As the Carillion crisis gathered pace, PACAC (the Public Administration and Constitutional Affairs Committee) was contemplating a new inquiry into the way Government and the public sector makes decisions about how to source the delivery of public services, including the risks of concentrating a large number of contracts with a small group of large companies. On the day Carillion collapsed, we were ready and we launched under the title: Sourcing public services: lessons learned from the collapse of Carillion.
We will be focussing primarily on how Whitehall departments and government agencies let public services contracts and then manage them. We will be asking about how civil servants decide what to outsource, how they assess the real value of each bid, when the best price might be by no means the best value, and how civil servants assess the risks of letting a particular contract. Whitehall and the Treasury also need to know who holds the central assessment of the overall risk exposure to a single company which might hold tens or hundreds of separate contracts across several departments or agencies, and underwritten by the taxpayer amounting to billions of pounds.
Treasury figures show that, in 2015/6, the public sector spent £192.1 billion in goods and services in 2015/16. £114 billion of this was procurement by central government (including £65 billion from the Department of Health and the English NHS). £70 billion was procurement by local government and another £8 billion was procurement by public corporations.
The government have been insisting that “we are just the customer” and not responsible for the conduct of any private company. It is true, in the final analysis, the company’s directors are responsible for the conduct of their business, but the customer, representing taxpayers, needs to know whether a company is sustainable or not, when it is entrusting it to deliver services on which the public depends, and trusting it with sometimes very substantial sums of money in order to do so. In some cases, publicly funded contracts account for a substantial proportion of the turnover and profits of a single business. PACAC was told that SERCO now almost solely contracts with the public sector. It does not tender for contracts from other private companies. How do civil servants assess how well managed a contracting company really is? How do departments assess genuine good governance? Carillion’s latest annual report and accounts were choc-full of all the right words about the management’s values and corporate social responsibility. PACAC will expose whether these words were matched by the actions and decisions of those leading the business.
Government also has great influence over the nature of these companies and the competition between them. There has long been a danger that too many contracts for the provision of public services via private companies go to ‘the usual suspects’. This group of large companies are not just skilled at bidding for such contracts. They are favoured by Whitehall by being designated as ‘preferred bidders’. This is not intended to create a cartel – they are fiercely competitive with each other – but there is a sense that this group of large corporations is a bit of a cosy club. Where is the diversity amongst suppliers which promotes innovation and new ways of doing things? Where are the new entrants?
We will want evidence from those outside the club to substantiate claims that bidding processes are too long, arduous and risky for smaller competitors, and the costs of bidding are prohibitive. There is naturally a risk averse culture in the civil service. The doctrine of accountability to Parliament means that Permanent Secretaries, who are the accounting officers, know they will have to explain everything to the National Audit Office and the Public Accounts Committee. But sometimes it seems being risk averse in fact adds risk. It may seem easier and safer to choose contractors from a limited pool of bigger, more established companies who regularly deliver public contracts, but this may just be putting more and more eggs into too few baskets. PACAC has regularly heard from small and medium sized businesses who feel incensed by the process-driven acquisition decisions of government departments. They feel administratively excluded, and they claim they could provide services at a fraction of the cost of much larger companies.
Learning these lessons is not just vital for better public services and better tax payer value. The Carillion crash is another blow to public confidence in the whole capitalist system, as far as many are concerned.
The banking collapse and the Eurozone crisis shattered long established public confidence in big business and governments’ ability to manage markets. The Carillion collapse is potentially another shattering blow, reinforcing a narrative which is hostile to private enterprise and wealth creation. This draws on public sentiment which is rightly appalled by the apparently cosy relationship between government, political parties and big business. They see lavish pay and benefits for the top directors of companies, who in the end fail their employees and their pension fund beneficiaries. They let down their customers, default on their suppliers and lenders, and of course end up costing hard-pressed taxpayers. The public will not tolerate public authorities continuing to contract with companies which seem to live like this.
This has a deeper message for every major corporation. Carillion’s 2016 Annual Report says that its dividend increased in each of the 16 years since its formation as a company. In 2016, this occurred as its pension shortfall grew to over half a billion pounds. The Pension Protection Fund now estimates it will have to take a hit of £900m, its largest ever single bill. If the public begins to think that this is what capitalism is always like, then the whole system will lose consent. That is what Jeremy Corbyn is campaigning for.
The social market system of regulated capitalism is the foundation of our modern civilisation. It has enabled the investment and creativity which is feeding the world and raising millions of people out of poverty every year, offering employment and opportunities undreamed of by previous generations. It is funding research into new medicines and better healthcare the world over. Capitalism is transforming the lives of whole nations for the better. There is no contrary evidence whatsoever that state driven or socialist systems have ever achieved this or ever will. Now is not the time to let carelessness and short-termism of a few businessmen (and they are nearly all men!) to put this at risk. But capitalism must heal itself and corporations must demonstrate that they can be trusted.
The failure of some businesses to take their corporate governance and social and environmental responsibilities as seriously as they should threatens everything. This is about how individual directors conduct themselves, sometimes under the most exacting challenges and pressures. However, all the evidence suggests that businesses that prioritise the needs of all their stakeholders, not just their profits and shareholders, benefit from enhanced brand value, improved talent recruitment and retention, higher levels of employee engagement and more satisfied customers. This leads to more sustainable financial performance. Conversely, companies which do not command the confidence of their employees, customers and wider communities, and prioritise director and shareholder remuneration are all too often found wanting.
Just as with the Kids Company Inquiry, PACAC, and other Committees who may well launch their own inquiries, will identify lessons for company directors and their professional advisers, as well as for government.