The end of privatisation is coming

It is getting on for a decade or so before I first heard the fatal phrase, uttered in this case by a voluntary sector worker at the door of a community meeting:

"If you get any couples, mark them both down as women.  We haven't got enough of those."

In that simple sentence, you discover just what a trap the whole edifice of targets, standards and audited processes was that New Labour erected at such expense around the public and voluntary sectors.  The point is that target systems encourage frontline staff to finesse the way things are counted, to their own benefit.  When that involves money, it begins to look like fraud.

It is known as Goodhart's Law: any numbers that are used to control people are bound to be inaccurate.

Unfortunately for the coalition, the same is true of Payment By Results.  The whole system encourages gaming, and worse than that it encourages organisations getting public money to interpret figures to maximise their income.

I don't know, of course, what has been going on with Serco and G4S.  It may involve no fraud, just the unconscious failure to look too closely at the way numbers are transformed into invoices.  I expect this will be the ultimate revelation from any of the current inquiries that the Justice Department announced yesterday, but the question of how unconscious it was is precisely why the word 'fraud' has emerged.

The targets/results system encourages mild reinterpretation.  Once again, when money is involved, it becomes expensive.

Encouraged by the management consultants, outsourced or privatised services pay increasing attention to the business of counting so as to maximise income.  Hospitals are employing highly experienced accountants, at £1,000 a day, to re-code the work they do, so they can bill a bit higher.  There is also studious inattention to anything that might question the seamless process of numbers turning into invoices.  In this border between the accounting  departments of the oursourcing giants and those of the Whitehall departments, the costs are mounting.

In fact, it is just too expensive.  The influential NHS blogger Roy Lilley estimates today that CCGs may be spending about £95m a year dealing with disputed service contracts.

That is why, despite the parallel announcement about the privatisation of the Royal Mail, I'm pretty sure that this marks the beginning of the end of privatisation as we know it.  For that reason and these:

1.  The money isn't there any more.  The depth of the crisis in public service funding is now so intense, and the available funding has been sliced so thin, that the scope for making a profit on most outsourcing - and certainly most privatised utilities - is no longer there.  The demand is not going to be there from businesses, especially if they are going to come under the kind of forensic scrutiny that now awaits Serco and G4S (and we haven't even begun examining the Payment-By-Results contracts yet).

2.  The economies-of-scale doesn't work any more.  The only circumstances in the near future when there might be some opportunity for profit is if the deliverable outputs are so narrow, and the means so virtual, that some kind of economies of scale are possible.  That is precisely why the public is increasingly sceptical - and so are the professionals, because it is increasingly clear that these economies of scale are purchased at the cost of diseconomies of scale in  other parts of the system, which have to be paid for in increased demand by someone else.

3.  The issue is no longer public versus private, it is flexible versus inflexible.  The worst service, the most inflexible and inhuman systems are now to be found - not in the public sector - but in the privatised utilities: all the sins of the nationalised industries have simply been continued by their private owners, as I explained in my book The Human Element.  The issue isn't ownership, it is scale and flexibility - so as to avoid the mounting diseconomies of scale, when you have to do the work over and over again because it is so ineffective (why is quality cheaper, said W. Edwards Deming rhetorically? The answer: No rework).

So there we are.  RIP Privatisation (1984-2013).  It is on the way out, not for ideological reasons, but simply because it no longer suits the immediate needs of policy-making.  The Serco/G4S scandal is just the beginning: by the end of this process, there will still be outsourcing - micro-enterprises will meet a whole range of needs - but I don't see how the giants of outsourcing can survive.