The NAO challenges government and its private sector contractors to work together more effectively in taxpayers’ interest and address the issues behind the current crisis of confidence in contracting out public services.

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In two reports published today: Managing government suppliers; and The role of major contractors in the delivery of public services – the National Audit Office has challenged government and its private sector suppliers to work together more effectively in the taxpayers’ interest and to address the issues behind the current lack of confidence in government’s use of contractors.

Contracting with third parties is an important element of public service delivery, but there is currently a lack of transparency over the role that contractors play, the business that they do, the rewards that they make and the way that they perform. The NAO’s two memorandums cast light on some of the features of government contracting and the way the Cabinet Office is working to improve government’s management of strategic suppliers.

In the memorandum The role of major contractors in the delivery of public services the NAO sets out some of the benefits that can be achieved through contracting but highlights three issues that deserve greater public scrutiny.

First, it raises questions about the way public service markets operate. This includes the need for scrutiny over whether public service contracts are sufficiently competitive and whether the rise of a few major contractors is in the public interest.

Secondly, it highlights the issue of whether contractors’ profits reflect a fair return. Understanding contractors’ profits is important to ensure that their interests are aligned properly with that of the taxpayer. But transparency over rewards that contractors make is at present limited.

Thirdly, the report asks how we know that contractors are delivering services to the high standards expected. In particular, government needs to ensure that large companies with sprawling structures are not paying ‘lip-service’ to control and that they have the right culture and control environment across their group. This requires transparency over contractors’ performance and the use of contractual entitlement to information, audit and inspection. This should be backed up by the threat of financial penalties and being barred from future competitions if things are found to be wrong. We therefore welcome the strong response by the Cabinet Office and Ministry of Justice once contracting issues were uncovered with the electronic monitoring contract.

In the associated memorandum Managing government suppliers, the spending watchdog welcomes the fact that the Cabinet Office is now asserting government’s position with contractors in way that its scale as a customer merits. Specifically, this has enabled government to get greater value from contracting and has sent signals that government is willing to be tough on underperformance. However, the Cabinet Office still faces a number of challenges in developing a more mature approach.

The Cabinet Office is currently focused on short-term savings and has adopted a robust approach with departments and suppliers, which has enabled it to report significant savings from contract renegotiations. However, this approach will become harder over time, and risks missing out on achieving longer-term value for money through innovation and investment. There is a balance to be struck between tough negotiations and maintaining relationship with suppliers in the long term, if government is to maintain competition in public sector markets.

The Cabinet Office is seeking to reform commercial practice across Government with the development of the Crown Commercial Service. There is a risk that the Cabinet Office’s ambitions are not matched by the right resources, capability and information. It has gaps in commercial experience and expertise below senior levels, while its information on its 40 strategic suppliers is inconsistent and incomplete.

“Contracting with private sector providers is a fast-growing and important part of delivering public services.  But there is a crisis of confidence at present, caused by some worrying examples of contractors not appearing to treat the public sector fairly, and of departments themselves not being on top of things. While some government departments have been admirably quick off the mark and transparent in investigating problems, there is a clear need to reset the ground rules for both contractors and their departmental customers.”

Amyas Morse, head of the National Audit Office

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