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National Audit Office questions the role of major government suppliers

The National Audit Office (NAO) has published a report examining the role of major government suppliers in delivering public services. The report looks at four of the main government suppliers as The National Audit Office (NAO) has published a report examining the role of major government suppliers in delivering public services. The report looks at four of the main government suppliers as examples (Atos, Capita, G4S and Serco) and focuses on three main issues:

  • whether there is currently sufficient competition in contracted out public services;

  • the transparency of the profits that major suppliers make and whether they represent a fair return; and

  • how the government and the public can monitor whether contractors are delivering.

The report states that “there have been several high-profile allegations of poor performance, irregularities and misreporting over the past few months. These raise concerns about whether all contractors know what is going on in their business and are behaving appropriately; and how well the govearnment manages contracts. The government believes that contractors generally have often not provided sufficient value, and can contribute more to the overall austerity programme."

The competitiveness of contracting out

The NAO highlights the difficulty of maintaining competitive pressure throughout the term of the contract. Some complex government contracts can only be delivered by the largest suppliers. Furthermore it is hard to maintain competitive pressure throughout the life of the contract once the tender process has been completed.

Given the rising market dominance of a few major government suppliers, the NAO questions whether this is in the public interest. It concludes that although large suppliers have advantages (such as market expertise, good supply chain management and robustness), they can also contribute to a consolidation of the market, by acquiring small businesses that win government contracts, which in itself could be viewed as bad for innovation and competition.

Do the profits of large suppliers represent a fair return?

The NAO argue that it is important for the government to understand the profits of large contractors to be better informed of the contractor's risk and reward profiles which in turn will help to structure the contract and then manage it well. However the report finds that "few companies publish sufficient information in their accounts to separately identify the revenues and profits from their public sector work". This means that without contractual open book accounting arrangements, the government are largely blind to the profits that major IT suppliers make and consequently the tax paid in the UK. The question of whether supplier's profits represent a fair return therefore remains unanswered due to this lack of transparency.

How can we monitor whether contractors are delivering?

The report highlights the importance of the government being a well informed customer when it comes to big IT suppliers, the NAO says that this requires "more than just the key performance indicators reported to the client" but also "public reporting and openness to public scrutiny". The NAO voice concerns that in bidding for contracts IT suppliers may just pay 'lip-service' to corporate governance structures but in reality not have the right culture and control environment throughout their group and supply chain.

The report argues that companies will be more likely to meet the standards of performance that the public would expect if it is in their financial interests to do so. The report states that this involves "financial penalties, banning from competitions and political fallout when problems are found" as well as "the use of contractual entitlement to information, audit and inspection."

Outsourcing delivery vs outsourcing responsibility

In response to this NAO report, Margaret Hodge, chair of the Public Accounts Committee said, "this report raises some big concerns: the quasi-monopolies that have sprung up in some parts of the public sector; the lack of transparency over profits, performance and tax paid; the inhibiting of whistleblowers; the length of contracts that taxpayers are being tied into; and the number of contracts that are not subject to proper competition. It is the government's policy to outsource delivery of public services, but what it cannot do is outsource responsibility. Departments have a duty to ensure that the taxpayer is not being ripped off and that people, not profit, remain at the heart of our public services."


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