Can local government save 20% on what it buys?

There has been a lot written over the years about public sector procurement, especially about the view that public bodies could get better deals than they currently have. As someone who has worked in public roles I know that the bodies seek the best value for money they can find, as far as the constraints on them will allow.

The fact that public money is involved means high standards of probity are expected. And for all but the smallest contracts (and anything involving national security) the EU’s procurement regime requires that the opportunity to bid for the contract is offered to any interested firm or person in the 25 member states. A public manager receiving tenders for some goods or service might feel that they could have negotiated a better deal but they would be reluctant to use negotiation for fear of being suspected of bribery or corruption. It’s rather like the adage that no-one got fired for buying IBM. In the public sector no-one gets fired for going out to tender and accepting the lowest bid.

The report referred to in this article by Ben Goldacre does not, in my opinion, help the situation. Making a sweeping generalisation from a small sample of data (if there is any data at all) is methodologically flawed. Perhaps the consultants have more data than they put in their summary report and it is not their fault that DCLG have broadcast in the way they have but the way to identify potential savings requires a detailed review of an organisation’s pattern of spending.

Experienced, knowledgeable procurement managers can analyse which products and services are being acquired, what the current terms of the contracts are and compare them with benchmarks. They might well identify some areas where the organisation could save 20% of its spending but I would be surprised if any organisation’s contracts were universally expensive. It is more likely that an organisation will have a poor deal on products A, B and C but have really good deals on D, E and F. This is because the price that the organisation gets depends on how the deal was procured, the timing, the extent of competition, the appetite of bidders to offer discounts, etc. What this means is that the potential for making savings through procurement is unique for each organisation.

This is also why moving to consolidated contracts might not save as much as predicted (by Sir Philip Green, for example). If a group of organisations form a consortium to procure something there is a chance that some of the organisations could have got a better deal for themselves than the consortium achieved. This used to be the case with schools when I worked in local government I presume it still is the case. A large secondary school might get a great deal on photocopiers. The smaller primary schools would like to get such a deal so they all club together with the secondary school. The consolidated contract prices might result in a lower average cost for the whole consortium but the cost to the secondary school goes up to “subsidise” the primary schools. If you were the headteacher of the secondary school and were under pressure to keep your spending down would you voluntarily offer to pay more for a service in order that your counterparts in primary schools benefit?

When local authorities controlled all their schools they could enforce this sort of deal (and adjust individual school budgets accordingly) because the authority benefited from the lower average cost. But now it is every school for itself—and every hospital, police station, fire station, library, etc—we are inevitably going to get some sub-optimal deals. Nevertheless, public managers should continue to get the best value for money deals that they can.

I paid my taxes, what do I get in return?

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For the last year Eric Pickles has been talking about the citizen's inalienable right to have their domestic waste collected each and every week. I don't want to comment on the stories about whether or not there has been an increase in the rat population since many councils moved to fortnightly bin collection (although I cannot resist mentioning that this kind of increase in efficiency in any other local government service would be celebrated rather than chastened). What I do want to comment on is the following statement from the Telegraph:

Yet for many people, a bin collection is the only service they receive from the council – and one for which they have to pay on average £120 a month.
Statements like this annoy me. Of course there are some council taxpayers who do not have children of school age or elderly relatives receiving social care but even so they receive more services than refuse collection. They breathe clean air, drink clean water, perhaps buy food from restaurants and take-aways, walk or drive along illuminated roads at night, enjoy the view across greenbelt fields. All of these activities are provided, regulated or monitored by local councils. And they cost money. 

So, is paying £120 a month for council services too expensive? For some people, it is a terrific bargain. Their children (or grandchildren) are receiving an education for much less than a private school would cost. Not only that, the use of the average cost disguises the fact that people living in lower value houses (who one would expect are relatively poor) pay much less than the average. In fact, the poorest would pay no council tax at all because they are in receipt of welfare benefits. Of course, some people pay a lot more than £120 a month, and they might very well decide to opt out of the local council-run school and pay for private education. That's their choice. What all this illustrates is that the amount paid in tax has nothing to do with the services received.

This is because taxation is the classic example of a “non-exchange transaction”. In a free market the buyer and seller exchange goods and an amount of money that they regard as equivalent (or they exchange goods for goods in a barter system). If they did not regard the exchanged items as being equivalent they would not go through with the transaction. Taxes don't work like that. Government assesses the amount of tax due and collects it quite separately from the government's spending activity. In the UK, Her Majesty's Revenues and Customs brings the money in, lots of other departments spend it. 

One of the issues facing a government as a result of the disconnect between taxes paid and benefits received is to impose taxes that are regarded by taxpayers as fair. By way of example, I think the principle of an income tax regime where the wealthier pay more in tax than the poorer is accepted by most people as fair, albeit that they might have different views about the actual tax rates that apply. But if a government fails to maintain a tax system that is seen as fair then they risk non-payment, or worse. Look at what happened with the community charge in the early 1990s where public antipathy to what was effectively a poll tax led to civil disturbances and the end of Margaret Thatcher's prime ministership.

All of this means that on the whole local people have to feel that what they get from their local council is value for money. Because central government has reduced its funding of local government what we are seeing now is a reduction in the service received by local people but no corresponding reduction in the council tax they pay. That will surely mean that more and more people begin to feel that they are not receiving enough in return for their taxes. I think something similar will happen with other public services, such as healthcare.  People are paying more now in taxes because income tax rates and VAT went up and are getting less service. Sooner or later this will lead to a problem for central government and they'll be stuck. Do they cut taxes or increase spending on public services? Whichever way they go they would increase the budget deficit (in the short term at least).

I'll end with a quotation from Franklin D. Roosevelt that I think is a reminder of why taxation is important: 
taxes are the price we pay for the privilege of living in a civilized society.

Outsourcing is a risky business

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Outsourcing services from public bodies to private sector providers has lots of positives. Depending on the service and circumstances it might enable capital investment, provide access to new technology, improve customer satisfaction and/or save money. The negotiation of a contract also enables the parties to agree who is best placed to manage the various risks connected with the service. This means that that some of the risks that have hitherto been faced by the public body can be transferred to the private sector provider to manage. Typically these will be operational risks relating to hiring, training and managing staff, managing the supply chain and so on. But for all the risks that can be transferred, to the benefit of the public body, outsourcing brings with it a new risk: that the private sector supplier may fail to deliver the services. If that happens the public body (or some part of government) will be forced to step in if the public are to continue to receive their services, in just the way that this article suggests may happen with Southern Cross.

I'm not saying that outsourcing should not happen. I think, though, that politicians and public managers should recognise that things go wrong and should manage their suppliers to try to prevent failures by, for instance, putting sufficient resources into the team that monitors the suppliers' performance. It also means having a contingency plan in case the worst happens. Easier to say than do, I know, but then managing any public service is easier to say than do and that's why public managers should be better paid. But that's a different story ...

Red tape is good

Well, I guess not all red tape is good but much of it is, as noted by Richard Murphy in his tax research blog.

The public sector exists because there are services and products that society wishes to benefit from and which a free market would not provide (or might under-provide). There are many regulations implemented by governments which are designed to ensure that the public gets what it wants. For example, there are price controls in place on services like water and electricity supply, health and safety laws to ensure employers spend money of protecting their employees and so on. When I was a finance director I often heard from colleagues that we should get rid of the bureaucracy. I would reply that some bureaucracy is a good thing: the procedures that ensured staff were paid accurately and on time, for instance. I acknowledge that bureaucratic procedures might be improved and made more efficient but I find it difficult to see how they could be abolished.

Government ministers like to pledge to cut red tape. The Labour government has a Better Regulation Task Force which subsequently because the Better Regulation Commission. And when he was vice-president of the USA, Al Gore headed the National Partnership for Reinventing Government. These sorts of programmes sound like a sure-fire winners: surely everyone hates red tape and wants to be rid of it? Well, it seems that Vince Cable's Red Tape Challenge has uncovered the fact that the public want to keep regulation. That'll be a difficult problem for Cable and David Cameron, not least because there will have been an assumption that cutting red tape would save money. If they keep the regulations they will have to keep the regulators.

Spend less, create more social value

David Cameron delivered a speech today which has been reported as being another relaunch of his 'Big Society' policy. Towards the end of his speech, though, he mentioned something which might have a fundamental effect on public services in the UK. He said:

We are revising the Green Book – the basis on which the Government assesses the costs and benefits of different policies – to fully take account of their social impact. We are developing a new test for all policies – that they should demonstrate not just how they help reduce public spending and cut regulation and bureaucracy – but how they create social value too.

Nothing was said about how social value would be assessed but the previous government's Cabinet Office was involved in the production of a paper on social return on investment which identified several ways that monetary values can be estimated for intangible costs and benefits. I assume that whatever method is recommended in the new Green Book (which perhaps will be a Blue Book) it will result in social value being estimated in money terms. 

If we assume that public bodies only wish to spend public money on projects or services that they believe will generate some intangible social value then an evaluation process that includes the social value is likely to indicate that more projects are worth while than an evaluation process that focuses only on the cash payments and subsequent income and/or cash savings. Such a situation would be a problem for the government, though, because it wants to keep public spending down. It does not want its own departments, local authorities, police forces, hospitals, etc putting forward proposals for all sorts of schemes that would create lots of social value but require lots of investments.

Hence, I think, Cameron's comment about projects reducing public spending. What the government wants, it seems, is to invest in projects which both save money and create social value. Such projects are difficult to find. We have seen over the last few weeks as the impact on budget cuts take effect that spending less money on public services means that less social value is produced. Indeed, it is exactly what one would expect because it is the reverse of the situation where a government minister is under pressure to tackle a social problem they say they will deal with it by announcing some additional spending. 

Cameron suggested that the review of the Green Book might be 'quietly radical'. It remains to be seen whether it is radical in the sense of resulting in more and better investment by the government or radical in the sense of cutting back on public investment.

Competing for public audits

What does the OFT’s announcement that the audit market should be investigated by the Competition Commission mean for the audit of public organisations? When Eric Pickles announced in August 2010 that the Audit Commission would be abolished he stated that public organisations should be free to choose their auditors. One possibility is that the Audit Commission's own audit arm (formerly known as District Audit) could be floated off in some form to compete with the existing audit firms. I believe that Pickles's department has hired some management consultants to advise on how that might happen.

The abolition of the Audit Commission is, in its way, a classic piece of Conservative market deregulation. My personal view is that, generally speaking, market regulations were imposed by governments for good reason and deregulation makes things worse for most people, whilst allowing a few to make a lot of money. There are too many cases of deregulation resulting in a bad deal for consumers (eg price rises) if not worse (Enron-type frauds and scandals). Once local authorities and NHS trusts are in a position to choose their own auditor I am sure that the larger ones—the county councils, London boroughs, metropolitan boroughs, major acute hospitals—will receive suits from the 'Big Four' as well as some of the smaller firms. The process will be a beauty parade. The codes of practice that set out what comprises the audit of a major organisations means all the firms will provide the same service so the client organisation will pick the one they fancy. In the first year or two they might also get a good discount on the fee.

What the practice of the FTSE 350 companies shows is that once an audit firm is hired they very rarely are replaced. I suspect that's because there's little incentive. All the firms do more or less the same thing and charge more or less the same fee so why would a client organisation spend the time and trouble to have a new beauty parade every five or seven years? And if a new firm were selected as a result there would then be an element of disruption as the new auditors found out all they needed to know about the client's business and accounting system and so on. It's rather like changing your bank. Even if you could get a cheaper deal from a different bank, it would have to be a very significant improvement on your current deal for it to be worth the trouble of moving all your direct debits and all the rest of it.

Whilst the larger public organisations can look forward to being enticed by the Big Four audit firms I doubt that the smaller district councils, the ones whose budgets are still £10–20million and so are substantial organisations in their own right, will. They might see much the same effect, though, from the small and medium-sized audit firms who would be happy to have a regular income from organisations that will pay their bills and never go bust.

If the Audit Commission's audit division is floated off as a stand-alone organisation (New District Audit, perhaps?)then I expect it would compete for all shapes and sizes of audit. Its unique selling point would be its specialism in public sector audits and I expect that it would win some of the business. Prior to the Audit Commission's creation, local councils could choose between being audited by the District Audit or by a 'professional auditor'. (Back then hospitals were not part of trusts and the whole of the NHS was audited by the Exchequer and Audit Department, which was renamed the National Audit Office in 1983).  When local government was reorganised in 1974 202 boroughs had moved over to the professional audit, while 119 use the District Audit (Coombs and Edwards, 2004: 82). (There were 21 others who used the antiquated system of electing local people as auditors, a practice which I don’t think the secretary of state, or anyone else, is proposing to reinstate.) So back then the private sector held about 2/3 of the local government audit market. During its tenure the Audit Commission has favoured its own auditors with about 70% of the market. Would a stand-alone ‘New District Audit’ be able to hang on to 70% of the market. I doubt it. At least, I doubt it in terms of fees. There are about a thousand principal councils and NHS bodies currently audited by the Audit Commission (and many thousands more parish councils). The New District Audit might be able to win 70% of them as clients but the professional firms will focus on the bigger, more valuable clients and I can well imagine that they might secure 70% of the fees. And once they are in they’ll be very difficult to replace.

Reference: Coombs and Edwards, (2004) The audit of municipal corporations—a quest for professional dominance. Managerial Auditing Journal, 19(1), 68-83.