Examples of the failures, defaults and financial penalties incurred in outsourced and privatised services. Evidence from UK, Ireland, other European countries, Canada, Australia and developing countries.
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Education: Individual Learning Accounts - failed marketisation of training
In July 2000 Capita Group PLC won a contract to operate the Individual Learning Account (ILA) scheme under which everyone aged 19 or over had a right to an ILA entitling them up to chose how they spent up £200 on training. Between its September 2000 launch and its closure on 21 November 2001 there were 2.5m accounts logged on to Capita's computer system. The scheme was closed because there were suspicions that abuse of the scheme had become so endemic that could not be eradicated without killing the scheme itself (House of Commons, 2002). The scheme cost £268.8m with an overspend of £69.9m. Capita received nearly 8,500 complaints by the end of October. It's security was later described as pitiful and the vetting procedures for learning providers as ‘shocking’ in evidence to the Select Committee (ibid). The level of abuse and fraud was estimated to run into millions and by August 2002 560 learning providers were under investigation by the Department's compliance unit and 99 had been transferred to the police (National Audit Office, 2002).
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CANADA: Flawed, Failed, Abandoned: 100 P3s: Canadian and International Evidence
By Natalie Mehra, Ontario Health Coalition, with research and support from: BC Health Coalition, Canadian Health Coalition, Council of Canadians, Canadian Union of Public Employees, Friends of Medicare/Alberta and National Union of Public and General Employees. March 2005. Analysis of 100 failed projects.
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Hospital cleaning
The NHS market testing programme led to a series of contract failures and reduction in cleaning standards in the 1983-2000 period (Public Service Action, 1983-1997). By 2002 some 52% of domestic services contracts were outsourced with an estimated value of £94m according to an unpublished NHS outsourcing study.
Standards had declined to such an extent that the NHS Plan launched in 2000 included a additional £31m to improve the quality of cleaning combined with a Patient Environment Action Team (PEAT) to visit every hospital to inspect standards (Department of Health 2000). In autumn 2000 only 20% of NHS Trusts had a achieved a good standard of cleanliness, rising to nearly 80% by summer 2004. Additional investment specifically to improve cleaning had risen to £68m by 2004 and the DoH issued a revised specification, recommended minimum cleaning frequencies, a revised Healthcare Facilities Cleaning Manual and best practice guidance on evaluating and awarding contracts as part of a renewed campaign to control infection, particularly MRSA (Department of Health, 2004).
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IBM savings failure in Department for Transport shared services contract
IBM’s shared services contract with the UK’s Department for Transport’s (DfT) forecast £57.0m savings by 2015, but these had vanished by March 2008 and were replaced by a forecast of £81.1m additional costs (National Audit Office, 2008). A centralised Shared Services Centre in Swansea for the departments and its agencies such as the Driver and Vehicle Licensing Agency (DVLA) and the Driver Standards Agency (DSA), began in April 2005. The original estimate of the technical contract was £16.5m, yet the Department paid IBM over £54m by the end of March 2008 plus a further £18m to other contractors.
As costs escalated, IBM got approval to develop some of the software offshore. However, “…the reduction was not as great as had been envisaged because of delays and additional costs associated with complying with the stringent government security accreditation requirements regarding software development abroad. Neither IBM nor the Department have been able to supply figures for the cost reduction, which resulted from this exercise, including the effect of increased security accreditation effort” (National Audit Office, 2008).
The Shared Service Centre had a poor performance record with delays in the availability of some services and delays in payments to suppliers. The cost per invoice processed was more than four times that of invoices processed by the National Health Service and Prison Service shared services centres.
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Individual Learning Accounts failed marketisation of training
In July 2000 Capita Group PLC won a contract to operate the Individual Learning Account (ILA) scheme under which everyone aged 19 or over had a right to an ILA entitling them up to chose how they spent up £200 on training. Between its September 2000 launch and its closure on 21 November 2001 there were 2.5m accounts logged on to Capita's computer system. The scheme was closed because there were suspicions that abuse of the scheme had become so endemic that could not be eradicated without killing the scheme itself (House of Commons, 2002).
The scheme cost £268.8m with an overspend of £69.9m. Capita received nearly 8,500 complaints by the end of October. It's security was later described as pitiful and the vetting procedures for learning providers as ‘shocking’ in evidence to the Select Committee (ibid). The level of abuse and fraud was estimated to run into millions and by August 2002 560 learning providers were under investigation by the Department's compliance unit and 99 had been transferred to the police (National Audit Office, 2002).
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Leisure Trust Failure Alternative Option for East Hertfordshire District Council
East Hertfordshire’s Leisure Services contract with Enfield Leisure Centres Ltd (Aspire Trust) has a major financial crisis. It was £500,000 in the red in the first year of a five-year contract. Resignations of senior staff and the liquidation of the Enfield Trust added to the scale of the crisis – a crisis in the making during the evaluation of the market testing bids in 2005. An in-house bid ‘disappeared’ at the evaluation stage and despite the Enfield Trust bid being based on an 8% increase in leisure income and a 10% cut in staffing costs, they were awarded the contract. But the contract was not signed until five months after staff were transferred and large sections on monitoring and staffing issues were removed.
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London Borough of Southwark – WS Atkins
The £100m education contract to operate the Local Education Authority (LEA) was terminated after two years of the five-year contract. Atkins failed to meet several key targets and claimed the contract was unprofitable. The contract termination cost Southwark Council £1.5m.
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National Air Traffic Control PPP has to be refinanced
National Air Traffic Services (NATS) was privatised in July 2001 but had to be refinanced in 2003 because the company’s financial position was not strong enough to continue with capital investment and the airline group was unwilling or unable to invest additional funds. NATS was owned by the Civil Aviation Authority and operated air traffic control in Britain. In 1997 it estimated that it needed an annual £100m capital investment to increase air control capacity. The government decided that privatisation via a PPP was the best option and NATS was privatised in July 2001. The Airline Group, a consortium of seven UK based airlines (BA, Airtours, British Midland, Britannia, Easyjet, Monarch and Virgin) obtained a 46% share in NATS for A$2,000m (£800m) (NAO, 2002). National Audit Office (2002) The Public Private Partnership for the National Air Traffic Services Ltd, HC 1096, Session 2001-02, July 2002, London.
However, the airline industry suffered a downtown after September 11th 2001 which forced a refinancing of NATS in 2003 – basically the company’s financial position was not strong enough to continue with capital investment and the airline group was unwilling or unable to invest additional funds. The four banks which funded the airline group did not want to change the structure of the PPP. After refinancing BAA plc, the owner of major airports and itself privatised in 1987, became a new investor with A$12.5m (£5m) of share capital and a A$150m (£60m) loan to NATS. The government also invested the same amount. The original PPP and refinancing deal cost A$187.5m (£75m) in advisers fees (NAO, 2004). National Audit Office (2004) Refinancing of the Public Private Partnership for National Air Traffic Services, HC 157, Session 2003-04, January, London.
BAA plc was acquired by the Spanish construction group Ferrovial in June 2006, the same company that acquired Amey plc in its financial crisis in 2002/03.
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National Express East Coast rail franchise terminated
The Government terminated the National Express plc East Coast rail franchise (London-Aberdeen) in 2009 less than two years into a 7.5 year contract. The contract required the company to pay the government £1.4bn, but had paid just £120m at termination and had failed to make service improvements. The line was renationalised in November 2009 when government owned East Coast Trains took over the route. National Express walked away at no cost and informed the company that the termination would affect future bids for rail franchises! http://www.bbc.co.uk/news/uk-14087578
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Network Rail takes over outsourced rail maintenance
Network Rail originally split the rail network into 20 maintenance contract areas which were awarded to seven firms Amey, Carillion Rail, First Engineering, Balfour Beatty, Amec, Jarvis and Serco. In October 2003 Network Rail made a strategic decision to terminate all contracts and to return all maintenance work in-house following the earlier agreement to takeover Amey's Reading contract in January 2003 (Network Rail, 2003).
By July 2004 some 16,000 maintenance staff, over 5,000 road vehicles, 600 depots and a network of 11 training centres had been transferred to create a single rail maintenance operation. Jarvis withdrew from its three contracts in October 2003 and were followed a systematic transfer in the remaining contract areas. Network Rail achieved significant improvements in performance with the new in-house operation, for example reducing delays in Thames Valley, Wessex and East Midlands by 21%, 20% and 22% respectively (Network Rail, 2004).
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Overview of Leisure Trust Performance
Comparison of performance of in-house and leisure trust services between 2000-2006 and summary of Bristol, Chiltern and East Herts trust failures.
An Audit Commission analysis of 84 inspection reports on local authority sports and leisure services showed that 6% of directly delivered local authority services were excellent compared to 0% of trusts; the comparable figures for good services were 37% compared to 30% of trusts; 60% of trusts were judged to be ‘fair’ compared with 52% of directly provided services; and 0% of the latter were considered poor compared to 10% of trusts. On the basis of these samples Leisure Trusts are not performing as well as local authority in-house services.
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Pathways to Work
In 2008–09, £94m (38%) of Pathways to Work programme expenditure on employment support did not deliver additional jobs. Between 2005-10 the Pathways programme cost £793m but did not provide a net return to the Exchequer. “Although there has been a reduction of 125,000 claimants in receipt of incapacity benefits between February 2005 and August 2009, the Department accepted that Pathways will have contributed only modestly to this reduction, and cannot determine precisely its contribution” (House of Commons Public Accounts Committee, 2010).
“Contractors have universally failed by considerable margins to meet their contractual targets for helping claimants who are required to go through Pathways. They have performed worse than Jobcentre Plus areas, although recent improvements have narrowed the difference. Despite being paid £100 million in 2008–09, providers claim not to have made a profit from their contracts. The Department agreed to pay £24 million in service fees early in view of contractor cash flow problems, although we consider the need for this was questionable given the large size of some of the organisations involved. The Department had an objective to build a healthy market, but has failed to develop an adequate understanding of the supply chain. It has not monitored how well prime contractors are sharing rewards and risks with the more than 80 specialist sub-contractors involved…..” (ibid).
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Railtrack PLC replaced by Network Rail
Railtrack PLC, the privatised rail infrastructure company was placed in administration on 7 October 2001. Railtrack was sold for £1,904m in 1996 preceded by a £869m net debt write-off. The shares were priced at 390p, almost doubled in price within a year and by 1999 were over 1,600p valuing the company at £8bn, four times its original sale price (Whitfield, 2001). Network Rail is a non-profit company limited by guarantee. It operates commercially but any surplus is reinvested in the railways it owns and maintains the tracks, signals, bridges and 2,500 stations.
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Restructuring of Royal Armouries PPP/PFI project
The Royal Armouries moved from the Tower of London to a new museum in Leeds in 1996. The £43m PPP/PFI deal with Royal Armouries International (RAI – led by 3i Group plc,) included £20m from the museum and £8.5m from Leeds City Council and Leeds Development Corporation. The Armouries financial advisers, Schroders, forecast 1.3m visitors per annum based on PA Consulting and MORI projections which would have given investors a 25% rate of return over 25 years. However, visitor numbers peaked at 344,000 in 1997 and plummeted to 191,000 within two years. This led to two refinancings of the project which ceased to be a PPP/PFI project in 1999 following the renegotiation of the contract. Cumulative losses soared to £10m in 1999 and the Bank of Scotland refused further lending thus forcing a renegotiation of the contract. The Armouries took over the running of the museum whilst RAI retained responsibility for some services. The core problem was the wildly optimistic visitor forecasts and a delay to the redevelopment of the adjacent docks which was expected to boost visitor numbers (National Audit Office, 2001).
“Under the contract revision, the main risk allocated to the private sector (the ‘demand risk’ of adequate customer numbers) was transferred back to the public sector whilst shareholders, who should have lost their investment when the contract failed through lack of cash, were substantially protected. These changes were achieved by shifting responsibility for the new museum to the Royal Armouries whilst RAI was allowed to retain profit-making activities such as catering, car parks, and corporate hospitality, giving shareholders a chance of profit even though the venture had failed and under the original agreement they should have lost their money” (UNISON, 2004, Public Risk for Private Gain: The public audit implications of risk transfer and private finance, July, London).
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Sale and lease-back of government buildings offshored
The New Labour government, keen to establish a market in the sale and lease-back of government buildings, announced a A$9 billion (£3.6 billion) private finance initiative deal with Mapeley Group in March 2001. It included 700 buildings of the Inland Revenue, HM Customs and Excise, and the Valuation Office Agency in the Strategic Transfer of the Estate to the Private Sector (STEPS) project. Mapeley immediately transferred the freehold and long-lease properties to Bermuda.
The New Labour government, keen to establish a market in the sale and lease-back of government buildings, announced a A$9 billion (£3.6 billion) private finance initiative deal with Mapeley Group in March 2001. It included 700 buildings of the Inland Revenue, HM Customs and Excise, and the Valuation Office Agency in the Strategic Transfer of the Estate to the Private Sector (STEPS) project. It was similar to an earlier private finance initiative project by the Department of Work and Pensions for the Newcastle Estate. Under sale and lease-back, the state sells buildings that are maintained by private sector property management companies for 21 years, who then find other tenants/uses.
Mapeley immediately transferred the freehold and long-lease properties to Bermuda. Mapeley is owned by Fortress Investment Group, USA, Soros Real Estate, Netherlands and Delancy East Ltd, UK, but it is now based offshore in Bermuda. The Strategic Transfer of the Estate to the Private Sector is expected to save A$860m (£344m) over the 20-year contract period. However, Mapeley estimated that it would have had to increase its bid price by A$137.5 (£55m) to bring the STEPS properties onshore: in other words, the Inland Revenue lost A$137.5m (£55m) income because of the deal. But the shareholders of Mapeley are non-UK resident and do not have to pay UK capital gains if they sell their shareholdings – this is a potential additional loss of income for Inland Revenue. Inland Revenue knew about the offshore plan during preferred bidder negotiations, but HM Customs and Excise were not informed until after the contract was signed!
Seven months into the contract, Mapeley demanded more money based on errors in pricing its bid and the level of contract variations, and claimed an annual shortfall of A$67.5m (£27m). Mapeley’s bid was some A$1,250m (£500m) lower than two other bids. The Departments refused to pay and the firm’s shareholders injected additional finance. Four years into the contract the performance management system had still not been agreed. By April 2004 the Departments had spent an additional A$32.5m (£13m) on consultants for the STEPS project.
Yet the National Audit Office made no comment on the offshore aspects of the deal except that the A$137.5m (£55m) was “not material”. However, they did recognise that the STEPS business model “has a high degree of fixed costs and is therefore very sensitive to any future shortfalls in forecast income”. Civil servants appearing before the Committee of Public Accounts could not give any assurances on whether the A$860m (£344m) savings will be achieved or not. Despite all the pitfalls with this project, the National Audit Office claimed that “STEPS had demonstrated a number of benefits both for departments and for bidders, for example, reduced costs and a more attractive portfolio of properties” (National Audit Office, 2004). The evidence shows only that it may have reduced costs in the first four years of a twenty-year contract. The only certainty is that the private sector gets an ‘attractive portfolio of properties’ from such deals.
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Savings greater if IT kept in-house
The majority of companies that have outsourced IT operations would have saved more money had they kept the services in-house, acc-ord-ing to a study of contracts worth more than £3bn. The outsourcing industry is facing a mid-life crisis with some “high-profile outsourcing deals being taken back in-house” and employers starting to question the value of long-term savings, research by Compass Management Consulting found. www.ft.com/cms/s/0/c314d2dc-f136-11db-838b-000b5df10621.html
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Scope of Strategic Partnership Reduced by Swansea City Council
The City Council signed a £83m contract with CapGemini in 2006 to transform IT services and promising £70m savings over ten years. However, a year later the contract was reduced to a £40m project with the abandonment of phase 2.
The City Council signed a £83m contract with CapGemini in 2006 to transform IT services and promising £70m savings over ten years. However, a year later the contract was reduced to a £40m project with the abandonment of phase 2. An investigation by the external auditor, PricewaterhouseCoopers, revealed that only £6m savings had been achieved even from the reduced contract, which had claimed £26m savings. Furthermore, the City Council had transferred only 5% of the risk of failing to meet savings targets to CapGemini. The City Council, CapGemini and UNISON representatives had agreed a secondment model for staff during the preferred bidder negotiations but this was overturned only hours before the Cabinet meeting approving the contract.
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Strategic Partnership Significantly Reduced by Redcar & Cleveland Council
The City Council signed a £83m contract with CapGemini in 2006 to transform IT services and promising £70m savings over ten years. However, a year later the contract was reduced to a £40m project with the abandonment of phase 2.
The City Council signed a £83m contract with CapGemini in 2006 to transform IT services and promising £70m savings over ten years. However, a year later the contract was reduced to a £40m project with the abandonment of phase 2. An investigation by the external auditor, PricewaterhouseCoopers, revealed that only £6m savings had been achieved even from the reduced contract, which had claimed £26m savings. Furthermore, the City Council had transferred only 5% of the risk of failing to meet savings targets to CapGemini. The City Council, CapGemini and UNISON representatives had agreed a secondment model for staff during the preferred bidder negotiations but this was overturned only hours before the Cabinet meeting approving the contract.
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Strategic Partnership terminated by Bedfordshire County Council
The Strategic Service-delivery Partnership (SSP) between Bedfordshire County Council and HBS Business Services was terminated by the County Council in August 2005. Nearly 550 staff were transferred from HBS back to the County Council. The council took over all HBS services, all the staff and assets involved in the delivery of those services. It paid HBS £6.75m to purchase assets such as IT, furniture and fittings and to acquire goodwill, contracts and services provided by HBS, including to schools and other organisations. This document sets out the rationale for terminating the contract and the terms of the agreement.
Bedfordshire County Council agreed a £267m Strategic Service-Delivery Partnership with HBS Business Services Group in June 2001 and transferred 550 staff to HBS. Bedfordshire UNISON commissioned the Centre to undertake an evaluation of the Strategic Partnership. The study revealed that the partnership was in crisis and had failed to deliver. The contract was terminated in August 2005. Documents include the rationale for terminating the contract and the terms of the agreement.
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Terminated UK PPP Projects
Details of 15 terminated PPP projects plus 5 other projects with major difficulties (download document).
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West Berkshire Council Terminates Strategic Partnership
In June 2005 West Berkshire Council terminated a £168m Strategic Service-delivery Partnership with Amey plc. The contract, for IT and corporate services, had only completed three of the ten year contract period. Amey plc agreed to pay £3m to the Council as part of the settlement agreement. The document includes the Council resolution and press releases.
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UK: 105 public sector ICT contract failures
The ESSU Research Report No 3 identifies the scope of major cost overruns, delays and terminations in 105 outsourced public sector ICT projects in central government, NHS, local authorities, public bodies and agencies in the last decade. There has been wide reporting of individual and department or authority-wide project failures in the national and ICT press but little analysis of the overall scope and evidence. The value of contacts is nearly £30billion with an average cost overrun of 30.5%.
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247 Cancelled and Distressed PPP and Privatisation Projects in Developing Countries
World Bank Private Participation in Infrastructure Database: Two tables providing sector and regional analysis by value and number of projects of 247 cancelled and distressed PPP and Privatisation projects in developing countries between 1990-2007.
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37 Failed Privatisation Projects in Water Supply and Sanitation
A global list of failed privatisation projects in water supply and sanitation by country, date started and ended, companies, reason for failure and outcomes such as renationalisation. From Water: Private, Limited: Issues in Privatisation, Corporatisation and Commercialisation of Water Sector in India, 2007, by Gaurav Dwivedi, Rehmat and Shripad Dharmadhikary.
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British Energy
The privatised nuclear power generator, supplying 20% of Britain's electricity, had to be bailed out by the government to the tune of £410m in 2002 to meet the company's debts. A restructuring deal was agreed in which the company's creditors agreed a debt-for-equity swap in which they take control of 97.5% of the shares leaving the existing shareholders with just 2.5%. The restructuring deal has been extended to March 2005. British Energy was delisted from the London Stock Exchange as part of the agreement from where it was first privatised as part of the Tories electricity privatisation.
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Connex South East Trains
On 26 June 2003 Connex were informed by the Strategic Rail Authority that after seven years of poor performance their rail franchise was being terminated. Connex were given a choice of immediate termination or 6 months notice and chose the latter although they later agreed an early transfer with South Eastern Trains taking over on 9 November 2003 (SRA, 2003). South Eastern Trains is a newly formed subsidiary of the SRA. Between 1996/97 and 2002/03 Connex received £779m in public subsidies (www.csenews.net).