Trust is a form of social capital - in commercial relations, it provides 'order for free' (or at least at a substantial discount). When trust is lost, customers and suppliers must invest more in systems and processes that can serve as substitutes: survey respondents reported that negotiations are now more often dominated by lawyers and compliance experts, rather than people concerned with operations.
They use an army of contract monitors, so you bring your own.
One participant reported that his company was now sometimes appointing lawyers as contract directors. It does not require a deep understanding of the delivery challenges faced by the human service providers to know that this is not a desirable outcome.
Government's loss of faith in the private sector was undoubtedly influenced by the global financial crisis in 2008. Within a year or two, the government began to adopt a more aggressive approach to managing its supply chain, and in 2013, government's trust in its suppliers was shaken by a controversy involving two large providers in the justice sector.
In part, this has involved a loss of trust in the integrity of private sector providers. It is not yet clear whether there was any criminality involved in the highly-controversial electronic tagging contracts, but government certainly felt that these companies had exploited the relationship. There is still a view at senior levels in some government departments that suppliers are routinely gaming the system.38
But there has also been a loss of trust in the capability of providers. One senior civil servant (identified in the interviews) was reported as saying to the representative of a major provider: 'You never do what you say you're going to do'. Established providers are seen as having accepted responsibility for services which (at the negotiated price and timetable) they are not able to manage.
In a recent article, the Financial Times suggested that this problem might have been exacerbated by the rapid growth of the industry, with some companies not able to develop bidding and management capability at the rate at which they were winning contracts.39
And in some quarters, there may be a loss of confidence in the institution of contracting itself. To some extent, this uncertainty arises from repeated reports of failure on the part of government, but this in turn has raised questions about the limits of control under a contractual model. In a meeting with industry, another senior civil servant expressed his view that contracting was suitable for procuring paperclips, but not for complex public services.
At the same time, however, providers have been losing faith in government. This can be traced to the decision in 2010 to extract large cash payments - hundreds of millions of pounds - from its major providers with no legal or contractual foundation. The content of these conversations has never been disclosed, but the chief executives who were called to these meetings certainly understood that their standing with government would be affected by their willingness to cooperate. In the opinion of some providers, the relative ease with which ministers were able to extract these payments led them to believe that the industry could be squeezed a great deal harder. It matters not whether this is an accurate representation of what ministers were thinking at the time - it is what senior executives in the industry independently concluded the situation to be.
Such practices are sometimes used in the private sector, but they are regarded as a particularly aggressive way of managing a supply chain, and courts and competition regulators have taken the view that they are an abuse of bargaining power and 'conduct not done in good conscience'.40
While government codes of conduct insist that public sector employees should treat suppliers with fairness and respect, the conduct of ministers and civil servants in 2010 can reasonably be described as unconscionable - and suppliers had no effective recourse. There is no question that this behaviour shook the industry and compromised the trust relationship that had been built up over some years.
There is a belief in the industry that government has sometimes abused its position as a monopsonist, that competitions involving government-owned enterprises and social enterprises underwritten by government, have not ensured a level playing-field, that (in public at least) departments and agencies have not been prepared to acknowledge their own failings in some of the contracts that have run into difficulty.
Contractors regard some commonplace procurement practices, such as delaying or deferring bids in the interest of achieving better outcomes, as a fundamental breach of trust and thus unethical. It usually comes as a surprise to public officials to learn that contractors regard these practices as unethical. They are not dealt with in the Civil Service Code or in codes of conduct relating to procurement and contracting.
In part, this is because the two sectors view trustworthy and honourable conduct in different ways. This was suggested by a survey of government contractors conducted by the NSW Independent Commission Against Corruption (based in Sydney, Australia) some years ago, which found that some private suppliers thought that public sector ethical standards were lower than those in the private sector. Their reasons for taking this view included 'the inability of employees to take ownership or responsibility for the contracting process, lack of performance orientation and lack of accountability regarding time management'.41
These issues go to the perceived integrity of government as a commissioner and manager of contracts, and they have a profound impact on the capacity of the UK public service market to sustain contracts for complex services.
A commercial director of a large company reported that they were losing significant sums of money on a major contract, but no one in government believed this, or it was excused on the basis that the company must be making money on other contracts. The attitude was: 'Accountants can fiddle the figures'.
On another highly-successful contract, with open book accounting, the customer refused to accept that the company was making a loss. Despite having been shown the numbers, the response of the contract director was, in effect (as the provider saw it), that the company must be lying. Only recently has the customer been prepared to engage with the supplier in the pursuit of cost reductions, because the contract is coming up for rebid. There is a real prospect that the company, a long-term supplier of this service, will not tender, and there are now concerns that the service will cost significantly more following market-test.
In a PFI contract with a gain-sharing clause, the customer employed a consulting firm to trawl through old accounts, using indexation analysis to insist that profits had been excessive throughout the seven years of the contract, and must be repaid.
The suggestion was that it was 'morally corrupt' and there was all kinds of pressure to give it up. They would stare blankly at you when you tried to explain.
Another manifestation of this loss of trust is a willingness to intervene in detailed management decisions about delivery:
If standards slip, as they sometimes do in the real world, someone comes and counts heads. They argue that you can't be delivering to the contractual standard because they can't see the cleaners on the floor.
Of course, there are goods and services where trust is based on the customer's familiarity with production processes that are highly standardised - millions of commuters negotiate the public transportation systems of major cities on a daily basis without worrying about the contractual niceties. In these cases, the trust is institutional rather than individual. But it is far from clear that this is possible or desirable with complex and non-standardised services, or where services are being delivered to vulnerable individuals.