Government Response to the Committee's Seventh Report: After Carillion: Public sector outsourcing and contracting

Ninth Special Report

1.The Public Administration and Constitutional Affairs Committee published its Seventh Report of Session 2017–19, After Carillion: Public sector outsourcing and contracting, as HC 748 on 9 July 2018. The Government’s response was received on 29 October 2018 and is appended to this report.

Appendix: Government Response

1.It is intolerable that the Government is spending £250 billion with little evidence that it is currently following its own procedures to secure value for money. The business case procedure set out in the Treasury’s Green Book provides a suitable basis for making decisions about whether and how to let contracts. However, we are concerned by the evidence of the Comptroller and Auditor General that this is not always followed. The Cabinet Office and Treasury should ensure that all contractual decisions are based on a sound business case and in accordance with the guidance laid out in the Green Book.

Response:

1.1Central government organisations, including departments and the bodies they sponsor, must follow the Cabinet Office spend controls process when they want approval to spend money on specific activities. The Cabinet Office controls are part of the wider government approvals process set out in the managing public money guidance.

1.2Cabinet Office maintains and administers spending controls regarding commercial transactions. This includes any new contract, contract change or variation, and contract extensions that have a transaction value of £10 million or more (excluding VAT).

1.3The Cabinet Office Commercial Control applies at a minimum of 2 points in the commercial and business case lifecycle: Outline Business Case (OBC) - when an organisation has formed a view on the approach to market (or current supplier for a change/variation or extension) but has not yet formally engaged either in tendering activity or, for a contract extension or contract change, in negotiation with the supplier; Full Business Case (FBC)—when an organisation has concluded the market activity (agreed the contractual change or secured agreement on extension conditions following negotiation/engagement), evaluation and identification of a preferred bidder but has not yet announced (or formalised) this to the bidders/supplier.

1.4Government organisations are required to support their requests for approval from Cabinet Office with business cases (or equivalent detailed assessments of options approved by HMT). Since December 2013 HMT has had a scheme in place with the Welsh Government, called the Better Business Cases Network, which aims to improve civil servants’ ability to engage with the five-case model set out in the Green Book. In that time, the Network has trained over 6000 civil servants to understand the Green Book guidance better and to make sure it is applied effectively to contractual decisions. Officials in HMT are currently developing plans to roll the scheme out across the rest of the UK.

1.5Cabinet Office and the Treasury are currently developing a playbook which will be used in conjunction with the Treasury Green and Orange books. The playbook will both specify a methodology for simple and complex outsourcing and a set of standards which will apply across government. It will provide contracting authorities with a series of questions to consider as the commercial lifecycle progresses, which will enable them more effectively to define what they want to deliver, what the options for taking their requirement to market are, what their contracting and procurement strategies will be, and how to be better prepared for the potential impacts of corporate failure on the continuity of public services. Importantly, the playbook will seek to strengthen the approvals process which Cabinet Office uses to ensure that contracting authorities are following guidance when making outsourcing decisions.

2.Public trust in outsourcing has been seriously damaged recently. This is due to a number of high profile failures–including most recently the failure of Carillion. The Government needs to rebuild trust in the process by which it makes decisions about outsourcing. The Government can only achieve this by being transparent about how and why it decides to purchase a good or service. Especially in cases where private sector involvement or the type of commissioning is novel, the Government should publish its rationale for the decision and notify the relevant select committee. This might take the form of a published business case, for example.

Response:

2.1Carillion’s liquidation has exposed issues that have at times informed a breakdown of trust between government, suppliers and the public. The Government accepts that it is incumbent on it and industry to rebuild that trust and greater transparency will help.

2.2The Government has committed to adopting ‘Open Contracting’, and the UK was the first G7 country to implement the Open Contracting Data Standard (OCDS) in its central purchasing authority, the Crown Commercial Service.

2.3The next UK national action plan on open contracting aims to improve compliance, coverage and quality of publication to Contracts Finder, the online database that contains summaries of upcoming procurements and the contracts already let. This includes improving the use and validation of organisation identifiers, publication of subcontracting data and improving compliance with policy requirements and guidance to publish contract documents, and the creation of additional metadata fields in Contracts Finder to indicate specific types of contract terms (e.g. use of a transparency clause).

2.4As your report suggests, government should try to rebuild public trust in outsourcing by making the rationale behind its decisions to outsource novel services more transparent. Cabinet Office and Treasury are currently looking at how government could make the rationale behind its decisions more transparent as part of the playbook.

3.The Government must produce evidence about the advantages and disadvantages of purchasing from the private or third sector in different public services. This should include an assessment of the cost and quality advantages and disadvantages of purchasing services. The Government should establish a centre of excellence for research into applied contracting (for example, through establishing a new “What Works Centre”).

Response:

3.1Contracting authorities carry out an options analysis at the business case stage of procurements to enable them to make a ‘make or buy’ decision. This options analysis assesses the cost and quality advantages of purchasing services compared with delivering them in-house. It ensures that public bodies only purchase services from the private and third sectors where they have evidence that doing so will enable them to deliver services at the required quality and at better value for the taxpayer. In response to your report, the Government Commercial Function took a sample of business cases, approved within the last three years and which led to decisions to outsource. The sample showed average projected savings of 19.9% between the base case and the projected whole life cost. Government is considering options to provide further analysis on the benefits of outsourcing. The playbook will provide further guidance on top of the Green and Orange Books to enable contracting authorities to carry out more effective options analyses and to improve their ‘make or buy’ decision making.

3.2Putting aside issues of function and remit, Government remains unclear, having reviewed the written and oral evidence presented to the committee, what specific problem a new centre for excellence would solve which existing processes and initiatives in government do not already address.

3.3The dissemination of best practice and learnings is already fundamental to the operation of the Government Commercial Function. The Commercial Operating Standards and associated masterclasses already provide the opportunity for those departments who are performing well to share their ideas and to disseminate best practice across the wider public sector. We will continue to broaden participation in the masterclasses as we roll out the Commercial Operating Standards to the wider public sector, NHS and local government.

3.4We also already enjoy a productive relationship with the Business Services Association and Confederation of British Industry, in which those bodies feed back to government on outsourcing processes and individual contracts and how they could be improved.

4.The Treasury and the Government should not approve any further PFI projects until they can clearly justify, based on evidence, their claims about the benefits of the scheme. It will seem bizarre to many observers that the Government has chosen to pay more than it could for £60 billion worth of projects, without evidence of any benefits from the extra cost involved in using this financing method. Ministers should be able to choose to use state finance where it is clear that private finance would bring no benefits. The Treasury should scrutinise in particular the recently approved transport projects (the A303 Stonehenge tunnel and roads and the £1.5 billion approach roads to the Lower Thames Crossing) to ensure that there is good evidence that private finance represents the best value for money in these cases.

Response:

4.1Treasury and IPA would highlight that the PFI model was retired in 2012 following a fundamental assessment of its performance and building on concerns raised by the Committee and other parties. Treasury and IPA’s preferred model of Public Private Partnership is now PF2.

4.2The Government believes firmly that value for money is of primary importance and applies a strict scrutiny process to projects with the aim of ensuring that a decision to use private finance is only made where it can be demonstrated to provide value for money over conventionally procured and government-financed alternatives.

4.3It is for procuring authorities to determine the procurement route to be used based on the value for money assessment process set out in the Green Book, a new edition of which was published on 6th March 2018. The Green Book requires departments to base their appraisal of value, costs, benefits and risks on empirical evidence, for example from past projects or similar projects in their department.

4.4However, the Government recognises the concern raised by the committee about the absence of benefits data and addresses this point in its response to the Public Accounts Committee’s report on PFI and PF2.

4.5The Lower Thames Crossing and A303 Amesbury to Berwick Down projects have not yet reached outline business case and so a decision about the financing of these schemes has not yet been made. When these schemes come to Treasury for approval it will scrutinise the value for money of each scheme carefully.

5.The Government should investigate the experience of the Scottish Government with the Non-Profit Distributing model and report back in its response to this report its view of what the UK Government can learn from the Scottish experience.

Response:

5.1PPP is a devolved matter and each of the Devolved Administrations has developed a model to suit their local circumstances. These models, including Non-Profit Distributing (NPD), are similar to PF2 in that the responsibility for and risks associated with the design, build, financing and maintenance of an asset is transferred to the private sector. We understand that the Scottish Government is no longer procuring new NPD contracts.

5.2In written evidence to the Public Administration and Constitutional Affairs Committee, the Scottish Government identified six key benefits to the NPD programme. These were: risk transfer, transparency through a public interest director, flexible contracts, profit capping, the exclusion of “soft” maintenance services and unitary charge payments which are not linked to inflation.

5.3The PF2 model similarly captures most of these features, with the exception of caps on private sector profits. We chose not to apply capping in PF2 contracts because profit incentives encourage the private sector to innovate and deliver public infrastructure projects more efficiently. In PF2 schemes, however, we do publish the expected and actual rates of returns made by the private sector.

6.Balance sheet treatment is not an appropriate justification for the choice of method of finance or for the terms of government contracts, especially if it means the contracts cost the Government more. We welcome the decision to clawback excessive profits from refinancing; however, it is wholly unacceptable that the Government have reduced this in order to conceal the true nature of public sector liabilities. The Government should note in their response that our recommendation follows similar arguments from both the Treasury Select Committee and the Public Accounts Committee. Without compelling evidence and justification from the Treasury, the Government should re-introduce refinancing provisions allowing 50% gain share for the public sector.

Response:

6.1The Government notes the views of the Treasury Select Committee and the Public Accounts Committee and believes firmly that value for money is of primary importance. Treasury’s guidance to departments is clear that it is value for money and not the accounting treatment, which is the key determinant of whether a PF2 scheme should go ahead.

6.2Refinancing provisions increasing the gain share from 30% to 50% for the public sector were introduced alongside “rescue refinancing”, a provision which allowed the private sector to recoup up to its bid equity return before any gain-share could take place. This was a significant benefit as it allowed investors in a poorly performing project to make up their returns on a refinancing before any gains were shared with the public sector; in all projects, it allowed the private sector to offset the reduced benefit of refinancing caused by higher gain-share.

6.3The net change in value to the public sector by reducing gain-share has therefore been minimal. Were we to move back to 50% we would have to reintroduce these “rescue refinancing” provisions which we no longer think provide good value for money.

7.The Government’s position in some public sector markets is monopsonistic. It has huge power as the only buyer in those markets to set prices, standards of quality and to determine the behaviour of participants. The Government should recognise in its response to our report its position as a monopolistic buyer in some markets and commit to publishing a strategy which would identify what it thinks the risks that arise from this are, how it can mitigate them and what it can do to improve these markets and render them more stable.

Response:

7.1It is clear that in certain markets, including in the complex outsourcing market, there are some services where government is the only buyer. But across the board, what Government needs to do is ensure that it has healthy markets and robust procurement strategies. These points are being addressed through the measures which the Chancellor of the Duchy of Lancaster announced in his speech to Reform at the end of June this year. Government officials are developing strategies, the details of which will be published in due course, which will afford government greater insight into the financial stability of suppliers and markets, and which will establish better ‘right at the start’ processes which on a case by case basis will take account of market (and therefore monopolistic buyer) conditions.

8.The Government’s guidance on risk transfer is sensible but too often that guidance appears to have been ignored in Departments. The Government must ensure that in the future this guidance is followed. In areas where the Government lacks information about the state of existing provision of services, it must evaluate which risks its partners are capable of taking on and which risks must remain with the Government. The Government ultimately cannot outsource the need to understand what it is outsourcing. We expect the Government to set out to us new procedures to ensure guidance about risk transfer is followed in the future. For example, contract announcements could be accompanied by a disclosure of which risks each party has agreed to manage.

Response:

8.1The Government does not outsource its understanding of individual business cases for projects and programmes. Where specialist advice requirements for projects or programmes, that can benefit from external perspectives, are identified by departments it is legitimate for these skills, experiences and advice to be sourced and leveraged.

8.2Business cases developed for Government projects and programmes must take account of available guidance on risk and the development of the commercial dimension of those business cases. Work is commencing in financial year 2018/19 to review the “Orange Book”, the government guidance on risk. This work, carried out in consultation with industry and professional bodies, aims to produce standards, principles and guidance which support the collective practices, culture and capabilities that integrate with strategy-setting and performance management to inform effective decision-making.

8.3We do not intend to extend our current transparency approach to take on disclosure of risk positions. An extant Procurement Policy Note (PPN 02/17; December 2017) outlines existing policy requirements on central government to publish tender and contract documents with the Contract Notice at the relevant stage of the procurement. In addition, the Procurement and Contracting Transparency Requirements already set out policy requirements that central government attaches the contract documents to the award notice published on Contracts Finder for all contracts with a value above £10,000.

8.4The playbook will join up with the Treasury Orange Book to provide further clarity on guidance to departments on risk transfer, thus helping contracting authorities to understand what approach to risk transfer they should be taking.

9.The complexity of risk management is exacerbated in some of the innovative contractual models that the Government has used recently. The Government should pause its roll-out of these models, such as payment by results, given the difficulties the Government has had in evaluating which activity leads to outcomes and working out costs. In areas where payment by results has been implemented, we believe that the Government should, if it decides to re-purchase the services, re-evaluate how it apportions risk between itself and providers. The Government should in its response to this report lay out how it would do this.

Response:

9.1We are currently reviewing what constitutes appropriate risk transfer in light of the evidence presented to the committee by several of government’s Strategic Suppliers relating to the relatively small number of complex contracts which also have meaningful payment by results elements. This work is likely to result in a series of recommendations that prevent industry from having to take on unmanageable or inappropriate risks. These recommendations are likely to include:

10.The Government’s preoccupation with price has been noticed by the market and is a matter of grave concern. The Government’s failure to assess the quality of services as well as their cost is lamentable. There needs to be a complete reappraisal of how the Government assesses quality of the work it commissions. This will both incentivise providers of services to focus more on quality and ensure there is less chance of providers aggressively undercutting bids deliberately with the intention of potentially renegotiating the contract later on. This is particularly important in cases of complex services for vulnerable people, where the risks and the consequences of service failure are most acute. It is no surprise that the quality and reliability of privately supplied services is so variable if the Government nearly always judges bids on price alone.

Response:

10.1 Cabinet Office has looked into market opinions on the cause of reduced financial performance in Government suppliers. Investors and analysts attributed this to three key factors. The first was flatter growth in public sector spending. The second was the general maturing and evolution of the outsourcing sector from a rapid growth/high margin phase to a longer-term steady state phase with lower growth and tighter margins. The third factor was rising competition in the sector. This increased pressure on suppliers, matched with increased attention paid to efficiency in public sector spending has led to a perception that the attention paid to service quality has suffered. However, measures relating to the scope and quality of services still form the bulk of new procurement evaluations, and this is reflected in the level of service received in most public sector contracts.

10.2 We do recognise that there are a number of areas where there is a slightly higher risk of price having a disproportionate influence on decision making. One is in deciding when to utilise pre-agreed contract extensions with incumbent suppliers versus re-competing services early. Another is in the small proportion of tenders where traditional price vs quality evaluation models would struggle to provide appropriate differentiation between bidders on quality grounds. To address this, government is developing revised guidance on designing evaluation methodologies for bids as well as for supporting business decisions on sourcing (especially Make vs Buy).

10.3 Finally, we recognise that it is important to be able to provide confidence that Government suppliers are delivering value on their contracts. As such, a government-wide contract spend database has been launched, which will bring together multiple sources of commercial data and allow for simple, yet powerful, reports to be produced to turn this data into actionable information. We are currently working on including key, high-level KPI reporting for contracts within this database. There will be around 3–5 KPIs recorded for each service, and in the first instance we will implement this process for Government’s ‘gold’ contracts with its Strategic Suppliers. By doing so it will be easier to monitor performance at a contractual and supplier level, both to provide the necessary confidence on performance levels and to enable appropriate remedial action for each contract and future similar ones.

11.In each case where the Government has had to renegotiate a contract because its initial assumptions about cost, risk transfer or contractual structure have proved incorrect, we believe the Government should undertake a lessons learned exercise to identify what went wrong. The lessons identified in this exercise should be shared with the Comptroller and Auditor General and his officials to decide whether there are any issues to report to Parliament

Response:

11.1 Government departments already undertake lessons learned exercises to identify issues and to plan against them in the future. Commercial specialists are encouraged to share the findings of lessons learned exercises, and other examples of best practice, on the Knowledge Hub, a virtual network hosted by the Government Commercial Function. In June this year, over 2000 civil servants across 151 public bodies shared such lessons learned and best practices in as many as 62 network groups.

11.2 Cabinet Office also hosts quarterly ‘big deals’ events, which bring together senior civil servants, working in commercial areas, to share knowledge and best practice on government’s complex transactions. The big deals events are part of government’s work to continuously improve its understanding of and ability to deliver the largest and most complicated public services.

11.3 The Comptroller and Auditor General is already empowered to decide whether there are any issues in government outsourcing which should be reported to parliament. Government officials will continue to support the National Audit Office wherever they choose to look at contracts or have raised concerns.

12.The Government should improve its due diligence processes to understand the resilience of the cashflow and financial position of its partners. In 2017, the Government still awarded contracts to Carillion despite the weakness of the company’s balance sheet on the basis of “quite detailed tests on the financial capability of Carillion”. The Government should urgently review its due diligence procedures on the contracts awarded to Carillion. The Government should commit to announcing its findings from this review in its response to this report.

Response:

12.1 Tests of financial standing are a discretionary part of the selection stage of public procurements. In practice almost all substantial procurements include such a test.

12.2 The required level of financial standing is at the discretion of the contracting authority, though they are advised that the test should be proportionate to the size of the contract and the perceived risk. Tests are based on the latest published information.

12.3 We will be reviewing what financial information we should seek and what processes we should undertake in order to assess suppliers’ financial health both at the time of procurement and on an ongoing basis. While such assessments will not provide complete assurance, our work will enable us to assess the level of risk we should accept, the extent to which we should rely on historical financial information as an indicator of future financial health, and whether it is appropriate to seek and rely on forecast information.

12.4 It is important to recognise, however, as the National Audit Office investigation into the government’s handling of the Carillion insolvency recently did, that of the 7 announcements of government contracts which Carillion made after their profit warning on 10 July 2018, only 2 were for new design and construction contracts. 2 were awarded before 10 July and only announced afterwards, and 3 were variations on contracts which Carillion already held and which were awarded in 2014.

12.5 With regard to the award of the 2 HS2 contracts to Carillion after their July profit warning, the profit warning did not mean that the consortium, of which Carillion was one part, failed to meet the financial standing requirements set by contracting authorities. In fact, not to award the contract to the consortium would have been contrary to procurement law. Given that the consortium had passed the financial tests in the HS2 tender not awarding them the contract could, therefore, have led to litigation and further costs to the taxpayer.

13.The Government needs to ensure that the market for Government contracts remains contestable from within the public sector, from existing companies and new entrants. We welcome the Minister’s commitments in this area and we await to see in the Government’s response details on its new measures to increase small and medium sized enterprises’ participation in the market.

Response:

13.1As the Minister for Implementation announced in April this year, the Government’s aspiration is that 33% of central government procurement spend with private businesses should go to SMEs by 2022. As the Minister said, we have introduced a package of new measures to level the playing field for SMEs who want to supply the Government. These measures include:

13.2The Prime Minister also wrote to Secretaries of State requesting that they appoint a Minister to champion SME procurement within their own department. That group of SME champions has now met.

13.3All commercial controls going to Cabinet Office Ministers now include advice on the opportunities for SMEs in the procurement.

14.The Government should test the thesis that less competition (as opposed to contestability) also undermines outcomes for the public sector. This reflects a widely held consensus but it would be useful for the Government to commit in its response to commission further research. The Government should outline in its response to our report the detail behind the Minister’s commitment to a new playbook of guidelines, rules and principles.

Response:

14.1Both competition and contestability are important requirements if we are to make sure that taxpayers’ money is protected when public services are outsourced. Competition (that is to say, the presence of a strong market for service delivery) drives value for money in several ways:

14.2It should also be noted that these issues will need to be balanced against some of the potential disadvantages of shaping markets to reduce concentration, such as:

14.3Contestability is also a key element to driving value for money, and one which impacts in a more immediate time frame. Maintaining appropriate contestability (that is to say, retaining sufficient viable competitive tension from bidders throughout a procurement), keeps bidders focused on presenting high value bids, and provides disincentives on them from eroding service requirements, operational standards, and risk transfer. Contestability is protected in a number of ways during procurements or service extensions:

14.4Cabinet Office and Treasury will ensure through the playbook that the potential impacts of low competition are assessed and, where possible, mitigated from the outset of any procurement.

15.The Minister for the Cabinet Office has announced a review of how CO responded to the Carillion crisis. That review should take note of the weaknesses in the government’s approach. These include the government’s surprise that Carillion issued a profits warning in July 2017, when some investors had been warning about the state of the company for years.

Response:

15.1We are undertaking a review of how Cabinet Office responded to the Carillion insolvency, and where there are lessons to be learned we will endeavour to learn them.

15.2It is important to recognise, however, that it was not that a profits warning was issued which took government by surprise. It was the scale of that profit warning which was unexpected, by both government and the market alike. There was no way in which government could have anticipated the scale of the profit warning before it was made.

15.3We monitor all of our strategic suppliers. We raised concerns with Carillion around the company’s pension deficit, short position, operating cash flow and net debt levels in our engagement with the company.

15.4We can only base our understanding of a company’s financial situation on information that is publicly available to the market. A profit warning is the mechanism which public companies use to alert the market that their internal forecasts are different from the market’s consensus expectations. They are issued to correct that consensus, and by their nature therefore always contain an element of surprise.

15.5Government believes that we acted appropriately, and very effectively, after the insolvency announcement of 15 January 2018. As your report notes, the insolvency could have resulted in the collapse of public services. But through the contingency plans which Cabinet Office, central government departments and devolved authorities put in place, with the assistance of the Civil Contingencies Secretariat, government was able to manage the insolvency and ensure minimal disruption to public services and the continued employment of the majority of Carillion employees.

16.The Cabinet Office should ensure that it holds appropriate information about the contracts held by each of its strategic suppliers and aggregate the risk exposure from across the whole of Government to large contractors like Capita and Serco. The Cabinet Office should also ensure that it learns lessons from this crisis about how to quickly collaborate with local government to deal with the issues raised by a collapse such as Carillion.

Response:

16.1Cabinet Office does collect data in relation to the contracts which our strategic suppliers have across the whole of the public sector in order to understand risk exposure, and Contracts Finder contains summary data on the majority of central government contracts.

16.2The Government Commercial Function is also developing an internal tool which will allow individual departments to understand and track information on contracts in individual departments and across government. The tool will act as a repository for a range of data on central government contracts, and will be used internally in a wide range of ways to improve commercial outcomes.

16.3Government worked closely with MHCLG and the Local Government Association throughout the contingency planning process. We will review how we collaborated with local government and where there are lessons to be learned we will endeavour to learn them.

17.We welcome the Minister’s commitment to bring forward proposals for living wills with each key strategic supplier. The Government should lay out in their response to this report what these living wills will contain. The Government should clarify whether these wills would only apply when a contractor goes bankrupt, or whether they would also apply when a contractor withdraws effectively from a contract. The Government should set out measures to ensure that the public knows that these living wills are agreed: so that users of services can have confidence in their resilience despite what may or may not happen to particular companies.

Response:

17.1Contracts already contain clauses covering the procedures for contract termination and exit.

17.2Building on these clauses, living wills are currently being developed jointly with industry and relevant subject matter experts across government, and their content will be scrutinised as part of that development process.

17.3The proposals will require suppliers to put proportionate plans in place for what happens if they become insolvent. The suppliers who will need to develop living wills will be those delivering critical public services, or those whose corporate failure would seriously affect government’s ability to deliver key public services.

17.4Living wills will be reviewed annually to make sure they are assured and up to date.

18.The Government must continue its efforts to improve its commercial capability. Currently, this capability is unevenly distributed among departments. The Government also needs to take care that it does not, through having better negotiating capability, merely drive harder bargains with the private sector based on unrealistic estimates of service quality and cost. The Government needs to move beyond such a transactional approach and develop its understanding of the market and its partners in delivering public services. The Government and its contracting partners should share and express the same values. The Government should set out in its response to this Report its future vision for commercial capability, including measures to encourage collaboration within the public sector and verified trust between the Government and its providers. This should include a new code of conduct which would apply to both Government and suppliers and set out expectations of behaviour and shared values.

Response:

18.1The Government has already embarked on an ambitious program to improve the commercial capability of its commercial teams with the creation of the Government Commercial Function and the central employment model of the Government Commercial Organisation (GCO), which is designed to attract experienced commercial professionals from the private sector into Government at the more senior level. The Government has published the People Standards for the Commercial Profession, which seeks to ensure a balanced set of relevant capabilities are required from commercial professionals. Following a rigorous assessment process, should these capabilities be found to be lacking, the GCO provide an intensive supported learning and development program for individuals to upskill and improve commercial capability.

18.2In September 2017 the Government published a Supplier Code of Conduct. The code sets out the ethical standards and behaviours expected from suppliers of goods and services to government.

18.3We have set out in the code that we expect all suppliers to meet these commitments and ensure that their employees, partners and subcontractors will do the same. It sets out our expectations of the commitment and adherence to the highest standards of ethical and professional behaviour, both by suppliers and government.

18.4In delivering these commitments we must ensure adherence to the highest standards of ethical and professional behaviour that are expected of suppliers when they work with government, and how they can help the government deliver value for the taxpayer.

18.5Cabinet Office is currently reviewing the supplier Code of Conduct. Potential changes will seek to align it with recent policy changes (such as GDPR), and to include better wording around gender pay, prompt payment, and the UK corporate governance code. We will publish the new code of conduct when the review is complete.

19.The Government needs to improve, as our predecessor Committee suggested, its understanding both of risk transfer and of costing. Commercial skills cannot be seen in isolation from other skills. We believe that it is vital that staff with commercial skills work alongside staff with other skills such as costing, project management, IT and financial planning in letting contracts. They should also work alongside staff with deep subject knowledge and expertise. In its response, the Government should set out its plans to integrate together teams which have IT, project management, costing, financial planning and commercial skills and possess deep knowledge and expertise.

Response:

19.1Government agrees that staff with commercial skills should work alongside staff with costing, project management, IT and financial planning skills. That is why since 2010 government has developed and rolled out a functional model of government, led by the Chief Executive of the Civil Service, which provides strong central leadership of cross-departmental corporate functions. This model has professionalised the civil service, and has led to improved decision-making, cross-departmental working, organisational capability, efficiency, resilience, and control.

19.2This functional model has enhanced government’s ability to design, manage and deliver public contracts at good value for money to the taxpayer. It will continue to deliver quality and savings as we continually review and improve it in the future.

20.The Government needs to improve its internal information so that it can design, let and manage contracts more successfully. The Committee has made this point before in other contexts. The examples in this report strengthen the case that the Government needs to develop a full understanding of the services it provides to the public. The Government should set out in its response how its strategy to improve management information will tie into its commercial strategy.

Response:

20.1The Government Commercial Function is developing a government-wide contract spend database to allow individual departments to understand and track information on contracts in individual departments and across government. This will act as a repository for a range of data on central government contracts, and will be a tool that can be used in a wide range of ways to improve commercial outcomes.

20.2The new internal database takes data from existing systems including the publicly available information on tender activity and contract awards on Contracts Finder, and supplier spend data from other sources.

20.3Central government organisations, including departments and the bodies they sponsor, must follow the Cabinet Office spend controls process when they want approval to spend money on specific activities.

20.4As part of the spending controls the central commercial teams in the Cabinet Office lead the administration of the commercial control. The commercial control process seeks to assess all commercial activities, identified by organisations on a commercial pipeline of planned expenditure worth £10m or more, using the Commercial Operating Standards.

20.5The commercial control process considers the pre-market, procurement or negotiation strategy and then the subsequent proposed agreement, contract change or preferred bidder proposals.

20.6A facilities management asset register for property, fixed assets and removable assets is, and should continue to be, updated at the end of each contract to ascertain what is owned and leased, and where the asset resides, to help manage large expenditure.

21.We understand the Government’s concerns about the implications of increased transparency for some smaller contractors, and such requirements should be proportionate. However, we think that the principle that Parliament and the public need to have key information about the delivery of public services is important. The Government should set out in its response to our report which key performance indicators it has decided to publish and its justification for the choice of those indicators. The Government should work with the Information Commissioner to ensure that revisions to the Freedom of Information Act address her concerns.

Response:

21.1As the Chancellor of the Duchy of Lancaster stated in his speech to Reform earlier this year, government will publish between 3 to 5 Key Performance Indicators, starting with our most important contracts. Cabinet Office has already begun discussions with departments as to how they will select the relevant KPIs for the top 500 contracts, known as the ‘gold’ contracts, and how they will be reported. At this stage it is not possible to say which those KPIs will be, although it is clear that, because each contract is for different services, the KPIs are likely to vary between contracts.

21.2Government agrees with the Information Commissioner that if more diverse models of service delivery develop we will have to ensure that transparency is not lost. We will endeavour to make sure that democratic government is upheld through transparency, and will work with the Information Commissioner where appropriate.

22.We recommend that the Government should consult with the Local Government Ombudsman and the Parliamentary and Health Service Ombudsman about the problems identified by the Local Government Ombudsman in relation to complaints made about private sector contractors, over whom he has no jurisdiction. We agree with the overarching principle that all users of public services, regardless of who delivers the service, should have the right of access to an independent ombudsman. The Government has already published the Public Sector Ombudsman Bill in draft and this should be amended.

Response:

22.1Departments should take the lead in ensuring they have effective mechanisms in place to allow their service users to report their experiences, whether positive or negative, through robust channels, and these should be adapted to fit where the service is outsourced through a 3rd party.

22.2For central government contracts, contracting authorities should ensure suppliers are required to put in place an effective complaints handling process and that is managed through a contractual KPI.

22.3Departments should ensure issues relating to specific types of service provision and strategic suppliers are escalated to the government commercial function so they can be raised in routine SRM discussions and discussions with Crown Reps.





Published: 5 November 2018