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A council block at 1255 Barnet High Road
‘Less than five years since the outsourcing began, Barnet has paid £327m to Capita – and the problems keep mounting up.’ Photograph: Sarah Lee/The Guardian
‘Less than five years since the outsourcing began, Barnet has paid £327m to Capita – and the problems keep mounting up.’ Photograph: Sarah Lee/The Guardian

Some call it outsourcing. I call it spivvery

This article is more than 5 years old
Aditya Chakrabortty

All over the country, rows over the likes of Capita threaten to be the Tories achilles heel at the local elections

The crisis at Capita will today be treated like a business story – albeit a huge one, with a big company shooting up distress flares and launching an urgent £700m whip-round. But this story is far larger than that. It holds up a mirror to how the British state is now locked in a sick codependency with outsourcing companies whose very business model drives them both into financial precariousness and service failure.

The first episode of this story aired in January, when Carillion collapsed. Capita, however, is on a different scale. It employs almost twice the number of people as Carillion did, and it does everything from collect the BBC licence fee to recruit soldiers for the British army. Name the public-sector opening and chances are that Capita has its fingers jammed deep inside.

From issuing parking tickets to evaluating disability benefits, Capita has done it all – just as Carillion did anything from tunnels for HS2 to school dinners in Greater Manchester. Nothing connects these jobs – because the only real specialism these giant outsourcing firms have is to bid for contracts. The salesmen in David Mamet’s Glengarry Glen Ross knew their business wasn’t real estate – it was to “always be closing”. So it is with the outsourcers: they win business; what happens afterwards is a roll of the dice.

At the 2012 London Olympics, G4S could not provide the security guards it was paid to do – so the army was drafted in. In 2014, Capita racked up such a backlog of assessments for personal independence payments that the government had to send in civil servants. Later that same year, NHS trusts across Britain began withdrawing their payroll and IT services from Capita.

But the most remarkable Capita story is in local government. The Tory councillors of Barnet used David Cameron’s spending cuts as an excuse to outsource large chunks of its public services. Their aim was to turn the borough into a no-frills “easyCouncil”. And by far the biggest 10-year contracts – everything from HR to highways – ended up with Capita. Less than five years since the outsourcing began, Barnet has paid £327m to Capita – and the problems keep mounting up. Bins haven’t been collected; when the snow fell a couple of months ago, gritting trucks weren’t on the road; a few months before that, Capita failed to do the council’s accounts on time. The outsourcing was meant to save Barnet money; last week it was announced the council will need to make more cuts to close a “budget gap” of £39.5m.

This is spivvery for which you and I pay billions extra just to get minimal services – it can also lead to a financial fragility at the heart of the firms on which Britain now relies. As noted by Adam Leaver, professor of accounting at Sheffield University, Carillion repeatedly pulled forward hundreds of millions on profits expected from future work, and paid that cash out to shareholders. Since the huge profits it was booking did not exist, it had to borrow the cash it paid out to shareholders – and the debt was secured against goodwill: its brand name, relations with customers and staff. However hard such things are to value, Carillion reckoned that they were worth a tidy £1.57bn. As MPs discovered to their amazement in January, “goodwill” was Carillion’s single biggest asset.

It was like an internal Ponzi scheme aided and abetted by ministers such as the hapless Chris Grayling who shut their eyes to the profit warnings and chucked ever more contracts the way of Carillion.

Of Britain’s five biggest outsourcers, Capita has an even higher proportion of goodwill on its books when set against its assets. Back in February, Leaver observed that were the firm’s executives to write down just 25% of the value of that goodwill, they “would wipe out the firm’s equity”.

Carillion may be the riskiest company, but some of its same business and financial practices can be seen across the outsourcing industry. As they have grown, the giant outsourcers’ business model has relied more and more on the public sector playing the role of useful idiot – talking up the importance of private-sector efficiency and never batting an eyelid when the likes of Capita tap them up for some expensive loophole in the contract. That is clearly changing: Labour councils such as Preston want primarily to contract out to local businesses, while at Westminster Jeremy Corbyn and John McDonnell want to bring more of the state back in-house. The problem for the state is that having tied itself to the outsourcers through a thousand binding contracts, it is hard to see how it frees itself in a hurry.

All this underlines that outsourcing is a political as well as a business issue. It is also now an electoral one. The ructions in Haringey were about outsourcing housing and planning to a joint venture with multinational developer Lendlease. In Barnet last week, an ordinary meeting of the audit committee of the council ended with the extraordinary scene of a former Tory councillor lashing “the disastrous Capita contracts” and claiming that “residents are being fleeced”. He ended by calling on locals to vote Labour. Imagine that: Margaret Thatcher’s true blue backyard turning red because of Capita.

Aditya Chakrabortty is senior economics commentator for the Guardian

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