ring 999” to transfer costs on to the NHS.

* Private contractors cutting corners in the Government’s welfare-to-work programme by “parking difficult cases” and “creaming” money for getting people into work who would almost certainly have done so without their involvement.

* Significant concerns that plans to outsource the probation service will not be cost-effective and private companies could be paid for work carried out by local authorities and the NHS.

The IfG found that even in areas such as education – which have not been outsourced but where schools have been given much more independence to run their own affairs – gaming also exists. Some academies, which are run outside of local authority control, admitted they encouraged their students to take vocational qualifications which would boost exam performance – even though teachers considered they were not the most valuable option. “Schools that turn themselves around often do it [by] exploiting tactics to improve exam results in the short term which are not about the experience that every child gets in a lesson,” one headteacher told the IfG.

The report comes just days after the Government placed all the contracts held by two of the UK’s largest outsourcing firms, G4S and Serco, under review, after an audit showed they had charged for tagging criminals who were either dead, in prison, or never tagged in the first place. The two firms are the major private players in both the privatisation of the criminal justice system and the Work Programme. Experts say it is difficult to see how any further large-scale outsourcing of police, probation or prison projects can succeed without their involvement.

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The IfG warned there were significant concerns over their dominance in the market. “A number of large providers now deliver a wide range of services, commissioned by separate government departments in particular areas of the country,” the report warns. “This allows these providers to undercut competitors making them attractive to commissioners.”

Both Serco and G4S denied they were abusing their market dominance. On the claim that contractors may be monopolising services in some parts of the country, a G4S spokesman said: “That is simply not true. We employ people in every constituency in the country.”

The report found particular concerns with the Work Programme, where private companies are paid by results to get the long-term unemployed back into work. It found companies regularly playing the system to ensure they made money. One expert adviser told them: “If providers cannot make money doing the things you expect them to do, they will make money by doing the things you don’t want them to do.”

One director of a Work Programme contractor added: “These contracts are on the edge of being financially viable. You have to aggressively cream and park.”

Mr Gash, director of research at the IfG, said mistakes can have a “real impact on people’s lives and value for money”. He continued: “We want to see government carry out external reviews of all new outsourcing programmes worth over £100m per year to assure themselves and the public that they will work.”

A Cabinet Office spokesman said the Government was also encouraging the voluntary sector to get involved in delivering services. “Our reforms already address the need for the Civil Service to improve its commercial capability and how it manages contracts,” he said. “But we must accelerate the pace of change to make more savings for the taxpayer, create better quality, more efficient public services and promote growth.”

Sector by sector: The recommendations

Education

Headteachers of academies admitted they were being forced to “game” the system and focus resources on students on the C/D grade borderline in order to increase the percentage of pupils obtaining five A*-C grades – known as the “floor standard”. Gaming appears to increase where schools are under threat of closure.

The Institute for Government (IfG) also found big disparities between funding for academies based on their geographical location. Consequently, some academies close to old local authority boundaries (which had different funding levels) are competing in the same catchment areas but with very different levels of funding per pupil.

Recommendation: The school funding regime should change to even-out inconsistencies while current reforms to floor standards will make this metric less important.

Work programme

Designed to pay private companies by results to get people back into work, the IfG found that contractors were “skimming off” the easy cases of people who were likely to get a job anyway while “parking” and giving little support to those people with long-term problems.

Providers were also cutting costs by using “group sessions” and telephone calls rather than face-to-face contact. Providers claim the low fees paid by the Department for Work and Pensions (DWP) discourage them from focusing on more challenging groups.

Recommendation: The Government should set minimum performance levels, and punish poor performers by imposing penalties or terminating contracts entirely.

Care for the elderly

Most care services for the elderly are provided by the private sector and regulated by the Government through the Care Quality Commission.

But it is very hard for families accurately to assess the care and standards of large numbers of independent nursing homes.

In 2010 the CQC abolished its star-rating system which ranked care providers according to the quality of their services.

Instead it encouraged the development of consumer generated “Trip-Advisor style” rating – entirely unsuitable for the elderly or infirm.

Recommendation: Bring back government star ratings and introduce a tighter regulatory framework.

Probation service

The Ministry of Justice has announced plans to open up 70 per cent of the probation service to outside providers. But the IfG warns that re-offending outcomes – by which providers will be paid – are very difficult to measure and in most circumstances cannot be controlled by one provider alone.

Some senior officials told the IfG that they feared private companies would be less well placed to integrate with other services (like mental health agencies and the police).

Recommendation: The MoJ should not outsource probation contracts all at once – but roll them out and assess each one over time. The department should also demand high levels of transparency and publish data not just on their key performance indicators (including reoffending rates) but also on the contracts they have let to specialist providers of services like drug treatment or mentoring support.