Earlier this month, the Serious Fraud Office started a formal criminal investigation into Serco and G4S, who are accused of overcharging for electronic tagging contracts. Today, Serco issued a profit warning: recent scandals appear to be hitting its bottom line.
Despite this, both companies are still being considered for an £800m contract for the privatisation of probation services and other government contracts. It seems that even accusations of fraud do not eliminate Serco as a potential government supplier. However, this is no reason to be complacent; people across the world are beginning to realise that outsourcing may not be all that its cracked up to be.
Serco is a large, multinational contracting firm. Although it has also won contracts with the private sector, Serco has benefited from the past 25 years of contracting out public services in the UK and across the world. It delivers public transit systems, prisons, IT systems, health services and more besides. Its contracts range from the Iraqi air traffic control system to prisons in Australia, the Dubai metro, or benefits systems in the US. In the UK, 12 out of 17 government departments work with Serco.
At the same time, the company has been involved in a growing list of scandals. The company is alleged to have covered-up the sexual abuse of immigrants in Yarl’s Wood removal centre. A boy died from a burst appendix after Serco “out of hours” services in Cornwall advised putting him to bed. And there have been numerous accusations of fraudulent record keeping.
Corner cutting
Serco bids for contracts which the public sector wants to deliver more cheaply and so it is not really any surprise to see that there are some problems with its services. Often, cutting corners requires a drop in quality, and Serco’s entire business model is based providing cost savings.
Of course, the company is not hindered by the need to actually know anything about the service being delivered. Last year for instance, with only a very poor track record of GP “out-of-hours” services, it started to deliver community health programmes in Suffolk. The move into healthcare has not been a success; Serco now faces a fine for failing to meet targets.
These services are often labour intensive, and cheaper contracts mean lower pay for workers. If Serco takes over a government service, new staff will often find themselves on inferior contracts, reducing labour costs.
At the same time, Serco has become adept at talking the language of public service reform. It set up the Serco Foundation and publishes the Ethos Journal, which promotes ways of creating a “public service ethos”. This may be in stark contrast to the reality of its service delivery but, in government circles, this talk is the norm. The company exists very much as an insider in policy debates, sponsoring events and facilitating discussions about the future of public services.
It plays a similar role in other countries, too. Recently, after spending millions of dollars on lobbying the US government and making donations to the Obama presidential campaign, Serco won a contract for $1.25 billion processing applications for the new Obamacare reforms. The new system has had a disastrous start, and Serco’s role has drawn criticism.
Is there an alternative?
As the growing catalogue of complaints and accusations show, not all contractors are satisfied with Serco’s services. Researchers in Greenwich’s public services unit have noted a growing number of public bodies in Europe and North America taking services back “in-house”.
Local authorities in France and Germany have started to return out-of-contract water and energy services to local control, a process known as “re-municipalisation”. This also gives the people who actually use these services more involvement in how they are operated.
In Germany, 44 new local public utilities have been set up since 2007 and more than 100 concessions for energy distribution networks and service delivery have returned to public hands. This process has been accompanied by extensive local support.
In 2010, Paris city council replaced private water companies with a municipal water service. The city saved about €35m (£29m) in the first year and was able to reduce water tariffs by 8%. Inspired by the example of Paris, a further 40 French municipalities have also decided to re-municipalise water services in the last couple of years, including major cities such as Bordeaux and Brest.
In the UK, cleaning services in hospitals were brought back in-house in Scotland, Wales and Northern Ireland because of infection risks from poor quality services delivered by private contractors. This is just one example from many: the Association of Public Service Excellence (APSE) found that 80 out of 140 councils have brought back services including refuse collection, recycling, street cleansing, housing management, catering, grounds maintenance, IT and accountancy.
In Norway, Sweden and Finland dissatisfaction with private social care providers has led to municipal authorities delivering their own services once again.
So while Serco and other outsourcing giants may appear to have fairly robust business models, straddling the public and private sectors and exploiting the increased interaction between the two, there is still reason for them to be cautious.
A growing public dissatisfaction with the performance of companies like Serco, coupled with the expiry of contracts, may make the public sector start to re-consider more and more “in-house” options. Without public sector contracts, shareholders might start to question the future of the company.
Serco would do well to avoid complacency. Just remember Enron and Lehmann Brothers: no company is too big to fail.