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Thu September 20 2018

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MPs say government procurement policies contributed to Carillion’s collapse

9 Jul A committee of MPs has concluded that while the government was right to let Carillion fail, it needs to rethink how it procures projects and services.

Government’s continued fixation on getting the lowest price regardless of quality has ultimately resulted in contracts failing and having to be renegotiated.

The Public Administration & Constitutional Affairs Committee, comprising backbench MPs from across the political spectrum, has published its report on its inquiry into the January 2017 insolvency of Carillion, titled After Carillion: Public Sector Outsourcing and Contracting.

It concludes: “The government’s preoccupation with price has been noticed by the market and is a matter of grave concern. The government’s failure to assess the quality of services as well as their cost is lamentable. There needs to be a complete reappraisal of how the government assesses quality of the work it commissions. This will both incentivise providers of services to focus more on quality and ensure there is less chance of providers aggressively undercutting bids deliberately with the intention of potentially renegotiating the contract later on. This is particularly important in cases of complex services for vulnerable people, where the risks and the consequences of service failure are most acute. It is no surprise that the quality and reliability of privately supplied services is so variable if the government nearly always judges bids on price alone.”

It is equally damning of the private finance initiative (PFI), saying: “It is unacceptable that almost 30 years after the first PFI projects were initiated, the Treasury cannot produce an evidence base to support its claims that PFI is worthwhile for any reason apart from the fact that it takes debt off balance sheet.”

It says: “The Treasury and the government should not approve any further PFI projects until they can clearly justify, based on evidence, their claims about the benefits of the scheme. It will seem bizarre to many observers that the government has chosen to pay more than it could for £60bn worth of projects, without evidence of any benefits from the extra cost involved in using this financing method. Ministers should be able to choose to use state finance where it is clear that private finance would bring no benefits. The Treasury should scrutinise in particular the recently approved transport projects (the A303 Stonehenge tunnel and roads and the £1.5bn approach roads to the Lower Thames Crossing) to ensure that there is good evidence that private finance represents the best value for money in these cases.

“The government should investigate the experience of the Scottish government with the non-profit distributing model and report back in its response to this report its view of what the UK government can learn from the Scottish experience.”

With regards to Carillion’s collapse, the MPs say: “The government made the right decision to let Carillion fail. The government lacked confidence in the plans put forward by the company’s management. The cost of funding the company would have been higher than the costs of the liquidation. It is notable that the shareholders and financers of Carillion have lost money through the failure of the company. We agree with the minister that this is appropriate as it sends a signal that ultimate responsibility for Carillion rested with its management, shareholders and financers.”

However, government is not blameless in Carillion’s demise, because of its focus on cost over quality.

During its inquiry, the committee found that the government's overriding priority for outsourcing is spending as little money as possible while forcing contractors to take unacceptable levels of financial risk. This approach, the MPs say, has been made more damaging by the fact that the information the government uses to inform the outsourcing process can be either incomplete or simply incorrect. “The government must be aware of this: it has written contracts that force contractors to pay out when it gets its own data wrong and has been known to forego performance penalties in the initial phases of contracts.”

As a result of the government's preoccupation with cost, it has had to renegotiate over £120m of contracts since the beginning of 2016 to ensure public services would continue.

“Ultimately, this has led to worse public services as companies have been sent a clear signal that cost, rather than quality of services, is the government's consistent priority,” the report says. “Contractors told us that the government was known to prioritise cost over all other factors in procurements, driving prices down to below the cost of the services they were asking firms to provide. Worse, the government was unable to provide significant evidence for the basic assertion behind outsourcing: that it provides better services for less public money, or a rationale for why or how it decides to outsource a service. This was especially true for PFI. Shockingly, the government admitted to the Committee that the ‘entire [PFI] structure is to keep the debt of the balance sheet’."

The committee said there was a “desperate need of greater transparency” and called on the government to commit to underpinning contracts with realistic assessments of cost and risk transfer. “It must collect evidence about the benefits and disadvantages of outsourcing in general as well as for individual services, and it must use this evidence as the basis for transparent outsourcing decisions,” it said.

Sir Bernard Jenkin, chair of the Public Administration & Constitutional Affairs Committee, said: "It is staggering that the government has attempted to push risks that it does not understand onto contractors, and has so misunderstood its costs. It has accepted bids below what it costs to provide the service, so that the contract has had to be renegotiated. The Carillion crisis itself was well-managed, but it could happen again unless lessons are learned about risk and contract management and the strengths and weaknesses of the sector.

“Public trust requires that outsourcing better reflects public service values. The government must use this moment as an opportunity to learn how to effectively manage its contracts and relationship with the market."

After Carillion: Public Sector Outsourcing and Contracting is available via publications.parliament.uk.

MPU

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