Interserve is the latest outsourcing crisis

The interaction of Government, Government bodies and private sector outsourcing is one of the most interesting conundrums of recent years.

In the scheme of Brexit, this is merely a small tick. However, in another world, the near collapsed of Interserve, following on from Carillion a few months ago and Melrose of a couple of years ago would be bigger news.

The are two main interesting bits to see, one is the cause and the second is the cure.

The cause in the main is public sector procurement being led by strict rules on pricing. Only the lowest bids will win and it is not in the interest of Local or National Government officials to change this. So what we get is the new entrant cost-price game. Experienced companies are forced to compete with crazy new entrants for another classic of this case, take the Ministry of Transport offering a contract to a Ferry company for Brexit that had no Ferries. New entrants without experience will often hugely underestimate costs and are financed to survive this, or at least think they can.

In the short term, this has held Government procurement costs down, however in the long-term it has really undermined the outsourcing businesses that play in this space. Many, in a desperate bid to survive, have bid too low for contracts. As a result, we are seeing a string of re-financings and lender taking hold of the businesses. The Government, if it wants to avoid constant crisis, needs to change its procurement guidance such that it assures providers will survive and can indeed thrive.

The second interesting piece is what Government lawyers have done to mitigate this unfolding disaster. They have implemented ‘Living Wills’ so that services and contracts (read sub-contractors) will continue even as the parent goes bust above in the corporate structure. This is great for the much needed services, but another huge red flag for the Listed Entities, as now there is even less incentive for the Government to help and debt holders can seize the company in what is effectively a Government backed Pre-Pack administration. So much for shareholders, Management will do just fine in the circumstances. So whilst this is clever for the Government, it will actually undermine the sector further. Interserve will no doubt follow this path come the decision day on Friday of this week.

My own take is there is no way the Public Sector can deliver on the huge range of services the Government needs at a reasonable cost, so Outsourcing can be a good strategy and deliver economies of scale not possible in the Local Government sector. Increasingly though what we are starting to see is ‘Public-Private’ vehicles where Public contracts are run on private lines by Public sector companies that try to achieve the balance between public ownership risk levels and private endeavour and enterprise. This will be a solution Lefty (read all) Governments will jump on and will work just fine until they discover the ease for which corruption and graft can be embedded within these hybrid vehicles.