By Elisabeth O'Leary
EDINBURGH (Reuters) - British government contracts worth 4 billion pounds to house asylum seekers have drawn few bids from private firms in a sign that the collapse of Carillion has dampened appetite for riskier projects, sources involved in the process say.
A decision on bids for the Asylum Accommodation and Support Services Contract (AASC), in which private firms provide housing for migrants in seven UK regions is due to be made before Christmas.
Britain hands out 200 billion pounds of public work to private firms every year but this is the most significant services contract since Carillion, a provider of defence, education, health and transport services, collapsed in January.
Outsourcer Interserve <IRV.L> this week become the latest company to move to shore up its balance sheet, underlining the frailties of a sector where margins can be wafer-thin.
The value of the government's 10-year AASC contract has doubled since the work was last tendered. However, the government has already had to reopen applications in one region after receiving no valid bids in May.
The terms are still not flexible enough to take into account fluctuating risk factors, according to potential bidders. Opposition lawmakers, for their part, lament a lack of oversight about the conditions in which asylum seekers are housed and say the drive to keep costs low jeopardises quality.
G4S <GFS.L> and Serco <SRP.L> are bidding for parts of the AASC contract despite taking hundreds of millions of pounds in losses in 2016 on its predecessor, when refugee arrivals and costs outstripped budgets baked into fixed contract terms.
Wary of those losses yet unwilling to undermine their relationship with the government by not bidding at all, those firms are asking for more money up front before taking on contracts, sources close to them say.
Another bidder is Mears <MERG.L>, who specialises in social care and housing services, and is the only newcomer to the asylum contract since 2012, according to the same sources.
"Essentially what the (interior ministry) is saying in these contracts is 'Here is the risk, you price it.' But the central commercial construct isn't going to change," said one of the sources, who declined to be named.
"The government punches in the numbers into the system and the machine spits out the answer. Take it or leave it."
The only way to insulate against the risk is to bid at a high enough price to cover all eventualities, the source said.
"If we win these contracts it will be because we have made sure that they are solid enough. If we lose, it will be because -- with all of our knowhow -- the conditions offered are not nearly flexible or lucrative enough for it to be worthwhile."
The interior ministry declined comment, as did G4S, Serco and Mears.
Carillion's demise sparked an outcry about the way private companies are contracted to do public sector work. A UK parliamentary report in July berated the government for its "aggressive approach to risk transfer to the private sector".
The government is now working towards making contracts both more flexible and more demanding.
But the AASC process shows it has far to go, says Labour Party lawmaker Alex Cunningham, who has questioned the conditions in which asylum seekers are housed.
"There is nothing (...) at all that says to me that this contract will be any better than the last."
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(Reporting by Elisabeth O'Leary; Editing by Keith Weir)