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Carillion’s failed hospitals show need for outsourcing reform

Avoidable failures in government outsourcing have left the public waiting up to five years for two much-needed hospitals

While Carillion took the financial hit, Tom Sasse argues that avoidable failures in government outsourcing have left the public waiting up to five years for two much-needed hospitals.

Two years on from the collapse of Carillion, the National Audit Office (NAO) has published an investigation into what went wrong on two major PFI contracts the company held for new hospitals in Liverpool and Birmingham. The report confirms the earlier picture of corporate malpractice, which a parliamentary inquiry memorably called a "story of recklessness, hubris and greed".

But it will make for difficult reading in government too – showing a willingness to jump at low-price bids without examining whether the company could reasonably bear the risk. The badly delayed hospitals should act as a timely reminder to the new government of the importance of implementing outsourcing reform.

Commissioners were guilty of a narrow focus on the lowest price bid in the case of Carillion

In the case of both hospitals, the contracting organisations chose bids submitted by Carillion which were priced too low to meet the required specification.

This is only the latest example of a much wider problem across government. Commissioners should select the bid which offers the best value – a mix of price, quality and wider benefits – and assurances that a supplier can deliver.

In practice, officials and suppliers have told us, "it always comes down to price". But while the lowest-price bid might satisfy a need to find savings in that year’s departmental accounts, it often achieves poor value in the long run – particularly when a contractor proves unable to manage risks.

Responsibility for delivering services always rests with government

Carillion took responsibility for construction risk as well as financial and operational risk if the projects went wrong – and it hit problems at the Liverpool site when it discovered asbestos and cracks in structural beams.

Government was successful in ensuring Carillion bore the cost of the risk it has signed up for: the company and its partners ended up losing at least £603 million, while the NHS trusts will pay more or less what they had originally budgeted. This is good news: in other major contracts that have failed, such as Hinchingbrooke hospital, it has not always happened.

Yet that does not make this a story of successful risk transfer – or of government being a savvy negotiator. The upgrades to the Royal Free Hospital in Liverpool were needed to address risks to services due to the hospital’s poor condition, but patients will get their new hospital five years later than planned. The hospital in Birmingham is set to be four years behind schedule.

These delays have real costs for people’s lives. And the NAO has fired a warning signal that the hastily drawn together replacement contracts carry "significant risks of further delays and added costs".

Ultimately, government is always responsible for the provision of services which are relied on by the public. That is why it needs to be clear-eyed in assessing what companies can and can’t do; which risks they can reasonably price and manage and which they can’t. Allowing a company to bid too low and take on risks it cannot bear does not end well for the public either.

The two failed hospitals highlight the importance of government reform of outsourcing

The failed contracts should act as a timely reminder to the Conservative government of the importance of driving through reform. Several critics used the two-year anniversary of Carillion’s collapse earlier this week to argue that "government has learned nothing". But while they are right that investigations into bad accounting practices have moved too slowly, they are wrong to say government has sat still since Carillion.

In fact, it has committed to a significant set of reforms, publishing comprehensive new guidance on how the government should decide whether to outsource a service – and how it should procure contracts, select bids and transfer risk. Fully implemented, these rules would prevent contracts like those for the Liverpool and Birmingham hospitals being signed.

But changing behaviour is easier said than done; similar guidance in the past has been frequently ignored. It will require commitment from Number 10 and the Treasury if the government is to change its attitude to outsourcing – and change the incentives that point towards selecting low-ball bids rather than assessing a private firm’s ability to manage risks and deliver value.

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17 SEP 2019 Online event
17 September 2019

How to fix government outsourcing

The Rt Hon Sir David Lidington MP joined us to launch our new report which assesses the government's record of outsourcing over the last four decades.