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This speech was given as part of a debate in the House of Commons on 12 February 2004
Mr. Richard Bacon (South Norfolk) (Con): It is a great pleasure to follow the hon. Member for Hemsworth (Jon Trickett). In his book on the Treasury, David Lipsey says that when watching a hearing in the Public Accounts Committee, it is impossible to tell from Members' questions which party they come from. When I read that, I thought of the hon. Member for Hemsworth, because I listen with great interest to his contributions and questions, and have on occasion abandoned my planned line of questioning to take up where he left off.

I listened to the hon. Gentleman's speech with great interest. He is right that problems are involved in tending towards oligopoly in suppliers: that applies not only to PFI contracts, but to bank finance. A financial journalist who covers capital markets recently told me that he was worried about the capacity of the financial markets to absorb the Government's huge pipeline of social infrastructure projects. That means, of course, that prices are likely to go up. There are legion examples of the City and financial advisers running rings around the Government, perhaps the most extraordinary being that of the Ministry of Defence building. The most extraordinary aspect, which is not mentioned in our report, is that the MOD went into the swaps market without a swaps adviser, and was of course taken to the cleaners.

I agree with the hon. Member for Hemsworth about the worries that should arise if there is only one bidder for a contract. I, too, was struck by the fact that the Libra project had only one bidder. That should automatically set alarm bells ringing, as the National Audit Office told me a long time ago. Three or four weeks ago, I had a meeting with the mobile phone company, O2. It was a congenial meeting and they were a nice bunch of fellows. They told me, with some pride, that the company was bidding for the ambulance contract and that there was a good chance that it would get it—not least because it was the only bidder. They were very pleased about that, but it nearly turned my blood cold. I have not had the chance to raise that with the National Audit Office, but I hope that it will take notice of this debate. I say to the Economic Secretary that I would not suggest for one minute that, assuming that it was done legally, the contract should be removed from the company on the ground that it was the only bidder. However, in such a situation it is incumbent on the Treasury, the Office of Government Commerce and all the other players involved to take a particular interest in the contract to ensure that it does not go wrong.

Like other Members, I hugely enjoy being a member of the Committee. I pay tribute to Sir John Bourn and his team at the National Audit Office. I pay particular tribute to those in the press office, who are unfailingly helpful to me; and to the Committee staff here. They are ably led by Nick Wright, who is extremely good humoured when I send him e-mails at three o'clock in the morning. The other day, I suggested that if he did not like that, I could telephone him at three o'clock in the morning, but for some reason he said that he would prefer to carry on receiving the e-mails.

I wish to refer to several issues. I have served on the Committee for two and a half years and, as we consider the various projects and reports, I sometimes tend to feel that we are listening to a scratched record. The most startling example of that was our hearing on tackling benefit fraud. The National Audit Office report on the subject includes a chart, which refers to previous studies. Indeed, it stated that our Committee examined the matter in 1998. Under the heading "On the scale and nature of Housing Benefit fraud", our report stated:

"It is totally unacceptable that seven years after we last looked at this issue" -

that is in 1998, so the report is referring to 1991 - 

"Housing Benefit fraud should exceed £900 million, and the Department still did not have information to show whether fraud is increasing, or all the information they need on the types of fraud, including landlord fraud, and variations at regional and local level. The absence of reliable information must cast doubt over the decisions the Department have taken to invest in anti-fraud work and over the achievements they have claimed."

The helpful appendix of the NAO's recent report, "Tackling Benefit Fraud" places previous recommendations in the left-hand column and action taken by the Department in the right-hand column. In most cases, something is written in the right-hand column, but in the case that we are considering, it is blank. In other words, we made a recommendation in 1998 and the Department has done nothing about it. When we questioned Sir Richard Mottram about whether housing benefit fraud was increasing or decreasing, he could not tell us. He had an idea, but he could not tell us the exact position five years after we said that it was unacceptable—and that was seven years after we had previously considered the matter. That is one of the essential worries about the work of our Committee. However many good reports we publish, the Government do not listen hard enough.

In the famous agricultural fraud case involving Joseph Bowden, we had published a previous report on the business of the then Ministry of Agriculture, Fisheries and Food - now the Department of the Environment, Food and Rural Affairs - and the permanent secretary had had to admit that he had not read it. We had previously recommended that the Department could learn lessons on dealing with agricultural fraud from the way in which benefit administration fraud had been handled. The permanent secretary was not even aware of the report, even though it related directly to his responsibilities and was addressed effectively to his Department as well as Parliament.

In paragraph 32 of our 31st report, "Tackling Benefit Fraud", we concluded that the

"Department were unable to assure us that the number of people committing fraud, its overall value or the level of landlord fraud were reducing, although they believed this to be the case."

Paragraph 33 states:

"The Department acknowledged that the pace of change had been less than desirable."

That is one way of putting it. It continues:

"Despite efforts over the years to drive up performance, the results of their comprehensive performance assessment review in autumn 2002 had been very mixed, and the Department considered that the record of local government in administering housing benefit was not defensible."

That is an interesting sentence because it is the point where our responsibilities as a Committee end. I said to Sir Richard Mottram that if local government's record in administering housing benefit was indefensible, surely that was the point at which policy itself caused Government expenditure to be uneconomic, ineffective and inefficient. There is no way round that.

Sir Richard Mottram, who is an able mandarin, simply smiled in a delphic manner and replied that that was policy. I then tackled the Secretary of State for Work and Pensions, whom I bumped into in the coffee queue in Portcullis House. Although I would not describe his answer as delphic, it was difficult to understand. However, it boiled down to the contention that, by the time we shifted to a better system, the people whom we would need to make it work would have left. We could not therefore make changes, even though we recognised that the housing benefit fraud system, as administered by local government, was indefensible. I find that a weak reply and I should like a little more effort to be made.

It is not obvious that housing benefit must be administered by local government simply because it relates to housing, which is based in local areas. I hope that the Treasury is beginning to consider that, because too much money is at stake and too many mistakes have been uncorrected for too long.

The second theme that I want to mention is transparency. The Treasury will know that I have always taken a great interest in professional fees, not least for the Treasury building. I will not labour the point, as I made it in last year's debate, about the £25.2 million for professional fees for the Treasury building. I have a letter on my desk from the Financial Secretary - so it must be true - saying that that is apparently very good value compared with other projects. The reason I am slightly sceptical is that when we ask witnesses about the level of fees, they are not always completely candid. When we had as a witness the chief executive of Bouygues UK, which is working on the Home Office building in Marsham street right now, I asked him what the level of professional fees in relation to that building was. He said that they were £9 million, and he repeated it two or three times. I asked him two or three times whether £9 million was all. Finally, through gritted teeth, he said in his French accent, "No, £25 million." I had to ask him three or four times to get the right answer out of him.

When we had a hearing on Wembley stadium, I was struck by an article in the Evening Standard which said that professional fees in relation to Wembley national stadium were £82 million. I therefore asked Ms Sue Street, the permanent secretary at the Department for Culture, Media and Sport, whether that article was accurate. Her reply was,

"I am very sorry, I am advised that we do not know."

I asked her if she would send us a note, and she kindly did so. The report has been published extremely recently, so we have not yet debated it, but I refer to it because it makes the general point about professional fees. When it came out earlier this week, it elucidated the facts: professional fees relating to Wembley stadium were indeed £81 million, which covers

"Fees, Fixtures, Fittings and Equipment",

and - this is one I like - "inflation for delayed start", whatever that means; and there is no breakdown so one cannot see how much of it is inflation for delayed start. It also covers "contingency", for which there is also no breakdown, so one cannot see how much of it is contingency, and

"other costs in the Multiplex construction contract".

That alone is £81 million. That is not the half of it, however - actually, it is slightly more than half of it - because there is another line,

"Bank arrangement fees/finance costs",

which were a further £22 million. Then there are

"Legal and other professional fees",

which were a further £11 million, and perhaps the best line of all, "WNSL" - Wembley National Stadium Ltd. - "management fee", which is a further £19 million. That makes a total of £133 million.

Hon. Members may recall that the lottery grant to the football stadium at Wembley was £120 million—all of that and more went on paying the professional fees. That is why it is a subject that we need to keep under review and on which the National Audit Office needs to keep an eye.

The reason I referred to transparency is that I sometimes get the sense that we are not given as much information as would be helpful to enable us to reach considered judgments on these matters. One notable exception was the report on the redevelopment of the Ministry of Defence main building. Page 24, one of my favourite pages in any recent National Audit Office report, sets out with startling clarity how the public sector comparator is arrived at. Again, I referred to that in the debate last year, so I will not dwell on it, but it simply sets out the base costs for each item, the extra cost because of the risk, and, in the final column, the risk as a percentage of the base costs. How it is worked out is therefore transparently clear. It is obvious how easy it is to manipulate the figures, to which we referred in our report when we alluded to the fact that just by changing the risk factor for one item - capital expenditure - from 29.5 per cent. down to 29 per cent., the public sector comparator can be changed so that instead of it being £100,000 more expensive it is £1 million cheaper.

The Government now say that they have a much more sophisticated method of analysing risk factors and coming up with a sensible arrangement for advising Departments on what sorts of risk factors ought to be applied to their projects. In a recent hearing, when we were told by a witness that the figure for the risk factor was 24 per cent. for capital expenditure, we asked why. The reply came that that was the figure that the Treasury gave. When we asked how the Treasury got that figure, we were told that the Treasury had had a study done by Mott MacDonald, a group of engineering consultants, and that that was the figure with which it came up. Being a bit of anorak, I decided that it would probably be useful to look at the Mott MacDonald report, which is precisely what I did. In that study, the Treasury provided a list of some 60 projects, and Mott MacDonald provided a further 20 projects, making a total of 80, and it analysed them to see what the typical cost overruns had been.

It is interesting to study the Mott McDonald report in detail. The measurement of operating expenditure is covered on page 10:

"There was great difficulty in obtaining information on operating expenditure. Such information was only available on a small number of projects."

It turns out:

"Of the 80 projects initially reviewed, only 50 projects had a reasonable amount of information, and were retained for analysis. Although most of the information required on the retained projects was available, some key data was lacking."

As a result of that analysis, Mott McDonald comes up with an optimism bias, which involves calculating a percentage figure to add to the total cost of a project so as to arrive at the project's actual cost—basically, one begins with the original cost estimate and adds in the optimism bias to calculate what a project will really cost.

The Mott McDonald report contains a helpful chart that explains that for standard buildings the optimism bias is 24 per cent.; for non-standard buildings it is 51 per cent.; for non-standard civil engineering projects it is 66 per cent.; and hon. Members will be relieved to know that for standard civil engineering projects it is only 44 per cent. Having examined the chart, it occurred to me that the figures must derive from the 50 projects that Mott McDonald has studied.

At the back of the report, there is a project list containing standard buildings, non-standard buildings, standard civil engineering projects and non-standard civil engineering projects—for example, Manchester airport; terminal 4 at Heathrow; Salisbury hospital, phase 1; the Limehouse Link road; and the A34 Newbury bypass. I expected to see three columns to the right of those projects. First, a column listing the original cost estimate; secondly, a column listing the actual out-turn; and thirdly, a column listing the percentage overrun. By aggregating the percentage overruns, one could calculate an average cost overrun for standard buildings, non-standard buildings, non-standard civil engineering projects and so on.

One could not calculate the figures in the table without going through that exercise. However, I have examined the report carefully, and it does not contain any figures, so it is a mystery how Mott McDonald calculated the 24 per cent., 51 per cent. and 66 per cent. figures. Bear in mind that the whole purpose of referring to the report is that the Treasury advises Departments on percentage optimism bias as a direct result of it. If one asks a Department why it has included a percentage optimism bias, it will say, "The Treasury told us to".

Jon Trickett: I am listening to the hon. Gentleman's argument carefully. Does he agree that the Mott McDonald report, which is a critical document on which the Government rest much of their case about public sector comparators, measures deal creep within the public sector but fails to take account of deal creep in the private sector, which means that we end up comparing apples with pears?

Mr. Bacon: The hon. Gentleman anticipates my concluding point. I fear that this is simply another way - if a rather more sophisticated way - to provide any number that the Government require for the public sector comparator. Given that the Treasury uses the report and that Departments say that it gives them numbers based on it, it is strange that the report states that

"the study results on their own should not be used directly as a benchmark to assess optimism bias levels in current and future projects."

The report states a number of reasons for that:

"the introduction of risk management, improved procurement practices (based on greater diligence at the project definition stage), partnering" - 

that is always a good one - 

"more controlled cost monitoring, value management, and the application of concurrent engineering."

In other words, the basis for the numbers that are now being used is itself flawed, but the Treasury still recommends it to Departments.

I turn to the conclusion of the Mott MacDonald report, which states:

"The optimism bias recorded for projects in several recent studies have proved that there is a tendency for project managers and project owners to underestimate costs and time, and overestimate benefits for a project.

Failure to consider and actively manage the causes of optimism bias tends to result in an accumulation of unforeseen cost and time overruns, and benefit shortfalls. However, by developing strategies for the effective management of project risk areas, it is possible to reduce the optimism bias and raise confidence levels in project estimates."

This exercise, which was undertaken on the Treasury's behalf, is in fact a laudable one. Getting some form of scientific measure of what goes on inside large projects, why they go wrong and the precise extent to which they go wrong is very helpful. But I come back to my point about transparency. At the moment, there is no transparency. One cannot go through the report and discover how the figures have been arrived at, so the suspicion remains that the whole exercise is still just another way of manipulating the data, just as the public sector comparator itself too often seems to be a way of manipulating the data, in order to demonstrate the required result.

I turn briefly to the future. As I said at the beginning of my remarks, I worry that our reports and the legion warnings issued about projects in many different areas of government—particularly, but not only, computer projects—are so often ignored. The national health service provides us with an example of huge procurement: the National Programme for Information Technology in the NHS in England. The NPfIT concerns the provision for clinicians of electronic patient records, and it is costing a fortune. Estimates have varied. A recent announcement valued contracts in the region of £2.3 billion. That figure rose to £2.6 billion, and following the recent letting of quite a few contracts, it has reached some £4.2 billion. Indeed, it is expected to rise still higher. The problem is that however much money is spent on the programme, it will not work unless there is buy-in from the users. One of the classic problems with such projects is that the users are not consulted adequately or in time.

The magazine Computer Weekly and the NPfIT itself jointly undertook a study of this issue. A health care market research firm called Medix undertook a survey of people in the health service who might need to have contact with the programme. It asked, "What consultation has there been with you personally about the NPfIT?" One per cent. described such consultation as "More than adequate"; 3 per cent. said it was "Adequate"; 8 per cent. said it was "Barely adequate"; and 11 per cent. said it was "Inadequate". However, 75 per cent. said of such consultation that there had been "None at all", and 2 per cent. were "Unsure".

The NPfIT was so furious about these results that it issued its own press release, in which it completely ignored any of the survey's negative findings. Those who want to check the survey can do so easily, as it has helpfully been made available on the internet. That is one of the few ways in which IT manages to hoist itself by its own petard.

Slightly worryingly, the striking report by the National Audit Office—we are not really debating it; indeed, it was published only today, and we have yet to take evidence on it—says in large letters on page 7:

"Lessons applying more widely from the Bureau's experience are" - 

it is referring to the Criminal Records Bureau -

"The importance of consulting with potential users of the service at the earliest opportunity to gain a clear understanding of how they are most likely to access the service, and responding promptly and effectively to such feedback."

In the report on the Libra project, to which other Members have referred, we offer the following warning on page 4:

"Departments will not achieve the full benefits of introducing IT if they do not redesign business processes in parallel."

The NPfIT says that it will begin redesigning the business processes, but it has already let the contracts. The warnings that we are giving are current. We have not even had the chance to consider the NAO report, listen to the evidence and issue our own report. However, the advice is clear: consult early. In respect of the second report, we already know that the NPfIT is ignoring the need to design business processes in parallel while introducing IT.

That brings me to my final point, about the Office of Government Commerce. The NAO's report on the Criminal Records Bureau states, in paragraph 13 on page 3,

"The Office of Government Commerce Gateway Review Team raised questions about the readiness of the Bureau to go live, but accepted that there was 'no turning back'."

That raises the question of whether the gateway reviewers are culturally too close to the people whom they are reviewing.

The Work and Pensions Committee is currently conducting a study on the IT projects under way in the Department for Work and Pensions. I hope that we shall also look at that, and that the Treasury will take account of it. One of the witnesses for the study was Sir Peter Gershon, chief executive of the OGC. He was asked whether he had ever stopped a project, and also whether he had ever advised that a project was too complex. In each case he gave answers that were long, difficult to understand and non-committal, which suggests that the real answer was "No". I hope that the OGC will seriously consider publishing gateway reviews; perhaps the Treasury will give it a nudge in that direction.

Mr. Allan: I agree with the hon. Gentleman about the effectiveness of the gateway review process. I have looked into it myself, and my impression is that the process has no power to stop projects. If a red light is thrown up, it is for the Department or the public body to decide whether to proceed.

Mr. Bacon: That is true. What is also true is what I thought the hon. Gentleman was going to say: the gateway process does not apply to the health service or the NPfIT.

The central point is this. If these matters were in the public domain and MPs, members of the public and journalists could read about them, the Department might be helped to conclude that it should take a slightly more robust view, and perhaps occasionally stop projects in their tracks.

I think the OGC does a great job, and that it negotiated a fine deal with Microsoft. Sir Peter Gershon's recently conferred knighthood is well deserved. If the title "Hero of the Taxpayer" existed, he would be worthy of it, because he does a tremendous job—but he does it in very difficult circumstances. His only real power is one of suasion. He cannot point at Departments and tell them what to do.

Mr. Leigh: Sir Peter is retiring after three years as a permanent secretary.

Mr. Bacon: I am disappointed to hear that, because I think he was just getting into his stride.

One of the central aspects of the problems we face is the fact that the civil service is constantly on the move. Permanent officials actually move far more often than Ministers. I had the opportunity to have a chat with the right hon. Member for Livingston (Mr. Cook) the other day. I gave him a lift in my car. I was picking up my laundry from the launderette, as you do, and there he was walking along. As his office is in Norman Shaw South, I decided to give him a lift. He said that when he was Leader of the House one of the most extraordinary things he discovered from talking to parliamentary counsel was that when drafting Bills parliamentary counsel almost never get to talk to the same civil servant twice about the same subject, because civil servants move on so quickly.

I was delighted to hear that Sir Andrew Turnbull is thinking of introducing four-year posts for civil servants. That will be a very interesting development, if it actually happens. I was also delighted to hear from Sir David Omand, when the Chairman and I went to Heathrow airport to visit Customs and Excise, that the Government's approach to risk management will in future be tied not just to the statements of internal control that permanent secretaries must sign, but to the spending review process. If they can get traction on that, it will be very interesting.

Another point made by David Lipsey in his book was that the Treasury and the PAC ought to be allies. I sometimes feel that we are not nearly as close allies as we should be, and I believe that one of the reasons is the fact that the information that would enable us to work more closely together is held too closely. The Whitehall culture is the same in other Departments as it is in the Treasury: "Your job is to defend your Department against outsiders". From the Treasury's point of view, Parliament is just another outsider.

As the NAO has pointed out, we are about to spend an extra £61,000 million of taxpayers' money over the next three years in the spending round. A 1 per cent. improvement would lead to an extra £14 billion going into front-line services. I have considerable scepticism about whether that will happen, but if we are to see the changes that we want and achieve the fundamental shift in the way that the Government deliver services to the public, which Sir Peter Gershon spoke about in his ongoing efficiency review, we need to use every lever at our disposal. I believe that the most important lever is transparency, and oxygen, to enable the people of this country to govern themselves, to criticise their Governments more effectively and to ensure that taxpayers get value for money.


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