Around a third of government spending is with external suppliers. Government relies on contractors to deliver a vast range of critical services to both the public and government itself – from work capability assessments and hospitals to major IT systems. Unfortunately, poor data means government cannot readily say what it buys, who it buys from and for how much.
One thing we do know is that major suppliers – like Capita, Serco and Interserve – are winning an increasing share of government contracts. For central government, the proportion of published procurement spend going to the 25 ‘strategic suppliers’ increased from an eighth in 2012-13 to around a fifth in 2016-17, even as some of these companies faced financial difficulties. Some departments rely heavily on these contractors: the Department of Work and Pensions spends 67% of its procurement budget on strategic suppliers, while HM Revenue and Customs spends 55%.
Government’s growing reliance on the major contractors leaves it vulnerable, as the collapse of Carillion and the ongoing problems with Interserve have shown. Recent analysis by the Financial Times and Company Watch reveals some of the largest outsourcers have weak balance sheets with an unhealthy reliance on goodwill and a continuing stream of government contracts. Our research suggests shrinking margins and risk transfer from government to the private sector is contributing to these financial weaknesses.
Companies say risk and shrinking profit margins are leading them to walk away from government contracts. And there is evidence this is happening.
A big question looms for the government: how it will maintain both value for taxpayers’ money and a healthy market of suppliers? The government’s commitment to ‘living wills’ to deal with the potential collapse of strategic suppliers is welcome. But livings wills are part of the mopping-up exercise, not prevention. The government needs to review the health of its outsourcing markets urgently, including thinking about how it might better monitor and manage contracts.
To do this, the government must improve the tracking and quality of its data on procurement spending. This should include collecting information on the number of bidders for contracts, and better information on the shape of supply chains to help improve competition.
Information on who is bidding for contracts is crucial to gauge the health of supplier markets. Companies say risk and shrinking profit margins are leading them to walk away from government contracts. And there is evidence this is happening: the Scottish Government awarded a £238m contract for escorting prisoners to the only bidder after G4S and Serco, which both have experience running similar contracts, pulled out. At the same time, evidence from around the world shows that publishing more contracting information reduces the chances of ‘single bidding’, as well as increasing competition and reducing prices.
The government has its work cut out balancing the viability of critical services with getting the best price for taxpayers. Improving its procurement data is an important first step in the right direction.
