Shadow State: Inside the Secret Companies that Run Britain

By Alan White

Public sector monopolies came with a story, an implied commitment to a common cause. They were, in some inescapable sense, ours. UK’s public services industry is an experiment whose principal agents are large companies that belong to their shareholders.

Research (2014) suggests the market for public service outsourcing has an annual turnover of £72 billion: about twenty-four percent of the spend on public services in the UK.

The number of contracts in the UK has increased sharply by 47 per cent to 148 contracts a year since 2010 . . . And these figures date from before the major privatization drive in the NHS.

Four companies really dominate the landscape: G4S, Serco, Atos and Capita.

The money they brought in from government in 2012 ranged from around $500 million (Capita) to £1.2 billion (Serco).

Overall, these four companies’ work cost around £4 billion - the market is being led by giant multinationals.

The dizzying growth of outsourcing took place in line with the rapid growth of globalization in the late twentieth century.

To understand the development of modern outsourcing, we need to start in the 1970s, when the exchange rate system that had been set up with the Bretton Woods agreement collapsed.

Controlling inflation became the government’s overriding priority.Ideals like a comprehensive welfare system and full employment were shifted to the back-burner.

The aim was very simple: reduce the bill for public services.

In 1980, compulsory competitive tendering (CCT) was brought in for construction, maintenance and highways work.

The Conservative Nicholas Ridley MP began to argue that councils should concentrate on allowing services to be provided, rather than providing them themselves. He oversaw bus deregulation in Great Britain and came up with a famous plan to deal with trade union power.

In 1988, he claimed outsourcing would take politics out of the public service equation, making everything from education to refuse collection a simple transaction.

Today’s outsourcing giants can trace their foundation to this initial drive to see local government working more closely with the private sector.

By 1991 Capita had increased its staff numbers by a factor of ten. Serco had 3,000 employees and revenues of £59 million in 1989. By 1999 it had 27,000 employees and revenues of more than £800 million.

Labour had pledged to abolish compulsory tendering, and it did do this when it got into government – but only to replace it with Best Value, essentially a less prescribed and more wide-ranging version of the same.

Prime Minister John Major had begun to use the PFI to finance and operate hospitals, schools and prisons – legal contracts which allowed private companies to provide public services for the state.

The use of PFI grew at a tremendous rate under New Labour.

New Labour picked up the Conservatives’ ball and ran with it. Public services were handed to the private sector on an ever-increasing scale.

Tony Blair’s autobiography doesn't make any explicit mention of outsourcing as an ideology. There’s some mention of not ending up in hock to public sector unions, and some left-wing analysts have seen this as the fundamental goal for Blair’s administration.

New Labour’s commitment to privatized justice and prison building under Jack Straw required the unions representing workers to be defeated ‘so as to enable the cutting of staffing levels and wage and pension costs’.

By 2009 – with Gordon Brown now in charge – even the normally sympathetic Telegraph was writing a story with the headline ‘Meet Serco, the Company Running the Country’.

What’s of concern is the way giants such as Serco have come to dominate the market.

These services have an intrinsic effect on our social fabric and the knock-on effects can have huge impacts on the people they serve.

Is it right for giant corporations – paid by the state yet barely taxed, with shareholders drawn from among the country’s elite, and lobbyists with access to the very top of government – to carry out mucky work in the crime, justice, welfare and immigration sectors among others?

Should such companies really be operating in sectors where many of the people with whom they deal are deeply vulnerable?

Can a company like G4S or Serco really have fingers in so many pies, such as defence, welfare, health and justice, while maintaining the public’s best interests?

The work we ask outsourcing firms to do is often concerned with the dignity of vulnerable people. In a civilized country, there shouldn't be any muddiness over the question of accountability when this work is carried out.

I was left with a lot of questions about the outsourcing industry but the biggest was a simple one: why does the government really want private firms to do this kind of work?

In fact, the most obvious answer is a simple one: it’s a good way to save money.

For several years now, there’s been an outcry on social media about the way outsourcing companies have treated disabled people.

It begins with an outsourcing firm whose name is now notorious in the context of disability services. Atos.

‘It is ridiculous to have people making an assessment based on a tick-list that looks like it should be used for an MOT on a car.’

As of 2014: there were 1.6 million claimants on incapacity benefit, assessed at a rate of 11,000 every week. It cost £70 million in 2013/14 to assess the appeals.

People are having their lives ruined by a system that was designed to support them.

There is example after example of human suffering on a scale unacceptable in a civilized society.

But it’s worth noting that the assessment with which it’s most closely associated was drawn up not by Atos, but the DWP. Its descriptors were written by the department, which gave the company strict rules that it had to stick to.

The Work Programme was introduced in June 2011, the biggest-ever single scheme to get the long-term unemployed back into work.

The general consensus among analysts is that if the Work Programme is improving, it’s doing so at a glacial pace.

In March 2014 Channel 4 News reported that the DWP’s own assessment of how the Work Programme was performing suggested it was continuing to fail.

When you introduce a private company, you introduce a profit incentive, and there is a question here: will it encourage your contractor to do a good job, or will it simply encourage them to game the system?

The Work Programme’s PbR [payment by results] model sees ‘primes’ – A4e, G4S and the like – subcontract out work to smaller businesses and charities.

In 2015 the National Audit Office issued a report that stated PbR was not only a challenging form of contracting, but clearly couldn't work for every service – undermining quality and value for money if badly implemented.

Ministers’ optimistic rhetoric on PbR simply doesn't match the evidence.

The problem with administering these projects badly is that standards can fall by the wayside in the drive for profit. Hardly a suitable model upon which to base more government outsourcing projects, you may think. You’d be wrong!

We continue to use force on the estimated 2,000 children in custody in England and Wales.

Hundreds of injuries are reported every year.

The cases may seem tragic, inhumane and cruel – but however cold it sounds, one of the most practical solutions is better oversight and management.

We really have to question what impact the introduction of a profit incentive has on the people who are compelled to ‘use’ this particular state service.

Violence is four times higher at Serco-run HMP Doncaster than at a comparable-sized state-run prison.

Private-sector-run prisons offer little for those who’d like to see the prison system as an effective, constructive way to integrate offenders into society. And our failure to prevent reoffending, of course, comes at a massive social cost that affects us all.

When you talk to supporters of outsourcing, they often put forward a very simple argument in its favour: it saves money. The data simply does not exist.

Outsourcers will tell you how they can save money. But few can promise to make things better. Qualitative improvements are impossible to claim because they’re dealing with people, who are hugely complex.

There also isn't robust data on how the state is doing to begin with.

Whether it’s in the courts, prisons or probation, the Ministry of Justice has outsourced at a breakneck speed in recent years.

In justice, many services are still to be outsourced, yet those that have been have generated a slew of scandals.

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The Health and Social Care Act 2012 is a huge, complex Act of Parliament. It will be years – perhaps decades – before we know for sure which elements of it have merit and which don't.

A 2012 Guardian data investigation found overwhelming lack of support among the royal colleges and organizations representing the medical profession.

The suspicion that arises due to the lack of transparency means there are already questions about the unhealthy influence of the profit incentive on the NHS.

In June 2014 the Bureau for Investigative Journalism (BIJ) discovered that thousands of NHS patients – some seriously ill – hadn't received vital medicines on time because Healthcare at Home, a company which had been contracted to deliver them to their homes, had failed to do so.

Most people familiar with the notorious story of the private company Circle Health’s failed deal to run Hinchingbrooke Health Care NHS Trust in Cambridgeshire would probably know it took over thanks to a £1 billion deal.

Circle Health is owned by a parent company, Circle Holdings plc, which in turn is owned by a series of hedge funds. Nearly a third of the shares are held by Lansdowne Partners, founded by Sir Paul Ruddock, who has donated £692,592 over time to the Conservative Party.

‘Since the Tories’ hated health reforms became law, [Circle’s] profits have gone up from £64.6 million in 2010/11 to £170.4 million in 2011/12’.

The majority of Circle’s contracts – including Hinchingbrooke – were drawn up under Labour.

Many major NHS providers make annual losses at the time of writing.

‘I believe that what a lot of these companies are trying to do is to undermine any chance that an NHS organization can win contracts. Once they have squeezed out the state sector, and the third sector, we will then see prices rise; then we will see profits’.

The Health and Social Care Act has been in operation nearly four years at time of writing, and the issue of conflicts of interest has become hugely concerning.

In the year after the Health and Social Care Act came into force, £13.5 billion worth of contracts were on offer: the amount available to the private sector had trebled.

NHS England’s CEO, Simon Stevens, was previously the president of UnitedHealth Europe – a private health firm.

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There are around five thousand young people in residential care homes – and around three quarters of these homes are run by private companies.

A Radio 4 report found that in 2011, the top five providers had turned a profit of £30 million.

Ann Coffey MP described the movement of children around the care system as ‘the most terrible market failure’.

Caring for these children is highly profitable, he said, with each child worth at least £2,500 and up to £5,500 a week for the multiply disabled, abused and damaged.

According to the 2012 Adult Social Care Survey, one in three adults who are in residential care or receiving help at home fear abuse or physical harm — that’s about half a million people.

In theory, the private sector rather than the taxpayer should carry financial risk. But there are many ways companies can sidestep this.

More than 300,000 care workers are on zero-hours contracts, tied to an employer essentially without any employment rights.

Are the motivations by which politicians make those decisions born of ideology, evidence or something rather more concerning – and do they have the best interest of the public at heart?

We’ve consistently seen people – often vulnerable people – being let down by agents of the state. But the obvious question is: whose fault is it?

We explored the issues with the way Atos approached the job, but we only really touched on the Department for Work and Pensions’ (DWP) culpability. There had in fact been a huge failure of management at a governmental level.

Sometimes things go wrong because of contractors, sometimes it’s almost entirely the government department’s fault, and most of the time it’s a combination of the two.

The issue of accountability and the question about what happens when the government introduces a profit incentive into state services are closely related.

The fundamental thing is about management – it’s about managing these companies, rigorously and effectively, not enough money is spent by the government on oversight. It simply doesn't employ enough people to oversee the firms it’s contracted.

So who is managing this risk? Who’s managing our learning process? Well, no one...

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The truth is most services, most days of the week, most weeks of the year are delivered in a way most people most of the time find useful.

While outsourcing itself isn't an ideology, the decision to outsource most assuredly can be born of one.

The political ideology among our main parties when it comes to outsourcing is strikingly homogenous. That’s why our politicians rarely have an answer when things go wrong.

This gives rise to another simple question. Why do we outsource?

The honest answer to this question, so far as politicians go, is obvious. We outsource because it saves money.

But does it? However absurd this might sound, it’s pretty much impossible to say.

There’s an ideology that always assumes savings can be made, even when there’s evidence to the contrary.

You’d be amazed by how virulent the government can be in its desire to insulate the process from media criticism.

The primary deliverer – in your case the state – has a huge responsibility to procure effectively and to manage robustly.

Most right-wing think tanks don't reveal their funders but the fact they receive large sums from outsourcing companies is hardly a well-kept secret.

This issue of transparency is the biggest failing in the outsourcing industry’s evolution over the years. Not only does it muddy the waters around accountability, it’s actually stifling debate around how, and when, we should outsource.

A survey by the British Medical Journal found around a third of doctors in charge of the new clinical commissioning groups had interests in private medical companies.

And the concerns extend far beyond individual doctors and managers: there’s a political dimension.

In February 2014 the Daily Mirror revealed that private healthcare firms with links to the Conservative Party had been awarded NHS contracts worth nearly £1.5 billion. It singled out Care UK, whose chairman, John Nash, had donated £247,250 to the party (including £21,000 to Andrew Lansley, the prime architect of the Health and Social Care Act).

One can trawl through the register of members’ interests and find scores of MPs with various connections to private health firms – many have received political donations, while others have held directorships or been majority shareholders, and others have been paid for consultancy work.

The current business secretary, Sajid Javid, received an £11,000 political donation from Moundsley Healthcare in 2013.

The then deputy prime minister, Nick Clegg, accepted £10,000 from the owners of Caretech, which has a £114 million turnover – in part helped by reliance on zero-hours contracts.

‘Ravinder Gidar [the owner of Gold Care] gave £50,000 to the Conservative Party after making hundreds of thousands of pounds from Gold Care’s nursing homes where residents have been found lying naked in their own urine’.

Just as there’s a huge question over the lack of transparency in political interests, so there’s a huge worry over the ‘revolving door’ whereby civil servants leave their jobs and join the firms they were, until recently, responsible for commissioning.

Alan Cave, a central manager of the Work Programme as a civil servant, left to join Serco, one of its main beneficiaries, in 2013.

In December 2015,David Laws, the former schools minister, took a job with the free schools sponsoring-charity Ark, whose chair of trustees, in the run-up to the 2015 general election, had given him over £15,000.

When, as in G4S’s case, over a quarter of your business depends on revenue from state contracts, then you need to be part of the political process . . .It is embedded in the regulatory process and sits on the very bodies that licence and regulate its markets.

In November 2013 the National Audit Office (NAO) found that, despite holding government contracts worth around 拢4.5 billion, Atos and G4S paid no corporation tax at all in the UK in 2012.

So why go into the market at all? It’s very hard to get a definitive answer on that. But from the outside looking in, the obvious answer seems to be that it’s an easy one to dominate, with a risk/reward balance that’s firmly in the firms’ favour. In other words: it’s broken.

We return to a question we asked at the start of this book: if not G4S, then who?

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Tom Gash from the Institute for Government told me that however the saga eventually plays out, the end result has been disastrous.

It doesn't matter who’s running prisons or building roads. You don't outsource responsibility. The government’s ability to negotiate and manage outsourcing contracts is highly questionable.

‘Government is clearly failing to manage performance across the board, and to achieve the best for citizens out of the contracts into which they have entered. High profile failures have exposed serious weaknesses in government’s capability in negotiating and managing private contracts on behalf of the taxpayer.’

Many of the markets we’ve looked at already in this book, such as prisons or detention centres, are ‘dominated’ by just a few contractors, and ‘the government is exposed to huge delivery and financial risks should one of these suppliers fail.’

For far too long, a small number of huge firms have won vast numbers of government contracts with huge price tags attached and delivered relatively poor value for money.

It would be nice to know there’s someone in government working out which bits worked and which didn't, and the reality is absolutely nobody is.

Some sort of change needs to happen in terms of the relationship between the state and private sectors.

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In 2015 the Conservatives won the British general election with a majority. Shortly after the result was confirmed, the FTSE 100 rose 2.3%. Outsourcing firms’ share prices had risen. Serco’s went up by 5.95%, Capita’s by 6.72% and G4S’s by a mighty 7.35%. The shackles had been taken off the government’s impetus to outsource.

There’s evidence to suggest that they are responsible for wages falling across the country, thus ultimately harming the British economy.

The truth is that Britain has been hijacked by a group of companies that don't offer the value they say they do. They operate in a broken market, squeezing out or sitting on smaller providers who could bring more expertise to the arenas in which they operate. They are given an easy ride, because government offers no effective oversight, and consistently draws up contracts with generous terms. But if not the outsourcers, then who?

And yet the imperative to outsource will only ever become stronger, on the (by no means assured) assumption that it does actually make savings.

The general public barely knows this industry exists. Yet it’s an industry that has been responsible for such poor quality service that lives have been lost and still it remains one of the things on which the political class pins its hope for the delivery of public services.

Without true transparency, accountability and a market that allows a proper diversity of providers to flourish, the same horrifying stories will be generated, time and again. Until then, the shadow state continues to thrive.