House of Commons - Local government procurement - Communities and Local Government Committee

Local government procurement - Communities and Local Government Committee Contents

7 Probity and governance

81. Procurement fraud costs local authorities some £876 million annually according to National Fraud Authority figures.[182] Although endorsed by Cipfa,[183] this figure is only an estimate. Alan Bryce from the Audit Commission told us that the estimated figures were not robust since they were merely extrapolations from fraud levels identified by the Ministry of Defence which were not necessarily directly replicated in the local government sector.[184] According to the Audit Commission's report Protecting the public purse 2013: Fighting fraud against local government, detected fraud in 2012-13 was only some £1.9 million.[185] Transparency International UK (TI UK) told us that fraud was a "difficult thing to measure" and that a national body with responsibility for collecting this data was necessary.[186]

82. DCLG told us that councils must operate within a robust set of financial regulations which aim to ensure regularity and propriety, as set out in DCLG's accountability system statement. Councils must appoint a Chief Finance Officer (or section 151 officer) who must advise immediately of any illegal spending.[187] Councils must be audited every year by an independent auditor, who looks at the "truth and fairness" of the council's financial statements, and their arrangements to achieve value for money. The auditor has the ability to produce a public interest report which examines concerns about a council's approach to procurement.[188] DCLG noted that Fighting Fraud Locally, the local government strategy for tackling fraud, published in April 2012 had been developed by local government for local government, to address the need for a greater focus on prevention and smarter enforcement. It provided a blueprint for how councils could reduce their risk to fraud, realise cash savings, and work together to prevent future fraud losses.[189]

83. However, several witnesses expressed concerns about council approaches to protect against impropriety and fraud. The Committee on Standards in Public Life stated that unless councils specified ethical standards in contracts it was unlikely that the market would operate to drive these up and argued for more consistency in the application of the rules.[190] Cipfa considered that although existing rules meant that regularity and propriety were "in general well protected in procurement",[191] and that councils probably had more defences than the private sector against fraud, nevertheless there was a "long way to go before all councils have adopted best practice across the board".[192] The Audit Commission told us that although a 40% increase in detected procurement fraud cases since 2011 indicated a greater focus on the issue, given the scale of potential loss, there was still "some distance to go".[193] Alan Bryce from the Audit Commission considered that currently there was a "very good chance" that an organisation could attempt procurement fraud without being detected and that a culture of celebrating fraud identification was needed.[194]

84. Some witnesses considered that the move to greater private provision of public services together with changes to legislation and policy were opening up the risk of corruption in local government. TI UK said that with outsourced contracts now accounting for around one-quarter of total public spending, local government was "inherently exposed to considerable corruption risk" and there was a lack of transparency.[195] It stated that:

196

TI UK's report Corruption in UK Local Government urged the Government to "review changes in local government to ensure that they do not inadvertently create an enabling environment for corruption".[197] It considered that this would require:

198

85. The Local Government Ombudsman noted that "contracting out of a service must not break the chain of accountability that runs between public services and the public" including the right to complain when things go wrong. It considered that the public must be able to access the complaints procedure even when a private contractor is delivering the service.[199] Unison also considered that where an activity was removed from a local authority then it was more difficult to ensure that fraudulent or improper activity was not taking place.[200] However, NOA disagreed, considering that the governance frameworks that were in place for outsourcing contracts went a "long way" to ensuring that there was no impropriety.[201]

86. Witnesses raised the difficulty of detecting less overt forms of fraud including collusion by suppliers. Cipfa consider that suppliers operating in cartels were "the hardest irregularity to detect". The organisation noted that successive court actions brought by the Office of Fair Trading had shown how collusion could become widespread in particular trades or industries, and that client authorities needed as a defence to maintain the "closest possible security as to the names of firms from whom tenders were currently awaited".[202]Nonetheless, NOA told us that the introduction of more competition in some industries had made it a "lot more difficult" for oligopolies to form and reduced the likelihood of profiteering that had "previously been perceived to be going on amongst the supplier community".[203]

Local authority capacity to tackle fraud

87. Witnesses addressed the capacity of councils to tackle fraud, including the adequacy of skills in commercial management and capacity to manage problems created by outsourcing of contracts. Paul Mallory from IACCM told us that there would be merit in looking at whether more awareness or skills training could be done, for example "around examining price ranges and deciding whether or not there is anything odd about them".[204] However others such as YPO told us that as experts knew their fields "inside out" they knew what to look for.[205] Scape considered that fraud had been "easy to perpetrate" on local government because most authorities acted independently of each other.[206] Mark Robinson from Scape considered that an umbrella organisation for local government procurement could deter fraud by remedying the current fragmented approaches.[207] Alan Bryce from the Audit Commission was also concerned that the transfer of resources to tackle benefit fraud from councils into the Department for Work and Pension's Single Fraud Investigation Service would considerably reduce the capacity of councils to tackle procurement fraud.[208] The Minister, Baroness Stowell, told us that the large majority of detected fraud had been identified by only a small proportion of councils and that 100 councils had detected no fraud at all.[209] She drew attention to additional funding of £16.5 million from DCLG which would pay for an additional 200 fraud investigators, replacing some capacity moved from local government to the Department for Work and Pensions.

88. CIPS wanted a greater focus on prevention. It recommended a major education programme to raise awareness of how fraudulent practice occurs and how organisations could introduce controls to reduce risk.[210] We did not consider internal fraud in detail in this inquiry but note that there is a need to focus on fraud perpetrated on councils both by third parties and by those working within local authorities.

89. Councils need to be one step ahead of the fraudster. Councils must tackle fraud pro-actively. This is essential during not only the tender process, but also during the implementation of contracts. It is not sufficient for councils to 'let and forget' contracts: rather close monitoring of their delivery is essential to detect potential fraud. We recommend that the Government provides support and guidance to councils on the best ways to identify and tackle fraud. The LGA should work with councils to provide information on potential abuses of tendering processes and contract implementation and disseminate best practice examples of effective approaches.

90. We are concerned that some councils have yet to develop sufficient commercial focus and the acumen to combat fraud, including operations by cartels. It is vital that those responsible for managing contracts are alert to the potential for abuse of market power and collusion amongst potential suppliers and that they share information effectively.

Transparency and audit

91. We received evidence that the outsourcing of public services can dilute transparency and disclosure requirements on suppliers. TI UK said that commercial confidentiality inhibited scrutiny of outsourced services. It was concerned that, unlike public bodies, private-sector companies delivering public services were not automatically covered by the Freedom of Information Act 2000 since information disclosure was dependent on the specific provisions of individual contracts: "The contract might, for example, narrowly define the information to be treated as held 'on behalf of the local authority', thus limiting the public's right of access to information".[211] Unison told us that a lack of transparency in council contracts with third parties was a weakness since the taxpayer was not able to "understand precisely what is going on and what value the council is getting for the arrangements it has entered into".[212] The union recommended that all contractors working for local authorities should be directly subject to the provisions of the Freedom of Information Act.[213]

92. The Audit Commission told us that the difficulty in obtaining information from private companies was seen by some councils as preventing fraud investigations from proceeding.[214] Alan Bryce wanted to see terms written into contracts that suppliers must provide sufficient financial information to enable investigation of any potential fraud.[215] However, some private sector organisations, such as CECA, representing the construction sector, had reservations that placing commercially sensitive documents in the public domain could take away commercial advantage and deter companies from coming forward to tender in the future, impacting in the long term on the competitiveness of markets.[216] Nevertheless, the National Audit Office referred to the information that contractors such as Serco, Capita G4S and Atos, were able to provide for the Office's recent reports on government contracts, noting that "contractors might often be willing to go a lot further [with information provision] than we sometimes think".[217] Furthermore the CBI noted that, in recognition of the fact that transparency was essential for identifying and dealing with poor standards, it had developed with its members a common approach to transparency. This included the principle that, although providers were not, and should not be, subject to the Freedom of Information Act they should abide by the exceptions it sets out for the public sector. The approach recommended that suppliers should provide commissioners of services with the "information necessary to respond to public questions about performance".[218] The Cabinet Office Minister, Nick Hurd MP, told us that the Government expected contractors delivering outsourced services to assist councils in meeting their current obligations under the Freedom of Information Act. He referred to the Justice Committee's view that the Act should not be extended to apply to private providers of public services.[219] However, unless requirements apply equally to all service delivery bodies, whether public or private, there is no level playing field for those wishing to compete for contracts since those covered by regulatory requirements may well face additional costs.

93. We heard concern about data collection and monitoring after the abolition of the Audit Commission. TI UK stated that abolition would weaken the independence of internal and external audit, and of monitoring officers, financial officers, and chief executives because there would no longer be an organisation to act as a backstop and provide support.[220] Furthermore, the independence of auditors would be compromised since companies would be "incentivised not to challenge the authority too much" for fear that they would not get a contract renewed or that they would not win other contracts for providing the local authority with other services such as back-office functions.[221] TI UK also cautioned that there would be no institution to collect nationwide data on fraud and corruption or analyse trends.[222] Ian O'Donnell for Cipfa endorsed concerns about the future of work currently undertaken by the Audit Commission. Since the Commission's National Fraud Initiative was transferring to the Cabinet Office, local government might not remain the focus of attention in future. Cipfa would not, however, wish to see created a new heavily resourced body that "looks just like the Audit Commission".[223]

94. DCLG stated that local services should be "accountable to local communities rather than Whitehall" and that whilst government continued to reduce "unnecessary bureaucratic central performance management burdens on local government", at the same time it was strengthening local accountability measures such as transparency. The Department noted that it still had a role in assuring Parliament that the public money it distributed to local government was spent properly and had published its Accountability System Statement setting out the regulatory framework for local authorities to reassure Parliament and the public that councils were spending their resources properly.[224] Baroness Stowell also noted that DCLG had produced a transparency code listing key data which local authorities were required to publish, including information around tenders and contracts extended to the business, voluntary, community and social enterprise sectors.[225] The Department acknowledged nonetheless that there was potential to "go further".[226] One approach which the Cabinet Office Minister argued would improve transparency was open book accounting under which details of contract performance were fully evident.[227] Cabinet Office officials told the Public Accounts Committee last year that the Office was developing a model contract requiring the use of open book accounting for all central government contracts.[228]

95. Contracts let by public bodies must be transparent and performance against them auditable. The Local Government Association should consider how greater transparency in private sector contracts can be achieved, without compromising councils' ability to attract a wide range of bidders. For example consideration should be given to extending the publication of information requirements on contractors relating to performance delivery and contract costs and greater use should be made by local authorities of open book accounting. Councils should consider when seeking tenders establishing a level playing-field for all potential bidders, both private and public, by mirroring in contract terms the regulatory requirements on public bodies to provide information. This may be particularly applicable to long-term or larger contracts. Furthermore, contracts should include terms which require contractors to notify the commissioning council of any identified impropriety relating to the contractor or its sub-contractors. Any such notifications should be published.We recommend that the Government provide guidance on how central government experience of such approaches as open book accounting can be further utilised by the local government sector in order to improve procurement transparency.

Whistleblowing

96. Witnesses told us that whistleblowing was an essential element in effective fraud prevention. The Audit Commission told us that "short of whistleblowing" it was very hard to find procurement fraud.[229] The Commission considered that more could be done beyond a tick box approach which simply required whistleblowing policies to be in place, to give greater assurance to potential whistleblowers.[230] TI UK also considered whistleblowing to be one of the main ways of detecting procurement corruption and fraud in both the public and private sectors, because the employees of an organisation typically had "much more information and more opportunities to witness misconduct than external enforcement agencies".[231] It considered that whistleblowing had been more effective than audit, internal monitoring or police investigation in revealing corruption in local government and recommended that "suitable mechanisms should be established to provide an easy-to-use and anonymous channel for reporting corruption suspicions or incidents, beyond the local authority itself".[232] TI UK noted research which showed that whistleblowers were still "typically heavily penalised" for raising concerns at work. Around a fifth who raised such concerns were fired or had some "very hostile reaction" from their organisation.[233] It recommended improved institutional support to protect a whistleblower from an adverse reaction, including systems to examine the records of local authorities in dealing with whistleblowers and a code of practice including a requirement for a senior person to be designated with responsibility for whistleblowers.[234] The organisation was concerned that the abolition of the Audit Commission removed an important safeguard and reporting point for whistleblowers.[235] The Minister, Baroness Stowell, told us that the current arrangements for whistleblowing would be re-established after the Audit Commission's abolition and that regulations would be amended to enable whistleblowers to raise concerns directly with the NAO under current standards of protection.[236]

97. Whistleblowing has a vital role to play in detecting fraud and impropriety since those working on, or close to, procurement exercises and contract management will frequently have the best perspective on whether regulations are being adhered to or if suspicious practices have been adopted. We recommend that the Government publicise arrangements, including the role of the National Audit Office, for the provision of an anonymous channel for reports by potential whistleblowers concerned at local authority procurement operations.Furthermore, as part of contractual requirements all contractors should have a robust internal process for whistleblowers to report concerns. Any notification to a contractor by a whistleblower of impropriety relating to a local authority contract should be required under the terms of that contract to be notified to the council client by the contractor. Contract terms should also specify employee rights to report concerns over a contractor's actions without reprisal.

182 The National Fraud Authority estimates that, of the some £2.2 billion of fraud perpetrated against local authorities, some £876 million was in the procurement arena. Back

183 Q199 Back

184 Q410 Back

185 Audit Commission, Protecting the public purse 2013: fighting fraud against local government, November 2013. This represented some 0.2% of the 107,000 cases of all types of fraud against local government. See also Q199 Back

186 Q201 Back

187 Section 151 of the Local Government Act 1972 requiresevery local authority to make arrangements for the proper administration of their financial affairs and requires one officer to be nominated to take responsibility for the administration of those affairs. The Section 151 officer is usually the local authority's treasurer and must be a qualified accountant belonging to one of the recognised chartered accountancy bodies Back

188 Department for Communities and Local Government (LGP 63) Back

189 National Fraud Authority, Fighting fraud locally: the local government fraud strategy, April 2011 Back

190 Committee on Standards in Public Life (LGP 54) para 10 Back

191 Chartered Institute of Public Finance and Accountancy Commissioning Joint Committee (LGP 07) para 36 Back

192 Q213 Back

193 Q406 Back