LONDON (Reuters) - National outrage at the failure of G4S (GFS.L) to provide the security it promised for the London Olympics is a blow to the British government’s drive to outsource more services as it battles to cut public spending and slash debt.
Outsourcing, or the use of private firms to provide public services, had been expected to surge under Britain’s coalition government. But its image as a leaner, slicker alternative to the traditional public sector has been badly tarnished by recent headlines.
Private companies run a plethora of public services, from job-seeking and out-of-hours medical help to prison management, army training and mobile radio for emergency services.
According to analyst house ISG, the UK spent 8.9 billion pounds on such outsourcing in the first half of this year alone.
Analysts at Jefferies predict some 4 billion pounds of new work is waiting to be awarded but after the high-profile failure of G4S to provide all the guards needed for the Olympics, there is a stigma around outsourcing.
“I think what the Olympics has told us is there are some contracts that are just too big to outsource and the consequences of getting it wrong are costly,” said Panmure Gordon analyst Mike Allen.
Critics of outsourcing say private companies are hard to hold to account and motivated only by profit - supporters that the public sector can be inefficient and prone to strikes.
Serco (SRP.L), which runs centres where illegal immigrants are held before being moved abroad, is expected to make about 60 percent of its forecast 5 billion pound revenue from public sector contracts for 2012.
For rival Capita (CPI.L), around 2.2 billion pounds of contracts it is shortlisted to win come from a public sector it describes as “buoyant”. It currently runs customer services for BBC TV licensing and the Criminal Records Bureau.
The 4 billion pounds of new work noted by Jefferies includes deals in areas such as defence training and maintenance, health, prisons and police with firms like Serco, Capita, Babcock (BAB.L) and Mitie (MTO.L) all in the running to win a portion.
G4S, which makes over 1 billion pounds a year from public sector work that includes running six prisons, was expected to feature prominently in the new contracts before the problems with its 284 million-pound Olympic contract. It has since said it is unlikely to have much immediate success.
Complaints over outsourcing are part of a wider trend of criticism of long-standing policies which have blurred the line between public and private sectors.
Private Finance Initiatives, which secure private funding for public infrastructure like schools and hospitals, have been heavily bashed for providing high returns for private firms but little value to taxpayers, pressuring government to revise how they are funded.
Southwest One, a back office venture between three councils and IBM (IBM.N), saw one of the authorities take some services back in-house after it said it was not saving enough money, while Capita’s court interpreting services firm has been criticised for holding up cases by failing to supply linguists.
Capita told Reuters it had turned the service around after inheriting the contract when it bought Applied Language Solutions late last year.
Its chief executive Paul Pindar added on Wednesday he did not expect the furore around G4S to impact the flow of government work and that an increasing amount of austerity-driven contracts were already piling up.
But some potential customers are becoming cautious.
Grappling with 20 percent budget cuts, Britain’s police forces are looking at outsourcing operations beyond traditional areas like technology, human resources and accounting.
G4S has won a 10-year deal to design and build Lincolnshire police a new station and to manage operations like its vehicle fleet and firearms licensing. G4S claim it can save the force 28 million.
However, three police forces which have looked at hiring G4S to do similar work said on Monday they would reconsider after its Olympic woes, and Surrey police are also considering pulling plans to outsource non-core police services such as guarding crime scenes and collecting CCTV footage.
Some local councils, which account for a quarter of public spending in Britain, are also looking at cutting outsourcing to manage budget cuts and frontline service growth themselves.
Birmingham Council Chief Executive Stephen Hughes said he didn’t expect a boom in outsourced council work as authorities tackle budget cuts of 27 percent between 2010/11 and 2014/15.
“The levels of savings you make through a traditional outsourcing are nothing like the order of magnitude that upper tier authorities are looking for and therefore it becomes unattractive,” he told Reuters.
Some council officials list as disadvantages the high upfront costs of contracts, their inflexibility, and the fact that many run for as long as 10 to 15 years.
Some services face the axe and councils are looking at alternatives like joint ventures, shared council operations and turning their own revamped services into moneymakers.
In order to win more work outsourcers may have to tweak some of their terms. Some councils, for example, want assurances that local jobs and apprenticeships will be protected.
Nine prison contracts to be awarded this year will probably include a new payment-by-results scheme being piloted in Doncaster, meaning private firms only receive full payment if they reduce the rate of reoffending.
The six jails run by G4S are being turned into working prisons intended to give inmates the skills and experience needed to get a job. Firms such as Serco and Interserve (IRV.L) are tying up with social enterprises to give offenders better support once they leave prison.
Editing by Andrew Roche