On Friday 13 July, a strange thing happened. Eco-Actif Services, a Community Interest Company which helped find work for the hardest to employ, including ex-prisoners and ex-substance abusers, went bust. It shouldn’t have. At the time, it had £1m worth of advance orders on its books and a turnover of £700,000. So what happened? Well, for the full answer, you have to go back a very long way in time: to about 1979, in fact.

The basic economic aim of Thatcherism can be spelled out in two words: controlling inflation. The exchange rate system which had been set up with the Bretton-Woods agreement had recently collapsed. Government-set exchange rates were unworkable, so it was agreed to let them float. It meant the Thatcher government began to give priority to rooting out inflation rather than welfare and employment, deregulated its financial markets, and - most pertinently to our subject - began privatising whole industries, like gas and electricity. At the same time, it sought to reduce the bill for services it knew the public wanted to remain in public hands.

In 1980 compulsory competitive tendering (CCT) was introduced for construction, maintenance and highways work. In 1982, health authorities used it for support services. A few years later the Conservative Nicholas Ridley MP was the first to argue that councils should concentrate on enabling services rather than providing them. He described a utopian vision of a local council that existed in the Midwest, which met just once a year to award service contracts to private firms. Politics was removed from the equation - education, building, refuse collection - these were merely financial transactions.

Ridley’s ideas, to a small extent, were picked up by the Local Government Act of 1988, which extended CCT to things like garbage removal. A little later, under John Major, “white collar” services would also be contracted out. And Major was the first to use the private finance initiative to finance and operate hospitals, schools and prisons.

New Labour’s politics were supposed to represent a compromise between social democracy and the market orientation of Conservative neo-liberalism. In place of the “free market”, Tony Blair and Gordon Brown recast Britain as a small vessel in a globalised sea, unable to do anything but sail along the unstoppable tide that guided it.

They were upfront about this, in a way that would seem shocking now. In 2003, Blair was asked to comment on the news that the UK insurance company Aviva, which traded as Norwich Union, would “outsource” jobs to India, as part of an axing of a total of 2,350 posts in Britain. He said he was “desperately sorry” for anyone whose job was at risk, but outsourcing jobs abroad was just “the way the world is today”. "We have not tried to pretend to people we can stop what is happening in the global economy," he added.

Outsourcing was just another element of this vision of a corporate-lead world, and now it happened under on a scale previously undreamt of. Like Thatcher and Major, Blair believed some public services could be more efficiently delivered by the private sector, and what’s more, was keen to avoid ending up in hock to public sector unions. So New Labour picked up the Conservatives’ ball and ran with it. “What matters is what works”, said Blair in a 1997 speech.

By 2001 the party’s election manifesto explicitly stated that private or voluntary sector providers should be brought in where public providers were failing to improve, or where they could add value to public services. Major’s Private Finance Initiative was expanded upon, while CCT was replaced with “best value”. Lofty ideals were put forward: outsourcing under New Labour would not be allowed to drive down the wages of workers, nor reduce the quality of work that was carried out.

At the same time, the welfare system was becoming increasingly stretched. The narrative of unstoppable globalisation was still going strong in 2010, when Gordon Brown was interviewed in the final weeks of the 2010 election, and asked why he could do nothing about low wages. He told his interviewer that it was “impossible in a global labour market to control the salaries of people”.

As the journalists Ed Howker and Shiv Malik wrote in their book Jilted Generation: “He was angry. It was the anger of a man who knows his hands are chained, just as his predecessor Tony Blair suggested they would be...he was obviously angry because he’s perfectly aware of the human cost associated with this impotence...[And] when Thatcher, Major, Blair and Brown point to the massive rise in GDP...they’re committing a sinful omission.”

On Monday this week, the scale of this omission was, not for the first time, laid bare, in a news story that barely made the BBC News bulletins. The accountants KPMG announced that one in five British workers is paid less than the amount they need for a basic standard of living. The study reported bar staff, restaurant workers, catering and retail staff had been worst hit by the economic downturn, and that the current minimum wage is hopelessly inadequate.

But successive governments have had an answer to this problem since 1976, the same year Callaghan decided full employment wasn’t a primary objective (under Thatcher, it wasn't an objective at all). This was when he decided to introduce in-work benefits. These payments - and those to the jobless - grew and grew, to around a fifth of government spending, to wails from a political right that seemed unwilling to accept it was the inevitable flip-side of an economic vision it had supported. Today the Coalition is attempting to reform a system that was never designed to be used as a mechanism of redistribution in the face of low pay and mass unemployment.

As New Labour’s outsourcing drive picked up, a number of questions began to arise. First, there was the question of efficiency - it seems incredible, but government rarely if ever carried out detailed comparisons of inhouse versus outsourced provision, blithely accepting that one trumped the other. As Tim Banfield of the National Audit Office recently told Radio 4’s File on Four: “We’ve not seen sufficient evidence to back up the idea that it makes savings.”

Then there was the issue of transparency. There was no central database of outsourced contracts, no price break-downs for individual services, and the fine details of deals were kept secret under commercial confidentiality laws.  And this tied in with a third problem: competition. In this fragmented industry, it was hard to work out which companies had which percentage of contracts on their books, but a picture gradually began to emerge of just a few giant providers - the likes of Capita and Serco - dominating the scene.

This took us full circle: were these big corporations specialist only in winning contracts, rather than delivering on them? A badly-drawn up contract to which companies had no real obligation to adhere potentially worked for both parties - a local or national politician could sign off on a long-term deal promising value, and the saving could be cited throughout his tenure. By the time any problems emerged, he’d likely be long gone.

There was one other, more fundamental issue. Thatcher, Major and Blair were operating policies of government that, deep down, appeared to be based on the idea that individuals were motivated by money. They just couldn’t say it out loud.

And just as New Labour felt it was their job to build on, rather than question, the fundamental tenets of the Conservative vision, so David Cameron’s government spotted an answer to both these problems - the social fissures opening up due to a surplus of labour; the doubts beginning to form around outsourcing -  in their predecessors’ legislation.

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The government won’t trumpet this, but it really is a New Labour policy. In 2002 the party published a paper on NHS financial reforms, which introduced a brand new idea: Payment By Results (PbR). In 2008 the Department for Work and Pensions’ (DWP) Commissioning Strategy asked for a much greater focus on the idea.

Today, PbR is arguably the central pillar of the Coalition’s thinking on the delivery of public services for the most vulnerable. While the projects associated with it have generated coverage, the concept itself oddly doesn’t seem to have attracted many headlines. Yet look how far its influence already spreads:

- The Work Programme and Troubled Families fund, run by the DWP.

- The Troubled Families Financial Framework, run by the Department for Communities and Local Government.

- Schemes aiming to reduce reoffending among inmates run by the Ministry of Justice.

- The Youth Contract, run by the Office of the Deputy Prime Minister, aiming to get young people into jobs.

- Acute health care services, run by the Department of Health in hospitals.

- For children’s charities like Barnardo’s and for Sure Start children’s centres, run by the Department for Education.

And more, with pilot schemes also taking place. These policies, many centring around early intervention, are aimed squarely at helping the rump of society that’s been left furthest behind by the economic changes described above - the families with generational unemployment, the young, the criminal, the drug-addicted.

But PbR stands for more than that. It’s supposed to produce many of those things felt to be lacking under the last Government - a diversity of providers, accountability, decentralisation, and fairness. If the name itself seems to give the lie to past and present governments’ fundamental cynicism about the motivations of public service providers, this will be offset by a greater emphasis on localism. As Oliver Letwin wrote in the Guardian earlier this year:

“In effect, central government is saying to local governments: ‘You have the power and the knowledge to bring the right people together in the right way in your locality to crack these problems which affect the whole country; and we will make it worthwhile for you to invest time and effort in doing so; but we'll do that by rewarding success, rather than by forcing you to tick boxes and follow processes we prescribe.’”

Many commentators, on left and right, want this vision to work, just as they backed New Labour’s outsourcing policies at the time. But the kvetches have already begun. In justice - last week, the the Wales Probation Trust wrote to MPs to tell them a north Wales project was to be put on hold on the instruction of new ministers, the same day that David Cameron announced he wanted to see it rolled out across the system. In health - last year, the director of NHS finance at the Department of Health, told an audience at a healthcare event in London that PbR ignores the quality of services.

And, of course, with the Government’s flagship policy: the Work Programme. All of which leads us back to Eco-Actif, and the real challenge that has to be overcome. The ironies stack up thick and fast when discussing all this. A company which aims to get people into work, finding that Government policies have left its staff on the dole queue? How did it happen?

Well, when Eco-Actif signed up to the Government’s flagship PbR scheme, the Work Programme, it was actually a sub-sub-contractor. The main contractor was - and here’s a familiar name - A4e. It’s this sort of company that’s able to put up the investment funds required to win a big contract. It then passed on the work to a social enterprise called 3SC, which in turn contracted Eco-Actif.

The charity found itself short of working capital while it waited up to 18 months for payment, due to red tape that cut the number of referrals it had been receiving. Essentially, it had signed a bad contract, with a giant company that had access to a lot more legal advice, and capital. It was the kind of disaster which professionals had warned about at least one year earlier [2].

Colleen Baldwin [3] picks up the story: “Eco-Actif was unable to raise the needed bridging funds, because when it approached banks and other established and social finance providers, potential investors turned them down giving three grounds: the government's Work Programme is too high risk; the prime contractors are not passing sufficient funds to the ultimate delivery organisations to make sufficient surplus to finance any loan; their association with A4e is a matter of great concern.”

So here we see one of the obvious early problems with the PbR model: the danger that small charities are used as “bid candy” by the big players. The charity’s former managing director, Anna Burke, was remarkably equivocal about the £8.6 dividend paid to Emma Harrison, the A4e director, especially given that she’d lost £20,000 of her own money. She told Baldwin: “I feel this is a red herring - she was perfectly entitled to this money - we, as a ‘Big Society’ need to think about whether it is acceptable in the future to allow individuals to make large bonuses out of unemployment whilst small organisations go to the wall.’

Interestingly, despite her experience, Burke also remains of the view that PbR is a good thing if sensibly paid and properly financed - but she feels the Work Programme is fatally flawed. And there’s every chance she’s right. Earlier this month Channel Four News obtained [4]leaked A4e figures. It found that over the first full year more than 93,000 unemployed people went on to A4E’s books. That alone netted the company more than £41m of taxpayers’ money in “attachment fees”. Of those people, just 3,400 found sustained work - a success rate under four per cent. There was a huge regional variation in the figures - possible evidence of a growing temptation to concentrate on those for whom jobs were easiest to find.

It’s hardly the only worry surrounding the programme - there have been concerns raised about bonuses being claimed for people who already have jobs, about cash being claimed by firms when clients have been helped by other firms; in short, about systemic fraud on the part of the largest contractors.

This is actually a very short survey of some of the issues surrounding the PbR model. Despite the above it isn’t, necessarily, a bad idea. But it’s clear that ministers need to make it easier for charities to bid for government contracts by guaranteeing a proportion of up-front payments to fund costs, and need to give investors more time to assess risks before funding charities.

Above all, we need far more transparency around the entire outsourcing industry. Yesterday’s Private Eye revealed in a single story that two leading government officials behind the programme have joined companies winning contracts under it (Adam Sharples has become Chairman of Ixiom, Alan Cave has gone to Serco), and that the commercial interests of Serco meant that the details of a February meeting with Oliver Letwin could not be disclosed. Without transparency, the stench emanating from tale after tale like this will continue to linger.

For decades now, we’ve voted in governments that have told us private is best, with little evidence to quantify that claim. It’s also time for us to consider other options for genuinely local, accountable public services. And maybe there’s a suitable model to be found on the Mozart Estate. [5]