Contractors under fire for government procurement 'game'

Large government contractors in the private sector need to be made accountable to both parliament and taxpayers once they decide to accept public money, MPs say.

The accountability is needed as "too often" big firms bid for contracts with a "weak" understanding of the sector, and expertise "not well suited" to it, say the MPs in a new report.

But taking aim at the government as well, the Public Accounts Committee says the procurement system incentivises a focus on tendering and winning, not ensuring the right supplier.

'Merry-Go-Round'

Cue the emergence of a small group of large companies which are "expert at winning public contracts,” but who do not “always deliver a good service”, the committee wrote.

It added: “The government has created a merry-go-round procurement culture that encouraged a small number of companies to bid for contracts that they knew they would be unable to deliver for the agreed price.”

The PAC is referring to the so-called 'Strategic Suppliers' -- 27 companies each providing £100million+ worth of services to the public sector, despite “significant concerns about [their] performance.”

'Race to the bottom'

The MPs made a specific charge about what the companies are now resorting to so they can turn a profit.

“Our evidence suggests that some companies have bid at a price that provides little or no margin with the expectation that subsequent variations will enable them to make a reasonable return,” they said.

“We have real concerns about a race to the bottom in pricing. A number of suppliers are now going through corporate cleansing and refusing to bid for contracts where the profit margins are low.

“Such cleansing has not stopped them doing this in the past. Too often suppliers will also pass cost-cutting down the supplier chain without due regard for long-term implications.”

'Attitude'

The PAC admits that the collapse of Carillion in January 2018 has “sharpened” its focus on the relationship between the government and its Strategic Suppliers.

The MPs have since found the "attitude" among the suppliers that "money can be made from contract variance”, so even if “data is wrong at the outset this can be a way to boost income on a low margin contract."

"In the middle of this game," the PAC condemned, "the user of the service too often loses out.”

The same fate can hit SME sub-contractors. “The government’s approach over several years has led to the market concentrating in a small number of large suppliers that are effectively the only businesses able to compete for large, aggregated, public sector contracts.

“A focus on price has reduced margins for prime contractors, which have cascaded down the supply chain, placing some subcontractors on the edge of sustainability.”

'Not just the bottom-line'

Trying to untangle the procurement process as a whole, the MPs’ report points out that 'contracting out' was originally conceived to save taxpayer money, and to encourage innovation in the delivery of services.

"We have concluded that too often these [two objectives] are not being met. There is a wider public value to delivery of services than just the bottom line cost," said PAC's chair Meg Hillier MP.

"[Government] must look with fresh eyes at the motivations of companies currently bidding for central government work, and develop a strategy that requires contract-awarding bodies to look beyond bottom-line costs."

So the Labour MP wants contracts to be "properly scoped," meaning that on any deal, an "agreed understanding" between state and supplier of what is being paid for, and over what timescale, should be in place.

'Government has failed to understand or manage'

At present however, the government has “failed to understand or manage the market”, and public bodies “do not always have a sufficiently clear understanding of the service they are outsourcing,” the PAC report scolds.

The current process of tendering for government work also is still skewed against small companies, despite targets in place to increase state spending on SMEs.

John Manzoni, permanent secretary at the Cabinet Office admitted to the MPs: "We are not doing as well as we would like on small and medium-sized enterprises elsewhere in government procurement … It is better than it was, but it is still not where we want it to be.”

'Losing the market for SMEs'

The Federation of Small Businesses reflected: "The [PAC] recognises that a ‘Merry-Go-Round’ culture has developed where public contracts are being awarded to a small number of large companies.

"By doing so, government is handing over huge market power to these firms and effectively losing the market for small businesses."

The federation's Mike Cherry added that "now is the time for action" from the government, alluding to the PAC finding "little evidence of action" to help SMEs so far, although proposals to that end are incoming.

'Complacent'

This awareness of a need to widen the pool of SMEs (in the IT sector specifically, it was said to be "achievable") was hinted at by Mr Manzoni, as he said government “should not be satisfied with its relationship with the private sector”.

The MPs said the Cabinet Office appeared "somewhat complacent" however, in relation to the health of certain markets.

For example, Coleen Andrews, director of market and suppliers at the Cabinet Office, told the PAC that there were “more than enough suppliers in IT.”

The official implied she was content that for most big contracts there were between two and five final bidders, and that suppliers were now more cautious about deciding what to bid on.

'Quality and effectiveness'

However, other outsourced sectors beyond IT do not have the same levels of competition, countered the MPs, who have issued 22 recommendations to help boost the “quality and effectiveness” with which private companies deliver against public contracts.

Alternatively, Ms Hillier suggested simply legislating. "There are many areas in which the Cabinet Office can drive compliance across departments,” she said, “not least turning its proposed ‘playbook’ of guidelines, rules and principles for contracting into a set of mandatory requirements."

Her committee concluded: “The government cannot divest itself of responsibility when it contracts out the delivery of public services.

“Many of the companies that we have looked at rely on the public purse for a significant proportion of their revenue. Those companies need to be accountable to parliament and taxpayers once they decide to take public money.”