13 Austerity and Outsourcing in Britain’s New Corporate State

STEPHEN WILKS

Introduction

After 2010, austerity in Britain became a central, and at times a dominant, discourse. The 2015 general election virtually revolved around debates on the scale and implications of austerity, with the three big parties (Conservative, Labour, and the Liberal-Democrats) competing over their tax and spending plans and their ability to achieve a balanced budget. Only the smaller and the nationalist parties resisted the debt reduction imperative. But austerity should not be seen simply as a driver of public policy, far less as an exercise in fiscal retrenchment, but as an expression of deeper-seated structural and institutional transformations in the United Kingdom. Austerity has been employed with great ingenuity to consolidate a transformation in the nature of the British state and to bolster the neoliberal forces that have created what I have termed the “new corporate state” (Wilks 2013, 70). The chapter reviews the impact of austerity and the rise of the public services industry as a preamble to an analysis of how companies have exploited the profitable potential of austerity. It then explores the implications of institutional change in three areas: the emergence of the new corporate state in the United Kingdom; the inadequate accountability of companies that deliver public services; and the impact on the practical operation and constitutional position of the British civil service.

The new corporate state rests on a reconfiguration of British elites since the triumph of Thatcherism in the early 1990s. This has involved a decline in the old “establishment” elites and in the central civil service and the trade unions. New elites have come to the fore, including a careerist party/political elite and a corporate elite of leading managers of large companies and financial institutions. These newly powerful elites have crafted a new political settlement that rests on market rhetoric but is structurally biased towards the interests of large corporations.

The austerity discourse has been embraced within the political and corporate elites to reinforce the new settlement. In turn the contours of austerity have been defined and imposed in line with the values and principles of the new corporate state, specifically involving managerial values, market tests, tolerance of inequality, rejection of public solutions, and pursuit of a smaller state. Austerity has been employed to cut public spending by transferring governmental activities to the private sector and boosting the profitability and value of corporations. Austerity appears as a systemic force reinforcing institutional change and, in a dismal paradox, rewarding the very people who precipitated the financial crisis. This may not be a very novel argument (for an exemplary deployment, see Crouch 2011), but the chapter goes on to examine implications of the new political settlement and presents a more novel discussion of the resilience of the new corporate state, the accountability of the public services industry, and the constitutional implications of rampant outsourcing.

Austerity and Public Spending

Austerity has come to frame British governance and public life in a way that is dominant and remorseless. It grew, of course, out of the 2008 financial crisis, although counter-cyclical spending meant that it did not begin to bite into public services until 2010. It is in the nature of crises that they can shock policies and institutions into new paths, and it was not inevitable that austerity would reinforce existing trends; there was a brief moment during which social democratic alternatives were seriously visualized. But with the creation of the Coalition Government in 2010, the crisis worked perversely to intensify pro-business and pro-market policies and to undermine forces of resistance. In particular the crisis legitimized austerity and was used to justify a meta-policy of cutting public spending. In turn this legitimized and justified the resort to outsourcing and to redefinition of the role of the civil service.

Before exploring the reasons for the shift to outsourcing of public services, we should consider the contours of austerity and the dimensions of the public services industry, which was poised to shape an agenda requiring the comprehensive contracting out of public services. The origins of austerity and the dimensions of the United Kingdom’s acute fiscal crisis have been extensively debated, and something of a statistical fog tends to descend. All the figures in this section are therefore drawn from the authoritative Office for Budget Responsibility (OBR) Report published in September 2014. For 2007–8 the government was already planning a deficit of 2.6 per cent of GDP. Total UK borrowing was not high by international or historical standards (see Lee chapter in this volume), but the Labour government was tolerating a structural budget deficit that allowed accusations of fiscal mismanagement to undermine their opposition to Coalition fiscal consolidation. By 2009–10 the deficit had quadrupled to reach £157 billion or 11 per cent of GDP and was still at £115 billion by 2012–13. Over the same five years public sector borrowing grew from 37 per cent of GDP to 74 per cent (Riley and Chote 2014, 2). The response from the new Coalition Government, in the June 2010 Budget, was to emphasize strict austerity, planning to eliminate the deficit by 2015. Chancellor Osborne adopted an uncompromising stance, which the Coalition consistently maintained and was perpetuated by Osborne, who continued as chancellor in the majority Conservative government after the 2015 election.

By 2014 only about 40 per cent of the budget deficit had been eliminated. Clearly the Coalition missed its target to achieve fiscal balance before the 2015 general election, but the assault on public spending continues. The 2015–16 budgets and spending plans do not anticipate eliminating the deficit until 2019–20 (see Riley and Chote 2014, 125; and IFS, 2016), so that the austerity imperative, already in its seventh year, will continue for another three years with its associated cuts in public spending and public sector pay freezes.

Expressed in terms of public spending in the 2014 plans, the pattern measured against GDP looked as in table 13.1.

As these numbers indicate, the main burden for closing the deficit falls on public spending. Receipts from taxation make only a minor contribution, mainly from a rise in the rate of VAT (Value Added Tax, a regressive sales tax). Corporation tax receipts fall over the period. The implications for spending are captured in the following quote: “With relatively small contributions from tax increases and capital spending cuts, the vast majority of the savings required to eliminate the pre-crisis deficit and to accommodate higher spending on welfare, debt interest and other … spending are projected to come from cuts in RDEL [resource departmental expenditure limits] – the day-to-day running costs of public services, primarily public sector pay and procurement” (Riley and Chote 2014, 126).

The distribution of actual and planned cuts is, however, very variable. Three areas have been protected: overseas development (trivial); education (substantial) and the National Health Service (huge). The NHS is actually scheduled for growth to allow for inflation. This leaves all other expenditure programs in an extraordinarily vulnerable situation. The OBR remarked that in real terms “total RDEL spending in 2018–19 would be 22% down on 2010–11 and for the unprotected departments down 45%” (Riley and Chote 2014, 119). As I have argued elsewhere, cuts on this scale are beyond the ability of the civil service to manage without radical system change (Wilks 2010). The scale and intensity of fiscal austerity is captured by final quotes from the OBR: “From its peak in 2009–10, the improvement in the budget balance is forecast to total 11.2 percent of GDP by 2018–19. That would be one of the largest budget reductions among advanced economies in the post-war period,” which “implies that by 2018–19 public services spending would fall to its lowest share of national income at least since 1948 … probably the lowest share since 1938” (Riley and Chote 2014, 119 and 128). Thus the politics of austerity translate in the United Kingdom into an onslaught on public spending and revolutionary cuts in the majority of public services.

This bleak picture has ominous implications for all public servants, and for those who depend on public services, but it may not be such bad news for private sector companies. Austerity is as much an opportunity as a threat for the private sector, and to understand why this is the case we have to appreciate that austerity policies are being implemented by a state apparatus that is in flux. The Institute for Government captures the institutional transformation: “The past 30 years have seen a dramatic shift in the way British public services are provided. Government is now rarely the sole provider of publicly-funded services. In education, employment, health – indeed, almost every area – private, public and voluntary organisations compete for the right to provide our services … Today, roughly £1 in every £3 that government spends on public services goes to independent providers.” The institute goes on to emphasize the uncertainties of this huge ideological experiment in prosaic but potentially terrifying terms: “The impact of this vast shift is, in truth, not well understood” (IfG 2013, 4).

The Public Services Industry as an Alternative Civil Service

The new providers of public services are predominantly private sector companies that have grown at a remarkable rate to form a distinct new industrial sector, known as the public services industry (PSI). The scale of this new industry was revealed in the Julius Report commissioned by the Department for Business to explore ways in which the industry could be supported. The Julius Report revealed that in 2007–8 the PSI had revenue of £79 billion; it employed over 1,200,000 people and accounted for about 6 per cent of GDP (BERR 2008, ii). Since then it has grown to about £100 billion and it has received increased attention, often for the wrong reasons. The National Audit Office (NAO) prepares reports for the independent, cross-party, Parliamentary Public Accounts Committee (PAC), which has undertaken a series of investigations into performance and value for money (NAO 2013; PAC 2014). The ability of the civil service to work with the PSI has been explored by the Parliamentary Public Administration Select Committee (PASC 2011); and the major reformist think tank, the Institute for Government, has placed study of commissioning and public-private partnerships at the centre of its research efforts (IfG 2013). These studies are responding to the government’s frequently reiterated determination to downsize the civil service (and local government) by increased outsourcing. This determination was presented in the Open Public Services White Paper (Open Public Services and Cabinet office 2011) and has been implemented through annual iterations of the Civil Service Reform Plan, which affirms that “the Civil Service will need to do less centrally and commission more from outside” (Cabinet Office 2012, 7). Currently, therefore, the standard mode of delivering public services has become either partnership with the private sector, or outright delegation of service provision to companies, in each case managed through contractual arrangements. This revolutionary but badly understood and barely examined transition from an “administrative state” to a “corporate state” is the central preoccupation of this chapter.

The rise of the public services industry has been charted elsewhere (Wilks 2013, 132–44). Drawing on that analysis, we can briefly review the more familiar reasons for its creation, before turning to some of the underemphasized reasons that bear more directly on the influence of austerity. It is tempting to argue that the rise of the PSI is simply an expression of the ideological shift to neoliberalism. It certainly appears as the logical extension of the ideas underpinning the New Public Management; the ideas of market disciplines, competition and private sector management that have driven reform of the civil service since the early 1990s. But an ideological explanation is deceptive in two respects. First, this is not party-political ideology. Outsourcing originated with the Thatcher governments in the late 1980s, but it became bipartisan and flourished under New Labour. It is more persuasive to see outsourcing as part of a new hegemony, part of the shift towards the market state so ably analysed by Blyth (2002). Second, outsourcing has a complex relationship with neoliberalism. Neoliberalism celebrates the market, but there has been what Crouch (2011, 49) terms a “corporate takeover of the market.” Corporations have not only been able to exploit market power, their colonization of government has allowed them to design the very markets in which they operate. Neoliberalism has opened the door to what can be termed “regulatory capitalism” in which the regulations are more influenced by corporate imperatives than by the public interest, with the result that the markets are far removed from the ideal free markets of neoliberal myth. We return to this point in the concluding comments on “constitutionalizing” corporate power.

The PSI is therefore an expression of the neoliberal hegemonic shift, which also finds expression in a systematic critique of bureaucracy and disdain for the state and public service. Again, this is a familiar and depressing dimension of contemporary politics. The expressions of political dissatisfaction with the civil service and direct ministerial criticism of civil servants have become ubiquitous. Tony Blair famously referred to “scars on my back” in attempting civil service reform (1999), whilst David Cameron, in his 2011 speech to the Conservative Party conference, “announced the government’s intention to take on “bureaucrats in government departments,” whom he described as “enemies of enterprise” (PASC 2011, 12). The Open Public Services White Paper gave substance to that intention, alleging that “too many public services are still run according to the maxim ‘the man in Whitehall really does know best’” (Open Cabinet Services and Cabinet Office 2011, 7). The PASC brought together much of this dissatisfaction with the rather world-weary thought that “the need for frequent civil service reform programmes … can be attributed to failure to consider what the civil service is for, … and what it can reasonably be expected to deliver” (PASC 2011, 10), and it called for a systematic civil service reform plan. What we have seen is the collapse of the traditional Whitehall model and the inchoate, tendentious attempts to replace it with a new model that, in the form of outsourcing and the public services industry, has been termed “the alternative civil service” (Wilks 2014b).

Rather paradoxically, the imperative to cut public spending also favours the growth of the PSI. As noted above, the austerity agenda in the United Kingdom is concentrated on massive cuts in public spending, which generate huge incentives to pursue value for money. There is no comprehensive study that establishes clearly that private provision of public services creates better value for money than public provision, but there are some clear examples of success. The received wisdom, broadly endorsed by the NAO and reformist think tanks, is that outsourcing will produce real savings, especially in simple services and where there is also a private market for services such as catering.

The familiar explanations for the growth of outsourcing and the rise of the huge public services industry therefore rest on ideology and a critique of the traditional civil service. This is combined with the view that fiscal crisis requires bold, innovative, and entrepreneurial measures that can be provided by private sector companies. What is less often considered, in popular and academic accounts, is the role of the companies themselves in shaping the dominant discourse. The public services industry is large and diverse, stretching from small care home operators to the huge global outsourcing specialists such as Serco and G4S. But the critical competitive advantage for all these companies is their ability to win government contracts. It is hardly surprising, therefore, if they make strenuous efforts to encourage government to outsource as much as possible, and to do so on terms advantageous for the companies terms. This could be visualized as “lobbying,” but that is a wholly inadequate description; instead the industry’s political campaign is far more systematic and effective, and the leading companies have organized to effect structural change in the institutions of the British state.

The pressures for outsourcing draw support from the City and the financial services industry. Outsourcing creates a range of substantial and lucrative profit opportunities from bond and share markets to contract finance and transactional banking. The City had, and has regained, huge economic influence through the mobilization of ideas as well as wealth. Financial services providers had already established great political influence within government and proved a valuable ally in opening doors for the PSI. A perceptive critical research group note, “Explaining why the ‘politics of austerity’ took this form … [targeting the public sector] after the great crisis depends on recognising the importance of the new politics of the City state … the striking development of recent decades has been the reconfiguration of the institutional mechanisms that convert … financial muscle into influence over policy” (Erturk et al. 2011, 19). The City had become a cornerstone of the new corporate state and lent its weight to the outsourcing bandwagon.

The political campaign by the PSI has been a campaign of ideas comparable to the combination of ideas that Blyth analyses to explain the dis-embedding of liberalism in the United States (Blyth 2002). It deploys arguments about public choice theory; the failure of the state; the critical importance of competition; managerial competence, corporate efficiency, and sound finance. The ideas have been mobilized in alliance with politicians working as a politico-corporate elite, and the industry has been able to mobilize the corporate elite, including accountants, the financial services industry, and crucially, management consultants. As discussed below, the corporate elite has colonized the civil service and has moved the debate about reform of the state away from concerns about how the civil service can “deliver,” to how best the civil service can “commission” the private sector. We come back to the civil service below, but first let’s consider how austerity has accelerated the turn to outsourcing and has consolidated the institutional transformation to the new corporate state.

The PSI and the Exploitation of Austerity

The major PSI companies are organized into the Business Services Association, which articulates the industry’s policy preferences. Since 2003 the companies have also been organized through the Public Services Strategy Board of the Confederation of British Industry (CBI). The CBI link gives them greater legitimacy and greater political purchase, since the CBI is extremely influential and has outstanding contacts at every level of government. In 2014 the Public Services Strategy Board (PSSB) included eighteen senior executives of the biggest outsourcing companies, including G4S, Serco, Atos, and Capita (the chair was Ruby McGregor-Smith, CEO of MITIE Group). As the financial crisis unfolded in 2009–10 the PSSB resumed its campaign to capture a greater share of public spending by crafting a persuasive austerity discourse.

The proposition from the PSSB was bold and unapologetic: “Our message is clear: a tight spending environment is precisely the right time to look again at how public services operate and where providers from outside the public sector can help deliver better value for money. That means promoting new models for running public services” (PSSB 2010, 2).

The seductive prospect offered by the industry was to sustain service levels whilst cutting costs quite dramatically. A 2009 budget submission suggested that moving to private sector public service providers could generate £130 billion in savings over a five-year period. The industry argued for a greater share of spending but also a changed relationship with Whitehall, which would be based on “strategic commissioning,” contracts awarded to achieve “outcomes” rather than outputs, and new long-term partnerships between the civil service and outsourcing companies.

The campaign was launched in April 2010. In May came the general election, which ushered in the Conservative-dominated Coalition Government. The PSI could hardly have dreamed of a better outcome. The chancellor’s stress on spending reductions was matched by the Cabinet Office’s enthusiasm for outsourcing. The Cabinet Office minister, Francis Maude, proved both an outspoken critic of the civil service and a great enthusiast for engaging with the PSI. Consideration of private provision became the norm, in local government even more than at the national level, with public agencies and the NHS also ramping up their outsourcing. The outcome in a headline was “State Gripped by Biggest Wave of Outsourcing since 1980s” (Financial Times, 17 July 2012).

The industry maintained its siren song. A 2012 report from the PSSB drew on research conducted by Oxford Economics to establish an order of magnitude for the savings that the private sector was delivering. The consultancy identified average savings of 11 per cent, and the report set the scene: “Balancing the budget by the end of 2016–17 will require significant reductions in public spending … Central department budgets will be on average 8% below their current levels in real terms in 2014–15. The situation in local government is tough too: councils face a cut of 28% in the central government grant.” What then was the answer? Obvious really: “Open up the provision of services to competition” (PSSB 2012b, 5) which means, of course, more outsourcing. In the foreword to the report, the newly appointed and robustly pro-market director-general of the CBI observed, “This report sets out a compelling case for the government to go further and faster in opening up public services markets. By applying a ‘best provider’ approach the government could realise average efficiency savings from productivity improvement of 11% or more across billions of pounds worth of expenditure on public services which the CBI believes could conceivably be opened up more to independent providers.” Government, he insisted, will have “to metamorphose from a direct provider to a market manager” (John Cridland, PSSB 2012b, 4). The report put numbers on the savings. Calculating that £278 billion in public services were capable of being delivered by the private sector meant that annual savings of £22.6 billion could be achieved. This provided an enticing prospect for hard-pressed ministers.

It seems that the CBI was pushing at an open door. Earlier in 2012 the government had published its Open Public Services White Paper and the Civil Service Reform Plan, both of which implemented the CBI’s agenda, but there were some ominous portents. Some drawbacks of outsourcing had become apparent through a series of contractual failings that aroused considerable media attention. A care home operator, Southern Cross, went bankrupt, creating uncertainty and distress for thousands of elderly residents whose care was funded by local government. The real drama came with the failure of G4S to fulfil its contractual obligation to provide over 10,000 security guards for the 2012 Olympic Games. To avert disaster, the government drafted in the army, but it was a public relations disaster for G4S, which had to pay compensation, lost contracts, and also parted company with its CEO, Nick Buckles, who had been forced to accept a Parliamentary Committee’s contention that the episode had been “a humiliating shambles.” The PSSB responded with a policy paper underlining the need to build trust in public services markets (PSSB 2012a), including the development of policies to deal with corporate failure. Later scandals have embraced Serco as well as G4S, both engaged in fraudulent misrepresentation of delivery targets, but the outsourcing locomotive was not derailed; instead, much of the blame was bizarrely shifted to the civil service, accused of incompetent commissioning. In further rounds of civil service transformation it is envisaged that officials will be creating markets for public services, commissioning within those markets, and undertaking market studies. The IfG (2013, 6) visualizes this new role as “market stewardship,” and we come back to it below.

The public services industry thus emerges as an agent and beneficiary of the dismantling of the state apparatus in favour of hybrid modes of public service delivery, outsourcing, and complete privatization. These radical transformations are gradually being recognized in the academic literature and are finding their way into textbooks (for instance, Hughes 2012; Alford and O’Flynn 2012). Surprisingly though, and with some limited exceptions, such as the Green Party and the formidable former chair of the Public Accounts Committee (Margaret Hodge), there has been very little critical comment (for a further exception, see Derbyshire 2014). Yet transformations of this magnitude demand serious and critical debate. This chapter goes on to examine three areas where debate is imperative.

Austerity, the Rise of the New Corporate State (and the Decline of the Welfare State)

The transformations in the delivery of public services were underway before the recession. But whilst austerity did not create new institutions, it emerged from and reinforced the new, neoliberal-inspired political settlement. The new corporate state operates within a culture of business dominance and respect for managerialism, and it rests on a deployment of corporate power that finds expression in models of partnership working between companies and the agencies of the state. This is not a “market state“ of the type outlined by Bobbitt (2012), but it is a state defined by its relationship to markets. These markets are structured by regulation created by government in dialogue with business, or often self-regulation by business itself.

Various terms have been used to capture the shifts in the nature of the state and the role of the corporations in governance. The companies have been termed “parastatals” (Derbyshire 2014, 43) engaged in “shadow government” (Stanger 2009, 13), and there is a venerable legacy of discussions of “the contract state” or the “hybrid state” (Kettl 1993; Donahue and Nye 2002). Interestingly, most of these studies are from the United States, and the direction of travel of reform implies a steady “Americanization” of the British state. This could involve the effective dismantling of the permanent civil service, the depoliticization of regulation and service delivery, and the dismantling of the welfare state. Many would argue that these trends are already well established, but the settlement is still fragile, and the new corporate state may come under challenge. It is in this context that austerity exerts its influence. It can be used as an effective weapon to divert criticism.

Criticisms of the transformations intrinsic to the new corporate state are multiple, but let’s consider four. First is public concern. Polls show a consistently sceptical public attitude to the operation of public services by private companies (Wilks 2013, 144), which has been reinforced by recent contractual failures. Thus, a recent YouGov survey indicated, “The advocates of the market system have won the basic argument … However, it is clear that there are also widespread concerns about the way government and private companies behave” (Kellner 2013, 16). Second is an increased incidence of policy failures, which seem to be arising from a combination of business overconfidence and ministerial incompetence, compounded by their refusal to take advice from a civil service that is itself suffering from poor morale. Policy failure is a rich topic that has generated a new term: omnishambles was applied to a series of blunders in George Osborne’s 2012 budget and also to failures in managing railway franchises; the failed attempts to privatize the national forests; the collapse of private consortia modernizing the London Underground; and the breakdowns in border control and tracking of immigrants, to cite only a sample (see King and Crewe 2014).

A third area of vulnerability lies in the NHS, which is simultaneously the biggest plum for those who would expand outsourcing, and by far the most precious institution to the mass of the British public. Support for the NHS is a national religion, to criticize it is political sacrilege, and it was a key issue in the 2015 general election. And yet the NHS is already party to considerable outsourcing, estimated by the NAO to amount to £50 billion or 40 per cent of its spend (NAO 2013, 6). Current legislation in the form of the Health and Social Care Act 2012 is designed to create markets and has imposed a new competition regulator called Monitor to enforce competition. Health markets are therefore being created, but the pressures of austerity within the Service are intense, with predictions of a financial crisis across the NHS. There is a groundswell of academic, trade union, and medical concern about privatization through contracting out, and failures in NHS delivery could discredit outsourcing. Finally, a fourth source of criticism lies in the inequality debate. Clearly there is a growing academic debate, both globally and nationally, symbolized by the extraordinary attention devoted to Picketty’s work (Picketty 2014). The public debate about inequality in the United Kingdom has intensified and affects outsourcing in numerous ways. There is, for instance, unequal access to public services, which is prone to increase when private sector operators become involved and market dynamics come into play. Then there is the differential effect of cuts in public services, which clearly have greater impact on the poor, the disadvantaged, and those with ill health and handicaps. This feeds into a post-recession critique of excessive remuneration, which has been popularized by, among others, work from the High Pay Centre (e.g., Wilks 2014a). This discontent about inequality has gained increasing political traction and was articulated during the general election, especially by the Green Party (although it ought to be natural territory for the Labour Party). It could explode to threaten the elite consensus underpinning the new corporate state, which is a consensus built on financial reward legitimized by wealth creation.

Austerity has been employed to provide a compelling response to criticisms and threats to the new corporate state. As a discourse or series of ideological weapons, it can be used to justify radical changes in the apparatus of the state; it gives credibility to criticism of the alleged privileges enjoyed by the public sector; it enhances promises of additional value for money from the private sector; it explains policy failures; it provides a climate of “harsh reality” to rationalize growing inequality; and, in terms of neoliberal economic policy, it provides a platform of “sound finance” on which to pursue the absolute imperative of renewed economic growth. In the early days of the Coalition, ministers were derided for asserting that “we are all in this together” (a claim made additionally ridiculous by the wealth enjoyed by the millionaires who formed a majority of the Coalition Cabinet). Nowadays the refrain is TINA, the phrase popularized by Margaret Thatcher to the effect that “there is no alternative.”

This interpretation of the importance of austerity in sustaining the new political settlement appeared to find confirmation in the May 2015 general election campaign. Instead of concessions and electoral promises of more generous spending programs, TINA, dressed in the harsh colours of austerity, dominated the manifestos of the major parties. Each party remained committed to further expenditure cuts and promised a balanced budget by the end of the next Parliament. The Conservatives were most extreme, with promises to reduce taxation and to run a surplus, which means that their expenditure cuts would be swinging, estimated by the Institute for Fiscal Studies (IFS) to be a further 18 per cent, giving spending reductions to “unprotected” departments of 33 per cent between 2010 and 2011 and 2018–19. But, as the independent IFS notes, “All four parties’ plans imply further austerity over the next parliament” (IFS 2015, 2–3). To a dismal extent this debate about fiscal rectitude and promises to “finish the job” featured as one of the key themes of the campaign. Indeed, the surprise victory of the Conservatives ensured that the austerity policy would be sustained and the reappointment of George Osborne as chancellor reinforced the spending cuts and the austerity narrative.

The Responsibility of the Public Services Industry

The PSI is a corporate success story. It has grown rapidly and it has avoided the impact of spending cuts by increasing its share of public spending quite dramatically. The Financial Times noted that “the value of government contracts handed to the private sector has doubled in four years to £20 bn, as the coalition has sought big cuts in the cost of delivering public services” (Stacey 2013). The industry includes a huge range of companies, some quite specialist, some large multinationals (often foreign owned), some mixing public and private business, and some focused almost exclusively on the public sector. Solid data are hard to come by but profit levels and share prices indicate high levels of sustained profitability. What the companies have in common is that they all operate under British company law and, for the quoted companies, under UK requirements of corporate governance.

British companies have a fiduciary duty to maximize returns for their shareholders. If the company is quoted on the London Stock Exchange, it is obliged to conform to certain requirements about its governing board and to publish details of its corporate governance and operations, including board remuneration. In practice, in a familiar feature of Anglo-American stock market capitalism, companies pursue “shareholder value,” which involves short-term maximization of profits and, for quoted companies, strategy skewed to raising the share price. These strategies are congenial to the senior managers, who in practice control major quoted companies, because they enhance their huge remuneration packages and share options (the High Pay Centre put the average remuneration of a FTSE 100 CEO at £4.3 million by 2012).

The companies in the PSI are therefore driven by the same incentives that drive all corporations in the United Kingdom but their strategic goals and lack of any additional framework of accountability generates an almost visceral scepticism about their suitability for the provision of public services. This scepticism is reflected in the opinion polls referred to above, but, for the purposes of this discussion, it is interesting to speculate on whether we are seeing a qualitative change. It is possible that the structure of public services delivery has actually been transformed. In the past a powerful and resource-rich government contracted at arm’s length with deferential private sector companies for a range of specific service components. Now we are reaching a position where a weak and austerity-obsessed government is operating in partnership with assertive monopoly providers of public services who are providing entire services. It is government that has become deferential. Ministers applaud private sector solutions, civil servants are cowed and out of their depth in dealing with well-resourced corporate bidders, and government itself has been colonized by the private sector (a point returned to below).

Naturally there is criticism of creeping privatization and of the failures of contracting out. The companies respond with programs of corporate social responsibility and protestations of ethical codes and caring corporate cultures. But all of these corporate initiatives are entirely voluntary, they are not regulated, they appear to have minimal impact on front-line service delivery, and they are arguably a diversion from more effective modes of accountability (see Wilks 2013, 207). There is insufficient space to review the evidence for failure, deception, and outright fraud in private sector service delivery, but we can note the following:

• There is evidence of undue influence in the winning of contracts (see Gosling 2008 and campaigns from various public sector unions; on the revolving door, see Wilks 2015).

• There is evidence that companies “game” the system to submit deceptively low bids and to exploit inadequately specified performance targets (IfG 2013, 27).

• The civil service has poor commissioning skills, and the companies have been able to negotiate favourable contracts with unanticipated (by government) profit opportunities (IfG 2013, 34; NAO 2014).

• There is an oligopoly of provision in several key service areas, which precludes real competition.

• There are examples of companies “walking away” from unprofitable contracts, requiring government to increase subsidy or to fund alternative provision (the paradox of residual service responsibility).

More recently, cases of outright fraud have soured trust in the whole outsourcing process. Two of the largest outsourcing companies, G4S and Serco, had been engaged in systematic overcharging on government contracts and were the subject of fraud investigations. They have been profusely apologetic and, along with two other companies, Capita and Atos, were investigated by the NAO and the Public Accounts Committee (see NAO 2014). Their senior board members appeared before the committee to present embarrassing pictures of contrition. The chairman of Serco referred to “the particular issues that have arisen this year that sadden me, shock me and which I am deeply sorry about” (PAC 2014, Ev7, Q43).

The PAC report on the four contractors was modest but does begin to define an agenda for reform. It had harsh words for government: “Government is clearly failing to manage performance across the board.” And it defined some of the dilemmas: “The contracting out of services has led to the evolution of private-owned public monopolies, who largely, or in some cases wholly, rely on taxpayer’s money for their income. The state is then constrained in finding alternatives where a big private company fails” (PAC 2014, 3).

As part of their recommendations the PAC called for more transparency from companies, including “information on corporate social responsibility, including the company’s approach to taxation” (which they studiously avoid); and that the companies should be “expected to behave with the same standards of honesty, integrity and fairness that apply to the public sector itself” (PAC 2014, 7 and 11). This is an important perspective: should companies that are delivering public services, funded by public money, be operated according to a more accountable business model?

The question of suitable business models for public service delivery is a potentially important area for debate, and we can briefly consider three aspects of the agenda through the issues of voluntary change, contractual obligations, and reform of company law. For voluntary change, it is clear that companies would be willing to accept measures of greater accountability, to protect their reputations and to strengthen their ability to win contracts. They told the PAC that they would be happy to operate under principles of open book accounting (which would allow government to appraise operational performance and profitability) and would accept greater transparency. Serco even went so far as to offer a seat on the board of its UK operating company to a representative of government. As regards contractual obligations, again it would be relatively easy for government to insert standard clauses into contracts requiring companies to meet certain behavioural standards, such as paying “a living wage” or even sharing windfall profits. Such standard provisions could extend into mechanisms of accountability such as ensuring access for the NAO, securing reports from third party auditors, or requiring company managers to report to, and to appear before, parliamentary committees. Interestingly, the NAO has begun to press for personal accountability from senior corporate executives (NAO 2014, para 18).

Finally, there is the question of company law reform. If, as argued above, there has been a radical institutional transformation in the operation of the British state; if the public services industry has emerged as an “alternative civil service,” then we need an equally radical transformation in the nature of the companies that undertake public functions. A whole raft of reforms are possible, some of which have been debated for decades but take on a new salience in the context of a contract state. Thus we could consider legislation to create more socially responsible corporate governance (here the German model is suggestive); we could consider imposing social obligations through stakeholder rights; and we could consider alternative partnerships or public interest legal forms through expanding the role of Community Interest Companies. One creative set of proposals has been advanced by Colin Mayer. He presents an excoriating critique of the shareholder value imperative, and asks, “Why should I trust an organization that is owned and controlled by anonymous, opportunistic, self-interested wealth seekers?” (Mayer 2013, 244). His solution is to create “trust firms,” which are corporations controlled by a board of trustees who are the guardians of the corporation’s values and principles. Such corporations would remain market orientated but would define and consistently pursue a set of values, which could include public service, impartiality, and fairness, the sort of values that are incorporated in the widely used “Standards of Public Life” (see Mayer 2013, 201 and 247). Such moral corporations could win the sort of trust from the public and from government that is unlikely to be earned by conventional shareholder value companies.

Constitutional Implications for the Civil Service

The reciprocal of the rise of the public services industry is, of course, the decline of the civil service. Outright privatization shifts services from government to the private sector. Outsourcing, in contrast, is a hybrid mode of service delivery that requires continuing partnership between the public and private sectors. In the new corporate state that partnership has brought a qualitative change, with the dominant partner moving from the traditional civil service to the private sector companies. This is a transition that is still plastic and ill-defined, but it involves government being unable to deliver certain services without private sector cooperation; and it also involves the wholesale delegation of policymaking. These are big arguments that deserve more extended treatment and have been explored elsewhere (Wilks 2013, 100–5). Here we can simply pick out a couple of illustrations of change before considering the constitutional implications of the new partnership in public service delivery.

For apologists the central civil service has been “modernized.” An alternative view is that it has been colonized. It has been colonized by managers and managerialism. The argument is easily validated simply by examining the annual Civil Service Reform Plans. They are replete with managerial ideas and reforms. A recent plan, for instance, has the fatuous requirement that any person appointed as a permanent secretary should have taken a business school leadership course (Cabinet Office 2014). More to the point, the managerial obsession simply opens the door to business influence. Two quick examples.

First, every department in Whitehall now has a “board” modelled on the boards of plcs, which will be chaired by the minister and will have non-executive directors (NEDs) who are almost all senior executives from the private sector. The lead NED will be involved in the appointment of the permanent secretary and will have the right to recommend his or her removal in the event of under-performance. The lead NED for the Cabinet Office, and coordinator of the NED initiative, was none other than Lord John Browne, the former CEO of BP, who had an extraordinarily influential role within government. As a second example, the imposition of austerity across Whitehall was led by the Cabinet Office, by Francis Maude, the minister, and by the Efficiency and Reform Group. The permanent secretary of the Cabinet Office, also referred to as the chief operating officer (COO) of that group was initially Ian Watmore. The bulk of his career had been outside the civil service, including managing director of Accenture UK from 2000 to 2004. Watmore left the civil service in 2012 to be replaced by Stephen Kelly, former CEO of a quoted software company, Micro-Focus. In turn Mr Kelly left in 2014 to become CEO of the Sage Group. He was succeeded by John Manzoni, who took on an enlarged and spectacular role as the first “CEO of the civil service.” He was not the titular head of the Civil Service (that remained Sir Jeremy Haywood, Cabinet secretary) but he was the lead executive in a number of areas including major projects and austerity. Mr Manzoni had also been recruited from the private sector. He was CEO of Talisman, the Canadian oil and gas group, but before that he was with BP and sat on its main board from 2003 to 2007. His former boss, Lord Browne, was on the appointment panel (Mason and Dudman, 2014). These two examples of business influence being injected into Whitehall at the highest level are part of a wider syndrome of managerialization of the civil service.

There is something demeaning in the way that private sector corporate governance has been introduced into Whitehall (see Wilks 2007), and something tragically appropriate about the imposition of austerity on Whitehall by leading exponents of business management. Austerity empowers managerial reform and is turning the screw very painfully on the civil service itself. In addition to pay freezes and reduced pension entitlements, cuts in civil service posts are at the centre of the austerity drive. There will be cuts of 22 per cent in staff numbers since spring 2010 when there were 490,000 civil servants. By spring 2015 there were 405,000 and the Coalition was planning to get the numbers down to 380,000 (see IfG 2014). Let’s now turn to the constitutional implications of the transformation in the status and role of the civil service.

The Whitehall model may be dead in practice, but it is very much alive in constitutional convention. The mechanisms of political accountability still include an independent, impartial civil service, together with the doctrine of ministerial responsibility (the principle that the minister is responsible for the activities of her department) and the principle of departmental accountability to Parliament and parliamentary committees. These principles have become threadbare and are increasingly flouted (especially ministerial responsibility) but they have not been replaced. So where does this leave the public services industry? Four areas seem intensely problematic for the constitutional accountability of public services operated by the PSI.

First, the classic Weberian definition of the state was that it enjoyed a monopoly of legitimate violence. That has changed. The state has now delegated some deployment of violence to private sector corporations. This is familiar in private security, but it also applies to the operation of prisons, support for the police, and deportation of illegal immigrants (where controversial deaths have occurred). The legal position of private sector employees who exert violence under state contract is unclear, as is the ethical code of expectations under which they operate. This dimension of outsourcing may have affected the high levels of public unease displayed in the surveys quoted above, and it raises the question of whether exceptional safeguards should be imposed by the state when sanctioned violence against individuals is involved.

Second, the chain of democratic accountability is broken by extensive outsourcing. The principle of ministerial accountability becomes unworkable when those delivering public services are not government employees, when their work is defined in a legal contract, and when their companies have no obligation to answer to ministers or to Parliament. There must be a suspicion that this distancing of ministers (and officials) from delivery is not entirely unwelcome. For ministers a tactic of blame avoidance is congenial. The companies themselves can be blamed for service failure, and ministers can avoid embarrassment unless things go catastrophically wrong. But for processes of democratic accountability this is bad news, service delivery becomes depoliticized, and cynicism about government increases. This seems an obvious constitutional issue but it is simply not being debated. A recent House of Lords investigation into the accountability of the civil service ignored the issue entirely (House of Lords 2013), although the PASC did begin to think about some of the issues and called for “a new Haldane model” for accountability for service delivery (PASC 2011, 29).

Third, in recent years the status and responsibilities of the British civil service have been formalized with a civil service code and standards for ethical behaviour and expectation of integrity and fairness in the operation of government. Yet at the same time implementation of many services has been transferred to private sector companies, and employees who have no such framework of ethical behaviour. The PAC affirms that firms “are expected to behave with the same standards of honesty, integrity and fairness that apply to the public sector itself” (PAC 2014, 11), but there is no constitutional framework to require them to conform. At the altruistic end of the spectrum, ideals of public service that condition the behaviour of many public servants will not come into play. At the formal end of the spectrum, the legal liability of those operating services funded by the taxpayer becomes ambiguous. In all cases the ethical standards that might be thought to be relevant to the relations between a citizen and a representative of government dissolve into a strictly commercial transaction, political rights become contractual rights, citizenship dissolves into market relations, and constitutional rights evaporate.

Fourth, when outsourcing begins to apply to whole services, then delegation moves beyond “delivery” to embrace “policy.” In areas such as training, transport, energy, offender management, or social housing, government is no longer able to define policy options and pursue them, it is obliged to work with non-governmental suppliers and to choose whatever policy options they are willing to cooperate with. Democratic choice becomes market feasibility, government itself is to some extent privatized. As the Institute for Government expresses this shift, “Government must urgently professionalise its approach … embracing what we call a ‘market stewardship’ approach … adjusting the rules of the game in an attempt to steer the system … to achieve their high-level aims” (IfG 2013, 6).

As we saw above, this is exactly what the CBI wants. John Cridland exhorted government “to metamorphose from a direct provider to a market manager.” For many people, and arguably all democrats, this is a deeply depressing thought, and a prospect that austerity is bringing closer. Indeed, why bother with a Constitution at all if government is simply there to manage the market?

Conclusion

Austerity in the United Kingdom has embraced fiscal consolidation and structural and institutional reform of the public sector but, as argued above, it has also been mobilized to bolster the power of the corporate elite and to consolidate the creation of the new corporate state. The commitment to austerity involved a strategy of persuasion and ideational initiatives as part of a concerted campaign waged by business associations and companies in financial services and the public services industry. It has been depressingly successful and has shifted the impact, and partially the blame, for the financial crisis from finance to the public sector. It has been manifest in the harshest program of public service reductions for at least half a century, which has involved remorseless commodification of public services and transformational reform of the British civil service.

Austerity as a principle of public life has been sustained, despite its economic illiteracy. Paul Krugman (2015) has bemoaned the delusional endorsement of austerity by British political parties, pointing out that “the doctrine that ruled the world in 2010 has more or less vanished from the scene. Except in Britain.” In explanation he cites business interests: he asks, “Why does big business love austerity?” simply because “scare talk about debt and deficits is often used as a cover for a very different agenda, namely an attempt to reduce the overall size of government.” Krugman’s analysis seems all too accurate. Like Krugman, and like Lee (see chapter 6), this chapter sees austerity in Britain as a matter of conscious political choice. And like McBride (see chapter 8), we can also see moves to “constitutionalize” austerity through a range of institutional changes. Both the Conservative and Labour parties included in their 2015 election manifestos proposals for formal rules for “budget responsibility” whilst the forces opposing the austerity imperative have been weakened by the reduction in the capacity of the state and the growth of the public services industry. The scale and the importance of the institutional transformations that accompany the growth of the new corporate state are only gradually being appreciated.

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