Written evidence submitted by Colin Cram (PROC 22)
Table of Contents
Paragraph 1: Government Procurement Policies: A Historic Perspective
Paragraph 3: Strategic Aims for Government Procurement?
Paragraph 5: Analysing Public Sector Procurement Expenditure
Paragraph 7: Addressing the Structure of Government Procurement
Paragraph 11: Benefits of a Single ‘Crown Commercial’ Organisation
Paragraph 19: Skills and Capabilities
Paragraph 20: Lessons from Local Government
Paragraph 23: Framework Agreements
Paragraph 27: EU Procurement Directives
Paragraph 32: SMEs
Paragraph 35: Project Failures
Paragraph 38: Education and Defence
Appendix: Government Procurement Policies, Extract from 1989 Copy of Government Accounting
Useful Further Reading:
1. Towards Tesco, Colin Cram. Published by the Institute of Directors, March 2010 https://www.iod.com/MainWebSite/Resources/Document/policy_article_towards_tesco.pdf
2. Guardian’s Public Leaders Network, Colin Cram. http://www.guardian.co.uk/profile/colin-cram
· The fundamentals of first class procurement are:
o An agreed set of aims and objectives.
o A comprehensive understanding of procurement spend.
o The right organisational structure, with the right terms of reference, the necessary authority, staffed with sufficient staff of the right calibre and the training and accountability for delivering the agreed aims.
Taken overall, these are absent.
· The history of UK government attempts over the past 25 years can be summarised as desperate attempts to patch up a seriously flawed design. Successive governments have invested in trying to improve the quality and coherence of central government and public sector procurement, but without addressing the fundamental flaws. The results have been disappointing overall, but there are some very good procurement teams and the capability of procurement has generally increased.
· There now appears to be a greater determination in the Cabinet Office to tackle the more fundamental issues in government procurement. There seems evidence of resistance to this by other ‘Whitehall’ departments.
· Public procurement aims, as stated by HM Treasury, have changed little over the past 25 years. They can be summarised as delivering value for money and supporting UK economic growth. They remain largely valid.
· Despite improvements, including several very good procurement organisations and initiatives, the aims have not been delivered overall. There has been limited buy-in by departments and other public sector bodies.
· The investments by the Office of Government Commerce (1999 -2010), in improving the capability of individual government departments, have increased the fragmentation of management of procurement. This has been accentuated by big and uncoordinated investments in procurement by government departments and other public sector bodies.
· The cost to the economy and to taxpayers of this failure to address the fundamental issues of public sector procurement (some £200bn a year expenditure, of which central government’s share is about £60bn) has been huge. Just a 5% overall value for money improvement for the past 25 years would have been worth over £200bn. More effective investment of just 5% of this procurement spend in innovation and economic growth would also have been worth £200bn.
· There is huge commonality in product and service categories procured by different parts of the public sector and in the skills and capabilities required for contracting.
· The benefits of rationalising civil government and wider public sector procurement through creating a single ‘Crown’ procurement organisation would be many and immense – 22 are listed at paragraph 14.
· This could be built organically on the Government Procurement Service.
o This would be consistent with the proposed central government shared services initiative announced recently.
o Within 5 years it could embrace much of the wider public sector.
o It would need to be organised centrally with regional and specialist/functional hubs.
o This would provide a solution to projects issues identified in paragraph 40 of the House of Lords 6th Report of 2012-13, The accountability of civil servants’) http://www.publications.parliament.uk/pa/ld201213/ldselect/ldconst/61/61.pdf
o It should prevent contracting fiascos such as that of the West Coast Line from recurring.
o It will reduce risks of corruption and favouritism – which the national Fraud Authority estimates to be worth some 2% of procurement spend.
· A purchase spend analysis throughout the public sector should be done annually. It is possible to do this despite the diverse finance systems.
· The skills and expertise required mostly exist. The fragmentation of public sector procurement management means that overall they are not used effectively. A coherent procurement structure would enable a gap analysis to be undertaken and any gaps filled.
· Local government procurement remains, despite some excellent initiatives, collaborations and several procurement agencies, chaotic overall. The cost of this lack of coherence is immense, both in terms of money and services to the most vulnerable.
· Framework agreements are normally less than ideal, but will remain necessary for as long public sector procurement remains fragmented.
· Blaming EU Procurement Directives is often a cover for incompetence.
o The EU procurement directives have been responsible for increased procurement professionalism in much of the public sector.
o There is some room for improvement, but overall they do not inhibit the application of best practice.
o Most public sector procurement organisations fail to take advantage of useful provisions in the Directives.
o Without the Directives, it is doubtful if Virgin could have appealed successfully against the award of the West Coast Main Line contract to First Group.
· The government’s initiatives to increase expenditure with SMEs are generally to be supported. There is more that could be done. The ‘aspiration’ should be re-defined and more targeted to link it more clearly with supporting innovation and economic growth.
· The proposed ‘Crown’ procurement should provide a service to ‘free schools’. They are most unlikely to have the specialist skills to do the contracting and should not attempt it. The EU Procurement Directives are a side issue.
RESPONSE TO PUBLIC ADMINISTRATION COMMITTEE’S
‘PROCUREMENT: ISSUES AND QUESTIONS PAPER’
Government Procurement Policies: A Historic Perspective.
1. Government procurement policies have changed little in the past 25 years. In essence, they are about securing value for money and supporting economic growth. Appendix A illustrates this with a copy of the government’s purchasing policies from the 1989 edition of HM Treasury’s Government Accounting. (See also Note 1). They were devised in the early days of the Central Unit on Procurement, set up in 1985 as a catalyst to improve central government procurement, largely as a response to my reviews. Apart from myself, all the procurement professionals were on loan from the private sector. So the policies were developed by private sector personnel who were used to having to deliver a variety of competing objectives in order to ensure the short, medium and long term competitiveness of their organisations.
2. Successive governments have exhorted public sector organisations and procurement personnel to deliver these policies. However, the vast majority of government departments and public sector organisations have focused on the immediate interests of their own organisations, rather than the broader public interest. Government and the rather chaotic wider public sector procurement (e.g. local government, the NHS, education) are not structured in a way that enables coherent implementation. The immense scale of central government procurement spend (excluding the NHS), at around £60bn a year, and a further £125bn+ in the wider public sector, means that this policy failure matters. Just a 5% value for money benefit over the past 25 years could have saved £200bn. Investing an extra 5% of public sector procurement spend into achieving UK economic growth would have been worth £200bn.
Strategic Aims for Government Procurement?
3. There should be five aims:
1) Secure value for money for the taxpayer;
2) Support economic growth;
3) Support departmental and organisational objectives;
4) Provide expert, independent and impartial advice on the best commercial strategies to deliver departmental and organisational objectives;
5) Provide assurance of probity and that best practice has been followed within the department and departmental families, including local government, education and the NHS.
All the above aims have national and departmental dimensions.
4. Defining value for money is complex, but Government Accounting in 1989 provides a good explanation (See Appendix). Measuring value for money is open to distortion. When assessing purchasing performance, the most common measure is price However, reduced prices do not necessarily mean reduced cost. If finance
directors are unable to recycle ‘savings’ either to use in other parts of the business or to enable the business to be run with a reduced budget, price reductions may be
Note 1: Colin Cram, Fuelling the Public Sector Procurement Engine
swallowed up in inefficiencies. This means that the objectives of procurement personnel are often out of line with those of finance directors, which can explain a reluctance to invest in procurement. A focus on price reductions risks distorting procurement strategies towards commodities rather than developing strategies that are much more closely aligned with organisational objectives and may be able to deliver much bigger benefits (See Note 2).
Analysing Public Sector Procurement Expenditure
5. Understanding how the public sector spends its money is fundamental to its effective management. (See Note 3). Despite the multitude of disparate finance systems, it can be done. I have demonstrated three times in very different environments (as Director of the North Western Universities Purchasing Consortium, Director of the Research Councils Procurement Organisation and Director of the North West Centre of Excellence, which covered 47 local authorities) that it is possible to download raw transactional spend data from any finance system, merge it with data from those of other organisations, run the combined data against Companies House databases and thus build a comprehensive picture of procurement spend by participating organisations. This includes total spend, spend by procuring organisation, joint spend by with each supplier (including an understanding of spend with common suppliers), spend into each post code area (hence an understanding of the impact on different local economies), spend with SMEs and spend by commodity/service. The Local Government Association, a couple of years ago, sponsored a purchase spend analysis in which many (though not the majority) of local authorities took part. The Government Procurement Service is attempting to get a greater grip on this for central government. However, the information would appear to be less than comprehensive.
6. Given the importance of the £200bn public sector procurement spend, one would expect such an analysis to be done at least once a year throughout the public sector. Imagine the consequences to ‘Tesco’, for example, of not having such data. There is great commonality of types of spend and suppliers throughout the public sector. The lack of a comprehensive database is a fundamental failure.
Addressing the Structure of Government Procurement.
7. There has been a long term failure by successive governments and senior managers in the public sector to address the fundamental flaws in public sector procurement. Instead large sums of money have been invested in patching up procurement. Despite improvements, this investment has not delivered the hoped for results.
8. Part of this investment was to encourage collaborative procurement between government departments. The continuation of HM Treasury’s Central Unit of Purchasing (paragraph 1 refers) beyond its original 3 year life resulted in only limited
Note 2: Colin Cram, Procurement can help public managers boost economy
Note 3: Colin Cram, What happens to our £220bn annual procurement spend?
collaboration. Following a review by Lord Gershon in 1999, the Office of Government Commerce replaced it with a much larger budget of 10s of £m. Despite some very good initiatives, such as the ‘Gateway’, too much of its resources were spent trying to improve the procurement professionalism within individual government departments; this increased the fragmentation of central government procurement, but produced an excellent income for consultants. The result was big and uncoordinated investments in procurement organisations by most central government departments, the creation of tens – possibly hundreds of heads /directors of procurement positions, a big increase in training and big increases in salaries and grading. Many will have a vested interest in arguing for minimal change.
9. The questionable nature of this investment was clear when the present government came to power in 2010. The value of central government procurement spend was not known, the percentage of procurement spend with SMEs was not known and Francis Maude was able to negotiate savings, ‘cash-backs’, of £800m with government suppliers, that had hitherto been dealt with separately by each department. The downside of this negotiation is that a senior person who works for one of those companies indicated recently to me that they hoped to recoup this money from the rest of the public sector, where the procurement spend is managed even less coherently. It is worth noting that the expenditure with these suppliers is frequently greater in the wider public sector than it is in central government, hence an argument for a public sector wide approach.
10. The present government, through the Cabinet Office, has more vigorously tried to pull things together and greater joint procurement is beginning to take place, for example through the Government Procurement Service taking over the Home Office Procurement Centre of Excellence and its partnership with research councils procurement to provide support to departments with the delivery of high value and more complex procurements. DWP is providing a procurement service to several smaller departments.
Benefits of a Single ‘Crown Commercial’ Organisation.
11. Creating a single ‘Crown Commercial’ or ‘Crown Procurement’ organisation would address the weaknesses. The model would be a central procurement hub, serving the whole of central government and, ideally, the wider public sector. To serve the wider public sector would also require regionally based offices and specialist category teams. The rationale and how this could work is described in more detail in ‘Towards Tesco’, commissioned by the Institute of Directors in 2010. (See Note 4) This has attracted attention internationally. (See Note 5)
12. There is plenty of evidence to support this proposal from my experience of creating joint and collaborative procurement organisations. For example, the procurement savings from my creation of a single procurement organisation for the Benefits Agency in the early mid 1990s worked out at around 15-20% overall (£50m) against an annual spend (excluding major one off contracts) of around £300m. This
Note 4: Colin Cram, Towards Tesco: https://www.iod.com/MainWebSite/Resources/Document/policy_article_towards_tesco.pdf
Note 5: Colin Cram, Hands on approach to procurement
saving was largely against previously tendered contracts. Two years after I left the research councils, having created a joint procurement organisation serving 5 of them, the management board for the joint organisation minuted that the initiative would save £170m in 10 years. This would be achieved without the introduction of new IT.
13. In 1996, the then Director of Procurement at Inland Revenue, John Cavell, and I (as Director of Contracts at the Benefits Agency – covering the Department of Social Security as a whole) assessed that given the commonality of procurement – commodities, services, suppliers, together with the common expertise requirements of the teams, there could be merit in creating a joint procurement organisation to cover both departments. A study was commissioned and undertaken by Dr Brian Farrington, formerly head of St Helens Business School. He concluded that there was an overwhelming case for the proposal. However, internal politics prevented it from going ahead. Had it done so and proved successful, other central government departments would almost certainly have joined and the creation of a single powerful and effective procurement organisation for central civil government would have occurred naturally. Total potential benefits since then would have been £billions – possibly £10s of billions - a great opportunity missed and a huge waste of taxpayers’ money.
14. Benefits of a ‘Crown Procurement’ organisation would be immense and should include
· Consistent standards, processes, procedures and contracts documentation.
· Consistent interpretation of the law and EU procurement directives.
· The costs of procurement and the numbers engaged in it would be known (which they are not at present).
· Breaking down silos between departments to ensure that projects and programmes that are interlinked, or potentially inter-connected, are harmonised and a coherent procurement strategy developed.
· Independence, to be able to challenge departmental commercial and procurement strategies, including project concepts and implementation.
· Independence, in order to bring objectivity to all procurement and commercial decision making and reduce the risk of corruption and fraud. (See Note 6).
· Defined and agreed levels of service. Service level agreements with each department would define both the services to be provided and the responsibilities of departments (legal and practical responsibilities) to enable a first class service to be provided).
· Performance Measurement: A consistent, transparent and auditable approach.
· Specialist teams to manage key markets and major suppliers.
· Capability and assurance that projects are supported by first class procurement strategies and practice (This would solve the problem identified in paragraph 40 of the House of Lords 6th Report of 2012-13, The accountability of civil servants’). http://www.publications.parliament.uk/pa/ld201213/ldselect/ldconst/61/61.pdf
Note 6: Colin Cram, Samuel Pepys’ Procurement Principles for Defence Chiefs
· Specialist teams to manage major contracts and the procurement element of projects, thus ensuring continuity and solving the problem highlighted by the House of Lords report referred to above.
· Oversight of the market to reduce the risk of cartels (Paragraph refers).
· Consistent specifications, ensuring that divergence from these are the exception.
· Much easier for suppliers to engage with government, knowing that they were always dealing with first class professional teams who understood their business and markets.
· Accountability for delivering government policies and results.
· Ability to take on companies that avoid UK corporation tax (See Note 7).
· Accountability for delivering departmental objectives.
· Support for and consistency with the proposed back office shared services initiative (announced in the past few days) for central government departments.
· Procurement research capability.
· Ability to implement more evidence based procurement policies (See Note 8).
· A complete inventory and gap analysis of skills and expertise.
· The possession and further development of the expertise needed.
· Good career paths and personal development for procurement staff, thus retaining expertise.
15. Based on my experience of creating joint procurement organisations, the number and cost of government procurement staff would be reduced by a good 20%, whilst at the same time being able to increase the number of contracting staff, i.e. increasing the expertise available.
16. Notwithstanding the growth of some powerful and respected procurement teams in the largest departments such as Revenue and Customs and DWP, most of the benefits mentioned above are largely lacking at present. The argument for a single ‘Crown Commercial’ organisation would seem overwhelming.
17. The major departments would need to retain commercial directors to develop and oversee the commercial strategies with the departmental stakeholders and ‘Crown’ procurement.
18. Oversight by the National Audit Office would be essential. There would need to be oversight also by a management board consisting or representatives of the major departments plus 2 or 3 from medium sized and smaller ones. There is an argument that such a board should be chaired by a member of HM Treasury.
19. The proposed organisation could be developed by the Government Procurement Service taking over responsibility for all the procurement of smaller and medium sized departments and eventually the largest ones. At the same time, there is huge
Note 7: Colin Cram, Taking suppliers’ tax payment into account on public contracts
Note 8: Colin Cram, Public procurement: Time for evidence based policy
commonality between what is purchased and the supply base of the wider public sector. So the GPS should take over the procurement of those bodies also.
Within 5 years time, UK public sector procurement could be transformed and could be genuinely the envy of the world.
Skill and Capabilities
20. Fragmentation of government and public sector procurement generally, means that procurement skills between (and sometimes within) departments are unevenly distributed and tend to be available only to those organisations in which they reside. Smaller departments – i.e. the vast majority, will not be able to afford enough people with the specialist capability and skills for all occasions. So, they either make do with what they have got (and risk sub-optimal results) or employ consultants. Even if they
could afford the specialists, their specialist knowledge and skills would be under-
used. Therefore, only the very largest departments or specialist organisations can have a procurement organisation with sufficient critical mass to possess all the expertise and skills required and to be able to sustain this through developing staff. (See Note 9) A coherent procurement structure would enable a satisfactory gap analysis could be done and a much more focused and cost effective training programme designed to embed world class practices.
Lessons from Local Government
21. There are some examples of very good practice in local government. However, the procurement capability of local authorities varies and the majority have insufficient spending power to secure value for money. Overall, local government procurement remains pretty chaotic and collaboration is weak.
· Excellent initiatives on construction by Hampshire County Council and SCAPE indicate potential savings of 20% if all councils joined in.
· The lack of coordination of social care procurement is responsible for failing to prevent the Southern Cross care homes scandal and the children’s’ homes scandal in Rochdale and elsewhere (See Notes 10 and 11).
· Lack of joined up working in the NHS and local government enabled construction cartels to flourish (See Note 12).
· There are some superb initiatives on waste collection and management, the unitary council of Cheshire West and Chester saving over 35% through innovation and merging the services of several former councils. If all councils worked together on this the benefits could be huge.
· There is increasing collaboration through purchasing consortia.
Note 9: Colin Cram, Lord Heseltine’s expensive ‘sticking plaster’ for public sector procurement
Note 10: Colin Cram, Care home procurement model fails vulnerable children
Note 11: Colin Cram, Coordinating Social Care Procurement
Note 12: The Telegraph, Construction cartel ‘may have cost taxpayer £300m’ http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/2788332/Construction-cartel-may-have-cost-taxpayer-300-million.html
22. There is some evidence that EU procurement directives may be tested by some of the large back office outsourcings and where chief executives seem able to over-ride effective competition in favour of their preferred supplier. This can make it virtually impossible for new and innovative suppliers to break into the market.
23. The lessons from local government are that joined up services can deliver very large savings. However, failure to implement joint procurement wastes large amounts of money and can deliver poor services.
24. In the absence of joint procurement, framework agreements can assist in securing better value for money. The major part of the tendering exercise is done
once on behalf of all who intend to use it. That is good for suppliers as well as saving duplication and public sector resources. However, the lack of commitment from those organisations seeking to use the frameworks means that volumes cannot be guaranteed and so suppliers will rarely offer the best prices. The Government Procurement Service should be able to use the leverage of central government departments to secure best value, of which other parts of the public sector would wish to take advantage. However, the latest GPS procurement spend figures suggest there may be some backsliding. If all departments (and, ideally the rest of the public sector) committed, value should be unbeatable. For example, the Government Procurement Service was recently able to use its leverage on photocopiers, delivering savings of up to 50%.
25. An alternative to frameworks is to let contracts for use only by those
organisations that are prepared to commit up front. I introduced this when Director of the North West Universities’ Purchasing Consortium and this has delivered some large benefits.
26. In conclusion, many of the framework agreements are necessary because public sector procurement is not joined up.
EU Procurement Directives
27. Blaming the EU Procurement Directives is often a cover for incompetence. There is much mythology about them. They have compelled many public sector organisations to improve procurement standards. They have enabled good procurement directors to argue for more resources and authority. They provided Virgin with a right to appeal against the award of the West Coast Main Line contract to First Group and the standstill period of 10 days meant that Virgin had time to appeal (See Note 13). They have forced much more discipline in processes, for example, having to determine evaluation criteria and weightings at the start of the process – very sensible and a means of reducing corruption and favouritism. EU Procurement Directive timescales are short.
Note 13: Colin Cram, West Coast Rail Fiasco. http://www.guardian.co.uk/public-leaders-network/2012/oct/03/west-coast-rail-fiasco-procurement
28. Opportunities allowed by the EU procurement directives to be more entrepreneurial are often not used by most UK public sector contracting authorities. Pre-commercial procurement, i.e. discussions with industry before the formal procurement process starts are a good example. The Dynamic Purchasing System has rarely been used (though some simplification would help).
29. In local government, councils’ legal teams tend to interpret the directives differently, some taking an overly cautious approach. This problem exists to some degree in other parts of the public sector. Consistent interpretation is essential – another argument for a public sector wide procurement organisation.
30. The directives make establishing partnerships with suppliers more difficult and some of the timescales for re-tendering of procurement agreements for repeat purchases or contracts for services are short.
31. It is often argued that EU thresholds for tendering are too low. However, central government and the NHS are governed by the much wider international GPA agreement, the thresholds of which are lower. So, increasing the EU thresholds will have little impact on central government and the NHS.
32. It has been government policy for over 25 years to increase public sector spend with SMEs. This was because of assertions in the mid 1980s in the USA that SMEs were the main drivers of increased employment. More recently, in the UK it has been argued that SMEs are more innovative than other suppliers and so can further drive economic growth. Little or no progress was made until the current government. It has introduced various practical initiatives to increase the proportion of spend with SMEs. However, there has been confusion over the target and whether it is an aspiration. Also, it is not clear that increasing the proportion of spend with SMEs will deliver the benefits of innovation and economic growth that the government is seeking (See Note 14 and the House of Lords Science and Technology Select Committee report ‘ ‘Public Procurement as a Tool to Stimulate Innovation).
33. There are many more things that the government could do to increase spend with SMEs and drive innovation. I am drafting a 15 point list of actions – in addition to those that the government is already taking - that the government could adopt to achieve these objectives (See Note 15).
34. However, there seem to have been some question marks over the reliability of central government’s data on spend with SMEs. It would make sense to sponsor research to understand better the relationship between SMEs, innovation and economic growth. This, together with a detailed and comprehensive purchase spend analysis would be helpful in assessing where the focus should be, what a meaningful target should be and how it could be achieved.
Note 14: Colin Cram, Government focuses procurement on SMEs, but problems lie elsewhere http://www.guardian.co.uk/public-leaders-network/blog/2011/mar/23/government-focus-smes-problem-innovation
Note 15: Colin Cram, Time for public sector action on SME procurement spend
35. Cost over-runs occur for a variety of reasons:
1) Deliberately under-estimating the cost in order to get a project agreed, knowing that once started the finance will be found to cover the escalating costs.
2) Uncontrolled changes to specifications – extras, amendments etc.
3) Poor project management and procurement.
4) Poorly researched business case. In such instances procurement may not have the independence or capability to challenge effectively.
5) Deliberate over-statement of the potential benefits (by £170m in at least one project recently criticised by the NAO).
6) The possibility of corruption cannot be ignored. There have been several cases in the USA of projects going ahead when they shouldn’t, due to corruption. The UK seems to be rather naive about the possibilities. If any senior person obtains work, on retirement or after leaving the public sector from a supplier that could have benefited from their policy or other decisions, the possibility of corruption should be considered as a matter of course. Equally, what appears to be incompetence, such as what happened with the West Coast Rail contracting, must be considered as a possibility for corruption. Only through the ability to challenge under the EU Procurement Directives, were the serious contracting issues identified. (Note 12 refers)
7) A failure to understand the changes needed to the organisation and to the roles of people within it in order to secure the benefits. This is common with outsourcings and has been identified as an issue in a yet unpublished paper by the Manchester Institute of Innovation Research at Manchester Business School (Part of Manchester University).
8) Over-optimism by suppliers.
36. It is astonishing that such problems continue to occur. The introduction of the ‘Gateway’ reviews in about 2000 should have prevented this. The West Coast Rail project was ‘Gateway’ reviewed. It is not clear from the Laidlaw report why the Gateway reviews failed to spot the issues.
37. Introducing the ‘Crown Commercial’ organisation recommended above would reduce the risk of projects going ahead that shouldn’t. The risk of projects not being managed and implemented properly would be much reduced. Such an organisation would be able to ensure that expert teams remained responsible for the contracts management throughout their life. This would provide a solution to projects issues identified in paragraph 40 of the House of Lords 6th Report of 2012-13, The accountability of civil servants’) http://www.publications.parliament.uk/pa/ld201213/ldselect/ldconst/61/61.pdf
Education and Defence
38. Either the Government Procurement Service, the Department of Education or the proposed ‘Crown’ procurement organisation should provide a contracting service to ‘free schools’. They are most unlikely to have the specialist skills to do the contracting and should not attempt it. The EU Procurement Directives are a side issue.
39. The idea of a GOCO for the Ministry of Defence is an interesting idea and needs to be properly explored. (See Note 16)
Note 16: Colin Cram, A GOCO offers a good deal to the MOD