Conclusions and recommendations
DFID’s strategy
1.We recognise that in DFID’s role as a commissioning organisation, there are numerous advantages associated with contracting outside expertise. However, despite the value that contractors can bring, there are certain functions that in-house staff must serve and which cannot be outsourced. With both the size and number of contracts growing, there are increasing pressures on staff who, even with the assistance of commercial advisers, may not be equipped with the necessary skills and expertise to manage the technical, operational and commercial aspects of such large and complex programmes. Replacing development expertise with commercial expertise or overburdening staff is likely to have implications for the effectiveness and impact of programming. Evidence suggests that the decision-making process at the core of programme design—which channel to use—needs to be strengthened. (Paragraph 17)
2.We urge the Department to ensure that the choice of implementing a given programme through contractors is always driven by the strategic value of that delivery channel. DFID Smart Rules should include more detailed guidance on the appraisal portion of the business case, and business cases should clearly justify why the particular channel was chosen, with reference to the relative benefits over other types of delivery. DFID should ensure that the emphasis on commercial expertise associated with the increasing use of contractors does not make generalists of DFID staff at the expense of technical knowledge and depth. (Paragraph 18)
3.Evidence to this inquiry and past IDC inquiries has suggested that an arms-length body to assume some project management responsibilities could be beneficial in both strengthening the expert oversight in DFID projects and deepening competition in the market. It is our view that such a body could contribute towards a suitable balance between in-house and outsourced expertise. It would also afford DFID greater direct scrutiny of contract-based delivery, a notable advantage given recent questions surrounding contractor conduct. We repeat earlier calls for DFID to investigate the idea of an arms-length body to assume programme management responsibilities. This should be done as part of its Supplier Review and the outcome reported to us. If DFID disagrees with this or believes it is not feasible, it should set out why in its response to this Report. (Paragraph 20)
4.In its 2015 Aid Strategy, the Government committed to allocating 50% of all DFID’s spending to fragile states and regions, up from a previous target of 30%. While DFID decides on the delivery channel for its programmes on a case by case basis, any perceived comparative advantage held by contractors is likely to result in their increased use. We share the Stabilisation Unit’s concerns about possible tensions between profit motives and programme objectives in fragile states. We also question whether the shifting of risk to contractors through Payment by Results (PbR) is likely to lead to substantially higher risk premiums which are then reflected in the cost of contracts. We note that with fewer contractors operating in such difficult environments this may have implications for market competition and value for money. (Paragraph 25)
5.DFID should ensure the use of contractors in fragile states is carefully managed and that output targets are designed to align profit incentives and development objectives whilst still taking account of drivers of conflict. DFID should be particularly cautious about shifting risks onto contractors in fragile states through PbR. It should also ensure that all overheads and profits are benchmarked against other donors and recipient countries to ascertain whether DFID is achieving value for money. (Paragraph 26)
6.DFID has taken some key steps towards improving the way it learns through contractors, though concerns remain about whether this knowledge is effectively extracted and internalised. The assumption that contractors are keen to share learning for the greater good overlooks the fact that, as for-profit companies, there is a strong commercial incentive to withhold information from DFID and potential competitors. We stress the importance of independent evaluations, and note that there appears to be little clear strategy to determine the degree of independence in evaluations across various programmes. A number of other donors use very different contracting models which are likely to have their own advantages and disadvantages. (Paragraph 33)
7.As part of DFID’s Key Supplier Management (KSM) system, it should apply a metric on the contractor’s contribution to DFID learning, including how cooperative they are with other contractors. Other innovative approaches should also be explored in the Supplier Review. DFID should use guidelines on best practice to set out clear regulations in its updated Smart Rules on when programme evaluations should be done completely independently of both DFID and contractor staff. It should also foster closer relationships with the procurement departments of other donors as well as multilateral agencies to try to learn about what works in different procurement models. (Paragraph 34)
Procurement processes
8.We commend the ability of DFID’s procurement processes to source development interventions quickly when needed, particularly in the case of the Ebola crisis. While DFID should be recognised for using effective procurement to drive down the costs of goods such as bed nets and vaccines, we believe that the majority of DFID programming—such as improving governance—involves a very different approach than that of commercial procurement of goods. We are concerned about instances where procurement-sensitive information has been available to some bidders and not others, and also about the limitations on excluding bidders (imposed by procurement regulations) who have had a role in the programme formulation. Delays and cancellations are also a concern, and high (and rising) bidding costs are likely to work against DFID’s stated desire of expanding the supplier base. (Paragraph 42)
9.DFID must make every effort to level the playing field in terms of information available. While we recognise that mistakes can be made in the way procurement-sensitive information is handled by staff, this can be overcome through greater transparency from the outset—publishing all information so that no single or group of bidders is at an advantage. Where a procurement is delayed or cancelled, DFID should take lessons away from this so similar events can be avoided in the future. Additional bidding requirements that come out of the Supplier Review should not impose significant additional costs on contractors, as these may drive those least placed to bear them (i.e. smaller organisations) out of the market thus reducing competition. (Paragraph 43)
10.We recognise that there are benefits to framework agreements, including the time and cost savings generated through greater administrative efficiency. However, there is a strong suggestion from evidence to this inquiry that they lock out organisations—particularly smaller ones with technical expertise—from bidding for DFID work. They can force smaller contractors into ‘second tier’ roles where their power and influence is reduced. In order for frameworks to work as intended and avoid narrowing the supplier base, they need to be updated regularly which is not current DFID practice. (Paragraph 52)
11.DFID should undertake a review of framework agreements and justify how their benefits outweigh the costs reported in evidence to this inquiry. Where framework agreements are used, DFID should commit to regular reviews and updates, allowing new market entrants access to bid for existing frameworks at more regular intervals. DFID should also consult with smaller organisations on how to make bidding for frameworks more accessible, offering tailored guidance to ensure that its procurement processes are not a barrier to entry. DFID should also justify why it continues to use framework agreements when the trend across government is moving away from them. (Paragraph 53)
DFID supplier and the supply chain
12.There is some evidence to indicate that there is healthy competition in DFID’s supplier market relative to other donors. However, there are a number of factors undermining the competitive elements of the market, including unequal access to Department officials, low numbers of bids and a range of other issues including unequal information and some organisations being locked out by framework agreements. Ensuring a competitive contractor market is a central component of DFID’s commercial strategy, and while it has the potential to lower costs and deliver greater value for money, this should be balanced with greater risk management. (Paragraph 62)
13.DFID should conduct market analysis, potentially with assistance from experts at the Competition and Markets Authority (CMA), to determine any issues that may be undermining market competitiveness. It should then take necessary steps to correct for these issues in order to create an increasingly level playing field for all potential bidders. (Paragraph 63)
14.Expanding its supplier base is another key component of DFID’s procurement and commercial strategy. While the Department has taken some steps to reach out to and include developing country contractors, these have had limited effect with only a tiny proportion of contracts still awarded to companies that are based in-country. We note that the UK Government made commitments to untying aid, both formally and in practice, yet some of DFID’s procurement practices (such as the establishment of framework agreements) can work against this commitment. (Paragraph 69)
15.DFID should report on how it plans to increase its efforts, beyond what has already been stated in evidence, towards helping more developing country contractors bid for DFID work. It should ensure that the format of Early Market Engagement (EME) exercises is geared towards greater inclusion, and should report to us on whether greater use of in-country EME’s has increased the number of developing country contractor bids. DFID should also make use of the Untied Aid Public Bulletin Board and, if it continues not to do so, should clearly justify why not and describe an alternative approach to advertising contract opportunities to developing country contractors. (Paragraph 70)
16.Despite DFID’s stated aim to expand the supplier base and facilitate access to DFID contracts by smaller organisations, evidence suggests that it does not have sufficient understanding of the challenges faced by small organisations nor how to address these. The broad Cabinet Office definition of SME’s means that DFID’s SME Action Plan is unable to capture the needs of small and micro enterprises. However, we also recognise that the Government is bound by this definition due to European Commission regulations. We also note that the use of Payment by Results (PbR) is likely to work against the aim of DFID procurement being more inclusive. (Paragraph 74)
17.DFID should be more inclusive of small and micro enterprises by disaggregating its approach to SME’s to target small and micro enterprises. This should include both collecting data on the work contracted to such enterprises and producing a strategy on how opportunities for them to bid for DFID work can be expanded. DFID should also report to the Committee on how it plans to mitigate the impacts of Payment by Results so that it does not preclude smaller organisations from bidding as evidence suggests is currently the case. (Paragraph 75)
18.A thorough understanding of DFID supply chains is essential to ensuring value for money and development impact in DFID programming. While we welcome DFID’s increased effort to map and better understand these supply chains, we are concerned that this is a feature of the delivery model that has been overlooked up to this point. While we recognise that DFID is not responsible for cases of mistreatment of sub-contractors, we stress that it is responsible for enforcing certain standards of conduct, and that a lack of enforcement and an over reliance on self-declaration of adherence to these standards has contributed to these behaviours. (Paragraph 84)
19.In order to facilitate better engagement between DFID and the sub-contractors that deliver its programmes, DFID should establish a dedicated ‘sub-contractors unit’ within its Procurement and Commercial Department. Much like the Key Suppliers Management (KSM) system for larger contractors, this would act as the main access point for sub-contractors and offer them a more consistent pipeline of information on future opportunities, provide a channel for raising grievances and allow DFID to better understand the challenges they face and how it can help overcome them. (Paragraph 85)
Conduct and performance of contractors
20.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. (Paragraph 89)
21.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. (Paragraph 93)
22.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. (Paragraph 94)
23.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. (Paragraph 99)
24.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.
(Paragraph 100)
25.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. (Paragraph 105)
26.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. (Paragraph 106)
Value for money
27.We agree with DFID’s position that, where contractors offer the best value for money, programmes should be tendered rather than delivered through multilaterals or civil society organisations. However, we stress that there is a critical difference between profiting and profiteering. The vague definition of “fair but not excessive” profits provides little reassurance to the public that contractors are not getting rich from UK Aid. While we recognise that being too prescriptive on what is “fair but not excessive” may distort the market, there is room for discussion on what this constitutes. Benchmarking against the rates paid by other donor agencies to contractors is key to ensuring that DFID is getting value for money. The fact that this is done internally with no reporting or details of methodology points towards a lack of transparency. (Paragraph 111)
28.DFID should determine some clear parameters on what constitutes fair but not excessive profits. It should also commission an independent review which benchmarks contractor fees across DFID programmes (including in different locations and comparing fragile and non-fragile states) as well as against other donors. It should also consider whether other donors are achieving better value for money through their differing procurement processes. (Paragraph 112)
29.We recognise that much of the media focus on the fees paid to consultants has been misleading, and that comparing these daily rates to the annual salaries of employees (and their benefits) is not comparing like for like. We welcome DFID’s move towards more transparent, open book contracting. However we also note concerns that this only happened last year and that, in the past, contractors may have exploited DFID’s inability to see costing breakdowns at the expense of value for money. We also note the approach of other donors towards fees, particularly Australia and its Aid Adviser Remuneration Framework (ARF). While we recognise concerns that such a prescriptive framework could distort the market, we believe that, if designed carefully, it can enhance transparency and deliver better value for money. (Paragraph 116)
30.We recommend that DFID consider an Australian-style consultant remuneration framework as an output of its Supplier Review. This framework should be prepared in collaboration with contractors to take into account their views, and should be designed carefully—building in an appropriate level of flexibility—to avoid any market distortions that may emerge. (Paragraph 117)
31.Disability inclusion is a key part of DFID’s strategy, as outlined in its Disability Framework. However, there is evidence to suggest that this issue is not being addressed in programmes delivered through contractors. A narrow definition of value for money may encourage contractors to focus on the easiest and cheapest to reach. The competitive nature of the contractor market and DFID’s strong focus on value for money may therefore be creating worrying incentives for them to overlook disability inclusion. (Paragraph 121)
32.DFID should ensure that the principles outlined in its Disability Framework are enforced in programming delivered through contractors and it should require that disability inclusion be written into contracts. (Paragraph 122)
6 April 2017