Government risk assessment of Carillion published

The Public Accounts Select Committee has published a report into the risk assessments of Carillion in the run up to its failure. Here's a snippet:

"The Carillion assessments show that:

  • Although Carillion had been rated Amber owing to performance against contracts with the Ministry of Defence and Ministry of Justice, it was not until after Carillion issued a profit warning in July 2017 that Government downgraded Carillion to Red. It appears the Government was not aware of Carillion’s financial distress until this point.
  • In November 2017, officials recommended a provisional Black rating for Carillion. However, following representations from the company, the Cabinet Office did not confirm the designation. Carillion collapsed less than two months later."

On a very strange (but welcome) transparency note, even the assessments themselves were made public.

What it appears to me is that by November 2017, plans should have been privately put in motion to forestall a potential (though not certain yet) entrance into administration, ie how to handle ongoing contracts, securing access to sites, etc. That for me is much more important than knowing exactly when the rating moved from amber to red and then finally to black.

On a final note: who and when had access to these risk assessment reports, ie only the Cabinet Office or the wider public sector which could have been tendering contracts with Carillion as a bidder.

Carillion and the policy of re-pricing contracts

Somehow I missed this excellent blogpost by Peter Smith last week about the Public Administration and Constitutional Affairs Committee hearing on public sector outsourcing. The whole thing is worth reading, but here's an interesting bit:

"Asked about contracts that are in difficulties, “we have re-priced in some case” says Manzoni. He then backs off somewhat and says “we have to be careful with regulations”. Really? Tell us more, do explain where you have broken the law!  “Several I can think of where a re-pricing has taken place, where we have got it wrong”."

I do not fully agree with Peter's immediate conclusion of illegality. It may be that what is meant in this context is that the service delivery changed and as such the prices changed as well. This would be legal (within the limits provided for in the Regulations). Even a pure price change might be legal if it met the three criteria mentioned by Peter in his post and present in Article 72 of Directive 2014/24/EU:

(i) the need for modification has been brought about by circumstances which a diligent contracting authority could not foresee;
(ii) the modification does not alter the overall nature of the contract;
(iii) any increase in price is not higher than 50 % of the value of the original contract or framework agreement. Where several successive modifications are made, that limitation shall apply to the value of each modification. Such consecutive modifications shall not be aimed at circumventing this Directive;

The burden of proof for the conditions to be met remains with the contracting authority, so in this case evidence would have to be provided that a diligent contracting authority could not foresee the need to increase the price. An of course, the more times the repricing happens to any given contracting authority the less likely it is the test will be met. But who would put forward a complaint even it that was the case? 

In the bigger picture, this is yet another example of what I have been harping for years: the price of regulatory focus in the procedure has moved the pressure points (corruption/illegalities/violation of competition etc) to other areas of the system, namely contract performance and pre-tender launch. 

It is also evidence of the winner's curse at play, but we have known that for ages.

Carillion, Capita and the obsession with lowest price contracts

In the wake of Carillion's implosion, we are coming to see the internal workings of the UK Government in a light that might be surprising or unexpected for those looking from the afar. The most recent piece of information comes in today's Telegraph and is connected to what award criteria are used. Mostly, lowest price even in large outsourcing contracts.

The Public Contracts Regulation 67(1) establishes - correctly - the principle that contracts need to be tendered in accordance with the most economic advantageous tender. 3 years after the Regulations came into force, lowest price or price only contracts should be a thing of the past. But they are not, why?

First, as mentioned in the Telegraph's piece, there is a huge pressure on budgets and that means the pressure is passed on to the private sector via price only contracts. If a large percentage of a pool of contracting authorities operating in a market all have the same approach, then margins of economic operators are indeed squeezed. By itself that is not a problem and is part and parcel on the economic world. No company likes competition, so take with a grain of salt the tears claiming contract prices in the public sector are too low. Having said that...  

The winner's curse exists really is a thing in public procurement. If only one contractor can win and the lowest price is the award criteria, there is a huuuuuuge pressure to win the contract at any cost - and try and make the difference up during the contract. In effect, quite often the prices presented to win the contract are not sustainable, ie, will not cover costs and allow for a profit to be made. Have too many of those, a little bit of a head wind and the positive cashflow won't be enough to keep the ship from keeling over. In effect, this is roughly what happened to Carillion (and may be happening to Capita as well).

In consequence, I would argue there are a lot more tenders that are abnormally low than those that are formally checked for that condition. In other words, there are plenty of apparently normally priced tenders which are effectively abnormally low depending on the financial circumstances of the tenderer and eventually other contracts the economic operator has already won or will be winning in the contract. In a world where the majority of winning tenders are abnormally low, when looked in context they will all look, well, normal.

That is only part of the story though.

Second, a longer term problem looms: lack of capacity in the public sector to deal with tender complexity. Lowest price tenders are easier to assess/compare and the corresponding decision to justify. It is no surprise they remain very popular in the UK (and elsewhere too), making irrelevant the default MEAT rule in both the Directive 2014/24/EU and the Public Contracts Regulations 2015.

This brings me to the final point: the UK pushed for significant changes to be introduced in Directive 2014/24/EU, which then led to the creation of the competitive procedure with negotiation and the innovation partnership amid other measures that I classify as being "for the 1%" of contracting authorities.

What Carillion's demise is showing is that not even the "1% of contracting authorities" have the chops to do the 'advanced' basics well (moving from lower price to MEAT) let alone deal with all those new toys included in the Directive. For years I have clamoured that what we need is to support contracting authorities in doing the bread and butter well. That means doing the actual work of training, supporting, upskilling and rewarding those at the coal face. To date I have seen zero investment from the UK Government on this (publishing guidance doesn't count...)

But that makes for less compelling marketing case than the new toys. Plus, it costs lots of money. Up front and for uncertain or diffuse benefits (ie, improving tenders, reducing risk and avoiding the next Carillion). For now, it is important to cut those budgets a little more though.

In the meanwhile, lowest price contracts remain the rule and not the exception.