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National Audit Office reports on outsourcing public services

14 November 2013

The National Audit Office's recent report on contracting with the private sector raises several questions about how outsourcing contracts operate.

In comparing the profitability of public sector contracts with their other activities the NAO concluded the average return made by large outsourcing firms on government contracts is lower than on private sector deals so its difficult to read from this that the public sector is getting a bad deal, but profit margins do vary between contracts.

However the NAO is concerned provisions such as "open-book" accounting, benchmarking and profit-sharing arrangements are used inconsistently across public sector deals.

Given outsourcing of public services is controversial to many, including mechanisms to ensure this type of transparency may be to everyone’s advantage. As the NAO warns, political pressure merely to reduce costs could cause providers to exit certain public sector markets, stifle innovation, reduce competition and possibly lead to higher prices.

The points raised by the NAO underline the importance of embedding transparency and a partnership ethos in outsourced contracts.

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