The private sector delivers complex services on behalf of the public sector, to the value of around £90 billion, which represents half of public sector expenditure on goods and services. The public needs to have confidence that contracts are managed well by both government departments and the contractors themselves. The case of G4S and Serco overcharging the Ministry of Justice for years on electronic tagging contracts was the starkest illustration of both contractors' failure to work in the public interest and government failure to safeguard taxpayers' money. In the course of our work we have identified and examined similar cases where there are allegations of the misuse of taxpayers' money. In our view the present crisis could have been avoided if earlier recommendations from this Committee had been acted upon.
The electronic tagging case has served as a belated wake up call and, led by the Cabinet Office, the government is now working to improve the way it manages its suppliers and contracted-out providers of public services. But the problems with contracting are widespread, long standing and rooted in the culture of the civil service. There is a long way to go and the focus on improvement must not be allowed to drift away as it has done in the past. In this report we set out four key areas for attention.
First, government will not achieve value for money from its contracts until it pays much more attention to contract management. In essence, the Civil Service has prioritised the work involved in letting contracts and deemed the monitoring of contracts as mechanical and unimportant. Government acknowledges that departments have long neglected to devote enough resource and expertise to the ongoing oversight and monitoring of 'live' contracts; taking their eye off the ball and placing too much trust in contractors and too much reliance on the information contractors supply. Government recognises that contracts have not been managed at a sufficiently senior level and that there has not been enough personal accountability for performance. Indeed, some departments have been cutting staff numbers working on contract management just when the Government has been growing the role of the private sector in delivering public services. It is also trying to tackle the long standing problem of government not having the commercial expertise to compete with their counterparts in the private sectora difficult battle to win. The recruitment of crown representatives, although at present too many are appointed from within the civil service, and the commercial fast stream programme are moves in the right direction. Strong accountability and appropriate sanctions and rewards for staff managing contracts should become the norm.
Second, contractors have not shown an appropriate duty of care in the use of public funds. Too often the ethical standards of contractors have been found wanting. It seems that some suppliers have lost sight of the fact that they are delivering public services, and that brings with it an expectation to do so in accordance with public service standards. The legitimate pursuit of profit does not justify the illegitimate failure to conduct the business in an ethical manner. A culture of revenue and profit driven performance incentives has too often been misaligned with the needs of the public who fund and depend on these services. In that context it is refreshing to hear contractors now talking about the need for "a new way of thinking about how companies do business with the Government, which is that companies owe a duty of care to the taxpayer". The challenge, for both the contractors and for government departments, is to turn that sentiment into meaningful changes in behaviour.
Third, as public service markets develop, quasi-monopoly suppliers are emerging who squeeze out competition, often from smaller companies with specific experience. Competition for government business should bring with it a constant pressure to innovate and improve. But for competition to be meaningful, there must be real consequences for contractors who fail to deliver and the realistic prospect that other companies can step in. It was not acceptable for Government to give the impression that all business with Serco and G4S was halted whilst investigations took place, when in fact contracts were extended, new contracts were awarded and negotiations for new business continued. Suppliers have become increasingly dominant in certain markets, often through acquisitions, while also failing to maintain effective control over all parts of their business. Government must guard against suppliers becoming too important to fail, and encourage competition through, for example, disaggregating contracts to encourage SMEs to bid for work. It must also make sure that all suppliers have effective internal controls commensurate with their size and responsibilities at simplifying and accelerating the procurement process.
Finally, the way government contracts gives too much advantage to the contractors. Government needs to rebalance commercial relationships towards its own and the taxpayers' interests. For example, long term service contracts need to be let in a way that allows government to manage costs and performance throughout the contract's life, and avoids the taxpayer being locked into unreasonable and out-dated costs and a victim of excessive profits. Government needs to extend its open book access arrangements in order to better understand contractors' performance and costs and ensure that contractors can only increase profits by performing better or cutting the cost to the taxpayer. Contractors also need to accept that spending public money brings with it a greater degree of public scrutiny and transparency; they must be far more open through, for example, the publication of contracts and performance indicators being standard practice.
For this report we took evidence on the basis of two reports by the Comptroller and Auditor General. We took evidence from G4S and Serco, from the Confederation of British Industry, Chair of the Committee on Standards in Public Life, Cabinet Office, Ministry of Justice and Home Office. This report builds further on the report and recommendations we published in March 2014.