5Conduct and performance of contractors
Compliance with priorities and expectations
86.Much of the focus of media attention on contractors has centred on examples of conduct not in keeping with DFID’s objective of poverty reduction. A number of contractors referred in written evidence to the intensity of competition at the tendering stage, and it can be assumed that for-profit companies with shareholders to answer to are likely to make use of any competitive advantage they can gain. Contractor B confirmed that “contractors will play every card they have and some they should not have to win the contract.”151
87.In December 2016, the Mail on Sunday published an article that used leaked emails to highlight serious concerns about ASI staff obtaining and intending to make use of internal DFID documents. The article stated that “a former government official now working for Adam Smith International obtained secret files revealing aid policies and spending plans for the next four years—then boasted this would help the firm when bidding for contracts.”152 DFID has been very guarded about the Business Plans in question (to the extent that they have not shared share them with this Committee) as they contain substantial detail on DFID’s country-specific strategies in its bilateral programmes. The competitive advantage afforded to any contractor in possession of these documents is therefore significant, and had the Mail on Sunday not obtained the leaked emails, DFID’s procurement processes would have been severely compromised. Allegations of improper behaviour by ASI relating to submissions to our inquiry were addressed in our recent special report ‘Conduct of Adam Smith International’.153
88.In response to this, DFID has launched its own forensic investigation into the allegations, and in a letter to the Committee the Secretary of State said that she is determined to “eliminate rogue practices by a few”.154 ASI also announced “major reforms”, including the standing down of a number of executives and the restructuring of the organisation “as an enterprise with primary focus on a social mission”.155 However, when asked whether such practices were a one-off case or whether there is a cultural problem among certain contractors, Contractor B told us “[ … ] it is absolutely embedded in the culture—absolutely.”156 It is also not clear in evidence from certain contractors that they have understood or internalised these concerns about the organisational culture. Written evidence from the Centre for Development Results, a group formed of contractors including ASI, makes a number of references to the media coverage of contractors being “overly negative” and “deliberately misleading”. It makes no reference to the poor conduct of some of its members. While we agree with this in some respects and call for a more evidence-based debate on DFID’s use of contractors in the media, it is not clear whether certain contractors genuinely see their practices as an internal problem or a media/public relations problem.
89.Recent reporting on the conduct of certain contractors shows that some have behaved in a way that is completely unacceptable, is not in line with the principles of the Department and is harmful to the public’s view of DFID’s work. While we firmly believe that this is not representative of all of DFID’s suppliers, we affirm that there is a serious problem in the practices of certain organisations and that this is unacceptable. It is not clear whether the gravity of this is appreciated by certain contractors and we are yet to be convinced that they share our view that the sector needs a genuine rethink in terms of its approach. The allegations made of ASI should not be approached as an isolated incident by DFID, but as evidence that there is something inherently wrong with the culture in certain organisations. DFID needs to take a more robust approach in creating regulations and incentives that shape the sector so that it operates to the highest ethical standards. It is clear that DFID cannot rely on its approach of self-regulation. While it is up to contractors to adjust their practices, it is the Department’s responsibility to establish a set of rules and parameters and, critically, to enforce them.
90.In her letter to DFID suppliers, the Secretary of State recognised that having contractors sign up to a set of principles is not enough. As she wrote:
“As a DFID supplier you have committed to our Statement of Priorities and Expectations for Supplier and Partner relationships. However, it’s become increasingly clear, far more needs to be done.”157
While it is clear that DFID has taken action on setting the rules through its Statement of Priorities and Expectations (SoPE),158 it is not so clear that they are being actively enforced.
91.In order for DFID to ensure that contractors are following the rules, it needs to be in a strong position to raise concerns and investigate cases when it believes they are not. However, one of the criticisms that applies across all DFID’s channels of delivery, not just contractors, is that it lacks the ability to challenge suppliers where necessary. Dr James Morton wrote that:
“One of the Department’s biggest weaknesses is its inability to challenge suppliers effectively and robustly. Large consulting firms, international NGOS and multilaterals, most especially the World Bank, all have stronger institutional memories and research capabilities and it is very difficult for DFID staff, often relatively junior and limited for time, to outface them.”159
With specific regard to contractors, Contractor B highlighted that this is partly a staffing issue. The two year placements that DFID staff typically rotate on do not allow them to “drill down into what is going on in its projects” in a given country. As a result, contractors get complacent and as and when they are challenged by a project officer, they can “outlast any two year posting” if necessary.160 This weakens the position of the Department in holding contractors to account.
92.Recently the SoPE has been made increasingly stringent and, based on the Secretary of State’s letter to suppliers, indications are that it may be made more so in the future. While there is a necessary burden associated with complying with regulations, there are concerns about the impact this will have on smaller organisations. As DAI Europe wrote:
“DAI fully supports all of the principles embodied in the new requirements, but we note that the cost and complexity of compliance is growing, and in a way that will particularly disadvantage smaller suppliers for whom the fixed cost of compliance cannot be leveraged across a large volume of work.”161
Another contractor expanded on this by writing that “whilst all of this might be perfectly reasonable, it does raise the bar well above smaller firms, and firms in recipient countries to ever contract directly with DFID again.”162
93.Many of the key areas of concern with respect to DFID’s use of contractors, such as profits, treatment of sub-contractors, commitment to ethical codes of conduct and honesty about capacity and capability in bids, are all addressed in DFID’s Statement of Priorities and Expectations (SoPE) for Suppliers. The fact that certain contractors breach the conditions of the SoPE suggest that not enough is being done to enforce it. While the prospect of adding to the SoPE might be well-intentioned, it is also likely to have the effect of overburdening smaller organisations to the point where they can no longer bid for DFID contracts. This will work against DFID’s objective of expanding the supplier base. We also note that in particularly complex environments, staff rotations may be too short for them adequately to get to grips with the development context, and this may put them on the back foot in managing experienced contractors.
94.Rather than expand compliance regulations, DFID should do more to ensure that the regulations set out in the current SoPE are effectively enforced. In its Supplier Review, DFID should explore ways that it can track compliance, with a particular focus on the issues raised in this report. DFID should also set out a clear set of consequences for contractors is they fail to comply with the SoPE. While such consequences should be proportionate, they should also be sufficiently firm to act as an effective deterrent against poor conduct. It should also consider extended postings in challenging environments, particularly where contractors are the dominant channel for delivery. This will help ensure that DFID staff have the requisite in-country experience to effectively manage complex programmes and ensure optimal delivery.
Ensuring high-level performance of contractors
95.Another concern relates to whether contractors actually deliver at implementation stage what they have set out in the bid. This report has already discussed how the choice of partners may help a lead contractor win a bid, following which there are cases where that sub-contractor has subsequently been dropped (see para 82). DFID confirmed in written evidence that it does not audit firms to assess their claimed capacity. Due diligence assessments focus on the evaluation of bids stage, and are designed “to obtain a level of assurance of a potential delivery partner’s capacity, capability, systems, policies and processes to deliver DFID programmes prior to entering into a formal agreement.”163 Nick Ford told us that “Through the life of the programme is where I am a bit more concerned.”164
96.DFID’s Internal Audit Department (IAD) assesses implementation of a cross-section of programmes. However, with 32 Full Time Equivalent staff who are required to cover assurance and counter fraud functions across DFID’s entire portfolio, it is undoubtedly stretched in its ability to perform in-depth follow up on all contractor-delivered programming. Contractor B noted that:
“[ … ] the point at which a procurement is finalised is an important pinch point in the market, because there is every incentive to win that contract and there is very little punishment for not delivering on the contract. You will say everything you possibly can to win that contract.”165
97.In written evidence, DFID stated that it uses payment by results contracts “to ensure payment is linked explicitly to delivery.”166 However, in its Payment by Results (PbR) Smart Guide it also acknowledges that there are risks associated with this. If poorly designed, procured, or delivered, the impacts of PbR can include:
- perverse incentives, where the payment scheme encourages damaging behaviour by suppliers or partners;
- cherry-picking or corner cutting, where suppliers choose the easiest interventions, avoiding harder-to-reach groups or individuals (see paras 118-122);
- distorting effort away from what’s important and towards what can be measured.167
Concerns about these issues were echoed in evidence to this inquiry. One contractor wrote that:
“DFID has tried to sharpen performance through introduction of modalities such as output-based-payments. In my experience, this skews incentives [ … ] and further reduces the returns for smaller and more local businesses. Incentives are all driven by ticking boxes and hitting indicators and targets. Not bad per se. But it assumes that what’s in those boxes matter for good development outcomes. Too often they simply don’t.”168
98.Linking payments to delivery on certain milestones is effective in theory, though in practice there are issues. Contractor A told us that “in most development programmes it will be very hard to identify concrete milestones that DFID can reasonably expect a contractor to deliver.”169 This is supported by findings from ICAI that “in Pakistan, DFID staff informed us that they lacked the information and the commercial expertise to select reasonable targets for supplier performance.”170 Contractor A raised an example where poorly designed milestones had a significant negative impact on the delivery of the programme. The lead contractor agreed milestones “without checking their feasibility with the technical team, and thus committed to some milestones that were either meaningless or impossible to achieve.” When these milestones were missed and funds withheld, project beneficiaries suffered as the costs were not absorbed by the lead contractors management fees but by the share of funding spent on field activities. The result in this case was that “[ … ] the milestone system badly misaligned incentives, failed to induce good performance, and denied the programme resources to fulfil its objectives.”171 Given recent concerns about the conduct of contractors, it is also concerning that they can actually use the weaknesses inherent in the design of milestones to conceal poor performance. One study of incentives for contractors used by the Swedish International Development Cooperation Agency (SIDA), concluded that:
“If the project outcomes are not easy to measure and evaluate, it is easier for the consultant to hide project misperformance or failure. This condition suggests that consultants have weaker incentives to perform at a high level when project outcomes are difficult to appraise. Moreover, cunning consultants who expect to perform at a low level of competence have an incentive to prescribe difficult-to-measure project outcomes.”172
99.DFID’s due diligence of contractors appears to focus excessively on the bidding stage and not enough on the implementation stage. There are examples to suggest this may have skewed the incentives of contractors to focus on winning contracts, not delivering them. While we recognise the logic in using Payment by Results (PbR) to incentivise effective delivery, we are concerned that DFID is not doing enough to mitigate the risks involved and this is to the detriment of quality programming and impact.
100.DFID should rebalance its due diligence efforts to focus increasingly on contract delivery. It should also increase the resources of the Internal Audit Department (IAD) if necessary. Where PbR is used, DFID should use the research it has commissioned—as well as the forthcoming work from ICAI—to create more robust guidance and training resources for staff on how to design effective programming milestones.
Performance incentives for contractors
101.One of the advantages of contracting stated in written evidence is that “when a contract is underperforming, or its activities no longer contribute to a DFID goal, DFID is at liberty to cancel that contract for convenience at any time.”173 In evidence from DFID, we were informed that “in the last year, 9 contracts above the OJEU threshold174 have been terminated for reasons including the programme’s underperformance, poor value for money, concerns regarding supplier capability, and changes in the delivery context.”175 Evidence suggests that there may be other cases of underperformance where the contract should have been cancelled but was not. Contractor A told us of an instance where the lead contractor received less than 50% on its Key Supplier Management (KSM) review due to “serious shortcomings in the management team”, but the contract was not cancelled. According to DFID’s scoring system, such a rating demonstrates “serious delivery failure and under performance. Immediate and major changes needed.” However, DFID failed to follow up on this and the project actually received an extension despite the protests (and withdrawal) of the sub-contractors who were unhappy with the way the programme was being managed.176
102.DFID contractual terms and conditions include provisions for the suspension or termination of the contract with or without default of the supplier. Despite the fact that programmes have been cancelled due to ‘underperformance’ and ‘concerns regarding supplier capability’, we were informed that none of the nine contracts in the last year were cancelled for ‘default of the supplier’. All were cancelled ‘for convenience’.177 Nick Ford told us that “even if you are terminating for underperformance, you may end up not going down the fault route, because it would be quicker, easier and less costly to the taxpayer to go down a convenience route”.178 While we recognise that this may be an easier and cheaper approach to contract cancellation, we have concerns about the implications for accountability. Failure to recognise formally and record the fault of the supplier may limit opportunities to investigate and learn from underperformance for future programming.
103.There is another concern about DFID’s ability to use the past performance of contractors to inform subsequent programming decisions. Contractor B described one of the problems DFID faces as “asymmetry of information” (i.e. contractors know how good they are at delivering while this is challenging for DFID to ascertain). It seems sensible that DFID would draw lessons from where contractors have performed poorly in the past and use this to assess their suitability at the bidding stage. Other donors appear to do this, as Crown Agents wrote “it is notable that other donors (such as USAID) take into account scores from annual reviews and project completion reports as part of their selection process.”179
104.When initially questioned on whether DFID takes account of prior performance in assessing bids, Nick Ford told us that public procurement regulations “do not allow for past performance to be brought into account in the bidding phase.”180 However, Crown Commercial Service guidance on the 2014 EU Public Procurement Directives state that “poor performance under previous contracts is explicitly permitted as grounds for exclusion.”181 When this was raised with the DFID officials, Nick Ford told us that “you need very robust systems to be able to take into account any past performance obligations, to ensure that you are assessing the tenders on a like-for-like basis.” Joy Hutcheon added that “the remedies available to suppliers under EU directives are extremely robust and we would run a risk of ending up in court very quickly.”182 We were also told that one of the goals of the supplier review is “ensuring that all our suppliers are incentivised to meet our statement of priorities and expectations.”183
105.Evidence suggests that continued poor programme delivery by contractors does not necessarily lead to the cancellation of contracts. Even in instances where it is recognised that DFID contracts are underperforming, they are cancelled ‘for convenience’ as this is an easier and cheaper route. While this may save money for the taxpayer in the short run, we are concerned about the long run value for money. Failing to recognise and record any fault of the contractor demonstrates a weakness in accountability and may result in missed opportunities for learning and strengthening for future programmes. Given the inherent difficulties faced by DFID in choosing the best organisation for the job, we are concerned by the fact that DFID, unlike other donors, appears to be unable to use past performance in assessing bids. It is unclear as to why this is the case given that the Crown Commercial Service states that this is explicitly permitted under the EU Public Procurement Directives. We are concerned about the potential effect this may have on contractors’ incentives.
106. DFID should take a more robust approach to creating performance incentives and demonstrate practical ways it is going to do this in its Supplier Review. This should include setting out clear parameters on the grounds on which a contract might be cancelled, and ensuring that there is a credible risk of cancellation by adhering to these. DFID should also ensure that where a contractor is seriously underperforming, the contract should be cancelled on the basis of default so that the failure of the contractor is recorded and that lessons can be learned. In light of the UK’s decision to leave the European Union, DFID should ensure that it has substantial input into any discussions of Government-wide public procurement regulations to be implemented after withdrawal. Such regulations should give DFID greater freedom to take into account contractors’ past performance in evaluating bids. Other donors, such as USAID, have this power and use it.
151 Q3 (See Annex 1)
152 Mail on Sunday, “Exposed, the foreign aid giant which conned MPs with fake glowing testimonials about overseas work to snaffle £329million of taxpayers’ cash” (3 December 2016)
153 International Development Committee, Seventh Special Report of Session 2016–17, Conduct of Adam Smith International, HC 939
154 International Development Committee, Letter from Rt Hon Priti Patel MP, Secretary of State for International Development, concerning DFID’s relationship with its suppliers (9 January 2017)
155 Adam Smith International, Statement: Adam Smith International Announces Major Reform (accessed 18 March 2017)
156 Q39 (See Annex 1)
157 DFID, Secretary of State letter to DFID suppliers (December 2016)
158 See Appendix
160 Q28 (See Annex 1)
162 Confidential written evidence (DUC0015) p3
165 Q3 (See Annex 1)
168 Confidential written evidence (DUC0015) p3
169 Confidential written evidence (CON0007) para 21
170 ICAI, DFID’s approach to delivering impact (June 2015) para 2.82
171 Confidential written evidence (CON0007) para 21
172 Gibson, C. (2005) “Incentives for Contractors in Aid-Supported Activities” in Gibson, C., Andersson, K., Ostrom, E. and Shivakumar, S. The Samaritan’s Dilemma: The political economy of development aid. Oxford: Oxford University Press
174 The Official Journal of the European Union (OJEU) threshold is the mandatory value (€135,000 or £106,047) above which Public Contracts Regulations apply
176 Confidential written evidence (CON0007) para 25
181 Crown Commercial Service, A Brief Guide to the 2014 EU Public Procurement Directives (October 2016) para 5.9
6 April 2017