A third of UK government funds spent with outsourcers, report finds

By on 16/12/2018 | Updated on 07/08/2019
The gates are shut – but has the horse bolted? Interserve is involved in many public sector projects, such as this University of York construction scheme (Image courtesy DS Pugh).

The UK government is spending nearly a third of its total expenditure on outsourcing, a new report by think tank the Institute for Government (IfG) has revealed.

The report, ‘Government procurement: the scale and nature of contracting in the UK’, reveals that departments and agencies spend some £284bn (US$324bn) with contractors. It was published as the share price of key supplier Interserve crashed, threatening the failure of another major contractor following the collapse of Carillion a year ago.

However, the authors argue that the current scale of outsourcing means that it is now “too large to be easily unraveled or scrapped”, noting that it is “the single biggest component of modern government.”

The report says that four departments – the Ministry of Justice (MoJ), the Department for Transport (DfT), the Department for International Trade(DIT) and the Department for Environment, Food and Rural Affairs (Defra) –spent more than half of their entire budgets with external suppliers last year.

Are you being Interserved?

“Government is spending hundreds of billions of pounds every year with external suppliers – but there are signs that some players involved in outsourcing are struggling, most recently Interserve,” said IfG director of research Emma Norris.

According to the Telegraph, Interserve won £938m ($1.2bn) of government contracts – representing 11% of the total – in 2017, but it has experienced significant financial difficulties during 2018. 

In the last few days the company has sought its second rescue deal of the year, and faces debts of £500m ($630m). News of the rescue deal caused share prices to tumble, dropping initially by 70%.

The company has 45,000 workers in the UK and provides construction, facilities management and other services such as cleaning and catering in schools and hospitals. It is also the largest provider of probation and rehabilitation services in England and Wales.

Lots of eggs, one basket

The IfG report says ‘strategic suppliers’ such as Interserve – companies that receive over £100m ($125m) in revenue a year from government – are winning more and more contracts. In 2016-17, government reported spending the largest amount of money with Capita, Carillon and Amey. The IfG calls this a “risky” strategy, “given that its top three suppliers have all experienced financial difficulties in recent years.” 

Despite Interserve’s financial woes, the UK has continued to award contracts to the company. Indeed, the very scale of the government’s contracts with Interserve make it a key client – meaning that if it were to turn off the tap, it could well prompt the company’s collapse and be required to pick up the pieces.

The IfG is urging the government to collect much better data on outsourcing, and to “urgently review the health of its procurement markets.”Government does not have the data it needs on its own outsourcing and procurement,” said Norris. “It needs to look hard at the experience of the past 30 years of outsourcing, and develop a much stronger sense of what has worked well and what has not.”

A Cabinet Office spokesperson said: “We monitor the financial health of all of our strategic suppliers, including Interserve, and have regular discussions with the company’s management. The company successfully raised new debt facilities earlier this year, and we fully support them in their long term recovery plan.

“We do not believe that any of our strategic suppliers are in a comparable position to Carillion.” 

About Natalie Leal

Natalie is a freelance journalist whose work has been published by The Sun Online, The Guardian, Novara Media, Positive News, and Welfare Weekly, among others. She also writes reports and case studies on global business trends for behavioural insights agency, Canvas8. Prior to working as a journalist Natalie worked for the public sector in social services for several years. She switched careers in 2013 after winning a fully funded NCTJ in a national writing competition. She holds a Masters degree in social anthropology from Sussex University where she specialised in processes of social change and international conflict and reconciliation processes.

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