Examination of Witnesses (Questions 56-140)
MR STEVE
BUNDRED, MR
AMYAS MORSE
AND MR
MICHAEL WHITEHOUSE
21 JANUARY 2010
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;[1]
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 onto 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 onto
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
Steve 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 10 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 throughout 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 resources used more 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 10 years, and I also think, because of the difficulty
of making cuts 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 10 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 10 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 resist
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 are currently
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 but which does put 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. 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 Hopkins: It has been put
to us that, for example, bulk ordering of equipment for schools—computers
for example—by a local authority would be much more efficient
than getting local schools to make their own individual orders
with companies. With a big order from a local authority, price
can be driven down.
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 Hopkins: We have increased
spending on education, but we are still only creeping up towards
the European average spending per head on education, and we still
have educational problems, we still have some of the largest classes
in Europe. Using the base of 12-13 years ago as the reference
point is really suggesting that we were right then and we are
wrong now. In fact, the base now is still not perhaps where it
should be. Quality might actually require more spending on education
rather than less.
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 Hopkins: The point I made
at the beginning, or that has been made earlier, is this balancing
of taxation with spending. Other countries have higher tax rates,
particularly on the better off, they have higher company taxation
and they have more revenue coming in which they are able to spend
on their public services. We almost ignore the possibility of
higher taxes and, indeed, the parties have been competing to cut
taxes. Our Chancellor, our Prime Minister cut the standard rate
by three pence. Three pence is the equivalent to £12 billion
a year, roughly. £12 billion is an awful lot of money, much
more than some of the tiny savings that have been suggested in
the Smarter Government report: £100 million here and £200 million
there. One pence on the standard rate could make a very, very
significant difference. I am not suggesting we should raise the
standard rate, but that is the reality.
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 Hopkins: I am just hoping
that as independent-minded public servants and not politicians
you should remind government that there are other ways of approaching
deficits than savage cuts.
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 Hopkins: I will send you a copy
of the report.
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 we will 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 service 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 retrenchment 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. Our work
supported the observations that Mr Walker made.
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 Camden
when you were chief executive all those years ago: that when you
took an axe to the numbers of people working in that local authority,
among those that remained, the morale improved.
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 Camden case, when the finances of local government are put
on a proper footing and the staff can spend their time focusing
on the services they provide rather than on the budget, then of
course that will be more satisfactory.
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% at a time when inflation
is running at 2.9%.
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 held 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 3%,
you could argue that over a four or a five-year period people
could have taken up to a 10 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 Hopkins: Government policies
sometimes are expensive. They choose to adopt them because they
are committed to them for ideological or philosophical reasons.
Will you be advising government very seriously about some of their
policies, like personalisation of public services, that might
be very expensive—hiving things off to quangos rather than
having direct services from local government? There is a whole
range of policies which may actually be expensive and you are
in pole position in giving advice to the Government, saying, "If
you want to save money, do not do this."
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 to partnerships and the complexity
and plethora of organisations that have been set up for philosophical
reasons, I think, rather than financial reasons over the last
10 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 Whitehall re-organisations which have cost
an arm and a leg and delivered nothing. We have had endless re-organisations
of the NHS. I have lost count of the number of re-organisations
of local government, the millions, perhaps billions that must
have been squandered in that way. Have you calculated the cost
of all those re-organisations and whether they have delivered
a fraction of what was promised?
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 England. However, as we
have two, there is an onus on both of us to work very closely
together, which we do, so as to ensure that there is no problem
that needs to be solved by bringing the two together.
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.
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