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HS2 Construction Starts – The Money Pit Gets Deeper

Construction of the HS2 high-speed railway network in England started formally last week. Some will be cheering – not me. At a time when working patterns have been changed because of Covid, perhaps for ever, and everyone is getting used to Zoom, Teams and the like, it seems crazy to be building new rail capacity so businesspeople can go to meetings. Other possibilities such as autonomous road vehicles make also make this very much a 20th century option.

HS2 is basically a job creation scheme, but an incredibly expensive one. The projected cost was initially £1-36 billion, but we’re now looking at £106 billion, incredibly.  The National Audit Office (NAO) report in January said this in summary. “In not fully and openly recognising the programme’s risks from the outset, the Department and HS2 Ltd have not adequately managed the risks to value for money”.

Does anyone really think that those “risks to value for money” will be achieved through the rest of the programme? Look at Crossrail, where the project is now three and a half years (at least) behind schedule, and the cost has risen to at least £19 Billion, some £5 billion over budget.

The business case for HS2 was always highly questionable. It relied on ascribing a value to the extra 20 minutes or so the passengers would have because of their somewhat faster journey from London to Birmingham. It assumed that the journey time was “wasted” from a benefit point of view, which is clearly not true (have they never heard of smartphones or laptops?), and also assumed that passengers wouldn’t use the extra 20 minutes by staying in bed a little longer!

This is an example of a vanity-driven Bad Buying project, and there are others described in my new book, Bad Buying – How organizations waste billions through failures, frauds and f*ck-ups,  published by Penguin on October 8th (you can pre-order it here). Politicians love to spend money in a way that they feel will provide them a “legacy”, assuming that posterity will thank them for their initiative and forget the huge waste of taxpayers’ money once a few years go by.

Another problem with huge programmes of this nature is the lack of anyone in a controlling position who has a vested interest in really managing costs. The engineering and construction firms are probably smart enough to avoid signing up to onerous fixed price deals, so they would like the construction to go on for ever. Likewise the well paid HS2 staff, including thousands of “contingent labour” workers (including procurement people) no doubt earning a very good day rate. The longer the better for them.

We might assume that the politicians have an interest in managing costs, but the problem here is both the relative timescales and the asymmetry of information. Even the Transport Minister has no idea whether they are being spun a line by the experts who are closely involved in the programme. And most Ministers last less than 3 years in post so they know that they probably won’t be around themselves to carry the can – and later Ministers can blame their predecessor! So who really represents the interests of the poor old taxpayer in this? NAO perhaps, but their reports, although excellent, tend to be put together well after the event.

The only positive I can see is that if I do write a sequel to Bad Buying, I’m sure HS2 will give me some good stories. But I’m not sure that offsets the likely spending of £5,000 for EVERY family in the UK, to build what may well become a major white elephant.

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Care Homes in the UK and Beyond – Bad Buying by Omission

One of the first disasters of the current Covid crisis in the UK was the transfer of thousands of people out of hospitals into nursing and care homes, without checks as to whether they had the virus. That put the focus again on the social care sector, and although most of the staff in homes have conducted themselves with great dedication and bravery since then, many issues remain.

I wrote an article on the topic some 5 years ago – here is an excerpt.

What market presents the biggest single challenge in public sector procurement? It has to be Social Care. A spend category worth some £20 billion a year in terms of local authority third-party spend. A category almost totally outsourced now, where funding is being cut by local authorities as their grants from central government are slashed. That is causing a reduction in supply, which in turn is driving severe problems for the NHS as record numbers of ”bed-blockers” are stuck in hospitals because of the lack of a social care-supported  alternative at home. A market where major providers have gone bust and more are teetering on the brink, with the vultures of private equity waiting in the wings.

Since then , we’ve seen more major providers going bust, and yes, the private equity firms have moved into the sector. Many homes rip off their privately paying residents, charging them far more than they charge those funded by councils who use their negotiating power to beat down prices. Meanwhile, too many staff are badly paid, staff turnover is high, and the quality of care is variable.

But these issues are not restricted to just the UK. In the Observer yesterday, Will Hutton wrote about the private equity sector in general and the care home issue in particular. He described the tragic death in a home in Spain of an 84 year old man, Zoilo Patiño, whose body was found in a locked room 24 hours after he died.

“The subsequent investigation into the management company – DomusVi, which had been contracted to operate the home – showed it had been stripped down to a “fast-food version” of healthcare by years of cuts: there was only one care worker for every 10 residents, with not even the PPE to help cope with a dead body”.

But DomusVi, Spain’s largest care home operator, is actually owned by ICG, a British private equity company. As is usually the way with private equity, the company was refinanced and is loaded up with debt – that leverage being one key way in which private equity makes its money. Stripping out costs, or “increasing efficiency” if we’re being kind, is another route often followed. For instance, Hutton claims that Care UK, backed by Bridgepoint private equity, has reduced staff numbers by a third while doubling the number of beds provided in the homes it operates.

Social care services, including care and nursing home provision, are bought by dozens of local authorities around the UK.  Many do a good job in a difficult situation, but this is a spend category that really cries out for some serious national thinking and strategy. We need to ask whether this is a suitable sector for private equity investment; whether there should be more scrutiny of the financial state of providers; what minimum standards might be imposed; and perhaps how to encourage more local, third sector and diverse suppliers into the market – as well as sorting out the funding of care, which is an issue that goes well beyond procurement.  

But the UK central government has never shown any appetite for this sort of involvement on the procurement front. This is in effect, national “Bad Buying” by omission. Whilst over the years, huge amounts of effort, skill and money have been spent putting together strategies and collaborative approaches to buying stationery (!), energy, cars or laptops, OGC, CCS, YPO and all the other collaborative bodies have shied away from social care, as have the strategists in Cabinet Office, the Department for Local Government (whatever it is called this week) or Treasury. 

Perhaps the promise of a new approach to social care funding will provoke some serious action on the procurement and market side as well. We can only hope so.

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Fraud, Charities and Steve Bannon – Where’s the Money Going?

The arrest of Steve Bannon, President’s Trump ex-adviser, hit the headlines this week. Along with several other men, he is accused of siphoning off funds that were given to a charity which sought private donations to support the building of the Trump-promoted wall (fence, barrier, whatever) between Mexico and the USA.

Without getting into the mentality of the donors who would give their hard-earned cash for that cause, the case does point out the difficulties of knowing exactly where you money is going when you had it over to any charity.  There have been many examples over the years of charities that do genuinely support good causes, but appear to be just as interested in spending money on fancy offices and big salaries for executives.

Even an organisation as reputable as the Australian Red Cross ran into controversy recently when it had to defend its decision to spend up to 10% of bushfire relief donations on administration costs. That doesn’t seem too unreasonable to me, but in the past, it had promised to put 100% of all money raised directly to a cause.

Then there are the actual fraudulent “charities” that act as a front for criminal activities. For instance, four men were found guilty recently of fraud in the UK when they expropriated over £500K of donated money rather than using it for genuine purposes.  Collectors in camouflage trousers and “Save Our Soldiers” shirts rattled collection tins and conned people at railway stations into thinking they were giving to support disabled troops. But the  money went to fund the lifestyles of David Papagavriel, Terence Kelly,  Ian Ellis and Peter Ellis. That’s the reason I never put money in collecting tins if I don’t know the charity, by the way, even if it looks like a great cause.

The third type of charity-related fraud comes when a charity itself is the victim. Every organisation that sees large amounts of money flowing through it can be a target for what I define as “procurement related fraud”, and charities are no exception. There are some interesting examples of this in my new book, Bad Buying – How organisations waste billions through failures, frauds and f*ck-ups (to be published by Penguin Business on October 8th).

The fraud may originate from outside the organisation, but often there are insiders involved, or in some cases it can be a purely internal affair. For example, one story in my book covers the exploits of the CEO of an education charity, Philip Bujak. He was sentenced to six years in jail in 2018 at Southwark Crown Court in London for swindling some £180,000 out of his organisation. Using a company credit card, false invoices to Fake “suppliers” and other routes he got the charity to fund his honeymoon, and family events at hotels. One bill for a “charity conference” was really his mother’s 80th birthday party, and he was also keen on buying and restoring paintings.

So don’t think that everyone who works within a charity is automatically a good person. There can be the odd bad apple, which means that charities (like every other organisation) need to take strong anti-fraud measures to protect against internal or external villains. I haven’t got the space here to go through all those suggested steps, but my book goes into that in more detail, with seven key principles to avoid buying-related fraud and corruption listed and explained.  And we will come back to those here at a later date as well.

Meanwhile we will watch the Bannon case with interest …

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Ayanda Capital Facemasks Contract – Were Basic Procurement Principles Forgotten?

It is a while since I wrote about the PPE (personal protective equipment) process in the UK government and health sector, but the stories continue to emerge and some are troubling to say the least.

The case of the contract with Ayanda Capital to supply face masks is one that continues to develop. Andrew Mills was the CEO of Virtualstock (a supply chain software firm) until 2018 but has acted as an unpaid government adviser since then. He secured production capacity for masks from a Chinese factory, but asked Ayanda Capital Ltd (an investment firm, registered in Mauritius but based in London) to “front” the proposal and then contract with government, as Ayanda had more experience in handling foreign payments.

The contract is worth at least £150 million, but now product has been delivered, fifty million masks can’t be used in hospitals because of safety fears. The masks use ear-loop fastenings rather than head loops, which means they may not fit tightly enough to be effective.

So did Ayanda fail to meet the specification? In normal cases, a product that does not meet the specification simply means that the supplier does not get paid.  No, says the firm, it’s not our fault.

“The masks supplied went through a rigorous technical assurance programme and met all the requirements of the technical specifications which were made available online through the government’s portal,” they say. If true, that suggests the technical specification given to suppliers was simply incorrect.

But why is the government not challenging this? We can only draw two possible conclusions.

  1. Ayanda is correct. The specification was wrong and the error was the fault of the government procurement team.
  2. The government wants Ayanda to have the money even if they have failed in some way – for whatever reason, maybe to avoid more embarrassing debate – and simply wants to ignore the apparent specification problem.

The Good Law Project is challenging the government through the courts on this and some other questionable contracts that have been let during the crisis.  Jo Maugham QC is leading the challenge, and on Twitter he has suggested, based on analysis of market prices, that Ayanda may have made over £50 million profit on this deal.  That leads to another question. What measures did the procurement team take to ensure that the supplier was not going to make “excess profit” out of this deal?

Was there an open book provision, so the cost price from the factory was visible? Clawback provisions? Maybe even a cost-plus pricing formula? Or was the Ayanda price simply accepted without analysis, benchmarking, negotiation or questioning?

In the heat of the PPE crisis, we might forgive a certain amount of unusual procurement in terms of the selection of suppliers and perhaps less focus on track record and capability than we see in normal times, in order to simply get access to product.

But if the procurement team really did fail on the specification, that is very disappointing. “Getting the specification right” is literally Chapter 1 in my new book, (out in October) because it is so fundamental. Equally, a failure to negotiate or construct a robust commercial arrangement in order to allow a supplier to make a reasonable but not excessive profit is really pretty basic procurement work.

If failure on these two fronts has led to the taxpayer losing millions, and undeserving businesspeople making millions, then this truly will be a contender for the 2020 Bad Buying Trophy.

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Satellite of Love? The Perm Sec Doesn’t Think So…

A ”Ministerial Direction” sounds like a very dry and boring aspect of civil service bureaucracy, but that is far from the case. It happens when a government Minister in the UK (an elected politician) insists that their most senior civil servant (the “Perm Sec”) takes an action that the civil servant believes is against the principles of good value for the taxpayer.

Or, as the Institute of Government puts it, “Ministerial directions are formal instructions from ministers telling their department to proceed with a spending proposal, despite an objection from their permanent secretary”.

They are unusual; through the nineties and noughties, a couple a year was the average. There were more around the banking crisis, and we have seen a not unexpected flood of directions in recent months around Covid-related issues. But often, they are not really reflecting a genuine disagreement between the Minister and the mandarin. It is more that the spending can’t definitely be seen as good value, so the permanent secretary has to seek the direction to protect themselves, even if they are wholeheartedly in agreement with the Minister in terms of the actual action.

Much of the Covid spending in areas such as the furlough scheme for instance may prove to be poor value ultimately, and cannot be clearly justified upfront; but I suspect civil servants were right behind the Chancellor and fully supportive of the actions he took.

However, very occasionally you get a direction which reflects a real disagreement, where the Perm Sec is basically saying “I think this is a waste of money and I am doing it because you are forcing me to, you idiot”. Put in nicer words of course. And one such case came to light this week, relating to the UK investment in proposed purchase of OneWeb, a (bankrupt) start-up company whose ambition is to provide global broadband. $500m in equity investment is being considered to co-finance the purchase of OneWeb from US Chapter 11 bankruptcy proceedings.

Perm Sec at the Business Department, Sam Beckett, says in her letter to Alok Sharma, the Minister, that while in one scenario “we could get a 20 per cent return, the central case is marginal and there are significant downside risks, including that venture capital investments of this sort can fail, with the consequence that all the value of the equity can be lost”.

There is more in terms of the issues, and Beckett does recognise that this could prove to be an opportunity for the UK, but she feels this would be an unusual investment for a public body, and you have to wonder why it would be attractive for the UK government if it is not to other more experienced investors!

Is this Bad Buying though? Well, you could argue that we won’t know that until we see if OneWeb succeeds or fails. But actually, good decision making is NOT really related to outcomes.  If I make the decision to stand out on the golf course in a thunderstorm with my umbrella up, and I stay dry and don’t get hit by lightning, that does not make it a good decision. It was a bad decision, because based on the facts available at the time it was made, it was the wrong choice (assuming that staying alive is high on my priority list).  You might argue it was successful in terms of outcome, but it wasn’t right at the key moment.

Sharma’s reply says that “I have been informed that even with substantial haircuts to OneWeb’s base case financial projections the investment would have a positive return”. But other experts have suggested that the chances of success here are pretty low. One attraction of the investment is to provide an alternative space system for GPS services to the EU’s Galileo system (the UK is leaving the EU of course). But some believe the OneWeb satellites are not fit for that purpose (follow the link for more techie debate!)

The Guardian talked to Dr Bleddyn Bowen, a space policy expert at the University of Leicester, who said “the fundamental starting point is, yes, we’ve bought the wrong satellites.” (This from Forbes is a pretty balanced view of the technology issues if you want to get into more detailed pros and cons).

That Bowen comment sounds like “getting the specification wrong”, which is literally chapter one in my new book, Bad Buying, out in October.  A good spec as any procurement professional knows is an essential starting point to a successful contract.  So, whilst I don’t understand all the aspects of this, it looks like this is the wrong decision based on risk and opportunity.

It may of course turn out to be a successful decision in terms of outcome – but that still won’t mean it was the right decision, if the facts at this stage suggest a high probability that the UK taxpayer will lose out. And on that basis, we nominate it indeed as an example of Bad Buying.

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Want Some Cheap Consulting? How the Big Firms Game the Supplier Selection Processs

Psssttt! Wanna buy a cheap consultant? Top quality, only £20 a day. Or, tell you what, you can have some for a tenner if you like. Yeah. Just £10 a day!

The UK’s central government procurement arm, Crown Commercial Services, has various frameworks in place that enable users to select and engage from a list of management consulting firms.  So how was it that the rate card for the different levels of consultants on certain “lots” includes the bargain rate of £10 a day for a junior consultant from one of the world’s very biggest and most highly regarded strategic consulting firms? Or how about the same rate for a junior and only £30 a day for a senior consultant from one of the big four audit / consulting giants?

What’s going on here? Well, it is almost certainly related to how the firms “gamed” the evaluation process in order to win a place on the framework list of approved suppliers. CCS has had some unhappy experiences with consulting frameworks, including having to pull an entire exercise in 2017 when it became clear that the big firms weren’t going to make it onto the list!

Generally, when price is evaluated in the tender (along with quality and other service factors), the buyer asks for day rates for the different levels of consultant – perhaps junior, senior, manager, director, partner. Then there is some sort of adding up process, maybe weighted to reflect different likely use of the different levels, to arrive at an overall cost.

So let’s suppose your rates are something like this,

Junior                    £1000

Senior                   £1200

Manager              £1400

Director                £1800

Partner                 £2400

Let’s also suppose that the buyer is weighting each at 20% to arrive at a composite average rate – in our case here, that would be £1560 per day.

I might worry as a bidding firm that such a number could be on the high side. So how can I adjust that, without actually reducing my profit margins (and hitting my £600K a year partner’s salary)? Well, we are unlikely to be putting many Partner level people into these projects, particularly for government work. So we can take a bit of a hit on that rate. And as for juniors – well, let’s just work on the basis that when the Department for Internal Affairs comes looking for a proposal, we’ll say we haven’t got any available. Let’s face it, clients don’t really want the graduate trainees who can barely run a spreadsheet anyway.

But we might want to up the middle levels a bit to recover the lost margin on Partners, as that is where we really will be supplying people. So how about this?

Junior                    £0 (free!!)

Senior                   £1300

Manager              £1500

Director                £1800

Partner                 £2000

Our average rate now is £1320. That’s a 15% improvement in overall pricing and a lot more marks when it comes to the evaluation. And in reality, the likely revenues if anything might be a touch higher.

So why did CCS allow this to happen in this particular case? Well, it might have been difficult to stop – you can reject “unfeasibly low” bids under EU procurement regulations but the overall prices aren’t unfeasible. And of course CCS desperately wanted these firms on their list, so users will access the contract and CCS will make their margin, which funds the organisation.

Maybe all this doesn’t really matter, but it is worth remembering the lengths and the creativity that the partners in these firms will go to in order to protect their £500,000 – £1 million+ annual salaries. But do think carefully about your evaluation process if you want to avoid this sort of game-playing.

Finally, if you want to hear more interesting stories about buying professional services, positive and negative, I’m a keynote speaker at a (free) virtual conference on that topic organised by Matrix MM on Tuesday next week, 21st July. More details here!

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July 2023 – NAO Report Calls Sunak’s Home Insulation Scheme “A Fraudster’s Paradise”

In an unusually hard-hitting report dated July 10th, 2023, the UK’s National Audit Office criticised the home insulation scheme introduced in 2020 by the then-Chancellor, Rishi Sunak. 

The first problem, says the report, was that the huge increase in demand for the services such as roof and cavity wall insulation caused “significant inflation in the market”.  That could have been foreseen; just as the massive leap in demand for PPE (personal protective equipment) during the Covid-19 pandemic caused prices to rise by a factor of 10, the money flowing into the insulation scheme had similar (if not quite such dramatic effects). That “could easily have been predicted”, says NAO, and in itself cost the taxpayer hundreds of millions.  

But the bigger problem was fraud carried out by the building firms involved, sometimes independently of their customers and sometimes with the two parties collaborating to rip off the government.

In many cases, the firms quoted far more than the fair market price of the work, telling the customer not to worry because the government would pay, and the installer would then make a payment to the householder as a “thank you”. The firms then relied on the government not having either the resource or the skills to check whether the price quoted was reasonable or not.

The more sophisticated fraud saw builders and homeowners putting in claims, and then splitting the money without the work actually been done, or after much lower value work was carried out.  Whilst the government claimed that it would be carrying out spot-checks, “in practice, so few were done that this did not prove to be a serious deterrent”, says the NAO.  Some checks were carried out by email or phone, “making it easy householders to obscure the truth”.  It took the NAO’s own highly-trained mobile squad of unarmed-combat-expert investigators to “extract the truth” as the report puts it, assuring us that there were very few serious injuries to the team or to citizens.

In other cases, homes already had insulation, so even with inspection it was difficult to prove whether or not the work had not been done as part of this programme.  There were also several cases of “insider fraud”, where the staff handling the voucher scheme (working for the outsourced service provider) colluded with outsiders to fraudulently obtain money.

The Treasury and the Department for Home Insulation responded saying that “the scheme was largely successful, and over 2 million households have benefited from it”. But there has been no measurement of the effect on emissions or on costs for homeowners because the scheme did not “baseline” the starting point, another failing highlighted in the NAO report.  At Prime Minister’s Questions today, Boris Johnson described the scheme as a “spiffing great success”, and said “ we can celebrate that the unprecedented toasty warmth of the Englishman’s house and home has been assured for the centuries”.

OK, this is fantasy of course. But my cynical, suspicious mind looks at schemes like the new home insulation grants, announced by Sunak yesterday, and immediately starts looking for the holes that might allow fraud and corruption. (And if you don’t think governments ever get this sort of thing wrong, do check out the Northern Irish Renewable Heat Incentive scandal).

It’s all about incentivisation really – how the firms and the householders perceive the incentives that influence their behaviour. And if there are incentives for behaving badly (committing fraud), then you have to put in place measures to stop that, because people do respond to incentives.

Indeed, I have a whole chapter on that in my new book, Bad Buying – How Organisations Waste Billions Through Failures, Frauds and F**k-ups (to be published in October by Penguin Books).  So  I do hope the government doesn’t rush into this without getting a few cynical bas**ds like me to look for the loopholes and the opportunities for fraud! The scheme is not necessarily a bad idea, but there’s a lot of taxpayers’ money at stake here.

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Do You Need a Helicopter, Mate? I Can Do You a Deal…

Is that expensive “sea bass” in the restaurant, or that you buy as “Category Manager – Fish” for a frozen food manufacturer –  really sea bass? Or is it a cheaper product? Or even something that should not be sold at all, an endangered fish species perhaps. What about those electrical components? Are they genuine, made by the reliable firm whose name is on the case, or are they counterfeit, bad quality products from an obscure plant in an obscure country?

There is a whole category of procurement-related fraud that is based on buyers not getting what they thought they were paying for, and you won’t be surprised to know that a chapter in my forthcoming book  “Bad Buying: How Organisations Waste Billions Through Failures, Frauds and F**k-ups” covers that very topic.

There are some pretty surprising cases too. Even bulk oil shipments can lead to issues, as there was a court case some years back based on a very large firm shipping oil that was apparently lower grade than the specification agreed with the buyer. So as in that case (or indeed the sea bass example), it can be very difficult to know if you are getting something genuine. Understanding the provenance of what you are buying is key – but not always easy.

However, a story this week from Moldova made even my jaw drop. The “counterfeit” goods in this case are … helicopters! Balkan Insight website reported this.

“The Moldovan Prosecutor’s Office for Combating Organised Crime and Special Cases and investigators from the Police General Inspectorate closed a clandestine factory in the Criuleni area near the Dniester river in the east of the country on Tuesday that was producing copies of Kamov KA-26 Soviet-type helicopters”.

The helicopters were destined to be illegally exported to other ex-soviet countries, and were “produced without the necessary permits and documents of origin for the parts and equipment used.”

 It is not clear whether the buyers knew they were getting unauthorised machines (but presumably at a lower price than the “real thing”) or whether they though the items were genuine. It also raises questions of safety of course. Were they actually made to the right specification, but the manufacturer was acting without the right permissions, or might the helicopters have proved dangerous as well as dodgy?

Anyway, this certainly qualifies as a prime case of Bad Buying, and one of the more interesting cases of what we might call “provenance fraud”. It also has confirmed my personal vow never to step into a helicopter again. I did once, from the centre of New York out to the airport, and while it was an “interesting” experience, it was also a “never again” moment!  

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Spend £5B with Private Hospitals? Hang on a Minute, Treasury says…

We’re seeing so many interesting procurement and supply chain issues during the pandemic, but focus tends to shift week by week. We’ve had the challenge of finding more ventilators, which has more or less disappeared as medics have found that such treatment isn’t advisable for many patients. Then we had global shortages of PPE (personal protective equipment) – that issue certainly hasn’t disappeared, and we’re now all very interested in how a tiny pest-control business in England could win a contract for over £100 million of PPE supply.

But there’s another “spend category” that could make £100 million contracts look trivial. According to the Guardian today (June 18th), the UK’s National Health Service is considering a huge deal with the private hospital sector to use the private facilities in order to help clear the backlog  of non-Covid treatments that re urgently needed. (The NHS has effectively taken over the private hospital sector since March, but there is evidence that many of their facilities have not been heavily used up to now).

The newspaper says that “Matt Hancock, the health secretary, and NHS bosses are pushing for a £5bn-a-year deal to treat NHS patients in private hospitals and tackle a spiralling backlog amid the coronavirus pandemic”.

However, the Treasury (the UK finance ministry) has refused to sign off the deal, and has told the health department (DHSC) to “get more detailed commitments from private firms about the number of patients who will be treated every month in return for the payments”.

Well done, the Treasury!

I’d like to think that some sensible procurement professionals are involved in those discussions, although I am surprised that those procurement experts who sit in the DHSC (and there are a few…) didn’t get everything in line before the deal went to Treasury. It does also suggest that Sir Simon Stevens, who leads the NHS, and was apparently about to announce the deal, maybe doesn’t really “get” procurement. That is something we have suspected for a while and was reinforced by his choice of a Chief Commercial Officer last year who had no procurement experience whatsoever.

In any case, throwing £5 billion at some private firms without knowing exactly what they will do for the money wouldn’t be sensible and would indeed be “Bad Buying”.  It may be that the view was to set up some sort of “cost plus” or “time and materials” arrangement with the private firms, rather than having very clear deliverables, payment based on outputs and so on. But those mechanisms, where payment to suppliers is based on their costs rather than what they actually do, has some major disadvantages. Here is a short extract from my forthcoming book, “Bad Buying – How organisations waste billions through failure, fraud and f*ck-ups” (to be published by Penguin in October). I’m talking about construction contracts here, but the principles are absolutely the same.

“How about ‘time and materials’? In that type of agreement, the builder keeps a record of all materials they buy for the project, and the time that staff – bricklayers, carpenters, labourers and the like – spend on the work. The buyer agrees to pay those actual costs, plus some sort of margin to cover overheads and profit. Traditionally, many such agreements were based on a ‘cost plus’ model. So, you might agree to pay your builders all their costs, plus 20 per cent on top.

But you can see the incentivization problem here. Not only does the firm have no incentive to buy bricks as cheaply as possible, but they actually have an incentive to spend more on material and to make the work go on as long as possible, as they recover all those  costs back, plus 20 per cent on top of that! You could put a cap on the profit / overhead element, but that doesn’t fully address the incentivization issue on the materials or labour”.

Anyway, it is right that the government takes its time and applies all the skills it has at its disposal to get these contracts right. We’ve got blasé about large amounts of money being spent through the pandemic, but this is £5 billion we’re talking about. (“A billion here, a billion there… pretty soon you’re talking real money”, as the phrase goes).

I’d also hope that best practice contract and supplier management principles are going to be adopted here too. But that’s another whole story …

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Public Procurement in the Pandemic – Is it Who You Know, or What You Know?

Yesterday, The Times published a long article looking at how PPE (personal protective equipment) has been supplied to NHS hospitals and other locations during the pandemic. Unlike most articles on this topic, it presented a rosy picture – well, rosy at least once the Army and Clipper Logistics got involved. Indeed, it could not have been more positive about those two organisations if it had been written by their PR people.

Everything was great – everyone got all the PPE they needed, the famous eBay portal worked fine (it didn’t), and the Army plus Clipper rescued the incompetent NHS procurement system. It is a little surprising to see one part of the public sector dumping so publicly on another, but perhaps that is a foretaste of spending battles to come in the UK government through the recession, battles which the NHS is likely to win over the armed forces. Perhaps the military are getting their retaliation in first?

Anyway, the aspect of the article that grabbed my attention was the revelation that the choice of Clipper was made by Neil Ashworth, “a civilian working in the British Army’s Engineering and Logistics Staff Corps and a former supply chain director at Tesco”.  It is not clear quite how and why Ashworth was involved with the Army but The Times says “It was then that the Ministry of Defence made contact with Mr Ashworth to get the ball rolling. He recommended Clipper, a fast-growing logistics group that specialises in online retail, to his MoD contacts and they told him to recruit the company”. Ashworth then called Tony Mannix, the boss of Clipper Logistics, and off they went.

I suspect Ashworth was also behind the choice of eBay for the PPE portal, based on comments made by Eb Mukhtar, the army reserve logistician who has been the public face (or at least the public name) behind this exercise up to now.

But how did Ashworth choose Clipper? Was there an analysis of alternative options? Is there any audit trail to support that decision? Did anyone ask whether Ashworth personally had any conflicts of interest here?

Now I’m not suggesting for a moment that the team should have taken 3 months to run a formal tendering exercise. Neither do I think that Clipper slipped Ashworth a brown envelope stuffed with currency – his cv is impressive and he clearly knows this area.  But even in these “difficult times”, we need to be on our guard against fraud and corruption in its widest sense. And my definition of “corruption” includes corruption of the proper process.

So even when there is urgency, we need to know that public money is being protected. In this case, we need some transparency about exactly how these decisions were made, and what checks and balances were in place. The same applies to some of the rather odd looking contracts for PPE itself that are emerging.

In my new book, Bad Buying – How organisations waste billions through failures, frauds and f*ck-ups”, (to be published by Penguin Business in October), there are some amazing stories of fraud and corruption. But the sad fact is that it can spread quickly if there are opportunities or process weakness, as it did in the US Navy during the “Fat Leonard” affair. Or as it has in South African public procurement and through their government owned businesses, to the point where the country is close to being declared a “failed state”.   

The reason it spreads like a virus is explained in my book – here is a key excerpt.

“Finally, this matters because it has wider effects beyond the organisations directly involved, as  corruption can distort normal business and even social practices and priorities. For instance, if firms know that bribing government officials is the best way to win public contracts, a firm will focus its resources and efforts into doing that effectively. They will worry less about writing a good bid, developing better products or services or performing the work well. 

The knock-on effect is that decent firms start thinking “what’s the point”?  They either move over to the dark side and start on the bribery route, or withdraw from the market, customer or even country altogether. This can lead to a downward spiral, where supplier performance gets worse and worse, and corruption becomes endemic…”

You might think that we are somehow immune from that unhappy situation in the UK and other developed countries. We are not. If firms start thinking that “who you know” is more important in terms of winning government contracts than “what you can deliver”, then we will be on a very slippery slope. And that’s why we shouldn’t absolve those involved in public procurement during these “difficult times” from the need for process, propriety and transparency.   

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