by Kieran Neild-Ali, grassroots assistant at the TaxPayers' Alliance
It is no secret that the government gives public contracts to private companies. Departments and government agencies will tender a contract to private companies to provide public services, build hospitals and schools or supply public bodies. In principle, and in many cases, in practice, outsourcing to the private sector is a good thing. The nature of profit incentives dictates that businesses will aim to complete government contracts on time, on budget, and to a high standard, in the hope of winning more contracts in the future. An element of competition will also naturally reduce prices and provide maximum value for money.
In theory, this symbiosis of public and private sector interests works well. However, readers won't have to cast their minds too far back to remember the catastrophic collapse of Carillion to realise this isn’t always the reality. Under the Private Finance Initiative (PFI), pioneered by John Major and then Tony Blair, the private sector invests in public infrastructure projects offering to finance the cost, build and maintain the project. The deal is that the government pays back the value of the contract over a fixed period of time plus an annual service charge. Carillion was a huge cog in the PFI machine, and was the second largest UK construction firm before its demise in 2018. And it became emblematic of the problems with the system.
PFI contributed to the collapse of Carillion because government contracts were low margin and high risk. On top of this, PFI deals required large upfront borrowing to offer the government a deliverable investment package. Despite it being common knowledge in the City of London that the company was struggling financially, the government continued to accept bids from Carillion, off-loading huge investment projects they could not deliver. It eventually resulted in the corporate monster collapsing.
This is only one part of the saga. The real travesty lies in what happened after the collapse. When PFI deals break down, the government - or more specifically, taxpayers - are left to foot the bill for the projects. In Cariliion’s case, £62 million worth of contracts were incomplete and the state was forced to step in. If the government had read the warning signs and acted responsibly, and the cosy corporate relationship had not continued, public projects would not have been awarded to Carillion. Instead, the fallacy of ‘too big to fail’ was used to justify keeping the company on life support.
Carillion almost became an arm of the government. Private project management would never have employed a contractor with billions of pounds worth of debt and plummeting share prices. Even if they did, the cost would be borne by the private company - not hard-pressed households across the nation. But with Carillion, there was no way out. That harrowing experience should have been a lesson learned for pro-PFI politicians.
Since the scandal, the government has endeavoured to reform the public tender process. However, with the state playing a more noticeable role in our lives, outsourcing and big-money contracts to the private sector are likely to remain a feature of UK public policy.
According to reports, the government has dished out contracts worth £1.7 billion to private companies during lockdown without adhering to its own competitive tender guidelines. These contracts were pushed through in the rushed response to the coronavirus outbreak. They provide for everything from medical equipment to advising civil servants on the pandemic. We all admire quick, decisive action in times of hardship and recognise that bureaucratic procedure would only frustrate the general public. But value for money matters and ministers now stand accused of wasting an eye-watering sum of money.
The NHS awarded private firm Serco a £108million 13-week deal to track and trace people who tested positive for coronavirus. Figures uncovered by the Labour Party show that after nine weeks only 83,000 people have been contacted, at a cost to the taxpayer of £902.50 for each person contacted. This is a shocking use of taxpayers money, especially when every penny counts in the fight against COVID-19. Alas, this is not the only flagship failure.
The government reportedly spent £150 million on unusable face masks. The masks were apparently bought without a tender process from a London-based investment company with no experience of public contracts. This would not be the first (or undoubtedly the last) time government PPE contracts have backfired. £16 million was spent on testing kits produced by a Chinese firm - lo and behold, reports suggest they did not work. In just three examples from recent months, £224 million has potentially been wasted on duff equipment and a test and trace system which failed to deliver value for money.
Failures like this are symptomatic of the wider issues with public contracts. As with Carillion, the rush to deliver on promises can see politicians tender to poor choice providers and, in the end, be left paying through the nose for substandard services. For taxpayers, it doesn’t get any worse than this double whammy of high costs and poor outcomes, with little light at the end of the tunnel.
This has happened time and time again. Outsourcing giant Capita was awarded a contract to run the British Army recruitment campaign worth £495 million in 2012. The recruitment process was lambasted by officials after a catalogue of failures. The Capita-run recruitment drive had a 47 per cent dropout rate and a 321 day wait between starting an application and actually receiving army training. This has left the army well below its target recruitment figure for 2022. The Public Accounts Committee investigated these failures in 2018 and their report pulled no punches:
“Capita’s performance has been abysmal since it started, and it has failed to meet the Army’s recruitment targets every single year of the contract – an unacceptable level of service delivery.”
The MoD was also attributed blame. The contract offered to Capita did not express the complexities of army recruitment, resulting in the signing of an ‘over-specified contract’. A major reason for the MoD outsourcing to Capita was to cut costs; however, because of Capita’s failures and the Ministry of Defence’s inability to draw-up a watertight contract, the army is unlikely to make its saving targets. This will increase the burden on taxpayers who - you guessed it - will have to pay for the extra expenditure. When it comes to our national security, there should be no room for error, whether on the part of a private company or the government.
In theory, these public contracts can provide sizable benefits. There are plenty of examples of this working well, across the health service for example. But taxpayers must not be taken for fools. Private companies must not be propped up by the government at the expense of taxpayers. No company is too big to fail and market conditions must ensure the most competitive bid wins.
This is why government contracts must not escape scrutiny. Usually, accountability only comes after the fact, with parliamentary enquiries and committees convening to apportion blame in the aftermath of failures, like with the Capita army recruitment fiasco. This is not good enough. Contracts must be awarded with a clear chain of accountability for decision makers. Minister’s mustn’t rush into bad deals for the sake of a quick headline. Bureaucrats should think twice about giving inexperienced companies the right to make PPE for NHS staff, or companies on death's door the right to build schools and hospitals. This secret arm of the state must be held accountable for the waste of taxpayers money, starting right now.