Does outsourcing make corruption more likely?

By Tony Collins

Few journalists want to write about corruption in local government unless they have specific evidence from a court case. Which helps to explain why a well-researched report on the subject last week attracted little mainstream publicity, although there was a piece in the Professional section of The Guardian .

Journalists assume, perhaps like many people, that local government doesn’t have a problem with corruption. But by its nature a subtle exploitation of the opportunities provided by a lack of oversight and accountability – at worst indifference – will remain hidden.

Who would say anything to the police – and if the police were informed would they act? – if officers or councillors shaped policy or a decision in favour of a certain company, with a view to opening up a path to future employment? Could such subtle deviance be proven?

“The temptation might be exacerbated by the risk of redundancy, providing a greater incentive for officers to use their position to build a network with a view to future employment,” says last week’s report Corruption in UK local government – the mounting risks.

The report was not written by a marginal organisation. It was researched and drafted for Transparency International by Elizabeth David-Barrett, Research Fellow at Said Business School and Director, Corruption and Transparency Research Centre, Kellogg College, Oxford University. Funding was from the Joseph Rowntree Charitable Trust.

Transparency International defines corruption as the abuse of entrusted power for private gain. David-Barrett says a disturbing picture emerges of conditions in which corruption is likely to thrive, what she calls:

“low levels of transparency, poor external scrutiny, networks of cronyism, reluctance or lack of resource to investigate, outsourcing of public services, significant sums of money at play and perhaps a denial that corruption is an issue at all”.

High standards in public life are the norm but David-Barrett notes that a “feature of researching this report has been the lack of agreement among the many experts we consulted about the scale and prevalence of corruption in UK local government”.

Some argued that the cases that have come to light represent the tip of the iceberg. Others said the small number of obvious corruption cases, and their disclosure by existing oversight structures, indicated there was no iceberg.

The report makes no comment on current levels of corruption but points out that, by its nature, it will usually remain hidden. Corruption in local government does exist, says the report, and it gives a few examples that have been publicised.

Outsourcing

“If local authority employees abuse their access to insider information or their ability to shape policy or contracts whilst in office in order to create opportunities for themselves, their friends, or for private-sector companies for which they will later work, this is corrupt,” says the report.

Such corruption could manifest itself in poor services and value for money. It may shut out companies of unquestionable integrity that could offer better deals.

That said, some suppliers may be concerned about the risks to their reputation of hiring through the revolving door. One unnamed interviewee quoted in the report says:

“We’ve been approached by individuals who are retiring from local government but don’t want to stop working. They come to us and say they can help us, they have a lot of experience. We look at it very carefully and err on the side of caution if we are going to be working with that council.”

But another interviewee is quoted in the report as saying

“There are situations where local authority staff end up working for contractors and implicit agreements to scratch backs in return for contracts will arise.”

The report claims that a council officer who had written the specification for a tender for a particular contract resigned from the council and successfully bid for the contract as a private-sector supplier.

Undue influence

“Research conducted for this report suggested that revolving-door type corruption is difficult to prove, but may not be uncommon and is certainly creating suspicions which, in themselves, undermine public confidence.”

Change requests

An interviewee is quoted in the report as saying

“…the number of variations – that’s where people make money. The profit is often determined by the award of work under the framework contracts, particularly where the pricing basis is not clearly defined, so that you can end up with charging for extra work by hourly rates.”

Another interviewee said

“The sharp operator in terms of the outsourcing contractor company will have agreed a contract based on a lump sum, invariably based on a local authority which, at the time that the contract was let, was much larger.

“If you have a company which provides HR, IT and admin, where can it make its savings? If they are prepared to make the investment, they can usually make significant savings for themselves, that’s where they are legitimately making some of their profit, but if the local authority has downsized over the years, then there is less to provide.

“So if it’s a 20-year contract, every 5 years there is a review and renegotiation based around head count. But normally councils are not very good at negotiating soft-side deliverables.”

The report says that corruption can arise if favoured sub-contractors are not held accountable, or the use of sub-standard goods is overlooked, or if a corrupt company and corrupt supervising official collude to agree on price increases or changes in specifications.

“There is a key weakness in the governance of this area because the contract implementation phase is often managed by the local authority department which uses the procured goods or services, rather than by the central procurement function. This department may be unaware of the precise terms of the contract and may not notice if corners are cut.”

A procurement expert is quoted in the report as saying

“There might be a disconnect between a procurement department that does this first part [pre-tender and tender] and the ‘client’, for example, the council’s IT dept. It is the IT department that is supposed to monitor the contract, and see how it is performing, but the disconnect reduces accountability. The supplier might be able to provide sweeteners to the IT department to re-negotiate the contract without going back through the procurement department.”

Another procurement specialist said that relatively few resources are devoted to contract management.

“The central functions in local authorities often focus on contract letting and not contract management. Many of the same skills are involved, but less [sic] resources are devoted to contract management. And departments are often left to manage contracts – raising risks not just of corruption but also of inefficiency.”

Does outsourcing reduce accountability?

“When services are outsourced, local authorities retain a statutory obligation to ensure that all of the rules that would have applied to them are equally followed by the external providers. However, the extent to which that obligation is fulfilled varies… there are concerns that local government officers do not adequately monitor contract performance or respond to complaints. Councils sometimes seek to claim that decisions made by contractors on long-term contracts are beyond their control.

“Without the Audit Commission to exert pressure and with the decline of local investigative journalism, there is a risk that corruption in this area will become more common.

“The Institute for Government’s 2012 report, Commissioning for Success, argues that decisions about when to outsource need to be made on a more robust basis, that monitoring and stewardship of outsourced services needs to be strengthened, and that accountability arrangements need to be clarified.”

Auditors enfeebled?

The report says

“The system of checks and balances that previously existed to limit corruption has been eroded or deliberately removed.

“These changes include the removal of independent public audit of local authorities, the withdrawal of a universal national code of conduct, the reduced capacity of the local press and a reduced potential scope to apply for freedom of information requests. We have identified 16 areas in which we find a marked decline in the robustness of local government to resist corruption…”

The lack of independent audits is a particular concern. Audits are carried out by companies that can be sacked if they’re too critical.

“We believe that the new system – in which local authorities themselves are solely responsible for awarding their audit contracts and where there is no back-stop support for auditors who are challenging the local authority – will narrow the scope and effectiveness of local audits, while increasing potential conflicts of interest…”

External auditors risk being sued if they try to highlight suspected corruption in a report, even if they have the appetite to do it “which is less likely given their commercial priorities and the expected relative reduction in the scope of audits”.

The report goes further and says that external auditors “may face incentives to avoid undertaking investigations or raising concerns about suspicions of fraud or corruption”.

Audit professionals interviewed for this report saw these as serious concerns. One commented, “If you come down tough on a client, and it creates ruffles, you’ve got an eye to what will happen when it goes to open competition.”

Another said “external auditors now have nominal independence but they will probably feel pressure to keep their clients happy so as to avoid losing this contract, future contracts, or non-audit contracts with the local authority.”

Risks

Particular risks of corruption include:

1. public procurement at needs assessment stage;

2. public procurement at bid design stage;

3. public procurement at award stage;

4. public procurement at contract implementation stage;

5. control and accountability over outsourced services;

6. the revolving door of personnel between local authorities and private companies bidding to provide services;

7. planning discretion and influence regarding ‘permissions to build’ decisions;

8. planning discretion and influence regarding ‘changes of use’ decisions;

The report says:

“We feel it is important to emphasise, as has been noted in a number of public consultations and inquiries, that the majority of local councillors and council officers observe high standards of conduct and very few misuse their positions to further their own ends.

“There is no substitute for a commitment to ethics and integrity in public service. However, when accountability is absent, public officials may exercise their power for private ends unchecked by scrutiny, complaint, or the threat of punishment.

“Clear opportunities exist for unethical officers and members to exploit public trust for private gain. In any sector, corruption tends to increase as oversight and enforcement are weakened…

“Irrespective of how much corruption currently occurs, we believe that under the new and proposed arrangements for local government, corruption is likely to increase and there will be less reporting of that corruption.”

Media enfeebled?

The report says there is little scrutiny of local authority work by a “largely emasculated local media”; and the ballot box “provides only feeble discipline given that turnout is low and in many areas one party dominates or seats go uncontested”.

Corruption scandals over the years have revealed that individuals are sometimes able to capture local politics, exercising informal power over the local party and their political group as well as council officers, “so that they can shape policy to serve their own interests unchallenged by their peers”.

Countering corruption

The report highlights a need for:

–  Effective assessment of corruption risks;

–  Independence of the units or authorities whose duty is to prevent or investigate corruption;

–  Visible and effective whistleblowing mechanisms.  “Whistleblowing has been more effective than audit, internal monitoring, or police investigations in revealing corruption in local government … Suitable mechanisms should be established to provide an easy-to-use and confidential channel for reporting corruption suspicions or incidents.”

– The institutional will to mount effective investigation and prosecution of corruption;

– A nominated individual in every local authority who is responsible for counter-corruption and who conducts a regular corruption risk assessment and liaises closely with law enforcement authorities.

– Strong sanctions implemented against those who are caught – both legal and other;

– A commitment to transparency.

– Firms providing an audit function for local authorities not being allowed to provide other commercial and consultancy services to the same local authority.

–  Internal investigations being adequately resourced and sufficiently independent. “Internal audit teams are vulnerable to manipulation by the corrupt, and this vulnerability increases if they are under-resourced, unsupported by the leadership or have their terms of reference and freedom to investigate curtailed.”

– Strict procedures requiring officers always to report (i) major price discrepancies among procurement bids and (ii) details of contract variations to the council’s Audit Committee and senior management.

– Greater monitoring of elected officials’ interests

–  Private companies, when operating services in the public interest, to be required to comply with the Freedom of Information Act with regards to those services. Specifically audit reports from local authorities should be covered under the Freedom of Information Act or published directly as public documents.

Thank you to openness campaigner Dave Orr for drawing my attention to the Transparency International report.

Comment

Lack of firm oversight, and a tolerance of bad practice contributed to the financial crisis of 2007/8. It was normal to give mortgages to people who had no means of paying them back. Only when the crisis became manifest did people realise that what had been regarded as normal behaviour was in fact deviant.

Is there a danger of tolerance in local government to aberrant behaviour such as the shaping of policy to favour outsourcing which could later benefit some individuals?

Those who claim corruption hardly exists can point to the strong ethos of public service in many councils – and indeed countless councillors do important public work for very little money – but that doesn’t remove concerns about what may remain hidden.

Transparency International’s report rings alarm bells. It points out that auditors, the media and whistleblowers are unlikely to expose deviant practices, and are even less likely to in the future. The report suggests that local government provides unprecedented opportunities for corruption.

“The accomplice to the crime of corruption is frequently our own indifference.”  – Bess Myerson, columnist. 1974.

Corruption in UK local government – the mounting risks.