The government ignores its own procurement rules and routinely tries to transfer risks it does not understand on to private sector companies, often providing them with incorrect data to support outsourcing bids, according to a report sparked by the collapse of Carillion.
MPs on the Public Administration and Constitutional Affairs Select Committee also said they were shocked by evidence from HM Treasury and civil service chief executive John Manzoni that underscored a principal motivator for Private Finance Initiatives was keeping debt off the public balance sheet.
The wide-ranging PACAC report sought to examine the way government procures services and shapes markets following January’s demise of outsourcing and construction giant Carillion, which had been the sixth largest supplier to the government. However, it praised the actions of civil servants and contracted workers for working “tirelessly” to pick up the pieces and keep services running.
Among MPs’ findings were a lack of transparency about how and why the government decided which services should be outsourced; a failure to provide correct data to outsourcers; a lack of consistency in following Green Book guidance on outsourcing; and –“shockingly” – an inability on the part of government to evidence claims that PFI was a “worthwhile” model for any reason other than keeping debt off the official accounts.
Included on PACAC’s list of reform demands is a moratorium on approving new PFI deals unless they can be clearly justified, based on evidence; the creation of a new body to research applied contracting, such as a dedicated What Works Centre; and a commitment to publish more detailed transparency data on outsourcing. MPs said they wanted to see aggregates of the total value of contracts operated by big players such as Serco and Capita so the public sector's total exposure to them could be better understood.
Committee chair Sir Bernard Jenkin said it was “staggering” that the government had attempted to push risks that it did not understand onto contractors, and had “so misunderstood its costs” – renegotiating contracts to the value of £120m within the past two years for that reason.
“It has accepted bids below what it costs to provide the service, so that the contract has had to be renegotiated,” he said. “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 PACAC report suggested departments were well aware of their capacity to provide private sector firms with incorrect data about services being outsourced because the government had “written contracts that force contractors to pay out when it gets its own data wrong”.
It said the recognition compounded the government’s problematic reputation among outsourcers for having the “overriding priority” of spending as little money as possible at the same time as forcing contractors to take “unacceptable levels of financial risk”. It added: “Ultimately, this has led to worse public services.”
The committee expressed particular concern over the government’s lack of data on the benefits of PFI and its successor PF2.
“The government has previously maintained that it selected private finance only when it judged it to be value for money to do so,” it said. “However both the comments of the civil service chief executive, and more importantly, recent changes to the Treasury’s guidance on refinancing make clear beyond a reasonable doubt that the government’s true reason for using the Private Finance Initiative or PF2 is that the debt does not have to be shown in the National Accounts or within the national debt.”
The report quoted Manzoni saying in evidence to the inquiry: “The entire PF structure is to keep the debt off the public balance sheet. That is where we start.”
The committee urged ministers not to approve any further PFI projects until they can clearly justify, based on evidence, their claims about the benefits of the scheme. They also called on the Treasury to scrutinise recently approved Highways England PF2 projects the A303 Stonehenge tunnel and the £1.5bn approach roads to the Lower Thames Crossing.
A Cabinet Office spokesperson said they would respond to the report in due course.
"The government is committed to ensuring a healthy and diverse marketplace of companies bidding for government contracts, and we have recently announced a wide package of new measures to further improve how we work with our vendors.
"This includes extending the requirements of the Social Value Act in central government to ensure all major procurements explicitly evaluate social value where appropriate, consulting on improvements to the prompt payment code, as well as measures to make the outsourcing process more robust and the results more transparent."