Involve The National Audit Office in Project Planning

So, two weeks have passed since the revelations of the latest (known) public sector IT disaster, and related wasted expenditure. But I'm willing to bet that nothing has changed in the way projects are planned, and we'll see many more juicy stories in future.  

Perhaps some kind of pre-emptive strategy would be in order...? 

Surely the National Audit Office is by now rammed with people who can spot the seeds of doom in just about any public sector IT project it cares to look at. So why not involve them at the start?

Forget all this talk of economic recovery, only the civil servants can save us now.

BS2 and The Planning Fallacy

In his excellent book Thinking, Fast and Slow, Daniel Kahneman explains that governments tend to reward bidders who over-estimate the utility of large-scale projects, while under-estimating the cost. This is known in the trade as "The Planning Fallacy". While Kahneman cited research that demonstrates the fallacy in relation to many railway procurement exercises over many years, we also saw if firsthand recently in the West Coast railway fiasco. Now the government is trying its hand again, with BS2 HS2.

The Planning Fallacy suits all those involved, except commuters and taxpayers. At the time of the West Coast debacle, costs were about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, had reached approximately £7 billion per annum. Approximately 10% of trains didn’t arrive on time. Only 42% of rail customers were satisfied with value for money for the price of their ticket. Only 69% said there was sufficient room for all passengers. And only 80% of rail customers were satisfied with punctuality.

This spring, the figures don't look any better. In fact, only 29% of UK commuters thought they got good value for their rail fares. Adding a fancy new rail project doesn't seem likely to fix their day-to-day experience.

There are numerous hard-headed dismissals of the alleged viability of HS2, including John Kay's piece yesterday. And it wasn't reassuring to learn from a Channel 4 news interview with the Transport Secretary that he has set aside a £14bn 'contingency' in an apparent budget of £40bn. It smells like 'waste' to me.

There must be ways to spend that kind of money to improve the lot of today's commuters, rather than saddling the next generation with a whole load of BS.

PAC Fiddles While Public Money Burns

This week saw the publication of two reports that highlight the woeful set of priorities that govern the activities of the Public Accounts Committee and the media bandwagon that follows it. 

The first was the repeat of PAC's outrage over Google's international tax affairs. It seems we really are expected to believe that (1) these MPs are unaware of the rules governing where a company is 'permanently established' under OECD/UN Conventions and other tax treaties; (2) that the amount of additional tax that Google might have otherwise paid on about £3bn a year of revenue during 2006-2011 would have saved the UK economy; and (3) the UK does not benefit from the application of these rules to its own firms in other jurisdictions.

The second report came in the form of the lastest Bumper Book of Government Waste (itself hardly 'new'), which highlights yet again the £120bn that the public sector burnt last year for absolutely no benefit whatsoever.

With priorities like these, we should add PAC's own budget to the bonfire.

Only Civil Servants Can Save The British Economy

That's the conclusion I reach from reading Lord Young's report on Growing Micro Businesses. The report makes it clear that government plans to fund small business growth and harness public spending power are still medium term options. Absent substantial growth, all we can do in the short term is make sure our tax revenues aren't wasted on a day-to-day basis. Can our public sector colleagues plug the leaks?

The scenario

Public spending is still roaring away at 44% of UK GDP and tax revenue barely exceeds 35%. This represents a yawning chasm that remains to be filled with higher taxes and/or spending cuts - unless GDP grows substantially faster. This would make public spending less of a drag on the economy (35% is the ideal number) and produce more tax revenue to pay off public debt and narrow the deficit. Unfortunately, the productive economy is limping along, largely due to problems in the UK (and EU) banking systems. This is particularly bad for the UK, as businesses rely on only a few major banks for over 90% of funding.

The growth strategy

Unable to improve the flow of funds to the productive economy via the banks, Lord Young's report reveals that the government's growth strategy depends heavily on educating over 4 million small businesses about alternative ways to finance increased production and employment, and using public sector procurement to buy more from those smaller businesses. Theory has it that, as they grow, the rest of the private sector will also benefit, and away we go...

Awareness of alternative finance

Unfortunately, Lord Young notes that the government is yet to come up with "a robust, evidence-based strategy for communications to all micro, small and medium sized businesses" to explain the alternative funding options available. Some money is being offered via alternative finance platforms, which leverages their private marketing spend, but apparently the government still needs to issue more information on support schemes via Gov.uk (the 3rd attempt at a government portal).

However, educating SMEs about non-bank funding options is only one side of the equation. Success also depends on persuading mainstream savers and investors to put money into alternative channels. This collides with the £400bn ISA programme, which massively subsidises bank deposits and regulated investment funds that don't support the productive economy. Countless people have explained this particularly vicious circle to the government. But the Treasury seems determined not to level the playing field, either by extending the ISA scheme to include alternative financial services or by reducing the size of the incentive that favours only bank deposits and regulated funds.

This is a problem that seems unlikely to be resolved any time soon.

Smarter public procurement

So where are we on the road towards smarter public sector procurement?

Unfortunately, the smarter procurement drive is mired in the need to "simplify and standardise procurement practice across all parts of Local Government, health trusts and the wider public sector".

This seems an enormous challenge. The next step, for example, is to initiate consultations on reforms to public sector procurement standards...

So actually getting the public sector to buy more from SMEs from the top down is likely to be a very long way off.

The last card - plugging the leaks

That leaves only one option in the short term: civil servants spending less and more wisely.

That doesn't mean slashing welfare payments, and so on. It means wasting less money in the context of the £166bn the public sector spends on its own goods and services.

Surely not all of this needs formal consultation. I mean, isn't it partly a mindset? Thriving private sector businesses recognise the need for constant change to remain aligned with their customers' evolving behaviour and changes in the market, and public sector organisations face the same challenge. Yet we hear little about how the public sector evolves to be more customer-aligned and efficient. Do public sector workers realise the scale of the opportunity to help? Surely they aren't resistant to the idea - after all, they must be among the most publicly spirited people in the country...

It's unfortunate that the public focus is preoccupied with the other side of the government balance sheet. It seems such a waste of time and resources to get distracted by the moral panic about how much more tax foreign corporations should pay, when we could be getting so much better value for the crushing amount of tax that each of us already pays personally.

The process of hauling people before the Public Accounts Committee alone costs money. And we have to be mindful that reforming international tax treaties will rest on the shoulders of public sector staff who may well spend, very inefficiently, huge amounts on travel and other services in the negotiation process. 

Ironically, even the argument about extra tax revenue demonstrates why it's critical to fix all the holes in the bucket before pouring more money into it.

Submarine Welfare

The Tory spin machine was in overdrive today, with the Chancellor linking a fatal house fire to excessive social welfare payments, while the Prime Minister used the recent bout of North Korean toy-throwing as the kind of "extreme threat" that justifies Britain's entire nuclear submarine programme. Hell, why don't we just pay for Trident straight out of the welfare budget and be done with it?

Given the gravity of the UK's economic predicament, you might have thought our political leaders would be sticking to hard facts, rather than inciting moral panic. But you'd be wrong. Party politics is all about cynically exploiting fear and greed:

"while narrowly targeted policies will fail to draw on the strength of middle-class political pressure to defend welfare, policies with wider coverage actively recruit the sharp elbows of the middle class." Source: The Solidarity Society: why we can afford to end poverty, and how to do it with public support. Fabian Society, 2009

That's right, the Tories have been tearing pages out of the Left wing playbook, even if they're trying to work the same trick in reverse. Blame all bad stuff on the welfare state, so most voters will want to spend less on it.

Ironically, the Left seem to think they got this idea from the Right, as explained by Rhiannon Lockley in her “Red Book” essay on "Understanding the Psychology of the Working Class Right Wing": 

 "...the key achievement of propaganda is to make the belief being transmitted internalised to the point where its origin is lost and it is accepted as natural and self-discovered by the individual... The volume and diversity of negative messages about scapegoated groups in the right-wing media today does much to achieve this, and it is also supported by the factual style of reporting which presents arguments as definite rather than exploratory." 

The truth is, they're all at it... endlessly spinning and scapegoating instead of solving the root cause of real problems. And we're paying for it. Big time.

So how do we get these people to focus on the real issues? Where do we start?

I think we need to play them at their own game. And the best place to start is closest to home. We should link all our ills to government waste - not the welfare budget or the healthcare budget, but the £166bn that the public sector wastes on itself - nearly a quarter of the UK's entire annual exenditure. Every time a politician strays from a discussion of the hard facts in any area, we should ask them how he or she is going to spend less on travel or communications costs, or office space or, dare I say it, expenses.

Once they demonstrate an ability to get that basic level of waste under control, they can graduate to discussing how to control state taxation and spending in other areas. But the bizarre rants of North Korean leaders and random criminal acts, however tragic, should be a long way down the list.   

Waste: The UK Government Shopping Channel

Whatever you think about taxes, we have to put an end to wasteful public spending. This is not about making 'cuts'. There are no hard choices here, no job losses. This is about staff being intelligent in how they spend money. 

Believe it or not, the government is trying to reduce waste. Today's example is the 'mystery shopping' channel that enables suppliers to report poor public sector purchasing practices, as explained in the short video embedded below. But I've been disappointed not to see more signs that the public telecoms bill has fallen by 30-40%, as Green reckoned it could (progress on IT strategy is reported to be slow, and limited to central government). And I'm yet to see the total figure for travel expenditure (let alone any reduction), despite an announcement in 2011 on central procurement of travel.

But, hey, let's applaud progress where we can.

After 18 months of mystery shopping over 300 complaints have been received. Of all complaints made about 80% are said to relate to the buying process itself, followed by contract mis-management (7%), bureaucracy (5%) and technology/systems (5%). A more detailed breakdown of the 240 'process' complaints suggests significant problems with pre-qualifying suppliers and poor 'purchasing strategy'. Central government is responsible for a third of complaints, but most relate to the NHS and other 'wider public sector' bodies. About 80% of cases referred resulted in a "positive outcome" - a great achievement from zero. The recommendations (summarised below) provide further insights.

However, it would be helpful to know how this complaints process fits into a more comprehensive approach to improving the public sector procurement process. I suspect that 300 complaints in 18 months represents too small a sample of all procurement opportunities to be relied upon as a guide to root causes of major problems. And the fact that 20% of complaints were not resolved satisfactorily leaves a lot of room for improvement. While it's critical to seek and listen to 'customers' comments and complaints, I would prefer to see a more data-driven approach overall, with simple metrics aimed at detecting problems in each step of the end-to-end procurement process. One can then look at which steps are attracting the most complaints, from whom and the value at stake before dedicating resource to figuring out root causes and improvements. There are also plenty of internal suppliers and customers to the procurement process whose complaints will be important to capture in addition to those of SME bidders. Maybe that more comprehensive approach is inherent in the suggested lean sourcing process, but I haven't seen specific mention of it yet. 

It will be critical to understand the bigger picture and to see how this programme develops over the next few years.

Recommendations:

• Public sector buyers have been told not to use "pre-qualification questionnaires" for contracts with a value below the relevant EU procurement threshold.

• A supplier's history of dealing with the private sector must also be given the same weight as any record of selling to the public sector.

• Insurance only needs to be in place once the supplier has actually won a tender, rather than when responding to a tender.

• Buyers are encouraged to engage with suppliers before a tender to ensure the tender document makes sense from the start of the bidding process, to avoid endless changes along the way or even cancellation because the wrong product is being requested. That also enables SMEs to group together to win a tender against big suppliers.

• Dynamic marketplaces and the Contracts Finder portal are designed to avoid all SMEs having to sub-contract to a large supplier (and the inevitable fat mark-up). But more time needs to be provided to answer some advertisements.

• Specifications should also be drawn broadly enough to enable more suppliers to compete for the work.

• Faster payment of invoices is critical. The public sector buyer is responsible for ensuring that prime contractors pay sub-contractors within 30 days of the receipt of a valid invoice in goods and services contracts.

• Public sector buyers must not charge suppliers for the right to bid. Instead, the cost of promoting "framework agreements and other catalogue type arrangements should be related to the value of business a supplier derives from those arrangements, rather than an upfront charge."

Image from Malvern Hills District Council.

Waste: A Panic Closer To Home Than Foreign Taxes

It never stops

As the moral panic over taxing foreign companies continues, MPs and other politicians must be increasingly relieved not to be focusing on far bigger problems closer to home.

For a start, the UK government has a lot of trouble keeping track of its own finances, which must suit those on the inside very nicely. While France, the U.S. and Australia can produce a comprehensive set of government accounts in less than nine months, it took 20 months to produce the UK’s first set of “Whole Government Accounts”, covering 2009-2010. Worse, the Public Accounts Committee was “surprised to find that Treasury did not have a grip on trends in some key areas of risk or plans for managing them.” 

Now you might be worried that the government wrote off £10.9bn in unpaid taxes, and perhaps a bit personally alarmed that it expected to pay out £15.7bn for clinical negligence claims. 

But let's get this into perspective. According to the Institute of Fiscal Studies, the government spent just under £700bn in 2010-211, up £30bn on the year before. At about 50% of GDP, that alone explains why our economy has ground to a halt. Of the total, 60% went in just 3 areas: social welfare (30% or £200bn), health (18% or £120bn) and education (13%). After that came defence (6%), public order and safety (5%), personal social services (4%), transport (3%) and housing (2%). Spending on trade, industry, energy, employment and the environment together only add up to 3% of total spending.

The UK government has never received tax revenues above 40% of GDP, and by far the majority of what it does receive comes from individuals. In 2008/09, the UK government collected £41.8bn in corporation tax and £149.6bn in income tax. Together, we and the corporations paid about another £180bn in National Insurance and VAT.

So we need to forget about taxes if we're to have any chance of turning around the public accounts. 

Public infrastructure projects and government consumption are great places to start. And they provide plenty of big corporate scalps to go after.

The Private Finance Initiative (“PFI”) was invented in 1992 as a way of funding the construction and operation of public infrastructure using private funds, so that the cost could be kept neatly off the public balance sheet. While initially attacked by the Labour government, the programme was massively expanded once they came to power in 1997, after the Health Secretary now infamously remarked, "when there is a limited amount of public-sector capital available, as there is, it's PFI or bust." 

As a result, there are 717 PFI contracts in the UK with a total capital value of £54.7bn. The woolly "Whole Government Accounts" put the present value of payments due to private financiers at £131.5bn. However, the true cost to taxpayers has since been discovered to be about £300bn, including running costs and interest payments at rates well above what the government could command directly. Yet the Treasury have trumpeted savings of only £1.5bn so far.

Government also tends to reward bidders who over-estimate the utility of large scale procurement projects, and under-estimate their cost. This "Planning Fallacy" is explained in Daniel Kahneman's book Thinking, Fast and Slow, and the recent West Coast railway fiasco is a case in point. Such a tendency can only suit the public and private institutions involved. It certainly isn’t benefiting commuters or taxpayers. Costs are about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, have reached approximately £7 billion per annum. Approximately 10% of trains don’t arrive on time. Only 42% of rail customers are satisfied with value for money for the price of their ticket. Only 69% say there is sufficient room for all passengers. And only 80% of rail customers are satisfied with punctuality. 

But if you really want to indulge yourself in a good panic, you need go no further than the government's own expense accounts and the suppliers who benefit. 

In his review of government financial efficiency in October 2010, Sir Phillip Green found that “the government is failing to leverage both its credit rating and its scale” in its expenditure of £166bn on goods and services. He attributed the inefficiency to poor data, fragmented procurement activity, the lack of motivation to save money, the absence of budgeting processes and inconsistent commercial skills across departments. 

The Green review estimated that the government could save up to 40% on its telecommunications bills by acquiring its own telecoms capacity. Travel savings were harder to get at. Two widely varying estimates were put on central government travel, before the real figure of £551m emerged. No figures could be discovered for the wider government travel bill (I'll bet it's those pesky railways again). There were also 71,000 central Government buyers with payment cards that had a monthly spending limit of up to £1,000, none of which was monitored. Railways again?

Phillip Green declined to estimate the total waste or the corresponding savings opportunity, but said rather ominously: 

“There is a huge opportunity that has been clearly identified both in central Government and beyond, but without a clear mandate, energy, focus and commitment, this cannot be delivered.”

Sadly, however, notwithstanding this "huge opportunity", it seems our MPs would rather focus on the amount of tax paid by foreign corporations. Even where those corporations are abiding by UK tax law and the sums to be gained (if any) are paltry by comparison to wasted expenditure that might be saved. 

What a waste.

The Bumper Book of Government Waste is available here.