Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

Nevertheless, such positive rhetoric on the merits of the NHS soon became the cover for a long series of reforms that have progressively introduced elements of private provision in the British healthcare system. With the National Health Service and Community Care Act of 1990, management and patient care were forced to behave as part of an ‘internal market’, with health authorities and general practitioners becoming autonomous purchasers of services under a limited budget. Hospitals were transformed into self-governing NHS trusts and their resources became dependent on contracts stipulated with purchasers. Contracting out to the lowest bidder was also introduced as a first element of outsourcing, with the NHS progressively moving away from its role of provider towards becoming a mere customer. Since 1992, the outsourcing process created by the Private Financing Initiative (PFI) has involved also the building of NHS hospitals. Through PFI, private companies were allowed to build hospitals which were then rented back to the NHS for a substantially high price. PFI was widely used throughout the ‘New Labour’ governments to save on infrastructure investment, with the renting price of hospitals subsequently burdening the NHS budget. Finally, the 2012 Health and Social Care Act de facto abolished the second principle of the original NHS, by introducing user charges and an insurance-based system that resembles the US healthcare model, passing costs and risks to patients, now customers in a market for healthcare provision. This final reform has also further increased the scope for outsourcing in many different areas, such as cleaning, facilities management, GP ‘out of hours’ services, clinical services, IT and so on. 50

Those reforms were aimed at producing a more efficient and cost-effective NHS, through the introduction of market elements in the provision of healthcare. In reality the efficiency has hardly improved, while ever-scarcer resources are largely misallocated. This is what Colin Crouch has called ‘the paradox of public service outsourcing’. 51Market-oriented reforms of healthcare fail to appreciate the evidence that there is no such thing as a competitive market for those services: contracts run for several years and they are granted to a small number of firms which come to dominate the outsourcing market. Those firms become effectively specialized in winning contracts from the public sector across different fields in which they do not have a corresponding expertise. As a result, the market is highly concentrated and the diversity of tasks makes it difficult to obtain a quality-efficient outcome in all the services provided.

A study by Graham Kirkwood and Allyson Pollock shows that increased private-sector provision is associated with a significant decrease in direct NHS provision, a reduction in quality, and costs being propped up by the public sector. 52There are many examples of inefficient outcomes created by the outsourcing process, for example Coperform with the NHS’s South East Coast ambulance service and Serco with out-of-hours GPs contracts in Cornwall; 53in some cases the public had to cover losses when private contractors withdrew from their obligations. Moreover, the whole system of contracting out has a distortive effect on the activities of NHS personnel. As noted by Pollock, ‘clinicians, nurses, managers and armies of consultants and lawyers spend their days preparing multiple bids, tenders and awarding contracts, instead of providing patient care’. 54

Finally, outsourcing appears to be immensely cost-inefficient. Contracting activities create a ‘new market bureaucracy’ that has to deal with the cumbersome process. These administrative burdens are effectively transaction costs that in the US represent around 30 per cent of total healthcare expenditure, while in the UK the actual figure is not known, although it was in the order of 6 per cent in the pre-marketization NHS. 55Yet, perhaps the elephant in the room will be the huge burden for the public that the PFIs will have created by the time their contracts expire. Especially in the case of NHS hospitals, that cost is estimated to be several times higher than the actual worth of the underlying assets. 56

Although reaching a more efficient provision of healthcare services for a lower cost has always been the stated purpose of outsourcing in the NHS, recent evidence seems to suggest that this might just be the second phase of what Noam Chomsky has called the ‘standard technique of privatization: ‘defund, make sure things don’t work, people get angry, you hand it over to private capital’. 57

Outsourcing Scotland’s Infrastructure

Use of PFI financing was particularly prevalent in Scotland between 1993 and 2006. Data published by the Scottish government show that the eighty projects completed in Scotland during this period will cost the public sector £30.2 billion over the coming decades – more than five times the £5.7 billion initial estimate. As well as poor value for money, there is a real concern that PFI projects may be low-quality and even dangerous: in April 2016, seventeen PFI schools in Edinburgh were closed because of safety concerns about construction defects.

In response to growing concerns about PFI, the Scottish government developed after 2010 the Non-Profit Distributing (NPD) model to fund a range of projects in three main sectors – education, health and transport. In this new model, there is no dividend-bearing equity and private-sector returns are capped; however, financing is still by private loan with the expectation of a market rate of return. Projects funded under the NPD model are therefore still significantly more expensive than they would be if they were paid for by direct public borrowing. 58A recent study by the New Economics Foundation found, for example, that between 1998 and 2015 the Scottish government would have saved a total of £26 billion if the projects financed through the Private Finance Initiative (PFI) and Non-Profit Dividend (NPD) schemes had instead been funded directly through a Scottish public investment bank. 59

As we have seen, outsourcing often increases costs and is a form of monopoly. Social Enterprise UK, which promotes organizations such as the Big Issue , Cafédirect and the Eden Project, has referred to the oligopoly of outsourcing providers as the ‘Shadow State’. Capita, G4S and Serco continue to win contracts in both the UK and US, even though they have all been fined for improper management. 60In 2016, for example, an investigative article revealed that G4S has been fined for at least 100 breaches of prison contracts between 2010 and 2016, including ‘failure to achieve search targets, smuggling of contraband items, failure of security procedures, serious cases of “concerted indiscipline”, hostage taking, and roof climbing. Other cases include failure to lock doors, poor hygiene and a reduction in staffing levels.’ 61

The fines, however, are minuscule in proportion to the profits made by both Serco and G4S – and such companies, rather than being penalized for carelessness and reckless cost-cutting, are being rewarded with more contracts. The applications procedures for Obamacare were outsourced in 2013 to Serco in a $1.2 billion contract. 62

Indeed, US Federal government outsourcing contracts to such companies are rapidly rising. A recent GAO report shows that in 2000 contract spending was $200 billion, while in 2015 it was $438 billion. 63This amount represented almost 40 per cent of government’s discretionary spending. The GAO report also distinguished spending on contracts for goods from contracts for services. Among civilian agencies, 80 per cent of contractor expenditures were for services, of which ‘professional support services’ was the largest category. The GAO report notes that ‘contractors performing these types of services are at a heightened risk of performing inherently governmental work’. Indeed, one of the most worrying aspects is probably not the amount of money spent on contractors, but that such a big proportion of it is for ‘professional support services’. This often means that inherently governmental work has been contracted out.