On 12 November 2013, the National Audit Office (NAO) published two reports:
This post looks at the key findings of the two reports.
The NAO reports consider the following issues:
- Is there sufficient competition in contracted-out public services?
- Can we see whether contractors’ profits reflect a fair return?
- How can we know whether contractors are delivering?
- What is government doing to manage its suppliers more effectively?
- Is government securing value from its strategic suppliers?
- Does government have an overall view of supplier performance?
Contracting out in figures
According to the NAO reports an estimated £187 billion is spent by the public sector on goods and services. This figure comprises:
- £84 billion by local government.
- £50 billion by the NHS.
- £40 billion by central government.
- £13 billion by devolved and independent bodies.
Around half of this is spent on contracting-out.
The NAO reports focus on spending by central government, which contracts out fewer services than local government.
Currently, central government departments contract relatively autonomously, though there may be many contracts across government with the same suppliers. The advantage of this approach is the close relationship between contracting and operational delivery. The disadvantages are:
- Lack of overview of how much business the government has with a particular supplier and how important that supplier is to the government as a whole.
- Missed opportunities for collaboration across departments.
- Disaggregation militates against economies of scale.
- No overall ownership of the government’s relationship with suppliers.
Contract management initiatives
However, since 2010, the government’s commercial relationships strategy has focussed on delivering savings, establishing greater control over spending in departments and providing intelligence information on the government’s business with suppliers. The strategy focuses on 40 key suppliers, selected by volume of spend and spread of activity.
The strategy has also introduced a number of spending controls, contract management and reporting initiatives which have resulted in substantial savings.
The Cabinet Office reported £840 million of savings in 2012/13 compared with £437 million for 2011/12 and £806 million for 2010/11 as a result of the commercial controls processes and contract renegotiations that it led. The new processes include the creation of the Chief Procurement Officer role which oversees:
- Commercial relationships including the Crown Representatives with special responsibility for between one and six suppliers, and the legal representatives.
- The Government Procurement Service.
- The SME Team.
- Procurement policy and capability, including the Complex Transactions Team.
A central controls process has provided another level of accountability and oversight of large contracts extended or retendered by central government departments.
The planned creation of the Crown Commercial Service, which will combine government’s commercial function with the Government Procurement Service, will build on these initiatives.
In spite of this positive work, there remains a lack of clarity around roles, particularly across central government departments and varying degrees of engagement, which has led to confusion around ownership and delay in getting contracts agreed.
Market management
The NAO reports note that one area which requires greater work is around market management. By squeezing contractors to make savings, the government may be missing out on longer term value through innovation and investment. A short-term focus on cost savings may drive suppliers from the market and deter new entrants. Savings should therefore be considered as part of a wider strategy for ensuring effective competition.
Suppliers have also raised concerns about the government’s ability to deliver service improvement and create effective markets in its negotiations.
Performance management
Government contracting has suffered from the following issues:
- Disproportionate allocation of risk.
- Inadequate monitoring of contracts- insufficient information to support KPIs or the wrong KPIs.
- Changes to contracts after they have been let.
- Lack of market engagement before letting the contract.
There have also been a number of high profile failures, for example around security for the 2012 Olympics and prisoner tagging.
However, many outcomes and behaviours required under public contracts are difficult to specify, for example, concepts such as acting with integrity and within the spirit of the law. Many standards are dependent on the culture of the contractor organisation.
The government has therefore introduced a system of strategic supplier performance ratings which lead to certain actions to improve performance. However, the NAO reports state that it is still not clear what is expected of suppliers to achieve a given rating; there are no agreed criteria or standards at a cross-governmental level. There is also a policy for using past poor performance in evaluating tenders for future work.
Four key suppliers
The NAO’s second report focuses on four key suppliers: Atos, Capita, G4S and Serco. In 2012/13 these four suppliers had £4 billion of public sector business; £3 billion with central government.
An analysis of the value for money delivered by these four suppliers includes the following observations:
- While there is a great focus on competition at the tendering stage, this can quickly diminish when the contract begins. Contracts are more profitable in later years as additional services are added or contracts are extended without rigorous testing for value.
- Acquisitions by the larger contractors have led to a consolidation of the market which may lead to less competitive markets and reduced innovation.
- The government has more oversight of costs when its contracts contain open book accounting provisions. However, contractors are reluctant to reveal more information than their competitors, particularly where they provide the same services in the private market against competitors who do not provide public services.
Profit and risk
The NAO reports note that profit should reflect the risk the contractor is being asked to assume, as well as innovation and investment. However, strong contract management is required to allocate risk appropriately and prevent it being returned to the public sector.
As there is no one approach to recording profit, it is difficult to assess how overheads are allocated and what margin is actually being made. Margin is supposed to reflect risk, innovation and investment, but these can be hard to gauge. Further, contractors do not isolate profit from public sector contracts in their financial information. This variation in reporting reduces the effectiveness of open-book access rights.
In broad terms, margin after overheads ranged across the four suppliers, with 1-10% being typical.
Of the four, on the NAO’s analysis, only Capita and Serco made any UK corporation tax payments in 2012.