Public AdministrationWritten evidence submitted by Baroness Greengross’s Transport Forum and the International Longevity Centre (PROC 18)

Summary

A Public Procurement contract is required to be effectively managed to ensure full delivery. In order to bring these ideals to a fruitful solution several key interlocking domains have to be in place. These are:

(a)Scope, negotiation, length and enforcement of the Contract.

(b)Transparency.

(c)Risk Allocation.

(d)An Independent Supervisory Board and an Independent audit.

This approach was clarified in our work on Railway Franchising but we see these steps as a blueprint for the successful management and outcomes of Public Procurement exercises in other domains such as Healthcare and education.

Background

In 2010 Baroness Greengross’s Transport Forum produced a paper entitled “Public Procurement-the lessons of Rail Privatisation(i) [submitted as supplementary material]. The primary aim of that paper was to seek if any wider lessons could be learned, or any general principles be derived from, the railways” experience which could be applied to the outsourcing of user-facing functions in other areas of public provision.

In summary while there have been numerous benefits from the privatisation of railways, we believed that the franchising model has proved to be flawed in several ways. The issue is just how, rather than being simply put down to experience, are these valuable lessons going to be put to good use in other sectors, such as healthcare, so that the hard work and learnings from this past and ongoing example of “privatisation” are incorporated in the methodologies of public procurement going forward. Into other transport issues, such as franchising motorways or in other sectors, such as procuring contracts for the provision of social care, both at home and in residential settings and potentially Healthcare and other domains of public procurement.

The outcomes from the Forum’s work in terms of ways if improving the efficacy of Public Procurement are detailed in our response to Q.10 from the Committee’s Procurement Issues and Questions Paper.

Response to the Committee’s Questions

The Committee expressed the wish to receive answers to the following questions from its Procurement: Issues and Questions Paper.

1. How successful has the Cabinet Office been at improving public procurement policy and practice?

I.It has been reasonably successful but recent events, including some poor NHS and Railways experiences, suggest that much remains to be done. The 2010 Green review(ii) of government efficiency highlighted the need for action to reform and centralise.

II.Government procurement and found that the Government was failing to leverage both its credit rating and its scale and that there is inefficient buying by individual departments, with significant price variations across departments for common items. It also found that there are significant deficiencies in the management information available to civil servants to show where and how Government spends its money.

III.The establishment in 2010 of the Efficiency and Reform Group (ERG), with the aim of taking a new more coordinated approach to driving efficiency across Government, is to be welcomed, as are its initiatives to reform and centralise public procurement and achieve efficiency savings. The announcement earlier in August 2012 that efficiency savings worth over £5.5 billion had been achieved in 2011–12, of which £422 million were attributed to centralising government procurement shows that some success is being achieved in this regard. We particularly welcome the focus on supporting small and medium-sized enterprises (SMEs) and the aspiration that at least 25% of government procurement spending will flow to SMEs by the end of the parliament in 2015. The fact that proportion of government spending going to SMEs has risen to 13.7% in 2011–12, is a welcome sign of progress in that regard. Factors such as making it faster and simpler to do business with Government, for example by abolishing pre-qualification questionnaires for procurements under £100,000 and committing to reduce the length of time taken to complete the procurement processes, have been a key part of that success.

2. What should be the strategic aim of the Government’s public procurement policy?

I.In its recently published seventh report “Rail 2020”,(iii) the Transport Select committee recommends that “in developing a new framework for rail franchising the Government [should] focus more on wider policy objectives, such as the promotion of sustainable end-to-end journeys, the quality of the passenger experience, or economic or social development, alongside the premium payments offered by train operating firms.” We fully endorse such a contingent approach to the setting of strategic aims for public procurement of whatever sort, with the aims being agreed and signed up to before being transparently published as part of the desired contractual outcome.

3. Does the Government have the right skills and capabilities to procure effectively?
Does the civil service have the skills and capabilities required to negotiate and manage contracts effectively?
What skills do procurement authorities require in-house, what skills can be bought in and what skills can be contracted out?
What lessons can central government learn from local government on procurement?
How successful are government departments and their agencies at communicating their needs to potential suppliers?

I.Regarding Rail Franchising, in its seventh report the Transport Select Committee is not convinced that DfT as currently structured is best placed and resourced both to set rail policy and do the detailed work necessary to run each franchise competition. They believe that franchises should be let and managed by a DfT agency or arms-length body. Under this arrangement, DfT would specify what it wished to be delivered under the franchise and the new franchising body, employing staff with appropriate specialist, commercial skills, would let and manage the contract.

II.We endorse the view that a new arms-length franchising body could employ staff with the appropriate specialist and commercial skills required to let and manage effective franchise contracts. However, ministers must remain fully accountable to Parliament for the railway.

4. How should the civil service ensure it recruits and retains staff with the right skills to run procurements, to negotiate and manage contracts and to deliver major projects effectively?

(See above.)

5. Does the Government have the organisational structures in place to enable it to procure effectively? (For example, how far should the Government centralise responsibility for public procurement? Do central government procurement “framework agreements” enable more effective public procurement?)

I.Far from centralising further, in terms of rail franchising the Transport Select Committee believes that “there is scope to devolve control over some rail franchises to local or regional bodies’ and supports the Government in looking at how to achieve this”. We fully support decision making in this regard being delegated to the appropriate authority depending on the contingent balance between local needs and aspirations and national strategic demands.

6. Does the Government collect the management information it needs to understand how public procurement is working?

I.Collecting information for information’s sake would be yet another bureaucratic burden that would both slow down the procurement management process and cloud the prone motive for collecting such information ie assessment as to success in achieving the main objectives of the procurement, such as improved consumer outcomes. However in specific circumstances better management information, rather than just becoming obscuring background “noise” could have wider implications beyond the primary procurement objectives.

II.For example Government procurement has an important role to play in nudging the private and public sector to adapt to an ageing society. For example, during the process of Digital Switchover, the Government introduced a procurement process (worth £600 million) which specified certain disability access requirements for the digital set top box to be provided as part of the help scheme. This process heavily influenced the whole industry, which previously had been reluctant to provide certain access functions (such as audio description). Subsequent to procurement even the cheapest set top boxes took became more accessible and usable for people with disabilities. Government should recognise the potential to use its own procurement to influence the design of goods and services being sold in the private sector and collect relevant management information accordingly.

7. How should Government ensure that European directives on public procurement do not inhibit public bodies’ ability to procure effectively?

I.No one would argue that there is anything wrong with the spirit of EU procurement rules, requiring as they do, the equal and non-discriminatory treatment of bidders and transparency in the procurement process. In practice though, particularly for SME’s they can become rather bureaucratic and unwieldy. It was welcome therefore that in 2011 the European Commission launched a review of the EU’s public procurement rules in 2011 and, following consultation, published proposals for revised public procurement.

II.These proposals, which are currently being considered by the European Council and the European Parliament for negotiation and adoption, include measures intended to simplify existing public procurement rules, aim to facilitate the participation of SME’s in bidding for public contracts and allow authorities to make better use of public procurement in support of common societal goals.

8. How should Government assess and manage risk when negotiating procurement contracts? (For example, how much risk should Government be prepared to accept and what are the limits on the transfer of risk to the private sector?)

I.As we highlight above, the government needs to be absolutely clear as to what risks it wants to allocate to the operator, why and how. People who take the risk should be the people best able to manage that risk. The problem is that if a company cannot manage a risk it insures against it and the cost of this has to be added into the charge the operator makes. Because of this it is often more costly than the government taking the risk directly and pooling it. There might be some merit is taking away the risk for operators of changes in the economic climate (the recent recession), in GDP or in employment patterns. (Areas in which Rail franchisees have recently been seen to be seeking government protection on the basis that they are risks that could not be foreseen.)

II.The best way of achieving such protection would be to link the contract to changes in the GDP and changes in London Employment or some similar Index. It might, however, profitably be borne in mind that such risks are continuously faced by companies both large and small that operate in the private sector. In between those risks that are clearly for government to accept and those that should fall to the operator there might be some that fall between the two. On balance, it is probably better for the government to accept these as well and factor their cost into any contract; however, any proposal to link the contract to changes in GDP would require some analysis to ensure it did not create perversities.

9. What is the best role for “prime contractors” and what are the advantages and disadvantages of relying on “prime contractors”?

I.The best role for a prime contractor is to undertake to perform the complete contract, while employing and managing one or more sub-prime subcontractors to carry out specific parts of the contract. In 2010, the Pentagon Partnership(iv) looked at the experiences of third sector organisations’ experiences of the sub/prime contractor model in the delivery of DWP/Jobcentre Plus contracts in the Tyne & Wear Region. Reasons given by organisations as to why they had not been subcontractors in the delivery of DWP/Jobcentre Plus contracts range from a lack of transparency/communication from prime contractors, overly-bureaucratic procedures, and a lack of understanding of (and a willingness to exploit) the third sector. Those respondents who had delivered subcontracted work cited communication, personality and culture clashes as negative aspects of the experience. Some of the Contractors even instances of bad practice that contravened the DWP’s own Code of Conduct for providers such as, Contract awards that are highly geared to achievement (and end-loading of payments); Problems with the credible pricing of work and payment issues.

II.Smaller contractors may have staffing or technology issue relating to their small size and niche service nature. This is a problem if they are unable to deliver to service standards and cannot be quickly replaced. Similarly, they may have cash flow problems if the prime contractor is slow in paying invoices or some sort of payment-by-results situation exists with a long lead-time between service delivery, verification and payment.

III.A 2012 Ofsted report, Ensuring Quality in Apprenticeships(v) highlights how subcontractors felt they were getting “poor value for money” from management fees and reveals many lead contractors were overcharging according to Skills Funding Agency (SFA) guidance. The most effective subcontracting arrangements seen in the survey were between subcontractors and other like-minded independent learning providers working as part of a consortium or training group. In these circumstances, the arrangements had improved their offer and added value to the experience of their apprentices. A true delivery partnership existed, with savings on shared services and a common vision of offering high-quality apprenticeship training.

IV.However, Ofsted reported that although some lead contractors legitimately regarded subcontracting as a way of meeting the needs of employers or expanding their training offer where they did not have the expertise themselves, others clearly saw it as a way of generating income for doing little work. Subcontractors who were not part of a training group or consortium were unhappy at what they perceived as poor value for money for the management fees charged by lead contractors. The introduction of the minimum contract value has forced often very good smaller providers to either work together or become a subcontractor of a larger provider. In several cases this has diluted accountability and has placed a greater distance between the learner and those responsible for learning. Most of the employers interviewed were actively involved in some aspects of the training and assessment of their apprentices and three quarters had some previous knowledge of the training provider.

V.However, neither the employers nor the apprentices interviewed had a clear understanding of the role of lead contractors and their responsibility for ensuring the quality of the learning programme. Importantly, where provider staff, learners or employers are dissatisfied with an aspect of training there was no obvious point of contact to report concerns to. One lead contractor described approaches from dubious parties wanting to act as subcontractors, but said there was no obvious body to refer their concerns to. Ofsted has recommended the government and other agencies look at an independent whistleblowing hotline and called for guidance on who can act as a lead contractor linked to performance rather than contract value.

10. What are the key lessons to be learned from the experience of cost overruns, delays and project failures in central Government procurement over the past five years or so?

I.A major lesson from our Railways Paper was that it is important for procurement and contract management to be recognised as a core public sector activity and to be organised and resourced appropriately. Processes and policies aimed at guaranteeing exemplary propriety should be established, in the context of the need to exploit effective commercial approaches.

II.Further, a naive and simplistic reliance on the market to provide often arises from either ideology or a failure to understand thoroughly how markets will react to a given set of circumstances. An example of this was the decision to change the London bus contracts to move the fares revenue risk from London Transport to the operators. The theory was that this would drive innovation and improve quality and customer service. The reality was, an outcome accurately predicted by the professionals, was that the operators focussed almost exclusively on maximising their revenue share at the expense of their competitors and, crucially, of the integrity and performance of the network. They acted consistently with the realities of the market and not the theory. There was also a notable move to market concentration, with dominance by a small number of large operators and a reduction in competition.

III.The key lesson here is to exercise a level of control or ownership consistent with the assured delivery of the required outcomes. The public sector’s role should be to set policy and finance and specify what is required, and then to assure provision in the most cost effective way. It is essential to establish a clear categorisation of those outcomes government wishes to secure and to conduct a robust and comprehensive analysis of the intervention options. This analysis should be based on sound economic, financial and commercial principles. If political or ideological goals are involved, they should be made explicit and overlaid after completion of the analysis.

IV.In the view of our Forum the most effective method of achieving value for money is to:

define the requirement accurately and clearly;

specify how delivery is to be measured and monitored;

pay due regard to the capacity of the market to deliver what is required;

assign risk appropriately to those best placed to manage it;

seek genuinely competitive bids;

evaluate these against the right criteria;

award on the basis of best value;

make explicit the expectation that all parties will honour all of their obligations;

adopt a commercial (rather than legalistic and confrontational) approach to contract management; and

apply high quality scrutiny and audit arrangements to all procurement and related activity to avoid, in particular, the possibility of inappropriate political influence.

V.The bidding process will define the “efficient” price and if it is unaffordable then the specification needs review. The resulting contract requires to be effectively managed to ensure full delivery.

VI.In order to bring these ideals to a fruitful solution several key interlocking domains have to be in place. These are:

A.Scoping the Contract

(a)In any public procurement exercise the reasons and objectives for the process need to be clearly and explicitly laid out. Only in this way can the delivery be monitored, success or failure assessed, and alterations or amendments be attempted if changes are found necessary at any time. Many failures can be attributed to a lack of clarity about what procurement was trying to achieve.

B.Negotiating the Contract

(a)It is essential that there is a realistic and workable alternative method of operation in place before negotiations are begun. A government without a credible fall-back situation is not in a strong position either with regard to the negotiating of the original contract or in its subsequent enforcement. If the whole basis of rail franchising or public procurement is to engage the benefits of competition it is worth making the obvious point that there must also be competition in the bidding process.

(b)Mounting a franchise bid can be extremely costly (many millions of Pounds both for the bidder and for the government. There might be merit in drafting some sort of summary contract, a Memorandum of Understanding when the preferred bidders are established and before a situation is reached where it is judged too costly to withdraw. Contracts must be open and honest, but they must also be realistic.

C.Transparency

(a)Greater transparency is fundamental. Too much vital information by which the public can judge the value of Public Procurement is hidden behind the curtain of commercial confidentiality. Whilst this might be sustainable during the negotiations themselves, once a Contract is let there is an overwhelming case for as much detail as possible to be revealed. In the same way, past performance should, and does, inform government choice. It should be seen to do so and reasons for the final choice of provider should be clearly stated at the time of the Contract itself.

D.Risk Allocation

(a)The government needs to be absolutely clear as to what risks it wants to allocate to the operator, why and how. Risk that arises from changes in public policy should not, for obvious reasons, be risks that are undertaken, or underwritten, by an operator. Since those changes are made by Government it is right that government bears the cost. Any contract should reflect this.

(b)People who take the risk should be the people best able to manage that risk. The problem is that if a company cannot manage a risk it insures against it and the cost of this has to be added into the charge the operator makes. Because of this it is often more costly than the government taking the risk directly and pooling it.

E.Length of Contract

(a)There seems to be no real evidence that merely having a longer term contract has resulted in significantly greater investment. The argument that major investments are unattractive in a short term contract, because of the difficulty of getting ones investment back, has always been addressed through the “Designated Franchise Asset” provisions in franchise agreements. At the end of a franchise previously identified improvements are valued and the franchisee is paid accordingly. This principle can be extended to cover any initiative that is desirable to the government and which can only recoup its costs over a long term without the franchise itself having to be for that same long period. Moreover, the rarely mentioned reality is that locking up large parts of the total public spending for long periods can be unattractive to governments who, as a result, are then faced with considerable spending constraints overall.

(b)It would seem that five years or so would be a reasonable initial period for both sides. There is, however, some understandable misgiving within the operating community about the difficulty of long term planning based on such a comparatively short period and, in particular, about the very considerable costs that are now involved in the franchise process. Because of this we believe it would be better to have an initial 5year contract that is automatically extended, 5 years at a time, perhaps up to a total of 15 years, if—and only if—“all the right boxes can be ticked” at the end of each period. The original contract must clearly state what these boxes are and what constitutes a “tick” and should also state clearly such things as might or would need to be renegotiated for succeeding terms. This would give both parties the opportunity to address both changed financial circumstances and changed political imperatives. If agreement could not be reached, an open bidding process would then be put in place.

F.Contract Enforcement

(a)Any Contract should incorporate an adequately sized Bond to be forfeited if the contractor or franchisee walks away from the Contract. Future Bonds should not only be of proper size to serve their purpose, but should also be accompanied by pre-defined penalties to be levied for non-delivery at the end of, and possibly even during, the Contract period. It is also important to ensure that where franchisees are wholly owned subsidiaries, the parent Company should guarantee such Bonds and Undertakings and not be able to isolate themselves from such risks. By the same token, if a franchisee is, for any reason, debarred from other future franchises, such a ban should extend to the parent company as well.

G.An Independent Supervisory Board

(a)This would act as a buffer between the day-to-day operations and the government imperatives—to the benefit of both. There should be passenger representation. The role of such a body is to represent each side to the other, attempt to broker a deal and attempt to act as referee. It clearly is not to make government policy.

H.Independent Audit

(a)Whatever mechanism is used for procurement, contract management and related activity it is absolutely essential that it be subject to independent and credible audit to avoid, amongst other things, the possibility of inappropriate political influence.

We are pleased to see that the Transport Committee in its recent Rail 2020 report endorses many of these points and sees them as a valuable blueprint for moving forward. We would go further and see these steps as a blueprint for the successful management and outcomes of Public Procurement exercises in other domains such as Healthcare and education.

January 2013

References

(i) Public Procurement-the lessons of Rail Privatisation. Baroness Greengross’s Transport Forum. 2010

(ii) Seventh report the Transport Select Committee “Rail 2020”, December 2012

(iii) Cabinet Office, Efficiency review by Sir Philip Green: Key Findings and Recommendations, October 2010

(iv) Survey of third sector organisations’ experiences of the sub / prime contractor model in the delivery of DWP / Jobcentre Plus contracts. Pentagon Partnership Spring 2010

(v) Ensuring quality in apprenticeships—A survey of subcontracted provision—Ofsted 2012