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The Truth About Government Expenditure

March 5, 2009

Truth About Government Expenditure

Public sector purchasing policy may quicken the pulse of few people. However, it may soon enjoy wider interest. Since my days in business, I have always believed that prudent public sector procurement provides the ideal opportunity to rein in waste and in time help fund responsible tax cuts without compromising delivery of service.

There is no one source where it is possible to understand what the government buys. I decided some months ago to undertake some research under the Freedom of Information Act to understand more about where our money is going. This has made intriguing reading. Nearly one-third of taxpayer’s money is spent on the goods and services purchased by government – yet the results of my questioning suggest a disturbing level of financial waste and administrative incompetence.

A significant proportion of the government’s procurement spend is incurred by government departments directly (rather than via quangos or public institutions such as hospitals or local government). As such I concentrated my research on the central government departments, submitting a Freedom of Information (FOI) request to each posing two simple questions. My first request was that each department provide an aggregate figure of spending on goods and services for each of the last three years. Secondly I asked for details of the number of suppliers used per annum.

This is the simplest possible thing to request and the sort of information that is a fingertip away for finance directors and procurement directors in the private sector.

From the responses that I received (five departments could not answer) central government spends over £47 billion per annum. More interestingly, to date the total number of suppliers is well over 100,000. Clearly even a modest reduction to these numbers potentially translates into a significant tax cutting opportunity.

In the financial year 2007/2008 the Ministry of Defence unsurprisingly led the way in purchasing expenditure with a total figure of nearly £18.1 billion. Meanwhile the Department for Health spent £9.7bn and the Department for Transport was another big spender with a total of £3,2bn. The number of suppliers used by central government varied but notably high numbers of suppliers are found at the Department for Work and Pensions (31,521), the Department for Children, Schools and Families (14,815) and the Foreign and Commonwealth Office (26,418). Indeed the Foreign Office also reckoned that they expect this number to rise in 2008/2009 to exceed 30,000 separate suppliers. These figures are quite simply astronomical.

I believe that there are clear lessons that need to be learnt from the present procurement policy. To start with a greater visibility and transparency of each departmental spend is essential. Five government departments seemed to be unable to provide answers to my simple FOI requests. These departments included the Department for Business, Enterprise and Regulatory Reform (BERR) and the Cabinet Office.

If BERR lacks the systems to provide its own data to those who request it then it is likely that there is little internal clarity on its purchasing decisions. Government departments must have their house in order and should be made to disclose freely and openly their expenditure with their contracted suppliers each year. It is ironic that the departments which run government (Cabinet Office) and which advise business (BERR) are not capable of producing this data. Next time Lord Mandelson or the Cabinet Secretary lecture us on needing to be more efficient, remember that their own backyard isn’t so ‘tidy’.

I believe spending and budget control within our bureaucracy must be subject to frequent and effective reviews ensuring accountability, protecting taxpayers’ money and encouraging greater competition amongst potential suppliers and contractors.

Whilst there has always been much discussion surrounding central government expenditure and accusations of financial irresponsibility behind the civil service curtains it is important not to play the gallery with loose accusations of “bureaucratic waste”. Instead this exercise was designed to produce firm evidence. However, when analysing the data it was evident that a “laissez faire” culture all too frequently appears to be reflected across central government. In my research much of the data provided was riddled with mistakes and duplications and was revised when challenged. This inward looking culture must be replaced by a tougher and more professional attitude towards auditing, ensuring compliance with public sector procurement rules and regulations. Data needs to be reliable, systematically processed and not chaotically managed.

Even making allowance for duplication, and the absence of five departments, I have already discovered that central government uses over 100,000 suppliers. This is a huge number and from the data presented it is clear that many suppliers are contracted to several different offices of different government departments, presumably on different terms. This in turn creates higher processing costs and produces yet more central government waste. Radically reducing the number of suppliers and managing them more efficiently should itself result in a sizeable saving to the public purse.

Ultimately, government must demand greater professionalism and a much more commercial outlook in its purchasing policy. The science and skills of sales needs to be translated to purchasing and procurement. Even a cursory analysis of the research that I have carried out suggests three specific pathways to revitalise the relationship between government and commercial suppliers.

First, by requiring that all suppliers with which a department spends more than £10,000 annually should be disclosed on the department’s website within three months of the year end. Personal responsibility for this expenditure should also be made public. This ensures that data is captured and provides suppliers with the knowledge of which of their competitors are being used, encouraging competition, a wider range of competitive bids and a more commercial dynamic to negotiating a better deal. It keeps incumbents on their toes.

Secondly, a contractual commitment should be inserted in all contracts that all suppliers who are dealing with central government should agree to charge the lowest rate that they offer other customers should be implemented. Such a contractual term would be upheld by a penalty of twice the difference in rates and a unilateral break clause in the event that benchmarking shows that they operate a differential pricing level to the detriment of the public sector.

Thirdly, all departments should have benchmarking clauses in contacts of greater than six months duration and no department should agree to confidentiality clauses which prevent benchmarking of rates.

Even these three simple changes would reduce the information asymmetry which suppliers have historically been able to use to their advantage. From advice that I have picked up from procurement specialists with extensive public and private sector experience it is difficult to believe that an annual saving of at least £4.7 billion (10%) could not easily be made on central government procurement alone. Recent publicity on the out of control IT spend only reinforces this conviction.

The evidence is overwhelming. The present government has created substantial levels of “Whitehall Waste” and a decade of purchasing irresponsibility must be brought to an end. The British taxpayer deserves a more transparent, responsible and professional approach to government expenditure. The Conservatives must seize this opportunity boldly to promote a prudent procurement policy that restores people’s faith in government spending without detrimentally affecting public services. From my research in this area I now believe that this is not only a sound idea in theory, but a realistic policy option in practice.

Mark Field MP