Public procurement has lost its way: PFI has not only left the public sector out of pocket but stripped it of the expertise needed to be an effective client
PFI rip offs, Grenfell and now Carillion: why is the public sector so full of management and procurement disasters?
The answer may perhaps lie in George Bernard Shaw’s 1906 play The Doctor’s Dilemma, in which the professions are described as “conspiracies against the laity” – the laity being ordinary laymen. Successive governments have placed their faith not in professional advisers to execute their projects, but in “big business”. Margaret Thatcher, high priestess of the market and its big businesses, started this in the 1980s when she stripped all the professions out of central and local government offices, kick-starting the outsourcing trend to the delight of companies such as the ill-fated Carillion.
What the government really wanted was not private finance […] but the maximum transfer of risk and management to the private sector, with a minimum of [public] involvement
PFI was dreamt up by some management consultant on secondment to the Treasury who seems to have had little understanding of the building industry. But it held sway
The Public Services Agency (PSA), home of government construction expertise, was disbanded in the 1990s. The government was so desperate to get rid of it that it paid – yes, paid – Tarmac Construction £49m to take over its projects group. In 1999 Tarmac’s construction and professional services group renamed itself Carillion.
The outsourcing movement went way too far, and the public sector was left without enough knowledgeable staff in-house to enable it to control the outsourcing it was condemned to implement.
The Blair/Brown Labour government followed where the Tories led. Its Private Finance Initiative became the monoculture for public procurement. PFI was dreamt up by some management consultant on secondment to the Treasury who seems to have had little understanding of the building industry. But it held sway: if the PFI option did not beat the traditional procurement alternative in a comparison, the project would not go ahead.
PFI was a fiddle and a misnomer. Fiddle because initially the PFI payments could be kept off the public sector borrowing requirement (PSBR), which was capped by the EU. Misnomer because what the government really wanted was not private finance – the government can raise finance cheaper than anybody, through gilts – but the maximum transfer of risk and management to the private sector, with a minimum of involvement from public servants.
Let’s go back to having significant professional expertise in our public bodies who can act as really intelligent clients […] No more feeding projects blindly to failing suppliers
So a basic “output” specification was put forward to which a PFI consortium would have to deliver often very complex big buildings. PFI evangelists thought they would transform design and build contractors into sophisticated industries like those in the car or aviation sectors, with their customer service and brand values underpinned by great design and quality products. Fat chance: the public sector was stitched up into long, expensive, inflexible contracts unsuited to the changing demands of hospitals and the like.
And as soon as they could, the providers refinanced their loans taking advantage of new, super-low interest rates and pocketing hundreds of millions in windfall profits. We are left with £222bn of debt for only £56bn in assets – a catastrophically bad deal.
The eventual Carillion collapse, with £1.5bn in debts and 20,000 UK staff, is the other face of this coin. I’m not sure we know exactly what went wrong, but a perfect storm of alleged Middle East slow payers, UK complex hospital project delays, rising costs on fixed-price contracts and a £600m pension fund hole all appear to be somewhere in the mix of mismanagement. The result is the public purse having to bail out Carillion’s many public projects with new teams on new contracts at new prices.
The common issue here is the relationship between the public sector as client and private sector suppliers, and the subsequent nature of the projects they set up. I am a strong believer that the public sector should look to the private sector to see how they behave as clients.
My private sector clients have no PFI contracts or long-term outsourcing deals. They tend to have great construction professionals in-house to interface with the management teams they assemble to procure the design and construction of their projects. Architects are highly managed but we have direct access to the user clients. A construction procurement route is selected as appropriate depending on the project’s demands of quality, speed and risk transfer. It’s not a monoculture of any contract type. Integrated teams for complex projects are common, but not always D&B. Construction management is making a comeback and two-stage tendering is very common. Term or framework contracts are often set up to minimise procurement costs or delays and to create in-depth knowledge of the client’s needs. These are normally for only five or so years and give the client great control and flexibility. There is constant overview of the suppliers work – it’s not “transfer the risk and walk away”.
Let’s go back to having significant professional expertise in our public bodies who can act as really intelligent clients, having a close but critical relationship with the construction industry and its suppliers. No more PFI and no more feeding projects blindly to failing suppliers.
Jack Pringle is regional director EMEA at Perkins+Will