Submission by Transparency International UK (TI-UK)

1. Summary

1.1   This submission focuses on corruption risks around procurement, which threaten to undermine good value for money, support criminal activity, and have the potential - if unchecked - to damage public trust in local authorities. This submission is based on the October 2013 Transparency International UK (TI-UK) research paper “Corruption in UK Local Government”[1], which provides further detail on corruption risk profile issues.

Our key points are:

1.2   With control of around one-quarter of total public spending, increasingly distributed through outsourced contracts to private providers, local government is inherently exposed to considerable corruption risk.

1.3   Specifically regarding local authority procurement, TI-UK is concerned about the following:

• poor controls and monitoring of contracts at implementation phase;
• a lack of capacity within some local authorities to manage large and complex contracting processes;
• a lack of transparency of outsourced and contracted services;
• weakened internal audit and counter fraud teams;
• poor controls over ‘revolving door’ risks where individuals move from local authorities to private sector contractors; and
• a poor whistleblowing environment.

1.4   The level of data transparency around local authority procurement is not available to achieve public or market-competitor scrutiny of procurement decisions.

1.5   Recent legislative reforms under the Localism Act 2011 - and likely to pass in the Local Audit and Accountability Bill currently in parliament - have removed key institutional defences to ensure resilience against corruption risks, replacing them with arrangements that are highly likely to be inadequate to protect the public interest and the public purse.

1.6   The new role of private audit will be more limited than the public audit model for local authorities. It will not include a duty to investigate corruption (including with regard to procurement), not provide support to auditors who challenge local authority managers on corruption issues, and is likely to be more expensive than the public audit model.

1.7   It will be more expensive and more difficult to address corruption within the system once it has established a substantial foothold, rather than understand and address the risks which are evident now.

2. Consultation Questions:

CONSULTATION QUESTION 5. How is regularity and propriety of procurement secured and are the arrangements for detecting and addressing impropriety and fraud effective?

2.1   By 2014, total public spending by local government is projected to be £171billion – 24% of all public sector spending.[2]  Local government accounted for 63% of total public sector outsourcing in 2012, a 7% rise from 2008, with the total value of council contracts let to the private sector increasing by 140% to £12.9bn over the period 2008-12.[3]  With control of around one-quarter of total public spending, increasingly distributed through outsourced contracts to private providers, local government is inherently exposed to corruption risk.

Detecting and addressing impropriety and fraud in procurement

2.2   We have several specific concerns around the regime for detecting and addressing impropriety and fraud in procurement for the Communities and Local Government Committee to consider. These are as follows:

2.3   Contract implementation governance risks. Our research suggests that the contract implementation stage of the procurement process - in which the winning bidder must provide the agreed goods and services according to the conditions and timing agreed in the contract and the local authority should monitor the fulfilment of the contract - is much less tightly controlled than the earlier stages.  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 stage 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 – raising risks not just of corruption but also of inefficiency. Contractors can often make their profit by bidding low at initial stages of contract bidding and then negotiating variations - including increases in the price or the use of cheaper inputs - across the life of the project. There is a risk that the local authority’s procurement team could collude in that strategy.  If contracts are written with a view to such re-negotiations of terms and rates, or with provisions for charging extra for unforeseen eventualities or errors, this may be corrupt. There is no standard guidance for declaring gifts and hospitality from contracting agencies, and - for elected officials - it is no longer a requirement to declare such lobbying.

2.4   Contract management capacity. Local authorities are frequently involved in high-value, complex, long-term procurements, where monitoring is inherently difficult and likely to involve many discretionary judgements on the part of officers and members.  High staff turnover and a lack of project management expertise also lead to weaknesses in personal responsibility and accountability for major projects.  A lack of control over major projects can lead to cost overruns and delays, but can also mean that it is difficult to detect instances of corruption.  Some authorities clearly struggle to manage such large-scale contracts, such as the Wirral Council –Highways and Engineering Services contract case in June 2012[4].

2.5   Lack of transparency. 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, 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.  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 in contract.[5] Commercial confidentiality further inhibits scrutiny of their work.  Information about services provided by local government in-house teams is subject to Freedom of Information Act requests, but private-sector companies that provide outsourced services are not automatically covered by the Act.  The public’s ability to hold local government to account for outsourced services depends on what is covered by the contractual relationship, where the Freedom of Information Act does apply.  This is not always sufficient to allow full scrutiny of service provision.  The contract might, for example, narrowly define the information to be treated as held ‘on behalf of the local authority’, thus limiting the public’s right of access to information.[6]

2.6   Weakened internal investigations. Our research suggests that the internal audit function is being weakened because local authorities are responding to the need to reduce spending by reducing these back-office functions.  A recent national survey by the Local Authority Investigation Officers Group found a 15% reduction in the number of fraud managers, as well as an 8% reduction in senior investigators, a 15% reduction in regular investigators, and a 19% reduction in intelligence officers.[7]  Cutting counter-fraud staff might be less politically controversial than cutting frontline services, but it is likely to be a false economy in the longer term, since internal auditors will be less able to save the council money by identifying fraud and inefficiency.  Local government will have significantly less internal capacity to investigate fraud from 2014, mainly because of austerity measures.[8] The Audit Commission previously provided specialist professional skills in counter-fraud and corruption that were not available to many local authorities, working with them to identify risks and encouraging good practice.  With the Commission abolished, many local authorities will lack access to such capacity.  Under pressure to cutback spending, and with the message from the centre that investigating fraud is not a priority, some local authorities will retain very little investigative power.  This could have serious implications for the future ability to detect and deter fraud, corruption and organised crime.

2.7   Revolving door risks. Local authorities increasingly outsource the provision of services that they would once have provided internally.  Frequently, the new supplier of those services also hires local authority employees to carry out the job.  This makes sense, in that the expertise about how to provide a service in a certain locality is maintained and there is greater continuity in service provision, which should benefit residents.  However, it also creates a risk of corruption.  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.  In addition, it might have consequences in terms of services being provided at low quality or poor value for money.  The transfer of individuals from government to private-sector roles, sometimes known as the ‘revolving door’, has been associated with many apparent conflicts of interest at the national level.[9]  These conflicts of interest can manifest as ‘abuse of office’, where an official might use his or her power while in office to shape a policy or decision in favour of a certain company, with a view to ingratiating himself or herself with that company and thus opening up a path to future employment; ‘undue influence’, where a former officer now employed by a private company might influence his or her former associates to make a decision in a way that favours the company; and ‘profiteering’, where an individual might profit from public office by drawing on information, knowledge or stature derived from his or her public role in order to profit financially. TI-UK research suggested that revolving-door type corruption is difficult to prove, but may be occurring at a significant rate.

2.8   A poor whistleblowing environment. Whistleblowing is one of the main ways of detecting procurement corruption and fraud in both the public and private sectors.  This is because the employees of an organisation typically have much more information and more opportunities to witness misconduct than external enforcement agencies.  A good framework for whistleblowing can thus play a key role in reducing fraud and corruption. However, whistleblowers often face high personal costs as a result of their actions.  Research conducted recently by Public Concern at Work (PCaW – a UK whistleblowing charity) and the University of Greenwich analysed 1,000 calls to PCaW’s whistleblowing advice line.   The study found that, of the 40% of callers who reported receiving a response to their actions, in one-fifth of cases the individuals were subsequently dismissed.  A further 21% of those who received a response experienced some form of informal reprisal, including ostracism by co-workers, verbal harassment or unreasonably close monitoring by superiors.  These forms of retaliation often result in individuals leaving their jobs, suffering stress and anxiety as well as isolation.  Whistleblowers can often find it difficult to gain new employment in the same sector.  Whistleblowing is only effective if there is an appropriate culture of support for whistleblowers, as well as the legal protection.  It is therefore cause for concern that the PCaW research found that, of all those surveyed, "those working in local government have the lowest expectations that the wrongdoing will be stopped and that the investigation will be satisfactory throughout the process of raising a concern".[10] The abolition of the Audit Commission removes an important safeguard and reporting point for whistleblowers.

CONSULTATION QUESTION 6. Is local authority procurement fully transparent, audited effectively and does it provide appropriate mechanisms for redress? Specifically, are the arrangements for securing the accountability of procured services and goods to local authorities and local residents adequate and effective? More specifically, to what extent are local authorities able to provide assurance to central government that value for money (in the broadest sense of the term) is delivered?

2.9   The answers to the Committee’s consultation questions ‘5’ and ‘6’ are interwoven because, in part, the current inadequacies in the oversight of probity result  from a shift from a public audit model to a private audit model in England.[11]  Private sector audit provides an audit opinion on the financial statement of the audited organisation. However, historically, public audit has gone further to examine regularity, propriety, probity and value for money as well. Neither internal audit teams nor external auditors in England in the future will have the range of powers that the Audit Commission had. The resulting loss of these functions has damaged the detection, investigation and prevention regime for corruption in local authority procurement in England.

2.10           Recent legislative changes – the effectiveness of the new audit regime to counter corruption

2.11           The new audit regime, as set up, will not have any responsibility for tackling corruption. The loss of defences against corruption through the audit regime – from one perspective – is likely to have negative consequences for value for money, alongside implications for growth in fraud and organised crime and degrading public trust.

2.12           Recent legislative reforms under the Localism Act 2011 - and likely to pass in the Local Audit and Accountability Bill currently in parliament - have removed key institutional defences to ensure resilience against these corruption risks, replacing them with arrangements that are highly likely to be inadequate to protect the public interest and the public purse. Under the new standards and audit frameworks, corruption is likely to increase while policy makers, the public and police will have much less information about how and where corruption is occurring in local government.

2.13           After the abolition of the Audit Commission, local authorities will be responsible for appointing their own external auditors.  We are currently in a transitional period, with five-year contracts starting from 2012-13 having been let to private auditing firms.  The contracts have been let at a much reduced rate, representing a 40% cut in the audit fees paid by local public bodies.[12]  However, it is not clear that the cuts will bring better value for money for the public.  The Government claims that it will save £250 million over five years, but, even if this proves accurate, this should be weighed against how much money might be lost through increased fraud and corruption if the new system proves inadequate.[13]  TI-UK understands from private sector audit experts that the final audit arrangements are likely to cost more than the public audit model. This stands in stark contrast to the basic reasoning for abolishing the Audit Commission. The decision to abolish the Audit Commission was largely based on estimates that the private sector could save money compared to the work of the Audit Commission/public audit model.[14]

2.14           In terms of the new model, when local authorities are able to appoint their own external auditors, from 2017, the independence of auditors may be compromised.  They may feel even less able to act without fear or favour, moderating their behaviour with a view to having their contract renewed and ensuring that their bill is paid.  Auditors may also be deterred from undertaking additional investigations for fear that the extra costs incurred will be disputed or go unpaid.[15] The Audit Commission used to play an intangible role in offering institutional protection to external auditors, which empowered them to pursue investigations without fear of being sued or losing future contracts with local authorities.  If auditors complied with the Audit Commission’s quality standards, they could carry out a piece of work confident that they would not get sued (at least nobody had been successfully sued) and confident that they were appointed by the Audit Commission, not the finance director of the local authority that they were investigating. 

2.15           A further problem with the new system is that the audit process will be much less transparent.  Previously, the work of the Audit Commission was covered by the Freedom of Information (FoI) Act and even some information held by external auditors was regarded as being held by the Commission in certain circumstances - for example, when it was investigating a complaint against a specified auditor, conducting quality control of their work, or when it had required an auditor to provide information for the discharge of wider Audit Commission functions, such as making judgments on local authorities’ use of resources.  This information was also subject to the Freedom of Information Act, meaning that it was possible for the public to scrutinise the work of external auditors where there were suspicions of misconduct.  However, no public authority has inherited those responsibilities from the Audit Commission, and hence under the new framework, information held by external auditors about the activities of local authorities will no longer be automatically covered by the Freedom of Information Act, but rather the details of what is covered by the FoI Act will depend on the terms of contracts. Citizens retain a right to gain access to other relevant information through the courts, but this represents an unnecessary cost and ultimately a barrier to public accountability.

2.16           The Government has also argued that formal and central institutions can be replaced by informal and local forms of accountability – for example, ‘armchair auditors’.  Yet there is no evidence that this will emerge. Given the decline of the local press and the patchy nature of civil society activity on local issues, it cannot be taken for granted. The public does scrutinise some of the work of local government, particularly making use of Freedom of Information requests, and this scrutiny almost certainly helps to deter corrupt activity.  However, the public does not by and large have the interest or capacity to monitor the conduct of local government to the depth necessary to hinder or detect fraud and corruption.  Moreover, even if the public detects suspicious conduct, it does not have the investigative capacity to probe whether standards or rules have really been violated or any institution to which it can turn to make a formal objection or allegation (which would previously have required a response, in the form of either an investigation or a reason why no further action was required).  The level of data transparency around local authority procurement is not available to achieve public or - more significantly and more powerfully - market-competitor scrutiny of procurement decisions.

2.17           Under the new arrangements, the police are the main body with the responsibility to investigate corruption allegations.  Yet this is fraught with difficulties, such that it is unlikely to work. Investigating and proving corruption is one of the hardest tasks in criminal prosecutions, which is why investigating authorities usually require specialist teams and units to deal with it, armed with the appropriate investigative powers. Under the former regime, the Audit Commission had special powers and responsibilities to investigate financial misconduct and illegality including the right to require and seize records even from third parties and demand explanations from officers, councillors and even contractors and those working alongside local authorities.  Importantly, it could produce Public Interest Reports to highlight corruption risks and issues without the need for the level of evidence that would be required by the Crown Prosecution Service.  Under the new arrangements, an external auditor risks being sued if it tries to fulfil a similar role, even if the auditor had the appetite to do it – which is less probable given their commercial priorities and the probable limiting of the scope of audits. There is strong reason to doubt that the police will devote resources to investigating possible violations or that the Crown Prosecution Service will consider it worthwhile to prosecute, especially in smaller cases. This is in addition to the police’s reduced capacity to investigate fraud and corruption in general as a result of austerity programmes affecting a range of police services.

2.18           In summary, the new role of private audit will be more limited than the public audit model for local authorities. It will not include a duty to investigate corruption (including with regard to procurement), not provide support to auditors who challenge local authority managers on corruption issues, and is likely to be more expensive than the public audit model.

3. Recommendations

3.1   Action now, following the recommendations below, will help to reverse the descent into a situation in which local government corruption is likely to increase, and perhaps increase substantially.  It will be more expensive and more difficult to address corruption within the system once it has established a substantial foothold, rather than understand and address the risks which are evident now.

3.2   The Government needs to review the changes that are taking place in local government to ensure that they do not inadvertently create an enabling environment for corruption.  This will require, at a minimum, a corruption risk assessment, strengthened whistleblowing systems, enhanced audit procedures, extension of the Nolan Principles and Freedom of Information to the private sector.

3.3   On reporting of procurement risks, there should be 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. Consideration should be given to how this data can be made available to the public, so that the scrutiny from market competitors who may have lost out to corruption – with the expertise and incentive to investigate that they provide – can be brought to bear.

3.4   Each local authority should have a nominated individual responsible for counter-corruption who conducts a regular corruption risk assessment and liaises closely with law enforcement authorities. Internal investigations teams need to be 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.

3.5   The rules should be tightened for ‘revolving door’ employment in the private sector, notably when officials and elected members have had access to confidential public service information.  Each local authority should be required to publish appropriate details of officials or elected members involved in the revolving door.

3.6   To support the independence of auditors, firms providing an audit function for local authorities should not be allowed to provide other commercial and consultancy services to the same local authority. Auditors should be allowed to access documents from significant private contractors that a local authority has used.

3.7   To support police investigations, guidance and resources should be provided to ensure that there is sufficient police investigative capacity to monitor and investigate corruption issues at a local government level, including as part of any organised crime strategy.  The police forces in England & Wales should consider creating a joint Public Sector Counter Corruption Unit, similar to the unit recently created in Scotland.

3.8   Whistleblowing has been more effective than audit, internal monitoring, or police investigations in revealing corruption in local government. Given the decline in other oversight mechanisms, confidential whistleblowing from citizens, employees, elected officials and the private sector will play an even more important role.  Suitable mechanisms should be established to provide an easy-to-use and anonymous channel for reporting corruption suspicions or incidents, beyond the local authority itself[16].

October 2013

Annex I

Transparency International UK (www.transparency.org.uk), the UK national chapter of TI, fights corruption by promoting change in values and attitudes at home and abroad, through programmes that draw on the UK’s unique position as a world political and business centre with close links to developing countries.

TI-UK: 

• Raises awareness about corruption;
• Advocates legal and regulatory reform at national and international levels;
• Designs practical tools for institutions, individuals and companies wishing to combat corruption; and
• Acts as a leading centre of anti-corruption expertise in the UK.

TI-UK’s vision is for a world in which corruption is greatly reduced and the UK has zero tolerance for corruption both at home and abroad.

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