Charities and social enterprises are being squeezed out of delivering public services by a small number of large companies favoured by local and central government commissioners, according to a report by Social Enterprise UK.
The Shadow State, written by the journalist Zoe Williams, argues that a shadow state is emerging in which a small number of large companies are providing the majority of outsourced public services.
It argues that this has serious consequences for Britain’s economy and communities because it is concentrating power in the hands of a few large companies that can control markets and influence the pay that large numbers of UK workers receive.
"Evidence points to companies providing lower-quality services in their drive to maximise shareholder profits," the report says. "These private firms, contracted by central and local government, are difficult to hold to account and operate without transparency."
Atos, G4S and Serco are among the private sector providers that are consistently awarded public services and are considered too big or complex to fail, the report claims.
The report says there is mounting evidence that social enterprises and charities, which reinvest their profits into additional services, are being driven out of public service markets – this in turn leads to a lack of competition and gives commissioners little choice of provider.
The involvement of private sector companies in public services is also fuelling low pay because firms deliberately keep wages down so they can increase shareholder profit, the report says. It points out that taxpayers often have to make up the shortfall by financing benefits for low-paid workers that would otherwise not be needed.
The Shadow State makes a number of recommendations, including a call for "open-book accounting" on all public sector contracts with a value of more than £250,000. This would, it says, prevent profiteering and increase transparency.
It also says that the Public Services (Social Value) Act, due to become law in January, should be strengthened so that all public bodies are obliged to include social value when commissioning and purchasing services. The existing legislation says that public services need only to "consider" social value.
Peter Holbrook, chief executive of Social Enterprise UK, said: "This is not an issue of whether or not to outsource public services, but about how public bodies allow the markets to be shaped and the sort of firms they choose. Commissioners need to be able to contract providers that are committed to quality public services and motivated not by shareholder profit, but by benefiting the communities in which they work. The Public Services (Social Value) Act allows them to do just that."