A toolkit for insourcing in Wales: interim report - 2. Policy drivers and ultimate objectives

The development of the toolkit will support the delivery of the policy commitment in the Programme for Government to:

… explore where services and contracts can sustainably and affordably be brought back into a strengthened public sector.

A key intent of this policy commitment is that it supports the pursuit of a socially just, fair work agenda for Wales, recognising that insourcing can result in enhanced local employment conditions. However, it is also recognised that insourcing has the potential to contribute positively across a range of other domains. Increasingly, insourcing is viewed as a pragmatic and sustainable means to address service improvement, service efficiency, to recalibrate local services to local needs and to support stronger local supply chains. In the Welsh context, the potential impact of insourcing on employment opportunities, particularly for young people, is relevant to the Welsh Government’s ambitions to tackle the so-called ‘brain drain’ of young talent from Wales through the growth of sustainable and stable employment opportunities.

Insourcing can also provide for more stability of provision, removing the risks around potential market instability and market failures. There are prominent recent examples of significant market failures in outsourced services - the collapse of Carillion and the recent decision to bring probation services fully back in house in England and Wales being notable examples.

In the context of local economic development insourcing can be a key tool to support local economies by combating wealth extraction. Here, there is particular potential to prioritise the consideration to insource where the Welsh public sector is reliant on providers which extract wealth that could otherwise be used to provide additional benefits for citizens and the state. Removing the role of private-equity- and venture-capital-backed providers in the care sector would be one such example. Recent reports have highlighted the prominent role of private equity firms in the UK care home sector. This includes firms with beneficial ownership via offshore tax havens which use debt and financial restructuring arrangements to extract profit disguised as rent and loan repayment costs (Vivek Kotecha - 2019. Plugging the leaks in the UK care home industry – strategies for resolving the financial crisis in the residential and nursing home sector).

There are overlaps with other policy commitments in the Programme for Government, with insourcing having the potential to impact both positively and negatively on related policy agendas. We have therefore approached this work with the intent from the outset that the model of insourcing developed for Wales needs to be one which achieves strategic synergy and commands cross governmental support.

Other Programme for Government commitments relevant in this context, and potential implications, are explored below.

Provide effective, high quality and sustainable healthcare

Insourcing could work in support of this policy objective, by reducing the friction in developing a collaborative public sector focus on prevention and tackling health inequalities. Whist this is not impossible to achieve via outsourced services – for example, a recent NHS Confederation report highlighted examples of collaboration between the NHS and leisure and culture trusts (Leisure and Culture Trusts Health and Wellbeing Support to the NHS in Wales, NHS Confederation - 2022) – direct collaboration between Public Service Board partners would arguably be easier if those services were all inhouse.

The process of outsourcing requires commissioners to delineate a specific service specification through the procurement process. In so doing there is a risk that specifications are narrowly described, inadvertently excluding opportunities to flex provision or innovate in the broader public interest.

Protect, re-build and develop our services for vulnerable people

Insourcing is of particular relevance to the commitments to pay care workers the real living wage and to eliminate private profit from the care of children looked after. However, as we explore later in this report, insourcing can be positioned as part of a broader spectrum of more generative service models, including not-for-profit and cooperative models of delivery. Clearly this policy commitment is also contingent on social care funding to commissioners being commensurate with living wage staff costs, regardless of model of delivery.

Build an economy based on the principles of fair work, sustainability and the industries and services of the future

Insourcing can support the strengthening of local supply chains in that it is easier to influence supply chain relationships directly rather than through the procurement process. Outsourcing providers, particularly larger national or multi-national providers, will often have national supply chain arrangements and may not be able to flex towards more local provision. This is particularly an issue in more rural or remote areas.

Additionally, the public sector is arguably more influenceable than private, outsourced providers in terms of the 30% target for working remotely. 

That is not to say that large employers do not have a role in the pursuit of socially just, fair work agenda, which offer goods and services to the devolved public sector. They equally have a role which smaller businesses or the public sector could not provide, where they can also demonstrate that they are good employers offering fair work jobs.

Build a stronger, greener economy as we make maximum progress towards decarbonisation. Embed our response to the climate and nature emergency in everything we do

The processes of service design or review and the development of options appraisals are opportunities to proactively consider how a service design or model could be adapted to support carbon reduction objectives. Insourcing can be a vehicle to achieve higher environmental standards as opposed to trying to influence the market through the procurement process. The closer the proximity of service provision to local policy, the easier it is to ensure adherence to those policies. As APSE reported: “in-house teams are far more likely to adhere to Green Accords and local environmental strategies” (Insourcing: a guide to bringing local authority services back in-house, APSE, 2009). This is particularly relevant in the current context where public bodies will be strengthening policy in line with climate emergency commitments. Again, however, insourcing is not the only model. For example, there may be opportunities to partner with a local social enterprise, community business or cooperative that has explicit environmental and social objectives – for example, one designed with circular economy principles.

Make our cities, towns and villages even better places in which to live and work

Insourcing explicitly sits under this objective in the Programme for Government. It could also impact on other commitments under this objective. The commitment to “Establish Unnos, a national construction company, to support councils and social landlords to improve the supply of social and affordable housing” (Welsh Government Programme for Government – Update) prompts an interesting question for the insourcing work, in that the same rationale on whether to bring services back into the public sector could also be applied to the development of new public sector provision as alternatives where there are market gaps or known extractive practices.

Build on our approach to the Foundational Economy and develop a Backing Local Firms Fund to support local businesses

The interface with foundational economy work, including the role of progressive procurement as a lever, is of particular importance, and a nuanced approach will be needed to ensure that exploring the potential for insourcing supports and doesn’t undermine foundational economy objectives.

As we set out in our recent publication on employee ownership in Wales (Owning the workplace, securing the future: A plan to support worker buy-outs and expand employee ownership in Wales, CLES, Sean Benstead and John Heneghan, 2022): 

“The Welsh government is committed to strengthening the foundational economy in Wales as a cornerstone of their economic strategy. The foundational economy is a concept that has been developed to describe the economic importance of the goods, services and other forms of provision that are necessary for a “good life to be enjoyed by as many people as possible.”

This can include a diverse range of policy areas including housing, childcare, utilities, health, education, public parks/recreation and culture. Traditionally, many of these goods and services were provided by the state as part of a collective endeavour because of their importance in providing the foundations of a better life for workers, and in recognition of their importance for a more inclusive economic system.

However, in recent decades, programmes of privatisation have disrupted traditional ideas about how everyday services are provided and also given powerful corporate actors access to public services, data and money. There is ample evidence that this transfer of ownership and provision means that these services are often delivered more for the benefit of private rather than public interest.

Measures which provide the basis to disrupt monopolies of foundational economy provision, or at the very least question its power, are vital to help ensure that workers, particularly those on the lowest incomes, can continue to access the everyday goods, services and other provision that are essential to help them live a life that they have a reason to value”.

There are both potential benefits and risks posed for the foundational economy agenda by insourcing. As set out above, insourcing can reverse the trend toward delivery of public services for private gain, restoring public values in public sector delivery. The foundational economy accounts for every 1 in 4 jobs in Wales, presenting a significant opportunity for insourcing to affect fair employment as a lever of progressive economic development. However, other mechanisms of delivery also have a potential role to play in this regard, including delivery via worker owned cooperatives, the not-for-profit sector, and social enterprise.

All these approaches can be used to progress the fair work agenda (better pay, improved terms and conditions, and better opportunities for development and career progression). They can also contribute to improved and more universal access to public services. However, these benefits are with caveats – it cannot be presumed that all private operators are bad employers (or indeed that all public provision is good). There have been significant efforts – supported by the Welsh Government procurement policy statement to drive social value driven through procurement, and there many examples of good private sector provision.

However, insourcing can provide for a more stable and sustained approach to achieving social value. When public procurement is flexed to deliver a positive social value return there can be a risk that positive changes may not be able to be sustained by further contracting, due to the need for open competition. For example, the Better Jobs Closer to Home pilot in Blaenau Gwent saw public procurement being used to support a ‘sheltered workshop’ for the production of protective clothing like NHS scrubs, provided employment opportunities for vulnerable citizens, but this contract was subsequently lost to an international supplier. That being said, the pilot encouraged local business engagement in public sector supply chains through the Better Jobs Closer to Home policy and ambition to grow resilient supply chains linked to public sector investment. As a result, Welsh-based organisations under the pilot were enabled to successfully evolve and secure positions on a Welsh Government Dynamic Purchasing System (DPS) for Personal Protective Equipment.

Public sector procurement can also provide a stable level of baseline demand for Welsh SMEs and other generative economic actors, which contributes to the objective to grow the “missing middle” - establishing a stable base of medium sized Welsh firms which are capable of selling outside Wales but have decision-making rooted firmly in communities.

Nurturing the third sector, including social businesses, not-for-profit enterprises, and democratic businesses such as worker-owned co-operatives, is key to maximising the benefits of a foundational economy approach. These organisations, provided they sit within a generative business structure, are hard-wired to redistribute surplus and benefits locally, so increasing their prominence in the economy, locks more wealth and benefits into local communities. It will be important, therefore, to ensure that the insourcing approach does not result in reducing the very demand which is nurturing this generative local economic activity, provided that socially just, fair work agenda is also met.

Public sector bodies will also want to have in view the relative pros and cons across the spectrum of service delivery models. For example, social enterprise/cooperative models can result in:

• The ability to access different forms of finance, including grants and income generation from commercial activities which can in some cases cross-subsidise other aspects of service delivery.
• Enhanced citizen engagement in decisions and delivery – e.g., member-led businesses. Social enterprise tends to be based in, and formed of, the local community.
• Ability to work across geographical administrative boundaries.
• Ability to integrate with communities, for example, by working with existing volunteering and community activity.

However, there are only limited circumstances in which procurement can explicitly be ringfenced for social enterprises, and not all social enterprises have a generative ownership structure (for example, some social enterprises are arms of profit-making corporations).

As CLES pointed out in its recent report on employee ownership in Wales (Owning the workplace, securing the future: A plan to support worker buy-outs and expand employee ownership in Wales, CLES, 2022), even when democratic businesses do feature in public sector supply chains, these have tended to be management buyouts, as opposed to worker cooperatives, and be at risk of corporate acquisition. Whilst there should always be an imperative to develop progressive procurement approaches which seek to maximise the role of generative business in supply chains, the reality of competitive procurement is that these may be displaced by more extractive competition when tenders come up for renewal. Insourcing, conversely, can lock in these local economic benefits over the longer term.

There are some services where there is a particularly strong case for their delivery via social enterprise or cooperative models – including some aspects of social care. However, there is also a compelling argument that Welsh Government will only be able to fully maximise the levers at its disposal for fair work in the social care sector if significant elements of provision are brought within the public sector. These considerations should be central in current debates and discussions on the development of a National Care Service for Wales.

Housing is another example of where social enterprise models have realised additional benefits – since the move towards stock transfer to housing associations, delivery has often stayed in the ‘public sphere’ but with additional freedoms to innovate. Particularly in Wales, housing associations have tended to have remained smaller, and firmly committed to a public service ethos. These include mutual models providing an equal voice for tenants, owners, and community. 

However, some social enterprise organisations will likely not be able to match the pay and conditions of the public sector unless additional funding is made available through commissioning.

Having regard to the specific local economic context will therefore be important. Issues of scale may also be relevant, with a need for the insourcing approach to be particularly focused on larger-scale provision, where delivery of the mechanism is more extractive, as opposed to smaller contracts where insourcing could potentially conflate with the Welsh foundational economy agenda which, in part, aims to shift emphasis towards developing the cohort of medium-sized firms in Wales.

A central consideration ought to be the extent to which services are seen as a core to the public service being delivered. No public sector organisation could ever be, or would want to be, fully self-sufficient – there will always be a need to procure some goods and services. The NHS in Wales, for example, does not want to be in the business of manufacturing hospital beds or surgical equipment. However, what we have seen over many years across the UK has been large scale outsourcing of some essential frontline and back-office services as if they are peripheral. These services – catering and cleaning, for example - are often delivered by workers at the lower ends of the pay scale and frequently have female dominated workforces. Their cost-base is predominantly labour costs, so any ‘efficiencies’ from outsourcing are inevitably at the expense of terms and conditions, most notably pensions contributions. The services these workers provide are as vital to public service outcomes as other parts of the public sector workforce, so there is a moral, as well as a social and economic case, for them to be brought back into a strengthened Welsh public sector. Consideration of what is core versus peripheral should therefore be a key part of a public body’s decision-making. Additionally, insourcing of core services will then yield greater ability to influence the peripheral.

The Well-being of Future Generations Act provides the contextual framing for:

• the desired outcomes which Welsh Government is seeking to achieve by prompting consideration of insourcing,
• the proposed decision-making criteria to be applied by public sector organisations
• the process of developing this approach.

The table below provides an illustration of how insourcing can contribute, either directly or indirectly, to the wellbeing goals.

The 5 ways of working described in the Act are relevant to the decision-making criteria adopted and the process of insourcing.

Looking at this issue through a wellbeing of future generations lens shifts the perspective from a narrow focus on cost to a wider appreciation of public value.

As the pursuit of a socially just, fair work, agenda for Wales is the key policy driver behind the commitment to explore insourcing, it is important that this agenda is progressed in a holistic way with a view to the wide range of other factors which influence the socially just, fair work agenda and related policy agendas, in Wales.

Drivers of deprivation, for example, go beyond the availability of jobs with a reasonable salary. These include a range of issues (often gendered, with greater barriers experienced by women), including: a lack of affordable childcare and lack of access to transport.