Ministers debate future of ‘Oligopoly’ and outsourcing in wake of Carillion collapse

SUMMARY:

The opposition questions the government’s willingness to hand over public contracts to private companies, given their track record in project failures.

business-handshakeRecently appointed Cabinet Office Minister David Lidlington and Shadow Cabinet Office Minister Jon Trickett have clashed in the House of Commons during a debate on the government’s future approach to private sector outsourcing, following the collapse of Carillion.

The opponents put forward their views on whether outsourcing is an effective approach for government spend on public sector projects, given a long history of scandals, project failures and taxpayers’ money going to waste.

Whilst the debate was not specific to technology buying, it is one that has long been at the centre of digital procurement. For example, the Government Digital Service and previous Cabinet Office Minister Francis Maude took aim at the ‘Oligopoly’ in recent years with the hope of dismantling the control that a select few technology companies held over public sector purse strings.

The creation of the G-Cloud and the SME spend targets are two examples of how the government has been looking to diversify its supplier base and open up competition to a broader range of bidders. In addition to this, Whitehall has been attempting to skill up the civil service, in a bid to reduce its reliance on private companies.

Since the early 90s the government looked to outsourcing as a way to solving its problems, citing cost savings as the main driver. However, this resulted in departments signing multi-year deals which saw little innovation introduced and reduced flexibility in how services were created. If you’re signing a 10 year deal based on current requirements, given the pace of technological change, how can you keep up with the market?

Not only this, but time and time again private sector outsourcers have failed to deliver on projects, often resulting in catastrophic failures, but have continued to rake in the profits (often as a result of poor management of contracts by government officials).

Whilst it looked like the tides were changing for a while, with a rise in SME contracts being signed and an insourcing of projects, concerns have been raised in recent years that the government is going back to its old tricks of relying on the ‘Oligopoly’, what with big name suppliers winning a number of government contracts.

Ministers will often say that SMEs still benefit because requirements have been put in place for large suppliers to spend more with smaller businesses, but as we have seen with the Carillion collapse, this can lead to damaging results for SMEs when things go wrong for the large supplier.

Carillion, which manages a huge variety of public sector and private projects around the UK, collapsed under a growing mountain of debt two weeks ago. Employees are now uncertain about their future, as well as their pensions, and subcontractors are out of pocket for work already carried out.

Not only this, but it emerged that shareholders continued to pay themselves huge dividends, despite profit warnings being issued as early as last July.

The question is therefore twofold – should the government be looking to manage more of these contracts themselves, given the apparent ineptitude of some companies in the private sector? And should the government, if continuing to outsource, be reliant on companies that it perceives as being ‘too big to fail’? Or should it be using a more diverse supplier base?

The opposition

Jon Trickett, Shadow Cabinet Office Minister, kicked off a debate in the House of Commons last week with a scathing attack on the government’s response to the Carillion collapse, citing a letter that had been sent out detailing six companies that would take over the management of its public sector contracts (although did not name them himself).

Of those six companies, he states that one of them has donated money directly to the Tory party, two of the firms are known for blacklisting workers, one of them is under investigation by the Serious Fraud Office and another has been caught “red handed” mis-pricing contracts”. He said:

My reaction to all that—I do not know whether it is unparliamentary—is to use three letters: WTF! What were the Government doing producing a list of that kind?

Trickett also went on to accuse the government of a lack of transparency over its handling of private sector contracts, stating that it refused to reveal details of those it was contracting with that were at risk. He said:

Back in 2017, while the Government were sleeping on the job, I submitted a written parliamentary question asking how many strategic suppliers had been rated either green, amber, red or black according to the severity of the risk posed by the supplier to the taxpayer. The Government’s reply was fascinating.

They refused to tell us how many of the suppliers posed a risk, saying that that could prejudice the contractors’ commercial interests. I did not ask the identity of those contractors; I asked only for the number that posed a risk to taxpayer interests. So my question posed no commercial threat whatever to any company.

The Government’s response illuminates their whole approach, which shows little regard for the needs of the taxpayer while paying far too much attention to protecting the commercial interests of their suppliers through every stage of the procurement process.

Trickett added that he has been approached by a whistleblower, who claims to have advised government ministers to insert into every outsourcing contract an indemnity clause whereby the supplier of the service would indemnify the taxpayer, should the company get into difficulty. However, according to the whistleblower, the government ignored the advice. But, according to Trickett, Carillion insists on the inclusion of such clauses into their contracts with subcontractors. He said:

The company, which has now become the poster child for corporate recklessness, took more steps to protect its finances than the supposed custodians of the taxpayers’ money sitting in their comfortable ministerial offices.

This is the crux of what people find so frustrating about private sector outsourcing – with the perceived notion that companies hold all the power and government is reckless in protecting the interests of the taxpayer and services.

Trickett wrapped up by pointing to the government’s increased spend in outsourcing and the threat of the Oligopoly. He said:

Maybe the Government’s devotion to outsourcing is the real reason why they have failed so monumentally in relation to Carillion. They had a blind assumption—and still have—that contracting out works efficiently, and that the market always knows best, which we know is not the case.

If they do not learn from the repeated failures of outsourcing, there will be another Carillion around the corner, and then another and another.

We need to change direction. Let me briefly set out the case, because outsourcing of procurement has boomed under this Tory Government. It is now worth £242 billion. Nearly a third of public expenditure—of our taxes—is being put at risk by a Government who are blindly following a dogma.​ To be clear, there never was a true market in outsourcing. It is an oligopoly.

This so-called market works well for a handful of companies making huge profits out of the taxpayer, but it is not working for anybody else.

The government’s response

Cabinet Office Minister David Lidlington responded to Trickett’s comments by stating that he recognises the collapse of Carillion has “caused huge anxiety”, but was also quick to defend the outsourcing practices of the government.

He stated that despite the collapse, public sector delivery continued without interruption and that no public bodies reported any major service disruptions. Questions were raised during the debate as to why the government continued to award Carillion contracts after its profit warning last July, to which Lidlington pointed to ‘fairness’ obligations under government procurement rules to consider all bidders.

He said:

When Government advertise opportunities, bidders go through a formal process, which may involve negotiations, and then submit a bid. These bids are looked at on a basis of equality between competing bidders. They are scored formally for quality and price against a published set of evaluation criteria, and the contract is then awarded to the highest-scoring bid. It would be a major legal risk for the Government, having published criteria, then to seek to exclude any bidder from a contracting process on the basis of other, somewhat arbitrary, criteria.

However, Lidlington was most adamant about the benefits that the private sector brings to public sector services. He said:

It is worth pointing out that outsourcing, whether in construction or the provision of services, is something that successive Governments—Labour, coalition or Conservative—have been doing since the 1990s. The services provided to the public sector by private companies include IT, back-office services, facilities management and other business services, such as running call centres. In many cases, those services have now been delivered by private sector companies for 10 or 20 years, and many have built up specialist expertise, skilled staff and investment to deliver public sector contracts.

This is a matter not just of cost, but of quality and innovation. If we look at a project such as Crossrail—the largest infrastructure project in Europe—that railway will open on time and on budget later this year. To deliver that project on time and within budget, Network Rail and Transport for London work with a huge range of private sector companies—including Costain, BAM Nuttall, Balfour Beatty, Morgan Sindall and others—and use their specialist expertise, which is something, frankly, that civil servants are not trained to have.

What I found to be such a pity about the hon. Gentleman’s contribution was that he resorted to ideology, instead of looking at the people—our constituents—who actually use the services and who benefit from the better value for money and innovative quality that private sector contractors are able to bring, and have brought successfully, to that work.

The Government are committed to ensuring that the public sector continues to benefit from the best of private sector innovation and skills. We do not put ideology first; we put the service user and the citizen first. That is the policy that the Government are committed to and which we intend to continue.

My take

It seems that the status quo will continue for a while yet and not even the collapse of a company like Carillion will drive any sort of effective change from this government.

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