Carillion’s collapse “could happen again” as the Government has not yet learned how to outsource work effectively, a group of MPs has warned.
Public services are deteriorating as the Government prioritises costs above all else in outsourcing decisions, said a damning report from the Public Administration and Constitutional Affairs Committee.
At the same time the public sector has become too reliant on a small handful of big businesses which are effectively “too big to fail” as they run vast swathes of public services with little effective competition.
Carillion, the UK’s second-largest builder and a major supplier of outsourced services, collapsed in January.
It entered liquidation with debts of £1.5bn, leaving more than 400 public contracts in limbo and tens of thousands of suppliers and sub-contractors unpaid.
“It is staggering that the Government has attempted to push risks that it does not understand on to 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,” said the Committee’s chairman Sir Bernard Jenkin.
“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.”
The Government said it will respond formally to the report “in due course”. A spokesman for the Cabinet Office added that Government has already announced a wide package of new measures to improve how it works with vendors since the Carillion collapse.
MPs found the public sector does not always properly follow its own guidelines to secure value for money when issuing contracts, meaning that costs and risks are not always correctly assessed.
“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 committee said.
“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.”
As the only buyer in major markets the Government “has huge power… to set prices, standards of quality and to determine the behaviour of participants,” the MPs said.
Yet so far it has failed to properly identify the risks involved in specific projects with the result that the Government has “often transferred risks to contractors that they cannot possibly manage”.
In Carillion’s case the company’s wafer-thin margins and subsequent collapse ended up costing the taxpayer an extra £148m, the National Audit Office found.
“There needs to be a complete reappraisal of how the Government assesses quality of the work it commissions,” the Committee said.
“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.”
It also called for an end to any new PFI (Private Finance Initiative) projects until the Government can prove there are benefits from using private funds, which are typically more expensive than state finance.
Currently it is “clear beyond a reasonable doubt” that PFI is only used so “that the debt does not have to be shown in the National Accounts or within the national debt”.