The Carillion collapse has “exposed fundamental flaws in the government’s approach to contracting”, according to MPs.
In a damning report the Public Administration and Constitutional Affairs Committee (PACAC) said the government’s “overriding priority for outsourcing is spending as little money as possible while forcing contractors to take unacceptable levels of financial risk”.
PACAC said the information used by Whitehall in the outsourcing process could be “either incomplete or simply incorrect” and the government “must be aware of this” because it has “written contracts that force contractors to pay out when it gets its own data wrong”. The report said the government “has been known to forego performance penalties in the initial phase of contracts”.
“As a result of the government’s preoccupation with cost, PACAC has found that the government has had to renegotiate over £120 million of contracts since the beginning of 2016 to ensure public services would continue,” said the report.
“Ultimately, this has led to worse public services as companies have been sent a clear signal that cost, rather than quality of services, is the government’s consistent priority.”
PACAC said it was “unacceptable” that the Treasury could not provide evidence to support the value of private finance initiatives, “apart from the fact that it takes debt off [the] balance sheet”.
The report said in 2015-16 central and local government spent £251.5bn with external suppliers of goods and services. Witnesses to the committee’s inquiry into the collapse of Carillion said savings from outsourcing were “about 20%”.
PACAC called for more transparency on contract awards and decisions to outsource and said contracts must be underpinned with realistic assessments of cost and risk transfer.
Chair of PACAC Bernard Jenkin said: “It is staggering that the government has attempted to push risks that it does not understand onto contractors, and has so misunderstood its costs. It has accepted bids below what it costs to provide the service, so that the contract has had to be renegotiated.
“The Carillion crisis itself was well-managed, but it could happen again unless lessons are learned about risk and contract management and the strengths and weaknesses of the sector.
“Public trust requires that outsourcing better reflects public service values. The government must use this moment as an opportunity to learn how to effectively manage its contracts and relationship with the market.”
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