Tag Archive for: Finance

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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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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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Fraud and Corruption – Sack the CFO!

Unfortunately, fraud and corruption are common in the business world, including in many large and well-known firms, as well as in governments the world over. Literally every day you could find a new story breaking that highlights an event of that nature, whether it is thousands of pounds, dollars or euros or millions involved. 

Issues related to ‘buying’, in its widest sense, probably represent the single biggest category of fraud and corruption globally. It is not hard to see why. When we consider fraud, it is clear that criminals trying to make money need to focus on where that money is. And buying (procurement) transactions account for most of the major spend areas for businesses and government bodies.

There are alternative ways you might look to extract money illegally or improperly from corporations, such as blackmail, or banking and investment frauds. There is some non-buying-related fraud committed by employees – we’ve seen examples of senior executives putting through pay rises for themselves that weren’t properly approved, for instance. But buying from third party suppliers accounts for trillions of dollars’ worth of trade annually around the world, so it is not surprising to see a whole range of fraud and corruption cases based around those processes.

Some of the low-level frauds are almost comical. The UK NHS suffered from a senior manager who extracted money by creating false suppliers, in order to fund her own activities as a horse breeder. The need to purchase expensive horse semen was a reason quoted in court to “justify” her criminal action.

However, without wishing to sound too sanctimonious, we do need to remember that there really are no victimless crimes, even in the seemingly light-hearted examples we see.  Taxpayers lose out when it comes to fraud related to government bodies, like the horse-related one. Even if the losses are covered by insurance for firms that are the victims, then insurance premiums will rise, or insurance-firm shareholders will take a hit. Someone always loses when a fraudster gains.

Perhaps the most annoying fact is that most buying-related fraud and corruption could be stopped by organisations taking a few relatively straightforward steps. Or where it can’t be easily stopped, and we’re talking about relatively minor frauds such as misuse of company credit cards, then it could be detected quickly.

Yet too often, the right processes aren’t in place, and we are left with a CFO after the event whining that “it was a very sophisticated fraud”. In 90% of cases, it wasn’t, the fraudsters simply exploited obvious vulnerabilities, and the CFO should be fired on the spot. If that happened a bit more regularly, we would see far fewer buying related frauds, that’s for sure!

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