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Interserve shows government must do more than manage the crisis

The government should fix the problems that are causing companies to run into trouble in the first place.

Interserve is the latest Government contractor to run into trouble. The Government must fix the way it manages the outsourcing market, says Tom Sasse.

Interserve – one of government’s largest contractors, which works in prisons, schools and hospitals – is in talks with lenders in efforts to avoid collapse. It is unclear if it will survive. This comes on the heels of Carillion’s collapse earlier this year. 

The Cabinet Office must deal with the crisis immediately before it gets worse

Labour has called for Interserve to be temporarily banned from bidding for any more contracts. Given Interserve’s balance sheet, and the fact that it relies on government for 70% of its revenue, that might spell the end for the company.

If Interserve does collapse, how will government mitigate the impact on people’s jobs and disruption to vital services, while protecting taxpayers? Interserve is the largest provider of probation and offender rehabilitation services in England and Wales, with a contract to supervise 40,000 offenders for the Ministry of Justice.

After Carillion, companies including Interserve have been piloting ‘living wills’ – lining up other suppliers to take on contracts like these in the event of collapse. But it is unclear if Interserve will have had enough time to complete its plans.

These problems show why it is urgent that all of government’s major suppliers have living wills. In Carillion’s case the Government stepped in and almost all the company’s services continued without interruption, but at a cost of £148 million to the taxpayer.

The Government must do more than simply manage the crisis

The Cabinet Office’s response to Carillion has focussed on how to manage the immediate fallout when contractors collapse.

But Carillion and Interserve are not simply one-off problems with individual companies. They are indicative of fundamental issues with government’s stewardship of the outsourcing market. Government is failing to create a healthy, competitive market for the services it contracts.

In recent years, the profit private providers are making on contracts have fallen significantly, while the risks for companies when contracts fail remain high. Interserve’s profits on running probation and cleaning services fell from 3.1% in 2013 to minus 0.4% last month. Other companies have spoken publicly about being tied into long-term contracts that are heavily loss-making, such as Serco’s contract for looking after asylum seekers.

As profits decline, companies are forced to chase more work. An investigation by the FT last week found that some of the Government’s largest outsourcers – including Interserve, Serco, Capita and Mitie – have “bankrupt” business models and “worryingly weak balance sheets”, which rely heavily on the promise of winning future contracts. As with Carillion before its collapse, this leaves little to fall back on should the flow of cash dry up.

The Government is not only left with a volatile sector that is vulnerable to suppliers collapsing, it is also failing to ensure competition – the rationale for outsourcing work in the first place.

Major companies are not bidding for contracts because they look too risky

In May, the Scottish Government awarded an eight-year contract for escorting prisoners in Scotland worth £238 million to the only bidder after G4S and Serco, which both have experience running similar contracts, pulled out.

The Government urgently needs to conduct a review of the state of its procurement markets. As a forthcoming Institute for Government report finds, the Government’s largest suppliers are winning more and more business.

Last year, roughly a fifth of all central government procurement spending was spent with ‘strategic suppliers’ – up from around an eighth in 2013. But several – including Interserve – have been hit with financial difficulties and the outsourcing market continues to show signs of serious distress.

If government doesn’t fix the problems that are causing companies to run into trouble in the first place, it will only be faced with further crises as more contractors hit the rocks. 

On 13 December we will launch our new report Government procurement: the scale and nature of contracting in the UK.

Cabinet Office
Institute for Government

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