Over the Christmas and New Year period, we will be featuring a daily favourite article from each month of this year (2016), which should take us nicely up to January 8th when we assume everything kicks back into gear! Today, a discussion about what good procurement looks like and whether suppliers have to make a profit out of public contracts.
Today, we have an important philosophical point to make about public sector procurement. It is this. If a public sector buyer puts in place a contract that once up and running sees the supplier losing a substantial amount of money, yet is continuing to deliver the service and meet the quality type standards, does that mean the buyer has done a brilliant job? Or does it indicate a poor procurement that did not fully understand the appropriate cost structures for the supply side, and has ended up with a situation that might be unsustainable?
This has come up because of the dreadful financial results announced last week by G4S, one of the largest providers of outsourcing services to government – not only in their UK base but in other countries too. G4S recently told a UK political committee (the House of Commons home affairs select committee inquiry) that it was paid an average of only £9.35 a night to house each asylum seeker. That was determined through a competitive process run by the government department responsible for this work, the Home Office. G4S is understood to incur costs at least 30% higher for each individual it looks after.
Serco, which currently houses 14,300 asylum seekers, also told MPs that they were paid £300 a month to house each asylum seeker but were spending £450 a month – so were making a loss of £150 a month per person. Serco made a provision in their accounts of no less than £115m for future losses on its asylum housing contracts.
That has happened perhaps because of the lack of experience amongst the providers when they bid to carry out this sort of work. Clearly, they misjudged the costs. The property boom in some areas of the UK in recent years cannot have helped either, pushing up the market prices of rental accommodation. But you have to think that there was some serious mis-pricing by the providers. If they are indeed losing money on every case, then the other problem has been the growth in numbers. It sounds like the contract means they are forced to accept however many asylum seekers appear.
Now usually, more volume would be good news for a supplier – more revenue plus some economies of scale on the cost side. But there are few economies in the business of sticking people into rented houses, and if you are losing money on every person, then more volume is very bad news indeed. It is also reported that the Home Office has the right to extend the contracts for another two years, so ironically we have suppliers here desperately hoping that their customer does not extend the contract! And there are apparently penalties in place and contractual conditions that mean the providers can’t just put the asylum seekers into tents somewhere.
Recently, John Manzoni, the Civil Service CEO and top civil servant in the Cabinet Office, gave an interview where he suggested that civil servants should be able to judge whether a provider was working inefficiently, or whether they deserved more revenue because something outside their control had occurred (that was our interpretation anyway). You can read more detail on that here, but might this be a case in point?
But surely there would be uproar if the government just handed over some more cash to G4S and Serco because they are losing money? And if they were rewarded, would any of the unsuccessful bidders from the initial competition complain about that as well? So this case shows the difficulty of Manzoni’s idea. What we have here is a combination of suppliers’ failure in costing and financial planning, probably overly aggressive bidding, plus some unforeseen events that are outside their control (volume, property costs).
But coming back to our starting point. Did the Home Office procurement team do a great job here? They put in place a contract where the supplier has accepted a lot of risk, by the look of it; performance risk, inflation risk, volume risk. The buyer is protected in the contract against the supplier trying to down-grade the service to reach profitability, and against the supplier just walking away it seems. And the providers have stuck with it, up to now at least, so there have not been any issues around continuity of service. OK, so the providers are losing money, but the taxpayer has benefitted at the expense of G4S and Serco shareholders.
Whilst the situation looks uncomfortable, particularly for the suppliers, and it may well prove unsustainable for much longer, at the moment we say yes – it is a “well done” to the procurement team at the Home Office!