Outsourcing company Serco shot up the FTSE 100 league table earlier this week after reporting a 31 per-cent rise in revenues and a confident outlook for the next few years. Damian Reece , in the Telegraph, remarked that the FTSE 100 now contains seven outsourcing companies. Shrewd investors see the sector as well placed to make a killing out of the public debt crisis.
Whoever wins the next election will be desperate to cut public spending. It is almost inevitable that a number of government activities will be contracted out to private sector providers. Prime candidates will be the back-office functions identified in the Treasury’s Operational Efficiency Programme – IT, HR, Finance, Procurement and Estates Management.
When the OEP survey report is published it is likely to show that these back office functions cost considerably more to run in central government than they do in other parts of the public sector and that the public sector as a whole has more expensive overheads than the private sector. Contracting out these services to private companies would be one way of reducing the cost.
But there may also be bigger prizes on offer for the outsourcing companies. As the FT’s Martin Wolf said, the costs of the financial crisis have been “comparable, in fiscal terms, to those of a major war”. As in wartime, when the government has its back to the wall the unthinkable becomes thinkable. The privatisation of entire government agencies must now be under consideration by both political parties.
The executive agencies were originally set up to separate execution from policy. The government departments make the policy and the agencies deliver the services. At least, that was the theory. In practice, the distinction is somewhat blurred. Privatising the agencies would reinforce that separation while, at the same time, saving costs. Increasingly, outsourcing contracts are joint ventures where the company agrees to split some of the profits with the government. The deal between the Department of Health and Steria for finance and accountancy services is one such example. These joint ventures make the sums look very attractive to a cash-strapped government.
In the past, a number of privatisation suggestions have been tossed around. The Benefits Agency, the DVLA, and Job Centres have been considered for some level of private sector provision. Earlier this week the RAC even called for the privatisation of the roads, something that has not been on the agenda since the high-tide of Thatcherism.
The unions will, of course, protest but, to a government that needs to save money fast, the outsourcers’ offerings could look very attractive. If the share prices of the outsourcing companies are anything to go by, their investors expect them to have a few bumper years too.