Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 60-79)


17 MAY 2006

  Q60  Mr Newmark: So things have improved since the NAO Report came out?

  Mr Rossington: Absolutely and there is more grinding out of detail on headcount reductions and matching of different kinds of figures, so that we are certain the answers are correct.

  Mr Newmark: Thank you very much.

  Q61  John Thurso: I have one question on procurement, and I am going back to the NAO Report again. Their report on postal services procurement found that in some areas has not been effective at negotiating with postal suppliers on behalf of the public sector. Are you satisfied that your target for annual efficiency savings from the use of mail service framework agreements of £30 million a year is realistic in the light of what they have to say?

  Mr Barrett: The comment in the NAO Report refers to a negotiation that we held with the Royal Mail which was not as fruitful as I would have liked. The NAO are picking up on that in the report. The major part of the £30 million efficiency savings referred to in the NAO Report will come from a combination of two things. One is the departments and other public sector bodies moving to more appropriate forms of delivery of mail; for example, moving from first class to second class mail. The second thing is taking advantage of more competitive offerings that are now available in the market place; in other words, business will probably move away from the Royal Mail as a result.

  Q62  John Thurso: Has anybody worked out what the cost to the Exchequer would be of the impact of that decision on Royal Mail?

  Mr Barrett: I think the very simple answer is no.

  Q63  John Thurso: Does it not seem like an obvious thing, for the left hand to work out what the right hand is doing and where the costs are?

  Mr Barrett: It is a commercial decision for the Royal Mail to make as to how far they want to lower their prices in response to competition. That is established policy. We are taking advantage of the deregulated market to get the very best deal for taxpayers in that market place.

  Q64  John Thurso: That is the point that interests me: the best deal for taxpayers, because at the end of the day, under the Universal Service Obligation the Royal Mail has to undertake that delivery network. It is the only player in the market that has that burden. If the cream goes to private suppliers, the obligation still exists. We will still want to have our letters delivered to the Ardnamurchan Peninsula or whatever it might be, and the net result of that is that it becomes more of a loss-making business. Where does that money come from? The Exchequer. You save £30 million or £40 million or £50 million on a contract, but the Royal Mail is quietly having to have a bigger sub, and if you even it all up . . . .

  Mr Barrett: Yes, but in the bigger picture, at the end of the day the competitive pressures that apply to the players in the market place provide efficiency and effectiveness across the whole market. I worked for BT. They have seen their market share go down from what was 100% pre-1984 to, I guess, something like 60% now, but the level of service and the price of services delivered to customers, both public and private sector in the UK today, is unmistakeable to the one that pertained in the early 1980s.

  Q65  John Thurso: I am sorry, I digressed there rather. When will you hit your target of 60% of public sector postal spend going through the frameworks?

  Mr Barrett: I would hope to do it in three years time.

  John Thurso: Thank you.

  Q66  Ms Keeble: The magic of quite a bit of what you say about procurement, in particular about the aggregation of demand, would argue against small and medium sized businesses being able to secure public sector contacts. Do you expect to see an increase in the number of SMEs?

  Mr Oughton: We would be aggregating only in those areas where it makes sense to do so. Having looked at the market place for certain commodities, it would make sense to aggregate for buying utilities because the market place is already a group of very large players. What is the best way into that market place? It is by aggregating demand and driving the best discounts we can from the suppliers. One of the important challenges for us is to be analysing the market place and judging where you are dealing just with big players and where you are dealing with a more variegated market.

  Q67  Ms Keeble: You have mentioned utilities, but which other sectors?

  Mr Oughton: Fleet, transport, other commodities: print, mobile phones, software licences—that type of commodity, where you are talking about high volumes and where demand typically, both in the public and private sector, is aggregated. There will be many other requirements that government has—both in central government and in wider public sector bodies, in health and education and elsewhere—where the right answer could well be to buy from small firms or from local firms or buying particular types of products, encouraging innovative solutions. I would like Mr Sykes to say a word about how we are trying to approach that issue.

  Mr Sykes: As John has said, there is aggregation of demand and we are very careful about the words we use because it is about being an intelligent client. Instead of 30,000 different public sector organisations all buying individually, it is about a corporate behaviour and understanding the market. We have been doing a lot of work over the last few years on trying to address the issues that were raised in the Better Regulation Task Force Report on the barriers of entry to small business. We worked with partners in the wider public sector and in the private sector on a pilot in the West Midlands. We tested out five areas of innovative approach to try to understand how we could improve entry to the markets. We had a sample base.

  Q68  Ms Keeble: What were the areas?

  Mr Sykes: May I explain this first? We had a sample in the West Midland of 500 SMEs, which was representative of the social distribution in that area of ethnic businesses, women in businesses, and so on, so that it was representative. We looked at making available the opportunities. We worked with our partners in that area and with Birmingham Chamber of Commerce to pilot a portal which made (I do not like the phrase low value) some sub-£100,000 opportunities available to the community of SMEs and we encouraged them to go and look at our website. Just putting the opportunities out there in the first place is important. We have done some world benchmarking. We identified, from our colleagues in South Africa, that one of the biggest barriers to small businesses is all the forms that they have to fill in. We designed a pre-qualification questionnaire where we told them the answers to the questions and invited them to indicate whether they could comply with the requirements or not. This did two things: it reduced the burden on the public sector buyer in analysing the essays that came in from people; it also meant that those organised, small enterprises that deselected because they could not meet the requirements knew what they would have to do the next time round. We worked with departments to try to understand how much buyers knew about how to do business with small enterprises. We developed a training package to go out to buyers in that particular community to show them how to think small and to design their procurements in a certain way. We worked with small businesses to put them thorough a sort of training course on how to respond to requests that came from the public sector, how to answer questions and how to put their bids together. We also did some work at that time with what I call primes, the big suppliers to the public sectors—many contracts have to be with big suppliers because the risk is so great—on how they could work with their supply chain. At the end of that particular pilot, we were amazed by the results. We started off with something like 14% of our SME community having done business in the public sector and the figure was about 23% at the end of that period that had won work in the public sector. I am pleased to say they had won work on the basis of merit. We checked afterwards and they had done perfectly good work; it was very good value for money; they had brought in innovation and good ideas. It was good to bring them in. We were able to go out to the buyers and say, "This is a good thing. It is a good value-for-money way forward". What we have done since then is to work with the Small Business Service to roll out the learning from the West Midlands' pilot. It went live about a month ago, and there is now a supply route to Government 2, which is a service run by BiP, a publisher; they won a competition to provide a national service, which is free to small businesses within their postal area. They pay a very modest fee if they want to apply to go on the register for business outside their area. That is cheaper than going into Yellow Pages, and it has a greater chance of success. We went around the country and trained over 800 buying people from the public sector using the training courses that we had developed. We worked with suppliers on a regional basis to invite SMEs and show them how to do business with government. We ran seminars and over 1,000 people attended. We have now handed the training packages over to the Regional Development Agencies and they have taken that up. We are continuing to work with the key suppliers to Government to encourage them to include SMEs in the way they do business in the future.

  Q69  Ms Keeble: That sounds a very interesting pilot and an interesting approach to the roll-out. Is that looking at advising or supporting other areas of government procurement as well? I noticed earlier you referred to schools, which I would have thought was all dealt with at local government level. Just to take one example from there, in my own constituency of Northampton, 34,000 items of fruit go to the schools every day. A number of struggling farmers would quite like to get the contracts. For some reason or another, it seems there is either not the opportunity or the skills to be able to manage that contractual relationship so that the local suppliers can get in. Are you able to unpick some of those? Do you actually look at the social consequences of government procurement?

  Mr Sykes: Do we look at the social consequences? I think the answer to that is yes, but it is a very complex landscape. There is now of course, in the particular sector you talk about, a Centre for Procurement Performance. I have colleagues working in that sector who are trying to help schools do their procurement in a different way. OGC has specifically made a portal for the small business, as I said, providing the opportunity to advertise opportunities. Any school can advertise its opportunities on there at zero cost and so there is now no barrier to people who want to put out opportunities to business. If the small buyers are in that postal area, they can register in that postal area free, and there is a way of introducing the small supplier to the small buyer. Within the resources we have, we cannot deal with 20,000 plus schools on an individual basis. We have to do that through our partners in DfES.

  Q70  Ms Keeble: Does PFI limit any of the opportunities for sharpening up procurement because people are stuck in long-term contracts where sometimes the monitoring of them can be quite problematic? I am thinking of the hotel facilities in either schools or hospitals.

  Mr Sykes: That is an interesting question. At the first level, there are risks for small and medium enterprises associated with financing a 25-year deal. PFIs are not done below £20 million and so a lot of small businesses are not bidding into that kind of space.

  Q71  Ms Keeble: I was thinking about the same service areas rather than the size of the contract. Obviously PFIs are the larger contracts.

  Mr Sykes: There is more work to be done. We need to encourage those first tier PFI partners to think about the value that can be added by small businesses. It is an opportunity for small businesses to keep their costs level or down as they go forward in time.

  Q72  Ms Keeble: I have a couple more questions. One is about areas where there is a limited pool of suppliers. Given that government spending power is incredibly important, obviously, there are some areas with quite a limited pool of suppliers. Have you had problems in that area and what is happening about broadening the supplier base? I am thinking about computers?

  Mr Sykes: Basically, if you have two or more suppliers, you have competition, so this is not just a question of suppliers; it is more a question of market capacity. The number of suppliers at the point in time when the volume of activity—

  Q73  Ms Keeble: May I pick you up on that? It is true that if you have two, there is competition but it is pretty marginal competition. There is the possibility, if you have only four major accounting firms, of having cartels. There are some really serious issues. I would not accept that two is competition. Sometimes they have cross-holdings anyway, do they not?

  Mr Sykes: Yes, it is not the ideal competition. In fact, if we go back a few years to when OGC first started looking at particular markets and take the IT market, it is true that a large proportion of government IT expenditure was limited to about three or four suppliers, with one or two of those suppliers having a disproportionate share of the marketplace. It was fortunate that we had new work coming forward and that we had previous contracts which were coming to a renewal stage. We worked with colleagues across the public sector to define ways to open up the market and create a level playing field for the incumbents and to encourage new players to come into the market. We had extensive dialogue with large suppliers who were not playing into the public sector space as to why they were not. We worked with colleagues to try to create the right environment. In the IT sector we now have about 15 suppliers and those very big suppliers do not have the same proportion, though when you have an organisation like DWP or HM Revenue and Customs, there are big contracts in their own right.

  Q74  Ms Keeble: Do you have any concerns about corruption or sharp practices or anything approaching that, given that these are very lucrative contracts?

  Mr Sykes: I do not have any immediate concerns. May I say further that there are other markets as well? We have just been working with DEFRA on the waste market to see whether there is adequate capacity, given the landfill directives that are due. A report will be coming out in the next few days on that.

  Q75  Ms Keeble: Finally, may I ask about Zanzibar, the wonderfully named online purchasing portal that was due to be up and running by now at the beginning 2006? What progress has been made?

  Mr Barrett: Martin Sykes can claim credit for naming the system but my organisation runs it. We have just accredited the Zanzibar system to the appropriate security level. We expect to go live with the Department of Work and Pensions before the end of this month.

  Q76  Ms Keeble: That is very good. What is going to happen then about integrating, say, with DEFRA, which I understand has its own separate system, is that right, or are you just going to remain separate?

  Mr Barrett: DEFRA certainly does not have a separate system in terms of—

  Q77  Ms Keeble: It says that they have already developed their own e-procurement systems that appear to duplicate the work, but that is not accurate, is it? That is in my brief.

  Mr Barrett: Lots of departments have e-procurement systems, typically based around an Oracle or SAP solutions. Zanzibar allows those sorts of systems to work commonly together and then to face out to the supply industry. I cannot say for sure that there is some functionality in the DEFRA system that does not duplicate that in Zanzibar, but our hope—and it is only a hope as far as DEFRA will be concerned—is that ultimately there would be value for money case made, and, where that is the case, that they will move to using Zanzibar, but it is their choice. We cannot force them to do that.

  Mr Oughton: We did look quite carefully, in setting up Zanzibar, as to whether it would duplicate other systems. We looked at Defence, for example, that had developed their own electronic commerce system. We looked at other departments, too. We looked at local government where again a system was already in use. The point about Zanzibar, as Mr Barrett says, is that it brings a number of functions together in the same place. It is web-enabled. It is a full marketplace. It will be successful if it demonstrates that it can produce value for money but again, rather as we were saying earlier, to be in a position where you rely only on one route to the market is not always the most comfortable place to be. A little bit of choice here, at least at this early stage when we are trying to understand what the technology can do for us and what the benefits can be, is no bad thing.

  Q78  Chairman: We have to move on because there is a lot of material to cover. I know there is a lot more we could discuss. I want to hear a bit more about the performance of, if I may. As I understand it, demand for the managed service has been rather flat at £36 million last year compared with £35 million the previous year. Why is that?

  Mr Barrett: That is because we have reduced our prices essentially. Demand has increased. Let me give you an example. We run a managed telephony service for about 120,000 civil servants. We managed to reduce the price that these civil servants would pay for that service. The reduction in price, even though the volume has increased, has meant that net there has been a relatively small increase in the charge that we levy on departments for those services.

  Q79  Chairman: I see, and so the service is cheaper but the demand has in fact gone up?

  Mr Barrett: Indeed, it has. A good example is a parallel service to Zanzibar where we run an e-sourcing service, which we launched in the middle of last year. We have just got 1,000 users on to that system. In the last week, the Olympic Delivery Authority has decided to use that for one of their major infrastructure projects. That is a service that has grown from a zero base in May last year.

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