The auditor general has set out key points that civil servants should include in submissions to ministers on any future outsourcing of services following the collapse of Carillion and the financial pressures faced by other providers.
In an evidence session to the Public Administration and Constitutional Affairs Committee on lessons from the collapse of outsourcing firm Carillion, Amyas Morse said: “I think there are a lot of areas where government does not have the capacity to do anything else but outsource."
He told MPs that the government “is not set up to deliver a lot of these contracts themselves” in areas outsourced to firms such as Carillion and Capita, which this week announced a restructuring plan.
Carillion's contracts included construction of part of the High Speed 2 rail link as well as provision of school meals and maintaining public sites including military bases and prisons. Capita administers the teacher pension schemes, as well the BBC licence fees, NHS trainee GPs’ payroll and the London congestion charge.
Morse said that it has been “the case for a number of years” that government does not have the capacity or resources to run outsourced services itself. “And not only that, in many parts of government the capability of even acting as a prime contractor is not necessarily there," he added. "That is not a fault, it is decision that a number of departments have made over time."
Committee chair Bernard Jenkin highlighted that following Carillion's closure, the Ministry of Justice had brought facilities management services for prisons back in house through a new department-owned company.
He asked Morse what officials should now include in submissions to ministers on service provision that would compare in-house and external options.
“There should be clarity, there should be a business case that makes it clear and in many cases there is,” Morse replied, adding that one of the key areas was to be clearer about the role and capability of the outsourcing firms themselves.
“When they put a case for one or the other, they should have a full explanation of what the consequences of the outsourcing are going to be,” he said. “I would like to see that the logic is better and the insight into the companies that take on the outsourcing and what they will actually perform is deeper.”
He said that the civil service was “developing more understanding” of the supplier market, adding: “I give credit to [civil service chief executive] John Manzoni’s team, they are developing more understanding of the corporate sector they are interacting with.”
Morse added: “They have still got in my view a considerable way to go and that is illustrated by the Carillion case but not just by that, but I think they are developing – instead of saying 'we don’t really understand what happens in the private sector, we’ll just see them as a counter-party', there is a more insightful approach. I think that needs to develop further.”
His comments come after Capita reported a £513.1m loss for the 2017-18 year, and set out plans for a restructure to reflect what it said were changing demands from clients, which include less outsourcing ‘mega deals’ from government.
In a restructuring plan published on Monday, Capita said that its would focus on five areas, including support services to central and local government, as well as customer services, HR, software and IT – all areas where it has public as well as private sector clients.
The plan will be funded by a £700m rights issue, but chief executive Jonathan Lewis said the firm did not face the same problems as Carillion, which closed in January after months of speculation that it was unable to service its debts.
"I get frustrated with that comparison – we are a completely different business,” he said.
"We have £1bn in liquidity, strong cash flow and a new strategy with investor support. We are not in PFI contracts and have nothing like the risk profile."
However, the Institute for Government warned that the collapse of Capita would be “far messier” than Carillion.
In an analysis published yesterday after Capita set out its reform plan, IfG researchers Nick Davies and Oliver Chan highlighted that the company provides services across every level of government.
They said the government has managed Carillion’s collapse with relatively little interruption to public contracts, continuing to pay staff working on them, but any rescue plan for Capita “would not be as easy, and the damage would be significantly worse for government departments, local councils and the British public”.
“For one thing, Capita is a bigger provider of government contracts. Whereas Carillion had around 450 contracts with government, it is likely that Capita has over 1,000 (data via OpenOpps),” they wrote.
Capita's contracts cover complex services in "every level of government, from Whitehall to the town hall", they added. "Failure to pay salaries would have a far more direct impact on public sector staff and the public than delays to construction projects [as a result of Carillion's closure].
“It would also be trickier to continue these services in the event of failure without bailing out the whole company. This might or might not be welcomed by the public, but would be only reluctantly adopted by the government as it would signal to potential contract bidders that any poorly performing providers will be rescued by government.”
They highlighted that poor data also meant that preparing for potential “provider failure” is difficult across government. “This is not down to secretiveness but, remarkably, to the fact that the UK government still lacks complete information on how many outsourced contracts it has, the value of these contracts, their length, types of services provided, which public authorities are buyers and which firms are in the supply chain,” they said.