I was at the park with my daughters the other day, and got talking to another dad. He worked in recruitment, supplying IT workers to the public sector. “It’s been a gravy train these past few years,” he sighed wistfully. “But things are getting tougher now.”
This will be no surprise to investors in firms providing services to the public sector. In recent weeks we’ve seen profit warnings from the likes of telecoms group Cable & Wireless Worldwide (CWW), while social housing maintenance firm Connaught saw its share price dive as it warned it would breach its banking covenants.
It’s bad news for shareholders in the sector. But it’s fantastic for taxpayers. I’ve never been convinced by the argument that spending cuts would be a ‘bonanza’ for private firms. First, it assumes work will be outsourced rather than delayed or even abandoned. More importantly, if money’s tighter, then outsourcers will be forced to offer better terms. Good thing too.
A report by Compass Management Consulting last month reckoned that poor procurement has resulted in the public sector paying 40%-plus over market rates for IT services in the past five years. According to Procurement Leaders magazine, £6bn could be saved on the annual £14bn the government spend on IT “without affecting front-line services”. And as The Guardian’s Nils Pratley noted, CWW’s profit warning showed it had made £20m profit on just £50m in public-sector revenues – a staggering profit margin.
As with most public spending over the past decade, outsourcing money seems to have been spent with scant regard for value. Some argue that this is because civil servants are naive and have rings run around them by predatory private-sector deal-makers, with their superlative negotiating skills. Nice theory, but I suspect the same civil servants who signed off on these deals are a lot more proficient at talking down prices when they’re haggling over a house purchase, for example.
The real problem is the skewed incentives. A private-sector firm is motivated by profit – give it the chance to milk the taxpayer and it’ll take it. The public sector is spending someone else’s money, with no real stake in the outcome – so why bother seeking out better value?
This also highlights a flaw in the big debate between the Austerians (who want to cut spending) and Keynesians (who want to keep it going). For all their bluster, neither side says much about what this money is actually spent on. But this is what matters most of all. Capitalism is at heart meant to be about the efficient allocation of capital. And who can allocate my own capital more efficiently than me? Rather than ramping up central government borrowing and spending, the Keynesians should call for tax cuts. That would make their message far more palatable.