Public Accounts Committee - Minutes of EvidenceHC 777

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Oral Evidence

Taken before the Committee of Public Accounts

on Monday 25 November 2013

Members present:

Margaret Hodge (Chair)

Guto Bebb

Jackie Doyle-Price

Chris Heaton-Harris

Meg Hillier

Mr Stewart Jackson

Fiona Mactaggart

Austin Mitchell

Nick Smith

Justin Tomlinson

________________

Amyas Morse, Comptroller and Auditor General, National Audit Office, Gabrielle Cohen, Assistant Auditor General, NAO, Keith Davis, Director, NAO, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Managing government suppliers (HC 811)

Examination of Witnesses

Witnesses: Stephen Kelly, Chief Operating Officer, UK Government, Bill Crothers, Chief Procurement Officer, UK Government, Les Mosco, Commercial Director, Ministry of Defence, Vincent Godfrey, Director of Procurement, Ministry of Justice, and Richard Douglas, Director General of Finance and the NHS, Department of Health, gave evidence.

Q1 Chair: Welcome. Apologies for being a little late; we had to discuss some issues among ourselves. I am sorry about that. We have a lot to get through and you are a big team in front of us today, although I think many of the questions will go to Stephen Kelly and Bill Crothers. Short, direct answers would be very much appreciated.

We are going to deal with both Reports: the Report on how you manage, and the Report we considered last week with the suppliers. You may hear references to both. We thought we had a positive and good session last week with the four biggest suppliers. If you look at the totals that the NAO put forward, probably about half of Government spend on supplies and services now goes through private contractors. This is a hugely important issue for this Committee, on the basis of both VFM and accountability.

Last week, we thought we secured some rather good commitments from the four we saw on three issues. One was open-book accounting; the second was open access by the NAO to all the contracts that companies have with the Government; and the third was freedom of information. I do not know whether you picked up on this, but I hope you did. Did you?

Witnesses indicated assent.

Chair: I hope that you are familiar with all this. These are views that this Committee has, for a number of years, thought were important, as we have looked at the fragmentation of public services and delivery by private contractors. We want to know your reaction to the commitments we got from the private contractors.

Stephen Kelly: Obviously, we welcome both Reports and their conclusions. Some of the initiatives that Bill and our Minister, Francis Maude, have initiated with industry are very much towards improving supply management, engaging with a partnership and being specific about the different segments of the marketplace. Historically, we have treated the market homogenously. If you cast your mind back to 2010, you are probably all aware that the marketplace, in terms of our data, was very fragmented. We had a long way to go, and we initiated, at that time, under our Minister, a cross-Government effort to raise our game. You could probably argue that some shock treatment was applied to the system at that time, and that there was reset with some of the suppliers.

What we are looking to do now is ensure that the second phase of the programme really addresses a couple of things: us becoming a better, more intelligent, smarter customer, continuation of our better data, better management of contracts-perhaps we will cover that in this session-and treating the marketplace more heterogeneously. The construction industry is very different from the FM market, which is very different from the people you interviewed last week about the outsourcing marketplace, which is very different from IT.

Generally, we welcome the statements made last week by the three chief executives and the chairman from industry. We have started a process with industry to encourage it, around this agenda, to ensure that greater transparency is associated with the suppliers.

Q2 Chair: Good. Encouraged or insisted on? There were three issues, and I want your view on all of them, and a further one, which Paul Pindar raised last week. One was that there should be open-book accounting.

Bill Crothers: Why don’t I start with that? In a recent sample of large contracts, about a third were open book, although most of the open-book clauses were not used. What we have is a right, but for some reason, the Departments were not enacting the open-book clauses.

Chair: I am sorry, but I am finding it difficult to hear you.

Bill Crothers: From a sample, a third of our large contracts were already open book.

Q3 Chair: We want 100%.

Bill Crothers: Absolutely. However, for most of that third, the Departments were not actually using the clauses that they already had.

Q4 Chris Heaton-Harris: Why was that?

Bill Crothers: We do not know. We have just found that out.

Q5 Chris Heaton-Harris: It is something that has been encouraged for a reasonable period of time.

Bill Crothers: Absolutely. It has been this Government’s policy to have all large contracts be open book. We are developing a model contract-a standard contract across Government-and open book would be in there.

Q6 Nick Smith: Have you asked the Departments?

Bill Crothers: We have only just found this out.

Q7 Chair: Are any of the Departments present hostile to open-book accounting?

Richard Douglas: No.

Q8 Nick Smith: Mr Godfrey, have you been looking at these accounts?

Vincent Godfrey: Yes, we have.

Q9 Nick Smith: Historically?

Vincent Godfrey: Yes, historically. I agree with Bill that it is not uniform across all of our contracts, but we have increasingly been auditing all of our accounts. We have recently audited all our major contracts.

Q10 Chair: I would hope that you are always auditing. I would expect contracts to be audited consistently all the time, over time. This is a different point.

Bill Crothers: The point that I want to make is that we need better capability.

Q11 Chair: Can you say yes or no to this? Will you be including a requirement for open-book accounting in the letting of public contracts by the Government or their agencies, including local government and health?

Stephen Kelly: Effectively, Government policy is pushing transparency aggressively.

Q12 Chair: I asked you for a yes or no.

Stephen Kelly: The new model contract that we have in place will have open book as a requirement.

Q13 Chair: For everybody?

Bill Crothers: For central Government. Our remit is central Government only.

Q14 Chris Heaton-Harris: Would you build capacity in central Government, so that people actually utilise what is in the contract?

Bill Crothers: That is the point I was making. We need standards. We need to ensure profit. The Report is consistent with that. We need to ensure that people understand the information that they are getting and so on.

Q15 Fiona Mactaggart: One thing that we heard from the companies last week was that they felt that the officials with whom they dealt were not sufficiently senior. Is that something that we are doing something about?

Stephen Kelly: There are probably two points there. I would not hide that we have a big job to do, in terms of building the capability. It is easy to say "open book", but there is some science in the interpretation of net margin and allocation of overheads, and we need some accountants and finance people on our side of the table. We need to raise our capability significantly to manage open-book relationships, candidly.

Secondly, I absolutely agree about having the most senior level for the material contracts; I think that they said, in answer to whether they would expect the CFO and CEO to be involved in the private sector, "Yes, you would." I bet that a CEO on the other side in the private sector would say that, for material contracts, the highest level of the organisation should be involved. The people whom you are looking at now should therefore be involved in some of these material contracts.

Q16 Jackie Doyle-Price: So, in future, if an accounting officer lets a contract and does not have open-book accounting as part of it, we can say that they have not fulfilled their duties under your regime.

Bill Crothers: Yes. There is a materiality point. This is for large, complex contracts.

Q17 Chair: I think we have to get back to non-central Government, because central Government is only £40 billion out of the £187 billion.

Stephen Kelly: Bill and I have some authority for central Government, but more in an advisory function, and we are very respectful of that. The Departments and the accounting officers have accounting responsibility within the Departments. In the wider public sector, if you break out the £187 billion, we have some £50 billion in health and £80 billion-odd in local government, which we can help to influence-there is some good joint work going on-but that is not our remit.

Q18 Chair: Mr Douglas, are you going to insist on it for all your trusts?

Richard Douglas: For the major contracts, were it appropriate, then yes.

Q19 Chair: Yes?

Richard Douglas: My only pause is on the £50 billion, which includes lots of things. It would include branded drugs spend, where we have a totally different type of relationship, because it is the pharmacological industry. For the types of contracts that are being talked about here, if that is a position that central Government takes, my view is that we would put that into the standard contracts for the NHS as well.

Q20 Chair: What we might usefully do is write to DCLG, because it represents £84 billion, to see what it will do with its contracts. Can we do the second bit, which was open access by the NAO?

Stephen Kelly: Just before we do, we have got some activities going on with the NAO where I think the process is working as a cross-Government review, which you are aware of. NAO are having an oversight of that. Actually, I think it is probably appropriate to let that process land, do some lessons learned about that, see where that takes us, and involve our Ministers, in terms of how we go forward. I think we are breaking ground here.

Q21 Chair: Parliament and, through Parliament, the taxpayer need some assurance. Open accounting will help your Departments manage better if they get the capability, as everybody is saying. What you then need is a mechanism that allows Parliament, through the NAO, and the taxpayer to be certain. We will come to the detail, but quite a lot of this stuff comes through whistleblowers and so on. What we have not had so far-for example, when we did the GP contract-is the facility to go into the contract. Did we, Amyas?

Amyas Morse: No.

Chair: We need that.

Stephen Kelly: We are breaking some new ground, I believe, with the process that we are currently pursuing with NAO oversight. We invited in the NAO to do that process with us and, candidly-I think you can get a reaction from the NAO independently-that process is working well, but, no doubt, we can make improvements, and it is probably worth letting that process complete, as that is only weeks away, and then reviewing what improvements we need to step it up, in terms of supporting transparency.

Amyas Morse: I do not have a problem with that at all; I think that is a reasonable response. It is just worth spelling out, though, that we are not saying, "We want to look at each and every contract." I would say that when there are instances when the Committee is trying to find out what is going on in a major contract, and the information available to it is not as good as it might be, we want to be able to use our investigative arm to find out what is going on. That does not mean that it will be appropriate in every case. It may be that somebody in an arm of Government is doing a great job already. In many cases, that is perfectly true.

A good example is the Ministry of Justice, which has been carrying out investigations; we have worked closely with it, and it has been in the lead. It is not a question of us developing eyes bigger than our stomach, but we think that there are times when the ability to come and report direct information to the Committee contributes quite a lot towards Parliament’s ability to hold to account.

Bill Crothers: I think that’s reasonable.

Stephen Kelly: Yes, that is reasonable.

Q22 Chair: Good. Paul Pindar suggested last week that Government should have the power to put third-party auditors in on any contract at any time, which is a similar sort of request, but that need not be the NAO, necessarily. Would you agree with that?

Stephen Kelly: Actually, our Minister hosted a round-table session for some of those CEOs, so he is already discussing these sorts of principles. One of the other areas that historically we have probably invested time on disproportionately-I will give you the context-is procurement, and you could argue that that has not always achieved the best outcomes. We have disproportionately devalued contract management over 10 years. That is where, candidly, the taxpayer probably suffered. I think we therefore need to reset. For some of these material, complex, large contracts, certainly the emphasis would be on us making sure that, on a periodic basis-probably annually-they are reviewed and the assurance is provided that, effectively, we are getting the service we require and saving the taxpayer money. In this case, we have kicked-off a process again where that has extended to involving third parties. In this case, actually, both suppliers concerned have given their consent, and that is a complete contract review for these suppliers.

Q23 Chair: Okay. I note that they have on tagging; it is just that we would rather take it wider. The final thing is FOI.

Stephen Kelly: What is the specific question?

Q24 Chair: At the moment, if you ask a freedom of information request-we all do quite often as MPs-what you get back is that it is commercially confidential, and therefore the information cannot be provided.

What was interesting last week was that the companies themselves said that they had no problem with providing the information pertaining to a contract, which was welcome. I wanted to get an assurance from you that, with their willingness to give, it is not you who uses commercial confidentiality to prevent MPs and others from accessing information on the delivery of public services through private contractors.

Bill Crothers: I think there is a question of whether it would be voluntary or mandatory. If it was to be mandatory, we would probably need to think about it outside here.

Q25 Chair: Why?

Bill Crothers: We just need to consult with industry. It is perhaps a burden on industry-

Q26 Chair: The interesting thing is that they were all okay, and they are the biggies.

Bill Crothers: That is right; those four were. It would probably be sensible for us to consult a little wider to give some advice to Ministers.

Q27 Chair: Where it hits me most is on DWP. You are desperate to get information about how the Work programme is performing in your patch, and it is always hidden behind, "You can’t give it. It is commercially confidential. DWP told us that you can’t have that information."

Bill Crothers: The principle is we believe that this Government is the most transparent. Transparency is always the first place where Ministers go when we give advice. On that principle, we would look at it. There may just be reasons why we need to think about how, and whether it is voluntary or compulsory, because it can add cost.

Q28 Chair: I think Richard Douglas gave a little look. What is your view?

Richard Douglas: I didn’t realise that I had given a little look. I will have to watch what my eyes do. From our point of view, if that is something that industry agrees with, it makes our job easier as well.

Q29 Jackie Doyle-Price: After last week’s session, I was left with a clear view that the enemy of transparency was not the companies, but the Whitehall machine that was hiding behind commercial confidentiality, perhaps because it does not want to show its weak performance in managing contracts. I get what you say: this is the most transparent Government-they are definitely a force for transparency-but ultimately you are taking on the force of conservatism in the Whitehall machine. Where is the stick to force that?

Bill Crothers: Within civil service reform, there is a programme I am running called commercial reform. Reform is challenging by its nature. We are trying to do things that have not been done previously. We are absolutely not resisting the idea. I just think that it is sensible to consider it a little bit and see how we would do it. I absolutely would embrace the idea, because transparency is good.

Stephen Kelly: Some things we would take are encouraging. We have done research on where the US, Canada and Australia are with transparency. We are also looking at European countries. I think we are ahead, but we need to go further, with things such as GMPP, with which you will be familiar through the Major Projects Authority. Contract Finder now publishes 19,000 contracts. Generally supporting Bill’s comments, the Government are committed to transparency. It is our job to work with industry, so it is respectful for us to talk to them. We were talking to the BSA and we plan to talk to people like the CBI to make sure that we continue on this path.

Q30 Jackie Doyle-Price: I think it is your Permanent Secretaries to whom you need to talk most.

Bill Crothers: We will talk to them, too.

Q31 Chris Heaton-Harris: I want to pick up on the Chair’s point and ask Mr Crothers about the DWP and the Work programme specifically. I have two providers for my own constituency and the geographic area around it. Each tells me that it is doing particularly well and has given me its own figures, but they would each love to know how the other is doing. That would encourage a competitive atmosphere in this market, so I can see it only as a positive. However, when you talk to some officials in the Department, I get the feeling that they see giving out this information as a complete negative. As we got the feel from the people in front of us last week, there is no great fear of this transparency from the companies themselves, as long as it is on a level playing field that is open to all.

I understand when you say that you have to test the market slightly wider. I guess the only question, which we will come on to a bit later, is how that affects smaller companies-whether they would be affected more adversely than larger ones. With that caveat, there can’t be too many reasons.

Bill Crothers: The only possible concern I have is deciding too quickly and it being a burden. Why would you possibly resist providing such information? I completely agree. I think it should be provided.

I listened to your discussion with the suppliers. They talked about information being withheld because it is commercially sensitive, and I think there tends to be a presumption of holding information back, rather than a presumption of everything being provided except that information that is truly commercially sensitive. I would agree with putting much more out into the public domain.

Q32 Meg Hillier: Would you want to see the companies do that themselves? I am picking up on what Chris was saying, but I have heard one of the companies saying privately that it would not mind putting out that information itself sometimes to defend its performance but, of course, the Whitehall machine and Government Ministers, perhaps politically, want to control the message, and that slows it down. Have you had any discussions about, say, allowing a prison operator, a tag provider or a Work programme provider to put out their own data?

Bill Crothers: If you go to the broader point, one of my key principles is that there should be much better knowledge within the system. Good competition requires perfect knowledge, and if there is knowledge about suppliers-their behaviour, performance and prices-and that knowledge is flowing around the system, competition will improve and everyone gets healthier. Not keeping information secret is the way to do that, so I have absolutely no problem with that.

Q33 Meg Hillier: You say that you have no problem with that, but is it official Government policy? Would Ministers be happy?

Bill Crothers: Transparency is the policy of this Government. The Minister for the Cabinet Office has been pushing very hard for transparency.

Q34 Meg Hillier: I know he has. He and Mrs Hodge are champions of transparency, along with the rest of the Committee. However, if you are the Home Secretary, the Secretary of State for Justice or the Secretary of State for Work and Pensions, everyone is on at you about a challenging policy-it could be any Government, let’s face it-and the provider is getting hammered about a prison or something, and decides to release data to prove, as it sees it, its good work or its challenges, you might not be quite so happy. Is that just tough?

Bill Crothers: You have been there, so you know that it is difficult.

Q35 Meg Hillier: I would be in favour of as much transparency as possible, but there is a whole swathe of people in the political machine who are there to control the message. Are they on board?

Stephen Kelly: The reality is that we are on a journey, which I think started in 2010. In the first phase, some blunt instruments were applied to reset the marketplace, and that was necessary. We are now at a stage at which we need to be more sophisticated, but within that the Government’s policy is very clear on transparency, and this is part of the journey. We are probably in the foothills with this area, and transparency will probably continue apace. In discussions with the CBI and the BSA, we will pick up on some of the things that came out of the supplier session last week. We want to reduce the burden, the red tape and the cost of bidding. Again, you heard some statistics on the cost of bidding, which is 1% or 2% of the total bid value. We want to have a light touch, but better information.

Q36 Meg Hillier: One of them talked about having 150 KPIs, I think.

Bill Crothers: Yes.

Meg Hillier: Are you working with Departments to cut down on that? Everyone wants their favourite performance indicators.

Bill Crothers: When looking at contracts across Government, we have looked at particular sets-as it happens, Serco and G4S-but we will infer more general messages from that. One of the things we have found is a theme that contracts are more complex than they need to be. There are many KPIs with which performance is not managed as well as it would be if things were simpler. We will look at that and make some recommendations.

Stephen Kelly: That is part of being a better customer.

Q37 Chair: Do any of the departmental representatives have any problem with FOI?

Vincent Godfrey: No.

Q38 Chris Heaton-Harris: Mr Mosco, I would have guessed that your Department has the most concerns about that particular area, for valid reasons. First, how do you feel about the questioning so far, as it were? Secondly, how do you feed that into the process?

Les Mosco: On transparency, the principle is good. I would want us to consult a bit more with industry, albeit that the four suppliers last week were all okay. We should, as Bill and Stephen have said, consult more widely, because I can see that there might be some companies that-

Q39 Chair: Give me an example of what could be a problem. I accept that MOD does not want to let out technical solutions on which you might be engaged, or something like that. That could be a problem, but it is as if the words "commercial confidentiality" are put up there and you immediately assume that people will move away. Where could that be a problem? Interestingly-sorry to interrupt on this one, Chris-the MOD more than others has a sort of oligopoly of companies with which it deals, and it spends megabucks-it is always overspending. In a way, openness is more-

Chris Heaton-Harris: It also deals with other Governments that might have other issues and are not on the same page as us.

Les Mosco: I think you asked me three questions there. On the first, one example of why a company might regard information as commercially confidential would be if it was loss leading on its pricing, for whatever reason. It might not want that to be made public, because all its other customers for the same thing might say, "Well, if you can sell it to x for that price, why aren’t you selling it to me for that price?" I can see circumstances in which a company would want to keep that private. The second issue is that a number of our contracts have security issues around them. In some extreme cases, even the existence of the contract is not something that we would want to talk about. There will be some such cases.

On the third point about the oligopoly and the very large suppliers, who are overwhelmingly the monopoly suppliers on very big contracts for which there is no real competitive market, new single-source regulations arrangements are coming in to replace the rules that have been around since the late 1960s, which are colloquially known as the "Yellow Book". That was a set of rules governing how monopoly suppliers operate and how you manage that when there has been no competition. That has been a form of open book going back to the late ’60s, but part of the Bill, which had its Third Reading in the Commons last week, was to strengthen and refresh the single-source regulations for monopoly suppliers. That has very explicit and quite tough requirements in terms of open-book disclosure and access by others to the numbers. That really does go a long way down the path you have been describing.

Q40 Austin Mitchell: I think that we all agree that openness is desirable and that not having it causes many problems. I was surprised last week to get the feeling that the providers are happier with openness than Departments and local government, which seem inclined to use commercial confidentiality as a cover for their own failings-that is just a jibe in passing. Having got open contracts and information, are the Departments, and particularly local government, in a position to use it as an effective means of auditing performance on the contracts?

Bill Crothers: Let me give you an example. I looked at an open-book contract-I did a commercial review of the contract with the Department and the supplier. The contract was open book, so we should see the gross margin. I looked at the gross margin, and they had deducted depreciation to get to gross margin. You just don’t do that. My point is that the relatively junior officials did not have the accounting experience to understand that that was a bad thing. The supplier was saying it had been fully open, but in my view, it was being somewhat disingenuous. You do not deduct depreciation to get to gross margin. My point is that we need open book, and some standards and capability, so that we know what we are doing and we are able to use the information. We need to use what we have and go much more broadly across more contracts.

Q41 Austin Mitchell: So you audit the rate of profit, with the reservations that we have just heard about from Defence. You know when the rate of profit becomes excessive.

Bill Crothers: In the contracts that are open, you can see if profits are excessive, but you have to look pretty closely and quite often you need a specialism. You need to know what you are doing, because they are experienced, and often our guys are not, and the truth is that suppliers occasionally play games.

Q42 Austin Mitchell: Finally, is it not damaging to have lists of preferred bidders because that excludes a lot of people who might be able to compete and does not give you the full and fair competition you need to get contract prices down? Why have preferred lists?

Bill Crothers: I agree.

Stephen Kelly: It is not the simplest. I think there was some good work done on the first Report around comparison of the four companies. If you look at Capita, you see £3.4 billion turnover and £290 million profit before tax, but it is not just the comparison against the plc numbers. What we are looking to do in the second phase of this programme is to compare their margin analysis, first to get consistency and apply the same accounting standards, so we are comparing apples with apples, but also to compare division against division. So, if the company is working in the US with the Department of Defence or the federal Government, it would be really useful to compare the margins that they deliver against that customer with ourselves. Then there were some more sophisticated conversations around gain share, which becomes quite pivotal in terms of the interpretation and intelligent customer function on our side of the table, to make sure we are going in with our eyes open.

All I am saying is that it is not as simple as it sounds. The challenge for us, honestly, is that we need to raise our capability significantly on our side of the table.

Q43 Meg Hillier: Can I ask how long it will take? I know Mr Crothers; he and I worked together in the Home Office on some old contracts and new ones. Some of the old ones are just bad, and they are written in for a long time. So how long will it take for all the contracts-the bad ones-to run out, for the new ones to be in place and for the staff to be capable of doing open-book accounting and the proper management?

Bill Crothers: I do not think we have to wait. We can pick one of the segments that has probably the least competitive practices, and that is ICT-technology, IT, telecoms. Probably about 40% to 50% of those contracts will run out in the next 18 months, so there is a natural cycle. However, my view is that if a contract is bad and it has a bad clause, you don’t wait till the end. We have enough influence on our side. We provide change requests and we do all sorts of business, so that we can negotiate those things into or out of a contract before it ends, and we have been doing some of that.

Chair: I was going to move on to tax.

Q44 Nick Smith: I just want to come back on capability. It seems to me that there are some unanswered questions about genuine concerns you have about capability to deal with open-book accounting. You have talked about this issue; it seems to be a very big issue. So what measures are you going to set in train to raise the capability of the staff you have got, to bring in new staff, or to get the senior staff to concentrate on this high-level challenge around the profits of the suppliers you work with? What are you going to do about it?

Stephen Kelly: Maybe I will start there. There are probably three key skills that we need, and No. 1 is someone who understands the domain; so, someone who has lived in the world of BPO or IT. You talked about some of the companies last week making between, say, 5% and 10% net margins; some of these ICT companies are making 40% or 45% earnings before interest and taxes. So, some of the areas that we will focus on are the areas where, in the first phase, we have treated things more homogenously, but we will get very smart around segmentation. So you need the main experience.

Secondly, you need financial management experience, and, thirdly, you need some contract management experience. Bill is leading a programme around commercial reform, which encompasses this. Bill, do you want to talk about what we are doing?

Bill Crothers: Briefly, we have announced previously that we have created an entity called the Crown Commercial Service at the centre of Government, essentially to manage all of that spend that is common to Departments. So, not tanks, not prisons, not hospitals, but that which is common. It is about £10 billion or £12 billion of the spend. We are actively recruiting for that. On Wednesday night, we will be having a recruitment seminar; 140 or 150 people are coming. We are looking for 80 or 90 people. Currently, we have open spots. We are recruiting commercial specialists. So we are just recruiting capability, and we need people who have the sort of experience that Stephen mentioned.

Q45 Nick Smith: You have told us about the "what" and the "why"; I am still a bit unclear about the "how". It sounds like you are saying you need a cadre of 100 people that you can drop into this problem. Is that your assessment?

Stephen Kelly: I think, again, the Report highlights this new function that was established a couple of years ago, around Crown representatives. Most of those guys-like Ian Tyler, ex-CEO of Balfour Beatty, and Rob Wilmot, founder of Freeserve-are very experienced individuals. It is very clear that we need to build up that cadre, have them segmented around key business areas like BPO, ICT, telecoms, construction, and then support that process and the Departments with real competence to be able to achieve that. We have half a dozen new Crown reps starting soon, so this is very much work in progress.

Richard Douglas: Could I come in with my non-health hat on, as Head of Government Finance Profession? There has been a focus for those of us working with Bill and his team on how we develop finance and commercial skills, working together across Government.

I have a stream of work led by one of our DGs to help develop a programme of finance training, both for finance people and, critically, to get better financial and commercial understanding across the wider senior civil service. I have mandated that training at the moment across the Department of Health. Every senior civil servant will go through that financial and commercial skills training. That is the sort of taster end of it, but we are trying to work with both professions together to get this capability right the way across Government.

Q46 Chair: I am going to talk a little bit about tax, and then I want to go back to control. You talked a bit about trying to get a real handle on understanding the profit levels. The Green Book, the Treasury guidance, is absolutely clear. It says that when the Government are deciding whether to contract with the private sector or deliver a service in house, Government should include the tax paid by contractors as a factor. There is a clear remit for you to ensure that, quite apart from my personal view and that of some others round the table that, if people are going to take the taxpayer’s penny to make some money out of it, they have a duty to pay their fair contribution according to the profits they have made in the business they undertake in this jurisdiction.

When we looked at the four companies last week-there may be good explanations-two of them, G4S and Atos, paid absolutely no corporation tax, although both of them had £700 million-worth of business with us.

Stephen Kelly: First of all, I would say that in the summer some new rules were established, where all companies had to be compliant with their tax. What I think you are moving to is the spirit of implementing that, rather than employing exotic accountants to work in the Cayman Islands and such places. Candidly, there is only so much we can do. We apply the rules, and Bill is overseeing that to ensure that companies are complying with the tax regime.

Obviously, with these things it is complicated. There is multi-year depreciation, writing off against costs. We understand that, but we do encourage companies that deal with the Government to be responsible citizens. In September Bill wrote to the top 40 suppliers reminding them of our expectations around corporate citizenship. We are just receiving the returns around that. You might want to talk through some of that because it includes tax as well as apprenticeships and other important areas.

Bill Crothers: It is broader. As Stephen says, it is really hard just to have a simple rule: if you pay no tax, you don’t get any business. It is not that simple. We had the rules that we put out which are compliance-essentially are you legal in tax-

Q47 Chair: "Legal" is very difficult to define, Bill.

Bill Crothers: This is a hard area, I’m sure we are in agreement. It is just hard to execute. We wrote to 43 suppliers and asked them for information on hospitality. We asked what they had spent on hospitality with the civil service; what number of new patents had they registered in the UK; what of the business they had with us was booked in the UK rather than overseas, and so on. We got replies from about half. That was two months ago-only half. Of that half, we need further discussion and more information. It is not just about tax. We are trying to address this to ask, "Are you a good corporate citizen? Are you contributing to the UK?" I know that is not your particular point. At least we can talk around that and investigate some other aspects.

Q48 Chair: I was pleased to read in the Report that you are beginning to have a look at past performance. You have decided at last that you can have regard to past performance in deciding whether or not you award a contract again. I wish you well on that. I have always thought it was ridiculous that we did not do that, and I did not believe the EU rules that said we couldn’t.

Will you have regard to this broader definition of corporate citizenship? You have talked about hospitality. We talk a lot about tax in this Committee. Will you have regard to that in deciding whether or not? I was thinking of the old PFI contracts we looked at where it was plain obvious that they were making an arm and a leg out of the contract, then taking most of it offshore and not paying any UK tax on it at all. I want to know how it is going to work.

Bill Crothers: There is a formal policy called taking past performance into account. It is surprising that it did not exist, but we put it there about a year ago. It is technical in that you have to take performance into account on a particular contract; so we look at a contract in defence, in justice, or in the Home Office, and that performance is documented by that Department and is then taken into account in the procurement decision by another Department. What you can take into account is somewhat prescribed. Generally, I think that we tend to be quite risk-averse and a little cautious. We tend to take a slightly different view-we should be looking at performance in the round. I will not say that that means we can take tax paid into account, because it is not that straightforward.

Q49 Chair: Does it mean you can’t?

Bill Crothers: It is silent-it does not say that you can or you can’t, but you can take performance into account. For example, you can take into account whether a supplier has been overcharging and whether a supplier is solvent or not; you could maybe take into account the example I gave you earlier of a supplier charging depreciation to get to gross profit, because that is disingenuous. I think we can take more into account than perhaps we have in the past and we need to take past performance into account properly, whereas before, we did not even have a policy on it.

Q50 Chris Heaton-Harris: Going back, lots of the contracts were very different to the contracts you are signing now. It is not an interest, because I no longer run the company, but I used to wholesale fruit and veg for a living in New Covent Garden market and one of my biggest customers was the American air force, and they insisted that you had the same price for a product for a month. It was a market, so the price went up and down: one day, I would be losing tonnes of money because I had agreed to make the supply, and the next day, I would be making tonnes of money, because there was a glut in the market. Contracts are way more flexible now. I am hoping that that fantastic, does-what-it-says-on-the-tin policy you introduced a year ago also means that you are being more flexible and modern in your contract approach as well, when looking at new contracts.

Stephen Kelly: Yes, I think that is fair. A departure that is probably welcomed is that pre-2010, there was a very binary view-either do things in-house or outsource them-whereas now there is more pragmatism to look at the business form and business structure of the best way to provide and deliver the public services. Recently, you have probably been aware of such things as MyCSP, which was a joint venture with Equiniti Paymaster, with some employee ownership. The good news is that one year later, service has gone up by 30%, the unit cost of the core administration service to the taxpayer has reduced by 20%, and over the life of the project, it will go down by 50%.1 So we are now seeing some more intelligent models, looking at equity, ownership and what we need in terms of better public services for less money. There are smarter ways of doing these things. I think it was Mr Pindar last week, who talked about how to operate gain share. Again, having 150 KPIs is probably not a smart way to go, but you need that intelligent, smarter customer, and fundamentally you need to ask, "What are we trying to achieve here?" in terms of the service to citizens, but also the impact on the taxpayer and the other areas around corporate citizenship.

Bill Crothers: Could I briefly say that the most important principle, which the NAO Report mentioned, is who are we? We are the Crown. We are not a Department. What has happened traditionally is that suppliers have priced per Department and you get a range of 50, 60, 70, or 80 separate rate cards by suppliers. When we become the customer-we the Crown-we want to get rid of that and get one price for all Departments and use our commercial leverage. We are just redressing the commercial balance that we have lost for years.

Q51 Chair: Keeping on this point, you have said that you can take past performance into regard. We are bit iffy about whether you can take their contribution on tax into regard, but you might look at their hospitality-that is what I understood you to say. I would like you to take their tax into account, but have you ever, on past performance, sacked anybody?

Stephen Kelly: A company or an individual?

Chair: A company.

Bill Crothers: Have we ever stopped a contract?

Q52 Chair: And not used them again?

Bill Crothers: As a matter of fact, yes, but I am not sure we have not used them because of that.

Q53 Chair: Can you tell us who, and in what circumstances?

Bill Crothers: I think it is a matter of record that the contract on e-Borders was stopped because of breach. That is in dispute. The supplier-

Q54 Chair: Who is the supplier?

Bill Crothers: Raytheon. They dispute it; they say that there was not a breach, so there is an argument going on. In that case, we said there was non-performance, it was a breach, and the contract was stopped, but they dispute that.

Q55 Chair: So that is the one contract.

Bill Crothers: No, no, it is the one I can mention.

Q56 Chair: What about you guys? Mr Douglas, Mr Godfrey, Mr Mosco?

Richard Douglas: I cannot think of one off the top of my head, but that does not mean there have not been any.

Chair: You have been there a long time.

Amyas Morse: Chair, if it is helpful, we had a hearing on the cancellation of the contract for East Coast main line rail operations. Do you recollect?

Chair: That was before our time.

Amyas Morse: No, it wasn’t. We were particularly impressed that the Department for Transport had had the gumption to take the action that they did.

Stephen Kelly: In the last fiscal year, I think-from memory-1092 were put through the strategic supplier control processes established by this Government, of which nine were rejected, and many of those were contract extensions.

Q57 Jackie Doyle-Price: On that point, the contract for PIP assessments was awarded to Atos after there was a lot of intelligence about underperformance on the work capability assessment contract. Were you involved in any discussions with DWP when that contract was issued?

Bill Crothers: The contract was issued a few years ago.

Q58 Jackie Doyle-Price: But the PIP contract was issued earlier this year after there was a lot of intelligence about underperformance on the work capability assessment. If you are saying that past performance is taken into account, clearly it wasn’t in this particular example.

Bill Crothers: I honestly cannot remember the timing. The policy became extant about 12 months ago, maybe nine. I am not sure when the PIP contract was awarded. It is the case that there is an obligation on Departments to take past performance into account, and they do that through requesting formal performance certificates.

Q59 Jackie Doyle-Price: The PIP contract was awarded earlier this year. That was after you said you were reviewing past performance.

Bill Crothers: I would be happy to check and write to you.

Chair: Did PIP go to Atos?

Q60 Jackie Doyle-Price: It did. Figure 10 documents it.

You had a review of the Atos management of the work capability assessment. That review took place after the contract was awarded to Atos, but this reflects concerns from a previous small audit. The Report documents that 41% of assessments did not meet the required standards. Typically, DWP’s response was that that does not mean the recommendations were incorrect, which is classic DWP when it comes these things. This is what worries me. You talk a really good game, but it is not replicated across Government. Where’s your stick?

Stephen Kelly: First, it was challenging getting that policy landed. During the course of last year, we received a lot of advice that was very risk-averse. The Minister was very clear that this policy needed to be enacted, and it landed at the beginning of this year. Regarding Atos, we have worked with the Department in the last eight to 10 weeks around those situations. Prior to that, I cannot speak for back in the spring, because I genuinely cannot remember, but we will write to you about the timing.

Q61 Chair: Do you want to say something, Mr Mosco?

Les Mosco: I wanted to answer the earlier question. I can think of a few cases where the MOD has cancelled contracts with a given supplier. The thing I would stress is that suppliers are often a curate’s egg. They are good on one contract and bad on another, so you cannot, on the basis of one contract, assert, "This is a delinquent supplier; we should never do business with them." You have to look at the facts of the case.

I can think of another example where we had a supplier that had a couple of contracts that we were unhappy with, and a number of other contracts that were okay. In the MOD, because we are so large, we have a process for managing key suppliers, and what we did with that particular company was to bring them in and have a very serious conversation with them. We pointed out where they had failed and we pointed out that we thought they had some underlying problems, which they have now sought to address. The issue of dealing with suppliers who are failing definitely does need to be followed up, but you cannot assume a single failure is a sign of the terminal decline of the company. If you get some consistency, however, yes, you need to do something in a co-ordinated fashion.

Q62 Jackie Doyle-Price: It can be down to a poor customer.

Stephen Kelly: It can be. One of the things from the market review last week that we are very focused on is that we want a vibrant, competitive marketplace in the private sector to provide excellent public services and save the taxpayer money. The whole purpose of this is not things like blacklists, and so on; it is to get them back in play, and really to get them to step up and be unequivocally clear about our requirements.

Q63 Fiona Mactaggart: You were saying that you had only recently been focusing on the Atos contract. I do not know whether it is your focus, but I had the rather peculiar experience just three or four days ago of receiving a grovelling e-mail of apology from someone in the Department for Work and Pensions. They had said that Atos, as part of its bid, had stated that 75% to 90% of claimants would have no journey longer than 90 minutes, and they had to write me an apology because that figure, which was repeated in about 10 different places in the Atos bid document, was actually 60 minutes. I am fairly certain that the DWP has been monitoring Atos on the wrong figure. I cannot imagine why they would have put 60 minutes in a parliamentary answer-not just some scribbled note-unless they believed in practice that that was what they were monitoring.

That causes me real concern that what is happening is that the reality that a company is committed to-in the same contract the company promised hundreds of centres in London and the south-east, but actually there are fewer than 100 centres-can be completely reinterpreted, as it seems to have been in this case, not in favour of my constituents who have excessive travel distances and who have to go upstairs in assessment centres despite their mobility difficulties, but in favour of the company. We do not usually see those documents, although I managed to get hold of this document. What are you doing to stop that?

Bill Crothers: That is new knowledge, and we cannot answer for DWP. What you have raised we should take away, perhaps. Let me talk about the process. We have a set of 31 strategic suppliers that do substantial business with us. We have a Crown representative allocated to each, who looks at the totality of the business across Government. That has never happened before. We meet on a regular basis every four to six weeks on a commercial review board, and we review the progress, the status and the performance of those suppliers and rank them "red", "amber" or "green". If they are materially and systematically poorly performing, they become "black", which means that they are high risk and we take special sanction with them. We get a report from the Departments, and it is not a passive thing; we ask the Department how they are performing in each of the contracts. We put all of that into the assessment of whether they are "red", "amber" or "green". When I have looked at contract management across Government, we could do better.

Q64 Fiona Mactaggart: What colour is Atos?

Bill Crothers: I cannot tell you. I cannot remember, and it would probably not be appropriate to tell you. The purpose of the process is not to name and shame and embarrass; the purpose is to tell the supplier how they are doing so that they can improve. We tell them what colour they are, and it works as a really good sanction because they do not want to become high risk, and we see improvements. The contract management in a number of our large contracts could be better, however. As Meg says, there are complex KPIs. The people who are managing contracts are sometimes too junior. Change requests happen at levels which are junior, or complex, or whatever. On that particular, if you would like us to take it away we will, but we cannot speak for DWP, because I don’t know the contracts that well.

Amyas Morse: Stephen, going into your last comment about a vibrant competitive environment, to be honest, I do not think the record of nurturing a competitive environment is all that great. I say that because to be quite frank it is quite evident, even with those companies that we saw last week, who were very open with us and in many ways gave very good testimony, that the rate of growth that they are achieving is largely speaking through acquisition-not solely, but mostly non-organic growth. Therefore what is happening-and it happens in a lot of areas of Government supply-is that the Government stand by and watch consolidation of the supplier base.

I am afraid, as you know very well, if you are a supplier and you want to maximise profitability, you don’t do it by having vibrant competition. You do it by having as little competition as possible. So you can’t expect them to do this for you. I think there is a real challenge about whether we have sufficiently agile means of maintaining competition in these markets. I don’t know what your comment on that would be.

Stephen Kelly: Amyas, I think you are absolutely right. Bill and I probably feel this sentiment. We are not here defending the record, because we have got tons to do, and we are in the foothills. What I opened up with, in terms of intelligent, better, smarter customers, and being a lot smarter around market segmentation-so treating the BPO market as very different from the IT market, very different from the big four and the consulting market: around the areas of public service provision around outsourcing, we have got a review just kicked off, to make sure we do get a vibrant marketplace.

A couple of, I guess, statistics give me some comfort, but also give me some fear. The good news is I think we saved overall £10 billion last fiscal year and we just announced we saved about £5.4 billion for the first half, unaudited. This programme probably cumulative savings are over £5 billion since the start of the Parliament. However, an additional £1.5 billion is being invested with the Government to SMEs. So there is G-Cloud, and the former Government CIO for the US announced at the weekend that he thought G-Cloud was probably leading the world around open procurement. What I would say on that is that there are about 1,200 SMEs,3 and 13,000 services. We came out last week with a digital framework. The issue-my worry-is: are we incubating a lot of great SMEs for financial consolidation? That would be to conspire against ourselves.

Amyas Morse: That is interesting, but can I come back to the direct point that you are often seeing small competitors winning contracts and immediately being acquired, and in some cases there is probably a contractual right on the part of the Government to oppose that, and they are not applying that right. Correct?

Bill Crothers: I agree. We have the contractual right typically to do that and I think we need to be very vigilant; and we are looking at one at least, at the minute where there is a takeover with a contract, with the company being taken over. We are looking at it.

Stephen Kelly: Yes, there is one specifically now where we are looking to enact the change of control provisions to prevent that happening. It is great having all these SMEs and doing another £1.5 billion, and typically most of them are UK companies; but you are absolutely right. I think it is very important for everybody in the Committee to take away that our end game is a vibrant market of big companies and small companies; but companies that follow purely consolidation-acquisition-that doesn’t make sense.

Q65 Chair: We are going to come to SMEs. I want to do a couple of questions and then I will go to Meg. The impression I got-it has come out of this questioning-is that your view is that the big four we saw last week are too big to fail.

Stephen Kelly: To fail à la banking crisis?

Q66 Chair: Well, we will go back over some of their performance, but they have now consolidated; they have all grown 500% in the last 10 years. They have become enormous. I think you have done a very good job at getting to grips with the IT, where there is more competition. However, for the other services we are looking at here you have the big four, which have done this 500% growth primarily through acquisition. Although one of them, Serco, has done it generically by getting more contracts, the others have all bought to acquire their market share and they are too big to fail.

Stephen Kelly: A couple of things. First, one of the problems this highlights is that from a companies point of view, if you continue to acquire companies, you have issues spreading the control environment that lead to issues associated with contract management, ethics and all that sort of thing.

Q67 Chair: Yes, but you won’t get rid of them. You cannot afford to.

Stephen Kelly: Secondly, I think there is adequate provision in most of the contracts around step-in, and all Departments have been asked for contingency plans to ensure that, if what you are suggesting did play out, we are well catered for in terms of provision of Government services continuing.

Q68 Meg Hillier: With Serco, the prison contract was taken away from them and it is now in the public sector. So is it that, just like with the failure of the banks, the public sector is the last resort supplier? If they fail, don’t worry because we will just step in.

Stephen Kelly: We have to acknowledge that we are where we are. The other critical factor around the strategy is disaggregation-making things smaller. For example, it is perhaps worth highlighting, since you mentioned that one, either prisons or probation, where we are looking to break things up into much smaller, manageable chunks. That could be done by business services, vertical or regional, to make sure that we are not dependent on just a few big companies.

Q69 Chair: So you mean to say you would have a "G4S north-east" or something?

Stephen Kelly: Do you want to talk to that, Vincent?

Vincent Godfrey: Yes. I could perhaps start with a pertinent example in electronic monitoring. Traditionally, and certainly since the inception of electronic monitoring in 1999, the contracts have been vertically integrated, so you would expect to see G4S and Serco providing everything in there. They own the equipment manufacturers, for example, and provide it as one end-to-end service. In the next generation of electronic monitoring, we have broken it up into four parts. Although you might have Capita running a processing centre, we have different software and hardware suppliers. For example, where the hardware is concerned, that is actually a competition between three companies, not involving G4S and Serco. It did not involve G4S and Serco from the outset, and two of them are SMEs, which has brought in different types of technology and moved us into that. It is also worth talking about the rehabilitation competition-

Q70 Chair: Can I stop you on that? We will bring you in again on rehabilitation. I have had some representations-I know Meg has as well-from a lady from an SME that has been active in trying to get into your new contract. I think she has written to lots of MPs, and she said that it has been an absolute nightmare dealing with you guys. She did try to get into lot 2, which was the software. Buddi is the name of the company, and they were told that they could not win the software contract as it was too high risk to give it to an SME. Deal with that one first.

Vincent Godfrey: That is not true. Buddi competed-

Q71 Chair: I don’t think she lies.

Vincent Godfrey: I was not suggesting that that was a lie, but we ran a competition, Buddi competed for the software, and they were not precluded on those grounds. They had the opportunity, they did compete and they are the preferred bidder for the hardware. As I say, other SMEs participated in that competition as well.

Q72 Chair: I have to say to you that Buddi were told that an SME could not win the software as an SME was too high a risk. That is what she actually said. Let me go on to what else she says. She gives evidence about how you set about the procurement. There was a PQQ on 9 February 2012. The preferred bidder was announced on 20 August 2013-that was 18 months later. Within that, for example, one request for information required her to fill 12 A4 boxes. It took four days, 20 hours each day, simply to print the documents. For an SME to do that is ridiculous. She then compares it with a contract in Michigan for similar equipment that they produce, where the PQQ, or their equivalent of it, gave a date of 26 June 2013 and the preferred bidder was announced less than five months later on 5 November. That is a shocking indictment of our ability to contract with SMEs when there is a non-contentious commitment across the piece to encourage SMEs into the market. Of course, she does say that her product-you can take this however you like-is much better than that of G4S. How do you respond to that? I have one more issue that she raised that I want to raise with you.

Vincent Godfrey: There are two parts to the answer. The time scale for procuring the next generation of electronic monitoring has been more protracted than we would want it to be. That is in part because the team that has been involved in the procurement has been dealing with issues that emerged in the early part of the year around billing with G4S and Serco. That has undoubtedly taken time to deal with, in terms of running the competition and resolving those issues. I would agree that that has extended unduly the duration of the competition.

Q73 Chair: Mr Godfrey, with the greatest respect, more than 18 months as opposed to less than five months cannot be justified simply by referring to the trouble you have had with G4S and Serco. You cannot justify it on that basis, sorry. It does not ring true to me.

Stephen Kelly: Madam Chairman, on that specific point and with full disclosure, I spoke at an event on Friday and the lady CEO came up to me and said, "I would like a chat with you." I have not had time to follow that up and I commit to giving her a call and finding out what went on.

Q74 Chair: Let me talk about the final thing that she raised with me, which I thought was outrageous. She does think she has better equipment, but I am not judging that. She thinks that we have an absurd situation. She has been trying to compete with the tagging on police services up and down the country. She cannot even enter the competition because we have a statutory instrument that defines the responsible officer for providing the tagging equipment. That statutory instrument states that the responsible officer has to be either G4S or Serco. In a statutory instrument laid down by us in Parliament, we are deliberately preventing what appears to be a perfectly bona fide good SME from competing.

Bill Crothers: We should look at that. Presumably that is a statutory instrument that came from the Home Office and relates to policing.

Q75 Chair: Yes, it is for policing.

Bill Crothers: We should look at that. I am not aware of that, but it is worth looking at.

Chair: Perhaps you can write to us on that.

Q76 Meg Hillier: First of all, I think that G-Cloud is great, and I appreciate G-Cloud coming and talking to SMEs in Shoreditch. It is a start, but it is not there yet and I think we would all recognise that. I met the chief executive of Buddi a few months ago. I had followed the story in the newspapers-it is not just us watching this matter-and I use Buddi as a model for what will happen to other smaller companies bidding through G-Cloud or anything else. The Financial Times was rigorously following whether Buddi made the cut. A message has to be got out that government is open for business to SMEs. Even in my area, where there are lots of very innovative SMEs, there is a bit of scepticism. A story like that goes round very quickly and some of the start-ups think, "I’m not going to bother, because it is too complex." What is your message to them?

Bill Crothers: That is counter to our message. We will look at those examples. The message is that we are open for business and we want to do business with small and medium-sized enterprises, not just because its some form of altruism, but because it makes economic sense. Those enterprises are cheaper, more innovative and they often perform better.

Q77 Meg Hillier: One of my local companies is Affinitext, which I am proud to have in Shoreditch-the Government helped support it in coming into Shoreditch. It has been very positive about the support that the Government have given. There is good and bad.

Stephen Kelly: We acknowledge everything. For an organisation of 400,000 people, the message sometimes takes a bit of time to land and to change behaviours. We are pushing ahead, but there will be many SME CEOs who will still either be cynical or be having bad experiences. Hopefully, if we get it right, those will diminish.

Q78 Meg Hillier: As you have Crown representatives, perhaps you need some SME representative.

Bill Crothers: We do. We have a Crown representative specifically for SMEs.

Q79 Meg Hillier: Perhaps we could have an event for them.

I want to ask a couple of other things. On this subject, you talked about probation and parcelling it up. What we understand about probation, which has been debated a lot in Parliament, is that there will be large-area contracts that companies with no experience of probation can bid for and then subcontract. Perhaps you are not the best person, Mr Godfrey, to answer that specific question, but pick it up if you can. It leads into the issue about contracts being sold on. We have had before us recently the issue of Capita buying up the court interpreters service, but I have anecdotal evidence-it is always difficult to prove and I have not had a chance to dig around-of contracts being bought and then sold on with the profit being taken by the original company. Is that something you will stop, or is it part of the Government’s mission?

Vincent Godfrey: There are two parts to that. The first is that for the competition for the rehabilitation programme the country has been divided into 21 geographic areas, and we are in the pre-qualification phase. After a long period of market engagement, which we undertook jointly with the Cabinet Office, we have had 35 responses and there is a very good mix of different types of ownership structures in there. Some are mutuals, some are larger companies and some are large companies working in conjunction with voluntary and community-based organisations, SMEs and so on.

On the second part of the question, we are doing the very thing we talked about earlier and putting strict controls on change of ownership and the ability to sell on and manage these organisations, so that has the second part of the provision in there as well.

Q80 Meg Hillier: So is that saying they won’t be able to, or that they will talk to you about it?

Vincent Godfrey: They have to discuss it with us and ultimately get agreement from us to be able to do that.

Q81 Meg Hillier: And do you look in open-book accounting at the profit?

Bill Crothers: Yes. We have a contract-one of the larger contracts-with a supplier that is selling a substantial part of its business to another company and in selling it their contract with us is also being sold. We think the contract is an example of really bad commercial practice and has been for the past two years, so we are using our change-of-ownership clause to our advantage to negotiate better terms. We may let the contract be sold and, if it is, its terms will be changed, or we can use a sanction to say that the company cannot sell the contract and we will stop it as a material element of the sale of the business.

If we are commercially smart, that is the sort of thing we can get involved in. I take your point. Across the system-ATOS and this or that-we cannot get everywhere, but if it is a big thing we intervene with the complex transactions team, which is for big deals. It gets involved and acts as an adviser on that sort of thing. If it is perfect, the change of ownership will be to our advantage because we will either stop it or improve it in a way that suits us.

Q82 Meg Hillier: That sounds great for the big ones, but going back to probation-you could say the Work programme too-which has similar problems, you talked, Mr Godfrey, about working in conjunction with SMEs, the voluntary sector and so on. What I am finding with, for example, the Work programme-we picked up on this in Committee-is that many of my smaller suppliers find that if they agree to go with the prime, they are ripped off because the cut for the prime is big and the little bit that trickles down is not worth it. They cannot be sure of the work and they do not get a good deal, so in my area they often choose not to bother. Some have, and have found that they were ripped off. Ethically, the Government are trying to support small businesses and they are the ones that are losing out. How deep down can your team go, or is this a culture that must get right down to the lower level?

Bill Crothers: We should mention that it is essentially a whistleblower service. It is called "mystery shopper". If someone is involved in procurement or a situation that they are unhappy with, they contact us. That is anonymous and the Cabinet Office then takes action and follows up. There have been something like 500 or 540 successful interventions.

Q83 Chair: Can you give us an example?

Stephen Kelly: With one SME, we did an investigation, changed the outcome, and they hired some extra people, because they planned their business on a contract with Government. There have been 540 interventions where-

Q84 Meg Hillier: Did they get more money?

Bill Crothers: They got the contract.

Stephen Kelly: They got the contract.

Q85 Meg Hillier: Directly with Government?

Stephen Kelly: No. Well, there are two things. One is that we are not there. Bill and I found an incident in the supply chain. There are a number of things. You know that we have done all the stuff on payment terms, better customer service and a better supply chain. The other thing is that one contract has a 33% margin for the prime contractor, taking a subcontractor through. You and the guys last week could argue that there are lots of issues around taking risks and so on, but we react and ask questions when we see pass-through margins above 10%.

Q86 Meg Hillier: Good. I am glad. We will hopefully come back to this in future, because there is a really big issue there. Some of those small companies will never be able to take the risk, because the Government will always go with the big ones, and the big ones will always make that cushion part of their job.

I have one last point about when you set contracts. I asked all four witnesses last week whether they had ever been asked about the hourly wage for their lower-paid members of staff as part of the contract. They all said that they had never been asked. What do you say you do about that? If you are dealing with Serco, do you care about the wages of the poorest and the hourly rates?

Vincent Godfrey: Yes, on the contracts that we are letting at the moment-

Q87 Chair: Which ones?

Vincent Godfrey: We are looking at the facilities management contract on our headquarters buildings at the moment, for example. We are therefore in discussions with the bidders on that particular contract about the wages that they are paying and so on.

Q88 Meg Hillier: Will that be in the contract?

Vincent Godfrey: It is under discussion at the moment. Referring back to an earlier point, SMEs are obviously concerned about payment terms, and we use some very practical tools to deal with that. In a recent project at Cookham Wood prison, we used a project bank account, so we had clear transparency over when the suppliers were paid, and we were actually able to see the financial flows of money to the subcontractors. On the rehabilitation programme, we are looking to put in place an industry standard form of subcontract, so that when we award the private contracts, those that come into that supply chain are effectively afforded back-to-back terms and conditions. We are trying to ensure that fair terms and conditions flow down the supply chain, which is not uncommon in construction, where you have standard suites of contract, but that is something that we are putting together as part of this procurement.

Q89 Chair: It is good to hear that. I want to intervene to raise another point. You win your contract because your price is low. You start implementation, but you have to do various things because your price is low. You sometimes damage services, such as Serco in Cornwall, or you cut wages. Reporting on this last week, the Financial Times referred to an instance involving Serco and Lincolnshire police-I accept that this is Home Office-where they took people over on TUPE at £26,000, and then advertised for replacements at £7,000 less. They were paying them £17,000. The Financial Times said that that was the same as stacking shelves in Tesco. I do not know whether that is right, but that was the comment. You want efficiencies, but to take Meg’s point, you do not necessarily want to get them simply through cutting wages, do you?

Stephen Kelly: What we can do, Madam Chair, is everything that we are trying to do, but we can also remind the companies that we deal with of citizenship and responsibility. You have seen some of the letters that we have written to say, "This is part of our overall citizenship expectations." Within the certification, the high risk and other elements, we follow the policy and the process, but the message we give to our suppliers is equally important. There are 200,000 suppliers, but we make clear in the sessions that we have with the material ones, which probably make up some 50% of the £40 billion that central Government spend, our expectations and what we see as good citizenship. It is about not only doing what it says on the tin and delivering services and saving money for the taxpayer, but also responsibility.

Q90 Chair: So what would you do in this instance?

Stephen Kelly: In that specific instance, to be candid, we would probably call them in. There are a couple of things. If, like Meg, you have got SMEs’ CEOs writing to you and there are any things that worry you, point them at a mystery shopper. If that does not resolve it, point them at us. Likewise, with those situations, you can point them at us. We will commit to you: we will look at it.

Q91 Nick Smith: I have questions for Mr Mosco and Mr Godfrey, but I want to pick up on Mr Kelly’s point about the Crown being the better customer and, particularly, about controls, including senior management controls. There have been several high-profile failures by suppliers in recent months. I am trying to understand why you did not know what was going on. Mr Mosco, what went wrong with the Army recruitment contract with Capita?

Les Mosco: That is fundamentally down to IT problems. Our recruitment partnering project with Capita is quite a complex mix of things, but one of the dependencies that was in the work that Capita was doing was usage of, and access to, an MOD IT system, and there have been problems with that. That is the principal reason why there is a problem on that contract.

Q92 Nick Smith: Did you expect there to be IT problems with one system not being able to talk to another?

Les Mosco: No. It needed work to be done, but we should have expected it to have been okay.

Q93 Nick Smith: Why didn’t the person responsible anticipate it, so that it did not occur?

Les Mosco: I think it has only recently become apparent. A lot of work is going into sorting out what that problem is, and working out the alternative way forward. That is subject to very active discussions as we speak.

Q94 Nick Smith: Given that this is a major plank of Government defence policy, I still do not understand why it is becoming apparent only now. Why is that? How far into the contract are you, and when did you find out that there was a problem?

Les Mosco: The initial operating capability, as we call it, was due earlier this year-I think it was March ’13-so it is only fairly recently that this has become apparent as an issue. What we have been doing since that became apparent is, first, trying to work out what the IT issue is and to see how that can be fixed and, secondly, putting more people into the process to make up for this problem.

Q95 Chair: How many soldiers have you put into the process?

Les Mosco: We have reduced the number of soldiers involved in that project by less than we should. I do not have the exact numbers, but-

Q96 Chair: We were told last week that the whole purpose of the project was to get 1,000 soldiers out of front-line recruitment and that, because of the failure of the IT, you had put 1,000 back into doing that because the figures had gone down.

Les Mosco: I think that the original intent was that about 1,200-

Q97 Chair: I know what the intent was. When the IT failed, how many did you put back in?

Les Mosco: About 2,100 military staff used to help with recruitment, and that was going to be reduced by about 1,200. So far, 347 have been released.

Q98 Chair: So another way of looking at it is that you had to put 800 back.

Les Mosco: We are behind the curve in the reduction that we should have had.

Chair: Another way of looking at it.

Q99 Nick Smith: I still do not understand why no one at your level knew that this was a car crash waiting to take place.

Les Mosco: As I say, the initial operating capability was only intended in spring of this year, and when it became apparent that that was not so, a lot of work was put into it.

Q100 Nick Smith: Did you pilot it before you rolled it out?

Les Mosco: Could we, or did we?

Q101 Nick Smith: Did you?

Les Mosco: I am sorry, I do not know the answer to that. I can get back to you on that.

Q102 Chair: And what do 800 extra soldiers for that period cost the taxpayer? There is an MOD culture thing here. You knew that we were going to ask about this; we asked about it endlessly last week.

Les Mosco: I do not know the average cost of a soldier. That would all depend on rank, grade and so on.

Q103 Chair: Oh, God. Well, give me a vague figure. That was a non-answer. I want a better answer than that.

Les Mosco: I can get back to you on that. I do not know-

Q104 Chair: No, you knew that last week we asked questions about how many soldiers were supposed to be taken off recruitment and put on the front line. The argument was 900 to 1,000. There must be a cost. I cannot believe for the life of me that the MOD does not have an average cost.

Les Mosco: The MOD may. I am sorry, Madam Chairman, but I do not have it with me here today. I can get back to you on it.

Chair: I am pretty shocked at that. It was completely clear from last week’s hearing-you have all had the advantage of our having had that hearing-that this would be raised today.

Q105 Nick Smith: Dreadful answer. What will you do to resolve the issue?

Les Mosco: The issue has been examined at very senior level-up to and including permanent secretary and the chief information officer.

Q106 Nick Smith: Have you been involved?

Les Mosco: Only very recently. The issue of what the cause of this is has been examined at very senior level.

Q107 Nick Smith: Hold on. You are the person responsible for this contract with Capita. Is it part of your job to have responsibility for this contract?

Les Mosco: I do not own every contract in the MOD. We place about 4,000 to 5,000 contracts per year. I do not know how many current contracts we have, but it is a large number.

Q108 Nick Smith: So it is not you. Is it in your Department?

Les Mosco: It is part of the MOD’s contracting, obviously. It is owned by the Army recruitment team. It is they who take the lead on working out what the issues are. It has been escalated through the chief information officer and up to the permanent secretary. There was a major review only last week of what the fundamental options are.

In terms of fixing the IT problem, the basic choices are to try to continue with the original proposal-option 1-which was that Capita’s system would integrate with the MOD system. Option 2 was to move away from that and have Capita responsible for the whole end-to-end process. Those were the two fundamental choices that are currently being decided between.

Q109 Nick Smith: Do you think that those two choices are sufficient to resolve the problem, as you see it at the moment?

Les Mosco: Yes, I do.

Q110 Nick Smith: Which would you recommend?

Les Mosco: If you are forcing me to give you an answer on that, I would put the end-to-end process with one company. That would be my choice.

Q111 Chair: Perhaps you can let us have a note on the additional cost incurred. This raises an interesting issue about who picks up the tab. This is an example of a contract that has not delivered to specification. There is an extra cost on the MOD, whether it is 800 or 900 soldiers. The MOD picks up the tab at the moment. We could say the same about the MOJ when the interpreters’ contract went wrong. The MOJ was not even able to tell us how much the extra cost of that was. You could go round others. Who should pick up the tab? Why can’t we get that bit of it right?

Bill Crothers: A good contract would have something called a consequential cost or a consequential loss clause. If it is that clear, you should have conversations and suppliers should pay, but it is rarely that clear. If Richard Bacon was here, I am sure that he would talk about us being a better customer and needing to be more disciplined, because you get into conversations with suppliers, and no doubt they will say that it is our fault, and we will say that it is their fault. We need contract discipline, good contract management-we are talking about a clause that is probably there already-and us to enact our rights and just do it with simple discipline. It sounds simple, but it is not that simple, and that is what we should do.

Amyas Morse: I think you are being given a fairly clear answer, if I may say so, Chair, in that there was a key dependency that the system supplied by the MOD would work in a certain way. You have been frank in saying that it has not worked in that way. I do not see how it is going to cost the supplier.

Les Mosco: I agree with what Bill says about consequential loss clauses. If I was sat here saying that I know that this was entirely Capita’s fault, I would be going after them. Right now, it is not clear that it is entirely their fault. I do not think that that is a case that I could assert, so this is not a contract claim that I can go for. In other cases, we would.

Q112 Chair: If you had a tougher contract, it might have been clearer.

Les Mosco: No, it is not a question of a tougher contract-this contract will have those clauses in-it is what actually went wrong here. Was it Capita’s fault or a mutual dependency thing? I don’t think this is a case where it is Capita’s fault.

Q113 Nick Smith: This is a question to Mr Godfrey. Last week we had G4S in front of us. As part of their press release the day before, they said they thought themselves to be contractually entitled to bill for monitoring services when equipment had not been fitted or after it had been removed. They then proceeded to apologise for that view and the profit they had made. Why didn’t your Department spot that?

Vincent Godfrey: The issues around it being spotted, the identification of the issues and so on are a matter of a criminal investigation at the moment, so I would be very reluctant-

Q114 Chair: Nobody has been charged, Mr Godfrey. I think you are free to answer those questions.

Vincent Godfrey: There are two points. First, I and the Department would firmly contest that they are contractually entitled to charge those amounts. So for example, you talked about instances where subjects had not been tagged, and so on and so forth. We are very clear that they are not contractually entitled to do so and we are obviously fully pursuing the recovery of the moneys for that. That is an ongoing process. The second issue-

Q115 Nick Smith: Can I just stop you there? I am glad to hear that you are contesting the contractor being paid for something they did not do. That is really good. Okay, but why didn’t you spot that at the time?

Vincent Godfrey: As I say, I need to be careful here because the issues around it are the matter of a criminal investigation-

Q116 Chair: Nobody has been charged, Mr Godfrey. All you are being asked is, why didn’t you spot it?

Vincent Godfrey: It is the matter of an investigation-

Q117 Chair: Why didn’t you spot it?

Vincent Godfrey: I am going to repeat the answer again.

Q118 Chair: No, I think you are using that as an excuse. There is nothing in the question, "Why didn’t you spot it?" that would impact on the case.

Vincent Godfrey: The Ministry of Justice did spot the issue, albeit very late in the life of the contract, so it was actually the Ministry of Justice that spotted the billing issues initially-

Chair: No, you had a whistleblower. It was a whistleblower who came forward.

Q119 Austin Mitchell: How did you first get to hear there was a problem?

Vincent Godfrey: The over-billing issues that were identified were identified by the Department in February, and they are separate-

Q120 Chair: By a whistleblower, Mr Godfrey.

Vincent Godfrey: No, we identified it as part of the procurement process. The subsequent note from the National Audit Office on that would confirm that.

Q121 Chair: I thought it was by a whistleblower.

Gabrielle Cohen: It was both.

Stephen Kelly: It was both. It was in the spring of this year and the MOJ enacted us. The process since then is probably a good example.

Q122 Nick Smith: When did you identify it?

Vincent Godfrey: The Ministry of Justice first identified it as part of the procurement process in February this year-that was my team. There is a story to it in terms of following up further investigations and so on that subsequently led to the commissioning of the PWC audit at the back end of April, early May, so there were various follow-ups and so on with G4S as part of that process that subsequently led to the commissioning of the PWC audit.

Q123 Nick Smith: To be clear about the timing, you said you found out about it this year. How long had they been billing you for work they had not done?

Vincent Godfrey: Since 2005.

Q124 Nick Smith: So what have you done about it since?

Vincent Godfrey: Since then we have replaced the contract management team. We have an entirely new contract management team. It is a team which, as Stephen was describing earlier, has mixed skill sets. We have people with audit experience and people with operational contract management experience, and we have analysts working on it as well, so it is a different type of team. It is a team that is co-located with the contractors, so the people who are working for me are based in the G4S and Serco processing centres at Manchester and Norwich respectively. They have day-to-day oversight of what is going on in those processing centres and so on, and they are managing the contracts on that basis.

Q125 Nick Smith: You have changed the team and the structures; well, that sounds good. Was it the same team who was managing it from 2005 to 2013?

Vincent Godfrey: There were a number of personnel changes. The contract since its inception in 2005 was managed by-

Q126 Nick Smith: Particularly the billing.

Vincent Godfrey: I would need to check whether the people who were responsible for the billing changed. As I say, there were a number of personnel changes in the management of the contract between 2005 and today, and I have only had responsibility for it since April of this year.

Q127 Nick Smith: Okay, one final question-has anybody been sacked over this?

Vincent Godfrey: There is an ongoing disciplinary investigation, so I couldn’t comment as to where that is-

Q128 Nick Smith: It is still ongoing?

Vincent Godfrey: As far as I’m aware, it hasn’t concluded.

Q129 Chair: How long has it been ongoing?

Vincent Godfrey: I am not sure how long it’s been ongoing; I would need to check.

Q130 Austin Mitchell: Are we to see the deprival of Serco from three prison contracts in Yorkshire as a form of punishment for this?

Vincent Godfrey: No. The decision was made for operational reasons.

Q131 Austin Mitchell: Should it not be connected?

Vincent Godfrey: Well, it wasn’t connected; it was made, as I say, for operational reasons.

Stephen Kelly: Separately, Mr Smith, I will say a couple of things. I have come in in the past, and there are a couple of things to say. How do we stop coming back to you and having these sorts of conversations, and make sure we are doing a good job for the taxpayer and delivering good services to citizens? I would observe that either commercial operational skills have not been valued by the system as much as they should have been or we have been through a process of deskilling these critical skills, particularly in contract management. I think Bill’s comments earlier around having very senior ownership of these are important-contract management: really raising the game, rather than just focusing on procurement. I think also when you look at throwing, effectively, a contract over the fence from procurement to contract management, we could improve there, and also the whole fundamental essence about how a lot of these conversations will come out on change control notice and the ownership of those at a much more senior level.

I think on our side of the table there are definitely some major lessons learned. Bill has led this cross-government review, which is in the process of concluding in the next few weeks. You might like to just-hopefully-give some reassurance that the plan will be not to come back and have these sort of contract car-crash conversations, because-

Q132 Chair: Mr Kelly, you are very good at being candid. I will tell you that my worry with MOJ is that it is going really fast on contracting out-there is a huge amount of business going out on contract. Is it your view that it is going too fast for the capability in the Department?

Stephen Kelly: There are a number of things. On the MOJ specifically, there are some things, particularly in the rehab area. In the light of what has happened during the summer, the NAO has overseen the work that Bill has led on the cross-government review. That is feeding its way into the current discussions on Rehab. Candidly, it is probably too early to say, but sitting here today, I think the lessons learned are being applied.

Q133 Chair: So are they going too fast just to be able to absorb it? I do not feel massive confidence. Having got some rotten contracts to date, we now go out again with probably one of the biggest outsourcing bits that we have got across Government, but is the capability really there? Would you feel confident that you are not going to be having this conversation with us in a couple of years’ time?

Stephen Kelly: On some of these elements specifically, obviously we will have an oversight through the Major Projects Authority-I am not copping out of the question, but probably what you want to do is get the accounting officer for the Department to answer that specifically. I will assure you that effectively the Cabinet Office and the MPA and the core functions of the Efficiency and Reform Group is supporting some of the lessons learned coming out of these situations that we found and making sure we do not revisit the same mistakes we made in the past.

Q134 Nick Smith: Can we challenge you on that, Mr Kelly? You talked earlier in terms of the capability to bring in some poachers to be gamekeepers and a new cadre of people to help you with this work. Then we talked about these two instances of contract car crashes. Then, as part of his evidence in his contribution, Mr Mosco says, "Not me, guv. There’s five thousand MOD contracts out there. I can’t be expected to have oversight of this little thing going on over here with recruitment and Capita." Like Miss Hodge, I am just afraid that the overall capacity is not there to stop this thing occurring again and again.

Bill Crothers: I would not disagree with you. When we do business there are three stages we go through: we think about what we are going to buy, we buy it and then we manage it, post contract. It is the case that most commercial officers spend most of their time in the buying, not in the managing of the contract or in thinking about what we are going to buy. If you break it into smaller contracts, it is exactly what Vince described with the new tagging.

As a general phrase, we spend our time in exactly the wrong place. The relative value is before the procurement starts and after the contract is signed, and most commercial officers spend all their time in the middle. Just to say to you, "It won’t happen again," is too trite. For example, the management of this contract did not run up to the commercial director; it ran up somewhere else-it is probably a question about health assessments and DWP. They probably did not run up to the commercial director, so you have contract management that is not performed by a professional group. I am not criticising the people and their competence; it is just that they are not necessarily professionals doing the job. They should be, and they should run up to the commercial director, and there should be more of a visible line up to my function. Then you stand a better chance of hitting it. We should have essentially a checklist. The NAO produced a checklist in 2008. We had to dig it out; most people did not know about it. It is simple: it is just contract management 101. We should be following the basics-nothing complicated, just the basics-so we will try.

Chair: Chris is waiting. Amyas just wants to come in quickly.

Amyas Morse: I would like to come in quickly with one thing. I am very supportive of what you are saying, Bill, but I am a little bit nervous about the scale of resource we are talking about. Not only have you mentioned 400-odd people but I guess that you would need that to be complemented by maybe two or three times that many out in the Departments to have a chance-not just commercial officers but people who are going to do cost-accounting and things of that sort-to do anything like what you talked about.

That is a lot of money. Have you got any commitment on budget? Do you know that you are going to be able to get that money? I do not see how it is going to happen otherwise. I am very supportive but I would like to understand how you think you are going to get the resource.

Bill Crothers: There are a lot of people who do it today but they are not necessarily the right people or skilled or trained in the right way, or they are not reporting in the right way. I am not sure it is all new. There may be some new, and we have some provision centrally, but there are people there today who are not the right people or under the right structure.

Amyas Morse: But in austerity, do you think you can get those Departments committing the resource to do it? I know they should but I am asking if you think you can get it.

Bill Crothers: When you look at the effort that Vince has applied, and we have been right there with him, in tagging with Serco and G4S it pays for itself. The economic argument of having people to manage contracts is easy. I take your point but it is self-evident that you should be managing hundreds of millions of pounds per annum with a few million pounds of people. It is self-evident.

Les Mosco: I am not sure how much comfort it will give you, Mr Smith, but prior to any of this, prior to Bill raising the contract management issue, prior to the Capita contract, in the MOD we recognised that we were not doing enough contract management, and have an initiative running to try to correct that. There are issues, as Amyas has said, to do with resourcing. I completely agree with Bill that it more than pays for itself. We expect our initiative to more than pay for itself.

Nevertheless, there are issues with overall headcounts that are capped, so you end up doing a prioritisation and trade-off between doing one set of work and another. We certainly recognised that we needed to put a lot more effort into contract management. Again, I agree with Bill and Stephen. The traditional philosophy is that the job is done when you have signed and placed the contract. That is merely an interesting point along the journey, because nothing has happened yet. Nothing has been delivered at the point you have signed the contract. Working through the delivery of the contracts and the contract management is a really important thing. We recognised that probably about eight or nine months ago and said, "You know what? We are just not doing enough." We had people doing it, but we realised that we needed to focus on it a lot more. I accept the criticism that we have not being doing enough of it, but we are at least on the case of trying to correct that.

Q135 Chris Heaton-Harris: I am going to drag us back to small businesses, if I may. It was a good intervention from Nick, and this is slightly out of order, so I apologise for coming back to it. You say that we do not have the capacity to manage some of the contracts now. It is scary to think that pre-contracting out, we were not just trying to manage them but we were trying to run them as well. I am quite happy with the direction of travel, but I would like to think that lots of small businesses can get involved.

Everyone has now got examples in their constituencies, and mystery shopper pointed a number of people down its direction. I have got a small business called Map Sight that has been told by the Home Office-the College of Policing, in this case-and others that because the licence is only for £5,000 a year for what it wants to do, it is in this kind of lost zone in procurement terms. It is way too small for people to get too excited about, but it is quite a useful tool for policing. It looks as though it is going to have to come out of petty cash somewhere in the police system rather than be allowed in. They also struggle because they are allowed to bid for this particular thing that they do but because they are a new small business, one of the criteria used is: can you produce three years of accounts? Not many small businesses can produce three years of accounts, and I would like to think we are looking at that particular area.

The other one was in transport. It was a Crossrail project, where the whole thing was contracted to one contractor, which then subcontracted all the way through the system. I just wonder how you maintain control of a contract through the myriad of subcontracting. In the end, this company, which is called Hi-Force, was not only the lowest bidder but the most domestic bidder for this particular piece of work, but they did not get it. They cannot find out why. They have asked the subcontractee above them why, but they cannot get any feedback. That is frustrating, because they cannot learn to bid better next time. I am hoping that you will be able to give us some comfort on sorting that out as well.

Bill Crothers: Three years’ accounts-I thought that we had got rid of that.

Vincent Godfrey: We have.

Bill Crothers: Madam Chairman also said that Buddi or someone had to deal with thousands of pages of tender documentation, and we have got rid of that as well. The truth is that there is a lag between the policy intent-the guidelines, or whatever-and the habits. Old habits die hard, I guess. You will not get a young, innovative technology provider getting business with Government if they need to show a track record of three years’ accounts, so we removed that. It is back to mystery shopper. We just have to keep saying it, and saying it loud. If people see tender documentation that is excessive, bureaucratic and thousands of pages, they should write to us-mystery shopper, Stephen, me or Francis Maude. Just write, and we will then deal with it when we catch it, and it amplifies through the system. That is the general point to your answer.

On the too small, I find it hard to believe. I worked with the police for quite a while, and it is a fragmented market. It is difficult to find the right person, but if something is small and it is a great product, they should be snapped up. Again, I know it is not the right answer in all cases, but mystery shopper does help, or you find that small businesses that write to the permanent secretary often get a receptive ear, and they get dealt with. Mark Sedwill, I am sure, would deal with it.

The third point-too difficult, because it is a complex situation. If you are a subcontractor bidding to a tier 2, which in turn is bidding to a prime, it is complicated. We cannot help all businesses win business. If they think it is unfair, they should write to us and we will do what we can. We are just listening, and we are open to hearing these problems and dealing with them.

Stephen Kelly: Just one hint of optimism-we have not had too much of that-in terms of Bill’s point. The procurement stuff for SMEs used to be about 6,000 pages and it was cut to 50, which is still too much, so we are on that path. The other thing is that the digital services framework was announced, I think, 10 days ago. There are 1844 companies on it, 840%5 of them SMEs. The good news is that 38% are new companies that have never worked with Government before. There will still be regression to the past, and I hope we have some safety valves, such as mystery shoppers and ourselves, to intervene, but we are moving and pulling the juggernaut in the direction of supporting SMEs.

Q136 Austin Mitchell: It is worrying. If we are going to put out more contracts for Government services in this way, we need more effective supervision of the contracts. What is worrying is that the aberrations, such as G4S and tagging and the after-hours contract in Cornwall, come to light only through whistleblowers. I shall ask Richard Douglas first of all, what has happened as a consequence of the discovery that services have not been properly provided in Cornwall? We do not know whether any of the other companies providing after-hours doctor services are just dumping on the emergency services and drawing the money none the less. How do you know it is not going on elsewhere?

Richard Douglas: We are very clear that the lessons learned from the out-of-hours work in Cornwall have been disseminated through NHS England. Through its responsibility for primary care commissioning, all those lessons from Cornwall have been taken into that. The basic things are the same as those that Bill talked about. There are two elements: the procurement bid and the contract management. The procurement bid is about the level that people are bidding at and the contract management is about what they are doing in terms of what they promise. That is built into the work NHS England is doing.

Q137 Austin Mitchell: Okay. Let me ask Mr Crothers. I would think that it is difficult for smaller Departments particularly to manage the contracts effectively and to take effective control. Do we not need a centralised management review or centralised management structure to look at the contracts?

Bill Crothers: Yes. I think it is a balance. It makes sense for the centre to do that for those goods and services that we buy that are common or where the Departments are too small. For example, it does not make sense for the centre to manage the contract for the procurement of tanks or something ludicrous. In the centre, we have formed exactly that: a Crown commercial service to provide a commercial service-procurement and contract management-for either smaller Departments, those who do not spend very much, or for those common goods and services of the larger Departments.

I just want to say one thing on something we are doing. Besides the prescription-the technology, the process and changing things-one of the key ingredients is not competence, but confidence, and having commercial officers who are sufficiently experienced and confident to speak up. There has been an asymmetry between the suppliers and the officials. The suppliers sell deals, run deals and are earning big salaries. They have done it multiple times. Sometimes, they are up against officials who have none of those characteristics and, importantly, do not have the confidence to speak up and say, "That is wrong. You will not do that deal." or "That element is wrong." If we can get our commercial officers to be more confident, we will go a long way. The competence will follow, but the confidence is absolutely key.

To give a quick example, we have a supplier who was charging us a finance charge of 15% for invoices that were paid in more than 30 days. When I raised that with the lead person in the supplier, they were quite brusque and said, "That’s what we charge." When I raised it with the global chief executive, he said, "That’s what the contract says." Speaking up with these companies requires confidence. If you are a reasonably junior official, you just get washed away. I am not a shrinking violet, but with these guys it was almost, "How dare you raise it? It’s contracted." My answer was, "It’s unfair. It’s abusive. You should not do it." Confidence goes a long way.

Q138 Chair: What is the end of that story, Mr Crothers?

Bill Crothers: We got the money back, and I believe they are not charging it any more. They are doing the right thing.

Q139 Austin Mitchell: I had somebody doing the asphalt on my drive once. I have one more question before Mr Crothers comes in. It struck me that a lot of the problems have developed because we have these huge organisations that have grown very rapidly, like Topsy. They do not have effective control structures over the parts that are doing the job or over the people they are subcontracting to. A lot of it seems to come from bad internal auditing and bad control structures in these companies. As the NAO says, it is difficult to provide for that in contract terms. How do you do it? How do you develop the confidence to see what is going on and understand the organisation?

Stephen Kelly: On our side of the fence, Bill talked about confidence. We talked about capability. The other "C" is the culture where commercial and operational skills are valued within the system, and we have got a whole remit around the Commissioning Academy. We can come back and talk to you about 1,800 people put through lean procurement, and better contract management skills through the Commissioning Academy. But I think that the point you are making is on the other side of the table, particularly with the big suppliers, and particularly those that have acquired a number of companies. How can we be assured that they have the control environment?

I have not been6 the CEO of a NASDAQ or a FTSE company. I have done corporate renewal. The work that we did with the National Audit Office in the summer has given guidance around what good corporate renewal-a good control environment-looks like from a company’s point of view, and it highlights some of the elements you are talking about. We have published that now, and we would encourage companies to raise their game in terms of the appropriate control environment to give us the assurance as a customer.

Q140 Chair: Mr Kelly, I will comment on that, and then we have two or three questions, and then we can close it. I am pleased to hear that, but I picked out Serco from one of my folders last week. There were four current contracts where the control environment led to a not very effective service. I think that what they do is come in low on price, get the contract and then, to try and get the profit, they damage the service rather than get efficiency savings.

Perhaps this is one for Mr Douglas. They are not all in there. We have the Cornwall contract we have talked about. There is a community health care contract in Suffolk that the NAO will report to us about. There is the prisoner transport in London and East Anglia where there were problems. Serco staff manipulated the statistics to improve performance data. That is very much what they were doing in Cornwall. And there is the pathology labs contract where they had 400 clinical incidents in 2011, including losing and mislabelling samples. That is just a couple of hours of my looking at Serco. Those sorts of issues, all of which are important, become so systemic that you say, "Hang on, we’ve had enough of these big guys." It’s back to the "too big to fail".

Stephen Kelly: From the company’s point of view, we are very respectful; we have got a duty of care to the customer. If I were on the company’s side of the table, a lot of it is around culture, the code of ethics, the tone at the top and all those sorts of things, the control environment and then the appropriate governance and the structure, empowerment of the board, and the audit committee: all those things we know and love. However, you have seen a clear example of a specific situation during the course of the last few months where we have become aware, and that has led to the cross-Government review. Out of that, over the next few weeks, recommendations will come. Bill, do you want to cover anything specifically to-

Q141 Chair: I know you are doing all this good work, but this feels pretty systemic to me.

Bill Crothers: Or "too big to fail", is that your point?

Q142 Chair: It is partly too big to fail. It was an argument we had with DWP when we were looking at one or two of the private providers on the Work programme. Where do you define systemic and then cut the umbilical cord?

Bill Crothers: It is a complex situation. Three years ago, we would not even have known the scale of the relationship. In fact, with some suppliers, three years ago, we asked the size of the business, and the Departments told us that in one company it was £600 million, while the company told us that it was £800 million a year. The right answer turned out to be £1.5 billion, and it was because we asked the question slightly differently. Honestly, I do not think the suppliers knew the scale of their business with us, because they did not add it up that way. They treated each Department as a different client. I know an ex-chief executive of one of these companies-I know him well-and he did not do that. He just did not see the world that way. His business was DWP, MOD and he did not add it up.

So we did not even know the scale of the relationship, and then we did not have a single point person-the Crown representative-to know all the business and all the issues, and to be able to deal with it. Then we did not have a poor performance policy and a high-risk policy for suppliers who were systemically underperforming. It is not a panacea, but those are devices that we have now that need to get bedded in and be used, and for there to be consequences. It is not simple. It means that if somebody is systemically, materially underperforming, we look at them and we consider them as a high-risk supplier. If they are a high-risk supplier, there are consequences, and those are that we want them to get a recovery plan. So, it is not a simple answer-there is no silver bullet-but I honestly think that we have the devices in place to try and deal with what you are describing. We just need the attitude and the judgment to do it.

Richard Douglas: Should I talk about the three health examples that you mentioned?

Q143 Chair: Were there three health?

Richard Douglas: You mentioned three, yes. Clearly, the Cornwall case is a proven one that we have been through. With Suffolk, the NAO is doing its work at the moment. I am not getting serious issues reported back to me on Suffolk. Pathology-wise, there is the joint venture with Guy’s and St. Thomas’ hospital, so I assume it is that one. Again, I have not had major issues coming through on that.

There are two things to say. First, if you take the thing about being too big to fail, none of these are too big to fail from an NHS perspective. If you look across the NHS business that these organisations are doing, it is perfectly substitutable. It is not on a scale that gives the problem you are suggesting. The other thing to mention is that with the key supplier management and thinking of the Government working as one, one of the shifts that we have made in the past six months-Bill and I working together-is to bring the NHS into that. The whole key supplier management is focused very much on looking at central Government Departments. What we are keen to do is bring that right into the NHS as well, so that management relationship also looks at the NHS-not just the big suppliers across Government, but we replicate the approach that Bill has adopted for NHS-specific suppliers as well.

Q144 Chair: Okay, well we will watch this space. The only other thing is a competition question. If we look at the first report, which we did last week, you will see, for example, that 46% of Atos’s revenue comes from contract extensions, and that 29% of Serco’s comes from a single tender. You will also see, back on contracts, that one of Serco’s is 40 years, one of G4S’s is 30 years, and Atos’s and Capita’s longest ones are 15 years. How can we protect the taxpayers’ interests when the contracts are made in that way?

Stephen Kelly: Obviously, of the £10 billion overall, probably about half7 the savings have come through areas controls operate, and a lot of the controls are around contract extension. Fundamentally, we know that when you re-compete, you get much better value for money. That is well proven.

Q145 Chair: So what are you doing to change that?
Stephen Kelly: We need to look at it segment by segment. Bill has got some work in flight looking at the next few years.

Bill Crothers: Every contractual commitment over £5 million-that is not per annum; it is £5 million, whether it is a change request or an extension-for the strategic suppliers needs the MCO’s approval. They need Francis Maude’s approval, and they are recommended either by me or by one of the Crown representatives. We have seen quite a drop in them. Occasionally, Departments do not leave enough time to run competition. The NS&I contract, for example, has now been re-competed. I am not sure when the extension happened, but the competition was run. As it happened, Atos won the re-competition, which might be another story, because the NAO makes a point about incumbents often winning the contract. I don’t have statistics, but we now have a control that prohibits, stops or discourages extensions and change requests. You have given examples. I could give you many more examples of contract growth by two, three or four times, where contracts have gone from £250 million to £1 billion. Competition is good and we should not be extending, because the increment between the award and the out-turn is a gift without good commercial pressure. So we are working on it. The one you highlight has been addressed; I don’t know about the Serco one.

On the duration of contracts, personally I like contracts to be short-three, four, five or maybe seven years. In some cases, there are reasons. The Serco one, for example, is a very, very material, large, complex, special-purpose vehicle looking after a facility. There might be a reason for that. But typically we should have contracts that are shorter, or you have easy ways to get out of contracts. Often, it can become a loveless marriage, where you’re tied to it and the penalty for getting out is too expensive. Again, we are looking at that. It doesn’t matter if a contract is for 10 years as long as you can walk away after two. The contract length becomes the wrong battle if you can get away.

Stephen Kelly: Going back to where we started, on things such as Contracts Finder publishing all the pipelines, we published data on £70 billion of contracts about 18 months ago; now it’s £169 billion. Bill’s team are working with the Departments on the forward planning for when those contracts come up. Could we do better? Absolutely, but now we are getting the data to see when contracts come up-2015, 2016, 2017-and we can proactively manage with the Department the competition for those contracts.

Chair: Good. Thank you very much indeed.


[1] Witness note: If the 3 year contract extension is taken up.

[2] Witness note: 104

[3] Witness note: suppliers of which 84% are SMEs

[4] Witnesses note: 1834

[5] Witness note: 8%

[6] Witness note: I have been ...

[7] Witness note: 60% of

Prepared 13th March 2014