When G4S was exposed as being woefully unprepared for the London Olympics, it was not so much its failure that caught the public attention but the sheer scale of the public services that this private company was subsequently revealed to be providing.

This company few tax payers had ever heard of was responsible for £759m of taxpayer-funded public services in 2010/11 alone.

The news that may come as even more of a shock to tax payers is that this scale of dependence on one firm is not unusual. In fact, a new report from Social Enterprise UK, entitled The Shadow State, suggests that outsourced public services are being dominated by just a few large companies like G4S, with little accountability and often very little value for money. Private firm Atos, for example, is now in receipt of £3bn worth of outsourced government contracts, according to the report.

‘Rather than a market maker, many local authorities and government departments are finding themselves at the will of this select and small group of big providers who are in such a strong position that they can dictate the market and prices to the customer,’ says Peter Holbrook, chief executive of Social Enterprise UK. ‘With the market for outsourced public services set to expand even further, we need to address this issue urgently.’

The Shadow State acts as a guide to do just that. In a broad ranging report, it outlines both the issues with the current system and suggests constructive ways to rectify the situation. How we got to a point where a report like this was required, says Holbrook, was a mix of short-sighted efficiency hunting and failing procurement processes.

‘Firstly, in this age of austerity, we seem to believe the only way of creating efficiencies is by buying in baulk, but that has lots of consequences: you are putting a lot of power in the hands of the suppliers, so much so that they are dictating price and terms to the buyers, which is ludicrous,’ he explains.

‘Secondly, these cheap prices being offered are not investigated. Are they coming at the cost of lower staff wages and conditions, and if so is that not just shifting cost onto another area of the public purse, like in-work benefits?

‘And lastly, there is a real lack of scrutiny of track record. You can have a really bad supplier but when they go and compete for another contract in another part of the country that track record does not seem to be taken into account, which is frankly inexplicable.’

He adds that the level of profit being made by companies fulfilling public services contracts also needs to be scrutinised, as does whether this profit is reinvested into the local community or the project, or whether it is just going to shareholders, as is, he says, the case with some of the current contracts.

The undercurrent to all of these points is that these big firms are failing while social enterprises, charities and SMEs that could be providing a transparent, socially aware and accountable public service are being squeezed out of the market. The report suggests a combination of a sole focus on price for procurement decisions and an overly complicated tender process that requires extensive resources to complete mean smaller organisations cannot compete.

The government did try to address the latter issue with the Open Public Services agenda, but the report suggests that has had little impact. The government will try again in January with the Public Services (Social Value) Act, which intends to ensure a level playing field for social enterprises and charities to bid alongside traditional private sector providers, by making sure that the additional ‘social value’ they create is taken into account when public service contracts are drawn up. Holbrook is hopeful of this measure being more effective than the last, both in broadening opportunities for tenders and in forcing the small group of incumbent big businesses to be more accountable.

‘The Act is a green light for commissioners to commission bravely,’ he says. ‘In the past, they may have known that a local provider would have been better placed to run a contract, be that because they had local knowledge or were led by service users or were closer to the community, but those commissioners are often nervous and reticent to go against the cheapest bidder. This Act should give them the green light to recognise that they can legally do that – they can commission in a different way and look at the bigger picture.’

The report stresses, however, that commissioners will need assistance in interpreting and using the Act, through statutory guidelines, and also that government will have to ensure the Act is adhered to. It also points to several forward-thinking councils as proof that the Act could actually go further and be strengthened.

One such council is Liverpool City Council. From October onwards, the council started placing an emphasis on using socially responsible contractors and suppliers when procuring the £270m budget for buying in goods and services from third parties. A new Procurement Board is being set up, which will co-ordinate all activity across the council with the aim of using the council’s buying power to have a positive impact on jobs and skills.

‘The new procurement policy is a shift towards making sure every penny of our spending benefits local people,’ says Liverpool City Council deputy mayor and Cabinet member for Finance, councillor Paul Brant. ‘The city council spends substantial amounts of money and it has the potential to really boost the local economy. This is about saying to firms that, in return for being awarded major contracts, we want them to demonstrate their commitment to developing jobs and skills in the city.’

The council says the proposal goes further than the Government’s new Social Value Act, as that Act does not apply to framework, works or supplies contracts.

Another council that has already looked further than the usual big company stalwarts is Birmingham City council, which awarded a 50 year contract to manage seven public golf courses to social enterprise MyTime Active in April this year. The company is committed to £10m of investment in the courses over the next five years, and will also be broadening participation through community outreach in schools and partnerships with local voluntary groups, with the aim of removing barriers to participation and improving the access opportunities for hard to reach groups at the heart of Birmingham.

Steve Price, chief executive of Mytime Active, says the Birmingham City Council contract is a prime example of the benefits of a council looking beyond the usual suspects for services.

'Social enterprises reinvest profits into helping a cause – it’s the ultimate in corporate social responsibility,' he says. 'Mytime Active has an annual turnover of £33m and since 2004 we have reinvested £16m from surpluses into new and improved services benefiting the whole community.'

Holbrook is keen to stress, though, that this report and these examples are not designed to “bash big corporate companies over the head”. He says it is as much about forcing these companies to be more transparent and accountable, and forcing them to work more for the social good, as it is about furthering the opportunities for social enterprises, charities and SMEs to get involved with public services.

And he says that ultimately it may not be Acts or legislation that forces council’s hands to ensure this occurs, but public opinion. He explains that public awareness of how and where there money is being spent is increasing and that eventually this will force a more responsible procurement for public services.

'As peoples’ awareness spreads,” he says “then more people will put pressure on MPs to pressure big businesses to be better citizens and for more social enterprises and charities and SMEs to be given a chance.'