The government’s “pre-occupation with price” when it comes to contracting is “a matter of grave concern”, MPs have said in a damning report.
The public administration and constitutional affairs committee (PACAC) has been examining the government’s outsourcing and contracting practices following the collapse of Carillion.
Its final report released today criticises the government for placing too much emphasis on price when awarding contracts.
“The government’s preoccupation with price has been noticed by the market and is a matter of grave concern,” the committee said.
The committee said the focus on lowest price led to low margins that “encouraged reckless acquisitions and efforts to achieve unsustainable growth” among contractors.
Along with the failure of Carillion, the committee noted that other strategic suppliers including Capita, Interserve and Mitie had faced financial difficulty in recent years.
“These difficulties flow, in part, from the way that the government has contracted out,” it said.
Whitehall’s attitude to risk was also cited as a problem.
“The government has deliberately promoted an aggressive approach to risk transfer to the private sector – often even attempting to transfer risks that the government itself has completely failed to analyse or to understand,” the committee said.
PACAC chair Sir 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 report criticised the current approach as short-sighted, pointing out that the public sector ultimately bore responsibility for services regardless of what happens to its contractors.
Local government ombudsman Michael King said: “The public sector can outsource the service, but it cannot outsource its responsibilities.”
There was also a “lamentable” failure by the government to assess the quality of service it was getting from contractors, according to the committee.
The PACAC called on the government to produce better information on what it contracts out so that the cost of delivery, the potential value of the outsourcing and the risk transfer involved can be better understood.
It added that more detail on its outsourcing would also allow the government to better assess the quality of service it received.
The committee considered PFI schemes separately from outsourcing and said it was “time for honesty” about the model’s benefits.
It criticised the Treasury for being unable to produce evidence about the value of the PFI approach, despite having 30 years of data on such projects.
As a result, it called on the government not to approve any more PFI projects until it could “justify” claims about the benefits.
In addition, it called on the Treasury to further scrutinise the approved A303 Stonehenge tunnel and Lower Thames Crossing PFI projects to find out whether they represented value for money.