UK aid contractors struggle to stay afloat

LONDON — A number of British aid contractors are struggling to stay afloat after two collapsed so far this year, leading to questions about what lies behind their demise. Veteran Department for International Development contractor Maxwell Stamp was the first casualty, going into administration — a U.K. insolvency process — in early February. Aktis Strategy, which managed a number of development projects for the Foreign & Commonwealth Office, followed suit in early March. Other suppliers are said to be feeling the pinch and have lost staff in recent months, including top names Adam Smith International and Crown Agents. “It’s only a matter of time before the industry has its own Carillion.” --— Anonymous DFID contractor senior manager Devex heard from multiple sources that United States engineering firm AECOM, which entered the London market in 2015 to lead a procurement and logistics project for DFID, is trying to sell the U.K. business. The company would not confirm or deny the rumors, saying in a statement: “We are continuing to work with DFID and are committed to delivering our [aid procurement] contract for the U.K. government.” Meanwhile, international professional services firm WYG, which has contracts with DFID and FCO, issued a profit warning in February, citing “political uncertainty” in the U.K. as hampering its consulting services. Earlier this month, the firm’s financial chief resigned. Suppliers have blamed contracting reforms, introduced by DFID in 2017 in response to the ASI scandal, for their financial distress. Fee caps, profit restrictions, and burdensome compliance requirements mean contractors are feeling “squeezed,” according to a number of staffers from the community, who spoke to Devex on condition of anonymity to preserve business ties. Cash flow issues due to long delays in the procurement process and uncertainty over future projects are also making it hard for aid firms to survive, many said. But others pointed to internal issues at some of the companies affected as the source of the problem, including poor financial management, excessive risk-taking, increased competition, and undiversified funding streams. Contractor crackdown DFID’s supplier reforms were introduced by former development secretary Priti Patel in response to sustained media criticism of the high profits reportedly earned by private aid companies, and allegations of unethical behavior by one of DFID’s top contractors, ASI. These concerns were echoed by the findings of a parliamentary inquiry into DFID’s increased use of private contractors, which doubled between 2010-2015. The reforms were designed to improve transparency and accountability, prevent profiteering, and create a more level playing field for smaller companies to bid for DFID funding. Changes to the department’s terms and conditions included open-book accounting requirements, profit and fee caps, and increasing the use of payment-by-results mechanisms to pay contractors. However, some say the reforms have left contractors in trouble. “The strongest factors behind the sector struggling has been a reduced pipeline of projects, slower procurement and sometimes suspicious, or even antagonistic, attitudes toward contractors based on a need to respond to tabloid witch hunts,” Stephen Macey, an independent consultant who has worked for a number of DFID contractors, said. One senior manager at a major DFID contractor told Devex: “DFID is asking contractors to do more for less, while also slowing things down.” “It’s only a matter of time before the industry has its own Carillion,” they said, referring to the British construction giant that went into liquidation last year. Crown Agents, one of Britain’s biggest and oldest contractors, reported a net loss of £12.7 million ($16.6 million) for financial year 2017. Its most recent annual report blames a “notable slowdown in the frequency and speed at which new contracts were awarded,” and the fact that its large DFID and U.S. programs came to an end in 2016. Asked about the situation by Devex, CEO Fergus Drake said the company had recently won new contracts from DFID and Japan. “With many other opportunities in the pipeline, we are confident that 2019 will be our strongest year since 2012,” he wrote in an email. Contractor ASI has also laid off staff in recent months, although communications adviser Brigid Janssen said some of this had been balanced by new hires elsewhere in the organization. She pointed to DFID’s procurement reforms and payment delays as causes, making it especially difficult for contractors such as ASI to work in fragile countries where U.K. banks are reluctant to provide financing. Risky business Jeremy West, a former director at Maxwell Stamp, which received £6.4 million from DFID in 2017 and was one of the department’s top 20 contractors until its shutdown, told Devex DFID’s reforms played a part in the company’s downfall but there were also other factors. “The tendering and contract freeze that seemed to be imposed by DFID following the ASI scandal, which lasted for nearly two years, had a major impact on the business,” West said, before adding that the company was also left vulnerable after taking on risky contracts with other funders. “The company’s success in winning major contracts in the Middle East also backfired, when the host governments did not pay invoices amounting to several millions of pounds,” he said. According to Haniya Dar, commercial contracts director at Hamilton Verney Consulting, DFID’s reforms have transferred more risk onto contractors. “The thing that has hit contractors the hardest is the fact that risk is now ineligible as a separate line item,” she said, explaining that DFID previously allowed contractors to charge a risk contingency and premium — a major source of profit for contractors. “From DFID’s perspective, they are trying to keep costs low and not allow risk premium and contingency to become profit … but we’ve gone from a situation where private sector contractors would have made a possible 30 percent profit margin, or greater, to being squeezed,” Dar said. A number of suppliers complained of delays of up to two years between DFID announcing a new opportunity and contracts being signed. One pointed to a lack of consistency, remarking that “no two tenders look the same.” Another said they wanted to see greater predictability from DFID in terms of future work. “For those of us still really active and interested [in DFID contracts], getting certainty on timelines is one of the key things we need, and visibility of the pipeline,” they said. A DFID spokesperson told Devex: “The reforms made to DFID procurement are to ensure tougher scrutiny of costs, high ethical standards, and greater transparency. Our priority is achieving maximum value for money for both the world’s poorest people and the U.K. taxpayer. No supplier has refused to sign up to the new code of conduct or other requirements.” British firms feeling the heat But DFID’s reforms are not the only challenge facing contractors. Some insiders at firms said to be struggling pointed to poor management, inefficient work processes, and high staff turnover as problems. “I think the U.K. market contains some firms … who have survived for years due to DFID's budget expanding and some are now struggling under a more competitive marketplace.” --— Stephen Macey, independent consultant A number rank poorly on workplace review website Glassdoor, with frustrated staff venting about a lack of strong leadership and a perception that senior managers were putting their own interests ahead of those of staff and projects. Some talk about a “toxic” work culture and call into question the validity of information provided to staff and funders about the state of play. Increased competition from foreign firms — such as Chemonics, Coffey, Nathan Associates, Palladium, and DAI — has also made things tougher for British contractors, Macey said. These companies have set up London offices — and in some cases bought U.K. firms — lured by the massive increase in DFID’s budget in order to meet the target of spending 0.7 percent of gross national income on development. “I think the U.K. market contains some firms … who have survived for years due to DFID's budget expanding and some are now struggling under a more competitive marketplace,” Macey said. West, who previously worked for British development consultancy HTSPE, which was merged with U.S. development giant DAI in 2013, said: “I hear a lot of the smaller companies are struggling, however those owned by larger non-U.K. parents will be OK, as they have other donors to fall back on.” And while some were optimistic that changes could be made to improve the resilience of British contractors, others warned the quality of DFID programming would suffer if more are driven out of business. Update, March 24: This story was updated to clarify that ASI has laid off staff in recent months and has also taken on new hires.