Transforming contract management - Public Accounts Committee Contents

3  Management of public service markets

29.  Conclusion: Public service markets are becoming more difficult for government to manage.

30.  An essential part of contracting-out public services is maintaining effective competition for government business, stimulating a constant pressure to innovate and improve. Against a background of increasingly large and dominant suppliers in some markets, in this section we consider: the need to guard against suppliers becoming too dominant to be allowed to fail; the risk of them losing control over all parts of their business, the need for meaningful consequences when they perform poorly; and the need to ensure SMEs can compete for government work.

The consolidation of markets - too important to fail

31.  As certain markets for supplying government services have evolved, the risk has emerged that they become dominated by a few large firms, who become so important to the continued provision of services that they cannot be allowed to fail. The NAO reported that, in reacting to G4s's and Serco's overbilling, "government was constrained in its actions and acted as if the firms were too important to fail: their failure could create widespread disruption to public services and government wanted their ongoing participation in competitions."[48] The Ministry of Justice told us it did not consider the firms to have been too big to fail, while also stating that one of the lessons it has learned is to structure big projects in such a way that no one supplier can have too large a market share.[49] The Cabinet Office refuted that it had ever thought the firms were too big to fail and, when challenged as to whether government could have brought in other suppliers said "Certainly in some areas."[50]

32.  The consolidation of markets into a limited number of viable suppliers can also be a threat to competition, and to the pressure to innovate and improve; which should be part of the benefits of contracting out public services. The Cabinet Office highlighted the risks consolidating markets pose to choice and competitiveness and described one example of a company that had made 77 acquisitions costing £50 billion over a period of six years.[51] The CBI also stressed that effective competition, avoiding over-reliance on a small number of suppliers, is fundamental to ensuring good performance and corporate behaviour.[52]

33.  Government only started relatively recently to understand the extent to which markets for government services have consolidated. The Cabinet Office highlighted that as recently as four years ago government had no cross-government picture of who its major suppliers were and how much business was done with them across government.[53] The NAO reported that the Cabinet Office's spending database is steadily improving this information and the Cabinet Office described how it is improving its capability to analyse such data effectively, but there is much further work to be done.[54]

34.  Market consolidation not only present risks to competition but also to the companies' ability to manage public services. The Comptroller and Auditor General highlighted the dangers such disorderly growth can present to the ability of contractors to maintain control across fast-growing and diverse businesses. The CBI agreed that the right levels of governance and control were vital in such circumstances, and that contractors convincing themselves that they would deliver things they could not do lay behind much of the recent outcry around outsourced services.[55]

35.  The Cabinet Office explained how government contracts contain change of ownership clauses which allow government to intervene when service providers are taken over. The Cabinet Office told us that typically government had not used those clauses to its advantage but, where it had done so it had extracted significant benefit from contractors for the taxpayer.[56]

36.  Recommendation: Led by the Cabinet Office, departments must take concerted action to develop competitive markets for public services. Government must use its contractual powers to intervene in market consolidation so that taxpayers and public service users benefit from the innovation and competition a thriving market can offer.

Consequences for failure

37.  We heard how there was no ban on G4S and Serco winning new work after discovery of the overcharging in July 2013 and during the subsequent 'corporate renewal' period.[57] The fact that Government gave the impression that all discussion with Serco and G4S were halted whilst investigations took place, whilst in fact the companies have been awarded new contracts in other departments had existing contracts extended and were in negotiation with departments over new contracts is evidence of the over reliance on these larger suppliers.

38.  The Cabinet Office told us that, while the man in the street might consider a ban to be appropriate, government had to balance that with EU law. It added that it had oversight of the control environment in government within which it was important to stop contract extensions and that it had 'paused' a number of contract requests. It had also advised the two firms that "it is probably not welcome for them to bid for new business until they get through this phase."[58] The Home Office described how, in the case of one new contract for which one of the firms would be bidding, it had made it clear that such a bid would not be welcome, and that firm had voluntarily stepped aside.[59] Serco told us that they considered themselves "unawardable" for any new work during the period through to January 2014 and both firms reported that they had suffered negative financial effects since the discovery of overbilling.[60]

39.  Nonetheless, G4S and Serco continued to be awarded work, including both contract extensions and new work, whilst they were under investigation (between July 2013 and January 2014 for Serco and July 2013 and April 2014 for G4S). Written evidence submitted to us after the evidence sessions, from the two firms and from the Cabinet Office, confirmed that while the corporate renewal plans were being agreed, the Ministry of Justice, the Ministry of Defence, the Department of Health, Department for Business, Innovation and Skills and HM Revenue & Customs all awarded additional work to the firms. In its written evidence the Cabinet Office set out a chronology of relevant government statements and contract awards to G4S and Serco during the corporate renewal period, and stated "We believe that there was a robust cross-government response to the over-billing issues that emerged at MoJ, and that Government worked within legal and operational necessity constraints to limit work placed with both companies."[61]

40.  We also heard the Cabinet Office describe how, in the past, it had been a matter of policy to treat each government department as a separate client, which could not therefore share information on the past performance of a contractor bidding for work with another department. The Cabinet Office told us this has changed and that they do now take account of poor performance in other departments.[62] The CBI agreed that contractors should be penalised for underperformance, and that it could be appropriate that they should be excluded from competitions where wrongdoing is absolutely proven or past performance in a specific area casts doubt over their ability to deliver. However, both government and the CBI were against the idea of blanket bans from public service markets where contractors have performed poorly or behaved unethically. Government felt this had to be balanced with EU law, while the CBI felt it could be unhelpful by reducing choice.[63] The Cabinet Office was clear that it would be obliged to stop doing business with companies which had been convicted of certain crimes, but said it could do other things if they were not actually convicted, such as not giving contract extensions.[64]

41.  Recommendation: All government contracts should include robust sanctions for underperformance or weak control which should be applied rigorously when performance falls short, and performance on previous contracts must always be taken into account when awarding new work.

Opening up public services to SMEs

42.  The CBI outlined some of the familiar difficulties that smaller businesses find when trying to compete in public service markets. These included poor pre-market engagement for them to understand properly what government requires, costly and bureaucratic processes, and the degree of risk being transferred.[65]

43.  The Cabinet Office has controls in place that prevent departments letting contracts over £100 million without central approval. It told us that the amount of business that government does with SMEs has risen by about £1.5 billion, or 20%, since 2010, that it has more than halved the average procurement duration (still close to 100 days), and reformed other processes, for example introducing the 'G-cloud' through which 90% of companies doing business with government are SMEs. But the Cabinet Office acknowledged that there was more to do on encouraging SMEs to enter markets for government business.[66]

44.  Recommendation: The Cabinet Office should look at the barriers to SMEs joining markets and develop a plan to address each barrier. Departments should be required to demonstrate that they have considered disaggregated models for each major contract.

48   C&AG's Report, Transforming government's contract management, para 6 Back

49   AQ 220 Back

50   BQq 49-51 Back

51   BQq 122-124 Back

52   BQ 29 Back

53   BQ 89 Back

54   BQq 89-90; C&AG's Report, Transforming government's contract management, paragraph 3.6 Back

55   BQ 18 Back

56   BQq 138-140 Back

57   AQq 30-33 Back

58   BQ 46 Back

59   AQ 221 Back

60   AQq 4-5, 14 Back

61   Written submissions from Serco, G4S and Cabinet Office Back

62   BQ 95 Back

63   BQ 13-14. BQ 38 Back

64   BQ 44-45 Back

65   BQ 29 Back

66   BQq 125, 131-133, Written submission from Cabinet Office  Back

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Prepared 10 December 2014