New report: public service markets favour large companies and shareholders


A report published by Social Enterprise UK says a ‘shadow state’ is emerging in which a small number of large companies providing outsourced public services are becoming too big or complex to fail, with serious consequences for Britain’s economy and communities.

Monday 3rd December 2012

Evidence points to companies providing lower-quality services in their drive to maximise shareholder profits.  The Shadow State says these private firms, contracted by central and local government, are difficult to hold to account and operate without transparency.

Charities and social enterprises being pushed out of public sector markets

Decades of outsourcing by successive governments now means that £82billion [1], a third of the spend on public sector commissioning and procurement, is spent on independent providers.  Accelerated by recent policies, the Health and Social Care Act, The Work Programme and Welfare Reform Act, this is predicted to rise to £140billion by 2014 [2].  The lion’s share is going to large firms and their shareholders, resulting in money moving out of the public realm and being turned into private wealth, says The Shadow State. The report’s recommendations have been endorsed by Margaret Hodge MP, Chair of the Public Accounts Committee.

At the same time evidence shows that social enterprises and charities are being squeezed out of public service markets.  Civil society organisations that have a legal responsibility to pursue their social mission above profit, that put people and communities first, and that reinvest their profits to improve the quality and number of services – are not faring well. 

Polling reveals public opposition to shareholders making profits from public services

Polling for The Shadow State has identified public dissatisfaction about shareholders making profits from the delivery of public services [3].  Two thirds of UK adults believe it is unacceptable for shareholders to profit from running hospitals and health services (66%), children’s homes (66%), police services (66%), and care homes for elderly and disabled people (63%).

Only a fifth (21%) say it is acceptable for shareholders to profit from children’s homes, and only a quarter (26%) think it acceptable for shareholders to profit from care homes for elderly and disabled people.

Push to increase shareholder profit drives down quality of services and staff wages - and fuels inequality

Research in The Shadow State reveals the extent to which private firms delivering public services are cutting costs to maximise profits for investors.  It outlines evidence showing some firms are placing vulnerable children in residential care homes in parts of the country often many miles from home, cutting individuals off from any friends or family, but where property prices are lowest and therefore cheapest – this is despite councils paying private firms an average of £200,000 per year, per child. 

The report also says that profit-seeking firms bidding for public sector contracts on price often creates a ‘race to the bottom’ on wages as they seek to increase shareholder profit - fuelling low pay.  The Shadow State argues that low pay fuels inequality, leaving workers and families in poverty, while a minority benefit at their expense.  Taxpayers often have to make up the shortfall, financing benefits for the working poor.

New legislation will throw national and local commissioners a lifeline

The report says urgent action is needed to strengthen the Public Services (Social Value) Act, due to become law in January, which has the potential to create more transparent markets with a range of providers.  The legislation should ensure a more level playing field for social enterprises and charities to bid alongside traditional private sector providers by making sure that the additional ‘social value’ they create is taken into account when public service contracts are drawn up.

Chris White MP (Conservative, Warwick and Leamington Spa and author of the Public Services [Social Value] Act 2012) said:

The Shadow State asks a number of important questions about the future of public services and the way that the Government spends public money. The number one focus of public service delivery must be on improving outcomes and getting maximum benefit for our communities - I hope that the Government will look carefully at this report to see how we can maximise those benefits.”

Jon Trickett MP, Shadow Minister for the Cabinet Office, said:

“Under this Tory-led government the outsourcing of public services has changed in scale and character, without any systematic attempt to understand or analyse the impact of this process and without any attempt to win consent amongst the public. It is ideologically driven and lacks any meaningful evidence base to measure its effectiveness and efficiency. There appears to be an absolutist conviction that everything public is bad and that all private provision is automatically good.

“A one nation Government would place public benefit at the centre of decisions about how public services should be delivered. Government should apply the Public Services Social Value Act in a meaningful way. The truth is there needs to be a detailed debate about the future of our public services in this climate of outsourcing.”

Peter Holbrook, Chief Executive of Social Enterprise UK, said:

“This is not an issue of whether or not to outsource more public services, but about how public bodies allow the markets to be shaped, and the sort of firms they choose.  The whole issue needs urgent attention. Commissioners need to be able to contract providers that are committed to quality public services and motivated not by shareholder profit, but by benefitting the communities in which they work.  The Social Value Act allows them to do just that.

“No company should be allowed to become too big to fail and no company allowed to strip wealth out of Britain’s communities while providing sub-standard services. Taxpayers only need to look at how energy and train companies work to understand how a few suppliers can hold buyers to ransom."

Lord Victor Adebowale, Chief Executive of the social enterprise Turning Point, said:

“I have nothing against the private sector in public services. But private sector organisations are making money from the taxpayer, and from the taxpayer’s point of view that money needs to stay in public services. It’s not as if we’re talking about selling iPads to China. They’re not generating more money. If you’re taking money out of social services or health, it doesn’t really matter if you’re more efficient, ultimately it could still cost us all more. Because you’re taking money out of the public realm.”


DOWNLOAD THE REPORT, which includes an executive summary.

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[1] The Size of the UK Outsourcing Market Across the Private and Public Sector, Oxford Economics, April 2011


[3] Opinium Research carried out an online survey of 2019 UK adults aged 18+ in November 2012