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MODERN GOVERNMENT MODERN PROCUREMENT
1. Introduction
Last Autumn the Government commissioned two separate but complementary
reviews on the subject of Government procurement.
The first of these reviews was undertaken by Peter Gershon, managing
director of GEC Marconi, who was invited to review "civil procurement
in Central Government in the light of the Government's objectives
on efficiency, modernisation and competitiveness in the short and
medium term".
The second review, by Sir Malcolm Bates, Chairman of Pearl, builds
on his previous review of the Private Finance Initiative (PFI) and
Public Private Partnerships (PPPs) in June 1997 and examines the "progress
made by the Government in the delivery of PFI and PPPs and recommends
changes to existing arrangements intended to improve further the Government's
approach to PPPs".
This document sets out the key recommendations of the two reviews
and the Government's plans for their implementation. Both reviews
propose significant organisational change.
Gershon recommends the creation of the Office for Government Commerce
which would be a distinct organisation within the Treasury, but with
close links to other Whitehall departments. It would provide for departments
a central resource of procurement skills and would set the strategic
framework within which departments would operate.
The Bates Review sees a continuing need for central expertise for
PFI/PPPs and makes a number of recommendations for possible successors
to the current Taskforce. The Government has decided to take forward
the recommendations of the Bates Review by setting up a new body,
Partnerships UK, as a PPP. Its purpose will be to work in the public
interest and address the key weaknesses in the current PFI/PPP process
in order to make the public sector a more effective client.
2. Government Procurement and the Private Finance Initiative
Total civil procurement of goods and services by Central Government
was some £13 billion in 1997-98. The composition of this expenditure
has been changing and will continue to change significantly through:
- the modernisation agenda and joined-up Government initiatives;
- the desire to deliver value for money savings to release resources
for key policy objectives;
- the increasing use by Government of purchased services as opposed
to the acquisition of capital assets.
Leading institutions in this country and abroad have achieved significant
combined cost and quality benefits through detailed restructuring
of their procurement activity. The potential gain for Central Government
civil procurement is therefore a significant prize.
Much has already been achieved by departments and agencies. Improvements
to Central Government civil procurement have brought savings, greater
efficiency and better relationships with suppliers.
The Private Finance Initiative (PFI) has come to play an increasingly
important role in public sector procurement. PFI and other PPPs offer
potentially huge benefits to Government by bringing the skills of
the private sector to the provision of public services. As well as
improving value for money, PFI/PPPs can help ensure a higher sustainable
level of investment in public services.
Investment by the private sector under the PFI is equivalent to 17
per cent of total public sector investment over the three-year period
covered by the Comprehensive Spending Review (CSR). The Government
is keen to foster new types of relationship with the private sector
under its wider PPP programme. For example, new joint ventures to
exploit untapped commercial potential or spare capacity in public
assets are being encouraged under the Treasury's new Wider Markets
guidance.
In the last two years, since Malcolm Bates' first review of PFI,
progress in the area of PFI/PPPs has been dramatic. The abolition
of universal testing and a more streamlined and simplified process
has increased the flow of good PFI projects. Since the review, some
£4 billion worth of PFI deals have been signed, and there has
been a vast improvement in the execution of PFI deals in key public
services such as health and education.
But despite the important contribution of PFI/PPPs to public sector
procurement, serious weaknesses remain, for example, in public sector
skills in contract negotiation and in project management. The Government
is committed to further improvement in the efficiency of public sector
procurement and the development of PFI/PPPs.
The remainder of this paper describes in more detail the recommendations
contained in the Gershon and Bates Reviews and sets out a clear timetable
for the implementation of changes which the Government believes can
help deliver a step change in performance in the area of procurement
and PFI/PPPs.
3. Review of Civil Procurement
The Gershon Review examined the whole process of acquisition from
third parties by Government, including goods, services and large capital
projects. This process spans the whole life cycle from initial inception
through to the end of the useful life of the asset or the completion
of a contract. The review covered conventional public funding and
more innovative types of procurement such as PFI/PPPs.
Gershon identifies a number of weaknesses in Government procurement.
These cover organisation, process, people and skills, measurement
and the contribution of the "centre" of Government. The proposals
for dealing with these weaknesses call for the creation of a central
procurement organisation called the Office of Government Commerce
(OGC).
The aim is to provide a greater sense of direction in procurement
and push best practice in the public sector. Gershon believes that,
effectively implemented, the changes he recommends could deliver efficiency
savings of the order of £1 billion a year. Departments would
need to work more closely with OGC and in some cases accept some loss
of sovereignty in procurement matters, but this would deliver better
value for money for Government as a whole; an important practical
example of modernised, joined-up Government.
Key Findings and Recommendations
(i) Structure
The Review found widespread recognition that there is a need for
a central body to ensure consistency of strategy, promotion of best
practice and appropriate aggregation. Industry note a lack of consistency
in approach with different departments applying different rules, approaches
and practices to the procurement of essentially similar requirements.
And this lack of consistency results in a wide gap between best and
worst practice in Government.
Fragmentation and insufficient coordination between those central
organisations with a significant role in procurement, mean that, at
present, the centre lacks the means to drive through changes in Government
procurement.
The Office of Government Commerce would fulfil this role. It would
be created by bringing together a number of bodies presently in the
Cabinet Office and the Treasury, including the Buying Agency, CCTA,
PACE and the Treasury Procurement Group and the continuing PFI Taskforce.
It would be a distinct organisation within the Treasury, but with
close links to departments.
A Supervisory Board chaired by the Chief Secretary to the Treasury
with representatives from Government departments and the private sector
would approve and monitor the OGC business plan and approve and monitor
targets across Government.
The Government endorses the analysis set out by the Gershon Review
and its recommendation to create the OGC. A transition team has been
set up and the Supervisory Board will be in place by the end of the
year. At the same time, a Chief Executive will be recruited by open
competition.
OGC should be operational and effective from April 2000 and its remit
for the intervening period will be to take forward the Gershon recommendations
on strategy, process, measurement, people and the supply base which
are set out below.
(ii) Policy
Gershon recommends that OGC should establish a common strategic framework
within which all departments should conduct their procurement activity.
The framework would cover a standard procurement process, common performance
measures, key standards, common systems and key values. This would
ensure appropriate commonality of approach to procurement in order
to secure leverage with key suppliers, maximum value for money from
the aggregation of common requirements and to facilitate the widespread
use of best practice. OGC would also act as a central procurer for
departments where this offered value for money.
The presumption would be that each Department should conduct all
its procurement activity according to the standard framework unless
it was able to offer good reasons why it should not do so.
(iii) Process
Another weakness identified by Gershon is the absence of a common
process across Government for the management of large, complex or
novel projects. Gershon recommends that OGC should define a common
process taking into account best practice in the private sector and
relevant experience from Government. The process would identify distinct
phases in the life of a project and between these phases there would
be "gates" characterised by a set of deliverables. At key gates a
project would only move forward to the next phase if it successfully
completes an independent review - conducted by people with no vested
interest in the project - which would assess the progress of the project.
(iv) Measurement
Good common measurement systems are an essential component of any
effective procurement system. At present there are no cross-Government
systems for recording what is purchased, the associated prices and
sources of supply; analysing the true costs of procurement transactions;
rating the capability and performance of suppliers; or targeting and
measuring year on year value for money improvements.
Gershon considers this is an area of great concern. The weakness
in measurement means that Government lacks an essential tool for strategic
procurement activities and inhibits informed decision making. In response,
OGC would define a set of common performance measures and in the meantime
put in place interim arrangements for the collection of relevant data.
(v) People
Although there are some talented and capable people within the Government
Procurement Service that is now being established, the overall levels
of skill and seniority need to be raised significantly. In addition,
procurement staff must be of the necessary status within Government
to allow them to influence decisions. The recruitment and retention
of high calibre staff is essential to the proper functioning of the
Government procurement function.
Gershon recommends that OGC should identify causes for the current
difficulties in recruitment, motivation and retention of professionally
qualified procurement staff and put in place an action plan to reverse
the situation. A strong planning function needs to be implemented
within the OGC so that procurement skills are developed in good time
to support new Government policies and initiatives.
(vi) Supply Base
There is widespread agreement that Government procurement is fair,
transparent and compares well with other countries. However, tendering
to Government is burdensome and costly to suppliers. Government procurement
tends to focus on ensuring the lowest up-front cost which does not
always translate to best value for money over a project's lifetime.
Industry suggest that bidding for Government contracts is typically
between 10 and 50 per cent more costly than bidding for comparable
projects in the private sector and this additional cost can deter
some potential bidders from competing.
Gershon recommends that the OGC should consult with industry to identify
the causes of the burden on industry and take appropriate action to
reduce them. The procurement strategy should take into account the
costs borne by industry in bidding for a contract as well as the total
costs borne by Government. Invitations to tender should weight the
value for money criteria against which bids will be evaluated.
4. Second Review of Private Finance Initiative and PPPs
The second Bates review of PFI and public private partnerships (PPPs)
examines the progress made by the Government in the delivery of PFI/PPPs
and recommends changes to existing arrangements intended to improve
further the Government's approach to PPPs. It covers the whole breadth
of PFI/PPPs and includes recommendations for improving departments'
resources, improving IT projects and developing the Wider Markets
Initiative.
Key Findings and Recommendations
Bates identifies a need to consolidate and strengthen central co-ordination
in PFI procurement if the improvements achieved in the last two years
are to be sustained. His recommendations include retaining the Gershon-style
gateway review before local authority PFI projects receive revenue
support and introducing similar quality assurance measures for other
parts of the public sector. Other recommendations accepted by the
Government will result in greater standardisation in both contractual
terms and process, together with an improved skill base within Government
to build on what the PFI Taskforce has achieved.
What follows concentrates on Bates' recommendations for institutional
change and the Government's plans for taking them forward.
Institutional Arrangements
The first Bates review of PFI resulted in the creation of the Treasury
Taskforce. This consists of a Policy Team, composed predominantly
of civil servants, responsible for developing policy guidance on PFI,
and a Projects Team of around a dozen highly skilled people from the
private sector who are available to help public sector bodies execute
PFI deals. There is a widespread view in Government and industry that
the measures adopted to give effect to the first Bates Review and
the creation of the Taskforce have been successful in improving the
public sector's performance.
The recommendation in the first Bates review was that the Taskforce
should have a limited life of 2 years. The intention was that, at
the end of this period, the level of expertise of the PFI functions
within Government would be sufficient to set up partnerships with
the private sector without any continuing need for a central co-ordinating
capability. The present review judges that there is still insufficient
evidence of deal-making skills in departmental private finance units
and concludes that a longer term requirement for central expertise
remains. In particular, Bates points to the following areas of weakness:
- strategic planning;
- project management;
- negotiating skills;
- financial disciplines;
- management of long-term contracts.
In short, there remains a shortage of the essential skills required
to set up effective partnerships with the private sector, whether
in PFI deals or those expected under the Wider Markets guidance. Bates
identifies three alternative institutional arrangements following
the expiry of the Taskforce:
- extend the life of the Taskforce;
- create a public sector, fee-earning agency;
- set up a new public private partnership.
A simple extension to the life of the Taskforce would present a series
of practical difficulties. Too short an extension would not see the
essential skills transferred to Departments to make them self-sufficient,
while Bates considers a long extension might run the risk of bureaucratising
the Taskforce. Moreover, it would be difficult to sustain a high quality
team on the basis of short-term secondments. It is also questionable
whether the Taskforce is a sufficient resource to provide more active
intervention at a project level which Bates considers essential to
the further development of PFI/PPPs.
A public sector fee-earning agency would provide the Taskforce function
with a permanent home within the Civil Service in a manner which would
allow its project capability to be deployed more widely in support
of public sector procurement. However, as with the option of extending
the Taskforce, Bates judges that it would be difficult to recruit
and retain staff with the level of skills required.
The third option is to create a new public private partnership managed
on private sector principles to support public sector PFI procurement
and PPPs with a combination of project and financial skills. Bates
judges that this type of institution would be best able to offer the
incentives, disciplines and rewards capable of providing a long-term
home to the private sector skill-base required to support the public
sector in these areas.
In the months since the Bates Review was submitted, the Government
has examined carefully the case for creating a new PPP and undertaken
detailed feasibility work to satisfy itself that it represents the
best way forward. What follows is a more detailed description of the
new PPP, Partnerships UK.
Partnerships UK
Partnerships UK will be a new public private partnership which will
work with both the public and private sectors to address the key weaknesses
in the current PFI/PPP process. By working in partnership with the
public sector, it will seek to make the public sector a more effective
client and ensure the best possible deal for the public sector in
privately financed investment programmes. In effect, it will enhance
the public sector's "intelligent client" capability.
The aim of Partnerships UK is to deliver better value for money by
working on the side of the public sector. For a particular project,
it will align itself with the public sector procuring authority and
inject more detailed examination of practical considerations into
the decision making process and drive forward the conclusion of deals.
In this way, and by making available its experienced development staff
and resources to assist with the development of projects, it will
help departments and other public sector organisations make a better
job of procuring PFI deals.
Partnerships UK will have no form of monopoly or guaranteed market
but will seek to win business on the strength of its offer. The Government
is confident that it will be good for the public sector and the private
sector alike:
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for the public sector, because its activities will boost the
flow of investment into the nation's infrastructure and help the
public sector achieve stronger value for money purchasing in PFI
deals; and
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for the private sector, because it will contribute to the creation
of a better flow of well-structured projects and bring about a
long-awaited reduction in the cost, delay and uncertainty experienced
by bidders for PFI projects.
The structure and functions of Partnerships UK and the process by
which its development will be taken forward are set out in more detail
in the Annex to this document.
5. Technical Annex
The need for a catalyst
Central to the Bates analysis is the perception that partnerships
with the private sector require a range of private sector skills which
it has proved difficult to nurture within the Civil Service. In addition
to this skill shortage, it is clear that financial constraints - for
example at local government level - can inhibit the effective development
of privately financed projects. This can mean insufficient resources
are devoted to the crucial development stage of PFI projects and can
result in delays to badly needed investment projects and a failure
to secure the best value for money deals.
The strategic need is to create a catalyst to achieve quicker and
better value for money PFI and PPP deals which, by mobilising private
sector skills in service of the public interest and easing the financial
constraints on public sector procurers, can enhance the flow of investment
in the nation's infrastructure.
The mission of Partnerships UK
Partnerships UK will be a new public private partnership operating
in the private sector, and yet with a strong mandate to address key
weaknesses on the public sector side of the current PPP/PFI process.
Its mission is to work in partnership with public sector procuring
authorities to get the best out of their privately financed investment
programmes. It will seek to improve the quality of PPP and PFI deals
by making available to public sector procuring authorities both the
skills of an experienced transaction team drawn from the private sector
and the financial resources to ensure the development of stronger
propositions and more economic and effective management of the procurement
process.
Ownership and Management
A majority interest in Partnerships UK (which will be formed as a
plc) will be held by private sector investors and this will be reflected
by a majority on the Board and a private sector Chairman, appointed
by the private sector investors. As a result, Partnerships UK is expected
to be classified as a private sector entity for the purposes of the
national accounts, which would ensure the private sector incentives,
rewards and disciplines necessary to make it work. However, its role
as a catalyst of public sector investment projects will be central
to the terms of reference under which it will operate and the Government
will be entitled to appoint a minority of non-executive directors
to represent its interests.
The executive management team of Partnerships UK will be drawn from
the private sector, with secondees from the public sector to help
foster a close relationship with Government. The extent of the staff
resources will be large enough to make a material contribution to
improving the quality of public sector procurement of PFI/PPP deals.
All management positions will be filled competitively.
Partnerships UK will work in close conjunction with
OGC which will provide support to departments across the full range
of public sector procurement activity. Under the new arrangements,
the Taskforce will continue as part of OGC, but with a slimmed down
projects capability. The Taskforce will continue to be responsible
for PFI policy formulation and advice and to chair the Project Review
Group which is responsible for prioritising the allocation of PFI
credits to local authority PFI projects.
In the local government sector, Partnerships UK will also seek to
maintain the close working relationship that the Taskforce has established
with 4Ps in its role as adviser to local authorities on PFI projects.
Capital base
The flow of completed PFI deals over the period covered by the Comprehensive
Spending Review (CSR) is expected to be in the order of £3 billion
a year. As PFI becomes entrenched as a core procurement option for
public sector capital spending, the Government expects a continuing
flow of projects of that order in years beyond the CSR.
The Government expects Partnerships UK to grow over time to become
a billion pound company. Its initial capital base will be committed
in essentially equal amounts by public and private sectors. In the
case of the private sector, equity will be drawn down progressively
as required to meet the growth in activities. The Government will
make available an initial injection and will provide additional financing
(probably in the form of an ongoing guarantee). The resources will
be completed by borrowings from financial markets which will explicitly
carry no guarantee by the Government.
The exact size and nature of the Government's commitments will be
determined in the development phase which will follow this announcement.
The Government will keep its commitments to the minimum necessary
to secure the successful launch of Partnerships UK; they are not expected
to exceed £20 million in the case of the initial cash injection
and £170 million in the case of the guarantee. The exact financial
arrangements will also be subject to any necessary Commission approval
with respect to the state aid rules.
The business of Partnerships UK
The aim of Partnerships UK will be to inject more detailed examination
of practical considerations into the decision making process and drive
forward the conclusion of PFI/PPP deals. Its predominant business
will be in project management, offering public sector bodies undertaking
PFI/PPPs, private sector expertise and skills.
Partnerships UK will not operate as a bank - its role is not to provide
long term debt for PFI projects. Instead, in support of its core project
development function it will be able to provide development funding
where appropriate to get PFI deals off the ground, where existing
forms of private finance are not available. In these cases it will,
where necessary, provide a range of financial products, tailored to
the needs of public sector bodies in the early stages of the procurement
process, which enhance, rather than undermine, existing flows of private
finance.
For example, Partnerships UK might provide support to bundle together
projects which individually are too small to be economic for private
sector bidders. In addition, and with the agreement of the public
sector authority, it might provide support for contractors' bidding
costs on large or novel projects. The objective throughout would be
to make the PFI/PPP process work more effectively.
As is the case now, the procuring authority would lead in matters
relating to service specification and delivery and value for money.
Departmental accounting responsibilities would therefore be unaffected
with the public sector retaining ownership of projects throughout
their life. The role of Partnership UK would be in execution, particularly
project management and project finance.
Development Phase
A Steering Group will be formed to oversee the development of the
business case, to consider governance issues, and to prepare for the
raising of private sector capital, which is not expected to take place
before March 2000. The Government will appoint financial advisers
during this period to advise it on the terms of its involvement.
The Steering Group will include representatives of a selected group
of financial institutions consisting of Abbey National Treasury Services
Plc, Barclays Bank, Halifax, Prudential and Royal Bank of Scotland,
together with European Investment Bank. These institutions have not
given or been asked to give any commitment to underwrite or provide
any long term capital, and they enjoy no special privilege or priority
to do so. It is expected that the private sector capital raising will
be tendered competitively. The Government will pay the development
costs incurred during this period (estimated at £6 million).
Partnerships UK is intended to work as a catalyst between the public
and private sectors and in partnership with each of them. During the
development period leading to the raising of private sector capital,
the Government expects to engage in extensive dialogue within the
public sector, and with potential investors and private sector participants
in PFI in order to ensure that the final business plan achieves the
greatest benefits for all stakeholders in PFI, from both public and
private sectors alike.
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