Last year’s failure of Carillion has thrown into the spotlight the issues surrounding private companies and public sector procurement. Jane Fuller considers the priorities
This article was first published in the January 2019 UK edition of Accounting and Business magazine.
It was humbling to attend ACCA’s UK Public Sector and Not-For-Profit Conference in late 2018. Unlike this financially orientated speaker, some attendees deal in life and death – the fire-fighting service and those working in social care, for example.
This puts last year’s failure of Carillion, the private sector contractor, into perspective. After the disruption, life has gone on at the various projects, and its management will probably have improved. Even the £150m bill to the taxpayer can be put in perspective. In evidence to the Public Accounts Committee in June 2018, Rupert Soames, chief executive of another contractor, Serco, said it had spent ‘£443m more on providing services to the taxpayer than we have been paid over the last four years’.
The recent travails of several private sector contractors, notably Interserve, suggest that the pendulum has swung from them doing very nicely out of public sector business to the winner’s curse: ‘The good news is that we have won the contract; the bad news is that we have won the contract.’
Since the financial crisis, constraints on public spending have driven a race to the bottom on costs. This has exacerbated perennial problems with long-term contracts: it is difficult to forecast costs many years ahead; the unexpected will happen; fixed prices, guarantees and risk transfer are all dangerous to the provider.
Public bodies can be difficult customers. Through the apparent transfer of all risks, they risk losing the inhouse expertise necessary to commission and supervise contractors effectively. They may be outsourcing for the wrong reasons – to avoid upfront costs and keep debt off balance sheet.
A better way is, first, to remember the fundamental difference between capital spending and service provision: bundling is the enemy of transparency and muddies the view of value for money. The government can borrow more cheaply than private companies; it should make use of this privilege.
Second, contracts should be as short-term as possible – 25 to 30 years is a lifetime in business – and the longer ones must allow flexibility to renegotiate when the unforeseen happens.
Third, the public sector procurer needs to retain the expertise necessary to design realistic contracts, to assess the contractor’s financial health, to engage with it effectively and to watch out for early warning signs.
Fourth, there must be a contingency plan. Now fashionably called a ‘living will’, it simply builds on existing practices, including the dreaded verb that staff will be ‘TUPE’d across’ to whoever must pick up the pieces.
The worry is that all this will cost more at a time when austerity may not be over. But there is a prize if public sector financing costs and knowledge of the end-customers’ needs can be better combined with private sector focus on efficiency and fulfilling contract terms.
Jane Fuller is a fellow of CFA UK and serves on the Audit and Assurance Council of the Financial Reporting Council.
"The travails of some contractors suggest the pendulum has swung from them doing nicely out of public sector business to the winner’s curse"