1 Five areas for improvement |
There needs to be far greater visibility to government, parliament
and the public about suppliers' performance, costs, revenues
1. The spirit of cooperation
and openness we saw from the four contractors we examined needs
to read across to all private contractors who receive public funds.
Too often the government has used commercial confidentiality
as an excuse to withhold information, often in response to Freedom
of Information (FOI) requests from the public or MPs. However,
the contractors we examined had fewer qualms about commercial
sensitivity and recognised the public's right to more visibility
over the use of the taxpayers' pound.
We expect to see all government bodies that contract out functions
and public services, and the contractors themselves, having transparency,
not commercial sensitivity, as their default position.
We did receive assurances from the Cabinet Office on the openness
of significant government contracts, specifically agreeing that
performance information on the Work Programme should be made public
2. The Cabinet Office
also told us that only one-third of government contracts currently
require the use of open-book accounting, and that, even where
such provisions exist, they are rarely used.
Departments have often lacked the ability to use open-book accounting,
and they would need to improve their capability significantly
to make this work in practice.
The contractors we examined had no objection to open-book requirements
being built into contracts, and it is surprising that such an
'easy-win' to improve transparency over vast sums of expenditure
has not been implemented.
Open-book accounting provisions need to be standard practice in
government contracts and need to be used. Parliamentary scrutiny
of private sector provision is also hindered by the NAO's access
to companies being limited to examining individual contracts.
· The Cabinet Office should:
· mandate the use of open-book accounting
for contracts above an agreed level of expenditure;
· develop guidance for departments on
how and when to use open-book accounting
· explore how the FOI regime could be
extended to cover contracts with private providers, including
the scope for an FOI provision to be included in standard contract
· Ensure that the Comptroller and Auditor
General has adequate access rights to contractors.
· Neither the Cabinet Office nor departments
should routinely use commercial confidentiality as a reason for
withholding information about contracts with private providers.
A clear explanation for any exceptions must be provided and the
Cabinet Office should check that departments are treating disclosure
as their default position; and
· The Cabinet Office should set out a
plan for departments to publish routinely standard information
on their contracts with private providers including, for example,
contract duration, value and performance against key indicators.
Contract management and delivery:
Central government's management of private sector contracts has
too often been very weak.
can bring benefits to both citizens and to the taxpayer. For example,
the Department for Work and Pensions has been able to make use
of the economies of scale provided by Capita's established private
sector customer contact centres, which previously serviced a number
of other organisations.
However, the benefits depend crucially on the government's ability
to manage contracts well. There have been a number of fundamental
weaknesses in how some government bodies have contracted for public
services from private contractors.
Some departments do not adequately protect the taxpayer and citizens'
interest in the writing of contracts. This was the case in the
contract on GPs' out of ours services in Cornwall that this Committee
examined. Some departments are not always sufficiently vigilant
of contractors' operations and delivery of services to users.
For example, while it is scandalous that G4S and Serco overcharged
the taxpayer tens of millions of pounds for electronic tagging,
it is shocking that the Ministry of Justice did not spot the overcharging
for eight years.
4. The rapid growth
in public sector business by some contractors, often achieved
through acquisitions, has in some cases outpaced their ability
to keep tight controls over all aspects of their government funded
business; and, in turn, government bodies have not done enough
to gain assurance that contractors have adequate governance and
For example, the G4S Chief Executive admitted that they did not
have the right controls in place on the electronic monitoring
contract, and the Serco Chairman told us that they needed to build
significantly on their controls in order to bring them up to an
5. Government has
a tendency to make managing contractors' performance overly complicated,
and not always focused on the most important issues - we heard
of one example where a department had put in place 150 performance
needs to have information on contractors' performance and the
way they manage public services across government. This includes
user feedback, independent inspections and information on corporate
social responsibility, including the company's approach to taxation.
However, data collection comes at a cost and too often government
has not demonstrated that it knows what it is asking for, or why.
This leads to poor information and waste. Information needs to
be focused, proportionate and relevant, coupled with performance
indicators that are linked to appropriate penalties for failure
and to rewards for excellence.
6. Where contractors
have failed to deliver, the penalties are sometimes not imposed
and even where they are, have not always reflected the full cost
to the taxpayer. For example, a series of failures by Capita in
supplying translators to the court service was met with a fine
of only £2,200. This does not come close to taking into account
the cost to the criminal justice system and to individuals caused
by their failure to deliver.
· Cabinet Office should provide guidance
to departments on how to ensure that contractors, of any size,
have effective governance and internal controls over all aspects
of their operations;
· Cabinet Office should provide guidance
and support to ensure the terms of contracts properly protect
both the taxpayers' interest and the service users' legitimate
· Cabinet Office should seek to standardise
the information that government requests from contractors as far
as possible and improve the consistency, accuracy and efficiency
of information collection;
· Departments should periodically review
and update the performance regime of their major contracts to
ensure that they reward or penalise behaviour as appropriate;
· To encourage good performance, departments
should look at the scope for more ways to share the savings from
efficiency gains with contractors;
· Departments should ensure that the
penalties imposed on contractors who fail to deliver reflect the
full cost to the taxpayer; and
· Departments should make full use of
their ability to take into account past performance on similar
contracts when re-tendering or contracting for new services. Assessment
of contractors' performance should also cover their corporate
social responsibility policies and their record on corporate taxation.
There is not enough effective competition in the market for government
7. Some private sector
providers have grown significantly in recent years, often through
buying up competitors or other organisations in their supply chainfor
example, Capita's purchase of the court interpreters' service.
But the government has not analysed directly the implications
on the operation of the marketplace, and on the delivery of public
services. Some public
service markets, such as for private prisons, asylum accommodation
or the Work Programme are now dominated by a small number of contractors,
and the government is exposed to huge delivery and financial risks
should one of these suppliers fail. At the very least, limited
markets lack the competition required to ensure that taxpayers
get the best deal.
One way in which government can avoid becoming overly reliant
on particular suppliers is ensuring that different parts of a
service are provided by different companies. This was not true
of the electronic monitoring contracts, where G4S and Serco provided
both the service and the equipment.
8. Small and medium-sized
enterprises (SMEs) are still hampered in their efforts to win
government business by excessive bureaucracy and bidding costs.
We heard of one example in the Ministry of Justice where the procurement
process took more than 18 months, and bidders were required to
provide the equivalent of 12 A4 boxes of information.
It is even harder for them to compete when large scale providers
have come to dominate a market, when contracts are unnecessarily
long, or when contracts are extended when they should be re-tendered.
Furthermore, where SMEs are in the supply chain of larger firmsas
is the case with the Work Programme - they have often found that
the majority of profits stay with the major supplier and do not
find their way down to smaller firms.
We are pleased that the Cabinet Office has recognised the need
to change contracting habits and create a more competitive marketplace
· In the short term, departments should
review contracts to ensure that, in the event of supplier failure,
contingency plans are in place for continuity of services, and
that government is protected financially. They should explore
all options for amending existing contracts where necessary;
· In the longer term, the Cabinet Office
and departments should do more to encourage diverse markets. For
example, departments could split up contracts and be required
to set out specific actions to encourage SMEs and new entrants
in particular markets, either as primary bidders, sub-contractors
or part of consortia; and
· Departments should increase competitive
pressure by reducing contract duration and extending contracts
only by exceptionbalancing the need for stability and incentives
for contractors to invest in improvement with the scope for savings
from increased competition.
Government does not currently have the expertise to extract the
greatest value from contracting to private providers.
9. The Cabinet Office
told us that government has a long way to go before it has the
skills required to manage contracts properly.
This is a concern, given the speed at which some departmentssuch
as the Ministry of Justiceare going ahead with outsourcing,
despite a poor track record.
We have not seen enough ownership or oversight of contracts at
Accounting Officer and board level in departments.
Beneath that, there is a longstanding problem of insufficient
investment in staff with contract management skills. This is illustrated,
for example, by recent problems with contracts for electronic
tagging and out-of-hours GP services.
The Cabinet Office recognises the skills gap in departments and
agencies and told us about plans to recruit people with the relevant
skills and commercial expertise.
It remains to be seen whether the Cabinet Office can deliver on
its ambitious agenda for improving skills across government, and
secure the resources necessary to do so. In our view, investment
in the right people with the right commercial skills is essential
if the Government is to achieve the objectives of contracting
10. To its credit,
the Cabinet Office has also recognised that government needs to
act as one customer in its relationship with major suppliers,
who often have contracts with several different government bodies.
It has introduced 'Crown Representatives', who are senior officials
responsible for leading the government's relationships with a
portfolio of suppliers. This is a welcome step, but the Crown
Representatives are under-resourced and contractors tell us that
their regular points of contact in departments are still not sufficiently
senior, skilled, or empowered to make quick decisions.
· The Cabinet Office and departments
should ensure that there is appropriate Accounting Officer and
board level engagement in all major contracting decisions;
· The Cabinet Office and departments
should invest in developing experience and expertise in commercial
issues and contract management;
· The Cabinet Office should explicitly
require departments to ensure that those who are responsible for
day-to-day contract management have sufficient authority, commercial
skills and experience. This includes having the expertise to put
open-book accounting into practice; and
· The Cabinet Office should strengthen
the Crown Representative initiative, ensuring sufficient coverage
across government bodies and major suppliers, providing them with
the time and support necessary.
Public service standards:
Contractors have not consistently demonstrated the high ethical
standards expected in the conduct of public business.
11. For a number of
years, Serco and G4S charged the Ministry of Justice for services
they were not providing. Serco's Chairman has at least admitted
that this was 'ethically wrong' and G4S's Chief Executive admitted
to the company's 'flawed judgement'.
The four contractors we examined all have whistleblowing policies
in place. However, although legislation has enabled contractors
to nominate someone in the contracting department as a person
to whom whistleblowers can make authorised disclosures, none have
· Departments should include a standard
term in contracts requiring suppliers to have whistleblowing policies
in place. This should require contractors to nominate designated
officials within departments to receive disclosures from whistleblowers;
· The Cabinet Office needs to be clearer
with firms which seek to win government contracts that they are
expected to behave with the same standards of honesty, integrity
and fairness that apply to the public sector itself. It should
set specific expectations which include transparency, the treatment
of service users and employees, and ethics; and
· The Cabinet Office and government bodies
should ensure that government's expectations are then built into
standard contract terms.
2 HC 777-I, Qq 53-55, 238 Back
HC 777-I, Qq 208-212 Back
HC 777-I, Qq 24-27, 31, 209 Back
HC 791-I Q31 Back
HC 791-I, Qq 2-5 Back
HC 791-I, Qq 2-53, 40 Back
HC 777-I, Qq 10-13, 25, 27, 29, 44; HC 791-I, Qq 11-15, 30 Back
HC 777-I, Qq 21, 26, 53, 55-56 Back
C&AG report, The role of major contractors in the delivery
of public services, Figure 4, HC810, Session 2013-14 Back
HC 791-I, Qq 91-110 Back
HC 777-I, Qq 29, 151, 157-158; HC791-I, Qq 15, 44, 131 Back
HC 777-I, Qq 47-48, 132-133, 207; HC791-I, Q123 Back
HC 777-I, Qq 9, 51-52, 63-65; HC791-I, Qq 141-143 Back
HC 777-I, Qq 51-52 Back
HC 791-I, Q36 Back
HC 777-I, Qq 35-38, 62-70, 81-82, 155, 172-188, 221-229 Back
HC 777-I, Qq 65-67 Back
HC 777-I, Qq 70, 91; HC 791- I, Qq 64, 66, 68-69, 76-79, 82, 135 Back
HC 791-I, Q67 Back
HC 777-I, Qq 63-68, 70, 82, 83, 91-112, 188, 191; HC 791- I, Qq
HC 791-I, Qq 67-69 Back
HC 777-I, Qq 28-30, 152; HC 791-I, Qq 64, 70-72, 76, 135 Back
HC 791-I, Q72 Back
HC 777-I Qq 91-98, 136-144; C&AG report, The role of major
contractors in the delivery of public services, Figure 6, Figure
10, HC810, Session 2013-14 Back
HC 791-I, Q82 Back
HC 777-I, Qq 24, 64, 81-85; HC 791-I, Q 77 Back
HC 791-I, Q 42, 44, 45 Back
HC 791-I, Qq 132-133 Back
HC 777-I, Qq 28, 51, 151, 157-158; HC 791-I, Qq 15, 44-45, 131 Back
HC 777-I, Q 112; HC 791-I, Qq 136, 140, 143 Back
HC 791-I, Qq 22, 44-45, 131, 134, 139 Back
HC 791-I, Q 134 Back
HC 791-I, Qq 36, 42, 48-50 Back
HC 777-I, Qq 149, 163-165;HC 791-I, Qq 45, 63, 78, 142 Back
HC 777-I, Qq 115, 117-118, 124, 133 Back
C&AG's Report, The role of major contractors in the delivery
of public services, paras 3.14-3.15 Back