Headlines: December 4th, 2012

A new report 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.

The Shadow State report from Social Enterprise UK sets out evidence that points to companies providing lower-quality services in their drive to maximise shareholder profits. The report says these private firms, contracted by central and local government, are difficult to hold to account and operate without transparency.

Decades of outsourcing by successive governments now means that £82billion, 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. 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.

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

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.

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.