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Competitive advantage

21 July 2012

6:00 AM

21 July 2012

6:00 AM

Scambusters is the name of a government initiative to prevent householders falling victim to rogue traders who use high-pressure sales techniques to flog lousy and vastly overpriced goods and services. It would be more convincing if the government did not so frequently allow itself to be ripped off.

At his appearance before the home affairs select committee this week, G4S chief executive Nick Buckles had the air of a cowboy plumber standing amid a bathroom full of leaking pipes, and demanding, in spite of the havoc he has caused, that his bill be paid in full. To astonished MPs he agreed that the reputation of his company was in ‘tatters’, and doubted whether it could provide even its lowered target of 7,000 security guards for the opening day of the Olympics. He went on to say that G4S would be charging the government its full £57 million management fee (which forms part of an overall contract of £284 million).

We know from PFI scandals what to expect next. Ministers will huff and puff about not paying but in the end will meekly hand over the money, having discovered that they have managed to sign a contract heavily weighted in favour of their contractor.

For some on the left, the G4S fiasco confirms the theory that capitalism promotes greed and incompetence, and that only the public sector can be trusted to run public services. But if the public sector were handling Olympic security, it is not difficult to imagine a crisis just as severe. G4S has failed miserably, but no more so than the UK Border Agency, which failed to provide sufficient staff to manage queues at Heathrow. Moreover, if G4S guards were in the public sector, their unions would, like those of bus and tube drivers, be demanding huge extra payments under threat of an all-out strike. Either way, public agency or private contractor, the taxpayer would end up being stung.


What the events of the past few days do confirm is that public-private ‘partnerships’, where the government cosies up to a favoured contractor, offer none of the benefits of the free market. It has been shown over and over again, from PFI deals to train operating companies, that when private companies are awarded monopolies they exploit them ruthlessly. They raise prices, lower the quality of the service to as low a level as they think they can justify and demand bailouts if things go wrong. They know they can get away with it because the ultimate consumer — the public — has no choice whatsoever.

The contracting-out of public services has led to the creation of a pseudo-market dominated by a tiny number of large companies who seem to bag nearly all the contracts on terms which seem far more generous to the contractor than those in use between private firms. Going shopping for 10,000 temporary security guards is not like going shopping for soap: G4S was just about the only security company large enough to bid, and it shows.

Contracts of this kind, therefore, bear no relation to a free market where large numbers of buyers and sellers settle prices and determine quality through competition. These are negotiations between a single customer and a single supplier, with the potential to be coloured by friendships, political donations and Wimbledon tickets.

Where it is not possible to source sufficient bids from the private sector to make something resembling a genuine marketplace, why cannot public and private sector bid against each other? This, after all, was how outsourcing began. In many of the early ventures into the practice in the 1980s, companies put in bids to run public services, but the public sector provider was not excluded from the process: it, too, could bid. And in some cases the public sector won the right to carry on providing the service because it provided better value for money.

‘Market-testing’, as it was known, often led to the public sector making savings which managers would never have bothered to make without the threat of competition.

But somewhere along the way, the practice of market-testing public services seemed to get pushed aside. In some cases, such as rail privatisation, the public sector provider was dismantled and forbidden from bidding to continue to run services. In others, such as health care, politicians were not brave enough to advance the idea that hospitals should be anything other than publicly owned.

When it came to Olympic security, why wasn’t the Army invited to bid at the start? There is no reason why soldiers should not spend some of their time doing civilian work. For military chiefs, bidding for civilian contracts would have provided an opportunity to make a case against cuts in manpower, which will reduce army numbers from 102,000 to 82,000 over the next decade. Indeed, given that 20,000 troops are probably going to end up being used in the Olympics, these cuts are already beginning to look foolhardy.

The real evil is not capitalism nor even state ownership, but a lack of competition. We suffered from that when the state dominated large parts of the economy, and we are suffering from it again now that some public services are in the hands of monopolistic contractors. It is time that public and private sector were made to compete to ensure that we do have competition.


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