Memorandum from CIPFA
INTRODUCTION
CIPFA welcomes the decision of the Public Administration
Select Committee to look into this key area of the provision of
public services through the third sector. The Institute is pleased
to comment on the following questions from the Select Committee's
Issues and Questions Paper where the experience of our members
is particularly relevant. We would welcome the opportunity to
discuss our responses further with the Select Committee in oral
evidence if the Select Committee wishes.
KEY QUESTIONS
1. What are the benefits of contestability
to the users of public services?
(b) Is loss of accountability a threat of
commissioning services? If so, how can this best be managed?
A clear contracting framework can strengthen
rather than diminish accountability. When commissioning a service,
the public body concerned must have the appropriate processes
in place to be satisfied that it is making the best decision in
the interests of the public when commissioning services from any
other organisation, regardless of the sector the other organisation
belongs to. Similarly, during the agreement period, the ultimate
accountability for the service's quality remains with the commissioning
body, as its members will ultimately be held responsible for this
by the public. Adequate reporting and service quality inspection
mechanisms should therefore be built into the conditions of any
commissioning agreement by the public body.
Providing the appropriate controls are in place,
there is no intrinsically greater threat of a loss of accountability
from a public body commissioning services from the third sector,
than there is when commissioning services from the private sector.
3. Does commissioning benefit the third sector?
(a) Will contractual relationships with the
state improve stability within the third sector?
This is an area where we see both benefits and
risks.
An appropriate contracting framework can definitely
strengthen the stability of third sector organisations but only
if they have the skills and capacity to put in realistic tenders.
Tendering processes can use a lot of resource and therefore need
to be streamlined and proportionate to the scale of the contract
being let. For example, a two stage bidding process for a small
respite or advocacy service would not be appropriate. There will
be additional costs associated with taking part in contracting
processes and potentially in contract management and providing
performance data.
Contractual relationships with the third sector
will also give the state a strong interest in its stability. Measures
which public bodies can take to support stability include:
— Payment mechanisms which protect
contractors against steep and arbitrary changes in the volume
of orders.
— The least possible prescriptiveness
as to methods.
— Abstinence from driving unduly hard
bargains.
In particular, longer term contracts offer the
stability required by third sector organisations and their staff
to focus on doing the job well, while reducing the pressures on
them to allocate undue attention to renewing or replacing short
term funding, or face ending the service in question. This is
particularly important for smaller bodies.
The risks in this area stem from the idea that
the voluntary sector can act as an alternative form of public
service contractor, particularly when there is an underdeveloped
private sector supply chain. We believe that this approach can
create two areas of difficulty:
— First, undermining the genuine delivery
of public services either by public sector bodies, or by private
sector contractors, as it can be seen to be relying on the element
of voluntarism as providing a below cost solution to immediate
financial difficulties. For example, in the social care sector
of public services, the idea of "co-production" can
be used to disguise an attempt to deal with the difficulties created
by under funding and rationing of services.
— Second, by acting to "professionalise"
what should be a level of voluntary activity. Because, naturally,
the Government as a contractor insists on a quality of standard
of provision, increasingly it is calling upon third sector organisations
to train and qualify their staff to professional service delivery
standards. The voluntary sector is therefore finding itself drawn
into increasing levels of complexity over training, qualifications,
and quality checks that mean that instead of there being voluntary
sector effort effectively the voluntary sector becomes another
commissioner of fully employed staff, who are the only ones who
are capable of delivering the service to the standards now demanded.
This undermines both the element of voluntarism, and, the delivery
of service in some cases. We understand that a number of community
organisations are no longer able to cope with the increasing level
professionalisation and as a result are curtailing their activities
to the overall loss to the community.
(b) Will close involvement with service provision
prevent third sector organisations retaining the ability to be
critical of government?
There is no inherent reason why this concern
should materialise in practice. The increasing recognition by
government and the opposition parties that the state needs to
work with and through partnership or commissioning to achieve
public service improvements, makes it unlikely the government
will simply cut off funding to an organisation which voices criticism.
Such a move would risk bad publicity if government were seen to
be "bullying" organisations providing public services
which exercised their right to hold an opinion on government policy.
Our experience from the public sector is that organisations within
local government, health and other arms of the public sector will
voice critical opinions on government as they see the need to,
and we see no reason why the third sector should feel the need
to refrain from such a healthy dialogue in order to help inform
public debate on services.
If the fact that a wider view is to be taken
of third sector delivery then this must take into account the
fact that voluntary sector organisations are both advocates for
their service as well as deliverers of that service on many occasions.
This advocacy role cannot be ignored. However, it does raise issues
around community governance. The Committee has rightly drawn attention
to the concerns that widespread use of third sector deliverers
of public services can mean that there is no proper democratic
control of their activities. In part this is true, although if
the Government considers them only as contractors, then there
is no need for governance arrangements above contractual terms.
They are in effect just another form of contractor and we would
not expect a private sector contractor to undergo an element of
democratic control.
However, if the aspirations of the White Paper
are taken as a guide for the future then there is an argument
for the engagement of the third sector not only in the delivery
of service, but also in the design of that service through a form
of community governance. The democratic interface will then have
to be addressed. However, this is not an insuperable problem,
and indeed if the third sector were enabled by the acquisition
of assets and budgets they might provide a significantly locally
focused and locally sensitive delivery of a key service. Appropriate
controls would need to be put in place such as the independent
audit of an organisation's activities, the establishment of a
"Charter Mark" or quality standard before assets and
funds are delivered, perhaps combined with regular authorisation
of the group's activities through the democratic process at parish
or community level.
(c) Is there a risk that service providers
will become increasingly bureaucratic?
Whilst any service-providing organisation runs
the risk of focussing too much on processes and not enough on
outcomes, this risk is no greater in the third sector than elsewhere.
Given that public sector commissioning of third sector organisations
to deliver services is an area with great potential to grow in
the future, this risk can be addressed by reminding public bodies
in guidance from central government to assist service providers
by keeping reporting and monitoring requirements at levels appropriate
to the funding, service and provider in question, rather than
adopting a "one size fits all" or overly bureaucratic
set of requirements.
(d) Is there a risk that third sector organisations
will lose their independence, their identity or their distinctive
ethos?
There are clearly risks in this area, particularly
where a contractual relationship with the state is significant
in relation to a third sector organisation's other activities.
However, there are a number of measures that can be taken, including:
— matching their specifications, and
their selection and evaluation criteria, as closely as they can
to the abilities sought from the third sector bodies which they
want to attract to the service under consideration. The more sensitively
and effectively that clients do this, the more likely that contracts
will reinforce the ethos of third sector bodies, rather than erode
it; and
— avoiding imposing on small third
sector tenderers the same insurance requirements and financial
standing criteria that they impose on large private sector contractors.
(e) Might the third sector become polarised
between large service providing organisations and more radical
groups? If so, would this matter?
Giving significant contracts to any sector must
be expected to have the effect of making some of its members bigger.
However, we see no correlation between small size and radicalism.
Some of the biggest and longest-standing voluntary organisations
have always been forceful and intrepid campaigners.
4. Does commissioning services from the third
sector have any benefits for the state?
(a) Does the state risk losing control of
service delivery in a way which might be damaging?
One of the strengths of voluntary organisations
which work with vulnerable and disadvantaged people is that they
do not normally perceive third sector staff or volunteers as being
"officials". Therefore any perceived loss of control
is likely to be more than offset by the advantages of using the
third sector.
(b) What capacity will the state need to ensure
that it can be an intelligent customer of services?
All stages in commissioning call for the same
range of expertise and knowledge of contract law and practice.
This suggests that it would be unconstructive to force the pace
at which third sector services are taken up.
(c) How is duplication of effort in order
to monitor and manage contracts best avoided?
Some duplication is unavoidable whenever any
work or services are contracted out, for the reasons given in
answer to question 1(b). It can however be reduced by:
— Rationalising all the different data
needed for making contract payments, supervising output, updating
personal records, and ordering essential support services. The
more often that one piece of data can serve several such purposes,
the better.
— Eliminating the number of different
client personnel who have to visit the same end users, or the
same sites. This means rationalising their duties in the same
way as for data.
5. What are the financial implications of
providing services through the third sector compared with directly
provided state services?
(b) Are there "hidden costs" such
as contract oversight?
Contract oversight needs to be considered and
costed at the commissioning stage by the public body, with this
being an important point for central government guidance to the
public sector.
(c) Are the benefits of the third sector participation
in public service provision so great that it is appropriate to
have financial rules which encourage this, or should the aim be
to have "competitive neutrality" between public, private
and voluntary sectors?
For contestability to work in an efficient manner,
there needs to be a level playing field between different types
of providers. The objective ought to be to enable decision making
to take place based on value for money, ie taking into account
both quality and cost.
If, instead of a level playing field, it is
decided centrally that the benefits of the third sector participation
in public services provision are so great that it is appropriate
to have financial rules which encourage it, this would skew the
vfm decisions made by the individual procurers of services. Such
skewing of decisions at a local level interfere with those decisions
and lead to lower vfm overall, with consequential waste to public
funds. It could moreover be seen as anti-competitive.
In order to achieve a level playing field it
is important that the purchase of public services, whether from
the private, public or third sector, should be done on a full
cost recovery basis. The calculations of full cost should be done
in a manner that is consistent with sound accounting practice
and principles. CIPFA has undertaken considerable work on this
subject, particularly for the local government sector, where our
accounting codes are recognised in legislation as proper practice.
This work could have a wider read-over within the public sector
and to the third sector.
We would welcome the opportunity to discuss
this further with the Select Committee in oral evidence if the
Select Committee wishes.
Often, when costings are done in the public
sector they are still done on a marginal rather than a full cost
basis. This is unsustainable, in monetary terms, in the medium
to long term. There are several issues here. Many apply to both
the public and the third sectors. The issues may be summarised
as:
— The apportionment of overheads—CIPFA's
Best Value Accounting Code of Practice offers guidance on the
principles that should be used in the apportionment of overhead
costs. The guidance is specific to local government but could
have wider applicability.
— Depreciation—The full costs
of services must include depreciation (the accounting term for
the cost of the using up of assets—thus generating sufficient
cash over time to enable the repurchase/replacement of fixed assets
without "lumpy" demands on taxation/profit). However,
it is important to note that government general (and most specific)
grant to local authorities does not currently include depreciation.
We have made representation to government that this should be
addressed, and it will be an important matter to address if real
attempts are to be made to attempt a "level playing field"
between sectors.
— Return on capital—We note that
the CBI's work on a fair field[124]
recommends that full costs should include rates of return on capital
at least sufficient to justify long term retention of assets in
the business. In the public sector, including within central government
departments, a rate of return based on the value of assets and
the Treasury rate is commonly used for this.
— Cost of borrowing—We note that
the CBI's work on a fair field also recommends that there should
be debt neutrality for cost comparisons between sectors, ie to
factor an amount in so that the cost of borrowing appears the
same. This is questionable, since the difference in borrowing
costs is a real one that for public services falls on the public
purse.
— Volunteer input—One factor
that is unique to the third sector is the use of volunteers within
the sector. This is a complex matter that needs to be sensitively
addressed where public services are commissioned from the third
sector. How, if at all, should voluntary labour be costed when
doing cost comparisons? It is, after all, a real cost difference.
More fundamentally, however, is it appropriate that commissioned
public services should rely on voluntary labour? This goes beyond
the calculation of costs into such matters as the possible effects
of paid carers etc being put out of work on the acceptance of
a tender from a third sector organisation that is using volunteer
input and therefore has lower costs. The issue of volunteers is
a complex one, but if the third sector is to be a significant
provider of public services, it is one that needs to be addressed.
Where a third sector entity receives money from
a public body, it needs to be clear whether it is receiving money
on a commissioned (through purchase) or supported (through grant)
basis.
February 2007
124 www.cbi.org.uk/pdf/fairfield0106.pdf Back
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