Tens of billions could be lost to fraud as the UK government pushes ahead with a £100bn-a-year infrastructure drive, according to accountancy firm Crowe.
Number 10 has pledged to spend lavishly on new building projects during its five-year term as it seeks to “level up” the country. But between 2-10 per cent of all spending, amounting to as much as £10bn a year, could leak out of that budget and be lost to fraud, collusion or bribery, Crowe has warned.
“When the government commits to spending [hundreds of billions] on infrastructure by 2025 then it really matters what the level of loss is,” said Jim Gee, head of counter fraud services at Crowe. “There’s always some loss, you can’t reduce it to £0, but you can minimise it.”
The construction sector is particularly prone to fraud and corruption, particularly where large publicly-funded projects are concerned, the accountancy group said in a recent report.
The government’s political imperative to keep building plans on schedule means that any uncovering of waste, fraud and corruption is “sometimes perceived as likely to frustrate the delivery of the project by slowing it down”, it said.
Number 10’s flagship high-speed rail scheme in the north of England, HS2, Gee noted, had been approved at a price range of £72bn to £110bn, raising potential for between £1.4bn and £7.4bn in fraud and corruption, according to the lowest estimate.
The project has faced a series of scandals including allegations from whistleblowers that HS2 Ltd, the taxpayer funded body charged with delivering the project, misled parliament over the cost of buying up property along its planned route.
In May last year MPs accused the Department for Transport of successive transparency failings over delays and cost rises on the project that represented a “serious breach of the department’s duty to parliament and hence to the public”.
The DFT said at the time that it had introduced “significant reforms to ensure the project is delivered in a more disciplined and transparent manner.”
Alongside the Centre for Counter Fraud Studies at the University of Portsmouth, Crowe has advocated for US-style “integrity monitors”, effectively an independent team with investigative, auditing and engineering expertise drafted in to oversee projects.
“Fraud goes right the way through the construction process: from the bidding process to the construction phase — false invoices, phantom employees, unqualified employees, extortion and racketing,” said Gee.
“It is recognised that corruption in the construction sector is common. It’s there, it’s real and it’s something that, unless something is done, will cost taxpayers a lot of money.”
Fraud and corruption can be masked as unforeseen challenges arise, resulting in additional charges which can be “exploited by the unscrupulous”, the report added.
Other factors include difficulties in comparing costs on unique projects, complex subcontracting and supply chains and the public sector’s tendency to award work to the lowest bidder, which incentivises contractors to attempt to increase profits after work has begun.
The autonomy of site managers, who often have discretion to agree changes and make additional purchases, also provide opportunities for fraud, it added.
However, Armando Castro, associate professor in management at University College London, challenged the assertion that construction was particularly prone to corruption.
“Overall, it is a question of how well regulated the industry is by the government and regulators, the governance of the firm and the pressure of different stakeholders to be clean,” he said.
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