Don’t throw the baby out with the bathwater on Carillion

18 January 2018

It’s hard to tell whether something is a sign of the times. But that isn’t stopping many judging Carillion’s demise as just that – an emblem of mismanaged government, of profiteering at taxpayers’ expense, or even a “racket” between ministers and industry. Jeremy Corbyn spoke of the “folly” of outsourcing, believing the collapse of Carillion to be a “watershed” moment that shows private companies cannot run public services.

Highlighting one example of market failure to dismiss a whole system is rash. Those arguing for the state provision of these services not only ignore that the government does not have the expertise to build x-ray machines, schools or health apps. Nor would government get value for money employing all the IT specialists, lawyers or financial experts it uses permanently. Where this ignorance is wilful, it is more ideological than the public-private partnerships that have been in place since the 1980s.

Government currently spends almost one-third of its budget on external providers – £242 billion a year. The aim is to achieve better value for money than the public sector could deliver, even when procurement costs are factored in. The NHS relies on this. Private providers helped deliver the 2012 Olympics under budget, and employment services, through the Work Programme, more economically than previous schemes (to pick just two examples).

The theory is well-established: competition drives down cost and can increase quality. In private markets, at least half the productivity gains of private markets over 10 years can be attributed to the replacement of less-productive firms with more-productive ones.

This is the sober reality of markets: companies fail. And necessarily. This makes room for more economical, better companies to deliver services and goods. A decade ago, government was criticised for letting banks become ‘too big to fail’ – allowing them to take excessive risks in the knowledge that taxpayers would bail them out. This cannot now be said for the public-sector markets, making them honest in the long-term.

But improvements can be made to avoid unnecessary failure and increase competition to deliver value for money.

Civil servants focus too heavily on the price side of the value-for-money equation – at the detriment of value. Carillion was overrunning on costs on three major projects (two hospitals and one bypass). Only one of the largest private public-service providers has made a commercial return over the past five years, according to Gary L. Sturgess in a report to the Business Services Association.  Strugess quotes experts saying: “no one ever gets fired for going with the lowest price” and “value is seen as jam tomorrow”. When buying commodities, government should focus overwhelmingly on price, but more complex services require a greater focus on value.

Better commercial skills are needed for civil servants to more accurately balance quality and cost. Government should recognise that these skills come at a premium and reward civil servants financially, including through bonuses – which could also help stop commercial experts being ‘poached’ by private companies, as too-often happens. Government has moved on this in recent years, and installed ‘Crown Representatives’ to liaise with key companies, but this post for Carillion was unfilled for three months at the end of 2017.

Where appropriate, contracts should be split to ensure that the widest possible pool of companies can bid. Price is the biggest inhibitor to competition. The Coalition Government identified IT contracts as ripe for being ‘disaggregated’, but ministers should ensure that contracts across government are the right size to deliver the largest pool of competition possible.

Speed of the procurement process is critical. It is likely that Carillion were bidding for contracts as their financial situation deteriorated over the course of the last year, leading to contracts being awarded shortly after profit warnings were announced. Since 2010, government has looked to streamline the process, which can take 12 to 18 months for complex procurements. Yet, independent data suggest that average procurement durations were stuck at around 150 days between 2010 and 2013. Paper-based processes do not help shorten the length, so procurements should be digital-by-default.

Improving these practices are crucial for the future success of public procurement markets. The business of government will become evermore complex, with the potential to use more sophisticated technology to deliver services. Whether artificially intelligent health apps, predictive policing software or chatbots to replace call centres, these goods and services will only be dreamed up and developed by the private sector. Ministers celebrate the UK’s tech industry, and can help it flourish further through competitive procurement markets.

This should be the outcome of the Carillion affair. MPs are rightly looking into the detail of the events that led to the collapse of the manufacturing giant. The lessons to be learnt are that processes need to be refined, not that critical public-service contracts should be torn up.

Alexander Hitchcock, Research Manager, Reform

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