Carillion and the MoJ

It's unfortunate, but the collapse of Carillion has rather thrown us off the TR omnishambles and given the likes of MTCnovo a breathing space until we can refocus on their bullying tactics in London. 

Just one of the staggering aspects to yesterday's outcome is the utter pointlessness of 'audited accounts', especially when the likes of KPMG get the job of clearing up the mess that the other big firm PWC spectacularly failed to spot in the first place. They just rotate positions but I guess that's how capitalism works and as one Tory MP was heard to say yesterday, "if you didn't have failures it would be like having Christianity without the Devil."

Given the MoJ's track record on outsourcing, I guess it's probably a good idea to remind ourselves and take a look at this article by the Institute for Government from last August:-

Outsourcing problems at the Ministry of Justice

The Ministry of Justice (MoJ) can scarcely go a month without a bad news story related to one of its outsourced services. The recent outsourcing of probation services - which the Institute for Government (IfG) and many others warned was rushed and risky - is not going well. Many of the new private providers say they are making big losses, despite the department providing them with some additional cash, and probation inspections are revealing concerns with the majority of outsourced work.

There was uproar when MoJ announced that G4S would be providing electronic monitoring services for offenders, given the company is still under investigation for allegedly overcharging the department for the same services between 2005 and 2013. And this week, The Times published a Ministry of Justice admission that the savings promised when it outsourced maintenance of prison buildings to two companies in 2014 would not be delivered.

There have long been complaints about the quality of the work performed by Carillon and GEO Amey in different regions. And a recently published MoJ report reveals that “historically the costs of maintenance and services were not clearly understood by the business and consequently planning assumptions have not held true. The contract is therefore underfunded and the declared efficiency savings reduced.”

In truth, it’s currently impossible to find out precisely how well contractors delivering government services perform. Prisons and probation as a whole are inspected, which provides a good degree of transparency. But when more specific parts of the services are not inspected – as in the cases of electronic monitoring and prison maintenance – MoJ, like other departments, tell us relatively little about how well private providers are doing.

This is unfair to taxpayers, for whom the debate about marketisation is politically relevant given the differing stances of the main UK parties. But it’s also unfair to providers, as we can’t tell if problems are limited to specific companies or more endemic. If government acted on its promise to open up data on contractors’ costs and performance it would also be easier for us to judge the cause of problems – though basic data will never tell the whole story.

It is likely the 2014 outsourcing initiative didn’t get the time and attention it needed as it coincided with the much larger and more sensitive probation outsourcing. This was at a time when the number of MoJ civil servants had fallen significantly and there were vacancies in the commercial team. The IfG has written widely about the need to prioritise major projects ruthlessly, and outsourcing projects are no exception. Doing multiple outsourcing projects simultaneously can reduce competition as providers will often only have the resources to bid for select projects. And this wasn’t the only outsourcing initiative rushed through to lock in ‘savings’ before the 2015 election.

The backdrop of understaffed and increasingly violent prisons can’t have helped with delivery. I would wager that some of the reasons jobs aren’t being done as quickly as desired include poor communication from prison staff and constraints on prison access – a particular issue when some of the maintenance work is carried out by inmates. We’ve previously recommended the use of scenario and simulation exercises to test how contracts hold up in a range of circumstances, but these exercises rarely happen.

The underestimate of existing costs and the overestimate of savings was likely the result of inadequate data, poor technical skills and insufficient frontline consultation. But this is not just a question of staff skills and processes. Those contracting out services - ministers, officials and contractors - are often prematurely heralded for delivering ‘savings’ before they become real and then are not held accountable when costs escalate in ways that could have been predicted.

Commercial staff also have little incentive to look beyond the immediate costs of the service in question. The outsourcing of court translation services prioritised costs and wasted vast amounts of expensive court time and legal expenses when translators couldn’t be found for critical sessions. Disruption resulting from maintenance failures may be somewhat lower but shouldn’t be underestimated. For example, there are costs in staff time when officers have to escort prisoners to a different block if there is no hot water. Delays in fixing plumbing or ensuring a library is accessible can contribute to a hostile mood and ultimately even violence.

We urgently need better long-term performance management of government commercial staff and project owners to ensure those working on deals think about the long-term. Ministers and staff involved in projects that have gone wrong must be brought back to face Select Committee scrutiny.

But the most critical short-term steps to improve performance lies in better contract management. If providers promised to meet certain standards and are failing to, there needs to be a mature ongoing dialogue about the precise reasons and appropriate penalties must be triggered to incentivise improvement. The MoJ also needs to ensure that other departments using these providers are aware of the scale of the problems and the reasons for them – which will help inform future contracting choices.

The long-term solution lies in improving overall commercial capability in Whitehall. Cabinet Secretary Jeremy Heywood has long said that this is one of his top priorities – but now is the time for us to start seeing results. Current plans to improve commercial capability in Whitehall are focused on the right issues. But they will not succeed unless ministers and permanent secretaries recognise the importance of the issue, invest in the resources required to oversee multi-million pound contracts effectively and involve departmental commercial experts in key outsourcing decisions at an earlier stage.

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A reader has handily reminded us of this:- Feedback published by New Philanthropy on the TR competitive tendering procedure.

Problems with the TR competition

The round table participants identified four broad criticisms of the TR competition process:

- They found the process very chaotic and confused, with questions unresolved, deadlines and key aspects changing right up to the later stages of the competition. The final details of both the PCG and the payment mechanism were only available at a late stage in the process.

- The process was felt to be much more complex than it needed to be. Bidders needed to get to grips with vast amounts of documentation and detail.

- The MOJ did not appear to have the capacity to run or support an effective tendering process. Bidders who passed the PQQ stage received around four days of support from officials, but our participants estimated they needed three or four times that to resolve all issues and questions they had. The calibre and experience of officials supporting the bidders was described as ‘inconsistent’; some did not seem to understand their own processes and participants cited examples of contradictory information being given by different officials.

- The specification offered limited scope to describe the quality of bidders’ proposed approaches. More generally, our participants concluded that considerations around quality, vision, and innovation were largely irrelevant to the final decision of whom to commission."

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As this from the Independent demonstrates, the fallout is going to have widespread ramifications and may prove a watershed moment for further privatisations. It also has Chris Grayling's fingerprints all over it:-

Carillion bosses face inquiry after protecting ‘exorbitant’ £4m bonuses ahead of collapse

Carillion bosses face an investigation into a “shameful” bid to protect their bonuses before the firm went bust, with the company’s collapse now threatening to turn into a major corporate scandal. The Government warned directors of the firm, which handled hundreds of public contracts, that they would be hit with “severe penalties” if found guilty of misconduct in securing some £4m in handouts last year.

The bonuses were branded “exorbitant” in the Commons – one former cabinet minister likened the situation to a “British Enron” – while Labour leader Jeremy Corbyn said the collapse is a “watershed moment” for privatisation.

As the fallout spread, ministers were adamant fault lay squarely with the firm’s management and said taxpayers would avoid significant extra costs, despite stepping in to ensure Carillion-provided public services continued. But a slew of inquiries are now expected to pick through not only Carillion’s downfall, but the actions of ministers who handed the firm 450 contracts in recent years.

After Carillion failed, having racked up debts and liabilities worth £1.5bn, MPs heard how bosses tweaked rules in the firm’s 2016 annual report to make it harder for investors to clawback bonuses if the company hit trouble. Previously the firm had the right to reduce bonuses not yet paid, but after the 2016 report so-called “clawback” provisions could only be applied if financial results “have been misstated” or “the participant is guilty of gross misconduct”. A few months after the alteration an accounting crisis wiped £600m off the firm’s share value.

Labour MP Emma Reynolds, in whose constituency 400 of the 20,000 at-risk UK jobs are located, branded the bonuses “exorbitant” while workers’ pensions were at risk and creditors are set to get nothing.

Cabinet Office Minister David Lidington told the Commons in response that the official receiver in the case would launch an investigation into the circumstances around the firm’s collapse, and went on: “I think it would be wrong of me from the dispatch box to pre-empt the inquiry … into the conduct of both present and previous members of the board of directors. But I can say ... that the official receiver has not only the power to investigate, he has the power to impose severe penalties.”

His Labour counterpart Jon Trickett said: “It is shameful that as Carillion went from crisis to crisis, they were more concerned about protecting their big bosses rather than workers or our public services.”

The Institute of Directors (IoD) also waded in with a stinging rebuke to Carillion’s top executives for what it called a lack of “effective governance”. Head of Corporate Governance at the IoD, Roger Barker, said: “There are some worrying signs. The relaxation of clawback conditions for executive bonuses in 2016 appears in retrospect to be highly inappropriate.”

The firm was involved in providing school dinners and cleaning services to almost 900 schools; delivering maintenance and facility management services to hospitals, including 200 operating theatres, covering almost 12,000 beds and catering for 19,000 meals a day; construction work on rail projects including HS2 and Crossrail; maintaining 50,000 Army base homes; £200m of prison contracts and other major construction projects.

The firm’s share price has plunged more than 70 per cent in the past six months after making a string of profit warnings and breaching its financial covenants. But Downing Street accepted that eight contracts had been signed since a July 2017 profit warning, including a deal last Monday not yet signed with Leeds City Council to provide a new orbital road.

Of the others, two were deals with the Ministry of Defence, two related to HS2 and two were Network Rail contracts with a joint venture attached, plus a further one without, worth £62m.

Mr Lidington said: “It is regrettable that Carillion has not been able to find suitable financing options with its lenders and I am disappointed that the company has become insolvent as a result. It is however the failure of a private sector company and it is the company’s shareholders and its lenders who will bear the brunt of the losses: taxpayers should not and will not bail out a private sector company for private sector losses or allow rewards for failure.”

He said the taxpayer would step in to ensure workers providing public services were paid and to indemnify the official receiver, but officials insisted it would not mean major extra costs beyond what the Government would have paid Carillion under normal circumstances.

But as well as the official receiver’s probe, the Commons Public Administration Committee announced it would launch an inquiry into how the Government manages the risks of outsourcing.

One area of inquiry will likely include a decision to move a Government representative tasked with managing the relationship between Carillion and the public sector to another project, around the time the firm issued a profit warning last summer.

Ex-Labour cabinet minister Lord Adonis said the situation had “shades of a British Enron”, adding on Twitter that it involved “wild overbidding, fast-and-loose & grossly overpaid management [and] taxpayers taken for a ride”.

The Transport Committee will also grill Secretary of State Chris Grayling next week over contracts he approved before considering a wider inquiry, while chair of the Pensions Committee Frank Field MP said the Government had failed to heed warnings about Carillion.

The Labour MP said: “We called over a year ago for the pensions regulator to have mandatory clearance powers for corporate activities like these that put pension schemes at risk and powers to impose truly deterrent fines that would focus boardroom minds. If Government had acted then, the brakes might have been put on Carillion’s massive ramping up of debt and it never would have fallen into this sorry crisis.”

Britain’s corporate governance watchdog, the Financial Reporting Council, revealed they had been “actively” watching Carillion. A spokesman underlined the body’s powers to investigate, adding: “[We] will make a further statement on this matter shortly.”