31. As certain markets for supplying government services have evolved, the risk has emerged that they become dominated by a few large firms, who become so important to the continued provision of services that they cannot be allowed to fail. The NAO reported that, in reacting to G4s's and Serco's overbilling, "government was constrained in its actions and acted as if the firms were too important to fail: their failure could create widespread disruption to public services and government wanted their ongoing participation in competitions."[48] The Ministry of Justice told us it did not consider the firms to have been too big to fail, while also stating that one of the lessons it has learned is to structure big projects in such a way that no one supplier can have too large a market share.[49] The Cabinet Office refuted that it had ever thought the firms were too big to fail and, when challenged as to whether government could have brought in other suppliers said "Certainly in some areas."[50]
32. The consolidation of markets into a limited number of viable suppliers can also be a threat to competition, and to the pressure to innovate and improve; which should be part of the benefits of contracting out public services. The Cabinet Office highlighted the risks consolidating markets pose to choice and competitiveness and described one example of a company that had made 77 acquisitions costing £50 billion over a period of six years.[51] The CBI also stressed that effective competition, avoiding over-reliance on a small number of suppliers, is fundamental to ensuring good performance and corporate behaviour.[52]
33. Government only started relatively recently to understand the extent to which markets for government services have consolidated. The Cabinet Office highlighted that as recently as four years ago government had no cross-government picture of who its major suppliers were and how much business was done with them across government.[53] The NAO reported that the Cabinet Office's spending database is steadily improving this information and the Cabinet Office described how it is improving its capability to analyse such data effectively, but there is much further work to be done.[54]
34. Market consolidation not only present risks to competition but also to the companies' ability to manage public services. The Comptroller and Auditor General highlighted the dangers such disorderly growth can present to the ability of contractors to maintain control across fast-growing and diverse businesses. The CBI agreed that the right levels of governance and control were vital in such circumstances, and that contractors convincing themselves that they would deliver things they could not do lay behind much of the recent outcry around outsourced services.[55]
35. The Cabinet Office explained how government contracts contain change of ownership clauses which allow government to intervene when service providers are taken over. The Cabinet Office told us that typically government had not used those clauses to its advantage but, where it had done so it had extracted significant benefit from contractors for the taxpayer.[56]
36. Recommendation: Led by the Cabinet Office, departments must take concerted action to develop competitive markets for public services. Government must use its contractual powers to intervene in market consolidation so that taxpayers and public service users benefit from the innovation and competition a thriving market can offer.
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48 C&AG's Report, Transforming government's contract management, para 6
49 AQ 220
50 BQq 49-51
51 BQq 122-124
52 BQ 29
53 BQ 89
54 BQq 89-90; C&AG's Report, Transforming government's contract management, paragraph 3.6
55 BQ 18
56 BQq 138-140