PUBLIC SERVICE AGREEMENTS
26. Public Service Agreements are still new and Parliament
and Government are still working towards making them useful management
tools. They were launched in 1998 as part of the Comprehensive
Spending Review to link the allocation of public expenditure to
departments' aims and objectives. The first set of PSAs related
to the spending allocations for the period from 1999-2000 to 2001-02.
The Committee heard evidence on PSAs in spring 1999, publishing
a Report in July 1999.
The Report broadly welcomed the introduction of PSAs and included
recommendations on PSA targets, cross-departmental and regional
PSAs, audit and monitoring issues, and how the results of such
activity might be used.
27. The second tranche of PSAs was published in July
2000, alongside the results of the 2000 Spending Review, and is
intended to run from 2001 to 2004.
Departments have fewer objectives and targets now than previously:
the Treasury itself has ten PSA targets under the new system,
compared to 33 before. Mr John Gieve, of HM Treasury, told us
that "we had too many measures in the first set and too many
targets" and that the new PSAs were "more outcome based
and a better attempt to specify real top level business and political
priorities". He also explained that the process for negotiating
PSAs with departments had changed, with earlier discussions about
key priorities in a "co-operative process with departments
and with the other central departments".
The new PSAs are complemented by Service Delivery Agreements (SDAs)
which, Mr Gieve said, "explain how departments are going
about achieving their main business objectives" and incorporate
the "Cabinet Office agenda on such aspects as diversity,
equality of opportunity and so on".
28. During our inquiry we discussed with Treasury
officials and others the details of the new system of PSAs, revisiting
many of the issues raised in the 1999 Report.
Our focus was on how PSAs affected the relationship between the
Treasury and the rest of Whitehall, which we discuss in the following
paragraphs. We hope that the Treasury Committee in the new Parliament
will look again at the new system of public expenditure control
and update the 1999 Report on PSAs.
29. Professor Talbot, of the University of Glamorgan,
said in his written memorandum that "decisions about what
does or does not get funded ... carry clear implications for policy"
and that the Treasury's role in policy making has become "both
more powerful and more explicit" as a result of the introduction
of the Spending Review and PSA process.
Some witnesses were sceptical about the Treasury's ability to
improve the efficiency and effectiveness of public expenditure
using PSAs. Mr Kenneth Clarke MP said that "in principle,
it must be right that everybody is agreed what the money is for
and how you are going to make a success or failure in delivering
it" but warned against the Treasury "coming back all
the time and second-guessing what one was doing in particular
areas" and of the danger of PSAs becoming "a bureaucratic
paper chase and a process which takes up more time than the value
of that being delivered".
30. Treasury witnesses rejected the characterisation
of PSAs as a tool for facilitating the micro-management of other
departments' affairs by the Treasury. Mr Gieve argued that "what
the PSA is about is not imposing a Treasury template on everyone,
it is about getting an agreement between ministers and officials
at the centre and in departments about what is really important
and what people should be doing over a number of years. In that
way it is the opposite of what you fear. It is reducing the risk
of constantly having your elbow jogged and being told, 'That was
important two months ago but now we have decided it is something
Although elbows might no longer be jogged about priorities, the
Treasury is keen to question the ways in which departments spend
Mr Parry and Professor Deakin argued that the Treasury was seeking
"an intellectual victory" over other departments so
that they come to "think 'correctly' in the Treasury's eyes".
31. We are in no doubt that public expenditure
should be spent as efficiently and effectively as possible and
that the Treasury, as the guardian of the public purse, has a
major obligation to ensure this. It is important, however, that
once expenditure priorities have been set, departments are left
with the task of detailed delivery. The sorts of situations
described by Sir Michael Partridge, in which the Treasury sought
to determine how departments spent their money, are inimical to
good government and parliamentary accountability.
We are concerned that the structure of the PSA system encourages
the Treasury to micro-manage other departments' business. In this
respect, we welcome the simplification of the PSAs the Government
has recently carried out. The Treasury's recent stress audit referred
to a general perception amongst Treasury staff that the department
retained "an often excessive focus on detail" rather
than on the strategic role it was meant to have.
Not only does the Treasury set global expenditure controls and
take the lead in negotiations on PSAs, the Treasury "monitors
progress against PSA targets" and is best placed to take
action against departments which fail to meet targets, or to change
objectives and targets where necessary.
Mr Gieve told us that "there is not a rule that if you break
your PSA target you lose all of your money" but sanctions
against managers and individual civil servants could be taken.
We recommend that the Government should be clearer about the
incentives and sanctions associated with the PSA system.
32. We do not think it is desirable for the Treasury
both to set the framework within which departments should operate,
using the Spending Review and PSA process, and to act as the sole
assessor of whether or not departments are achieving their objectives.
The current system lacks independent monitoring of whether or
not departmental targets have been met and, within Government,
the means by which departments' performances against their targets
are assessed and responded to are unduly dominated by the Treasury.
In relation to external audit, we detected some recognition by
Treasury officials that the current position was unsatisfactory.
Sir Andrew Turnbull said that, in many areas, "the analysts
mark the exam" because progress against PSA targets could
be measured against publicly available data, such as macro-economic
Mr Gieve argued that "the more parliamentary scrutiny and
public scrutiny the better" and told us that the technical
notes, which provide the definitions and measures underpinning
PSAs, were devised after consultation with the National Audit
Office, the Audit Commission, the Office for National Statistics
and other interested parties.
The same bodies are involved in the Sharman review of whether
or not further mechanisms for external validation are required,
particularly where the statistics used by departments to measure
their performance are not National Statistics. Mr Gieve said the
Treasury was "open minded" on this question although
he emphasised that there already existed "an awful lot of
published, independently validated measurement information".
33. We concluded in 1999 that "the figures reported
for progress against quantifiable targets need to be made credible
by being externally validated".
We remain strongly of the opinion that the assessments of departments'
performance against their PSA targets should be the subject of
external review, by a body accountable to Parliament, such as
the National Audit Office, the Audit Commission, or another body,
rather than the Government. Such a system of audit could show
more clearly where the Government was achieving its objectives,
and where progress was less satisfactory, and stimulate public
debate about the Government's priorities and the policies associated
with them. External validation of the Government's assessment
of its own performance could help build public confidence in the
system of performance management and there is also considerable
scope for Parliamentary input, both into the discussions of why
targets have or have not been met and how the allocation of public
expenditure should reflect this. Mr Gieve is right to point out
that much published information already exists, but it is often
scattered across dozens of departmental reports, forward plans
and business plans and it can be difficult to compare departments'
performance across Whitehall and from year to year. We recommend
that, if the Government appoints an external auditor of its PSA
targets as we suggest, the auditor should publish a concise annual
report showing the progress made against targets by every department
and making recommendations for improvements.
34. External validation is most urgently needed in
relation to the Treasury's own PSA targets because the Treasury
both sets its own targets and measures its own performance. For
example, the Treasury formulates the estimate of trend growth
which it has a target to raise by 2004 and the Chancellor is responsible
for the composition of the retail price index, which the Treasury
has a target to keep at 2.5 per cent. Although, as Sir Andrew
analysts and this Committee are able to scrutinise the Treasury's
handling of the economy, the potential exists for the Treasury
to ensure that its own targets are always achieved or, if they
are not, that the targets are changed in a way which suits the
department. This problem can be overcome by the appointment of
an external auditor. The Audit Commission performs such a role
in relation to auditing the performance of local government bodies
and we have been shown no convincing reason as to why a similar
regime should not operate in relation to central government.We
recommend that, even if the Government decides against appointing
an external auditor for the whole PSA system, the measurements
of performance against the Treasury's own targets should be externally
35. Professor Talbot argued in his memorandum that
the introduction of PSAs could include a "substantial role
for Parliament (through the Select Committees) in scrutinising
plans and facilitating input from key stakeholders. Final decisions
could then be based on much more open, consultative and inclusive
Mr John Garrett wrote that "it would ... be valuable if Select
Committees were invited to specify what they need to monitor the
performance of the departments they shadow instead of having to
put up with whatever the Treasury imposes on them".
Although Treasury officials were keen to stress that Parliament
could be involved in the ex post scrutiny of PSAs, there was no
parliamentary involvement in their preparation.
Nor was there any opportunity for other interested parties beyond
Whitehall to contribute to the development of PSAs in a structured
way. Sir Samuel Brittan warned against having "PSAs put to
committees for prior approval" because "it would lead
to inordinate delays and the special interests would then start
PSAs are ultimately a matter for Government, but we see no
reason why the Government should not invite comments on improving
the current set, or why draft PSAs could not be published well
in advance of the next Spending Review for consultation. We envisage
that the publication of an annual report on the progress made
against PSA targets by an external auditor could give Select Committees
a more explicit role in the development and scrutiny of PSAs,
both ex ante and ex post.
36. We asked several questions of Treasury officials
about how performance against the new PSA targets will be monitored.
Mr Gieve said that a quarterly report would be prepared for the
Public Services and Public Expenditure Committee, a Cabinet Committee
chaired by the Chancellor of the Exchequer and on which the Chief
Secretary to the Treasury also sits.
Unusually for a Cabinet Committee, the secretariat is drawn from
both the Treasury and the Cabinet Office, rather than only from
Mr Gieve said "in effect the whole of the spending side of
the Treasury is supporting the Cabinet Committee".
We are concerned that the Treasury's role within Government
in respect of the monitoring of PSAs is too powerful. The
Treasury must clearly have the leading role in relation to the
control and allocation of public expenditure but it is less clear
why it should also be chiefly responsible for monitoring the progress
made against targets by departments. Mr Gieve argued that "it
is difficult to have an allocating process that does not look
to see what the money is being allocated for. These things have
to be done together. To split them out and say the Cabinet Office
deals with what departments should be aiming to do and the Treasury
deals separately with how much money they have would just lead
to confusion." In the same answer, however, Mr Gieve told
us that "Government objectives are set in a collective way"
and that "we cooperate with the Cabinet Office and,
obviously, with the Policy Unit in Number Ten very closely".
37. We heard evidence on the systems used in Australia
and New Zealand for the allocation of public expenditure and the
measurement of departments' performance. In Australia, the Treasury
is responsible for overall macro-economic policy and sets the
global total of public expenditure each year and the Department
of Finance and Administration negotiates the allocation of resources
between departments and seeks to ensure that value for money is
In New Zealand, the Treasury's role in relation to economic and
budgetary policy is complemented by the State Services Commission,
one task of which is to advise the Government on departments'
performance and recommend appropriate action.
Neither of these systems is necessarily ideal for the UK, and
we heard several criticisms of the New Zealand system, for example
for being too formal or overly based on contracts,
but they demonstrate that there could be scope for the UK Treasury
to share its responsibilities for the PSA system more widely.
38. We recommend that the Public Services and
Public Expenditure Cabinet Committee be reconstituted so that
its dominance by Treasury Ministers is reduced. This could
be achieved by establishing a separate sub-committee for performance
monitoring, chaired by a Minister from a department other than
the Treasury, for example. The advantage of this change would
be to associate other departments more explicitly with PSAs as,
at the moment, their role is somewhat opaque. It would also demonstrate
that PSAs are not simply tools of the Treasury and that the priorities
enshrined in them serve the Government as a whole, rather than
just the Exchequer. The Treasury would, of course, remain concerned
with the monitoring of PSAs and would continue to take the lead
on their development, although with an enhanced input from other
departments. The Treasury's ability to delve inside departments
to influence the management of resources would be lessened, however,
allowing the department to focus on strategic goals, an aim outlined
to us by Treasury officials.