Government is learning the wrong lessons...
INTERVIEWED by The Independent, Britain's Defence Secretary, Mr. Philip Hammond, announced yet another miracle claimed to flow from London's hosting of the Olympic Games, writes David Campbell for the Cobden Centre.
As a result of his involvement in the crisis over the provision of security services to the Games, he has undergone a Damascene conversion. Mr. Hammond, formerly a successful businessperson and a Conservative MP who is being mentioned as a successor to the current Chancellor, had labored under a 'prejudice' 'that the private sector was always more efficient, capable and preferable to the state'.
But the breach by G4S, the world's largest security firm, of its contract with the London Organising Committee of the Olympic and Paralympic Games (LOCOG) to provide private sector security personnel for the Games had caused him to change his 'thinking about the merits of the public sector'. G4S's breach was remedied only by the use of military personnel as substitutes for the personnel G4S failed to provide. In light of 'the story of G4S and the military recue', Mr Hammond has allowed his name to be attached to the following summary of his revised views: 'the G4S saga had caused him to rethink his skepticism towards the public sector' and to realize that 'we can't always rely on [the] private sector'.
As someone who has spent his adult life studying the private and public law regulating economic action, I have a developed a somewhat blasé attitude to regulatory failure. One cannot sensibly allow oneself to be repeatedly shocked by something one encounters so often. Nevertheless, Mr Hammond's views have shocked me. They completely misrepresent what went wrong in this deplorable episode, and display a profound misunderstanding of the working of public procurement which is truly worrying in someone in Mr. Hammond's position.
Though I suspect that G4S deserves even more criticism than it has already received, the fundamental failure over the provision of security personnel was not that of G4S, it was that of LOCOG. All Olympic contracting, including that for security, has been a demonstration of one of the worst failings of the public expenditure process. Initial estimates of cost are made palatable by being, to put it mildly, optimistically low. Once the initial investment is made, it is difficult to wind back, and though the eventually realized costs far exceed the estimate, this typically becomes merely another problem for the taxpayer. The bid for the Olympics was made on the basis of their cost being less than £2.5 billion. The realized public expenditure has been at least £12 billion, of which £9.3 billion is the 'Public Sector Funding Package' which is usually the subject of media attention.
Security costs have made a woeful contribution to this process. LOCOG initially estimated that it would need 10,000 security personnel. It estimated that 8,000 would be volunteers or come through a publicly funded recruitment scheme, and in December 2010 it contracted with G4S to provide the remaining 2,000. The results of the recruitment scheme appear to have been very disappointing, but this faded into insignificance when, for reasons which are not adequately known but which it is urgent should be uncovered, toward the end of 2011 the 10,000 figure became 23,700!
After completely revising its plans, including now utilizing 7,500 military personnel, in December 2011 LOCOG recontracted with G4S that G4S would supply the bulk of the extra personnel. In the end, G4S was to provide 13,700 personnel. This is to say that, merely 6 months before the start of the Games, G4S agreed to provide nearly 7 times as many personnel as it had agreed to provide a year earlier.
Despite LOCOG assuring the Public Accounts Committee that these issues were under control, the recruitment of the 13,700 personnel was always a logistic impossibility, though G4S, LOCOG and various Government departments continue to deny this. If LOCOG truly believed that, by agreeing this contract, it had an absolute guarantee that the personnel would be provided, then it admits to a naive faith in what the law of contract can do for you that stretches credulity. And, of course, the personnel were not recruited.
In a way which is scandalous if it actually is the case, the Home Secretary was made fully aware of the impending crisis merely two weeks before the start of the games, and the Cabinet decided that an extra 3,500 military personnel (a figure later raised by 1,200) would be deployed to fill the gap that had been left by G4S's now acknowledged failure. Why the quite chimerical December 2011 contractual 'solution' to this most serious of problems was ever thought to be plausible, and why the inevitable crisis was allowed to reach the eleventh hour, also are not known, but an inquiry which is not confined to G4S but also embraces LOCOG, the Home Office and the other departments of Government involved, must take place.
From the perspective of the law of contract, the public sector emerges quite well from this episode in one sense, but emerges extremely badly in a much more important sense. Contracting which involves drastic revision of the initial specifications is very likely to lead to substantial costs which would be avoided by more careful planning, and LOCOG undoubtedly sustained such costs in the course of its negotiations with G4S. In December 2010, LOCOG agreed to pay G4S £86 million. One year later, the figure was £284 million. Management costs had multiplied more than nine times and operational costs more than twenty times. But the December 2011 agreement has at least allowed LOCOG to shift the cost of G4S's failure to provide the extra personnel to G4S itself.
The usual remedy for breach of contract is money damages which compensate the claimant (what used to be called the plaintiff) for its loss. There are varying ways of quantifying loss. 'Buyer's market damages' compensate for the costs the claimant incurs in getting a substitute for goods or services not provided. In this case, LOCOG called on the military as a substitute. The costs of doing this will be shifted to G4S as it must pay what effectively are market damages for its breach (and make other payments).
But it is essential to understand that LOCOG has been uncommonly fortunate in the way this has played out. It was crucial that LOCOG was able to call on the military as a substitute, though, of course, a remedy of this kind plays no part in the normal working of the law of contract. If LOCOG had not been able to call on the military, there would have been no substitute personnel, regardless of the fact that G4S was in breach. LOCOG would have had a formal contractual remedy, but it would not have had a real remedy, and the difference between the formal and the real would have been manifested to it in an incredibly stark manner. For if the military had not been available to LOCOG, it appears the Games would have had to be cancelled.
Without the military, finding G4S to be in breach would be completely irrelevant because such a finding does not, by magic, solve the claimant's real problems. One has to competently negotiate to ensure one gets a real remedy, and LOCOG's incompetent contracting would have been exposed as utterly useless to it, and to the nation, for, without the military, that contracting would have led one of the most blatant government failures that has ever occurred.
This extremely worrying episode is one in which a public purchaser of security services was contractually incompetent to such a degree that, despite incurring costs of a magnitude never originally provided for, it put in jeopardy the actual holding of the Olympic Games. The situation was saved only because the incompetent contractor was able to call on the military to get it out of an otherwise impossible situation. And it is that that Mr. Hammond thinks should lead us to take a more favorable view of 'the merits of the public sector'!
But what of the private sector party, what of G4S? One's concerns about its role are certainly no less grave than those about LOCOG. But one suspects this episode is not a private sector failure in any clear way but rather an illustration of a long identified shortcoming of the sort of contracting that took place between LOCOG and G4S. Why on Earth did G4S agree to provide the extra personnel? It is inconceivable that it thought it actually could do this.
Again, the extent of the incompetence involved stretches credulity. Though the absence of hard information means one can only speculate, I would speculate that G4S was so conscious of the vast business that it did, not merely with LOCOG, but with a wide range of Government departments (the value of G4S's 2011 contracts with Government was over £0.75 billion), that it was prepared to do all it could to help LOCOG deal with the situation LOCOG had placed itself in at the end of 2011.
Mr. Nick Buckles, the CEO of G4S, has said his company had always taken a wider view of the Olympics contract. In the aftermath of the crisis, he told the Home Affairs Committee that: 'We did this purely because we wanted to have a successful security operation at the Olympics. It is not particularly financially lucrative for us. It was much more about, ironically, reputation and building reputation for the future'. Before the Committee, and elsewhere, Mr. Buckles has been fulsome in admitting his company's responsibility for what he has seemed even anxious to admit was a 'humiliating shambles' which has left the company's reputation 'in tatters'.
It would appear that G4S has now rendered one service for which LOCOG and the Government should be grateful. It has, so far, largely absorbed the blame for this episode, and the role of LOCOG's incompetence has not emerged. Instead, we are subjected to views like Mr. Hammond's.
One wonders what the Government would be prepared to pay for such extremely effective public relations work, though, of course, G4S will not be submitting an invoice for this particular item. Happily, when dealing with so contrite a party, the Government appears to be sufficiently magnanimous as to put past misfortune behind it. Though G4S claims it will sustain a loss on the contract with LOCOG, it seems that, despite its reputation being 'in tatters', it will maintain its wide portfolio of work for the Government.
One of the objections that has long been raised about the sort of contracting that took place between LOCOG and G4S is that it can make it extremely difficult to sheet home the ultimate responsibility the public purchaser always bears to ensure a service actually is provided to the public. The purchaser can attribute failures to the private sector provider and any shortcomings in its own contract negotiation and management escape censure. Effectively co-opted into Government, that provider may well find it wise to take a wider view of all this. This episode seems to be dramatic evidence that there may be something to this objection.
Mr. Hammond is, in the end, pleased that it was necessary to deploy over 12,000 military personnel to provide security services for the Games. They did, it is universally agreed, a fine job. But they were able to do so because, as Mr. Hammond tells us, they had access to 'massive resourcing'. I am confident that Mr. Hammond's own Department will retain its status of having in some respects the worst record of failure in public procurement of all Government departments, though this episode confirms it is a status which has to be maintained against competition far stiffer than that encountered in any Olympic event.
But, after his conversion, he can see the wisdom of the way the military has, by long tradition, done it, now telling us that: 'The G4S model says "here is a cost envelope within which I have to deliver an outcome and I have to do it incredibly leanly with very little resilience" … The military came at it from the exact opposite extreme. "What's the job that needs to be done? OK, we'll do it. Whatever it takes, we'll provide massive resourcing"'.
But who was responsible for adopting the 'cost envelope' rather than the 'massive resourcing' approach to Olympic security? We can be sure it wasn't G4S, which would enthusiastically have seized the opportunity to take the latter approach, if LOCOG had agreed to pay for it. Of course, if you will pay the military's prices, you should actually use the military. But LOCOG never initially agreed to pay the military's prices. Instead, it initially chose the 'cost envelope' approach, even then grossly underestimating security costs, and, if it is to be believed, in December 2011 it overwhelmingly compounded the emerging problems by even more grossly overestimating the 'cost envelope' approach's chance of success. This crisis occurred because LOCOG's security contracting was part of the wildly optimistic underestimation of the cost of hosting the Olympics that misled the public into agreeing to pay for them.
Mr. Hammond must understand the nature of this government failure, grave in itself, but which only narrowly escaped being almost incredibly worse. If he does not, he is unfit to be Defence Secretary, for as such he is Minister for a department that, at least as much as any other, needs to develop some sense of a 'cost envelope' in the conduct of its 'massive resourcing' of public procurement.
Get the safest gold at the lowest prices with BullionVault...