by Robert Henderson
Note: In 1989, I attended a meeting addressed by Teresa Gorman. To an audience of rapturous Tory boys she explained how the contracting out of local government services would bring on some kind of libertarian nirvana. All I saw was opportunities for fraud and corruption. The question I asked was slapped down and followed by funny looks. There are two ways of providing goods and services to the public. One is by leaving the whole demand and supply to the people. The other is by turning supply into a duty of the State. The first is generally better. However, given strict cash management, and some degree of public spirit, the second can be both cheap and efficient. The mixed provision we have had since the 1980s inevitably leads to corruption and low standards. I’ve been asking for years where the money goes. Robert may be on to something in his last paragraphs. SIG
Futher Note: Robert has asked me to replace the original version of this article with a corrected and updated version.
How much public money is being stolen
and wasted because of the privatisation
When the opportunity came for questions I raised the matter of increasing corruption in the spending of public money. This is a consequence of taxpayers’ money going to private contractors at an ever more alarming rate as the mania for putting out public services to private companies and not-for-profit organisations such as charities continues unabated, despite the ample evidence that contracting-out is generally very poor value for the taxpayer. My argument was simple: the greater the number of public contracts being put out to tender by commercial businesses and not-for-profit organisations, the greater the opportunities for corruption by either public employees and contractors colluding or contractors fixing things amongst themselves. Human nature being what it is, greater opportunities for fraud inevitably means greater instances of fraud.
Heseltine reacted with considerable vehemence to my suggestion that serious corruption might exist in public service saying that he “took great exception” to the idea. His denial rang hollow because sadly there is a constant flow of publicly reported frauds by those receiving public money. Here are a few recent examples of alleged frauds:
I can give two examples of questionable public contracts involving a great deal of money which I personally tried unsuccessfully to bring to public notice. Both involved Camden Council, the London borough in which I live. The first occurred in 2003 when the Council announced that they were to replace 14,000 kitchens and bathrooms in their council housing stock. In response to a question I put to him at a public meeting Neil Litherland, the then director of Housing in Camden , quoted me £6,000 for each room (£12,000 for a kitchen and bathroom combined). The bathroom and kitchen units Camden proposed to fit were pretty basic. The total cost at that price was £168 million (at 2003 prices). This struck me as outlandishly expensive, so I went to a local high street fitted furniture retailer to get a quote.
At the retailer I selected units of the same quality as those proposed by the Council and was quoted £1,500 for each room, including the installation of the kitchen and bathroom units. That was for a single retail sale. A contract for 14,000 properties should result in a very substantial discount below a retail sale, but even at the retail price quoted the contract would have been a quarter of the Camden quoted figure.
When I made my complaint to Camden, I doubled the £1,500 quoted by the retailer because Camden were doing other renovation work such as re-wiring and laying new vinyl on the floors in the kitchens and bathrooms as well as fitting the new kitchen units and bathroom suites. The extra £1,500 per room for this renovation work was almost certainly far too much, but even at £3,000 per room Camden would have been halved their actual bill saving £84 million.
A disinterested person reading that account might think the local politicians and the MP for area would have been biting my hand off to take up the case and stop the grossly overpriced contract going through. I could not find a single politician to take up the matter. Nor could I get even the local papers to investigate the matter.
The second case involved what is now known as the Francis Crick Institute. (http://ukcmri.wordpress.com/2012/11/11/links-to-all-ukcrmi-blog-posts/
). This is a gigantic medical research laboratory currently being constructed on land behind the British Library. The site is a road’s width from the Eurostar terminus. There are excellent grounds for opposing the building of such a laboratory because it will be dealing with level 4 (the highest biohazard level) toxins. This poses a risk of dangerous materials being released (through a terrorist attack or carelessness) into an area which is both heavily residential and arguably the busiest transport hub in London. However, that is not the important thing in the context of corruption.
In an attempt to stop the building of the laboratory I used the Freedom of Information Act (FOIA) to gain details of the sale of the land on which the laboratory is being built. The land belonged to the taxpayer and was under the stewardship of the Department of Culture, Media and Sport (DCMS). Thesite was put out to competitive tender and a good deal of interest was shown (27 bids, including the likes of Barratt Homes and Oracle Group – http://ukcmri.wordpress.com/2011/02/11/the-full-list-of-bidders/
). The decision was solely in the hands of the Secretary of State for the DCMS who was exercising a quasi-judicial role in the matter. Despite this, documents I obtained using the FOIA unambiguously show Gordon Brown when PM illegally interfering with the bidding process from before the closing date for bids and carrying on interfering until the sale was complete (http://ukcmri.wordpress.com/2011/02/21/gordon-browns-involvement-in-the-sale-of-the-land-to-ukcrmi/
). Here is an example extract from a Treasury document dated 1 August 2007:
The PM is also most recently stated that he is very keen to make sure that Government departments are properly coordinated on this project [the laboratory] and that if there is a consensus that this is indeed an exciting project then we do what we can to make it happen. This is extremely helpful from a DIUS and MRC perspective, but, formally a NIMR relocation project in London has yet to receive Lyons approval from Treasury (for either the first planned NTH site or the possible BL site).
This was before the initial bidding process was closed. The process was a sham, the other bidders having bid with no prospect of success. Brown should not have interfered at all, even to say whether he thought X or Y was or was not a promising project, but here he is issuing a direct instruction to favour the laboratory consortium by getting all the government departments with some future or immediate interest in the laboratory to put their weight behind it. (When a Prime Minister says he is “very keen” on something that is an order to move heaven and earth to achieve it).
As with the Camden contract for kitchens and bathrooms I was unable to get any politician, local or national, to take up the matter. Every Camden councillor and the local Labour MP Frank Dobson had the information but refused to act. Camden granted planning permission in principle, but this had to be agreed by Boris Johnson in his role of Mayor of London because the Institute building is over the height which can be sanctioned by a London council. Johnson granted permission despite having the details of the corrupted bidding process (http://ukcmri.wordpress.com/2011/01/14/notification-of-planning-irregularities-to-boris-johnson/
) and refused to comment on Brown’s illegal involvement in the decision. Equally telling in this case was the failure of the national media to take up the story despite Gordon Brown’s involvement. The nearest I came to getting the story up and running in the media was a single short piece in the London Evening Standard (http://www.standard.co.uk/news/no-10-interfered-to-push-through-600m-plan-for-virus-superlab-6557759.html
The nature of public fraud
Much, probably the large majority, of the fraud consists of inflating contracts. This can be done with or without the collusion of public servants and politicians. Collusion between contractors, public servants and politicians speaks for itself. Fraud without public servants or politicians being involved is more complicated. It requires a conspiracy by a number of contractors to fix a bidding process. The larger the contract or the more specialised the work to be done, the more likely a bidding process can be fixed, because often there are only a handful of bidders capable of taking the contract on. This leads to corrupt agreements between the companies to share out public contracts between themselves at inflated prices. This is done by the bidders putting in bids to a supposedly competitive bidding process structured so that the company who is to take the contract puts in the lowest priced bid. However, this lowest bid is much higher than it should be if it was pitched simply at a level to guarantee a level of quality and provide a reasonable profit for the successful bidder.
Where public servants and/or politicians agree to accept an overpriced contract they may be bribed either directly or indirectly. A favourite indirect method is not to pay the politician or public servant at the time of the fraud but later with lucrative sinecures after they have left office .
The current rules regarding ministers and public servants taking posts in private industry are so lax as to be next to meaningless – they can take up posts after a year or two, regardless of how closely the private sector job is linked to their previous post. A recent eye-catching example was that of Dave Hartnett who has just taken up a post with the accountants Deloittes. . The Telegraph Daily telegraph recently reported “Until last year, Mr Hartnett headed operations at HM Revenue and Customs. His new role will involve him working one day a week at Deloitte, which acts as auditor for companies – including Starbucks – which have been accused of using legal loopholes to avoid paying tax.” (http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10083254/Former-Revenue-boss-lands-tax-advice-job-at-Deloitte.html
). I am not suggesting there is corruption in this case, but is it really acceptable to have such a senior and important public servant turning from gamekeeper to poacher so rapidly? Like Caesar’s wife, politicians and public servants should be above suspicion.
Waste through incompetence and lack of alternatives
Some of the fraud will be accomplished because the public servant or politicians involved in making contract decisions are simply not up to the job of judging what is a reasonable price for the work being put out to contract. This is a common enough state of affairs because public servants often find themselves asked to negotiate contracts even though they have no experience of doing so because work which has always been done by direct public labour is suddenly subcontracted to the private sector. To cover their ignorance the public servant will often judge bids not on their objective merits, but on who is the cheapest within the criteria set for a contract. Whether the bid is a reasonable price for the work done is ignored. This has a knock on effect, not least because of the widespread lack of honest competition in bidding. Those accepting bids will justify their acceptance by referring to other contracts for similar work. Because of this inflated prices become the norm. The politicians who have to make the final decisions on the contracts are as ignorant as the public servants who negotiate the contracts and simply take what is put before them in the vast majority of cases.
But even where politicians or public servants do realise a price is too high, they can be in a very difficult position which makes them accept the price quoted. The problem is that if they refuse all the bidders for a contract on the grounds of cost , then how is the work to be done? They cannot go elsewhere often enough because there is no public organisation which could do the job rather than a private company or not-for-profit institution. This is a particular danger with really large or specialised contracts which can only be undertaken by a few companies. An inflated price may have to be paid by the taxpayer because there is no longer a public sector alternative.
How much money is being lost?
Total UK Government expenditure for 2014 is £715.3 billion (http://www.ukpublicspending.co.uk/total_spending_2014UKbn
). However, that does not include all of the Public Private Initiative (PFI) liabilities because Governments want to keep the full PFI/PPP indebtedness off the official national debt. A report by the Office for Budget Responsibility in August 2011 notes that many PFI deals are not recognised in the National Accounts.:
“ As well as lacking transparency, this has fuelled a perception that PFI has been used as a way to hold down official estimates of public sector indebtedness for a given amount of overall capital spending, rather than to achieve value for money.
The report details the scale of the problem noting that “at March 2010, PSND [Public Sector Net Debt] included about £5.1 billion (0.4 percent of GDP) in respect of PFI deals that were recorded as on balance sheet in the National Accounts.” However the OBR considered that “the total capital liability of on and off balance sheet PFI contracts was closer to £40 billion (2.9 per cent of GDP).” They estimate therefore that if PFI contracts were all recognised as debt in the National Accounts this would increase the level of debt by around 2.5% of GDP.”
It is clear that a substantial figure should be added to the headline £715.3 billion to account for the full PFI liability for 2014.
In the nature of things it is impossible to say exactly how much of taxpayers’ money will have been spent on overpriced contracts. However, the examples which are public knowledge suggest that it must be very considerable, because so much of what used to be done in-house by the British state, at both national and local level, is now put out to contract.
Take the NHS as an example. If you spend time as an in-patient in the present day NHS you are likely to find that the cleaning, laundry, catering and provision of multimedia installations are contracted out. The NHS will also spend immense amounts on equipment which will be supplied by a private contractor. Staff will often be recruited by a private agency for a hospital. If they need temporary doctors and nurses they will pay a private agency. The hospital may well have a Starbucks or a Costa Coffee instead of an in-house café for visitors. There is fair chance that hospital car park will be run by a private company. Most expensively, if the hospital is recently built it will almost certainly be the subject of a PFI contract which stretches way into the future (twenty years or more). This, and apart from costing the hospital a good deal of money to pay for the building, will almost certainly entail a costly management contract to run and maintain the building. This means in practice no one will be in definite overall charge, because if something goes wrong with the building the contractor has to be left to undertake the maintenance as they see fit
The NHS is one of the most comprehensive examples of contracting out. But most government departments and much of local government displays the same tendency. Schools and universities are within the contracting out net. Defence procurement is depends very largely on private contractors, foreign and British. Police forces around the country have either privatised much of their administration or are thinking of doing so. Even the translation service used by the courts has been put out to a private contractor (with disastrous consequences). Local government services such as waste collection and disposal and street cleaning are frequently in the hands of contractors. The most disturbing and absurd example I have come across is the privatising of the quasi-judicial District Auditor post which oversees local government and deals with complaints about their financial probity(“ Following the outsourcing of the Commission’s in-house Audit Practice, all auditor appointments are of private firms “ http://www.audit-commission.gov.uk/audit-regime/appointing-auditors/
If only ten per cent official Government expenditure is creamed off by fraud, that would mean £71 billion of taxpayers’ money will be lost this financial year. That is more than half the current government deficit. But the figure could well be much more because of the omitted PFI costs and the incentive of contractors to be as greedy as they can get away with. Putting on twenty or thirty per cent to charges for supplying goods and services to central and local government might seem reasonable if you are the supplier and have good reason to believe prices are likely to be accepted even if they are high. If the Telegraph reports of the grossly inflated prices charged through collusion by pharmacists and drug companies are to be believed, the sky is the limit in the right circumstances for ramping up prices.
Why do politicians do nothing?
It is little wonder that politicians in Britain are so willing to tolerate corruption because so many of them are happy to have their snouts in the public trough themselves in illegitimate ways. The information published by the Daily Telegraph on MPs expenses in 2009 was sufficient to show that the majority of MPs were engaging in expense claims which should never have been counted as legitimate expenses by Her Majesty’s Revenue and Customs (HMRC) in normal circumstances . This was because they did not meet the HMRC test of being expenses “ wholly, exclusively and necessarily “ incurred in the performance of a job. Very few MPs faced criminal charges even though quite a few repaid money they had claimed. Nor does the public know how many of the MPs faced fresh assessments by HMRC or the penalties if any HMRC imposed.
Two criminal offences are committed by those who evade tax by illegitimately describing expenditure they have incurred as tax deductible expenses. That counts as a false declaration. They are effectively claiming money by false pretences. A second criminal offence arises if the bogus expense claim is made without an employer knowing that it is bogus (effectively theft from the employer) or a business which is paying a sub-contractor expenses as part of the contractual arrangement and the business does not know the claim is bogus (effectively theft from the employing business).
How things used to be
Until fairly recently the British Civil Service was remarkably free from corruption (local government is a different matter), a fact made all the more surprising because of the truly colossal amount of money Government disposes of each year . There were two reasons for this. The first was the hard-won tradition of public service which in which the Civil Service is an apolitical institution and as such serves no political ideology or party but provides politicians of all stamps with disinterested advice and executes their policies. This tradition has been underpinned by the lifelong working careers which public servants, especially senior ones, have commonly had. Of course, that was merely the ideal and, as with any human institution, the reality fell some way short of the ideal. Nonetheless, such sentiments and conventions have in the past affected the behaviour of public servants for the better, especially in the area of honesty. Sadly, the public service ethos has been largely lost because of the constant upheaval in terms of employment, the loss of career security and thirty years of politicians and much of the mainstream media reciting the false mantra that private is good, public is bad.
The second reason for a lack of corruption was the direct provision of most the services provided by central government. This meant that the number of large central government contracts offered to private business was small in relation to the money spent on the direct provision of public service in all its aspects. In such circumstances serious fraud becomes difficult going on impossible for most civil servants because they do not have access to large amounts of taxpayers’ money. (Where they do have access, for example in the Inland Revenue, in most instances there are strict accounting procedures which make the embezzlement of large amounts of cash extremely difficult). Moreover, where there are few government contracts, most civil servants are not in a position where someone would find it fruitful to bribe them because they have nothing to sell. Unsurprisingly, where serious corruption amongst public servants employed by central government has occurred in the past, it has been overwhelmingly in those areas where large government contracts exist, most notably in Defence Procurement and building contracts. It is a reasonable assumption that the more public contracts offered to private companies, the greater the corruption will be simply because the opportunity for corruption increases.
It would be impossible to reinstate the public service ethos quickly, but taking work back into the public service fold would have an effect on fraud and waste through incompetence. It would definitely reduce fraud and should allow costs to be controlled because it would be the public sector setting the prices for the work.
The cruel truth is that the £715 billion of government expenditure in the present financial year is almost double what it would be if the UK had maintained public expenditure at 1980 levels in terms of the real value of the Pound. If the true PFI/PPP figure for 2014 was included it might be double. The huge increase since 1980 is very interesting because in 1980 the UK not only had a serious unemployment problem, but owned vast swathes of British industry, everything from British Leyland and coal mining to the public utilities and , believe it or not younger readers, a national bus network which meant that to live in the country did not mean you had to run a car. 1980s UK also had armed forces which were considerably larger than they are now and the putting out to private contractors of public sector work in national government and council services was rare except in areas such as road building and defence procurement. For example, local councils only routinely employed direct labour on items such as road maintenance and cleaning. In addition much of private business then was, we were constantly told, supposedly hideously uncompetitive . Yet despite these alleged crippling disadvantages, the British government in 1980 was able to maintain a level of public services better and more comprehensive than that we have today whilst spending, in real terms, little more than half of what government spends today.
Why has British government spending rocketed? It is reasonable to put forward as the primary culprit the mania for privatising everything . These things have not been understood by the privatisers:
1. The public service ethos did exist and was most valuable in maintaining standards, continuity and honesty within public provision.
2. Multiplying the opportunities for fraud results inevitably results in more fraud.
3. That public services cannot be run on commercial lines because public provision is normally universal provision. Unlike a private company losing business, a public service provider such as the NHS cannot turn round and say we will not treat these patients because we need to cut costs.
4. For public services to run properly those in charge of them need to be focused not on the bottom line but on the provision of the service.
5. Once a public service has been contracted out to a private provider, the private provider has the government over a barrel because there is no alternative to a private provider once the public service option has been done away with.
6. That public employment gave those so employed secure lives and indirectly increased the sense of security in those employed by outside of public service because having a substantial proportion in secure jobs in itself made society more stable and certain.
7. That public money is a recycling of money and however it is recycled it has a value because its spending supports local economies, many of which are depressed and heavily reliant on public sector workers’ spending.
8. That public expenditure has increased steadily during the privatising of public service activities.