1 The Audit Commission welcomes the opportunity to submit evidence to the Communities and Local Government Committee’s inquiry into local government procurement. In summary, this submission states that:
■ Costs fall and quality rises where there are more procurement and commissioning options available to councils, due to increased contestability and competition.
■ In the current economic climate, environmental concerns appear to have become less of a concern in councils’ procurement and contract management than economic regeneration.
■ Collaborative procurement can save significant sums of money for councils. Aggregating demand in the market will generate discounts, although the amounts vary according to the markets involved. Councils have made progress in procuring collaboratively.
■ Commissioning, procurement and contract management skills remain underdeveloped. But councils can recruit and train staff with the right skills.
■ Risks come from scale and complexity in contracting. If these risks are not managed corporately, they can bring about supplier insolvency, service failure, or fraud, all with reputational and financial damage to councils.
■ The Audit Commission’s annual survey of all detected fraud and corruption found there were 187 cases of detected procurement fraud in 2011/12 with a total value of £8.1 million. Most frauds occur during the implementation stage, rather than the contract bidding process.
2 The Committee’s inquiry is timely, because reduced grant funding means many more councils will look to increase their involvement in third-party arrangements, including long-term partnerships. Councils are changing their business models as they restructure to make large-scale savings. Shared services and outsourcing will become more common. Such measures often accompany transformation programmes, involving large-scale reconfiguration of services, staff redundancies and transfer under TUPE regulations. The Commission outlined the impact of these major initiatives in a number of reports, most recently in Work in Progress (Ref 1).
3 A move to more commissioning and away from directly providing services means councils have to acquire more commercial skills. They are not alone: the new Crown commercial service (Cabinet Office) will act as a consultancy service to government departments for the same purpose.
4 The most effective councils see procurement in a wider context. The traditional separation of ‘commissioning’ (for services) and ‘procurement’ (of goods) is ending, including in district councils that do not provide social care, and councils are strengthening their corporate approach to both by integrating them with contract management. Councils realise that all spending should aim to achieve objectives in the most cost-effective manner possible.
5 The Commission has long argued for more effective approaches to commissioning and procurement. Hearts and Minds (Ref 2) first set out the principles of Intelligent Commissioning. Focused on the increasing involvement in public services of third sector organisations, but applicable to all commissioning, the Intelligent Commissioning model situates procurement at the end of a process that begins with understanding the service outcomes required to meet users’ needs and the market that can provide them.
6 Hearts and Minds asserted that, where necessary, councils should develop markets to foster more competition and contestability. Healthy Competition (Ref 3) developed this idea, suggesting that costs could fall and quality rise where contestability and competition increased the procurement and commissioning options available to councils. The Institute for Government’s recent report Making Public Service Markets Work (Ref 4) addresses related themes. It finds that markets do not always work well and without an understanding of markets councils will struggle to manage procurement well. The Institute’s report also refers to the importance of collaboration in helping local public sector partners to achieve greater innovation, suggesting that central government could learn from this.
7 Third-party arrangements can bring significant financial and other benefits to councils, but they also carry risks that should be managed corporately. It is vital that councils procure goods and services effectively, achieve good value for money (VFM) both in procurement and during the life of the contract.
8 The recent report from the Public Administration Select Committee (PASC) (Ref 5) pointed to the need for a more integrated approach to procurement across central government. The PASC report themes of leadership, better data, aggregating demand, renegotiation, relationship management, and integrating procurement and contract management, are all relevant to local councils.
9 A forthcoming report (expected autumn 2013) on contract management from the Local Government Association (LGA), based on research by the Audit Commission, aims to help councils improve on all of these important issues. It finds that effective support for contract management is a vital part of effective procurement and commissioning.
10 The remainder of this submission focuses on the six individual questions in the terms of reference.
1. To what extent is local government procurement organised to deliver value for money and social, economic and environmental objectives, including stimulating the local economy? To what extent are local authorities achieving the involvement of local residents in delivering value for money? To what extent are local authorities able to develop long-term relationships with contractors?
11 The Audit Commission no longer carries out national studies of VFM across local government services and activities, including procurement, based on extensive fieldwork. But in recent research carried out on behalf of the Local Government Association, the Commission found case studies of several councils that have built social, economic and environmental objectives into their third-party contracts. In the current economic climate, environmental concerns appear to have become less important than economic regeneration; our research suggests that measures such as spending on local supply chains and employing local people (for example, as apprentices) are outcomes councils aim to achieve from their procurement and contract management.
12 But is also true that there remains a tension between the need to aggregate demand in the market to achieve economies of scale, and the desire to promote local economic growth by focusing councils’ significant spending locally.
13 The Commission has highlighted the VFM benefits that can accrue from procurement in one area on social outcomes elsewhere. In Building Better Lives (Ref 6), the Commission reported that “Every £1 spent on providing housing support for vulnerable people can save nearly £2 in reduced costs of health services, tenancy failure, crime and residential care.” It gave the example of “Spending between £2,000 and £20,000 on adaptations that enable an elderly person to remain in their own home can save £6,000 per year in care costs.”
14 Councils have for some time entered long-term partnership arrangements with one or more suppliers. In 2008, the Commission published For Better, For Worse (Ref 7), on the experiences of some early adopters of Strategic Service Delivery Partnerships; the third-party contractual arrangements that can last up to 15 years and encompass multiple services. The report found that these were variable in quality and attainment of outcomes, including VFM. Since then, many more councils have since entered such relationships, suggesting that earlier problems have been understood and overcome.
2. Do authorities take sufficient advantage of collaborative and joint procurement opportunities, including those available from central government? In addition, the Committee would welcome information on PFI contracts and their operation with local government.
15 Collaborative procurement can save significant sums of money for councils. Aggregating demand in the market will generate discounts, although the amounts vary according to the markets involved (for example, whether they are national, local or regional, and the range of suppliers that is active in each).
16 While audit is a small element of local government expenditure, the Audit Commission’s historic role as a single purchaser of external audit illustrates the benefits of aggregating demand to the maximum degree. Despite operating in a market with barriers to entry and a small number of large suppliers, over the past 20 years we have:
The audit contracts let in 2012, when the Audit Commission outsourced the 70 per cent of work previously carried out by its in-house Audit Practice, will save local public bodies £250 million over five years.
17 Market complexity, along with the variety in size and type of council, has hindered collaboration in many cases. But these are not insuperable obstacles for councils: there remains more that they could do.
18 A joint report by the Commission and the National Audit Office (NAO), A Review of Collaborative Procurement Across the Public Sector (Ref 8), found that, ”Ninety-three per cent of the public bodies we surveyed had used a framework agreement during 2008-09. Most felt that this had always, or often, resulted in better value for money and that greater collaboration had the potential to further improve value for money. However, there was wide variation in the volumes and proportions of spending that individual organisations were channelling through these existing arrangements.”
19 But Framework Agreements are not enough to maximise aggregation and reduce variation in prices and costs. The same report also noted that, “The public sector procurement landscape is fragmented, with no overall governance. There are nearly 50 professional buying organisations, as well as individual public bodies running commercial and procurement functions. Many of these organisations manage framework agreements for similar goods and services, for example, stationery.”
20 Councils have made progress since then. Most recently, Camden Council has led negotiations on behalf of London councils to secure standard prices for an ICT software package, after a data sharing exercise exposed a range in prices paid. The success of this initiative led to it being rolled out nationally, in conjunction with the Local Government Association (LGA). This features in a forthcoming report on savings from contract management, to be published by the LGA, based on joint work with the Audit Commission.
21 The Commission has less recent evidence about PFI, although we have acknowledged its importance in some services. For example, Well Disposed (Ref 9), a national report on waste management, noted the increase in take-up by councils of PFI as a funding mechanism to pay for long-term treatment of non-compostable waste. In some cases, the value of the contracts entered into was more than £1 billion. This report also identified one of the main issues with PFI: the difficulty councils faced in building a business case for long-term funding (and annual repayments over 25 or more years) based on realistic assumptions about volumes, flows and prices for different categories of waste. It noted that “The sheer scale of expenditure and the fact that WDAs [waste disposal authorities] feel under pressure to bring new disposal facilities on line in a short period of time means that the risks to VFM are significant”.
3. How can local authorities access the skills, expertise and capabilities to implement effective procurement strategies, including value for money and social and economic objectives? More specifically, does local government have sufficient understanding of its procurement expenditure and the markets for goods and services to deliver quality procurement strategies—locally and regionally. If not, how can deficiencies be addressed?
22 Lack of skills is a public-sector wide issue, as evidenced by the recent Institute of Government report. Healthy Competition (Ref 3) reported that “Councils generally lack:
■ sufficient people with the procurement, risk or contract management skills to make effective use of market mechanisms;
■ information about local public service markets that would enable them to use or develop those markets; and
■ information about delivery costs, management costs or service performance to determine the best service delivery option and the best way to secure that option.”
23 The Commission’s recent work with the LGA on contract management confirms that commissioning, procurement and contract management skills remain underdeveloped (see Q4). But councils can recruit and train staff with the right skills. The research found that:
■ Developing a commercial approach to understanding costs and value is the key skill involved in contract management. Staff recruited from a commercial background will have this, while some councils have successfully used consultants.
■ Training in contract management is increasingly common. Some councils have developed comprehensive training courses. In one case, these support a toolkit for central and service managers.
■ Training in contract management is vital to prepare councils for third-party arrangements. In addition to developing technical skills such as negotiation strategies and contract law, it can foster commercial acumen and other attributes among staff who are more likely to be commissioners than providers.
■ Above all, better contract management skills will make councils more confident that they can release value from their contracts and place them on an equal footing with suppliers.
4. To what extent is risk in local government procurement and contracting understood and managed and contracting strategies adopted, which are tailored to product and supplier market places? More specifically, do local authorities maintain and operate effective client management functions and have they entered contractual arrangements which allow the flexibility to meet changing circumstances such as budget reductions or changes in the way a service has to be delivered?
24 Risks come from scale and complexity in contracting. If these risks are not managed corporately, they can bring about supplier insolvency, service failure, or fraud, all with reputational and financial damage to councils.
25 The LGA’s forthcoming report on contract management, based on work carried out by the Audit Commission, directly addresses this issue. It shows that, in 2011/12, councils spent nearly £30 billion on third party suppliers of services (over half of the £57 billion they spent on goods and services overall, according to the Subjective Analysis Return). Although third-party spending is falling, in line with reduced council spending overall, it is rising as a proportion of all council spending on services.
26 Additional analysis by the Commission of the data published by councils on spending on items over £500 shows that, in 2011/12, the average number of suppliers in each council was over 500. This varies widely, however, from nearly 200 in district councils to over 900 in single tier and county councils.
27 It is clearly better for councils to build flexibility into long-term contracts, to meet changing needs. Outcome measures that specify what is required, rather than how it will be achieved, are important. Contracts should also contain incentives for councils and suppliers to share gain and pain. These include profit sharing, generating additional income, avoiding costs (for example, by removing duplicated tasks and unnecessary processes) and penalties for poor performance.
28 Where contracts do not contain these measures, our research suggests councils can renegotiate terms and conditions, although some find it hard to do so. Our most recent research suggests that suppliers are more receptive to such renegotiation when contracts are due to be renewed. This confirms the finding in For Better, For Worse (Ref 7) highlighting the importance of break clauses for councils to test the market on price and quality, and retain the possibility of withdrawing from the agreement altogether.
29 A corporate approach to commissioning, procurement and contract management helps to manage risks. This does not necessarily mean centralising all functions, but it does require councils to integrate their approach to all three. If procurement is carried out by service managers, it is vital that the council supports them effectively, to reduce the risks mentioned earlier, and to obtain good value. Service managers may resist this, believing that their technical knowledge makes them best equipped to procure and manage contracts. But an effective corporate approach integrates service and procurement expertise at all stages in the life of a contract.
30 A corporate approach can generate savings and other benefits, providing that councils invest in it. Small investments can generate dividends.
5. How is regularity and propriety of procurement secured and are the arrangements for detecting and addressing impropriety and fraud effective?
31 The Audit Commission’s annual survey of all detected fraud and corruption provides a regular measure of the volume and value of detected frauds in different services committed against local government bodies in England. In 2011/12, there were 187 cases of detected procurement fraud with a total value of £8.1 million.
32 Councils must report to the Commission all local authority frauds with a value over £10,000. These individual reports provide information on how the fraud was committed and identified. For procurement, they show that most frauds occur during the implementation stage, rather than the contract bidding process. This suggests that councils prevent fraud at the earlier stage, but that fraudsters can exploit weaknesses during implementation.
33 Importantly, most procurement frauds are identified through whistle-blowing disclosures, rather than detection by councils through fraud controls. Councils have consistently made clear to us that it is not easy for them to detect it through traditional investigative means, such as data matching.
34 Whistle-blowing will always be an important means of identifying procurement fraud, but councils could usefully strengthen their own counter-fraud detection and controls.
6. Is local authority procurement fully transparent, audited effectively and does it provide appropriate mechanisms for redress? Specifically, are the arrangements for securing the accountability of procured services and goods to local authorities and local residents adequate and effective? More specifically, to what extent are local authorities able to provide assurance to central government that value for money (in the broadest sense of the term) is delivered?
35 On occasion, the appointed auditors to councils have raised concerns about large scale procurement projects and some have issued a Public Interest Report (PIR) when the scale of financial mismanagement has generated public concern. Most recently, the appointed auditor for Corby Borough Council issued a PIR in June 2013, having found a significant number of failings in the Council’s arrangements for managing four major and important regeneration capital projects.
36 In 2012, the appointed auditor for Wirral Metropolitan Borough Council issued a PIR over the Council’s weaknesses in the management arrangements to award and manage the contract for Highways and Engineering Services.
37 Benchmarking is not easy in most council functions and services. Going the Distance (Ref 10) reported that, “only 40 per cent of survey respondents benchmark their road maintenance prices, and few evaluate contracts regularly”.
38 In the case of procurement spending, it is hampered by two things: the extent of contracting out, which means some councils will not record spending on services where they have been transferred to a third party; and commercial confidentiality, which makes it difficult for some councils to share sensitive information with others.
39 Some collaborative procurement arrangements are leading to greater transparency on price and quality, as suppliers record their performance and prices, allowing councils to compare them. Variation suggests scope for savings. In Valuable Lessons (Ref 11), we noted that schools could save over £400 million solely through better procurement, given the variation between their spending on standard items, and the savings offered by collaborative procurement.
40 The Commission’s approach to improving VFM rests largely on benchmarking, which shows the potential for efficiencies if high cost councils reduce their spending to the level achieved by the most efficient, so that all spend broadly similar amounts on services and functions. The VFM Profiles Tool (Ref 12) enables councils to compare their costs and performance across 151 indicators for 14 service domains. It does not identify procurement per se, but allows councils to compare spending on services.
References
Ref 1 Audit Commission, Work in Progress, Audit Commission, 2011
Ref 2 Audit Commission, Hearts and Minds, Audit Commission, 2007.
Ref 3 Audit Commission, Healthy Competition, Audit Commission, 2007.
Ref 4 Institute for Government, Making Public Service Markets Work, Institute for Government, 2013.
Ref 5 Public Administration Select Committee (PASC), Government Procurement, House of Commons, 2013.
Ref 6 Audit Commission, Building Better Lives, Audit Commission, 2009.
Ref 7 Audit Commission, For Better, For Worse, Audit Commission, 2008.
Ref 8 National Audit Office and Audit Commission, A Review of Collaborative Procurement Across the Public Sector, National Audit Office, 2010.
Ref 9 Audit Commission, Well Disposed, Audit Commission, 2008.
Ref 10 Audit Commission, Going the Distance, Audit Commission, 2011.
Ref 11 Audit Commission, Valuable Lessons, Audit Commission, 2009.
Ref 12 Audit Commission, Value for Money Profile Tools, Audit Commission, ongoing.
September 2013