Railways: Public Procurement

Lord Tunnicliffe Excerpts

Tuesday 30th November 2010 Grand Committee

[Lord Tunnicliffe]

My Lords, I thank the Minister for indulging my short absence. I also thank the noble Baroness, Lady Greengross, for introducing this debate and for sharing with me the paper from her transport forum. It reminded me of a paper that I had written some seven years ago, after 12 years’ experience of procuring goods and services for the public. I was procuring at the rate of something like £0.5 billion worth a year and I set down in a paper—it was literally only 22 lines long, so it was not a great seller—what I thought I had learnt from those 12 years. I ended up with 22 tips for contracting. I have looked at where the two papers coincided.

I take my first two points:

“Know what your objectives are”,

and, “Understand your suppliers’ objectives”. The essence of making a good contract is to think first of why you are doing it. You are doing it not for the Government but for the citizens, either singly or in groups, so you must know what you want and what that service is. You must have mutually compatible objectives and you really need measurable objectives. You do not want indulgences such as, “Let’s have innovation”, or all those fancy words. Get your objectives right first and understand your suppliers’ objectives so that they know whether those are possible.

I come now to contracts, which were at 11 and 12 on my list. I wrote,

“Contracts beyond their foreseen limits become progressively valueless”,

and, at point 12, “You cannot subcontract responsibility”. Because of those two facts, the idea that you can take contracts, litigate them and bring the behaviour of your contractor into line is pretty thin. My experience is that once you have a contract so far out of line that you cannot do business with your contractor, it is useless to try and litigate it and that, because you cannot subcontract your responsibility to operate the service, you are forced into a deadly embrace with your contractor. Much better than depending on tight contracts with penalty clauses is to have win-win contracts. In a good win-win contract, when a contractor’s manager thinks about making a decision to maximise the profit for his employer, he should be thinking, “That same action will maximise the benefit to the citizen”. Contracts that have those win-win characteristics are the only ones that really work over time, so win-win contracts with good mutual alignment are best.

My points 15 and 16 were:

“Risk migrates to the party of substance”,

and,

“Risk transfer should be appropriate”.

This idea that you can somehow subcontract risk to the private sector is unreal. When things go wrong, the risk will come back to the state. The reason that the state provides this service in the first place is that it has to be provided and the state cannot back out. You can only transfer to your contractor the risks that he can manage. You should not try to transfer risks that he cannot manage because, if you do, your contractor will then be a gambler. If he is lucky, he will make a fortune but, if he is unlucky, you will pick up the pain. We should remember that the private sector is risk-averse.

Point 21 on my list is that the private sector is good at focus and continuous improvement. Therefore, I allowed the private sector an important role here. However, as I wrote carefully on my piece of paper as point 22, the private sector becomes increasingly dysfunctional in loss-making situations or, as I said in discussions with colleagues at the time, the private sector runs around like a headless chicken. If your supplier is not making profits, all the nice things that he said in the contract and during the negotiations—all the cuddly and furry bits round the edge of what he promised to do—will evaporate. Private sector companies cannot survive without making a profit, so it is in your interests to make sure that you think through how they are going to provide the service and make a profit.

The one area in the report which I missed out but which I think is very valid is transparency. I certainly believe that we have had too much talk of commercial confidentiality over the years and that far more openness and open-book policies in contracting would benefit both sides so that all parties, including citizens’ representatives and the citizens themselves, could see what was happening on their behalf. Therefore, I strongly support the idea of far more transparency, including during the contracting and bidding periods.

Returning to the question of the railway contracts, I ask the Minister, first, whether we have clear criteria by which future franchise renewals will be judged. Do we have criteria by which to create the invitation to tender? Are those criteria written down? If so, where are they and, if not, will they be written down?

Secondly, do the Government understand the importance of win-win contracts as the only contracts that really work over time? Finally, do the Minister and the Government understand the whole issue of risk transfer and how it must be appropriate so that the public and the state do not become the losers?