Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  Q60  Jim Cousins: If you were serious about the target, Mr Macpherson, it would have been mentioned in this, would it not?

  Mr Macpherson: We are very serious about this target. If we were not serious about it we would not have the target. Actually, we adopted this target in the 2002 Spending Review. We rolled it forward in 2004 as a demonstration of the seriousness with which the Treasury takes regional growth. That was a departure for the Treasury, which historically it is fair to say has not taken regional development as seriously as it should have.

  Q61  Jim Cousins: These regional funding allocations when they are set up—it is very interesting to look at the text. All projects of national significance are left out of them; so the Thames Gateway, Crossrail, if it ever gets built, the contribution to the Olympics—all of that is excluded from the regional funding allocations. 10% of the expenditure on all of those things goes to Scotland under the Barnet formula; 7% goes to Wales under the Barnet formula; I think 4% or 5% goes to Northern Ireland under the Barnet formula; but the regional funding allocations for the English regions—nothing comes there. Is that not right?

  Mr Macpherson: I do not accept that.

  Q62  Jim Cousins: Is it right?

  Mr Macpherson: Is it right that nothing goes to the regions?

  Q63  Jim Cousins: No, is it right that projects of national and strategic significance, like Crossrail, the Thames Gateway, the Channel Tunnel fast link and all these other projects are left out of these funding allocations because they are of national significance? A share of that public expenditure is passed on to Scotland, Wales and Northern Ireland under the Barnet formula, but there is no reflection of it in the funding allocations to the English regions. Is that correct? Yes, it is correct!

  Mr Stephens: Yes, because they are projects of national significance the Barnet formula and the arrangements for funding devolved institutions are well-established and well set out. I would just point out paragraph 3.17 of the departmental report makes reference to publication of the consultation document in the course of reporting progress on this particular target; so that demonstrates that it was clearly contextualised in the context of working on that target.

  Q64  Jim Cousins: In December 2003 you published a government guidance note on progressing local pay. The only policy in that document is set out very clearly. It reads as follows: "Within existing national bargaining frameworks the policy is to increase the amount of regional and local pay flexibility and variability across the public service labour market." Is that still your policy?

  Mr Macpherson: Yes.

  Q65  Mr Love: I want to take you on to the efficiency agenda. When you last came to the Committee earlier this year you indicated that you were still developing a measurement framework to monitor the delivery of efficiency gains across departments. Is this framework now in place?

  Mr Oughton: In most respects, yes. We have been through a two-stage process, first of all to measure departmental capability to deliver on their plans, the first phase of this programme from the announcement of the Spending Review commitments in July of last year through to April of this year, when the clock started running on real delivery. It was about ensuring that the plans were well established. We were clear what actions were going to be taken by departments. We were clear the milestones they had to hit, and we were clear about the trajectory for the delivery of the gains, so that we could measure whether we were on track or off track. We went through three stages of that process, in July of last year, in September and then again, at the Prime Minister's insistence, at the end of the year, to develop robust plans. These were tested by a moderation panel including a very significant element of outside involvement, the Chancellor's productivity panel involving individuals such as Sir Andrew Foster, formerly of the Audit Commission, John Smith, Financial Director of the BBC, Sir Ian Byatt, formerly of Ofwat, and a number of other private sector specialists. We were satisfied that the plans were in place. When the clock started running on real delivery, in April 2005, we instituted a process of quarterly reports on data from departments, looking at the gains in terms of cash, the gains in terms of value for money, non-cash releasing benefits, as described by Sir Peter Gershon in his original report, tracking the headcount reductions to meet the Chancellor's target of 84,000 gross set out in the Spending Review, and also tracking the delivery of asset disposals, also set out in the report. In the Budget in the spring we announced progress so far, progress ahead of the start of the formal period of reporting, of £2 billion in efficiency gains, 4,300 relocations, with 7,800 further commitments made, and 12,500 headcount reductions. The methodology that underpins that, the way in which these numbers are calculated, has been worked out between ourselves in the Office of Government Commerce, my efficiency team, the Spending Team from the Treasury, Jonathan Stephens' teams, with support from the National Audit Office and the Audit Commission, which assessed the methodology. We believe we have a robust methodology and we are now calculating progress quarter by quarter. I would expect the Chancellor to want to report further progress in the Pre-Budget Report.

  Q66  Mr Love: You are talking specifically about the Gershon efficiency gains.

  Mr Oughton: Precisely so, the 21.5 billion.

  Q67  Mr Love: I was also asking in relation to the PSA efficiency savings.

  Mr Oughton: The £3 billion?

  Q68  Mr Love: Yes.

  Mr Oughton: The £3 billion PSA target, which is called Value for Money Gains is a mixture of cash-releasing gains and non-cash. It would be made up of, for example, reductions achieved through direct negotiation with suppliers on procurement. It will be made up from reducing process or transaction costs for doing Government business—basic procurement contracts. It will be made up of improvements secured through better contract management and better asset management. It will be made up through joint procurement activity. There will be a mixture of real cash savings off the bottom line through the negotiation of deals and a mixture of non-cash reduction in overheads and costs through the other methodologies I have described.

  Q69  Mr Love: I understand that each department's annual report will give an update both on the Spending Review 2002 and 2004. Has your Department identified any departments that are not living up to their commitments? Have you developed a comprehensive programme; and if there are departments in that position, are there any penalties or sanctions that you can impose upon them?

  Mr Oughton: No, I am satisfied that in every case the departments have produced clear plans. It was a struggle—this was new territory for many departments. We asked them to produce their plans really very quickly after the Spending Review settlements were announced in July 2004. We regarded that as work-in-progress. We wanted to see where the gaps in the capability were. This is a major mission-critical programme that has to be delivered across the whole of government. In exactly the same way as we would look at the skills required to deliver other major programmes, we wanted to see the skills issues that needed to be addressed here. At the earlier stages plans were not in terribly good shape. They have developed very considerably over the intervening period. I am satisfied that all departments have now clear plans. They have a clear understanding of the actions they need to take and a clear understanding of who is accountable for taking those actions, and a clear understanding of the milestones they have to hit period by period. In terms of progress, I have only at the moment one quarter's return for the period from April through to July of this year, which we have assessed. We are in the process of assessing the second quarter's returns that came in in October, and I have not yet completed that process so I cannot yet form a judgment.

  Q70  Mr Love: You did not mention in all of that whether there were sound data systems in place. If you think back to the debate we have had, there has been some questioning over the validity and timeliness of some; but stepping aside from that, are there adequate data systems in place so that they can demonstrate to you that the gains that they claim to be making have been delivered?

  Mr Oughton: I think there is a bit more to do on that. I think at one end of the spectrum the area where I am most confident is in terms of procurement deals. You can see the costs paid before and after the intervention and the use of the new technique, a better negotiation such as the Department Health reduction in the cost of drugs through their re-negotiated contract. You can see the effect of £950 million a year and you can see the effect of triggering improved discounts on our Microsoft deal for licences, Oracle and so on. You can measure those gains very precisely; that is real money off the bottom line on the contract. You can measure the achievement secured through the use of new techniques, for example electronic auctions. We recently announced that a consortium for 137 health trusts had secured 30% discounts on the purchase of desktop IT through use of the electronic auction. At that end of the spectrum you can measure with very high confidence the numbers. There is a harder area, the area that Peter Gershon describes as "productive time area", where he expected some £6 billion of gains across the efficiency programmes to be delivered. That is a mixture of changes in working practices, changes in ways of working. Some of that is already in place through the re-negotiation of contracts in the Health Service, and some of it is still to be done. Some of it will be about the release of time currently devoted to administrative non-patient, non-pupil facing tasks on the part of public sector workers through the enablement of IT modernisation programmes such as Connecting for Health in the NHS.

The Committee suspended from 3.37 pm to 4.00 pm for divisions in the House

  Q71 Chairman: Do you have any more to add?

  Mr Oughton: Only one thing, Mr Fallon. To develop the measurements approach in this very difficult area of productive time, we have been working first of all with the Department of Health on a frontline review, talking to clinicians and administrators in a selection of health trusts, to establish the current practice, how it can be improved and measured; and we are about to start a similar review in the Department for Education and Skills.

  Q72  Mr Love: I understand that the departments no longer have individual targets on efficiency. Does that mean that the NAO no longer audits those figures, and is that appropriate?

  Mr Oughton: Mr Love, they will have targets because the Spending Review 04 settlements and the settlement letters associated with those were very specific about the efficiency targets that each department had to make, both in terms of financial targets, headcount targets, and relocation targets under the Lyons Programme. We are monitoring those. They remain in place.

  Q73  Mr Love: Will they be audited by the NAO?

  Mr Oughton: The NAO is working with us on the assessment process, and the NAO is currently conducting a full study of the efficiency programme, which I think it plans to publish in the New Year.

  Q74  Mr Todd: One of the issues that you have touched on, the Lyons review and the workforce reductions, is how exactly you measure that output. Have you got an established methodology for working out how many people are working in a particular department and reporting on that satisfactorily, because there are a number of different ways—full-time equivalence, use of contract staff and all those sorts of things?

  Mr Oughton: Every department will report, as will the Treasury, on their manpower figures, on their headcounts, and they will be using the same definitions. What we are concerned about in the measurement under the efficiency programme are these: one is the reduction in the number of posts. The commitment was the reduction in the number of posts, not necessarily the numbers of bodies. How those reductions are made will be a matter for departments. The same is true of the relocation commitments under the Lyons programme, where the Government is committed to relocating 20,000 posts outside London and the South-East by 2010. Again, we will measure reduction of posts in the centre of London. The particular individuals who fill those jobs at the moment might in some cases relocate to other posts as they move to other parts of the country. They might relocate to other tasks within London and the South East, and the Department will then recruit locally when the posts have moved. They may leave the Civil Service as part of the exit programme, so a number of outcomes—

  Q75  Mr Todd: To clarify, if the individuals change their contractual relationship with the department by ceasing to be an occupier of an established post, but nevertheless perform broadly the same duties through an external contract with that department, how is that counted?

  Mr Oughton: If you are talking about the use of consultancy as a way of substituting—

  Q76  Mr Todd: Consultancy or contractors.

  Mr Oughton: Or contractors, yes. I would expect, when we scrutinise the departments' proposals, to look at how they are continuing to deliver on outputs, even though they have reduced the number of posts. This is about releasing resource so that it can be recycled into the front line to improve public services. We would want to be satisfied, using the same methodology that the Prime Minister's Delivery Unit uses, that outputs are being maintained or improved to meet the public sector agreement targets. We also want to be clear that the costs are being contained and reduced, in line with the efficiency commitments. So spending money in different ways, by employing people from outside government to undertake these tasks could only happen if those costs were contained within the overall cost ceiling set in the department. There is no free cheque, if you like, to go and spend money outside government, because you are constrained in spending money on your own people inside government.

  Q77  Mr Ruffley: Can I ask the Chief Executive of OGC to remind us—is the 84,000 gross reduction in Civil Service jobs published in the Gershon review a headcount figure or a full-time equivalent?

  Mr Oughton: It is a reduction in posts.

  Q78  Mr Ruffley: Which of those two is it?

  Mr Oughton: It is a reduction in posts.

  Q79  Mr Ruffley: Does that include part-time?

  Mr Oughton: It would vary from department to department, yes.

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