The government used its position as a monopoly buyer to transfer a “massive” amount of risk onto its suppliers, the chief executive of Serco has said.
Rupert Soames said it had become a “badge of pride” in the civil service to “transfer as much risk onto suppliers as you could”, and said the transfer of “political state risk” had contributed to large losses for the firm in its contract to house asylum seekers.
He said it was a “greater sophistication and toughness in the Cabinet Office that, in my opinion, led to the pendulum on risk transfer swinging too far”.
Giving evidence to the Public Administration and Constitutional Affairs Committee’s [PACAC] inquiry into the work of the civil service on Monday, Soames said Serco was “caught” by political risk with the COMPASS contract to house asylum seekers because there were limitations on how it could expand the programme when the numbers grew to double the original contract estimates.
“The political state risk is that we can’t expand the distribution areas because local authorities have to give us permission to put people into different areas. As a private company, there’s nothing we can do about it,” he said.
Sirco was looking at £120m of losses on the contract, he added, but accepted that “we bid too low, silly us”.
It was “often lost on people” that the government was a “monopoly buyer” he said, making it difficult for contractors such as Serco to turn down work or not re-bid for work. “We just sucked that up. We’ve gone back to our shareholders, we’ve raised the money, we’re taking the losses and we’re hoping to be able to re-bid that contract when it comes out again and do it better next time,” he said of the COMPASS deal.
Soames was also critical of tendering such as reverse internet auctions where suppliers bid down each other's prices. But he said the government was starting to realise it was putting too much risk onto suppliers and praised the new leadership at the Crown Commercial Service.
He also added that the “vast majority” of major outsourcing contracts “work really fine”.
PACAC had asked Soames to give evidence on the relationship between Serco and the civil service because of the increasing amount of public sector services being delivered through private contractors. The inquiry is ongoing.
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