Written evidence from The Chartered Institute of Public Finance and Accountancy (CIPFA) (MMP 26)

CIPFA, the Chartered Institute of Public Finance and Accountancy, is the professional body for people in public finance. CIPFA shows the way in public finance globally, standing up for sound public financial management and good governance around the world as the leading commentator on managing and accounting for public money.

Further information about CIPFA can be obtained at www.cipfa.org

1.              Executive Summary

1.1              Recommendations for improved practice resulting from the committee’s work should apply to both major capital projects and major revenue projects. Revenue projects will include large outsourcing contracts and managing the significant revenue consequences of capital spending.

1.2              Available figures indicate there are some £413bn of infrastructure projects in the government’s planned pipeline[1] and £284bn, or approximately one third of government day-to-day expenditure, is spent on goods and services procured from external suppliers.

1.3              There needs to be better understanding of the outcomes to be delivered by major projects. This should be clearly expressed within the specification for all projects. Clearly defined outcomes will support better strategic management of projects and engagement with market participants for contracts

1.4              In support of better outcomes, a broader definition and understanding of the assessment of value for money is required. There is a need to rebalance the pursuit of lowest cost with wider social, qualitative, environmental and strategic project outcomes.

1.5              Improved and more extensive use of open book accounting arrangements in contracts and projects needs to be in place. Open book arrangements should be seen as the norm in contracting to improve transparency for the public, over costs and profits and ongoing value for money management.

1.6              Government should invest to ensure the appropriate commercial skills are available within government to manage complex arrangements with external suppliers. Effective business partnering arrangements involving finance professionals should be encouraged in all financial aspects of major projects and contract management tasks.

1.7              While balancing increased costs against the potential for better project success, public bodies should consider a more programmatic approach to large scale and complex infrastructure projects. Programmatic approaches should also consider the use of standard costs where these can be established on a sector or project specific basis.

2.              Context and Background

2.1              CIPFA’s area of expertise is public financial management. Therefore, this submission will focus on relevant aspects of public financial management that support and improve the delivery of major projects and contract management across government. The submission will have relevance to the committee’s questions on:

• How can major public projects be managed to command more respect and public confidence?
• How adequate are the processes for monitoring the progress of projects over their lifetime?
• What are the best financial models to adopt for financing and managing the delivery of major projects?

2.2              The committee’s focus is naturally on the government’s major projects portfolio. In its enquiry scope, the committee also recognises that government bodies manage capital projects outside of the major projects portfolio. The committee should recognise the totality of contractual spend that needs to be managed effectively. This will include not only capital projects, but large outsourcing arrangements and other significant revenue related spend that is procured and contracted to non-government organisations.

2.3              The Infrastructure and Major Project Authority recently published its analysis of the national infrastructure and construction pipeline. This report shows 684 projects across sectors with a total value of £413bn. The phasing of this pipeline, shown below in figure 1, indicates that £188bn is planned to be delivered before the end of 2021.  

              Figure 1. National Infrastructure and Construction Pipeline (Autumn 2018)

2.4              The Institute for Government[2] recently noted that approximately one third of day to day government expenditure (£284bn per year) is spent on buying goods and services from external suppliers. Major outsourcing arrangements, and the revenue consequences of arrangements such as PFI/PPP capital projects, will be included within this annual spending.

2.5              A sharper focus has been placed on how such spending arrangements are managed due to the recent collapse of Carillion[3] and concerns over the sustainability and ability to deliver of other strategic suppliers to government.[4] The Institute for Government report shows that strategic suppliers are winning a large amount of government business. For both central and local government, the proportion of published procurement spend going to these suppliers has grown over the past five years.

2.6              It should be noted that the Cabinet Office and Crown Commercial Services do recognise the risks associated with concentrating purchasing with a small number of suppliers. Progress on setting out new guidelines[5] on supplier engagement and market management has been completed to improve oversight of these key suppliers’ work across government.

3.              Outcomes focus and value for money

3.1              CIPFA fully supports the view that during specification of a project, clear outcomes should be identified. Historically, the public sector is focused on identifying outputs rather than outcomes from projects. The National Audit Office[6] points to examples such as the Household Energy Efficiency programme. This programme delivered against its target of improving energy efficiency in one million homes, but did not have targets or measurable goals for its wider objectives such as saving energy. The conclusion from this is that a focus on outputs reduces transparency around benefits, and is a missed opportunity to instil greater discipline to the management of government initiatives.

3.2              Project success will include measures of outputs, while clarity on outcomes will assist in providing a better understanding on the project deliverables for external suppliers to government. Highways England, for example, sets out clear strategic outcomes in its delivery planning.[7] These include outcomes such as supporting economic growth and improving the environment. All of which is supported by performance measures, including output measures, that underpin achievement of those strategic outcomes.

3.3              In CIPFA’s view, a wider understanding of outcomes as opposed to outputs will assist in an improved understanding and assessment of value for money. It is important to not only focus on costs of major projects, which is understandable given restrictions on resources, but to understand qualitative measures and a project’s contribution to desired outcomes.

3.4              We note that the government’s newly published outsourcing playbook5 says in relation to clear specifications that they:

“must provide sufficient information for bidders to make an informed decision about whether they want to bid. Without this shared understanding, we cannot expect to be able to relate the price offered by bidders to our own understanding of costs. And if we cannot do that, then we will always be open to risk that we will not get the outcomes we want at the price we need.”[8]

Our question is whether all staff involved in major projects understand the difference between outcomes and outputs, and how that will impact on costs and quality and ultimately the determination of value for money. The NAO’s report[9] on projects leaving the government’s major projects portfolio noted that:

“poor measurement of what projects achieve reduces accountability and transparency for government and Parliament, and makes it difficult to assess whether the costs of projects are justified. […] It also means that government is missing an opportunity to learn about what constitutes success.”

3.6              Clearer specification of project outcomes supports better strategic management of projects, and consideration of how projects will overlap with other areas of public services and the wider environment. It also assists in a clearer engagement with the market. This will potentially prevent situations where costs from contractors do not accurately reflect the full requirements envisaged, resulting in cost overruns further into project delivery. Outcomes also assist in rebalancing the focus on lowest cost with wider social benefit and quality.

3.7              The Committee of Public Accounts noted in a 2016 report[10] that ”the requirements of good project delivery are not understood well enough by policy developers and decision makers outside the project management profession”. CIPFA agrees, and we argue it is important to successful delivery that both policy makers and those responsible for project delivery have a good understanding of the process and outcomes required.

4.              Improving transparency and contract management

4.1              A lack of transparency in awarding and managing contracts damages confidence in the public sector. There is a need to rebuild public trust in contracting, particularly contracting with the private sector.[11] This can be helped by being transparent about the rationale behind decisions to outsource services from the start. As noted above, clear specification of project outcomes supported by appropriate measures of performance on those outcomes is critical to addressing this.

4.2              Further transparency issues arise in the ongoing management of projects and contracts. This has two aspects: firstly the capacity and ability of the contractor to deliver, and secondly their ongoing financial stability to ensure security of supply. In recent times the latter factor has featured prominently with key suppliers to government such as Carillion and Interserve.[12]

4.3              The Government Commercial Function has gone some way to address the issues surrounding whether to deliver in-house or go to external contracting through the publication of its outsourcing playbook. However, CIPFA believes that transparency would be further improved during the contract delivery period if greater use of open book accounting arrangements were in use.

4.4              Open book accounting processes involve sharing cost information within each organisation, and across organisations in the supply chain, and encourages more robust contract management through lean processes and risk management. It helps establish the actual cost of a project, as well as a basis for performance improvement incentives. Open book processes allow organisations to:

• identify clear, mutual benefits and aligned values resulting in improved services
• share knowledge and information enabling partnering organisations to become more innovative with their working practices
• scrutinise and analyse all costs, identifying opportunities for cost efficiencies and improved value for money
• avoid problems as a result of more open and transparent cost information
• ensure risks are clearly allocated and managed more effectively.

4.5              Ensuring greater use of open book accounting arrangements in contracts and projects underpins two major benefits to improved transparency.

1.              Transparency over the costs involved and importantly the level of profits earned by suppliers. These are both vital tools to improve the management of contracts and value for money to the public purse.

2              Transparency for the public to grow confidence in the system of public procurement, particularly when combined with a clear rationale for external contracting.

4.6              Data on the government’s use of open book accounting is mixed. A previous NAO report,[13] based on a sample of contracts with spend greater than £1 million in 2013/14, showed that 31% of contacts had open book clauses. Of this, the government had received data on 19% of contracts for that year and importantly had taken steps to verify it.

4.7              In response to a Public Accounts Committee report, the government conducted a trial on open book methods to inform future policy. The Cabinet Office led the trial with support from key departmental stakeholders. The trial concluded open book accounting was not well understood; there was limited evidence of a standard approach in use across industry, and limited common understanding of open book methods in government.[14]

4.8              CIPFA believes that open book accounting should be the norm rather than the exception. However, this will require greater investment in commercial skills and support from effective business partnering arrangements from the finance function. CIPFA has produced supporting guidance for finance and procurement professionals in both open book accounting[15] and contract management, focusing on the operational period of contracts.[16]

5.              Developing agility and a programmatic approach

5.1              Larger infrastructure schemes can take a significant period of time to move from initial planning to operational readiness.[17] This can lead to issues where the original plans for the scheme are locked in from the start and are not easy to change alongside any changing requirements in the intervening period. In some cases, that intervening period may be years.

5.2              In order to deliver as much value as possible, not only do schemes need to have a clear understanding of what the outcomes require should be, but they need an approach that can support greater agility during long-term delivery timeframes. In certain schemes this could require the project be broken down, starting small and being able to scale up quickly.

5.3              An example of this is the approach taken on the M25, where there was no single public inquiry into the motorway as a whole. Instead, each section was presented to planning authorities in its own right and was individually justified, with 39 separate public inquiries relating to sections of the route.

5.4              This approach started small but arguably justified the need for the complete M25 route through each section. This also enabled lessons learnt to be assimilated and processes and systems adapted while progressing the project. This approach however does require assessing the balance between the potential for increased long-term success of project outcomes against the potential for increased cost in progressing stage by stage.

5.6              A programmatic approach can also be taken by the establishment of standard costs of delivery within certain sectors and projects. Examples of this are already in place in areas of construction projects such as social housing[18] where established measures of building costs are used to determine the costs of housing developments.

5.7              Where relevant, the appropriate development of standard costs[19] will assist in managing project costs and private sector profit margins. It can also be used to target improvements such as incentives for environmentally friendly or climate neutral initiatives within projects where additional development costs can be involved. Such developments will require a greater input from finance professionals as business partners within government. 

May 2019