54. Ultimate responsibility for any project rests, as David Simmonds from the Local Government Association argued, with the public sector as "they are the ones with the statutory duty to do whatever it is they are procuring for".122 Michael King, the Local Government Ombudsman, also took this view, arguing that the public sector" can outsource the service but it cannot outsource its responsibilities".123
55. The Government's guidance in the Green Book says that risks should be "borne by the organisation that is best placed to manage and monitor" them.124 Sir Amyas Morse, while discussing the case flow of a typical service for vulnerable people, explained what this meant:
if I ask you to sign a contract to take costs down and I make you responsible for the case flow under that contract, and I say, "If you don't get any more cases, you still have to deliver the same service and I am not going to up the price per case that you can charge", and I hold you to the contract and I make sure it is on very restrictive terms, I am simply making it impossible for you to be successful in the business".125
56. Nick Davies provided an example of successful apportionment of risk: in the Thames Tideway tunnel, the Government guaranteed that "for certain catastrophes for example, if drilling happens to flood the Underground" the Government would take the risk as the private sector could not effectively manage it.126 This kind of catastrophic risk contrasts with risks that the private sector can manage, which Nigel Kletz, Chair of the National Advisory Group for Local Government Procurement, described as risks around "day-to-day operational delivery".127
57. However, despite this guidance, there is evidence that successive governments have sought to transfer risk inappropriately and that they continue to do so. Rupert Soames said that in his view "Government has started transferring unmanageable amounts of risk into the private sector".128 Michael King told us that "all too often" local authorities try to outsource responsibility for a contract as well as operational risk.129 Professor Sturgess wrote in his recent report that, in his own work with private contractors, risk transfer was the topic mentioned more often than any other as a matter of concern for them.130 The NAO found that the Home Office had allocated risks to Raytheon, the IT contractor on the Eborders programme, which the company had "proved ill-placed to manage" (these included the risk that the company's designs for the programme did not meet the Department's detailed specifications).131
58. Professor Sturgess wrote in 2017 that "the experience of recent years has been that procurement teams are aggressively seeking to maximise risk transfer".132 The IfG agrees: reporting that the Government is "transferring more financial risk onto providers".133 A recent report by the CBI finds that 37% of businesses who work with the Government felt that the "government's handling of risk had deteriorated since 2015, with almost half stating there had been no improvement during this period".134
59. The Government recently used innovative contractual models to do this. The NAO says that, when designing payment by results schemes, the Government needs "to understand potential providers' capacity to take on risk".135 It is not clear that the Government have done this. For example, in the Work Programme, the Government "set initial performance expectations too high".136 They based these expectations on the unemployment rate for the period between 2001 and 2008 even though economic conditions had since changed.137 The Work and Pensions Select Committee described the Programme as "very ambitious" and said that they were "concerned" about the "financial viability of prime contractors" on it.138 Similarly, in the Transforming Rehabilitation Programme, the Government's initial estimates of demand and cost proved inaccurate.139 In 2014, over 80% of providers reported concerns about their exposure to financial risk on Payment by Results contracts.140
60. Sir Amyas Morse said that, where the Government uses these innovative contractual models, they should set up trials to test what risks can and cannot be transferred and how effectively such models work.141
61. We have found several instances where the Government has contracted with the private sector without knowing key data about the services it was asking companies to bid for. In these circumstances, the Government has asked the contractors to absorb any losses resulting from its own ignorance of the initial condition of the service. Recent examples of this include:
• In 2014, the NAO reported that, in the Compass contracts for asylum accommodation, "providers believe the information provided to them by the Department during the procurement was inadequate in some areas and has resulted in some of the difficulties now faced in running the service".142 The NAO said that the contractors took on responsibility for the accommodation "without carrying out full inspections" and the Department had had to delay the transition to the new contracts and failed to apply its performance regime during this period.143
• The 2016-17 accounts for the National Offender Management Service revealed that "historically the costs of [prison] maintenance and services were not clearly understood … and consequently planning assumptions have not held true."144 They admitted that consequently the contract they had let for prison maintenance was "underfunded".145 The Minister, Rory Stewart, disclosed to the Justice Select Committee in June 2018 that the contractor's bid had been £15 million lower than the cost of doing the work.146
• In May 2018, the NAO reported on NHS England's contract with Capita for primary care support services. It found that NHS England "did not know enough about the services it inherited to set achievable service specifications and performance standards from the start of the contract" and that Capita "underestimated the scale and nature of the task".147
This is still happening. Serco recently disclosed analysis showing that, in twelve recent procurements, the Government asked participants to take on the risk that the Government had got its own data wrong.148
62. Transferring too much risk can be counterproductive. On the Work Programme, the Work and Pensions Select Committee found that "elements of the programme have inhibited genuine innovation in the services delivered to participants, often leading to a fairly generic set of interventions."149 The IfG found that "providers concerned about their financial survival are generally unwilling to take on further risks by doing things differently".150 A recent study of payment by results programmes notes that "because of the financial risk transfer to providers" these programmes have "been more likely to stifle innovation" than stimulate it.151 This is not merely an issue with payment by results: the CBI's 2018 survey of 250 firms found that only 5% thought that current public sector procurement policies "incentivise innovation".152
63. UK governments have often transferred risks to contractors that they cannot possibly manage. This is driven, in part, by the decision to use contractual models such as payment by results which involve risk transfer on a huge scale. The transfer of large amounts of risk is often counter-productive: leading to more conservative approaches to service delivery. This situation has been made worse by the fact that governments have often not understood fully the services or projects they have wanted the private sector to manage and without any understanding or data about the assets being handed over.
64. The Government's guidance on risk transfer is sensible but too often that guidance appears to have been ignored in Departments. The Government must ensure that in the future this guidance is followed. In areas where the Government lacks information about the state of existing provision of services, it must evaluate which risks its partners are capable of taking on and which risks must remain with the Government. The Government ultimately cannot outsource the need to understand what it is outsourcing. We expect the Government to set out to us new procedures to ensure guidance about risk transfer is followed in the future. For example, contract announcements could be accompanied by a disclosure of which risks each party has agreed to manage.
65. The complexity of risk management is exacerbated in some of the innovative contractual models that the Government has used recently. The Government should pause its roll-out of these models, such as payment by results, given the difficulties the Government has had in evaluating which activity leads to outcomes and working out costs. In areas where payment by results has been implemented, we believe that the Government should, if it decides to re-purchase the services, re-evaluate how it apportions risk between itself and providers. The Government should in its response to this report lay out how it would do this.
________________________________________________________________________________
122 Q277 (David Simmonds)
123 Q277 (Michael King)
124 HM Treasury, The Green Book: Central Government guidance on appraisal and evaluation, March 2018, p. 30
125 Q520
126 Q453
127 Q278
128 Q627
129 Q277 (Michael King)
130 G. Sturgess, Just another paperclip: Rethinking the Market for Complex Public Services, Business Services Association, March 2017, p. 10
131 Comptroller and Auditor General Eborders and successor programmes (December 2015) p. 10, 34
132 G. Sturgess, Just another paperclip: Rethinking the Market for Complex Public Services,Business Services Association, March 2017, pp. 10-11
133 D. Crowe, T. Gash and H. Kippin, Beyond Big Contracts, Institute for Government and Collaborate, January 2014, p. 6
134 CBI, Partnering for Prosperity: CBI/Browne Jacobson 2018 Public Procurement Survey, June 2018, p. 12
135 Comptroller and Auditor General Outcome-based payment schemes: government's use of payment by results (June 2017) p 7
136 National Audit Office The Work Programme (June 2014) p. 7
137 National Audit Office The introduction of the Work Programme (January 2012) p. 22
138 Work and Pensions Select Committee, Work Programme Providers and contracting arrangements, Fourth Report of Session 2010-12, HC 718 , p. 34
139 Ministry of Justice, Probation reform: open letter from the Secretary of State for Justice, July 2017
140 D. Crowe, T. Gash and H. Kippin, Beyond Big Contracts, Institute for Government and Collaborate, January 2014, p. 6
141 Q532
142 National Audit Office, Compass contracts for the provision of accommodation for asylum seekers, January 2014, p. 6
143 Ibid. p. 5
144 National Offender Management Service, Annual Report and Accounts 2016-17, p. 69
145 Ibid.
146 Oral evidence taken before the Justice Committee on 26 June 2018 HC (2017-19) 483, Qq 41, 46 (Rory Stewart)
147 National Audit Office NHS England's management of the primary care support services contract with Capita (May 2018) pp. 7,9
148 Rupert Soames, Lecture to the Business Services Association (June 2018)
149 Work and Pensions Select Committee, Welfare-to-Work, Second Report of Session 2015-16, HC 363, p. 8
150 D. Crowe, T. Gash and H. Kippin, Beyond Big Contracts, Institute for Government and Collaborate, January 2014, p. 6
151 K. Albertson, C. Fox, C. O'Leary, G. Painter, K. Bailey and J. LaBarbera, Payment by results and social impact bonds: outcome based payment systems in the UK and US, February 2018
152 CBI, Partnering for Prosperity: CBI/Browne Jacobson 2018 Public Procurement Survey, June 2018, p. 14