Monday, July 09, 2018
A damning condemnation of outsourcing
An investigation by the House of Commons public administration and constitutional affairs committee into the aftermath of the Carillion collapse has produced a report that is a damning condemnation of the way that the UK Government handles outsourcing contracts and even of the practice itself.
Let us not forget, that PFI, as it was then known, was enthusiastically embraced by New Labour, with Gordon Brown seeking to use it to deliver projects off the Treasury books, so as not to upset his fiscal rules, whilst at the same time passing on risk from the public sector to the contractor.
However, the whole process became so complicated that many of those negotiating contracts on the part of the public sector failed to properly understand the intricacies of the deals they were working with. Penalty clauses proved inadequate and unenforceable, whilst a process of selling on contracts and sub-contracting even distorted who exactly was carrying the risk (and the responsibility) for the particular project.
In this fevered atmosphere, of under-bidding to win contracts and cross subsidy within over-large corporations, the subsequent growth and collapse of Carillion was inevitable. As the Guardian tells us the committee concluded that much of this was due to “an aggressive approach to risk transfer”.
The report found that ministers tried to spend as little money as possible when awarding contracts while forcing contractors to take unacceptable levels of financial risk:
Often the government does not fully understand the risks it is transferring to private companies, the committee says. It also fails to appreciate differences in quality provided by rival bidders because procurement decisions are driven by price.
As a result, public services have deteriorated as companies concluded that cost, rather than quality of services, is the government’s consistent priority.
Sir Bernard Jenkin, the Conservative MP who chairs the committee, says: “It is staggering that the government has attempted to push risks that it does not understand on to 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.”
Sir Bernard's conclusion that the government must learn how to effectively manage its contracts and relationship with the market is in my view, the wrong one. There needs to be a root and branch review of what the public sector hopes to achieve through outsourcing, how it is compatible with the delivery of high quality services to the public and whether it is right that so many key frontline services should be dependent on what is effectively an accounting trick. If that leads to a scaling back of outsourcing then so be it. Perhaps that is well overdue.
Let us not forget, that PFI, as it was then known, was enthusiastically embraced by New Labour, with Gordon Brown seeking to use it to deliver projects off the Treasury books, so as not to upset his fiscal rules, whilst at the same time passing on risk from the public sector to the contractor.
However, the whole process became so complicated that many of those negotiating contracts on the part of the public sector failed to properly understand the intricacies of the deals they were working with. Penalty clauses proved inadequate and unenforceable, whilst a process of selling on contracts and sub-contracting even distorted who exactly was carrying the risk (and the responsibility) for the particular project.
In this fevered atmosphere, of under-bidding to win contracts and cross subsidy within over-large corporations, the subsequent growth and collapse of Carillion was inevitable. As the Guardian tells us the committee concluded that much of this was due to “an aggressive approach to risk transfer”.
The report found that ministers tried to spend as little money as possible when awarding contracts while forcing contractors to take unacceptable levels of financial risk:
Often the government does not fully understand the risks it is transferring to private companies, the committee says. It also fails to appreciate differences in quality provided by rival bidders because procurement decisions are driven by price.
As a result, public services have deteriorated as companies concluded that cost, rather than quality of services, is the government’s consistent priority.
Sir Bernard Jenkin, the Conservative MP who chairs the committee, says: “It is staggering that the government has attempted to push risks that it does not understand on to 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.”
Sir Bernard's conclusion that the government must learn how to effectively manage its contracts and relationship with the market is in my view, the wrong one. There needs to be a root and branch review of what the public sector hopes to achieve through outsourcing, how it is compatible with the delivery of high quality services to the public and whether it is right that so many key frontline services should be dependent on what is effectively an accounting trick. If that leads to a scaling back of outsourcing then so be it. Perhaps that is well overdue.
