The myth of private sector efficiency

When it comes to health and social care, in-house staff still do it better

Which world-beating British industry employs 1.2 million people, has grown by 126 per cent since 1995, grosses revenues of £76bn a year, accounts for nearly 6 per cent of GDP, and comfortably exceeds, in value added (the difference between what is paid for goods and what they cost to produce), the food, drink and tobacco industry? The answer is the public services industry (or PSI) - comprising third sector (not-for-profit) outfits as well as private firms - which wins contracts to deliver what the government's own employees mostly did until about 25 years ago. As well as consultancy, cleaning, IT and so on, it is now responsible for some social care services and prisons, and about 30 per cent of all health care.

The PSI is due for another spurt with, I reckon, the relatively untouched field of schooling in the front line. When the über-Blairite Business Secretary, John Hutton, wanted a PSI review, he turned to DeAnne Julius, the American economist who has worked for the World Bank, the CIA, British Airways and Royal Dutch Shell.

Asking her to examine the evidence for the merits of outsourcing is, I would say, like asking the Pope to examine evidence for the existence of God. Her review, just published (www.berr.gov.uk/files/file46965.pdf), shows she has kept the faith.

"I am not going to be recommending full steam ahead," Julius assured the Guardian in May. Perhaps she changed her mind. Her review notes that, since 2003-2004, the annual growth of PSI has slowed from 6.8 per cent to 2.9 per cent. "There is a clear case for action" to reverse the trend, she insists. As other countries look to contract out services, she is keen for British providers to take advantage of the export opportunities and says ministers can help by "fostering a dynamic and thriving PSI in the UK". In other words, if consultants run off with a billion pounds of taxpayers' money a year (see the excellent book Plundering the Public Sector by David Craig), you should rejoice because KPMG, Capita and the rest can then assist the balance of payments by selling the same "services" to some other poor mugs.

Only when you delve deep into the Julius review do you see the thinness of the evidence on which the case for expanding PSI rests.

Many studies Julius quotes are ten or more years old and, as she admits, more recent work suggests the private sector doesn't have innate efficiency advantages. There is little robust evidence on what happens to service quality. Julius ignores recent findings on employment services, where the government proposes to expand outsourcing significantly. For example, a report for the Department for Work and Pensions in 2006 on Action Teams for Jobs (www.dwp.gov.uk/asd/asd5/rports2005-2006/rrep328.pdf) found private sector teams met only 78 per cent of their job entry targets, while Jobcentre Plus (public sector) teams exceeded theirs by 40 per cent.

Reviewing this and other recent evidence, Cardiff University's Steve Davies, in a paper for Critical Social Policy, concludes: "It is simply not true that either the private or the third sector has a consistently better record . . . than in-house staff. Wherever Jobcentre Plus has been allowed the same flexibilities and funding . . . it has been able to match, if not surpass, the performance of contractors." Over a wider range of services, the Commons public administration select committee last month said it was "unable to corroborate" the government's claim that the third sector does better.

Julius would argue that the contracting process itself causes in-house public sector employees to raise their game. There may be something in that, though I wonder if there would be a need for competition if the public sector ethos, which once provided an alternative kind of motivation, had not been so eroded. One effect of outsourcing is to weaken the broader concept of the public interest. Julius's recommendation that "multiple objectives for wider social and environmental goals should be used sparingly" in commissioning services illustrates the point.

Private capital is desperate to get its hands on education, health and social care which, in affluent western societies saturated with material goods, will be the future growth points. Its propaganda, painting the public sector as inherently inefficient, has been extraordinarily successful. Yet we have little idea of the long-term effects of relying on non-state providers, particularly during economic crises. As a Unison report due next month points out, some providers - in social care and waste management, for example - borrowed heavily to finance their expansion and could prove horribly vulnerable as the credit crunch progresses. Remember, it took only a few years for Northern Rock to go from being a respectable building society to a reckless private bank that had to be rescued with billions of taxpayers' money.