Cost not quality is Government priority when outsourcing services, say MPs

Public services are suffering because the Government is prioritising cost over quality when outsourcing them to the private sector, according to a new report.

The collapse of Carillion has exposed fundamental flaws in how the Government awards £250 billion worth of contracts for services and projects each year, the Commons Public Administration and Constitutional Affairs Committee (PACAC) found.

Public confidence in the system has been “seriously damaged” by construction giant Carillion going under, MPs said.

Services have got worse because contractors know the Government prioritises price over quality, according to the report.

And the Government was unable to present real evidence to back its key claim that outsourcing produces better public services for less money, MPs said.

The study found that the Government’s overriding priority for outsourcing is “spending as little money as possible while forcing contractors to take unacceptable levels of financial risk”.

The report states: “It is intolerable that the Government is spending £250 billion with little evidence that it is currently following its own procedures to secure value for money.

“The Government’s preoccupation with price has been noticed by the market and is a matter of grave concern.

“The Government’s failure to assess the quality of services as well as their cost is lamentable.”

MPs found that the Government’s “preoccupation with cost” meant it had to renegotiate more than £120 million worth of contracts since early 2016 in order “to ensure public services would continue”.

The committee said: “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.

“Contractors told us that the Government was known to prioritise cost over all other factors in procurements, driving prices down to below the cost of the services they were asking firms to provide.

“Worse, the Government was unable to provide significant evidence for the basic assertion behind outsourcing: that it provides better services for less public money, or a rationale for why or how it decides to outsource a service.”

MPs were also critical of the way the Private Finance Initiative (PFI) works.

The committee said it was “shocking” that the Government had admitted the “entire (PFI) structure is to keep the debt of the balance sheet”.

PACAC chairman 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 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.”

A Cabinet Office spokesman said: “The Government is committed to ensuring a healthy and diverse marketplace of companies bidding for government contracts, and we have recently announced a wide package of new measures to further improve how we work with our vendors.

“This includes extending the requirements of the Social Value Act in central government to ensure all major procurements explicitly evaluate social value where appropriate, consulting on improvements to the prompt payment code, as well as measures to make the outsourcing process more robust and the results more transparent.

“We will respond formally to this report in due course.”