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In the days since G4S admitted that it would not be able to supply all of the 10,400 security guards it had promised to police the Olympic Games, the company has certainly learnt the meaning of the dread phrase “reputational damage”.

In countless articles, it has been characterised as some sort of Marx Brothers-style operation, crashing haplessly from one corporate pratfall to the next. Past mistakes have been gleefully picked over; from the time three years ago when thieves landed a helicopter on the roof of one of its buildings in Sweden all the way back to the early 1990s, when it had an unfortunate habit of mislaying prisoners on their way to and from court appearances.

While the Olympics fiasco has rightly been termed a “humiliating shambles”, the cumulative effect of these attacks has been to turn what was a serious but singular case of contractual failure into something altogether more general. The business of outsourcing has itself been put on trial. With clowns like these at the wheel, the public has been invited to conclude, what on earth are we doing contracting them to perform our public services?

There are certainly troubling things about the Olympics affair. The fact that soldiers and policemen have had to be drafted in to fill the holes left by G4S has revived unhappy memories of what happened in the banking sector four years ago, when the taxpayer was summoned to pick up the losses of private entities.

But the idea of G4S as some sort of ramshackle venture barely able to chew gum and sign contracts at the same time simply does not hold water. Since Nick Buckles became chief executive in 2005, its sales have nearly doubled and profits have risen faster still. True, G4S and companies like it have not prospered because they perform public tasks much better than the state sector. All the evidence suggests that there is little real difference. Rather they have done so because they offer the chance to cut costs and increase flexibility through a form of regulatory arbitrage.

This has been seized upon by public authorities constrained either by inflexible employment contracts or by organisational structures. Take, for instance, independent local police forces, which might historically have found it difficult to club together to get a special deal on panda cars or a new range in handcuffs. Outsourcing is a neat way round such obstacles, with some of the gains then being recycled to the public authority.

Critics have latched on to some unappealing side effects, such as the cuts in salary and job security that ensue when outsourcers bring in cheaper contract workers. For instance, research by the Suffolk police shows that private sector police employees earn about 40 per cent less than their uniformed equivalents. What is emerging is in effect a two-tier labour market.

But if this is undoubtedly unfair, one can hardly blame G4S. If we wanted to end such regulatory arbitrage, the solution would be to make it less lucrative – at the probable cost of accepting fewer, more expensive public services. But if there is a public appetite for such a debate, it is very well disguised.

Whatever happens to Mr Buckles as a result of the Olympics fiasco, outsourcing is likely to outlive “Guard-gate”. Funding pressures will force the public sector to continue pushing work out to private contractors. What is important is that this process enjoys public confidence. And for that to be so, the rules must be clear and the benefits transparent. Too many contracts are shielded from public view by confidentiality clauses. This is unacceptable. Those trading with the public sector must accept external scrutiny to ensure risk is genuinely transferred and that the terms are fair. Corner-cutting and failing to deliver must be firmly dealt with.

The state should also tread carefully in choosing what to tender. While it may make sense to contract out ancillary operations, great circumspection is called for when it comes to core services, such as front-line policing. Competitive tensions may prove impossible to preserve once these are entrenched within private companies. The cost in terms of public confidence were they mismanaged would massively outweigh any gains in cash terms.

G4S has lost its reputation seeking to hire guards for the Olympics – a one-off task that has few long term implications for Britain’s public services. Other outsourcers will have their Marx Brothers moments. There will be more mistakes. They should not be irreparable ones.

jonathan.ford@ft.com

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