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Yet Again, a “Sophisticated” Fraud Hits the NHS

The UK’s National Health Service has for years been a “good” source of Bad Buying fraud and corruption stories.  There are several reasons for that. Firstly, it is huge organisation, employing some 1.3 million people. Secondly, it actually has a pretty good counter-fraud unit, and when fraudsters are discovered, they are often prosecuted, so the news becomes public domain, whereas private sector firms often hush up embarrassing cases. But it has to be said – the cases I’ve seen over the years often also suggest that too many NHS organisations have very weak policies and processes around procurement and payments.

The latest case reported in the media recently saw Thomas Elrick, 56, jailed for 3 years and 8 months.  He was assistant managing director for planned and unscheduled care at Harrow Clinical Commissioning Group (CCG) where he had the authority to approve invoices up to £50,000. That organisation is a purchaser rather than a direct provider of healthcare – so it buys services from providers on behalf of the local citizens. 

Elrick created a company, Tree of Andre Therapy Services Limited, using the name of his husband (who knew nothing about it) as the owner, and invoiced the Trust for services that were never provided. Between August 2018 and December 2020 he authorised payments totalling £564,484. To cover his tracks, he also sent an email from the account of his dead wife which claimed to show details of patients the firm had “treated”.

Elrick spent over £100,000 on holidays to Dubai, Hong Kong, the Maldives, Singapore and Switzerland, and also spent just under half a million on shopping, with Amazon, Apple and David Lloyd gyms. But eventually a smart colleague decided to look up the Care Quality Commission accreditation for this firm and found of course that it did not have one, and then the connection to Elrick was found.

There is an interesting angle here in terms of his response. In a statement after he was sentenced, Elrick said “I wish I could turn back the clock but I know that I cannot and I sincerely apologise…  I am not a bad person. I believe that I am fundamentally a good person who made bad decisions, for which I take sole responsibility.” 

Self-delusion is an amazing thing, isn’t it?  I stole half a million from the NHS but I am “fundamentally a good person”.  The mind of a fraudster is often interesting, I suspect.   

But we have to ask how on earth this fraud was possible?  In my Bad Buying book, I give seven key anti-fraud precautions every organisation should follow and this case study and organisation broke several of them. There was no check on the onboarding of a substantial new supplier, which had no trading record, no CCG listing and a conflict of interest in the ownership (although that might not have been easily spotted). There was no check apparently that services paid for were actually received; and of course most fundamentally one person could conduct the whole pseudo-procurement process and authorise payment of large invoices without anyone else being involved or approving the spend. “Separation of duties” and all that.

This was not a sophisticated fraud. It was enabled by an incredibly weak process that was wide open for exploitation by anyone with a modicum of intelligence (and a lack of morals).  Personally, I would fire the CFO and the Procurement Director at the Trust for allowing this money to be stolen so easily.  But this is the case in so many organisations and so often – basic precautions against fraud are simply not put in place. Is it ignorance, laziness, or maybe a management team that wants to leave the door open just in case they want to do something dodgy themselves? Who knows.

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UK Government Spend With Smaller Firms Declines

Without fanfare or comment, in the middle of the holiday season, the UK government recently published the data for spend with SMEs (small and medium enterprises) for 2021/22.  This covers central departments, and some associated bodies, although the definition of what is in and what is out is not always clear. The data is given as direct spend – money that goes straight to the small firms – and indirect, the spend that goes via larger firms that then use SMEs in their supply chain.

It is not unusual for it to take over a year from the end of the period in question before data is published. That is in part because it does take a while to gather the data, but I suspect the publication might have happened sooner if there had been a positive story to tell.

But the headline number was that SME percentage spend declined in 2021/22 compared to 2020/21.  The total was down from 26.9% to 26.5%, and the direct spend was down from 14.2% to 12.3%. That does not look good against the government target of 33% of spend.

Indirect spend was up by 1.4% but that was not enough to compensate for the drop in direct spend.  It looks like the main reason for the overall decline was a big drop in the Department of Health and Social Care (DHSC) SME spend year on year. I suspect that is the “PPE effect” – as we know, there was lots of PPE bought in 2020 and 2021 from smaller firms. They were often crooks, chancers and friends of ministers, but they were SMEs, nonetheless.

Until the pandemic, the DHSC spend was relatively small compared to MOD and Transport – the two “traditional” big spenders.  Most health spend was out in the Trusts so not captured in this data. But the huge amount of “central “ buying, on PPE but also track and trace and other projects, pushed up the significance of DHSC in the overall numbers.

In 2019/20, DHSC spend was just £3.1 billion against MOD’s £21.1 billion. But the figure shot up to £13.3B in 20/21 (MOD was £19.5B) and was still £11.5B in 21/22.  In 20/21, 23.3% of the DHSC total was direct SME spend, so that made the year look better, but by 21/22 that dropped to 14.2%, pulling down the whole percentage.

I’m going into some detail there because it does demonstrate how ridiculous looking at the overall number actually is. When one factor – PPE – in one Department can skew the whole data set, it is pretty useless. But let’s go back in time and look at how this target emerged.  

Supporting smaller firms was one of the first “social value” type issues government embraced. I worked in the Office of Government Commerce (part of Treasury, the UK finance ministry) as a consultant back in 2009 on the implementation of the 2008 Glover report – “Accelerating the SME economic engine: through transparent, simple and strategic procurement”.  (That link took some finding!)

But Sally Collier (OGC’s Policy director) and I didn’t really like the idea of targets for spend with SMEs for various reasons. One was the difficulty of setting sensible targets, which really needed to vary by department to be meaningful. We were interested in departments and buyers simply doing the right things, and therefore also worried that targets would mean effort going into the data, not the real action. But our advice was ignored and after the 2010 election a 25% target was set. 

It quickly emerged that 25% was unachievable. The Ministry of Defence and the Highways Agency (Transport) accounted for almost half of central government procurement spend and there was no way an SME was going to build a warship or the M25 motorway.  So the target was changed to an “aspiration”, a classic Francis Maude fudge, and then indirect spend was included to make it easier to hit the target.

But many of the first-tier suppliers to government have no idea really how much they spend with SMEs, so the data is pretty dodgy. Then the 25% target – which had never been achieved – was stupidly changed in 2015 to 33%, purely because the Cameron government wanted to say something positive for the “small business” lobby in their election manifesto.  And 33% is unachievable too, as we’ve seen, even including indirect spend.

The other issue is whether supporting SMEs is the right target today. We have become much more sophisticated in the 15 years since Glover and now most large private firms are interested in supporting diverse suppliers, not simply small firms.

So why not shift the focus to using government procurement to support charities and social enterprises, minority owned firms, innovative businesses, firms in deprived areas or those that employ lots of disabled people?  You don’t see Unilever or other admired private sector businesses defining some prospective suppliers as special just because they are small. Indeed, many SMEs are small because they want to be, or because they just aren’t very good.

But there has been good work in government over the years in terms of helping SMEs. For example, even back in 2009, MOD led some impressive initiatives to promote SMEs through their supply chain. But really, this element of public procurement policy is crying out for a refresh, a more nuanced set of objectives and – if we must have targets – something that is realistic and motivating, not a painful data collection exercise that is bound to end in failure.  

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HS2 Rail Programme Rated as “Undeliverable” by Government’s Own Experts

I’ve decided that I’m going to win the 100 metres sprint at next year’s Paris Olympics. I believe the benefits for the UK economy will be huge and I will inspire millions with my efforts. My wife has pointed out that my best time for the event was 13.8 seconds, recorded at Houghton School some years ago (many years ago to be honest). I need to beat that by some 4.5 seconds next year, but I am quietly confident.

However, in her annual report on my planned activities, Jane has had the temerity to rank my chances of success as “red”.  That red rating indicates that “successful delivery of the project appears to be unachievable.” That means “there are major issues with project definition, schedule, budget, quality and/or benefits delivery, which at this stage do not appear to be manageable or resolvable”.

I am disgusted by this lack of positivity. My gold medal will lead to transformational benefits for generations to come, improving connections and helping grow the economy. And I have already spent billions on food supplements, very expensive training programmes and massages, so you wouldn’t want to waste that money, would you?

That is pretty much the situation with HS2, the high-speed rail programme that is going to link London with other cities in England. The latest report from the Infrastructure and Projects Authority (IPA), which sits within the government’s Cabinet Office, has given the first two phases (1 and 2a) of the HS2 programme an unachievable “red” rating, defined as above.

There is no mention of HS2 anywhere in the report’s various narrative sections, despite the fact it is the biggest single programme in the UK in terms of cost.  In the table that list all 250+ projects, all it says next to the red rating is this. “A new railway connecting the country’s biggest cities and economic regions enabling rebalancing and regional growth in the Midlands Engine and Northern Powerhouse – through a high capacity, high speed and low carbon transport solution”.

And the Department for Transport’s response is also pretty much as above.

“Spades are already in the ground on HS2, with 350 construction sites, over £20bn invested to date and supporting over 28,500 jobs. We remain committed to delivering HS2 in the most cost-effective way for taxpayers. HS2 will bring transformational benefits for generations to come, improving connections and helping grow the economy”.

That really is treating us as idiots. No attempt to actually respond to the undeliverability issues, or explain how “red” will turn to amber and green, just that they’re committed to it and we’ve spent a sh** load of money already, so hey, let’s spend another £50 billion or so. At least.  

Clearly, all those supposedly super-clever people in Treasury and Department of Transport have never heard of the sunk cost fallacy. Well, of course they have heard of it but this is politics. Civil servants just have to do what their masters tell them, but you can be sure HS2 will be disappearing from a lot of senior peoples’ cvs on LinkedIn in a few years’ time. This is just a terrible, disgraceful and ridiculous waste of public money, from the beginning when the business case was manipulated to appear positive, and my daughter’s generation will be asking questions for years to come about just how we allowed this to happen.

William Hague in The Times agreed.

“If I were still in government, I would be climbing the walls about this. I would want to stop all work on HS2 today, but I know I would be told that the contracts signed for its construction make that impossible. I would want to fire somebody senior, but I would be informed that the chief executive of HS2 Ltd already quit last month so that satisfaction would be denied me.

Then I would say that if we can’t cancel it we should at least make sure that the bits that haven’t been abandoned will work well, but I would be told that the cost of making it start in Euston has doubled recently, that no one could decide how many platforms they wanted to build, that this crucial part is currently unaffordable and that the transformational, high-speed connection of Birmingham to central London might not even reach the latter. And then I would want to scream”.

Indeed, the IPA report is generally disappointing. It is full of case studies of successful projects and programmes (244 now in the portfolio), with little or no discussion on the problems. And I’m not sure how the rapid charging fund for EVs can be seen as a success when you read this. Most of the case studies have a few initial issues but are turned round thanks to the IPA to deliver success.  It reads in the main like a marketing document from a consulting firm. (I actually wonder whether privatisation is on the cards?)  I suppose we shouldn’t be surprised, at the end of the day, the IPA is not truly independent, it is part of government, so it does have to toe the party line.

It is also noticeable that so many projects are rated amber – no less than 80%. That can be a bit of a cop-out rating really. It says there are issues, but nothing too much to worry about. I think when the IPA or its predecessor first started, there were amber/red and amber/green ratings too, but I suspect that put too many projects into the (at least partially) red bracket, which is embarrassing for the government. But really having 80% of the projects ranked at the same level reduces the usefulness for any external scrutiny.  

Anyway, in the couple of hours it has taken me to write this, another £4 million or so has been spent on HS2. What a waste.

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Always Check Those Invoices!

The US Government Department of Justice recently issued a news release.  

“Booz Allen Hamilton Holding Corporation has agreed to pay the United States $377,453,150 to resolve allegations that it violated the False Claims Act by improperly billing commercial and international costs to its government contracts. Booz Allen, which is headquartered in McLean, Virginia, provides a range of management, consulting, and engineering services to the Government, as well as commercial and international customers”.

I do love the precision of the final $150 on that number! Couldn’t they have rounded it slightly?

The accusation was that between 2011 and 2021, the consulting firm charged costs to its government contracts and subcontracts that should instead have been billed to its commercial and international contracts. That particularly applied to some indirect costs. So the government was allegedly paying for activities and services that had nothing to do with the work the firm was actually doing for government organisations.

Now allocating overheads can be a tricky issue, as many of us know. And Booz Allen issued a statement, as you might expect.

“Booz Allen has always believed it acted lawfully and responsibly. It decided to settle this civil inquiry for pragmatic business reasons to avoid the delay, uncertainty, and expense of protracted litigation. The company did not want to engage in what likely would have been a years-long court fight with its largest client, the U.S. government, on an immensely complex matter. The company fully cooperated with the government and is pleased to move forward.”

So there is no admitting liability or guilt here. I can understand why the firm does not want a long, expensive fight – on the other hand, if you were 100% sure of your position, many firms would choose to take it further rather than handing over quite such a large amount of cash.

The most amazing element of this story is this. The investigation was sparked by a whistleblower, a former Booz Allen employee, Sarah Feinberg, who tipped off the authorities about the alleged misconduct from 2011 to 2021. And now she will receive no less than $69,828,832 as a thanks (it’s that precision again…)  

$69.8 million!  Good grief, I’m going to have a good think now about every firm I’ve ever worked for and whether they might have done anything “naughty” in their dealings with the US government …  

The moral of thee story is simple. Check your billing from professional service firms. I once took on a senior interim commercial/procurement role in government with an organisation that had around 100 consultants from one firm working on its major programme. That was £500K A WEEK we were paying this firm (it better be nameless…)  

I took a look at the invoices – incredibly there was no contract manager for this contract – and found that amongst other things, we were being billed for the senior partner’s assistant. The partner was only working about a day a week on our project, but we appeared to be paying a grand a day, every day, for his PA. We were also billed for the whole day for the whole team when I knew they had stopped work at lunchtime for their office Christmas Party! “An unfortunate error” I was told.  I saved £50K with one phone call there…

Of course, if you can structure any professional services assignment on a fixed price basis, most of these issues are avoided. That approach is usually – although not always – better for the buyer and actually arguably for the provider too. That is another question in this Booz Allen example. Why was so much government work being done on what sounds like a pretty loose “time and materials” basis?

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Don’t Be a “Bad Negotitor”

As it is the holiday season, here is a short extract from my Bad Buying book rather than a fresh article – taken from the chapter on negotiation.

Nothing Else Matters   

While this is not a “how to negotiate” textbook, let’s just run through a few basics, in the spirit of avoiding failure.  We talked about the BATNA concept earlier, and that broadens out into the importance of planning before face-to-face negotiation. Understand the market, your own situation (including your BATNA) and the other party’s situation too. In addition to that, here are three more vital points to consider; they are relevant to anyone who has to conduct business (or indeed personal) negotiation of any kind.

Don’t take it personally – in business negotiations, don’t get hung up on the people involved, your personal pride or status (as in my Charlie Hurley story).  Look on this as two parties coming together to solve a business problem; i.e. reaching a satisfactory agreement for the purchase. You can be tough, but you should never be personally abusive or insulting. And in business, very few negotiations are pure one-off bartering. It’s not like buying a carpet in the souk, where you will never see the trader again in your life. In business, you tend to work with people after the contract is agreed, and you may well need their support at some point. If you called their CEO a “fu****g idiot” during the negotiation, you can guess how they will respond if you need their help later!

Be creative – the classic task in negotiation courses is to ask two people to share an orange “fairly”. They end up halving it, of course. But if one really wants the orange for the zest (which comes from the skin) and the other wants the juice… then both can have, in effect, the whole orange. Understand what the other party really wants and think about options and creative ideas for the negotiation. One trick is to find aspects that the other party values more than you, that you can trade for benefits you do care about. For instance,  suppliers often value highly your endorsement or being able to use your organisation as a reference when they’re trying to win other contracts. That costs you nothing – but has a value to them. You can trade that for a longer warranty period, better payment terms, maybe even a price reduction. Or if your organisation is cash-rich, very prompt payment may be worth a lot to a cash-starved supplier.

Try to be objective – determining what is a “fair price” is rarely easy. But if you have evidence, your negotiation will be smoother and more successful. “Your price is too high” might work fine as a negotiation stance. But “I’ve benchmarked your price against two databases, done my own analysis of what I think it costs to make this product, and I’ve got prices from two competitors. I do want to work with you, but all of that suggests you are still 20% above a fair market price” is much more powerful.

Negotiation is a fascinating topic, and as well as the classic books, I’d recommend looking at the latest thinking in behavioural psychology from Nobel Prize winner Daniel Kahneman and others, in books such as Thinking Fast and Slow[1]. Their work has increased understanding of how issues such as priming and anchoring affect our negotiations.  I was taught years ago that the first offer in a negotiation could set the tone – so if a realistic price might be around £100, offering just £50 might reset the seller’s expectations. I always had my doubts about this, as you can look stupid if you make a really unfeasibly low offer. But the psychology of “priming effects” suggests there may well be something in this tactic after all, if used appropriately.

[1] https://www.penguin.co.uk/books/563/56314/thinking–fast-and-slow/9780141033570.html

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Support to Disadvantaged Suppliers Attracts Fraudsters

Programmes to support minority owned businesses, smaller firms, social enterprises and the like via public sector procurement have become increasingly popular over recent years in many countries. The Social Value Act in the UK in 2012 made this sort of action more prevalent in the UK, but the USA is probably where such schemes are longest established.

However, the irony is that the more successful such programmes are in terms of actually directing spend towards such suppliers, the greater the temptation for fraud and corruption to spring up. Genuine firms that need support might lose out to unscrupulous criminals and conmen/women.

One mechanism for that is basically using what we might call “non-value for money” evaluation criteria to award contracts to a supplier that doesn’t really deserve them. That can lead to distortion in the selection of winning bidders. “This firm’s bid wasn’t the cheapest but they are a small firm / owned by a women / promise to employ lots of disabled local people. That gave them lots of marks for “social value” in the bid evaluation”.  What isn’t made public is that the firm is also owned by the budget holder or decision maker’s sister-in-law.

The other quite common fraud is where a firm is apparently owned by a person or people who qualify as a “minority” but in fact, control rests with non-minority owners. We have seen that a lot in the USA and also in countries such as South Africa which have had schemes to give preference to black-owned businesses in public procurement.  I gave several examples of this in the Bad Buying book from both of those countries.

But this is still going on – a recent report in the Chicago Tribune highlighted a current case. It is not clear yet which of those two mechanisms is suspected here; is it disguised ownership or the use of minority programmes to favour a firm for improper reasons?  But federal prosecutors are “investigating possible minority-contracting fraud involving a series of Chicago government contracts worth hundreds of millions of dollars, including many with ties to a clout-heavy trucking and recycling company owner, according to sources and documents obtained by the Tribune”.

James Bracken and his wide Kelly own several companies engaged in construction, waste management and transportation. Investigators have asked city agencies for copies of bid documents and more relating to several contracts and for information relating to the city’s women and minority owned “set aside” programmes.

The programmes started in 1990 with the aim of awarding at least 25% of the total value of all city contracts to minority businesses and 5% to women-owned operations. But there have been accusations of fraud from the beginning. Company owners, chasing multimillion-dollar contracts, have put up phony “frontpeople” to get certified as minority or women-owned. Another route is to claim that a high percentage of work will got to minority subcontractors. In my experience, that is the sort of claim that rarely gets checked once a contract is operational!

A lot of this comes down to procurement carrying out the appropriate due diligence and checking out firms at the bidding stage, managing contracts well once they are operational, and of course keeping an eye out for conflicts of interest and other potential drivers of corruption. It is a constant battle between the forces of good (procurement, usually) and evil (certain dodgy potential suppliers and general low-life scum!)

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PPE Dumped – An Unhappy Reminder

There was an unhappy reminder of the pandemic and the PPE Bad Buying saga recently when several hundred pallets of PPE (mainly aprons, it seems) were discovered apparently dumped in Calmore, near Testwood Lakes Nature Reserve in the New Forest (near to Southampton). No-one knows how it got there…

Some of the material involved was identified as coming from a supplier caller Full Support Group (FSG). Now there is an interesting story about that firm. It was relatively late in the PPE saga when it became public that it was in fact the largest single supplier of PPE in the UK into the health system, with estimates that close to £2 billion had gone to FSG to buy huge quantities of PPE.  It was not immediately apparent though because the firm was already a major supplier to the NHS pre-Covid, so the pandemic purchases were made using existing framework contracts, which did not show up on registers of new contracts.  (That’s a weakness of the transparency rules by the way, but let’s save that for another day).

I had some personal communications with the founder and CEO of the firm, ex-nurse Sarah Stoute, and I’m still not really clear whether FSG and its leaders are amongst the heroes of the pandemic or the villains. In terms of heroes, the owners took huge risks when they saw the pandemic starting, and committed to buy PPE mainly from China at their own risk in late 2019 and early 2020 as prices started rising. That could have literally bankrupted the firm if the market had moved the wrong way but those stocks helped the NHS get through the crisis – and of course prices went up and up, benefiting the firm’s bottom line.  

The owners also tried to advise the NHS and the PPE buyers about the suitability or otherwise of some of the new sources of PPE that started coming on board. Now that might be seen as self-serving – “buy from us rather than these unsuitable new suppliers”. But Stoute was proved right on some occasions where (as we now know) the government bought PPE that was unsuitable or didn’t meet specifications – or was bought from firms that turned out to be run by crooks, basically.

The counter argument basically runs that the owners made huge profits as shortages grew and bought themselves a Caribbean villa for £30 million, an equestrian centre and a country mansion in the south of England for £6 million.  As I say, they took substantial risks, but maybe buying villas wasn’t the most tactful thing to do quite so quickly. I think I might have waited a couple of years at least!

But back to this dumping of stock. Clearly that was nothing to do with FSG or with the NHS or individual NHS trusts. However, we do know that the NHS some time ago appointed firms to help with disposal of unwanted PPE, most of which was sitting in shipping containers around the country (some was still being held by suppliers to).

So the most likely explanation is that someone was contracted to dispose of PPE, they probably then passed on the task to another firm, and maybe another one again, util it ended up with a bunch of criminals who offered a cheap price for disposal then simply dumped it.

Sara Stoute has also said that the reason this stock is surplus is that it wasn’t stored correctly – their lawyer said, “the PPE became unusable because of the way it was stored after delivery, not due to wrongdoing on their part”. If that is true, that is another indictment around the whole story of mismanagement we’ve seen unfortunately from the beginning of this saga.  As well as the money (and time) wasted, the disposal issue highlights the “wasted” carbon emissions embedded in the product and now the pollution and waste disposal risks and costs around it.  Not a happy tale, all in all.

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Waste in Woking – Taxpayers will Pick up the Bill

The trivialisation and celebritisation of British politics continues apace.  The headlines are dominated by why Nadine Dorries didn’t get her peerage (and why Charlotte Owens did – anybody got any ideas)? It is all about personalities and in particular our own Trump wannebee, Boris Johnson, the man who had damaged the UK more than anyone I can think of since 1945.

Meanwhile, stories that should be causing debate, analysis, and angry mobs with flaming torches marching in the streets, get limited coverage and little real analysis other than by a few dedicated journalists. For instance, we’ve mentioned before the billions wasted by a number of local authorities (councils) in the UK, including Thurrock, Liverpool, Slough, Croydon, and my own council, Surrey Heath.

But Woking – only 10 miles from my home – might turn out to be as big a scandal as any. The “bad buying” in this case is firmly in the property sector, as the Tory-led council “invested” in major developments both in their own town and more widely. Apparently, the idea was to make Woking the “Singapore of Surrey”, an idea so far-fetched you have to wonder what the council executives and elected representatives were smoking. (as the Guardian asked!)  The council is now bankrupt, and I would be furious if I lived 10 miles down the road.  

Woking has core revenues of around £16 million a year, and debts of around £1.8 BILLION currently. That debt to income ratio is the biggest we’ve seen so far in failed councils.  It is likely that something around £600 million, maybe more, will need to be written off in terms of current asset valuations. A review into how this happened found that within the overall figure, the council borrowed £160m for purposes outside regulations and had “sub-optimal record keeping.”  A huge amount was borrowed from the central government controlled Public Works Loans Body (PWLB) and total debts may end up at over £2 billion. A Section 114 notice has halted all spending on non-essential services.

As the Guardian said: “In Woking’s case, the 114 notice shows the council had advanced the colossal sum of £1.3bn – money borrowed from the PWLB – to joint venture companies, notably Victoria Square Woking Ltd, in which the council held a 48% stake and a Northern Irish developer, Moyallen Holdings, held the majority. Then the value of the assets fell”.

There are also questions about why Woking partnered with Moyallen, a relatively small property company, for the Victoria Square development. That venture still operates, but the Bank of Ireland placed four of Moyallen’s other operating units into administration – including two entities used to control the Peacocks Centre at Woking.  The council’s former chief executive was allowed to operate far too independently, it seems. An “acquisition opportunity fund” allowed him to spend up to £3m on regeneration projects without formally approval from the council or executive, and that led to purchases including farmland for £1.5m, and £2.3m on two pubs, one of which burnt down!

Primary responsibility must fall with characters who have all moved on now – previous Tory Leader of the Council, David Bittleston, Chief Executive Terry Morgan, and Finance Director Leigh Clarke.  It would be good to see those three in court charged with malfeasance in public office. However, all the councillors who failed to raise the alarm also share some blame. One councillor tried to sound the alarm about the dealings but was shouted down in council meetings.

But other stakeholders who deserve a lot more criticism than they are getting are those in central government. The majority of the loans came from the PWLB – a central government body within the Treasury that lends money to local councils. Concerned observers had contacted Treasury and the Department responsible for local government – currently called the Department for Levelling Up, Housing, and Communities (DLUHC) – about Woking but were ignored. In 2017, the Times  “raised the alarm about reckless council spending” but were told by central government that “ that there were “strong checks and balances” in place to protect taxpayers’ cash”. 

Well that was clearly total nonsense, so Treasury and DLUHC must share some of the blame for this fiasco. Partly because of that, government will have to bail out the council. There is no way local taxpayers can cover the debt (without bankrupting them personally) so this will effectively end up as a wider taxpayer debt write-off.

In recent years, we’ve seen both Labour and Tory councils getting into trouble around bad investments, bad buying and criminality at times too. This is about personal and systemic failures, not really party politics, although central government has failed to monitor the gross incompetence of these councils.  So given the outlook for the next general election, and if Labour are serious about giving more power to local councils, we really need some new parallel measures put in place. We have to make sure more power does not simply lead to more huge failures, with more crooks and incompetents wasting or stealing huge amounts of our money.  

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Disqualifying Suppliers from Government Contracts

It feels like the new UK Procurement Bill has been moving through Parliament for years – it is only a year in fact, although before that there was an extended period of consultation.

One of the themes of the Bill is that it should be easier for the contracting authority (CA) to “bar” or disqualify suppliers from bidding altogether. That has been possible for many years if the supplier or one of its directors had committed certain criminal acts, but the new legislation includes exclusion for poor performance for the first time.  There is also exclusion for “improper behaviour” which has led to a supplier gaining an unfair advantage in the competitive process.

However, the authority will also have some flexibility. The new rules mean that the existence of a mandatory or discretionary exclusion ground is not enough in itself to throw the bidder out of the process.  The CA has to first decide if the circumstances giving rise to the exclusion are likely to happen again. That’s quite a difficult and potentially controversial assessment to ask the buyer to make, in my view. There is also going to be a centrally-managed list of firms that have been barred.

It will be interesting to see whether there will really be any significant change of behaviour in this area. In truth, CAs are very cautious about barring firms, fearing I suspect legal challenge and endless argument getting in the way of running the actual procurement process. I’m not sure that will change.

An interesting example of this unwillingness was reported recently on the Nation Cymru website. Campaigners have accused a National Health Service Trust of ignoring anti-fraud regulations by allowing two firms that have been convicted of bid-rigging to form part of a consortium to build a new cancer centre in South Wales. The Acorn Consortium is the preferred bidder for constructing the new Velindre Hospital in Cardiff. That project has faced strong opposition on environmental and medical grounds, and it is those against the construction who have raised this issue.

Nation Cymru has described how two of the consortium members – the Kajima group and Sacyr – have been found guilty of fraud offences in Japan and Spain respectively. As the website reported,

“Kajima was sentenced for bid-rigging in March 2021, with one of its executives receiving a suspended prison sentence and the company itself being fined 250 million yen (around £1.53m) for its role in the scandal, which involved a number of firms colluding with each other on the construction of a railway line to maximise their profits. Sacyr received a penalty of €16.7m in July 2022 for its part in creating a cartel aimed at aligning bids for government contracts”.

When asked why this had not led to exclusion, a Velindre University NHS Trust spokesperson responded: “The robust procurement process has been undertaken in line with procurement law, UK and Welsh government policy and all required due diligence has been undertaken.” 

I’m not sure that’s a good enough explanation really. When the spokesperson was asked to explain in more detail why “regulation 57” (which covers this sort of thing) did not apply or was over-ruled here,  they “did not offer an explanation”.  I do think they should say more.

But conceptually it’s a tricky one. With my buyer’s hat on, do I really want to kick out what presumably is my best bidder because two possibly quite minor consortium members did something bad hundreds or thousands of miles away? On the other hand, we do have regulations for a purpose. 

In terms of the justification, having had a quick read of “regulation 57” (it’s some time since I studied “the regs”), I suspect the answer lies in the famous “self-cleaning” clause. That says, “Any economic operator that is in one of the situations referred to in paragraph (1) or (8) may provide evidence to the effect that measures taken by the economic operator are sufficient to demonstrate its reliability despite the existence of a relevant ground for exclusion”.

So basically, if a supplier can show that it has taken lots of steps to make sure it will never, ever get involved in bid-rigging again, or any of the other reasons for mandatory OR discretionary exclusion, and the buyer is naïve enough – sorry, I mean if the buyer analyses those declarations and decides they are valid, then the supplier is back in the game.

You can see the logic in this, but it is a bit of a “get out of jail” card really. It’s also another reason why in practice, we so rarely see suppliers barred. It will be interesting to see whether anything changes once the new Bill has been implemented – but I have my doubts. Barring is potentially just so fraught with hassle and risk.

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Huge Ship, Tiny Error, Major Problem

Picture: LPhot Alex Ceolin, UK MOD© Crown copyright 2019

You may know the expression “don’t spoil the ship for a ha’pworth of tar*”, but we have a case now where the ship most certainly has been spoiled – or at least put out of service for some considerable time – because of a tiny error in manufacturing. The impact of this has also led to a tricky contract management situation.

In August 2022, the British aircraft carrier Prince of Wales broke down just one day after departing its Portsmouth base for training exercises off the US coast. That was hugely embarrassing for the Navy given the ship had cost some £3.1 billion and this wasn’t the first problem since initial launch in 2019. This time, the issue was traced to a starboard propeller shaft fault and an installation error. Responding to a recent parliamentary question, Ben Wallace, the UK Defence Minister, said that based on “initial reports” the shaft was misaligned by 0.8 – 1 millimetre. That is a tiny mistake, but apparently caused a huge problem.

As well as the operational issues this caused, the question of who should pay for the error is also complex. Construction and delivery of the warship was carried out by a consortium of three firms under the banner of the now defunct Aircraft Carrier Alliance. BAE Systems, Babcock and Thales were all involved, which makes it complex to assess liability. Will the Ministry of Defence (MOD) end up paying or will they be able to pin the responsibility onto one or more of the firms?

A report on the “Breaking Defence” website said that the MOD “declined to comment on why the repair bill liability decision has not been made yet, nor when a decision is likely to be made”.  But MOD did say that repairs were likely to cost some £25 million, and that an investigation was looking at how to ensure the failure was not repeated. Well yes, one would hope that the same won’t happen again!

John Healey, the Labour Party’s shadow defence secretary pointed out that since the ship entered service in December 2019, it had spent 411 days in dock for repairs, compared to just 267 days at sea. A previous deployment also ended in embarrassment and a quick return to base in Portsmouth after an internal flood left the engine room and electrical cabinets submerged for 24 hours. The current repairs were supposed to be completed at the Rosyth dockyard in Scotland by February, but at time of writing (May 2023) still seem to be going on.

We could draw analogies here between our (literal) flagship and the wider state of the UK. Still pretending to be a significant global power, but incapable of actually doing anything to live up to that fantasy and all that sort of thing. But keeping to the facts, in a more mundane fashion it does highlight the importance of absolute clarity in the contract whenever you are buying from a consortium of any kind – and that doesn’t just apply in the military world of course.

Don’t assume a consortium will act as one entity if something goes wrong. It’s just as likely that each party will fight to protect their own position, which can leave the buyer in a difficult position, as we may be seeing here. So a strong and clearly written contract, including a definition of what will happen if there are issues after the formal consortium is dissolved, is essential.

And you can see why the UK Treasury (finance ministry) is not too keen on increasing the MOD’s budget for spending on more equipment, even given the present Russian threat. Cases like this (as well as high-profile failures such as the Ajax armoured vehicles) all add to a lack of confidence that such money would be spent well.

* A bit of research suggests that the expression was originally about sheep rather than ships! I didn’t know that…

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