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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