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Whitehall over-reliant on a ‘quasi-monopoly’ of suppliers

Whitehall has become over-reliant on a small number of ‘quasi-monopoly’ suppliers for the provision of public services, the Public Accounts Committee has warned.

In addition some contractors “simply have not shown an appropriate duty of care to the taxpayer and users of public services”, a new report into contract management said.

The committee said the fact that government departments continued to work with Serco and G4S while they were under investigation by the Serious Fraud Office (SFO) for overcharging the Ministry of Justice tens of millions of pounds for electronic tagging contracts highlighted the scale of Whitehall’s dependence.

“As public service markets develop, quasi-monopoly suppliers are emerging who squeeze out competition, often from smaller companies with specific experience,” the report said.

The committee condemned ministers for giving the impression that all business with Serco and G4S was halted while investigations took place. In fact, according to the committee, the MoJ as well as the Ministry of Defence, the Department of Health, the Department for Business, Innovation and Skills and HM Revenue & Customs all continued to award Serco and G4S additional work while inquiries were ongoing.

The report continued: “For competition to be meaningful, there must be real consequences for contractors who fail to deliver and the realistic prospect that other companies can step in. It was not acceptable for government to give the impression that all business with Serco and G4S was halted whilst investigations took place, when in fact contracts were extended, new contracts were awarded and negotiations for new business continued.”

The tagging contracts were also not isolated cases. According to the report two other G4S contracts with the MoJ having been referred to the SFO, while another Serco contract with the same department was being investigated by the City of London police.

Margaret Hodge MP, chair of the committee, said: "Too often the ethical standards of contractors have been found wanting. It seems that some suppliers have lost sight of the fact that they are delivering public services, and should do so in accordance with public service standards.

“The case of G4S and Serco overcharging the Ministry of Justice for years on electronic tagging contracts was the starkest illustration of both contractors’ failure to work in the public interest and government failure to safeguard taxpayers’ money.

“G4S apologised to us for getting it wrong and Serco said the affair was 'unacceptable and unethical; frankly, we are deeply ashamed of it'.

“We have examined similar cases where there are allegations of the misuse of taxpayers’ money. Serco’s altering of performance data on its contract for out-of-hours GP services in Cornwall is an unacceptable example. Two other G4S contracts have been referred to the Serious Fraud Office to investigate, and another Serco contract has been referred to the City of London police. 

“The legitimate pursuit of profit does not justify the illegitimate failure to conduct the business in an ethical manner. A culture of revenue and profit driven performance incentives has too often been misaligned with the needs of the public who fund and depend on these services.”

The report added that government must guard against quasi-monopoly suppliers becoming too important to fail, and encourage competition through splitting up contracts to encourage SMEs to bid for work.

It also said that the current approach to contracting by the government gives too much advantage to contractors. Open book accounting and published contracts should be the norm, it argues.

Hodge said: “Government needs to rebalance commercial relationships towards its own and the taxpayers’ interests - and avoid being locked into unreasonable costs and a victim of excessive profits."

The Cabinet Office said changes made to the government’s procurement and commercial management since May 2010 had brought savings of £5.4bn last year, but acknowledged that more needed to done.

“At the time of the last general election departments simply didn’t know how much business they did with strategic suppliers,” a spokesman said. “Despite our excellent progress over the past four years, we have long argued that there is more to do, including to strengthen transparency further and support SMEs.

“Public service providers should act with integrity and our action over the past year shows how seriously we take breaches of those high standards.”

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