Whitehall ploughs one-third of annual budget into outsourced services, despite ongoing financial misery of the sector

Whitehall could not abandon the outsourcing of public services even if politicians wanted to because it costs so much, according to research.

The government ploughs £284bn – almost one-third of its overall budget – into work done by external suppliers every year, think tank Institute for Government (IfG) said today.

The huge outlay is despite the collapse of one of its largest construction outsourcers Carillion in January, and the ongoing economic turmoil which saw embattled services provider Interserve’s shares more than halve on Monday.

The money is spent on a vast spectrum of things, from goods such as stationery and medicine to the construction of schools and roads, and from back office functions such as IT and HR to frontline services such as probation and social care.

Emma Norris, IfG director of research, said millions were being spend despite “signs that some players involved in outsourcing are struggling, most recently Interserve”.

The government must “urgently review the health of its procurement markets,” she added.

Workers at the NHS and the Foreign Office are among Interserve’s 45,000 UK employees, and most of its annual £3.2bn turnover comes from the government.

But, racked with £650bn of debt, it admitted over the weekend it was in emergency rescue refinancing talks with its lenders.

Interserve's predicament has been inflamed by its disastrous foray into the waste-to-energy sector, which it is trying to sell of as quickly as possible.

Morning Wire understands the government is still not concerned Interserve will go bust, but analysts were quick to compare it to Carillion.

Russ Mould, analyst at AJ Bell said: “Almost a year since the increasing intractability of Carillion’s problems became apparent, its peer Interserve appears to be losing the confidence of investors at pace.”

He said the company faced “the same toxic mix of loss-making contracts and unsustainable borrowings” as Carillion.