STAFF NEWS & ANALYSIS
Have You Heard About the Company That Runs Britain?
By Staff News & Analysis - August 29, 2009

It inspects schools, trains our armed forces, helps protect our borders, maintains our nuclear weapons, runs our trains and operates our prisons. Most of the public will never have heard of Serco, a FTSE 100 company that does all of the above and more. Led by South African Chris Hyman, Serco is also making money doing it and today underlined it is proving one of the recession winners. Profits in the first six months of the year – one of the toughest the UK economy has faced for decades – jumped 33% to £83.4m. However, Serco's journey into the DNA of Britain's public infrastructure, like those of rival support services companies Capita and Interserve, began before the recession arrived. All have benefited from the growing culture of outsourcing services under Labour, and Serco expects this trend to continue as the gaping hole in the public finances forces the Government to cut back. Serco has secured a record number of contracts in 2009 so far, worth £4bn, as its revenues climbed 30% to £1.95bn. – The Telegraph

Dominant Social Theme: Privatization: good, bad or ugly?

Free-Market Analysis: Actually, there is nothing good about it in our humble opinion. It is representative of a larger trend that is taking root in the Anglo-American axis. It is a response to the recognition that government is both profligate and incompetent and that only the private sector can remedy the situation. But that doesn't make the remedy right.

There is a difference between a private enterprise and the privatization of a public one. In private enterprise, a company finds a niche and offers services that are good enough to raise it above at least some of the competition. The company lives and dies by its product, services and continued market research. But when a private enterprise takes over a public monopoly situation, the leaders of the private enterprise do not have to worry about providing the goods and services that will maintain their company and expand their customer base.

In fact, they needn't worry about any of the traditional concerns of private enterprise because none of these concerns exist. In such a privatization, the performance of the company, and therefore its continued employment, is based on satisfying those that granted its sinecure. Likely, the company shall be focused on saving money by squeezing costs and providing the least amount of service possible to maintain a semblance of efficiency.

Practically speaking this means that under so-called privatization – monopoly privatization anyway (where one vendor administers the services), costs shall be controlled but services shall likely suffer as much or even more than under a public administration. In a public administration, bureaucrats are likely to be extremely rigid about regulations but not entirely immune to public outcry if services aren't provided. In the privatization paradigm, employees are likely to be more concerned about the cost structure than about the service – as cost control is the reason that the privatization is advanced in the first place.

Finally, in the longer view, privatization is an invitation to further public and municipal corruption. The private contractor has only a few ways to maintain its line of business. It can try to ensure costs are properly contained and that public complaints are not overwhelming. But the real lifeline to its role will always lie with those who have appointed it. Thus, the private firm will have every incentive to do what is necessary to make sure its patrons are properly greased.

Costs after all are fungible and performance in this sort of situation may lie in the eye of the beholder. The bottom-line certainty is only this: Those who provided you your berth must be cared for at any expense. This leads inevitably to additional corruption. Here's some more from the Telegraph article:

In partnership with Lockheed Martin and Jacobs Engineering, Serco also manages the Atomic Weapons Establishment, which provides and maintains Britain's atomic warheads.

Revenues from civil government work increased 49% in the period and a bullish Serco expects this trend to continue, giving it even more control of Britain's infrastructure. The company estimates that local authorities have endured a £4bn deficit in income for over the last two years as a result of the recession and that, by 2012 it will have revenues of £5bn.

In the results, Mr. Hyman says: "The financial crisis and subsequent economic slowdown means that governments around the world are contending with increasing demand for high quality services whilst also facing a sharp deterioration in public finances. They continue to experience growing demand for quality services from their citizens.

"We believe this is also leading to a greater acceptance of innovative ways of achieving these changes, a broader range of markets to be addressed, and an increase in the size and term of change programmes in order to achieve the scale of efficiencies required.

Not surprisingly, the shares rose 4% following the results.

To sum up, this sort of privatization is merely a different sort of public enterprise. Both the Canadian and British health care services are nationalized, but in Canada, private enterprise performs the public function. In Britain, the health care professionals work directly for the government. But ultimately it is acknowledged that both are government systems. And they are.

Monopoly privatization of public services is privatization in name only. It is merely a more cost-effective way of administrating the public purse because the cost containment is likely the ONLY area that can fully be measured. The satisfaction of the public good is a muzzy measurement indeed. The quality of service, timeliness, and all the rest are also subjective.

After Thoughts

Monopoly privatization must be cruel. In prisons, hospitals, schools, transportation and other arenas – especially where the subjects of the services cannot properly complain – the emphasis will be only on cost containment. Those lucky enough to experience such services will likely wish to experience the relative munificence of the municipal sector. Bureaucrats can be clumsy and disinterested but they are not apt to squeeze their wards into starvation, sickness and psychological meltdowns merely to satisfy a budget line. Such privatization should be seen as a virulent metastization of the state – a formula that combines entrenched incompetence with institutionalized cost-containment. The results of such practices are almost inevitably more public corruption, more suffering and less services. Monopoly privatization of the public sector, seen in this light, is no panacea.

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