Public sector outsourcing dies a slow death, the nationalisation zombie rises from the dead.

The public sector outsourcing market died another death this week with the news that the UK’s Probation Services (or Offender Management as they are now called by wacky bureaucrats) will all come back in house:

This isn’t entirely news as the problems with Criminal Justice outsourcing have been know about for several years:

On this occassion I make no apologies for quoting exclsively from the Guardian. It isn’t the great paper it once was, but it is still the best UK news source for public policy, particularly social policy. I’ve also covered the crisis in the UK public sector outsourcing industry for several years:

If you don’t want to read all of those links I can summarise for you:

Outsourcing Criminal Justice is an inherently stupid idea.

Outsourcing works well when you an transfer risk to the contractor in return for which they make profit, and where you can specify the outcomes you want without creating perverse incentives. You simply can’t do this with criminal justice in the way you can with processing applications, or dealing with telephone queries.

The Tories right now are doing a much better job of dismantling the UK outsourcing market than the Labour Party are, despite the launch this week of another set of jumbled proposals for the re-nationalisation of utilities.

I am pretty happy with the transfer of the utilities back into public ownership, along with big chunks of the Railways, with the proviso that I don’t like “all-in” or “all-out” models, I like a mixed economy with public and private competing, but with HMG maintain a market making stake.

I realise that I am conflating outsourcing with privatisation, but in this case the decisions to outsource/privatise vs in-house/nationalise are based on competing ideological views not on a well thought out set of ideas about the best way to deliver public services.

There are some really big things that Labour need to avoid when designing re-nationalisation proposals:

  1. Don’t use “leveraged buyout” style deals that load debt onto the newly re-nationalised industry. This will prevent them from future borrowing to fund capital investment (the lack of capital investment was always the problem historically with nationalised industries)
  2. Don’t try to hide the cost of these re-nationalisations using off balance sheet transactions. The public need to know clearly the cost of the re-nationalisations so they can judge if they are value for money
  3. Don’t recompense the former owners with Bonds that pay out an income. This is basically all of the problems of PFI without actually creating new assets

Labour’s original proposals had all of these problems:

A hopeless jumble.

It looks like the lateset set of proposals are a step forward, in that they are on balance sheet transactions, but still involve PFI style bonds, and still load debt onto the nationalised industry which will limit future investment.

The scale of the debt loaded onto the books of the newly nationalised will be reduced because Labour plan to pay less than the market value of the shares in the utilities to reflect investment, pensions deficits and historic profits. There is a precedent for that. In 2002 Railtrack got into financial difficulties and the Blair Government nationalised it, paying shareholders £2.50 a share – much less than the £9.50 that they claimed it was worth.

Railtrack haircut

The shareholders took the Government to court and the case dragged on for 4 years before the Government won.

The Utility companies are in much better shape than Railtrack was (it was insolvent and had £7bn in debts when the Government stepped in), and the fight from the Utilities is likely to be much stronger and a lot longer

Just as the Tories are killing off public sector outsourcing by putting ideological dogma above good policy making Labour are setting up re-nationalisation to fail by down exactly the same thing.

So far the Tories are making a great case for Nationalisation while Labour are making a great case for Privatisation. It’s almost as if they are both utterly and totally incompetent.

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