18 March 2019

Another of the Government’s biggest contractors has gone into administration because it took on risky contracts it couldn’t deliver, writes Tom Sasse.

First Carillion went into liquidation, and now Interserve has gone into administration. Is a worrying pattern of failure in government outsourcing emerging? 

Interserve’s problems were caused by mistakes made in the boardroom, but this does not tell the full story. It is an example of a company which took on too much risk and whose debts began to spiral – and it is an example which both the Government and industry need to learn from.

Government is better prepared than it was when Carillion collapsed

There is some cause for encouragement that lessons have already been learnt, with the Government clearly better prepared than it was when Carillion collapsed in January 2018.

With 45,000 employees in the UK, Interserve is one of the Government’s largest contractors. It cleans and maintains schools, hospitals, prisons and train stations. It is involved in government construction projects, including building renewable plants. And it 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.

So the immediate task is to avoid disruption. The company has said that its pre-pack administration arrangement, which means the company can keep trading and providing services under the ownership of its banks, will allow business to continue as usual on its government contracts. Cabinet Office officials have been closely watching discussions over Interserve for months and have said they expect no disruption to public services – but with loss-making contracts and heavy reliance on government work, Interserve remains vulnerable.  

The Cabinet Office has also recently set about improving the monitoring and financial assessments of suppliers, and it has been working with companies including Interserve to pilot ‘living wills’ – plans to ensure the continued delivery of a supplier’s services in the event of collapse, through in-house provision or using other suppliers. While these plans won’t be needed given the ‘pre-pack administration’ arrangement, they provide assurances to citizens and employees alike should the deal go awry.

Interserve’s problems show what happens when companies take on inappropriate risk

How Interserve arrived at this point of failure should be used as a case study. It signed contracts to build plants, including for city councils in Derby and Glasgow, despite major problems with the technology being used in these energy-from-waste projects. The projects were not delivered on time or budget, and as a result racked up £630 million debts.

While Interserve is responsible for signing risky contracts that it could not deliver, it is not the only company to hit trouble in this area. There is a similar story regarding probation services, and last year the Public Accounts Committee highlighted concerns over businesses bidding for contracts in areas they lacked expertise in.

Speaking at the IfG, Rupert Soames, Chief Executive of Serco, warned that over the last 10–15 years "huge amounts of completely unmanageable risk have been transferred into the private sector like hand grenades sitting in contracts and now they’re starting to go off." In its inquiry into Carillion, the Public Accounts and Constitutional Affairs Committee similarly concluded that the Government had “deliberately promoted an aggressive approach to risk transfer to the private sector".

A volatile market is bad for government, companies and taxpayers

A volatile market is bad for companies, for government and for taxpayers too. It is leading to less competition, with companies increasingly pulling out of bidding for contracts that look too risky – a quarter of all public sector contracts awarded last year went to the sole bidder. And when companies do collapse, it can cause disruption and incur additional costs for taxpayers.

The Cabinet Office’s new Outsourcing Playbook, a guide for officials making contracting decisions, shows that the Government is learning lessons from past failures. Oliver Dowden, the Minister for Implementation, said last month that he recognised "disquiet within the industry" over risk allocation and offered assurances that the playbook gives departments advice on how to "mitigate, reduce and then allocate risks to the party best able to manage them".

Government officials must heed this advice. The risks of not doing so are increasingly, and repeatedly, obvious.