The Real Taxpayer-Funded Fat Cats

In, let the reader understand, The Mail on Sunday (Middle England is revolting, and not before time), Ben Laurance writes:

It has been a week in which public sector workers have been told to tighten their belts. Millions have learned they will have to pay more into their pensions, work longer and receive less when they retire. Their only comfort, as the Coalition Government fights to close the yawning gap in Britain’s public finances, is Messrs Cameron and Osborne’s regular reminder that ‘we are all in this together’. Recent revelations about the scale of top salaries in local government - Britain’s highest-paid council chief executive receives almost £300,000 a year and scores are paid more than the Prime Minister - undermined this feeling of mutual pain.

But a new investigation by Channel 4’s Dispatches programme has revealed that the taxpayer is funding far bigger individual pay packages – in one case we found, an astonishing £10 million a year. This is no ordinary tale of Fat Cattery. These multi-million-pound deals are being paid to the heads of the ‘outsourcers’ – the giant private companies that say they can do a better and more efficient job collecting bins, say, or providing nursing care than the State. They are private companies but they are also the creation of the Government’s drive to outsource services. The lion’s share of their turnover – and of their executives’ enormous pay packages – comes from the public purse. But there is little in the way of public accountability.

These outsourcers already account for £79 billion of state expenditure every year, a figure which is set to grow if the Government fulfils its pledge to put nearly all state-run services out to contract. A White Paper on the subject is due soon and the companies with their foot already in the door are delighted. Over the past few weeks big outsourcing companies have given extraordinarily upbeat assessments of their position. Paul Pindar, the chief executive of Capita – which does everything from
collecting TV licence fees to placing social workers – is gleeful about the prospect of a public-spending squeeze. Unveiling the company’s annual report, he said ‘fiscal pressure on public spending’ is likely to ‘heighten the focus on outsourcing in the public sector in 2011’.

Another big outsourcer is Serco. In some parts of Britain it has taken over so many local services it is virtually indistinguishable from the council. In Canterbury Serco collects rubbish, trims trees, maintains road signs, cuts grass and looks after public toilets. Surely a company with such close ties to the shrinking public sector is going to be feeling the effect of government spending cuts? Not according to the company’s chief executive Chris Hyman. Serco’s profits grew by a fifth last year, and the company reckons to have an order book of £16.5 billion.

Last July, amid great fanfare, Cabinet Office Minister Francis Maude demanded to meet a group of the government’s largest suppliers which collectively receive billions from the State. His message was apparently tough: The Exchequer has to make savings and government suppliers would have to cut their prices; the Government wanted to see at least £800 million shaved off its bills. So just how hard did he squeeze government suppliers? In the weeks that followed, several companies signed a ‘memorandum of understanding’ with the Government. Yet ominously, Serco’s Chris Hyman said at the time that the effect of the deal was ‘not material’ to profits.

Strangely, the details of these agreements are secret, despite David Cameron’s announcement that all government contracts of £25,000 or more should be open to public scrutiny. The Cabinet Office refuses to disclose the ‘memorandum of understanding’ on the grounds of commercial confidentiality.

In the meantime the people at the top of these companies are earning a fortune. Nick Buckles is the chief executive of G4S, which provides, among other services, security guards and prisoner transport. In 2009 he made £3.8 million in salary, bonus, share options and extras. In the same year Serco’s Chris Hyman, an evangelical Christian with a penchant for racing Ferraris, received a pay package of more than £5 million. Paul Pindar, head of Capita, had to rub along on a deal worth a total of £1.6 million. But in 2008, his overall pay – including share options – was worth almost £10 million.

The outsourcers are often criticised as parsimonious employers whose profits grow fat only because they hire staff at the minimum wage, with minimum holiday and pension entitlements. Indeed, Capita is involved in a pay dispute with staff who recently stood outside the company’s head office, handing out leaflets detailing their grievances and highlighting the chief executive’s pay. A furious Mr Pindar went out to meet them armed with an annual report. Unfortunately for him, it showed his salary was a mere £14,000 a week. That, his employees pointed out, was more than many of them receive in a year.

But surely these state-created outsourcing barons deliver a better service? Try telling that to anxious parents in Bradford, where Serco took over the education service in 2001. The company promised to hit very ambitious targets and missed them. But it managed to persuade the council to lower the targets, which meant that Serco was awarded £5 million in ‘performance bonuses’. Today, after ten years of Serco’s schools contract, Bradford is still well down the Ofsted league table and its contract will not be renewed amid criticism that the deal was a failure that represented poor value for money. Serco, however, maintains: ‘We have honoured our commitment to close the gap at Key Stage 2 Level 4 and above.’

Lord Ramsbotham, the former chief inspector of prisons, told us he felt uncomfortable that prisons are being run with the aim of making a profit. He had seen cases where private prison companies tried to cut costs (and boost profits) by cutting staff too far, and examples where performance incentives can be counter-productive. For example, a private prison contractor may face penalties if drugs are found. The result, in Lord Ramsbotham’s words: ‘They don’t look for them.’

On Tuesday, economist Will Hutton will publish his government-funded report Fair Pay In The Public Sector. Naturally, its focus will be the public sector itself. But Hutton is also expected to highlight the huge sums being received by people running some of the companies who thrive on Government contracts. Of course, the controversy over executive pay isn’t confined to outsourcing groups. For decades boardroom remuneration has far outstripped both average pay and corporate profit. This is largely because executive pay is set by comparing one executive with another, rather than the profits or the salaries of his or her workforce. And the people who set pay levels have a vested interest because they, too, are directors.

In some cases, maybe we shouldn’t care. But when those companies are growing fat on government contracts, then we should worry. After all, they are filling their pockets with our money.

Ben Laurance presents Dispatches: Britain’s Secret Fat Cats on Channel 4 tomorrow at 8pm.