House of Commons - Contracting out public services to the private sector

Contracting out public services to the private sector - Public Accounts Committee Contents

1 Five areas for improvement

Transparency: There needs to be far greater visibility to government, parliament and the public about suppliers' performance, costs, revenues and profits.

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.[2] 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.[3] 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.[4] 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 in full.[5]

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.[6] 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.[7] 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.[8] 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.[9]

Recommendations:

· 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 terms; and

· 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.

3. Contracting-out 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.[10] 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.[11] 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.[12] 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.[13]

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 internal controls.[14] 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 appropriate level.[15]

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 indicators.[16] Government 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.[17]

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.[18]

Recommendations:

· 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 expectations.

· 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.

Competition: There is not enough effective competition in the market for government business.

7. Some private sector providers have grown significantly in recent years, often through buying up competitors or other organisations in their supply chain—for example, Capita's purchase of the court interpreters' service.[19] But the government has not analysed directly the implications on the operation of the marketplace, and on the delivery of public services.[20] 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.[21] 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.[22]

8. Small and medium-sized enterprises (SMEs) are still hampered in their efforts to win government business by excessive bureaucracy and bidding costs.[23] 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.[24] 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.[25] Furthermore, where SMEs are in the supply chain of larger firms—as 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.[26] We are pleased that the Cabinet Office has recognised the need to change contracting habits and create a more competitive marketplace of providers.[27]

Recommendations:

· 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 exception—balancing the need for stability and incentives for contractors to invest in improvement with the scope for savings from increased competition.

Capability: 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.[28] This is a concern, given the speed at which some departments—such as the Ministry of Justice—are going ahead with outsourcing, despite a poor track record.[29] We have not seen enough ownership or oversight of contracts at Accounting Officer and board level in departments.[30] 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.[31] 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.[32] 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 out.[33]

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.[34] 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.[35]

Recommendations:

· 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'.[36] 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 done so.[37]

Recommendations:

· 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

3 HC 777-I, Qq 208-212 Back

4 HC 777-I, Qq 24-27, 31, 209 Back

5 HC 791-I Q31 Back

6 HC 791-I, Qq 2-5 Back

7 HC 791-I, Qq 2-53, 40 Back

8 HC 777-I, Qq 10-13, 25, 27, 29, 44; HC 791-I, Qq 11-15, 30 Back

9 HC 777-I, Qq 21, 26, 53, 55-56 Back

10 C&AG report, The role of major contractors in the delivery of public services, Figure 4, HC810, Session 2013-14 Back

11 HC 791-I, Qq 91-110 Back

12 HC 777-I, Qq 29, 151, 157-158; HC791-I, Qq 15, 44, 131 Back