Interserve’s collapse shows the UK’s outsourcing model is broken

There is no good reason why the government should pay private companies to profit from public services. 

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Until recently, few outside the opaque world of procurement had heard of Interserve. But the outsourcing behemoth, which entered administration on 15 March after a battle between its shareholders and creditors, is intimately connected to the public realm.

The £2.9bn firm employs 45,000 people in the UK, including in hospital cleaning, school meals, the probation service and the maintenance of overseas military bases.

The rescue deal that was eventually agreed meant ownership transferred to Interserve’s creditors: HSBC, RBS and several hedge funds. As the firm’s new owners, they are the primary winners from the agreement (the government has indicated that it will continue to offer contracts). Those traders who shorted Interserve’s stock – betting that its price would fall – have also lucratively benefited.

Meanwhile, the company’s chief executive, Debbie White, who received a pay package of £525,900 for four months’ work, including a bonus of 125 per cent, is expected to keep her job.

The list of losers is far longer. First, Interserve’s 16,000 small shareholders have lost their investments. Second, the firm’s suppliers will likely incur a substantial financial penalty. Interserve relies on hundreds of suppliers to provide its HR, IT and other management services. These companies – many of which are small businesses – face losing their contracts with Interserve as well as going unpaid for previous work.

The final – and most overlooked – losers are the company’s workers. Many UK employees fear job cuts as Interserve’s former creditors seek to extract every penny of value from the firm.

Looming over this array of winners and losers is the British state, without which companies such as Interserve would not exist. The government’s outsourcing drive has seen contracts worth billions handed to oligopolies including Carillion (which collapsed in January 2018), Serco and G4S, allowing the firms’ shareholders to profit from the delivery of public services. Even as companies such as Carillion and Interserve showed signs of financial distress, ministers continued to award them lucrative public contracts.

The affair is a fitting exposition of the failures of financial capitalism. A company was created to allow private investors to profit from state spending on public services, necessary in part because of the huge increases in inequality that have resulted from finance-led growth.

That firm then used cheap debt to underwrite a series of reckless acquisitions before being targeted by vulture funds eyeing a swift profit from its demise. When Interserve collapsed under the strain of its borrowing, it was taken over by a consortium of banks – including one (RBS) that is still 62 per cent-owned by the state as a result of its own calamitous acquisition spree.

If it appears as though there are too many villains to pin the blame on any single culprit, that’s because there are. The failure of firms such as Interserve and Carillion cannot simply be attributed to financial mismanagement, state incompetence, or profiteering hedge funds.

The rise and fall of the outsourcing giants reflects the logic of finance-led growth. As firms become ever more financialised, value flows up from workers to shareholders, and from shareholders to creditors, with a plethora of managers, advisers and lawyers making a tidy profit at every stage.

What, then, is the alternative? The seeds of a new model are demonstrated by RBS’s partial state ownership. If Interserve’s management are now partly responsible to the bank, whose managers are themselves partly responsible to the state, why not eliminate the middle man and allow the state to run the outsourcing process itself?

There is no good reason why the government should pay private companies to hire people to hire other people to deliver government contracts. That expertise could be brought in-house and used to deliver a procurement programme that aims to promote the public good.

A state-run procurement agenda could, for example, give preferential treatment to worker-owned enterprises with environmentally sustainable business models and ethical tax practices.

The outsourcing business is worth billions of pounds a year. If the state fully deploys its economic muscle, it could create value, rather than destroy it.

Grace Blakeley is the New Statesman’s economics commentator and a research fellow at IPPR. 

This article appears in the 22 March 2019 issue of the New Statesman, State of emergency