Posts Tagged ‘Mis-selling’

Private Eye: Economics of Outsourcing Demand Overcharging

February 15, 2015

This is another old story from Private Eye, this time from their edition for 26th July – 8th August 2013. This examines the scandal of the major government outsourcing companies overcharging the government for their services. The Eye concludes that the economics of outsourcing are such that the companies really have no chance of making a profit, except by overcharging.

Scandals such as overcharging by the taggers at G4S and Serco and dodgy job placements by A4E, not to mention appalling incidents like the death of deportee Jimmy Umbenga at the hands of G4S, raise the question of whether outsourcing is not simply a rip-off for taxpayers.

Governments repeatedly claim to make huge savings by awarding contracts to private firms on the strength of bids that come in way below existing public sector costs. Figures obtained by the Eye for the outsourcing of Birmingham prison to G4S in 2011 for example, show the Ministry of Justice expecting to shave £139m off what would have been the £610m cost of running the prison itself over 15 years, an expected 23 percent saving.

At the same time G4S’s accounts show that it only satisfies the stock market if it makes a gross profit margin, ie return on outsourcing contracts, of more than 20 percent. For such numbers to work, the actual cost of providing a once public service must fall by more than 40 percent when taken over by the private sector.

Even those who swallow the line about greater private sector efficiency (and not many who have dealt with the companies do) would recognise this as impossible. The result is that outsourcers simply must overcharge or under-deliver. Just as it is gradually dawning that the banking industry was – maybe still is -implicitly corrupt (relying on “mis-selling” and rate-rigging, etc, to hit its returns), so too looms into view the great outsourcing ramp.

This reinforces my opinion, and those of commenters like Jeff3, that outsourcing and public-private partnerships aren’t about saving the taxpayer money. They are about giving government money to subsidise their friends, partners and employers in business.

It’s intrinsically corrupt and economic. It should be discontinued immediately.

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