Carillion collapse exposes fundamental flaws in Government outsourcing

09 July 2018

The Public Administration and Constitutional Affairs Committee publishes its latest report, "After Carillion: Public Sector Outsourcing and Contracting".

Cost over quality

The collapse of Carillion has badly shaken public confidence in outsourcing. During the inquiry, the Committee found that the Government's overriding priority for outsourcing is spending as little money as possible while forcing contractors to take unacceptable levels of financial risk. This approach has been made more damaging by the fact that the information the Government uses to inform the outsourcing process can be either incomplete or simply incorrect. The Government must be aware of this: it has written contracts that force contractors to pay out when it gets its own data wrong and has been known to forego performance penalties in the initial phases of contracts.

As a result of the Government's preoccupation with cost, PACAC has found that the Government has had to renegotiate over £120 million of contracts since the beginning of 2016 to ensure public services would continue.

Ultimately, this has led to worse public services as companies have been sent a clear signal that cost, rather than quality of services, is the Government's consistent priority. Contractors told us that the Government was known to prioritise cost over all other factors in procurements, driving prices down to below the cost of the services they were asking firms to provide. Worse, the Government was unable to provide significant evidence for the basic assertion behind outsourcing: that it provides better services for less public money, or a rationale for why or how it decides to outsource a service. This was especially true for PFI. Shockingly, the Government admitted to the Committee that the "entire [PFI] structure is to keep the debt of the balance sheet."

The process by which the Government decides to outsource and awards contracts is also in desperate need of greater transparency. The Committee found examples where the process appeared opaque and that the Government does not always follow its own contracting procedures.

PACAC calls on the Government to commit to underpinning contracts with realistic assessments of cost and risk transfer. It must collect evidence about the benefits and disadvantages of outsourcing in general as well as for individual services, and it must use this evidence as the basis for transparent outsourcing decisions.

Chair's comments

Chair of PACAC, Sir Bernard Jenkin MP, says:

"It is staggering that the Government has attempted to push risks that it does not understand onto contractors, and has so misunderstood its costs. It has accepted bids below what it costs to provide the service, so that the contract has had to be renegotiated. The Carillion crisis itself was well-managed, but it could happen again unless lessons are learned about risk and contract management and the strengths and weaknesses of the sector.

Public trust requires that outsourcing better reflects public service values. The Government must use this moment as an opportunity to learn how to effectively manage its contracts and relationship with the market."

Further information

Image: iStockphoto

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