UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 126-iiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREPUBLIC ADMINISTRATION COMMITTEE
PUBLIC ADMINISTRATION AND THE FISCAL SQUEEZE
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This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935
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Oral Evidence
Taken before the Public Administration Committee
on
Members present
Dr Tony Wright, in the Chair
David Heyes
Kelvin
Mr Ian Liddell-Grainger
Julie Morgan
Mr Gordon Prentice
Mr Charles Walker
________________
Witnesses:
Mr Steve Bundred, Chief
Executive, Audit Commission, and Mr
Amyas Morse, Comptroller and Auditor General, and Mr
Q56 Chairman: Could I welcome our two witnesses this morning. As you know, we are having a canter through some of the issues surrounding the implications for public administration in the fiscal squeeze and we thought you were two people, amongst others, that we should talk to, and so we are delighted to welcome Amyas Morse, the recently arrived Comptroller and Auditor General, and Steve Bundred, the soon-to-depart Chief Executive of the Audit Commission. Between you we think we have got the right sort of people here. We have been looking at some of the things you have been saying, but would you like to say something by way of a short introduction?
Mr Bundred: I can be extremely short because had I submitted a written memorandum to this Committee, it would have covered much the same ground as the memorandum you received from Tony Travers; so I can save you all a lot of extra reading time simply by saying that I have read Professor Travers' memorandum and I agree with it completely.
Mr Morse: I am going to be slightly less brief than that; I cannot compete with you there. Steve and I did discuss beforehand, and what you are going to hear from us, I think, mostly, will be different aspects of a view that is quite coherent. I will allow myself a couple of comments, one of them because I have a private sector background, now receding behind me but, nonetheless, there. If I may, it is perhaps worthwhile to reflect a little bit for a moment on the difference between my private sector and public sector experiences, if you will find that useful. Typically, if you said to me "difference in competence", there is a significant focus in the private sector on cost management for pretty simple reasons, the simple reason being that it is much easier to improve the performance and profitability of a business quickly by taking costs out than it is by putting things on to the sales line. If you imagine, for a second, every time you make a sale, if you take £1 off the cost line it goes to the bottom line; if you put £1 on to the sales line, you are going to get a certain percentage of that as profit and then you have got to re-sell it next year. Therefore, if you are permanently restructuring your costs to take things down, it is a much more rapid and permanent improvement, and that is why, if you cut through much of the theoretical talk, an awful lot of the substance of management publications in the private sector are actually about cost reduction or re-profiling of organisations and, most typically, they have a lot of common factors. They involve using information to enable you to take layers of structure out of the organisation and, as a substitute for layers of management in particular, using information to allow more standardised ways of working and simpler decision flows without as much human interaction as normal and, therefore, a flatter organisation structure. It is not mysterious; it has been evolving for many years in the private sector. It is not miraculous, but it is an approach, and I think it is fair to say that the strong motivator there of a constant requirement for profit improvement is not as much present in the public sector, but I am hopeful that, despite the unwelcome aspects of the current financial crisis, actually it does provide somewhat of an approximation for that pressure to try to build confidence in some of those, what I call, management discipline areas. Therefore, I am hopeful to see that being pushed forward and I think it is a key ingredient to effective cost reduction of a sustainable, long-term kind.
Q57 Chairman: That is all very interesting, and I will bring Steve in here, but is it not just much more difficult to achieve the cost reductions in the public sector than it is in the private sector? Is that not one of the issues that we are going to confront?
Mr Morse: Inherently there is nothing magically more difficult. The difficulties come, I believe - and Steven can jump in - from lack of clear prioritisation, lack of having a clear programme and clear objectives and you get the impression that, if you resist long enough, you may manage to be successful in protecting your particular budget or programme. In other words, if it appears that the reality is that if you hold out for long enough, they will go away and that this not part of a structural change in approach which is really going to be driven through, then you will get a build-up of resistance and people playing it long on you and, therefore, it is much more difficult. If you also do not have a clear and coherent organisation and a clear leadership of what is to be done, then, yes, it is more difficult, but it is difficult for those reasons, not because of something inherent in the air in the public sector.
Q58 Chairman: Let us regroup and start at the beginning, if we can. You mentioned the Tony Travers memorandum to us, which I think, essentially, said the public sector does not know what is going to hit them and they are woefully ill-prepared for it. Could we get a grip on this. What is about to hit them and how does what is about to hit them now compare with moments of being hit in the past?
Mr Bundred: Let me deal with the latter part of that question first. Although it is undoubtedly the case that we are going to experience spending cuts of a kind that have not been seen probably in the lifetime of any of those currently working in the public sector, it is also the case that they are going to come after a period of ten years of sustained growth, and the public sector is starting from a much higher base than it experienced when there were spending cuts in the mid-1970s and in the early 1990s. Even if there were to be £50 billion of reductions in public expenditure, we would still be spending more in real terms than we were at the time of the last General Election.
Q59 Chairman: Tony Travers, who is going to figure largely in this session, obviously, said that the £50 billion actually should be £90 billion.
Mr Bundred: The £90 billion figure, I think, was probably the estimate of the structural deficit at the time of the last Budget. I think in the Pre-Budget Report that figure is more like £73 billion, and, of course that will be found by some combination, yet to be determined, of tax increases and spending cuts; it will not all be spending cuts.
Q60 Chairman: But we are agreed that this is of an order that in modern times the public sector has never experienced.
Mr Bundred: Yes.
Mr Morse: And, therefore, requires a different approach. I am trying to make the point, Chairman, that it is not a question of simply saying this needs cuts. It needs restructuring of approach. If you are going to achieve sustainable cost reductions of this kind, it has to be part of a change process, not simply saying, "We are going to take the lawnmower over everything", "We are going to take the lawnmower over the cost base, as we normally do, but this time we will set the ratchet differently". That does not work. It needs a more planned and intelligent approach.
Q61 Chairman: This is what we want to explore with you. Steve, I have been reading some of your stuff. I have not got the dates, but at one point you say that this is Armageddon, and then, later on, you say this is all perfectly manageable.
Mr Bundred: No, the word "Armageddon" I used not of the spending cuts. I said that the Armageddon scenario for the Government was that there would be insufficient lenders to match its borrowing requirement and that is why its spending cuts were inevitable. I never used the word "Armageddon" in relation to cuts themselves.
Q62 Chairman: Let us explore this question of what you are talking about now, Mr Morse, which is the scope of the public sector to achieve reductions of the scale that we are talking about without doing fundamental harm to the core services themselves. I suppose my question is: is that doable or is it an illusion that it can happen in that way?
Mr Morse: First of all, if I rest on what Steve just said, that we have had significant growth and so there is capacity to reduce, and you have to think, "What do you mean by 'irretrievable harm'?" What I would say is that I do believe it is doable and it is doable by understanding that what we are talking about is achieving results. Can we maintain the same level of resource throughput system? No, obviously we cannot. Do I buy that a reduction in the amount of resource in the system equals, necessarily, a degradation of results? No, I do not buy that. I believe that a more flexible approach, both to administration within the system, to the amount of resource that government spends talking to itself, making decisions and administering itself and also to the medium of service delivery - a different and more flexed approach to service delivery and one with more resource economically while still delivering services and meeting needs but meeting them, perhaps, in an evolving and different way - is entirely achievable and you see that already happening. If I can take HMRC, where there is a major change to go from the amount of face-to-face interaction to say, as far as possible, if we can do things on electronic media, either by phone or online, it has got difficulties about it but it takes the cost down and, essentially, in many ways you are still delivering the service; so that is a change process rather than a degradation in service.
Q63 Chairman: I think the judgment that I am asking for is, given what we are saying about the scale of what has to be done, can this be achieved by doing existing things more efficiently or do we have to say we are going to do fewer things?
Mr Bundred: I agree with Amyas: it is doable but I do not pretend it is easy. If you look at the NHS as an example, last year the NHS commissioned a report from McKinsey's on what would need to happen if they were required to take £20 billion out of the system. That report has not been published, I believe, but it has certainly been extensively leaked, and it did show that it is doable but it would require politicians to take some very difficult decisions around closing capacity in some places and certainly reducing staff.
Q64 Chairman: I have been reading your interesting remarks. You are saying it makes no sense at all to exempt major services like health and education from what has got to be done?
Mr Bundred: It seems to me to be absurd to imagine that the only services where no efficiencies can be found are those that have been most generously funded for the last ten years, and I also think, because of the difficulty of making goods elsewhere, there is a need to be seen to be fair in the allocation of cuts. Of course, politicians are entitled to have priorities, and one would expect those priorities to be manifest in the decisions they make about cuts as well as in the decisions they make about growth, but to simply exempt the two most well funded services from the kind of pain that will be inflicted on everybody else seems to me to be a mistake.
Chairman: We want to talk to you about some of the efficiency savings that are being talked about.
Q65 Mr Walker: For the last 20 years governments have talked about efficiency savings and the drive to cut out waste. It forms the centre of most election manifestos - "We are going to address the social security budget as £5 billion is being taken by people who should not be taking it", and so on and so forth - and actually little happens. How many of the efficiency savings over the last five or ten years have been illusory and what are the chances, going ahead, that real, genuine efficiency savings will be made?
Mr Morse: We have recently done reports on efficiency savings in the Department for Transport and in the Home Office, and we looked at those savings on the basis of savings we had complete confidence in and savings that, for one reason or another, we were doubtful about, in the sense that we thought there was a serious question, so there were three categories of traffic light priority. In each case there was a significant proportion of savings, a variable proportion of savings, that we felt really confident in. There were quite a lot that were one-off savings, so not things which were permanent reductions at the cost-base, and there were some which we thought were really a bit speculative. In all cases there is genuine forward movement through efficiency, but I would make the point to you that I think there is a very serious limit to how much can be accomplished by that means; in other words simply by incremental tightening. I think that if you are not prepared to go to something more radical than that, you will only achieve a marginal improvement, worth having but not likely to meet the strategic needs we are talking about today.
Mr Bundred: The only thing I would add to that is that there are further efficiencies to be found in the public sector, undoubtedly, but not just in back office functions. I think it is important in the debate about efficiencies to recognise that there is greater productivity to be found from the frontline as well as from back offices.
Q66 Mr Walker: One of the things that has happened to the public sector, rightly or wrongly, over the last ten or 15 years is that it has grown in the number of people it employs. People do not like to talk about headcount reduction, but we have seen a number of companies make significant headcount reductions. They reduce heads because that is probably one of the most effective ways of saving real money. What size of headcount reductions have you looked at in the public sector?
Mr Morse: I do not have a good answer to that, but I will give you an answer in principle, which is that if a large part of your cost-base is headcount, you are not going to reduce the costs without taking people out in the long run. If you do that as part of reorganising and re-costing or having a flat organisation, it follows inevitably that you are not going to have the same number of people in it; otherwise the cost will not go down in that way. Some costs can be associated with more efficient service delivery, getting more for less money, but you have to look at what the cost drivers are, and a significant part of cost drivers in the public sector, not the only part but a significant part, are people. It is very unlikely that will be excluded from how you achieve ultimate, serious cost reductions.
Mr Bundred: I agree with a lot of that too. I would add that certainly in local government we have observed a number of councils that are already either implementing staffing reductions or planning to do them, but we have not attempted to aggregate that and put a figure on what is happening currently or an estimate of what might happen in the future.
Q67 Mr Walker: You mention that there is always resistance from senior civil servants to reducing the size of their empire, or there tends to be resistance. Could it get to such a crude level that permanent secretaries are told, "In six months to a year we are going to review your performance and if you really have not taken up the cudgels on this one, you are going to be shown the door. That is how serious we are"? Do you think those sorts of conversations have to happen? They happen in the private sector with divisional heads and divisional and country managing directors: "You either reduce your costs or you leave the business." Are those conversations going to happen, do you think, whoever wins the next General Election, across Whitehall?
Mr Morse: I do not think I was saying that it is automatic that senior civil servants will reduce cost reductions, if you do not mind me saying so, Mr Walker, but what I do think is there is a natural effect. If you do a very crude cost reduction programme and you begin, as a result, to degrade quality of administration and quality of service, what will happen over a period of time is that people will not like it and you will rapidly get a push-back developing. Steve mentioned a number. It does not matter; it is a very big number that we need to accomplish in getting back to roughly where we were before the financial crisis in terms of the overall public finances. To get that far we need a degree of consent and co-operation from the people in restructuring the public services. It is not enough to say, "We are just going to do it to you", in a very rough and crude way. It needs to be something which is seen as a change process leading to a credible and in many ways improved approach if you are going to get consent and, therefore, a sustained effort over the longer term. I do not regard that as a bit of soft advice. If you do a structured cost reduction and you do not obtain the buy-in and support, not just by being tough, of the people that you are inviting to lead the change, it will not work very well for very long.
Q68 Mr Walker: What areas do you feel government should consider withdrawing from?
Mr Bundred: I do not think that is for me to say because that is essentially a political judgment. All I would say is that I think there should be no area which is exempt from consideration of the scope of spending reductions.
Q69 Chairman: Education, you tell us.
Mr Bundred: I am not suggesting that the Government should withdraw from education, but there is certainly scope for spending reductions in education.
Q70 Chairman: All these thousands of teaching assistants have been employed and you suggest that school numbers have gone down; staff have gone up.
Mr Bundred: Since 1997 there have been 32,000 new teachers, 70,000 extra support staff, 100,000 new teaching assistants and 80,000 fewer pupils.
Q71 Chairman: So you want a serious cull of people like this?
Mr Bundred: I think there needs to be some consideration as to whether or not the same outcomes could be achieved with less spending.
Q72 Chairman: I am sorry to press you on this, but I think we need to know exactly what you are saying, because you have got things to tell us. You say here, "Do not believe the shroud-wavers who tell you grannies will die and children starve if spending is cut." Then you go on to say that we need what you call a frank and intelligent debate about how and where they will fall - that is, the cuts.
Mr Bundred: Yes.
Q73 Chairman: What would a frank and intelligent debate involve then?
Mr Bundred: It might involve looking at the scope, for example, for greater efficiencies in education and in health rather than simply accepting that those two areas should be exempt from the pain that will be inflicted on everybody else.
Q74 Chairman: You say more than that, do you not?
Mr Bundred: The Audit Commission has published reports about value for money in schools, which certainly shows that there is scope for spending reductions in schools. Schools have increased their balances, schools could be sitting on £2 billion of balances, which is money that they have been given that they have not spent at all.
Q75 Chairman: More generally, you tell us - and this is interesting coming from a major audit body - that there is no direct correlation between levels of spend and quality of service. That is a pretty alarming thing for politicians to be told, is it not?
Mr Bundred: It should not surprise you, because the best run public services are those where management pays attention to delivering value for money.
Q76 Chairman: Frank and intelligent debate would involve telling people honestly the scale of what is to be done?
Mr Bundred: Yes.
Q77 Chairman: Do you think politicians of any party at the moment are telling people the truth about the scale of what is to be done?
Mr Bundred: The scale of what is to be done is evident from the Pre-Budget Report. What politicians are not saying at the moment is what judgment they would make about the balance to be struck between tax increases and spending cuts and where those spending cuts should fall.
Q78 Chairman: So they should be explicit about the tax spend?
Mr Bundred: I would like to see a more open discussion and greater clarity about the intentions of politicians of all parties.
Q79 Chairman: We have been told by previous witnesses that, on the whole, people think that a balance of two-thirds spending cuts, one third tax increase is about right. Is that what you think?
Mr Bundred: I think that is a matter for political judgment.
Q80 Chairman: Yes, but in the spirit of frank and intelligent debate?
Mr Bundred: I think the experience of other countries has certainly been that there needs to be more on the spending side than on the tax side.
Q81 Chairman: Do you think politicians should now be far more explicit, not only about the scale, but about the nature of cuts that are coming?
Mr Bundred: I would certainly welcome that.
Q82 Kelvin Hopkins: If I could preface my questions by saying I do not accept the cuts agenda and I think there is an intelligent alternative to this report, which I will not trouble you with now, which puts out an alternative. We are in the middle of a recession. Cutting jobs and cutting spending in a recession is not counter-cyclical, it is actually going to reinforce the recession, and so maybe this cuts agenda needs to be questioned.
Mr Morse: Let me comment on that. If you are going to achieve something - and I am repeating myself a little bit, Chairman - which changes the way you are organised, actually in the very short-term you should not be looking for that to produce enormous saving because you are probably going to have to invest, and certainly do some planning, and probably some enabling investment to allow you to rebalance the way you are organised. If you are going to become more information-led, if you are going to do things in that way, you are going to have to do some planning and some development in order to get that to happen. There are two subjects: one of them is a medium-term structural reduction and rebalancing and the other is what can be done in the short-term? I think those two need to be worked against each other. Then you can have a debate about what is appropriate short-term and you can have a debate about medium-term restructuring.
Mr Bundred: I would also add that we are coming out of recession. Clearly, in the midst of a recession there is a case for government to borrow and spend but, on the Chancellor's estimates, we will have growth this year and very substantial growth next year.
Q83 Kelvin Hopkins: We have two and a half million unemployed, and that is not coming down very quickly. It is reducing slightly. Typically in the 1950s and 1960s there were half a million unemployed. Two million unemployed is a very significant number and a significant cost. You touched on this, separating out the cyclical component of the deficit and the structural component. Clearly, the structural component has to be addressed by tax increases, I would suggest, or efficiencies, or whatever. It is the structural part that we should be looking at, not the cyclical part, and we are currently confusing the two and frightening everybody that we have to make savage cuts. Is that not the case?
Mr Bundred: I am certainly not confusing the two. The figure I quoted earlier in this hearing was the Chancellor's estimate of the structural deficit.
Q84 Kelvin Hopkins: If you look at some of the efficiencies, some of the problem, is it not, is driven by policy, and the difference between the private sector, which is profit and loss driven, and the public sector is that we have policies sometimes which are costly? It was a decision, not one I agreed with, for example, to give schools local management responsibility. It was over time, first financial and then general. That was costly. Is it not the case that if we actually re-established strong centralised local authorities where all that management was done by the local authority, we could make some savings? It might not be politically what people want, but it would make significant savings.
Mr Bundred: You can require schools to make savings without taking them back into local authority control. I do not think you need to make those sorts of changes in order to get greater efficiencies from the money that is spent on education.
Mr Morse: I agree with that. I think if you have good information and you use it intelligently, you are clear as to what it is you require, but just having a reorganisation is not necessary in order to achieve efficiencies. I am not saying it might not be a good thing; I am agnostic on that point. I am simply saying it is not an absolute necessity in order to achieve more cost control.
Q85 Kelvin Hopkins: But the skills required to manage costs are not going to be sufficient to manage, independently, thousands of schools. There are essentially head teachers who pick up a bit of accounting and school secretaries who pick up a few financial management skills, but it is not the same as the kind of skills you could employ at a unitary authority, for example.
Mr Bundred: Local authorities can certainly do more to provide support for schools in relation to financial management, but that is not at all the same thing as taking responsibility for financial management away from schools and placing it back within the local authority.
Q86 Kelvin
Mr Bundred: I would not disagree with that, and it happens now to some extent, and there is certainly scope for it to happen to a greater extent. My point is simply that there is nothing in the present arrangements for devolved financial management in schools which prevents that.
Mr Morse: Collaborative procurement can be applied across government, central government departments, to a significant degree; you can apply it across organisational structures: you do not need to be in an organisation to collaborate in procuring and getting benefits of scale.
Q87 Kelvin
Mr Bundred: As I said earlier, governments are entitled to have priorities. This Government has prioritised education, and no doubt it will continue to do so for as long as it remains in office, but that does not exclude the possibility that there are efficiencies to be found in education. As the Audit Commission said in the report it published on value for money in schools last year, the incentives for greater value for money in schools are very weak.
Q88 Kelvin
Mr Morse: Okay, but what can I add to that? That is a point of view and it is a policy decision. Do you want to have a higher tax regime or not? Obviously, if you decide to collect more tax, it reduces the amount of cost reduction you have to do.
Q89 Kelvin
Mr Bundred: As I said earlier in this Committee, the deficit will be eliminated by some combination of tax increases and spending cuts yet to be determined, and I would like to see greater clarity about what that combination will be.
Q90 Mr Prentice: On this business about tax, I am told that £27 billion of tax goes uncollected every year and £70 billion is lost through tax evasion. This comes at a time when the Government wants HMRC to close 200 offices by 2011 and get rid of 20,000 jobs. Does it make sense to put that kind of squeeze on Revenue and Customs when there is all that money out there which should be collected but, for one reason or other, is not being collected?
Mr Morse: This happens to be a subject that we have looked at closely in the NAO. I would say that there is spending that could happen in HMRC that would accelerate some aspect of tax collection, and it is very sensible and relatively painless to get on and do that. Because of the financial crisis, there is a big tax debt and there is a resolution of cases which would release more tax income, so this is a money-gathering device for government; we need to get it to work efficiently and not just treat it like any other department in that way.
Q91 Mr Prentice: Why have we not done that before?
Mr Morse: Forgive me for a second. That is true, but it does not follow that the way to do that is to keep the distributive revenue system. It may mean actually making some more central investment in debt-targeting systems and things of that sort, which the Revenue needs to do, in my view, in order to be in a position to collect money and pick some fairly low-hanging fruit.
Q92 Kelvin Hopkins: One of the points made in this report is that the most efficient way of bringing down the deficit is to maximise public investment in the short to medium term because that creates employment and employment means benefits reduce and tax revenues increase, and that is the quickest and most efficient way of reducing the deficit, not by making cuts in services which would simply increase unemployment and make the deficit worse.
Mr Morse: Forgive me, just going through that, it cannot be right to say that the way to reduce the deficit is to either keep employment high or necessarily to employ more people, because obviously you have got the cost of employment and then the tax is a percentage of that, and I am assuming that benefits are a lower level as well. Just in maths terms, it cannot quite work out, I do not think, in that way.
Kelvin
Q93 David Heyes: Mr Morse, you have painted a picture of a private sector that is much more cost-effective, with flatter organisational structures, where the drive for profit puts on the pressure. They are just generally quicker on their feet. That was the picture you painted. You contrasted that with a public sector where there was a lack of clear prioritisation, a lack of urgency, the avoidance of structural change, a lack of clear leadership, and so on. Are the distinctions between the private sector and the public sector as clear as that nowadays? Massive areas of public sector service delivery, which is what we have been talking about, are delivered by these super-efficient private firms. What is your comment on that?
Mr Morse: First of all, if I gave that impression, thank you for giving me a chance to clarify.
Q94 David Heyes: It was more than an impression: those were your words.
Mr Morse: Just to be clear with you, I do not regard everything (and I thought I did say this) in the private sector as a patent and I certainly do not mean to suggest that. What I simply said was, as it happens, in the area of cost management there has been a very heavy development in the private sector because it is an easy way to drive up profits - I did not think I went much further than that in it - and, therefore, there is something there that is useful to at least look at, not to bring over wholesale but to look at and understand, and that has been going on for a very long time. It is not to say that everything about the private sector is wonderful. I do not think that, but I do think that in these focused areas of what is the way in which you can reconfigure an organisation, roughly speaking, so as to get the results and deliver the services and have less cost, there are suggestive examples in the private sector.
Q95 David Heyes: But the private sector within the public sector is somehow stifled from doing that. That seems to be the inference to take from that.
Mr Morse: I should think the private sector within the public sector will do what it is contracted to do. If the contract says, "Be as efficient as you can possibly be," they will do that. If they are contracted to deliver a particular service, then they will do that.
Q96 David Heyes: That would open up a whole new area that, I suspect, is not in the brief of this Committee. You were saying that one of the ways in which the public sector can achieve that crisper, more responsive private sector approach would be through better information systems. I would like you to help us to understand what you imagine that consists of. Help us to understand what you mean by "better information systems". Is it just an accountant arguing for more accountants?
Mr Morse: No, it is not, it is an argument for fewer layers of management and fewer touches on every decision that gets made, to be very brief about it. In other words, any decision in any file that is going through the public sector, if you had a clicker for every single person that looks at it and gives input to it, you would be startled by the number. I had three years in the MoD, so I am not just making this up. I am now trying to get reports cleared through the public sector. An awful lot of people look at everything. If you actually said, "How many people absolutely need to be involved in each of these decisions?" you would find there was a startlingly smaller number than the number who actually are involved and who touch it. So there is room, in my view, from my own direct experience as well as from what I see in organisation structures, for much simpler and more direct decision pathways, and that means fewer layers involved in making decisions, and if you have good quality, consistent and coherent information, and not everybody inventing their own version of things, it is possible to make those decisions more quickly and many times they are better decisions.
Mr Bundred: It is also an argument for better data quality in the public sector. Much of the data on which decisions in the public sector are based is of very poor quality.
Q97 David Heyes: Can you give some examples of what leads you to say that?
Mr Bundred: The Audit Commission is responsible for providing an assurance framework around Payment by Results in the National Health Service. We found that the error rate of clinical coding decisions on which funding flows are based in the National Health Service varies from zero in the best NHS trusts to 50 % in the worst.
Q98 David Heyes: I heard the words you said; I did not entirely understand them: "Improved information pathways". We are lay people and that is the kind of jargon that is a bit lost on me. Can you put it more in layman's terms for us?
Mr Morse: I am sorry about the jargon. Let us try and think about it like this. Supposing you said, in order to clear a decision of a particular kind (and I am going to go back to my previous MoD job), you need someone to decide that a piece of equipment was needed, someone to decide that the deal being proposed was commercially viable, someone to decide that it fitted into the budget and someone to decide that it could be delivered on time; in other words that the supply chain could be managed, so that would be four people. In order to make a good decision you needed four people who really had something to give, a different competence laid on top of that decision as it came through. Everyone else looking at it was probably giving a view. It was being socialised with a lot of people who were not necessarily required in order to make a good decision. If you ask yourself that question, when you see decisions in public life - how many people are actually adding real knowledge and substance to how the decision should be made and how many people are actually accountable for the consequences of the decision and, then, how many people are involved - if you can cut the number of people involved and bring it close to the number who really add value, you get a much simpler activity. This is not a big IT argument; this is an argument for being disciplined, using information and saying, "Okay, this person said this, that person said that. It follows that we should conclude like this", and you actually make it simpler.
Q99 David Heyes: That is surprising, coming from an auditor, because those sorts of systems often exist as a safeguard against malpractice involving numbers of people in making decisions. Having decisions go through different layers and being recorded for there to be an audit chain that can be identified is often, in my experience, more in the local government than the national government sphere, the kind of thing that auditors insist on.
Mr Morse: Just to be clear, if you have a decision where competent people have looked at it and you have clearly recorded the evidence on which they base their decision, it is all properly recorded, you will find that you can audit it very readily. Interestingly, in a lot of the audit work we did we found that information of that kind does not exist in the structures that are there now. You say, "Can you please produce evidence of this?", and the answer is often, "No", or it is, "We had to create the evidence ourselves by doing focus groups and things of that sort, or by sampling and doing our own exercises to create evidence." What I am saying is it is not as if there is a high level of assurance in everything we look at now. In fact, with a simpler and more straightforward approach, you would have more confidence in the decisions being made.
Q100 David Heyes: Is this an argument really for saying that it is politics and politicians that add these layers that cause these delays in the decision-making process and the other criticisms that you have made about public sector delivery?
Mr Morse: It is that, but it is also the capacity of organisations to spend a huge amount of resource talking to themselves. Tell me you do not think that is true in the public sector. If you cut that out and say, "What is strictly necessary to go from here to here; everybody else stay out?" you get a remarkably direct process.
Q101 David Heyes: Steve, do you agree with that? Let us cut the politics and then we can all be more efficient and we can get on with making savings?
Mr Bundred: I would never suggest that managers in the public sector do not have the capacity to make things more difficult for themselves too. We started off in this hearing by saying whatever the number is it is a big number but, in our view, it is manageable although it will not be easy. I think the point that I would want to make is that in order to manage it public bodies do need to ensure - this is certainly true in local government - that they have got the capacity and the information systems to enable them to make difficult decisions and give effect to those decisions in a timely way, and although in local government there are many local authorities who are already preparing in quite a sensible way for the possibility or the likelihood of having less money available to them in the future, there are certainly a number of other smaller local authorities, in particular, who ought to be asking themselves some questions at the moment about the capacity of their finance function.
Q102 Chairman: I was going to ask you what public sector bodies, knowing all that we know, should be doing at this moment and, also, whether audit bodies like you ought to be helping them or ensuring that they are doing it?
Mr Bundred: They certainly ought to be looking at the quality of the data upon which they are basing their decisions and the information systems that Amyas has talked about. They should be asking themselves some questions about the capacity of their finance function and they should be looking at ways in which savings can be achieved without impacting upon the quality of services that they give to the public. They should be talking about things like collaborative procurement. They should be looking at the use of their assets. They should be looking very rigorously at the incentives that they have to get their staff to deliver better value for money.
Q103 Chairman: Your view is that some organisations are doing this and some are not. The second part of the question is this: is it the auditor's role now, knowing what is coming, knowing what they should be doing, to evaluate whether they are doing it or not?
Mr Bundred: We do that. Our auditors make scored judgments about the use of resources within the bodies that we audit, and we publish that information. We express a view about whether public bodies, local authorities, and so on are using their resources well.
Q104 Chairman: Do you think there is an exercise to be done, given the fact that we are all saying that there should be serious planning going on now for these next few years, to make sure that you do not take daft decisions, you take good decisions, well thought out decisions, ones that get rid of the bloatedness and retains what is essential? Is it not possible to do an exercise actually to evaluate, at least at the planning stage, how effectively these bodies are putting in place plans to do this?
Mr Morse: I think we can do something. We are not managing these bodies, and it is quite important, as auditors, not to get sucked into managing or acting as quasi managers - that is not our job - but what we can very clearly do, and we are doing this in the NAO, is to put forward principles of what we would regard as how to do coherent change processes and cost reduction processes and say, "We are looking for some of these elements. It is not a recipe but if you have not thought about these things, that is not right."
Q105 Chairman: You are telling your public sector bodies that at the moment, are you?
Mr Morse: Yes, and if our individual clients say to us, "I would like you to have a more detailed and engaged discussion," we are willing to have that discussion, but, on the other hand, it is not our job to force our way into the board room to have it. What we are prepared to do is to say what are the criteria we are looking for. If we were in future evaluating what they have done, what will we look for is the hallmarks, the badges, of a coherent, well thought out and well executed programme, and I think it is only fair that we should be prepared to give some indication of what they are rather than waiting until after the event solely with the benefit of hindsight.
Q106 Chairman: Is the Audit Commission doing something similar for local government and the Health Service?
Mr Bundred: CIPFA and SOLACE have done that for local government, and the NHS itself is looking at ways in which efficiencies can be found from NHS spending. The other thing, of course, that auditors can do and that we do do is to identify surplus areas where we believe there is scope for better value for money, and we have published a series of reports doing that. I mentioned the report we published last year on value for money in schools, but there have been other reports about other service areas too.
Q107 Chairman: You can retrench badly or you can retrench intelligently. It is how we have any safeguards that one rather than the other is going to happen.
Mr Morse: What you need is not actually to characterise it primarily through entrenchment but to characterise it as a change from the way we did things before to a new way of doing things. If you have a plan like that, if you have actually thought that through and said, "We are not just going to talk about maintaining services. We can see how we can deliver these new services. We can see how we can administer and support all of that. We can see how that would all work in the new state. We have got that plan and, although it may change a bit, we have got it there and now we are going to, in a credible way, move through into implementing that," then you have got something to work with, and then you are talking about measuring: did they actually do it? Is it sensible? But to start at least with that, you would say, "All right, these people are thinking clearly about the future and not just taking it from day to day."
Q108 Mr Walker: When I was in the private sector we had a lot of dealings with government, and our eyes lit up when we got government contracts because it was so much easier to earn significant sums of money off central and local government than it was off the private sector. I am saying this because you mentioned procurement. I do think that central government and local government procurement really does need to sharpen up its act. I have got acquaintances at the moment still fulfilling contracts with central and local government and government agencies and they simply cannot believe the amount of money they are being given to do fairly simple things. Is that a concern that you share?
Mr Morse: I would say that there is a big effort going on to raise commercial skills. It is a necessary part. If you are going to contract, particularly if you select a somewhat complex contract or a partnering contract where you have got to work closely with the private sector and you cannot field people who have comparable skills to the people they are supposed work along with, you are likely to have a bit of an unfortunate result. You have to make sure you have the right skills in place. However, there is a big effort going on to raise commercial skill levels and it is having an effect. Is it all perfect? I am not saying that, but I think it would be unfair to suggest that this effort is not going on, led by the Office of Government Commerce. There is an effort but it is still sometimes an uneven relationship in terms of skill levels; I cannot deny that.
Q109 Mr Walker: I know it is a well-worn example, but the GP contract was the most incredible thing for the public sector to enter into. You virtually doubled GPs' money while reducing their hours and weekend work. Are we going to see the end of those types of arrangements in the public sector and why on earth was that allowed to happen, in your view?
Mr Morse: That is not a particular one I have looked at, so I cannot comment.
Q110 Mr Walker: You must be aware of it.
Mr Morse: Of course I am aware of it, yes.
Q111 Mr Walker: Why would you not comment? You must have a view.
Mr Morse: On this particular matter, I do not have a better view than anyone else.
Q112 Mr Walker: What is your personal view? You must have a personal view as an informed commentator on these matters.
Mr Morse: I am not here as a person; I am here as the Comptroller and Auditor General.
Q113 Chairman: I have got a feeling that we have had an audit report on this, have we not? It must have come from the NAO, must it not?
Mr Whitehouse: Yes, we did a series of three reports on the contractual arrangements that were introduced in the NHS for consultants, GPs and ancillary staff. The observation that we made was to support the way in which the contract was developed.
Q114 Chairman: So you can speak with authority then.
Mr Whitehouse: As he said, it was before Mr Morse's appointment.
Q115 Mr Prentice: Jack Straw created a bit of a storm a month or two ago when he said that police officers should be out catching criminals but they stayed in the police stations because the police stations were nice and warm. It got me thinking about efficiencies in the Police Service. What are the most inefficient parts of the public service? Let us begin with the police. Are the police as efficient as they should be?
Mr Bundred: I think there is no part of the public service that could not be more efficient. The Police Service is not exempt from that.
Q116 Mr Prentice: It is a flat organisation, a lot of ranks were stripped out years ago, and I am just left wondering whether it is as efficient as it could be. I rephrase the question.
Mr Bundred: I am absolutely sure it could be more efficient, but I am certainly not in a position to comment on Jack Straw's statement. I have no evidence to support that.
Q117 Mr Prentice: What are the bits of the public sector, as you see it, that are least efficient?
Mr Bundred: Let me just say this about the Police Service, and it applies to the Fire Service too. I think the degree of scrutiny to which the uniformed services are subject is less rigorous than the degree of scrutiny to which, say, local authorities are subject, and that does apply to value for money considerations as well as to service quality considerations.
Q118 Mr Prentice: Why is that? Is it just a historic thing, or are we afraid of people in uniforms, or what?
Mr Bundred: I think it is partly cultural and it is partly to do with the natural trepidation of political involvement in relation to those uniformed services.
Q119 Chairman: Who should be doing the audit work in relation to them, and why is it not, therefore, as rigorous as it should be?
Mr Bundred: Because they are not accountable to directly elected bodies.
Q120 Chairman: No, but the Health Service is not either.
Mr Bundred: The Health Service is accountable to the Secretary of State for Health.
Q121 Chairman: So are these other services; so that cannot be the answer, can it?
Mr Morse: They are accountable to the Department of Justice, surely.
Mr Bundred: Police and fire services are accountable to partly indirectly elected police and fire authorities.
Q122 Chairman: Gordon is asking you, if you are saying this is the issue, why are we not getting an audit of these services?
Mr Morse: They are getting audited.
Mr Bundred: They are getting audited and they are also subject to inspection by HMIC.
Q123 Chairman: But you are saying it is less rigorous.
Mr Bundred: I am saying that the political scrutiny of them is less rigorous.
Mr Morse: You are not saying the audit is less rigorous.
Mr Bundred: I am not saying that the audit is less rigorous.
Q124 Mr Prentice: I think we have exhausted this one. David Halpern, when he came before us, said
something counter-intuitive: that if you reduce staffing numbers it improves
morale. You said the same thing,
Mr Bundred, in
Mr Bundred: Yes, that is correct.
Q125 Mr Prentice: It is a funny old world, is it not? If you get rid of people it improves morale amongst those who remain?
Mr Bundred: It should not be surprising
because people join public services in order to deliver good quality services
to the public, not to spend all their time coping with financial crises. When the financial crisis is dealt with, in
the
Q126 Mr Prentice: Did morale improve in the Audit Commission? I have a little note here in front of me that you agreed a package of housekeeping measures: you scrapped directors' bonuses; you cut £2 million from the pay bill; you shed 89 posts. Did morale improve in the Audit Commission after you did that?
Mr Bundred: Morale is very high in the Audit Commission, and it continues to improve.
Q127 Mr Prentice: Can I continue this line about morale? We learned yesterday that there is going to be a pay freeze in local government as from April next year, affecting one and a half million people. What do you think the consequences will be? Do you fear that people employed in local government are just going to take this on the chin or are they going to do something about it? Are they going to respond?
Mr Bundred: Do you mean by way of industrial action?
Q128 Mr Prentice: Yes, or whatever.
Mr Bundred: I am not in a position to judge.
Q129 Mr Prentice: You have advocated a pay freeze before, have you not?
Mr Bundred: I have not advocated it; I have predicted it. I have said that pay restraint was bound to be a part of the solution, and we are seeing pay restraint in the public sector, we are seeing it in the Audit Commission. We are freezing the pay of all our senior staff and the majority of our staff will get an increase of 0.7 per cent at a time when inflation is running at 2.9 per cent.
Q130 Mr Prentice: Would you like to see a pay freeze across the entire public sector?
Mr Bundred: The Chancellor has already indicated that there will be a cap on public sector pay for two years, and that seems to me to be entirely appropriate.
Q131 Mr Walker: Can I ask Mr Morse a question, just out of interest. I notice that you hold a senior position at Price Waterhouse. I am not an economist and this is not a trick question. It is just something that Mr Bundred said that sparked an interest. What happens if you have a period of sustained pay freezes, for example in the public sector, matched to a period of high-ish - in historical terms - inflation? What sort of pressures would build up over two or three years? Some people talk about two or three-year pay freezes in the public sector. What sort of future unintended consequences does this build into the system?
Mr Morse: I think the main consequence that you have would be that if people are finding that their way of life is materially affected, in other words they cannot absorb it in their personal budgets, they are going to be under quite strong pressure to think about moving somewhere else, if they can, and they are also going to be waiting for the first opportunity to try and recoup what they see as what they have lost. I think you have to understand, if you just say, "Let us freeze it for a period of time," you have not got rid of the dynamic that might be underneath that; you are going to have to deal with that.
Q132 Mr Walker: So if you froze pay for two years and it increased very slowly for the next two or three years but during that period inflation was running at three per cent, you could argue that over a four or a five-year period people could have taken up to a ten or 15 % real terms drop in their standard of living, potentially.
Mr Morse: That is reasonable. You are not talking necessarily about people who are starting with a particularly generous pay packet, so you just have to be aware of that. I am not against it; I am just saying that you need to understand that you may be creating pent-up pressure. This does not just all go away because you have decided on freezing pay.
Q133 Mr Walker: Absolutely, because then there is pressure to catch up, is there not?
Mr Morse: There can be.
Q134 Kelvin
Mr Morse: What we are going to be doing is giving the Government advice, and the NAO is preparing a report at the moment, on very accurate evaluation of the cost impact of policy decisions. I have to be frank and say that I think there is room for some more improvement in that area and it is likely that our report will come to that conclusion. We are saying more rigorous, clearer and more independent evaluation of policy impact. Whatever the decision the Government makes, and of course they are entitled to make them, it is a pity if they do not actually know what the cost is going to be of the decisions they are making.
Kelvin Hopkins: In our papers at one point it suggests that if services were moved back into local authorities and run directly by fairly tightly controlled local authorities with a good elected council, they would actually be run more efficiently, and probably more cheaply, than the way things have gone with hiving off partnerships with the complexity and plethora of organisations that have been set up for philosophical reasons, I think, rather than financial reasons over the last ten or 15 years.
Chairman: I do not think you will be offering the sort of advice that Kelvin would like you to advise, nor do I think it is your role to do that kind of thing either, but it is on the record.
Q135 Mr Prentice: You seemed to suggest earlier, Mr Morse, that
changing organisations could produce leaner, more efficient organisations, but
when I look back over the years we have had endless
Mr Morse: Two things. I have not calculated the costs of all those re-organisations, but we have an up-coming report on the machinery of government changes and I think we would be quite interested in the cost of that, let alone anything else.
Q136 Chairman: How up-coming is it?
Mr Whitehouse: We aim to publish in March.
Q137 Chairman: March is good
Mr Morse: We are trying to get a lot of things done by March, for some reason. I am not arguing for an organisation structure change. That is like, "Let us pour the same contents into different buckets." That is not what I am trying to say. I am trying to talk about changing the way you work in the organisation. I am not suggesting that if we just arrange the organisation chart differently everything will be wonderful. No, it will not. You have to work differently, more simply, directly and using management information properly, not, "Let's just fiddle around with the structure." That is not at all what I am recommending.
Q138 Chairman: The Government gave us their Smarter Government report just before Christmas, where they are saying they are going to find a further £12 billion of savings on top of the existing efficiency savings programme. Mr Morse, just in the way that you audit the assumptions underlying the Budget, is there an intention for you to audit the assumptions underlying this programme?
Mr Whitehouse: We have a remit at the moment with the existing efficiency programme that was introduced by the Chancellor in previous years. We are having some discussion with the Treasury about it, but there is no firm commitment that we will audit that.
Q139 Chairman: You should have been on our front row, I think. I know we are all over the place but it is all very interesting. Can I ask this as we end, in the spirit of frank and intelligent debate. If we look five years or so down the line, is your judgment that we shall say that we have now got a leaner and fitter, a better motivated, more innovative public sector because of what has happened or that it will simply be worse?
Mr Bundred: My guess is that it probably will be the former rather than the latter. Certainly it is the case that financial management in the NHS has improved greatly over recent years. It is also the case that the quality of management and the quality of services in local government has continued to improve. As Amyas and I have both said, we believe that the cuts that are likely to come are manageable. They are difficult but they are manageable without seriously adverse implications for service quality, and what we also know is that the necessity to make cuts is often a source of innovation in service delivery. I am certainly not pessimistic in any way about the future.
Mr Morse: I will give a slightly different answer. If it is done in a short-term, unplanned way, then I am not optimistic and I do not think that the cost reductions required will be necessarily achieved. If it is done in an intelligent, planned way over a period of time, then, yes, it could lead us to something much more positive.
Q140 Chairman: If we asked the same question about the audit bodies, and if the proposal was over the next five years, in the interests of efficiency, to put your two audit bodies together, would that be a great gain for efficiency or would it be an example of some of the perils of making machinery of government changes?
Mr Morse: I think it is probably more of the latter than the former. I have been through two major mergers in my life. There are some positive things to be said for bringing the bodies together. There are obviously some constitutional and other difficulties about it, but there are some positive things to be said for it. What I would worry about is taking the eye of both of us off the ball for a period of time when there is more pressure on the public finances than at any other time and finding ourselves focused on sorting out all the internal reconciliation problems, and really you should not underestimate how long that takes.
Mr Bundred: When Tim Burr and I last
appeared before the Committee you asked us a similar question. I think the answer we gave then is the same
answer now. If you were starting with a
blank piece of paper, you probably would not design two public audit agencies
in
Chairman: Thank you very much indeed for coming and thank you for answering in the way you have done and thank you for the work you do on the public's behalf as well.