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Contracting Out (Functions of the Official Receiver) Order 1995

1.11 p.m.

Earl Ferrers rose to move, That the draft order laid before the House on 28th April be approved [18th Report from the Joint Committee].

The noble Earl said: My Lords, the order represents another little operation for contracting out, which I know will be welcomed by the noble Lord, Lord Peston. It is proposed that the order should be made under Section 69 of the Deregulation and Contracting Out Act 1994. The purpose of the order is to enable the statutory functions of official receivers to be contracted out, subject to the exceptions which are listed in the schedule. There are two reasons why we wish to do that. The first is because the Government's "competing for quality" programme is all about achieving better value for money for taxpayers, and higher standards for customers. Impressive savings have been secured by this programme throughout the Civil Service. The other reason is so that official receivers will be able to concentrate better on their investigative role in bankruptcies and compulsory company liquidations.

The recent recession placed a very heavy burden on official receivers and their staff because of the amount of insolvencies which occurred. The number of cases with which they had to deal rose from some 13,000 in 1989-90

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to a peak of some 43,000 in the 12 months to March 1993. Because they had to deal with the administrative burden of those additional insolvencies, official receivers became increasingly unable to devote sufficient resources to their investigative role. Following a report by the National Audit Office, the Public Accounts Committee of another place was critical of what it saw as the Insolvency Service's failure to bring disqualification proceedings in sufficient numbers against directors who were alleged to be guilty of misconduct. That failure—and the sharp reduction in the number of prosecution reports which were submitted—was in large measure a direct result of the pressure on the resources of both the Insolvency Service and the official receiver.

Contracting out offers the opportunity of using the more flexible resources of the private sector without the need for maintaining a costly permanent public sector structure in the administration and initial investigation of bankruptcies and compulsory company liquidations. This will leave the official receiver free to concentrate on the small minority of cases in which serious misconduct is suspected.

We asked Stoy Hayward Consulting to undertake a pre-feasibility study. This was followed by a feasibility study on which it reported in July 1994. It identified the possibility of contracting out insolvency cases immediately upon the making of the bankruptcy or the winding-up order as one which would enable the largest transfer of the work of the official receivers—involving up to 1,050 posts—to the private sector. That would enable greater concentration by official receivers on their investigative role.

It is that option which the Government now propose should be pursued and which the order before your Lordships would allow. However, I should refer to the concerns which were expressed by the official receivers when they replied to the consultation exercise which was conducted with them under the Deregulation and Contracting Out Act.

Your Lordships will be aware that we have published an agreed digest of the responses from the official receivers and their concerns are clearly set out in that document. Those concerns hinge principally on how they will discharge their investigative duty if the other work were to be contracted out to insolvency practitioners under the preferred Stoy Hayward option.

Their particular concern is the proposed division of the further investigation work which is undertaken in the minority of cases where something untoward is suspected as a result of the routine investigative work which is undertaken in every bankruptcy or liquidation. That routine investigation work is the basis on which any other investigation work is built. They are also concerned that the provisions of the Police and Criminal Evidence Act 1986 would be bound to have an adverse impact on their capacity to obtain information from bankrupts and from directors in the course of their further investigation.

We understand these concerns and we have considered them carefully. However, we believe that they are not wholly warranted. Stoy Hayward's advice was that preliminary investigative work could be undertaken by insolvency practitioners, or other suitable contractors

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without necessarily prejudicing the official receivers' further investigative role. It did, of course, recognise that proper and effective conduct of the initial investigation and the provisions of adequate information to the official receivers would be vital if the cases requiring further investigation were to be readily identified and pursued. We will need to be sure that arrangements with potential contractors are fully worked through in order to ensure that the concerns of the official receivers can be put to rest. As regards the Police and Criminal Evidence Act, we have clear advice from counsel that in the present state of the law the provisions of that Act will be no more likely to apply to a contracted-out arrangement than they would be at present.

The other major areas of concern for official receivers were their personal liability under any contracts and their liability in respect of any acts or omissions of contractor which may occur. They were concerned that there should be proper training and resources for adequate contract management as well as monitoring. And they were concerned that they should have sufficient resources to discharge not only their further investigative role but also their residual functions which we do not intend to contract out. These are perfectly legitimate concerns and they will be fully addressed in the course of the contracting-out exercise. Some of the concerns have been raised in other contracting-out exercises and have been satisfactorily resolved.

As was emphasised in the discussions on contracting out in relation to Companies House, contracting out is a process of testing. Potential bidders will be required to demonstrate that they can offer—and can provide—better value for money than would be achieved if the activity were not contracted out. By "better value for money", I do not mean simply a lower price. It will be essential that the contractor maintains and, where possible, improves upon the present levels of service. Unless that can be demonstrated, contracting out will not go ahead.

Another place approved the order on Wednesday and if your Lordships were to approve this order today we intend to carry out a series of negotiations with potential providers. A number of them will then be short listed to receive a formal invitation to tender at the end of September. We plan that any contracts would be awarded in December and that all contractors would begin work by 1st April 1996.

In discharging their investigative duty official receivers play an important role in ensuring confidence in the operation of the market. That is a role which we want to be enhanced by the process of contracting out. At the same time, contracting out offers the opportunity for getting better value for money. The order opens up the way to achieving both objectives and I commend it to your Lordships. I beg to move.

Moved, That the draft order laid before the House on 28th April be approved [18th Report from the Joint Committee]—(Earl Ferrers.)

Lord Peston: My Lords, I thank the noble Earl for introducing this order. We debated this subject during our discussions on the Deregulation and Contracting Out Bill, which is now an Act.

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I have a number of questions. I agree with the noble Earl that we should approach this subject in precisely the way that he says. Certain tests should be applied in relation to what goes on, and I shall refer to some of them. We must ask what is a better way of achieving the relevant objectives. By "better", we mean either that we achieve the objectives more effectively or we do as well as we did before but more cheaply; or, with any luck, a combination of the two.

That leads me to some questions. First, I take it that the effect of the order does not have any consequences for all of the other official receiver's responsibilities and functions. In other words, the Government are arguing that the role of the order is to enable the functions of the official receiver to be done more effectively.

Am I right in thinking also that the effect of the order is permissive? Even when the order has been agreed by both Houses, the Government are not obliged to go ahead in the sense of saying, "We must accept a tender" or "We must accept this or that firm". Am I right that, at least logically, the Government could simply use the private sector as a yardstick to measure what the insolvency service in the public sector does?

That leads me to ask what the Government are actually proposing to do. Are they proposing to use the order to contract out the whole of the insolvency service function in one go or are they going to contract out a small part of it and see how that works out? There is a significant distinction between the two.

Section 69(3) of the Act states:

    "A Minister shall not make an order under this section in relation to an office-holder without first consulting him".

I—and I am sure that the Minister agrees—do not interpret that to mean that the office holder has a veto. However, I interpret it to mean that where the office holder raises very strong anxieties one should not proceed. I am bound to say that I am not 100 per cent. certain that all the anxieties of the official receiver have been met.

That takes me to our assessment of what is going on. The noble Earl referred to the Public Accounts Committee in the other place and its concern about the effectiveness of the insolvency service as it was then operating under pressure in the middle of a considerable down-turn in the economy. Are the Government now claiming that as a result of this order and the proposed changes there will be more prosecutions, more examples of fraudulent practice discovered and that more directors will be disqualified? Is that what the Government are predicting? When they are carrying out the studies and making the same privatisation claim that they have made in relation to other matters, are they saying that that is the test that they would like to see applied?

Can we be assured that all those matters will be monitored so that your Lordships will be told what has been done and whether there has been any decrease in the amount of fraudulent behaviour or an increase in the number of bankrupts prosecuted or the number of directors disqualified relative to what would otherwise be the case? In other words, if deregulation is to work successfully—and the Minister will notice that I am

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taking no ideological view on this but am approaching the order entirely in order of practicalities—we need to agree that that is the test to be applied.

I have one last point to make, which I do with great regret. The noble Earl referred to Stoy Hayward as government advisers. I believe that they have been paid for that advice as regards what should be done. It has recommended to the Government that the functions should be contracted out and the studies that have led to such recommendations were paid for. Am I not right that the particular firm to which the noble Earl referred is an insolvency practitioner firm which might bid for some of that business? Does the noble Earl not have any feeling of disquiet that the firm which advised him has an interest?

I should like an assurance from the Government that since Stoy Hayward advised the Government, in no circumstances would it be regarded as ethically acceptable for that company to bid for any of this work. That is my view which is clearly a matter of principle and is necessary to avoid a conflict of interest. Therefore, I hope that the noble Earl will say that the work was carried out totally objectively as was the research which was paid for and that that was done on the basis that it regarded itself as disqualified from being able to take on any of the work. That seems to me the minimum ethical consideration which should be applied.

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