Select Committee on Education and Skills First Report


5 Financial management capabilities of the DfES

48. There have been a number of events over the course of this Parliament which have led us to consider whether there is a particular weakness within the DfES over financial and project management. For example, there were serious problems with Independent Learning Accounts (ILAs), which were ended because of much higher take-up (and thus higher expenditure) than anticipated and because of suspected fraud. Another example was the change in the schools' funding system which, as we discussed earlier, had unforeseen consequences and gave rise to suggestions that the whole schools system had serious financial problems. There have also been difficulties with the UK e-university which led to its closure. With this background in mind, in this section we look in particular at underspending by the Department and at outsourcing.

Underspending

49. In each of the years 2000-01, 2001-02 and 2002-03 the Department underspent its budget, although at a declining rate. The table below shows the underspends on individual programmes in each of the Requests for Resources (RfRs) in the DfES' resource accounts for 2002-03. As can be seen, some programmes were significantly underspent.



Source: Department for Education and Skills Resource Accounts for 2002-03, HC 188, Session 2002-03, p 42.

50. We asked about the pattern of underspending. Mr Normington explained that the DfES was working increasingly on three year budgets which meant that "it makes no sense to focus on the artificial point of the end of March each year".[39] He argued that the DfES actually performed well on underspending:

"…in this year which has just finished we will be within about 2%of our budget which, on a budget of £27 billion, is pretty good actually, but it still turns out to be £500 million. If you look at aggregate sums, £500 million really is quite a big underspend, but it is 2% of the total budget and most organisations would be quite proud to be within that range. The issue is whether that money is lost. No, it is not. It gets profiled over a three-year period and in terms of helping with the school budget position, we have actually used some of that projected underspend to underpin what we are doing to stabilise school budgets over the next two years, so that is how we manage resource over that three years."[40]

51. Stephen Kershaw, Director of Finance at the DfES, pointed out another reason for underspends:

"[I]f there is one thing worse than underspending…it is overspending, so there is in a way a natural level of underspend…one way around that is precisely that we have to reduce the number of individual budgets because if everybody underspends a little on lots and lots and lots of budgets, that is what produces the big numbers which we are criticised for."[41]

He said that the aim was to help officials in the Department "to manage bigger clusters of budgets themselves in a much more intelligent way and do their own yearly reshuffling of money to the top priorities."[42]

Outsourcing

52. On outsourcing, we asked the Permanent Secretary about the roll-out of Educational Maintenance Allowances and the lessons that had been learned from ILAs in introducing such projects. He said:

"…we have been trying very systematically to learn the lessons from Individual Learning Accounts where that is appropriate and moving across to Educational Maintenance Allowances, and we have a very tightly run project for implementing education maintenance allowances which I personally have been keeping a close eye on…[there is] a much better risk assessment in the Department, which says: what are the big risks to us? And clearly the implementation of a system like this is a risk involving quite a big IT system as well, and we have learnt that we need to plan that properly, that you need to get your sequencing right, that you need to work effectively with your private sector partners much better than we did on ILAs."[43]

53. When we asked who was the private sector partner providing IT services, Mr Normington told us that it was Capita.[44] This caused us some surprise, as Capita had been involved in the ILA project and there had been criticism of Capita's role in its failure, but Mr Normington defended their track record and the decision to use them again:

"I do not like to contract with anyone who, I think, puts us at risk and we took the judgment that Capita were not going to put us at risk in the Educational Maintenance Allowances."[45]

54. Capita also responded to our questioning of their involvement:

"Capita responded to the invitation to tender issued by the Department for Education and Skills for a partner to provide the national Assessment and Payment Body (APB) service in support of the Education Maintenance Allowance (EMA) scheme. In bidding for a contract of this nature Capita undertakes a very robust process to ensure that the opportunity is compatible with the Company's capacity, competencies and experience; to test the commitment and capacity of the client and the achievability of its requirements; to ensure the commercial viability of the potential contract; and to test whether Capita can add value to the programme. In the case of the EMA APB Capita was, and is, of the opinion that this was an appropriate opportunity to bid and that the requirements are consistent with Capita's strengths. Capita was selected by the DfES through a robust and competitive process."[46]

Review of schools' funding

55. We asked the Secretary of State about what reviews had been undertaken in the Department following on from the schools' funding problems. He said that "a tremendous amount" had happened:

"…I am more proud of what has been achieved in relation to schools finance and LEA finance than I am of any other single area that we have achieved. We have made a significant step forward in the quality of our management arrangements… I receive, personally, a report every week on the latest state of affairs of what is coming through, for the obvious reason…that politically I felt vulnerable on the whole question of school funding and I wanted to make sure we had it working completely in a better way. I think we have made progress for that reason."[47]

Conclusions

56. There are a number of issues here to do with the operation of the DfES in general. Certainly mistakes have been made. In the case of ILAs, the objective of expanding training was given such a high priority that the caution normally associated with Government policy implementation was completely overlooked. With schools' funding, although we may never have a clear picture of the extent of the problems, one difficulty was the way in which the settlement for 2003-04 was presented by Ministers, leading all schools to expect large sums of extra disposable income which in many cases did not materialise. The lessons here for the Department are clear: always have a rigorous risk assessment, and do not oversell a policy particularly where, as with schools' funding, accurate forecasts of the outcome are not available.

57. Government Departments have an unimpressive record generally with projects involving IT procurement. They are often poor clients, lacking the necessary skills to ensure projects run as they should. The National Audit Office and the Office of Government Commerce have compiled a list of common causes of failure in IT-enabled projects across Government and the DfES has clearly not been immune from them. The causes are:

"1 Lack of clear link between the project and the organisation's key strategic priorities including agreed measures of success.

2 Lack of clear senior management and Ministerial ownership and leadership.

3 Lack of effective engagement with stakeholders.

4 Lack of skills and proven approach to project management and risk management.

5 Lack of understanding of and contact with the supply industry at senior levels in the organisation.

6 Evaluation of proposals driven by initial price rather than long-term value for money (especially securing delivery of business benefits).

7 Too little attention to breaking development and implementation into manageable steps.

8 Inadequate resources and skills to deliver the total delivery portfolio."[48]

58. Not all the difficulties for the DfES are of its own making. The Department cannot offload all the risk of a venture onto its private sector partner. If the work done by a private sector partner is flawed, it cannot just be written off, because the Department has a duty to discharge its responsibilities in all circumstances. Ultimately, if anything goes wrong the Department will have to pick up the pieces. As the argument for using the private sector to undertake particular projects generally includes an expectation of "risk transfer", the apparent difficulty of transferring risk away from the Department points to a long-term difficulty in the particular use of contractors to deliver major initiatives.

59. This helps to explain why there appears to be little competition in providing services to the Department. If the risk is never completely transferred, then the tender will demand a large number of quality standards and safeguards which only a very few companies are likely to be able to provide. So Capita won the tender for ILA computer system, it runs the Teachers' Pension Scheme, it won the tender for the EMAs computer system and, most recently, it won the tender for the Primary and Key Stage 3 strategies. The press notice announcing the award of this last contract was at pains to stress the rigorousness and impartiality of the tendering process.[49] There is no reason to doubt this, but, as David Normington told us, "[Capita is] very, very big in the education world",[50] and in these matters the size of a company and the resources it can bring to bear are crucial. Nor is this a criticism of Capita. Given the way in which these processes work, there will always be a company which fills the role that currently Capita fills with the DfES. In short, there is little real "market" here.

60. The Department does appear to have learnt some lessons from recent events. It has recognised the need for comprehensive risk assessments on major projects, it has taken steps to monitor more closely the flow of funds to schools and it has instituted a funding system for schools which above all other considerations is predictable.

61. All of this has meant a greater central control of certain functions, and it is at this point that several of the Government's policies can be seen to have conflicting objectives. Funding for schools is decided centrally with LEAs acting as agents of the Department with no say in the manner of distribution; monitoring of spending is being undertaken centrally; responsibility for management and coordination of children's services across England has been given to the department. And yet it is at this time that the DfES, along with the rest of the public sector, is being asked to make considerable efficiency savings: 1460 fewer staff by 2007-08, 800 more staff relocated outside London by 2010, and a total of £4.35 billion in annual efficiency savings by 2007-08.

62. Virtually the whole of the public sector will be in transition over the next five years as the Gershon proposals are implemented, and the Government will no doubt argue that the DfES along with other organisations has to contribute to the success of those changes. At the same time the DfES will be implementing the wide-ranging policy changes that we have discussed in this report across all schools and all children's services. We have identified financial management and project management problems that have occurred within the Department, and it clearly needs to address its methods of working in order to limit the possibility of similar problems in the future.



39   Q 79 Back

40   ibid Back

41   Q 91 Back

42   ibid Back

43   Qq 69-70 Back

44   Q 71 Back

45   Q 75 Back

46   Letter from Capita 4 August 2004 (Ev 54) Back

47   Q 247 Back

48   Improving IT Procurement, Report by the Comptroller and Auditor General, HC 877, Session 2003-04, 5 November 2004, page 4. Back

49   Capita awarded the National Strategies contract, DfES press notice 30 September 2004. Back

50   Q 72 Back


 
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