Carillion

Bernard Jenkin Excerpts

Thursday 12th July 2018 Commons Chamber

[Sir Bernard Jenkin (Harwich and North Essex) (Con)]

It is a pleasure to follow the hon. Member for Leeds West (Rachel Reeves). I commend her and the right hon. Member for Birkenhead (Frank Field) for their joint inquiry, which has shed a great deal of light on the situation. It was obvious when Carillion collapsed earlier this year that there was more than just one issue with the company. In general, companies do not go under for simple reasons, and there is no doubt that Carillion was mismanaged. The firm was paying ever increasing dividends, eventually reaching an annual figure of £80 million, while experiencing declining financial performance and an ever more rickety balance sheet. It took some time for that situation to arise.

The reason for Carillion’s importance to the Government and the intense public interest is that its failure was not just due to the spectacular nature of its bankruptcy; before its collapse, Carillion built hospitals, maintained schools, constructed bridges and roads and electrified railways. When it failed, it had approximately 420 public contracts with the Government accounting for 33% of its total global revenue. It was a shattering blow to public confidence in the Government’s ability to deliver public services via private contractors and providers. That was reflected in my right hon. Friend the Chancellor of the Duchy of Lancaster’s recent speech at Reform.

The Committee I chair, the Public Administration and Constitutional Affairs Committee, scrutinises the work of the Cabinet Office and the whole civil service in a way that we hope will improve public confidence in government and public services. We have taken a long interest in public procurement and public contracting, and we saw this crisis as an opportunity to consider the main strategic issues around outsourcing. In fact, we had already—prophetically perhaps—embarked on this inquiry before Carillion collapsed. Its terms of reference included whether the Government made effective decisions on outsourcing the delivery of public services, what lessons could be learned from the collapse and, given that the Government depend on so few public service providers, whether the rules on oversight and accountability of contracts needed to be changed.

PACAC’s findings were published this week, and they are stark. We uncover that sometimes the Government have little or no data on the services they wish to outsource or on the facilities they ask companies to manage. In some instances, what Government data there was was actually incorrect. My understanding—we could not put this in the report because we could not get it in evidence—of the Carillion prisons contract is that the Government originally thought they were transferring about 800 assets, but it turned out that the company was taking over the management of some 8,000 assets. How can such vast errors be made? I am afraid that it underlines how badly public services are run by Departments, but the lesson is not simply to pass that ignorance on as a risk to a private contractor and expect it to cope. We know that the Government are aware of that and have demanded that contractors accept in the contract the risks of their giving them incorrect information. There is no excuse for this carrying on.

We uncover a culture focused relentlessly on cost—by which I mean price—whereby companies are pushed beyond the limits of commercial viability and where procedures on transparency are not regularly followed. Most staggeringly of all, the Government cannot accurately assess the capacity of companies to which they are outsourcing to deliver a quality service. During the inquiry, PACAC found several instances where the Government had contracted with the private sector without knowing key data about the services they were asking companies to bid for. For example, in 2014, the NAO reported that the outsourcing company Compass believed that the information provided to it by the relevant Department was inadequate. It was managing facilities for asylum seekers.

Only two months ago, the NAO found that NHS England

“did not know enough about the services it inherited to set achievable…specifications and performance standards”

for a primary care support contract. Asylum seekers, primary care patients—these are the people who, for one reason or another, find themselves utterly reliant on the state to provide their accommodation food and for their basic human needs, and when outsourcing goes wrong, these people are on the frontline and they are the ones who suffer. The Cabinet Office did a brilliant job of rescuing the situation after the collapse and of keeping public services going, but it should never have come to that—the Government should not have to bail out private contracts with hundreds of millions of pounds of public money.

[Ronnie Cowan (Inverclyde) (SNP)]

Will the hon. Gentleman give way?

[Sir Bernard Jenkin]

I give way to my Committee colleague.

[Ronnie Cowan]

Given what the hon. Gentleman has just said, was he surprised as I was that, despite three profit warnings, despite hedge funds betting against its success and despite spiralling pension debt, the Government still handed out contracts to Carillion, including one to the tune of £1.4 billion for HS2?

[Sir Bernard Jenkin]

By that stage, the Government were in a Catch-22 situation. If they denied Carillion access to any public contracts, it would have been a further signal to the market that this company was going down and it would have put at risk all the other public sector contracts it held. Also, in that case, the risk was shared by two partner companies, which signed in blood that they would take over any risk of each or any of the companies going bust. The Government have not suffered any loss as a result of that contract.

[Ronnie Cowan]

What the hon. Gentleman is saying is typical of the attitude that Carillion was too big to fail—and not just with HS2; there was £158 million for Hestia with the Ministry of Defence and £62 million for electrification of the rail line from London to Corby. While the Government continued to give Carillion all those contracts, its suppliers must have been thinking, “Well, my money is safe here, too. If the Government believe in these big companies, I’m okay.” There is a knock-on effect, a domino effect, right the way through the process, and ultimately smaller companies suffered and failed.

[Sir Bernard Jenkin]

I totally agree with the concept that these contracts become too big to fail, and therefore, as I will explain, it becomes an illusion that the Government have transferred risk to these companies. These companies are a private sector extension of the public sector, and the public sector still carries the risk.

[Stephen Kerr (Stirling) (Con)]

My hon. Friend spoke earlier of contracts basically being awarded on price, rather than on any kind of value. Does he agree with the CBI’s response to the Carillion report that suppliers to the public sector need to “bid responsibly” for contracts and need to be “prepared to challenge” bad deals and to “walk away” from opportunities that will not yield long-term value? The reality is we have a group of companies in this country that seem to be addicted to bidding on price, and this becomes a self-fulfilling prophecy, à la Carillion.

[Sir Bernard Jenkin]

I agree, but unfortunately I think that the Government have fed that addiction. The pressures of austerity and the hunt for savings have encouraged the Government to try to get prices down and to be blind to the risks they are transferring to the private sector, resulting in the sickness of the sector. As I will explain, there is a misappreciation of the risks that private shareholders are prepared to bear, compared with the risks that we should be taking with public services and public money.

As I have said, the Government sometimes write into contracts that companies must accept the risk that the Government have got their own data wrong. An analysis disclosed by Serco found that this practice had taken place in 12 of the company’s recent procurements. That is in part driven by the decision to use contractual models such as payment by results that involve risk transfer on a huge scale. If the Government cannot assess the services they are trying to outsource, they simply cannot make an accurate calculation of a fair cost for the outsourcers, yet they tend to pretend to do so. In those circumstances, passing the risk on to contractors is unacceptable and, as we have seen, proves counterproductive, particularly if the Government are unable or unwilling to make a serious assessment of what is at risk when a company delivers public services.

PACAC found that the relentless drive to bring down costs has been among the most damaging factors. We received evidence from organisations and businesses in the sector that the Government have been “driven by price exclusively”, leading to a reduction in fees paid by up to 25% to 30%. Some people put it more bluntly. Rupert Soames, the chief executive officer of Serco, told us that

“in the four and half years that I have been running Serco I know one occasion”

when Serco had won a contract despite not being the lowest bidder. A survey conducted by the CBI revealed that 98% of businesses responding said that something other than “service quality” was the main reason why Government contracts are awarded. There are obvious problems with an undue reliance on price in the contracting process; industry leaders were concerned that “fudges” would

“allow technically poor but cheap bidders to continue... simply because the customer is desperate for the saving.”

Such bidders would then seek to renegotiate the price afterwards.

There are examples of all this going badly wrong. The Government, who are frequently the dominant purchaser in these markets, have great power to dictate prices to contractors. Professor Gary Sturgess, of the Australia and New Zealand School of Government—and why did we abolish our National School of Government and so have no equivalent institution?—told PACAC that companies were

“stupid to have gone ahead and entered into contracts... but this is a Government supply chain. ”

Representatives from the National Council for Voluntary Organisations said that, on average,

“large charities lose 11% on each contract they have with the government.”

There is something rather unpleasant about Government milking charities to subsidise public services, but that is, in effect, what is happening.

Instead of recognising that the focus on cost damages the ability of companies to meet the terms of their contracts and discourages innovation, the Government have taken a different approach. In some instances, they forgo performance penalties available to them, in essence declining to enforce the parts of the outsourcing contract that are designed to maintain the high standards of the service being provided, at the agreed price. In others, the Government have renegotiated the terms of some contracts. We received evidence from the Cabinet Office that just since 2016 the Government have renegotiated at least £120 million-worth of contracts in that way, including the Ministry of Justice’s flagship “Transforming Rehabilitation” scheme. The cost to the Government of the work necessary for the renegotiation itself is yet unknown.

PACAC found that the Government do not have a strong evidence base about when and whether to use the private sector, or whether such use will be more successful than using the public sector. This is what we call the decision to make or buy. The Treasury Green Book sets out a process that should be gone through when deciding whether to make or buy a service—whether to do it in house or put it out to contract—but we found no evidence that that was well understood or indeed followed. There is also a lack of a central database for outsourcing contracts, meaning that systematic analysis of outsourcing throughout the whole of Government is difficult at best, if not impossible. Nowhere is there an understanding of how much public service risk is being carried by each company, across all of its contracts and across all Departments. Without that kind of understanding, the Government are unable to prove the basic premise behind all forms of Government outsourcing: that the private sector is capable of providing a better service for better value. The basis for the claims made by the Minister who wrote the article in The Times earlier this week is data that is now some 20 years out of date. All this data should be published, as public confidence will not be strengthened without far more openness and transparency about how public contracts are let and managed. Nowhere is that more apparent than with private finance initiatives.

The ostensible purpose of PFIs was to take advantage of the expertise of the private sector in providing privately-financed infrastructure projects and buildings. However, despite having more than 20 years to research and form an evidence base, the Government were unable to justify their claims about the efficacy of PFI. In fact, in their testimony to PACAC, the Government claimed that PFI brought “discipline and rigour” to projects. But, while giving evidence, the chief executive of the civil service revealed that the real purpose is to make the public balance sheet look better. That motive can also be seen in the refinancing provisions for PFI, which allow the balance sheet to look better at the expense of the public finances.

It gets even worse than that. With private finance 2, it was decided that the proceeds of refinancing PFIs should be split between the contractors and the Government. After a school has been built and it is in the process of being managed, a lot of the risk has been carried, so the scheme can be refinanced at a lower rate of interest. It was decided that the benefits of that lower interest rate should be split 50:50 between the Government and the private sector. That was not the case with the original PFI scheme. It subsequently became apparent that, under the rather arcane public accounting rules, if such a change is made, the whole of the debt becomes public sector debt and is shown in the public sector borrowing requirement, so the Government said, “Oh, well, we’ll split it 70:30”. Therefore the Government now collect only 30% of the proceeds from refinancing a PFI contract. That is daft. It is the Government giving away public money just to satisfy silly public accounting rules. It should stop.

There are also issues concerning churn among civil service staff that make the management of public contracts difficult. Reports have highlighted the “insufficient continuity of staff” over the lifetime of a contract. On this front, the situation has been improving, but there is a great deal to do.

PACAC remains concerned that the Government are still taking a much too transactional approach to contracting and the management of contracts. It is vital not only that staff with commercial skills work alongside those within Government with other skills such as costing, IT and project management, but that those in the Government who manage the contract feel that those in the private sector are partners and collaborators. There should be trust and co-operation; it should not be an adversarial competition. When the Government make the decision to outsource a service, and when they accept bids from companies seeking to win the contracts for those services, it is crucial that the process of doing so is evidence-based and transparent.

It was to ensure that there was public trust in outsourcing, and in the Government’s capacity to do so, that Carillion was awarded contracts after it published a profit warning and after it had made other worrying sounds to the Government. That a company in the process of going bust should be awarded yet more contracts, giving it access to yet more taxpayer money, does raises the questions brought up by the hon. Member for Inverclyde (Ronnie Cowan) earlier. PACAC calls for the Government to re-examine how they assess contractors’ viability. Shareholders are prepared to take a far higher risk than the risk the Government should be prepared to take with public services and public money. The Government should publish their rationale for their decisions. Public service procurement cannot be done in the dark, cannot be done without evidence and cannot be done without the Government knowing what they are trying to outsource. It cannot be done on the cheap, and the public must be able to see that.

In conclusion, unless the right steps are taken and the right lessons are learned, a company very similar to Carillion, holding contracts of enormous public worth, could collapse again and all this will happen again. The public want companies that deliver public services better to reflect public-service values. Such companies are part of the public service, and if they do not demonstrate those values, they should not get the money.

[Several hon. Members rose—]