House of Commons - Local government procurement - Communities and Local Government Committee

Local government procurement - Communities and Local Government Committee Contents

2 Improving local government procurement

Role of procurement in serving communities

7. Whilst councils spend most of their budgets in-house, procurement from other parties makes up a significant proportion of local government spending on the goods and services needed to serve local communities. Of total expenditure of £162 billion,[5] it is estimated that councils in England spend some £45 billion annually on procuring goods and services from third parties.[6] Witnesses told us that further procurement via third parties, for example through outsourcing contracts for service delivery,[7] could deliver significant savings. The National Outsourcing Association (NOA) told us that "an entirely new approach" to public sector outsourcing, including the use of direct sourcing, shared services or mutual organisations, could deliversavings of 15-30% (or a conservative estimate of 10%, worth some £8.2 billion a year if achieved consistently across the local government sector).[8]NOA cited various examples where outsourcing had cut costs, including Birmingham City Council's savings of £500 million through its joint IT venture with Capita.[9] Other witnesses disagreed. Unison, for example, highlighted a "catalogue of failures of large strategic service partnerships" from recent months and years,[10] and recommended that councils should by default investigate the value for money case for 'in-sourcing' of contracts when they came up for renewal.[11]The Audit Commission had a mixed view of outsourcing and warned that, whilst third-party arrangements could bring significant financial and other benefits to councils, complex arrangements carried risks that need to be managed corporately.[12]

Procurement improvement initiatives

8. The LGA told us that local government understood the important role that procurement played in delivering value for money and councils sought to procure "the right services and goods at the right price". The LGA stated that local authorities faced a "42% real terms reduction in funding across this Parliament and a widening financial black hole of £2.1 billion a year," hence councils had prioritised efficiencies from smarter procurement both individually and collectively.[13]The local government sector had itself been leading reformthrough approaches such as the National Procurement Strategy and the 'Local Government Procurement Pledge'.[14]We received evidence of a range of successful approaches to improve the value for money achieved through procurement by councils including Halton Borough Council, Birmingham City Council, Hampshire County Council and Sheffield City Council.[15]

9. However, some witnesses considered that councils had so far failed to improve. The Specialist Engineering Contractors' Group (SEC Group) told us that construction procurement was "generally inefficient and wasteful for both council taxpayer and the supply side"since approaches had not fundamentally changed in decades.[16] The local authority procurement body, Scape, claimed that local authorities were as a consequence wasting more than £1 billion a year on their construction activities.[17] Other witnesses considered that some progress had been made, albeit inconsistently across the country. The Audit Commission told us that councils were now changing their business models as they restructured to make large-scale savings.[18] The Society of Procurement Officers in Local Government considered there to be "pockets of excellence" in local government contract management,[19] and the Chartered Institute of Purchasing and Supply (CIPS) told us that there had been some excellent initiatives. Nonetheless, CIPS concluded that overall local authority procurement was failing to provide value for money.[20]

10. These concerns point to considerable underperformance by many councils. A key question we asked during this inquiry was what further savings could be unlocked if all councils achieved maximum value for money in their procurement. However, data on procurement savings is not collated by the LGA nationally for local authorities.[21] Examples from witnesses of current savings gave us an indication of potential future savings through particular improvements. The LGA cited savings of over £100 million which the West Midlands Regional Improvement and Efficiency Partnership had achieved for its 33 local authorities through its collaborative approaches.[22] The Confederation of British Industry (CBI) told us that the three London Boroughs of Kensington and Chelsea, Westminster, and Hammersmith and Fulham were each estimated to be saving more than £2 million annually from a joint facilities management contract.[23] The CBI also drew attention to LGA estimates that some £280 million had been saved through joint commissioning by councils across the country via some 325 shared-service agreements.[24] However, although these examples give a sense of the likely level of savings, specific factors apply to each contract, so figures cannot simply be scaled up to give an accurate estimate of what could be achieved more widely across the local government sector.

11. We recognise that local government is aware of the need to improve procurement practice across the sector and that some councils are adopting effective procurement approaches which deliver savings to local communities. We are, however, concerned that more needs to be done and that not all are procuring so as to achieve maximum value for money. Councils must ensure that they have appropriate mechanisms in place to enable them to measure the costs and savings of their procurement exercises so that they can evaluate the extent to which they are using optimum approaches. We conclude that the Local Government Association should provide a forum for sharing data on successful approaches and the information should also be used to inform its programme of support for councils.

12. There are various models for council procurement ranging from individual councils conducting their procurement completely independently, through collaboration amongst councils to conduct joint procurement, to integration of council purchasing via a centralised body. In this section we examine a range of approaches starting with centralisation.

CENTRALISATION

13. The extent of centralisation of procurement has been at the core of central government's consideration of procurement since the 1980s. The Government set up a Buying Agency in 1991 as the main agency for non-specialist commodities and services to let framework agreements. This Agency, via several changes of remit and name, was transformed into the Government Procurement Service (GPS) in 2011. In July last year the Government announced that a new Crown Commercial Service (CCS) was to be created tobring the Government's central commercial capability into a single organisation. For central government, the CCS will also centralise the management of common suppliers and take a lead role in the letting and management of significant contracts.

14. If this approach were applied to local government, it would mean giving the responsibility for procurement to an external body working on behalf of councils to deliver their procurement objectives. Councils would monitor the performance of the body against specified outcomes but not control its day to day activities. The key attraction for central government of using a centralised model is to drive down the costs of procurement. The Cabinet Office told us that its work to streamline procurement, including through development of the CCS, would "fundamentally change the way we procure to improve efficiency, savings and service delivery".[25] It told us that its approaches to date had delivered savings of up to 10%: in2012-13the GPS managed £11.44 billion of public spending, delivering £1.1 billion in savings. This included savings of some £100 million for local authorities from a spend managed by the GPS of some £1.25 billion.[26]

15. The Cabinet Office noted that councils were increasingly taking up GPS services as "more compelling examples of success" became more widely known. It said that there was a "significant opportunity" for increased use by local government of centralised procurement services without compromising the "localism agenda and the critical need to support economic growth of businesses, in particular SMEs, in local areas". The Cabinet Office cited the centralised deals for commodities, such as energy, which had been established through central government buying power and which entailed contracts and key suppliers being actively managed, noting that this directly freed up council budgets and capacity to focus on specialist and key strategic procurement projects that supported local front-line service delivery. It further highlighted GPS work with a number of local government buying organisations to drive additional savings on common goods and services through increased aggregation and that this had resulted in a number of collaborative procurements. The Office cited the example of a joint framework for multi-functional devices with Eastern Shires Purchasing Organisation (ESPO) and YPO which was delivering average savings of 46% on hardware and 49% on service costs through standardising specifications.[27]

16. Wales is taking the GPS model further and is establishing a Welsh National Procurement Service to manage contracts across more than 70 organisations across the public sector—including all local authorities, health boards, universities, colleges, fire and rescue and police authorities in the Principality. The Welsh Assembly Government stated that it expected to see reduced expenditure, elimination of duplication and increased efficiency from co-ordination of the 20-30% of the total £4.3 billion Welsh budget spent on "common and repetitive goods and services".[28] We received evidence that a centralised model for council procurement could generate significant savings for local authorities. Our adviser, Colin Cram, calculated that additional cost savings of 13% could be achieved from this type of fuller integration of council procurement when compared to current savings from collaborative procurement.[29]

17. The International Association of Contract and Commercial Management (IACCM) told us that there should be "selective centralisation of activities and support" to enable establishment of a "critical mass, the dissemination of best practice and coordinated learning and knowledge transfer".[30] Centralised bodies would employ a specialised staff with commercial skills which some individual councils might struggle to match, although access to commercial support could also be achieved via other means including the use of collaborative bodies and/or programmes of support led by the sector. (We address skills provision further in chapter 0 below.)

18. Many witnesses were opposedto integration of council procurement into a centralised body or bodies. Their concerns focussed on five grounds. First, centralisation would erode the opportunity for locally flexible approaches. For example, the Association of Play Industries told us that, as play spaces and playgrounds were "not commodities like paperclips", tenders for such services needed to be bespoke according to "locality, the communities they serve and the outcomes delivered to children".[31] The LGA was concerned that a body not under direct local democratic control might limit local choice and flexibility and might have negative impacts on local economies. The LGA said that each of the more than 370 councils needed to be responsive to their voters and their residents, and be held to account for the price they paid as well as the quality they delivered.[32]

19. Second, we heard that not all goods and services were good candidates for centralised purchasing. Paul Smith from YPO warned that,whilst products such as energy could be obtained under "very good deals" when bought at a certain level of volume, some categories were "best bought locally".[33]However, Mark Robinson from Scape noted that central purchasing need not preclude support for local firms and that Scape's delivery partners committed to spend locally: "we have national arrangements. We set them up nationally but we deliver locally".[34]

20. Third, it was argued that local authorities' procurement arrangements needed to be tailored to locally specific factors, such as requirements for contracts to deliver social, economic or environmental value to the local area. We consider these requirements in detail in chapter 3 but note here that if a council wishes to deliver best overall value, then it is necessary to consider not only how contracts can be secured at the lowest price, but also how they can be linked to the delivery of a council's strategic objectives. Making such linkages effectively requires each council to be able to retain sufficient control over the outcomes for each procurement exercise. A centralised approach could militate against this.

21. Fourth, aggregation of spend can have negative consequences. The LGA noted that:

22. Fifth, implementation might not be straightforward. There have been difficulties in integrating procurement, as demonstrated by central government's experiences. The National Audit Office (NAO) Improving Government Procurement report concluded that the Government was not maximising the potential for savings through centralised procurement since, although it had succeeded in increasing spending through central contracts from £2.6 billion in 2009-10 to £3 billion in 2011-12, this still represented less than half of its spending on common goods and services.[36]

Compulsion to centralise

23. We received evidence for and against compelling councils to centralise their procurement. In favour were witnesses such as Alasdair Reisner, representing the Civil Engineering Contractors Association (CECA), who told us that the absence of compulsion meant that change happened only slowly in the local government sector and meant that many useful initiatives were blocked, including publication of a 'pipeline' of planned future local authority construction projects which would enable construction companies to plan better.[37]Mark Robinson from Scape recommended that an umbrella organisation be set up across the UK with delegated authority to deal with local authority procurement, organised for example either centrally or in regional hubs. Since he considered that consistency in council approaches could not be achieved in a "nice collaborative way" he said that it would be necessary to "make" local authorities procure in a different way.[38]

24. On the other side, Ian Taylor, representing the North East Procurement Organisation (NEPO), told us that "imposing a way of doing things on local government would be inherently difficult".[39] The Audit Commission also considered that, whilst centralised procurement carried "powerful weight," compelling all councils to use a centralised body might be seen as a "crude weapon".[40] The NAO noted that, although the Cabinet Office requirement for all government departments to buy through particular routes had led to savings, there was a "complicated set of factors to take into account" for the local government sector, "not least local accountability".[41] We also heard commercial arguments against compulsion. Simon Hill from YPO told us that he did not support mandation of centralisation since this generated complacency. He argued that a purchasing body should operate commercially, convincing each buyer that it offered the best deal, and that compelling everybody to use one central body could lead to the creation of "some bureaucratic monolith" that did not offer efficiency to the public sector.[42] Sheffield City Council's Director of Commercial Services endorsed this view noting that the council considered all options for each procurement, using a blend of central buying via the GPS, regional buying via bodies such as YPO and NEPO, and local buying where, as well as best value, the council made decisions on the basis of supporting local SMEs and delivering social value.[43] Ed Walsh from ESPO, whilst critical of the disparate choices made by councils and recognising the benefits from the rationalisation of choice, conceded that local commissioning strategies needed to recognise different local priorities and that "you will not have any friends in local government if it is mandated centrally that they have to do x or y and it offends their commissioning strategy".[44]

25. We conclude that local authorities' focus on meeting the needs of local communities requires councils to retain control over their procurement operations. Local freedom and flexibility would be lost if they were compelled to adopt a centralised model of procurement such as that adopted by central government in its Crown Commercial Service.

26. We recognise that there are potential savings to be gained by increased aggregation and even national arrangements—for example, for purchasing energy—but it has to be for local authorities to decide what provides the best value for money when weighted against their local needs and to enter such arrangements voluntarily. To assist local authorities, we consider that the Local Government Association should review current procurement spend on key categories to identify potential routes to increase the use of aggregated spend for these products and services.

COLLABORATION

27. Greater voluntary aggregation, if necessary up to a national level, would build on collaborative approaches currently spreading through local government. There have been alarge number of joint council procurement initiatives and regional collaborations established in recent years. The LGA told us that the number of shared procurement services had doubled during 2011-2012 with 75 councils now in 16 formal joint purchasing arrangements.[45] Witnesses told us of the potential for increased collaboration across local authorities to deliver benefits, including reduced costs of procurement exercises and lower prices for goods and services, as well as improved access to specialist commercial skills. For example, the Audit Commission considered that collaborative procurement could save significant sums of money for councils since aggregating demand would generate discounts, although the amounts varied according to the markets involved—whether national, local or regional—and the range of suppliers that was active in each.[46] The LGA cited the example of 313 councils purchasing energy in eight consortia in order to buy at the "simplest and cheapest arrangement".[47] The LGA was also funding work on councils' three biggest spend categories—energy, construction and ICT—to investigate how the sector could collaborate more effectively so as to "understand the markets; work better with the suppliers; quantify future planned spend; map and promote existing frameworks; and identify opportunities to make savings".[48] The LGA further noted that significant cost reductions could be achieved by increasing the capability of procurement teams through sharing of resources.[49]

28. Procurement organisations told us of the benefits to councils from using collaborative approaches. NEPO cited a reduction in one council's procurement spend in 2013-14 of over 26% through a combination of factors including "reduced settlement grants, putting local business first, partnership/outsourced contracts and other changes to the landscape".[50]Scape stated that its joined up approach to procurement had delivered savings of £200 million, with average savings of 14%, when compared to 'traditional' tendering approaches under which councils operated individually.[51] On average procurement bodies estimate collaboration amongst councils to be generating savings of 10-15%. Applying this to the approximately 15-20% of total third-party procurement budgets currently spent this way, we calculate that nationally savings of 2% may already be being generated.[52]Making better use of current collaborative approaches could lead to further savings, in some witnesses' estimation. Our adviser, Colin Cram, calculated that using collaborative agreements as a default would lead to total savings of £2.5 billion, i.e. additional savings of £1.8 billion per annum.

Barriers to collaboration

29. Witnesses were, however, concerned that maximum use was not being made of collaboration to deliver value for money. CIPS noted that only 15% of procurement spend by local authorities was currently channelled through procurement hubs despite this route securing long-term service and cost benefits for local taxpayers and their local economies.[53]A joint report by the Audit Commission and the NAO, A Review of Collaborative Procurement Across the Public Sector, noted that, with nearly 50 professional buying organisations as well as individual public bodiesrunning commercial and procurement functions, the public sector procurement landscape was fragmented.[54]

30. The Audit Commission said that, although care needed to be taken over some locally specific services such as contracted-out provision for looked-after children, councils needed to be very clear as to the reasons why they did not collaboratesince they needed to be sure they were obtaining better value for goods such as stationery, vehicles and travel.[55] DCLG stated that local authorities must take advantage of collaborative deals on specific categories of spend, particularly in high cost service areas. The Department expressed frustration at the stance taken by some councils and referred to the household waste Weekly Collection Support Scheme which had offered councils £250 million to allow them to take advantage of joint procurement deals. It had identified that many councils were buying similar goods—wheeled bins and refuse collection vehicles—at a similar time and considered that economies of scale would mean that products could be obtained more cheaply for those collaborating. It had organised workshops, with the LGA and other partners, to promote this but was disappointed that authorities had not taken "sufficient advantage of the procurement opportunity created from the Scheme". DCLG said that "excuses included: working to unique timescales; local sovereignty; and existing contracts, and these were complemented by a lack of understanding of processes and in some cases disinterest— a tunnel vision focused solely on the processes of their local authority". It further noted that where local authorities had joined up, the advantages had been "obvious" citing for example the London Waste and Recycling Board joint procurement of food waste caddies and caddy liners which had saved 25%, with one authority achieving savings of 68% over the costs of procuring alone.[56]

31. Even where collaboration was seen to be the optimum approach in principle, witnesses identified a range of factors hindering its effective implementation. The Audit Commission warned that "market complexity, along with the variety in size and type of council", had hindered collaboration in many cases but noted that these were not insuperable obstacles.[57] Witnesses referred to the need to identify the appropriate scale at which to collaborate.[58] Ian Taylor of NEPO considered that, of the North East region councils' annual £2.6 billion spend on goods and services, only some 10-15% could be bought nationally, some 25% would be best bought from regional suppliers, and about 50% was supplied through local SMEs, and this last category would be very difficult for a national organisation to manage.[59]Furthermore, during our visit to Sheffield we were told that collaboration could have negative effects on more effective councils which were working with less effective authorities since such unequal partnerships could bring more benefits to one party than the other where not all parties were performing at optimum levels.

32. Some witnesses considered that councils should be compelled to collaborate with other councils since joint approaches achieved savings. Although of the view that collaboration among councils in the North East of England was good, NEPO said that the lack of a requirement on councils to collaborate was a barrier since each collaboration was dependent on the commitment of many local authorities. It told us that its attempt to implement a model under which a lead local authority would conduct procurement for all members, on behalf of NEPO, had met with limited success as local authorities lacked the capacity to manage 11 partners.[60] Nonetheless, many other witnesses argued against compulsion due to the constraints this would place on local councils' ability to deliver local priorities in a locally accountable manner and the arguments they advanced were broadly similar to those we outlined above against compulsion to centralise.

33. It is clear that many local authorities are already conducting procurement in collaborationeffectively with other councils, either through initiatives established between individual authorities or groups of authorities, or via procurement organisations on a regional basis. Enhancing such approaches is a sensible way forward. We can understand the Government's frustration that authorities' responses to its funded collaborative initiatives have not been as expected. But the answer is not compulsion. As we have already stated, councils are answerable to local people and have to retain control over the delivery of local services.Nevertheless, we consider that there is scope for much greater work to join up approaches and deliver economies of scale without compromising local authorities' ability to deliver locally appropriate services, accountable to their communities. We conclude that the Local Government Association should conduct a review of collaborative approaches and produce best practice guidance for authorities on the most effective means of joining up procurement to deliver savings which reflect local priorities.

COLLABORATION WITHIN LOCALITIES

34. We received evidence on the benefits of public sector bodies within localities collaborating on the procurement of common goods and services. The LGA noted that the next challenge beyond inter-council collaboration was collaboration across community organisations such as the health and police services, using community budgets for example.[61] Ian Taylor told us that NEPO had helped a growing number of charities in the north east of England to reduce procurement costs using its contracts, and perceived growing signs of collaboration between health and education bodies.[62] Scape considered that community budgets were a good way of forcing people to work collaboratively if used in the right way.[63] Birmingham City Council told us that it had joined forces with the Birmingham Chamber of Commerce and other local public sector organisations to set up a cross-sector community interest company, Buy for Good, which helped social landlords, local authorities, schools, socialenterprises and emergency services to benefit from the reduced prices that the council could secure as the UK's largest local authority.[64]

35. There is scope for greater joining-up of approaches to deliver economies of scale by linking the procurement approaches of public sector bodies within local communities. The Local Government Association should conduct a review of collaborative public sector approaches at a local level and produce best practice guidance for authorities on the most effective means of joining-up procurement budgets across a range of local public sector bodies to help deliver joint local priorities.

Framework agreements

36. Framework agreements offer the potential to deliver savings without requiring councils to develop or join new procurement bodies. The existing EU rules define these as:

One significant advantage of a framework agreement is that the purchasing authority does not have to undertake the full Official Journal of the European Union (OJEU) process every time services or goods are required. Having to go through the tender procedure once rather than several times reduces tendering cost and shortens the time required to conduct a procurement exercise. KeepMoat referred to the North West Construction Hub as a "prime example" of a framework that had delivered value for money in a number of ways, for example by enabling the appointment of "competent, committed" contractors in a shorter timescale.[66]

37. However, not all witnesses wholeheartedly supported the use of such framework contracts. The Federation of Small Businesses (FSB) noted that the use of long-term framework agreements often led to the use of very limited numbers of suppliers and significantly reduced competition pressure for the duration of the contract.[67] Market Dojo, a small e-sourcing software company, also noted that frameworks could present problems for SMEs and micro-businesses, citing a tender from ESPO which excluded tenderers who could not offer one or more elements of a wide variety of services.[68] NEPO noted that frameworks could speed up processes but had drawbacks in that they might not meet specific local needs or include local suppliers and could lock new or improving suppliers out for the period of the framework.[69]

38. Some councils have taken steps to make framework contracts more manageable so as to retain economies of scale without such larger-scale contracts disadvantaging smaller firms. Staffordshire County Council,[70] and Halton Borough Council divide contracts into smaller units allocated, for example, by district—a process known as 'lotting'.[71] Hampshire County Council has adopted a "blended" approach to balance delivery of larger and more specialist contracts by larger companies with the use of SMEs for smaller contracts.[72]We also note that the new EU Directive on public procurement would render discriminatory processes that hamper small businesses illegal.[73]

39. We recognise that framework contracts can deliver cost savings in certain circumstances but have concerns about the impact on smaller firms. When using framework contracts, councils should consider the potential for sub-dividing at least part of the contract to enable smaller organisations to bid for smaller parcels of work. The Local Government Association should produce guidance on how the measures in the new EU Directive on public procurement could be used to encourage smaller companies to engage in procurement opportunities with local authorities.

5 Department for Communities and Local Government, Local Government Financial Statistics England, no. 23 2013, May 2013. This figure is for 2011-12. £45 billion is an estimate of likely annual spend via third parties from evidence to this inquiry. See footnote below Back

6 Colin Cram (LGP 81) £45 billion includes £10 billion on social care. In addition to the £45 billion, a further £15 billion is spent by educational establishments. The UK public sector as a whole spends £227 billion annually on procuring goods and services, of which £45 billion is spent by Whitehall, and £45 billion is spent by local government. See Public Administration Select Committee, Sixth Report of Session 2013-14, Government Procurement, HC123,p5 Back

7 Outsourcing has various definitions but in this inquiry we broadly interpreted it to mean the procurement of a service or goods from a third party rather than delivering or producing that good or service in-house. Back

8 National Outsourcing Association (LGP 21) Summary Back

9 National Outsourcing Association (LGP 21) paras 8-10 Back

10 Q73 [Peter Challis] Back

11 Unison (LGP 27) Appendix 1 Back

12 Audit Commission (LGP 11) summary and para 7 Back

13 Local Government Association (LGP 17) para 2 Back

14 Local Government Association (LGP 17) para 3 Back

15 See Halton Borough Council (LGP 26), Birmingham City Council (LGP 45), Hampshire County Council (LGP 03), Sheffield City Council (LGP 66) Back

16 Specialist Engineering Contractors' Group (LGP 60) para 2 Back