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LONDON (Reuters) - The head of a British government review launched into G4S and Serco following allegations of fraud gave his backing to the outsourcing industry on Friday and said the state would continue to contract out public services.
The review was opened into two of Britain's biggest outsourcing companies in July after the justice ministry found that they had charged for tagging criminals who were either dead, in prison or had never been tagged in the first place.
The discovery led to the Serious Fraud Office opening a criminal probe into the firms' electronic monitoring contracts.
"We've seen improvements in the business services companies. That's why in a way the current review and the behaviour of those suppliers is kind of a paradox," Britain's Chief Procurement Officer Bill Crothers told Reuters in an interview.
Together with other high-profile contract failures, the tagging scandal has put the political spotlight on Britain's 187 billion pound ($300 billion) a year public-sector contracting market and ignited a debate over the outsourcing of services to profit-driven private firms.
However Crothers, who is leading the Cabinet Office review, said outsourcing was still government policy. He said he had seen improvements in the sector as a whole since a round of contract renegotiations after the coalition came to power in 2010.
"These behaviours (by Serco and G4S) have actually surprised us ... we didn't do the review because we wanted to have a hard go at these two companies, it was bad practices and we couldn't walk away."
He did not go into detail about the improvements in the sector, apart from saying it was now a competitive market in which firms were open to innovative ideas such as joint ventures.
The review of G4S and Serco, in which audit firms PwC and Moore Stephens are examining 28 contracts held by the firms, should report before Christmas, Crothers said.
A second review of Serco, launched after it was accused of fraud on a contract for prisoner escort services, in which it has to demonstrate corporate change to be allowed to win government work again, will report separately, he said.
Since the tagging scandal first broke in May, both G4S and Serco have lost their chief executives, launched their own internal inquiries and begun top-down reorganisations.
Both companies have said that they will cooperate fully with the Serious Fraud Office investigation and will repay any amount due on the tagging contracts.
The National Audit Office said on Tuesday that a review of Britain's use of big companies to run services from prisons to hospitals had raised questions about whether the rise of a few major contractors was in the public interest.
Crothers said he had not seen improved competition among government IT suppliers, which are currently being investigated by the Office of Fair Trading.
The top five IT suppliers to Britain's public sector are HP, Capita, CapGemini, Fujitsu and BT.
($1 = 0.6215 British pounds)
Editing by Pravin Char