Which politician will dare dismantle crony capitalism?

Published in the London Evening Standard (November 25th, 2013)

Earlier this year Jeremy Stafford was at a London conference on leadership, talking about the importance of ethics in business. In his smart check suit he spoke passionately about the need for firms to avoid behaviour that could damage their interests and why bosses should take responsibility when things went wrong.

Now Mr Stafford appears to have taken his own advice. The CEO of outsourcing giant Serco’s British and European divisions quit at the end of last week to “pursue other opportunities” — a generous euphemism for his departure after presiding over corporate behaviour that stretched any definition of ethical business beyond breaking point.

Serco stands accused of ripping off taxpayers by overcharging for electronic tagging of criminals. Alongside its rival G4S, it is alleged to have pocketed perhaps £50 million by wrongly billing for offenders who were, in some cases, back in prison or even dead; 3,000 charges a day may have been bogus.

Mr Stafford is reported to be getting a six-figure pay-off, one more sign of the scandalous way the corporate world rewards failure by its bosses. What a contrast to the treatment of benefit cheats caught stealing smaller sums from the state. At least his former firm has been barred from bidding for government contracts and faces a fraud investigation.

Serco, which runs huge slabs of the public sector from school inspections to Boris bikes, was also found to have falsified performance figures following a furore over management of out-of-hours GP services in Cornwall. And on Friday Chris Grayling, the justice secretary, cancelled privatisation of three prisons because of its involvement.

Little wonder the firm said Stafford’s  departure was designed to “accelerate and consolidate” its drive to “refresh its relationship with central government”.  Yet this self-regarding statement exposes with great clarity the crony capitalism that corrodes our country, something that links the Serco scandal to the saga of shamed Co-op chief Paul Flowers.

On one hand there is the rise of a bumptious buffoon catapulted into one of the top jobs in banking by his Labour connections, where he presides over financial meltdown while guzzling ketamine and rent boys. This shows again the inadequacy of controls over a crucial economic sector, along with the way contacts and networking remain often more important than brains or talent when landing top jobs.

The same back-scratching behaviour has driven up executive pay so obscenely in recent years, regardless of any risk. Yet while the Crystal Methodist dominates headlines, the flip side of this cronyism is attracting far less attention despite much wider implications. For the Serco case shows the public sector being carved up and, slowly but surely, doled out to a small group of well-connected companies.

These firms have swollen to vast proportions by feasting off the state; the big four alone have seized phenomenal ranges of public sector work worth £6.6 billion last year. The largest is Capita: though less plagued by problems recently than other players, it is still  set to pick up the tagging contracts,  although hundreds of court cases were cancelled after it failed to hit targets for privatised court interpreter services. Meanwhile G4S, also involved in the tagging scandal and before that the Olympic security shambles, has become Europe’s largest listed private sector employer.

Some still argue pursuit of profit has no place in public services; indeed, Labour might even renationalise the railways. But this is a tired argument, given the bloated and blundering bureaucracy that has engulfed even the most sacred corners of the state, plus the pressures on the public purse whoever wins the next election. One study commissioned under Gordon Brown’s government put savings from outsourcing at up to 30 per cent “with no adverse effect on, and sometimes an improvement in, service quality”.

This explains why we are in the midst of the biggest wave of outsourcing since the Thatcherite sell-offs, the private sector extending its reach into areas such as defence, health, policing and welfare. Despite recent fuss over NHS reform, nearly one in five hip replacements are performed by private providers thanks to the last Labour government; next up for privatisation are huge swathes of probation services.

For all the fine talk of encouraging charities, mutuals and smaller companies, lucrative chunks of the public sector too often end up in the same hands, which have the connections — aided by armies of expensive lawyers and lobbyists — to win the complex contracts despite previous problems. The Coalition pledged to open up the process — yet just 10 per cent of funds from public contracts go to small and medium-sized firms.

A report by the National Audit Office found government officials totally out of their depth at controlling this oligopoly — an unsurprising conclusion after all those shocking banking failures, overblown procurement projects and billions wasted on private finance initiatives. The state is simply outgunned by private sector powerhouses — something evident also in the energy sector, with its six big suppliers and rising prices.

For capitalism to work its magic it must be disruptive. Just look at the technology industry with all that constant innovation (trying not to laugh at anti-capitalist blogs banged out on the latest laptop). But instead of unleashing this powerful force with the best regulators possible in the public sector, hesitant governments have evolved a cosy crony capitalism that protects the biggest players and their comfortable profit margins. Politicians struggle to see the difference between being pro-business and pro-market; the public loses out.

The Serco case provides a warning when the state sits increasingly on private shoulders. Incredibly, it took civil servants five years to take action after the discovery of overcharging, showing the scale of Whitehall complacency when spending other people’s money. Meanwhile G4S and Atos, the French firm with a dire record on disability benefit testing, are given deals worth £2 billion a year when they do not have the decency to pay a penny back in corporation tax. So how about stripping tax avoiders of any public sector work as a first step in a fightback against crony capitalism?

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