SLL co-hosted an event at the House of Commons on 27 March 2018 with Labour Business to discuss the outsourcing of public services (which is coming under greater media and public scrutiny than ever with expensive private sector failures) and Private Finance Initiatives (PFI), a topic of particular importance to Labour, as our current policy is to “look to” take control of PFI contracts, review all of them and “if necessary” take them back in-house.
The first expert speakers were John Tizard and David Walker, authors of the recent Smith Institute paper: “Out of Contract: Time to move on from the ‘love in’ with outsourcing and PFI” (which can be read here). Walker called for a review of contracts and particularly noted the lack of hard data about existing contracts. He called for information about their costs and duration to be collected and published to government and the public. Tizard summarised their recommendations as 1) setting up a ‘Domesday Book’, a central repository of data on public sector contracts, beginning with the most central and least risky contracts. At very least this will improve sharing of information and should reduce duplication of work; 2) a review on the impact of outsourcing policy, including how procurement relationships are managed post-contract; 3) a default of public ownership and management of public services. Any change to this should be after a test of public value, encompassing environmental and external factors, not simply price!
Simon Taylor, a barrister at Keating Chambers specialising in EU Competition law, explained the legal constraints on taking private contracts back in house, concluding that these were not insurmountable. The general principle of the EU is neutrality on public or private ownership (Article 345 TFEU) but this includes a requirement for transparent, fair procedures which do not discriminate against foreign providers. There is a mechanism in the rules specifically enabling public bodies to award in-house contracts to another public undertaking that it owns, provided this subsidiary body derives at least 80% of its income from its parent. Taking cleaning contracts as an example, a public body could directly hire cleaners to the work or could establish a subsidiary company, provided that this subsidiary doesn’t then go out into market and win lots of contracts; within EU law. This is tempered by Article 106 & 102, which allows the EC to intervene where special rights are granted to a public undertaking that could lead to abuse of dominance. In our example this could apply for instance if the cleaning contract established a monopoly to one undertaking for cleaning the entire City of London. Finally, Article 1 of the First Protocol of the Human Rights Act (protection of property) may prove an additional constraint on removing existing contracts from private, although public bodies could attempt to rely on the public interest exception.
Melanie Pears, Head of Public Sector at Ward Hadaway solicitors, a leading provider of legal services for NHS Trusts and other state entities administering PFI contracts, has worked in the sector for over two decades. She drew on her experience to outline how to make the most of PFI contracts from the perspective of the state employer and how they can be lawfully terminated.
These contracts are unusually long in their duration: quite normally 25-30 years; and often become unfit for purpose at some point during that term. This can lead to absurd inefficiency: for example, construction contracts often include a standard 12-year limitation of liability, which in a 30-year contract leaves the public body to find more funds to deal with any maintenance issues caused by flaws in the original construction that arise in the thirteenth year and onwards. Contract management teams quickly evaporate and are replaced by professional managers, whose incentive is to run the contract in the interest of the private sector, not always aligned with the public interest. From the public body’s point of view, few and low-grate professionals are often assigned to monitor these contracts. PFI contracts should be independently or jointly monitored and supported.
In practice, it may not be economically sensible to renationalise many PFI contracts, as they often include swap arrangements (insurance rate protections) that can cost huge sums (£25million for example) to cancel. However, there is a clear need for a review of each operational PFI scheme, looking behind the veil of intra-company loans to discover how profitable they are and undercover overcharging and inefficiency. It may be possible to exit failing contracts on the basis of default.
Samuel Townend, Vice-Chair of SLL closed the event with case studies of a poorly executed PFI contract and the negative external impact of outsourcing on public services. It is clear we must abandon unaccountable commissioning bodies and focus on improving in house skills at local authorities. With the saved time and money, we could establish programs to innovate and improve services and lost management skills to avoid ‘producer capture’.
(The above is produced by the author for interested members of the Society of Labour Lawyers who could not attend and reflects their own personal views, not necessarily those of the speakers)