Select Committee on Treasury Third Report



We asked Mr Gershon what progress the OGC was making in addressing the weaknesses in procurement identified in his 1999 review of civil procurement in central Government.[18] He told us that the OGC was "at the beginning of a long-term programme of fundamental reform. We are dealing with some issues which, as I have identified in my review, are not issues that are subject to quick fix; we have to change culture, behaviour and attitudes about procurement within central civil Government. So the approach that we are adopting is to try and get a balanced mix of short, medium and long-term actions. I am reasonably satisfied with the progress we have made in the first 18 months ...but I would emphasise that this is a programme of long-term fundamental reform that I am embarked on."[19]

Value for money target

The OGC's top level target is to deliver £1 billion of value for money improvements from central civil Government commercial activities by the end of 2002-03.[20] The OGC told us that "it is important to understand that the billion pound target is one which is delivered by Departments' improvement in procurement, not by OGC spending that procurement money. OGC's role is to help improve the way that those projects and procurements are undertaken in Departments."[21] The OGC was confident, based on the results of the first year, that it would achieve its three year target of the billion pound value for money savings.[22]

We asked the Department of Health and the DTLR what value for money savings they had achieved. Both Departments told us that the OGC had not set individual savings targets for each Department. The Department of Health said that the commercial spend in the Department was about £200 million and they had achieved savings of about £4.8 million. The Department of Health were looking to save around three per cent, but expected this to fluctuate from year to year because their Departmental procurement was small and in some years they would have one major transaction. DTLR told us that in the first year, as the then Department of the Environment, Transport and the Regions (DETR), they had saved in the order of £250 million, the majority of which, approximately £200 million, was by the Highways Agency which spends about £1.5 billion a year.[23] However, they noted that "we have to emphasise that not all savings are cumulative, some are one-off opportunities, so we cannot guarantee we can do £250 million every year for three years."[24]

The OGC subsequently provided information on the total value for money gains reported by Departments, Agencies and NDPBs for 2000-01, which totalled some £433 million. This included a figure for DETR of some £141 million, about £100 million less than the figure supplied to us by DTLR because OGC considered that this amount should be scored against later years rather than 2000-01. The OGC commented that, as this was the first year in which they had run this exercise, there had been a learning element for all concerned, and consequently, "some caveats over both the coverage and the quality of returns."[25] The OGC also noted that "figures for a single year can only represent a snapshot of a Department's procurement activity. For example, some Departments have long running contracts where it is only possible to influence value for money in the year in which they are let or renewed. As such, a single year's gains do not necessarily represent performance over a longer period."[26]

It looks as if the OGC is on course to achieve its top level target of delivering £1 billion of value for money improvements by the end of 2002-03, as Departments have reported improvements of some £433 million for the first of the three years concerned (2000-01). However, some caution should be attached to the initial figures, given the need for the accounting arrangements to settle in.

We note that so far Departments have been given no indication by the OGC of the level of value for money improvements they might be able to achieve. We recommend that, once the system has bedded in, individual annual targets for the major spending Departments should be introduced, and that the OGC's top level target be re-examined in the light of performance up to 2002-03.

The Gateway programme

The OGC told us that its Gateway programme "has been designed to provide structured, independent review of large, complex government procurements at five critical decision points during the life cycle. It has been based on proven private sector practices and piloted on a number of public sector projects during 2000. At the heart of the Gateway process is the principle that the greatest opportunity to influence the outcome is in the early stages of a project. The Government has agreed that this process should be mandatory for all large projects."[27]

Under the Gateway programme, launched in February 2001, procurement projects in a Department are reviewed by a team containing, typically, staff from other Departments with relevant experience of similar types of projects. There may be an OGC person on the team, and occasionally there is an external consultant. Team members undertake a standard training programme designed to ensure reviews are conducted to the quality standards set out by the OGC. The outcome of the Gateway review process is that the 'owner' of the procurement project receives a report from the review team with recommendations in those areas where there is scope for improving the project.[28] Mr Gershon considered that a successful outcome of a review would be one "that came up with constructive recommendations that were adopted by the project owner."[29]

Mr Gershon told us that the greatest opportunity to influence the outcome of projects was at the pre-procurement stage, which is where the OGC is focussing its efforts. Accordingly, the bulk of the 70 Gateway reviews that had been completed were of projects which had not yet reached procurement. In general, improvements in terms of cost savings will not be available until projects come in on cost and schedule in some three or four years' time.[30]

On the basis of the Gateway reviews that had been completed, Mr Gershon considered that there "is substantial room for improvement [in Government procurement] ...there is a significant amount of cost and schedule over-run on things like construction projects and a mixed record on IT. There has got to be substantial improvement."[31] The OGC expects "to be seeing gains from Gateway project improvements of the order of £500 million ... a year, when the Gateway is fully developed, fully on-stream and projects that are at an early stage today ... come on stream and start to deliver better benefits at lower cost."[32] These savings would be in addition to those currently included in the OGC's existing target, of £1 billion of value for money improvements by the end of 2002-03.[33]

A number of witnesses commented on the benefits of the Gateway review process. DTLR told us that it had "been a particular success. On the evidence of the reviews undertaken so far, the process adds real value and will help us to deliver projects on time, to cost and within specification."[34] The Department of Trade and Industry (DTI) noted that "the process so far has been very successful, highlighting issues such as the adequacy of project resources and project management skills, and the realism of timescales. These issues are not always comfortable matters to address, but airing them through the process should lead to higher success rates across Government projects as a whole. DTI has found the Gateway process very helpful for its own projects ..."[35] British Telecommunications plc commended the OGC for introducing the Gateway review process and told us that they had adopted the principles of the process for complex and risky projects.[36]

We note that the OGC Gateway review programme has been welcomed by Departments and appears to be having a positive impact. The benefits of Gateway reviews of procurement projects will not be available for some three or four years when evidence of the number of projects delivered to time and cost becomes available. We wish to be informed of this when the information is available and expect to return to this matter then.

The Private Finance Initiative

The OGC has "policy responsibility for the Private Finance Initiative (PFI) in respect of procurements using PFI techniques."[37] Mr Gershon told us that this meant that the OGC was responsible for leading PFI development and promulgation of policy and guidance to continue to improve PFI as a procurement technique. The OGC is not responsible for other forms of Public-Private Partnership (PPP), such as the Wider Market Initiative, or the injection of private sector equity into public sector-owned enterprises. These are handled by the Treasury.[38]

Our predecessors noted that the Government was considering the "benefits and practicalities of establishing a central system to collect information on project performance and provide a facility to benchmark performance against comparable PFI and other projects."[39] Their Report strongly supported this suggestion.[40] The Government's response was that while it had resource implications, "the Government accepts the need to satisfy itself that projects continue to deliver value for money. The [OGC] ... will consider with Partnerships UK cost-effective ways of ensuring that lessons from on-going projects are passed back to Departments considering new projects."[41]

We asked the OGC what information is held centrally on PFI projects and the extent to which PFI projects in operation are monitored. Mr Gershon's response was that individual Departments "are responsible for monitoring the performance of their own projects, whether they are PFI or non-PFI."[42]

We are disappointed that our predecessors' recommendation for the creation of a central system to collect information on each PFI project to enable comparisons to be made does not appear to have been implemented. While we accept that Departments should be responsible for monitoring their own PFI projects, we consider that the growth in the number and value of PFI projects reinforces the recommendation made by our predecessors. We therefore recommend that a central system to collect information on project performance and provide a facility, where practicable, to benchmark performance against comparable PFI and other projects be maintained.


The Office of the e-Envoy (in the Cabinet Office) has the main responsibility for the strategic development of IT within government in support of the aims of UK Online. It leads and advises on emerging information technologies and their strategic use across government. The OGC supports individual Departmental procurement from a commercial viewpoint and offers technological expertise to provide procurement advice about the relative merits of new information technologies and their strategic application across government.[43]

The OGC aims to achieve the optimum use of e-procurement[44]. The OGC told us that estimated savings of £100 million have been realised as a result of central civil Government applying electronic techniques to the processing and payment of procurement goods and services. However, measurements undertaken by the OGC had indicated that just over half of low value transactions were being conducted electronically, compared with an objective to purchase 90 per cent of low value goods and services electronically by March 2001.[45]

Mr Gershon told us that some Departments "could never get anywhere near" the 90 per cent target until they modernised their financial and accounting systems and that this could not be driven solely by the needs of low value, electronic procurement. He considered that the focus on the target had flushed out some bottlenecks within Departments that had to be and were being addressed.[46]

We asked the Department of Health and the DTLR how their performance compared with the 90 per cent target. The Department of Health told us that they had achieved about 36 per cent and attributed the shortfall to the fact that they "did not pay attention to this quickly enough [and] ...were rather slow to move "[47] However, they also said that from where they stood at the time it would have been very difficult for them to have achieved the target.[48] DTLR told us that they had achieved about 58 per cent and that the reason they were not at 90 per cent was that their e-procurement project was dependent on the replacement of the Department's finance and accounting system due in April 2002. DTLR said their systems would be capable of carrying out 100 per cent of their procurements electronically by September, but whether they would meet the 90 per cent target would depend on whether their suppliers were up to speed and able from their side to trade electronically.[49]

The OGC is piloting a number of e-procurement projects which were due to be completed in August 2001, but had slipped to Spring 2002. Mr Gershon told us that it had taken them significantly longer than anticipated to come up with a web-based electronic tendering system that had the necessary levels of security and integrity, but a pilot was now running.[50] The OGC subsequently told us that the e-tendering pilot ended in February 2002 and that the OGC and the pilot Departments and agencies would not be rolling out the piloted solution across government as it did not meet all its operational objectives. Specific areas of concern were that the piloted system:

  • failed to deliver all mandatory requirements particularly those relating to system functionality;

  • would not be fully networkable until the end of 2002, making it very difficult to rollout across government and its large supplier base;

  • had not given OGC or the pilot Departments sufficient confidence in the system or the service to award a main contract;

  • had already had two contract extensions totalling 5 months against the original timescales - leading to a lack of confidence in the service provider and its relationship with its sub-contractor.[51]

The OGC considered that among the main lessons learnt from the pilot were the recognition that there is a clear demand for e-tendering within Government and from its supplier base and that suppliers want to see a single system in place across Government. The costs of the pilot were some £650,000[52] and the OGC considered that "the estimated costs of a premature rollout that failed to deliver what is required are in the region of £27.7 million over the next four years."[53]

We note that the target of purchasing 90 per cent of low value goods and services electronically by March 2001 was missed by a large margin. The evidence given to us suggests that, at least for the Departments that gave evidence, the 90 per cent target was probably unrealistic in the first place. The OGC's e-procurement pilot projects have also slipped. Clearly there was a degree of over-optimism about the pace at which Departments can accommodate change and the market can deliver new technology solutions. We consider that OGC's future plans and targets in these areas should be based on a more realistic assessment of what is achievable, both by Departments and the market.

Overall impact

We have noted that substantial parts of MOD and NHS procurement have been excluded from the remit of the OGC. The reasons for this have not been fully explained to us except to say that these procurement processes are different. We believe that in future both MOD and NHS procurement processes should be brought within the OGC's remit unless explicit reasons are given for particular dimensions of procurement being treated independently by the relevant Government Departments.

Since its establishment in April 2000 the OGC under its Chief Executive, Mr Peter Gershon, has made substantial and commendable progress in modernising the Government's civil procurement processes. Clearly there is still substantial scope for improving the value gained from money spent by all Government Departments as indicated in the sections of this report dealing with particular dimensions of the procurement process. However, after two years sufficient progress can be seen to give confidence that savings are being made or can reasonably be expected.

18   See paragraph 2 Back

19   Q2 Back

20   Ev 4, para 6.1 Back

21   Q62 Back

22   Qq62, 64 Back

23   Qq 259-261, 343-346, 351, 354, 359-362 Back

24   Q347 Back

25   Ev 79 Back

26   Ibid Back

27   Ev 7, para 8.8 Back

28   Qq49, 52, 63 Back

29   Q53 Back

30   Qq48, 59 Back

31   Q58 Back

32   Q66 Back

33   Qq64-66 Back

34   Ev 56, para 4 Back

35   Ev 28, para 9 Back

36   Ev 24, para 5 Back

37   Ev 6, para 8.6 Back

38   Qq11, 14 Back

39   Treasury Committee, Fourth Report, 1999-2000, The Private Finance Initiative, HC 147, para 47 Back

40   Ibid Back

41   Treasury Committee, Fifth Special Report, 1999-2000, The Private Finance Initiative: The Government's Response to the Committee's Fourth Report of Session 1999-2000, HC 706, p. iv Back

42   Q13 Back

43   Ev 5, para 7.4 Back

44   Electronic procurement Back

45   Ev 9, para 8.26 Back

46   Q70 Back

47   Qq246-248 Back

48   Qq257, 258 Back

49   Qq317, 318 Back

50   Qq67,68 Back

51   Ev 77, para 5 Back

52   Ev 77, paras 8 and 9 Back

53   Ev 77, para 10 Back

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