Contractors forced to take unacceptable levels of financial risk, says Commons committee
The folly of using contractors to drive down the cost of providing public services has been exposed by the collapse of Carillion, an official report has shown.
The House of Commons public administration and constitutional affairs committee found there are fundamental flaws in the way the government awards contracts because of “an aggressive approach to risk transfer”.
The report, published on Monday, found that ministers try 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.”
Jenkin urged ministers to learn lessons from the demise of Carillion, which was one of the biggest corporate collapses in years.
“Public trust requires that outsourcing better reflects public service values,” Jenkin said. “The government must use this moment as an opportunity to learn how to effectively manage its contracts and relationship with the market.”
PFI, or ‘private finance initiative’, contracts were introduced in 1992 by John Major’s government and were also used heavily by the Tony Blair and Gordon Brown administrations. They are used to contract out public services – anything from building a hospital to providing school meals.
PFI has been criticised as being exorbitantly expensive, and also for hiding the government’s true financial liabilities.
John Manzoni, the permanent secretary for the Cabinet Office, told the inquiry: “The entire PFI structure is to keep the debt off the public balance sheet. That is where we start.” The committee says this is a “shocking” admission from the government.
The committee also found that the government has had to renegotiate more than £120m of contracts since the beginning of 2016 to ensure public services would continue because they were initially outsourced too cheaply.
A Cabinet Office spokesman said the government would respond to the report, adding: “The government is committed to ensuring a healthy and diverse marketplace of companies bidding for government contracts and we have recently announced a wide package of new measures to further improve how we work with our vendors.”
Jon Trickett, the shadow minister for the Cabinet Office, said the “damning report” showed the government had been “ineffective, lax and reckless with taxpayers’ money”.
He added: “Their ideological obsession with privatisation meant that they failed to spot obvious telltale signs indicating Carillion’s weakness.”
The UK spends around £250bn a year on outsourcing and contracting, or around 13% of annual GDP.
That is not wildly different than other countries, such as Denmark and Germany.
However, the committee says there is a “depressing inability of central government to learn from repeated mistakes”.
Carillion won contracts to run services for the NHS and the Ministry of Defence.
It was a central contractor for the Crossrail project and also maintained and repaired some UK prisons and provided cleaners and caterers to school.
It collapsed in early January under the weight of a £1.5bn debt pile after the government refused to bail out the company.
Many of its contracts have been taken on by other providers, saving thousands of jobs. However, some major construction projects have been badly hit, including a £335m scheme to construct a new Royal Liverpool hospital.
Construction of the 646-bed hospital is already more than a year overdue, with work on hold until a new builder – and fresh funding – can be found.
Back in May, a separate parliamentary report blamed “recklessness, hubris and greed” for Carillion’s failure, and also criticised auditors for not spotting its problems.
Carillion’s former directors, though, blamed an unpaid bill owed by Qatar, Brexit uncertainty and problems building the Royal Liverpool Hospital for the company’s collapse.