Lawmakers Urge U.K. to Learn From Carillion’s Failure

(Bloomberg) -- The U.K. government has a “depressing inability” to learn from repeated mistakes in contracting for outside services and must use the collapse of Carillion Plc to learn how to do better, according to a parliamentary report.

Carillion, an outsourcing company with deals in everything from hospitals to a high-speed rail project, collapsed in January and left behind debts of about 1.6 billion pounds ($2.1 billion) after a series of construction agreements soured. The failure has led to a number of parliamentary inquiries and increased scrutiny of government procurement.

In a report from the Public Administration and Constitutional Affairs Committee published Monday, lawmakers said the government must stop prioritizing cost over risk and quality.

“Despite the U.K. leading innovation in this field for some 30–40 years, there has been a depressing inability of central government to learn from repeated mistakes,” the report said. “To some extent the collapse of Carillion and the state of the sector reflect this.”

The U.K. government spends about 250 billion pounds a year on outsourcing and contracting, according to the report, but decisions are often unclear. The government should be forced to justify its reasons publicly and better understand the risks it’s transferring to third parties before awarding contracts, the report said.

The report also criticized the use of deals in which private firms are contracted to fund, construct and maintain projects, getting repaid over many years. There are currently about 700 such arrangements, which keep debt off the government’s balance sheet, worth about 60 billion pounds in the U.K.

“The government’s preoccupation with price has been noticed by the market and is a matter of grave concern,” the committee said. “The government’s failure to assess the quality of services as well as their cost is lamentable” and a complete reappraisal of the system is needed.

The panel agreed with the government’s decision not to bail out Carillion and praised its preparation for the collapse, which ensured most services kept running. The committee also urged the Cabinet Office to assess its risk exposure to other large outsourcers such as Serco Group Plc and Capita Plc, which are in the midst of turnaround plans following profit warnings.

To contact the reporter on this story: Suzi Ring in London at sring5@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, John J. Edwards III

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