All Government Contracts Should Go to Companies Focused on Social Impact

The title is overstated, but there are strong arguments why most contracts ought to be awarded preferentially to bidders who operate primarily for social impact (PSIs).  Jon Cruddas, who is helping write Labour’s Election Manifesto, is to make this point in an upcoming book, reported on by The Telegraph entitled ‘The Common Good in an Age of Austerity’.  This position is based on a hard-edged, practical position that puts taxpayers first.

Governments have a depressingly poor track record in negotiating with purely for profit companies (PFPs).  The Private Finance Initiative (PFI), which brought commercial capital into public services, has been widely judged a disaster, with profit transferred to the private sector, but risk retained by the state.  From aircraft carriers to databases government negotiators have failed to impress.

The most recent scandal involved £16.6bn of bids for alternative energy provision.  Recently, the Guardian quoted Margaret Hodge, Chair of the Public Accounts Committee, in saying, “Yet again, the consumer has been left to pick up the bill for poorly conceived and managed contracts”.  This is similar to a previous report by this committee which was highly critical of G4S, Atos, Serco and Capita.  Serco and G4S were also the subject of an investigation by the Serious Fraud Office.

But let’s not unfairly demonise PFPs.  They have a legal responsibility to act in shareholders’ interests and to maximise profits. In negotiating with governments, PFPs structure contracts to their advantage – they have no legal obligation to act otherwise. We shouldn’t be surprised by this – it’s perverse to expect otherwise! It’s even more perverse that despite this PFPs are awarded nearly all contracts.

Why not award most contracts to PSIs?  Their raison d’etre is about social impact – and their constitutional documents reinforce this. Their approach is not about maximising profit, but about charging fairly and looking after beneficiaries.  Often they are innovative in their approach and genuinely care about the outcomes they achieve—their key stakeholders are beneficiaries, not shareholders.

If contracts with PSIs were priced too low, the taxpayer would get good value for money and PSIs gain painful lessons.  If too high, then PSI’s extra surpluses grow enabling more social impact – again the taxpayer wins.  Given this win-win “game” it’s astonishing PSIs don’t win all contracts.

One issue is scale.  There is no denying that private sector providers are larger.  Commissioners must be able to establish that PSIs can do the work – but this should be the only test. Instead, civil servants put in place pointless hurdles that have the effect of eliminating PSIs from the competition.

This was evident in the MoJ’s recent initiative-turned-fiasco “Transforming Rehabilitation”.  PSIs were told they could play a large role in the programme and the impact investment sector, led by Big Society Capital, helped some PSI-led consortia to qualify despite the unfairly tilted playing field.  Some well-run and large PSIs were involved such as Catch 22, Turning Point and Changing Lives.   In the end, all the contracts are led by PFPs, although some PSI “bid candy” also featured.  This was cynical and Chris Grayling and the MoJ were rightly excoriated by Antony Hilton.

A key issue was the need for parent company guarantees to ensure contract fulfilment, and the sums involved (£13-£74 million) meant few PSIs qualified.  But let’s unpack this criteria.  The parent companies that offered such guarantees are lowly rated – in each case far lower than RBS before the crisis began, leading to a state rescue.  How good a “guarantee” is this really? And SEUK research on PSIs found they are actually less likely to go under than private firms over the past 30 years.  People tend to value what PSIs do and work to rescue them if they encounter difficulties – would G4S be protected in a similar way if it encountered difficulties?

The lobbying efforts of large companies help put in place criteria that made bid processes complex which they then have an advantage in winning.  Don’t taxpayers’ interests demand we take the benefits PSIs offer into account? The Social Value Act was meant to help ensure this—it doesn’t.

Government ministers and civil servants are either lazy, illogical or excessively influenced by business, not to weight these factors more heavily in favour of PSIs—let us hope it is laziness, which can be most easily addressed.

First published on Pioneers Post in February 2015.

Leave a Reply

Your email address will not be published. Required fields are marked *