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Private providers winning big fees on UK public sector contracts, experts warn

Private companies are charging lucrative fees to manage contracts across swaths of the UK public sector, pushing up the overall costs to taxpayers, procurement experts have warned.

Bloom, Pagabo and HealthTrust Europe, which is owned by private hospital group HCA International, are among companies profiting from the fast-growing market in managing “framework agreements” to award contracts for NHS trusts, local authorities and academy school chains.

The framework agreements consist of a preapproved list of suppliers with certain legal protections and conditions agreed in advance on services ranging from IT to food, medical equipment and construction.

They enable work to be awarded directly or with a mini-competition between the listed bidders. 

The private framework providers charge suppliers fees once they have won work or in some cases to join the shortlist. They say they provide a valuable service by speeding up contract awards and providing advice to suppliers and public authorities. 

But experts said the market was insufficiently regulated, with overlapping frameworks covering the same works and services and potential conflicts of interest because providers often represent the procurer and the bidder. 

Since fees are recovered by suppliers through the price of the contract, the cost to taxpayers of outsourced work was higher overall, they said.

Steven Brunning, head of public procurement law at Anthony Collins solicitors, said it was “in the interest of profit-driven framework providers to drive up the volume of work” and that there were “no regulatory controls on the volume of frameworks that can be set up . . . or the level of fees that can be generated through them”.

Luke Butler, head of the UK public procurement law unit at Nottingham university, pointed to the risk of conflicts of interest because some framework providers were “simultaneously acting on behalf of the public sector by commissioning services but also generating profits by making sure as many suppliers join their frameworks as possible”.

The value of contracts awarded via framework agreements surged from £10bn in 2019 to more than £35bn in 2023, according to procurement analyst Tussell, fuelling transparency concerns. 

It is hard to know precisely how many contracts are awarded through private sector providers because they require a public authority to sponsor them, obscuring their role. 

With non-profits and public authorities also running frameworks directly, Rebecca Rees, head of public procurement at Trowers & Hamlins solicitors, said it was an “overcrowded marketplace, which was at risk of delivering poor value for money for the public sector purse”.

She was echoed by Ian Makgill, chief executive of Spend Network, a procurement specialist, who said increased use of frameworks meant it was “harder to determine whether the public sector is getting value for money”. 

“The tender requirements that are published and sent to suppliers on frameworks are not made public, making frameworks a black hole for transparency,” he added. 

Bloom founder Adam Jacobs said that while conflicts of interest could be an issue, it acted as an “honest broker with full transparency”. He said the private equity-backed company charged suppliers a fixed fee worth 5 per cent of the contract once they began receiving revenues, which was passed on to public authorities in their bills. 

Bloom — which manages procurement services on behalf of Nepo, a non-profit owned and governed by 12 local authorities in the north-east of England — then provided a rebate to public authorities of about 1.5 per cent, he added. 

“We take the hassle . . . out of the procurement process,” Jacobs said.

Nepo — which runs frameworks used by 550 public bodies, including schools, NHS trusts, police forces, universities and housing associations — declined to comment.

Some framework providers do not reveal fees, which can be as high as 11 per cent of the contract value, said the procurement experts. 

In some cases, providers also levy an annual upfront and non-refundable cost of between £20,000 and £25,000 on suppliers to join a framework, even if the supplier does not win work, they added. Bloom, HealthTrust Europe and Pagabo do not charge upfront fees.

One procurement expert cited the example of a supplier paying a £350,000 upfront fee in order to compete for a £3mn contract to provide remediation cladding on a high-rise residential building — a problem highlighted by the Grenfell Tower fire in London in 2017.

HealthTrust Europe, whose parent company runs several private hospitals in the UK, said its service “adds significant cost savings and efficiencies for the public sector. These cost savings are not apparent when only comparing basic fees.”

“Our partnerships demonstrate our ability to meet the stringent criteria set by NHS England, including thorough compliance with healthcare standards,” it added. 

Framework contracts came under scrutiny after the collapse of Greensill Capital in 2021. In 2017 its founder, Australian businessman Lex Greensill, unsuccessfully tried to set up a framework agreement for supply chain finance. 

Simon Topglass, group chief executive of Pagabo, which is backed by private equity group Maven Capital Partners, said its fees were “completely transparent” and “include access to our expertise and multiple digital platforms” on topics such as procurement and contract management. 

“The market framework works to streamline procurement and drive efficiency for the public sector” and was “highly regulated with multiple layers of compliance”, he added. 

The Cabinet Office declined to comment but pointed to the new Procurement Act, which comes into force in October. It requires a new online register of frameworks to reduce duplication and increase transparency.

Originally published on June 7th 2024, in the FT by Gill Plimmer.

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