speri.comment: the political economy blog

After Carillion: the function of procurement in public projects

The post-Carillion debates must consider the effectiveness of local authority procurement strategies

Jon Morris and Andrea Genovese, University of Sheffield Management School

Recent concerns over the financial health of Capita and the collapse of Carillion has called into question the effectiveness of procurement processes in government contracts aimed at delivering the lowest cost to the public sector. Our research on large scale projects called into question the received wisdom of cost savings by local authorities that can be achieved by forming long-term, large scale contracts with a small number of suppliers for a range of services at the expense of supporting small and medium sized enterprises in the local economy. Such research has resonance for the post-Carillion landscape in public-private partnerships. This has led to calls for the return of public sector contracts to ‘in-house’ provision.

The Big Energy Upgrade was a £7m European Regional Development Fund project that investigated schemes to improve the quality of housing stock between 2010 and 2013 across Yorkshire and the Humber. Our research from the project reveals the tensions between national and European regulations on public sector procurement through competitive tendering with the emphasis on lowest-cost tendering on the one hand, and the ability for local authorities to design tendering and procurement procedures that would facilitate the involvement of locally-based firms with objectives focused around improving the local economy on the other. The regime of austerity and funding cuts to local authorities, which according to the Institute for Fiscal Studies saw the Department for Communities and Local Government take a funding cut of 23.4% during the period 2010-2015 has further restricted the abilities for local authorities to draw up individually tailored projects. Local authorities have instead preferred to take a lower-cost, ‘off-the shelf’ approach and contract public sector projects to large companies who take on the administrative functions and who can undercut competitors due to economies of scale by using highly standardised materials, components and labour.

Whilst this type of arrangement reduces costs for local authorities, the loss of control over projects can lead to ‘project capture’ by the contractor firm. Local authorities lose influence over the selection of sub-contractors and material sourcing. This type of arrangement favours long-term partnerships and can lead to complacency as competitor firms become ‘frozen-out’. Excessive price competition can also lead to a compromise on quality particularly when local authorities continue to cut back on in-house staff with the expertise to co-ordinate and manage these projects as administrative functions become the responsibility of the contracted firm.  Our research revealed that variations of this type of arrangement were the most common in running energy efficiency projects. The UK Parliamentary Committee on Science and Technology has estimated that ‘for every £1 invested by the Government in domestic energy efficiency, GDP could be increased by £3.20 and tax take by £1.27.’ suggesting that ‘this would more effectively stimulate the economy than cutting VAT, reducing fuel duty or investing in capital infrastructure projects such as HS2 and Crossrail’. The size of the energy efficiency market is significant and contracts to complete this work needs better framing towards encouraging uptake from local providers, particularly in deprived areas. However, the drive towards lowest-cost contractors is leading to arrangements which do not fully take advantage of this economic benefit, concentrating resources in a smaller number of companies with narrower geographical operations. This is particularly troubling for efforts to close the north-south divide in England.

Councils with a strong desire to manage their project supply chains were able to arrange their retrofitting projects to facilitate the involvement of locally-based firms for both labour and materials. This required investment in procurement expertise and a large capital outlay on warehousing. By developing relationships with a number of local suppliers, the council were able to shift to an ‘on demand’ system for obtaining materials, and were able to diversify risk from a small number of large suppliers. Switching towards this type of procurement strategy would represent a large shift in the dominant practices employed by local authorities. The capital expenditure required to build facilities such as warehouses to store materials, and the in-house expertise to design adequate tenders for a large number of smaller suppliers would represent a reversal of the austerity agenda of the previous 8 years.

Whilst the Carillion episode has centred on the political arrangements at a national level, there is a need to consider the effectiveness of local authority procurement strategies. Further selection criteria should be placed on the quality of bids for public sector projects, in particular guarantees over the involvement of local businesses and the local society. Contracting smaller jobs would aid the responsiveness of local authorities to developments in their local areas and would reduce the risk of expensive re-negotiations of long-term contracts, such as those seen recently between Sheffield City Council and Veolia. Whilst this may raise costs in the short-term, we believe that long-term sustainability of these projects can be achieved but local authorities will require greater resource provision for capital expenditure and procurement expertise in order to realise them.

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