HAMISH MCRAE: Why do governments oursource so many services when the companies they pay collapse? What we must learn from Interserve

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Why do governments have to outsource so many services when the companies they outsource to keep collapsing? 

It will be a deeply worrying weekend for the 45,000 UK employees of Interserve, which was taken into administration on Friday.  It follows the bankruptcy of Carillion in January last year – though mercifully since Interserve will be taken over by its lenders, there should be less disruption.

One lesson has already been learnt. Auditors have to lift their game, for companies do not collapse out of the blue. If the auditors are doing their job, they would spot the warning signs and qualify the annual reports.

Collapsed: Interserve was taken into administration on Friday

The second lesson is to put much more work into training Government officials how to write and manage contracts with the private sector. There are a lot of things governments cannot do. 

They cannot build a road, a school or an aircraft carrier, and they are not very good at running shops, hotels or airlines. Getting the private sector to help them is standard practice worldwide.

Did you know that the US Marine Corps has its mess halls run by the US subsidiary of Sodexo, a giant catering group headquartered just outside Paris? No? I’m sure Donald Trump didn’t know either. 

The marines are fed by an outside company because while they know a lot about fighting, Sodexo has 420,000 employees around the world who know a lot about providing other services.

So the question is not an ideological one about private or public provision. It is a practical one about managing the relationship between Government and its suppliers. 

We are not very good at it, as the failure of the now-abandoned Private Finance Initiative shows. It was developed initially by the Conservatives in the early 1990s and vastly expanded by New Labour from 1997 onwards. It was killed by Philip Hammond in the Budget last year.

Private Finance Initiative was killed by Philip Hammond in the Budget last year

The Chancellor has made a play about the waste of the PFI projects, but in the Spring Statement last week he launched a consultation on ways to support private infrastructure investment. So the idea behind PFI lives on. We just have to do it better. How so? There is no magic wand here, but there do seem to me to be two broad ways forward.

One is for Government bodies to do some provision directly themselves. Take railways. Some people have a nostalgic reverence for British Rail, but the facts show that fewer and fewer people used the railways before they were privatised in 1995, while numbers have more than doubled since then.

However, there have been failures of some franchises, and the public takeover of the East Coast main line has been a useful learning experience of the costs, problems and opportunities of running a railway. The other way to teach civil servants contract management is to draw on the wealth of experience in the private sector, for that is what companies do all the time. 

The private sector is far from being immune to failures. But officials who know about contracts might spot an Interserve or Carillion situation happening early enough to step in before disaster strikes. 

Disruption always carries costs, but it often creates opportunities. We will have economic disruption over the next few years whatever our politicians do in the coming weeks. But as James Reed says in this interview, that has created opportunities in the recruitment business.

We are pretty near full employment so if this economy continues to create jobs at anything like the present rate of nearly 450,000 a year, then the UK will continue to pull in workers. If fewer come from Europe, more will have to come from the rest of the world.

The great puzzle is why the economy generates so many jobs. I know the concerns about low productivity in the workforce, and those are valid. And it may be that Brexit-related disruption will at last start to hit job creation – we get new numbers next week. However, the UK is an unusually open economy, so if the world economy goes on growing, the UK economy will go on growing.

I think it will, and looking at those strong tax revenues, we are probably growing faster than the official GDP numbers suggest.