1. The NHS as a whole spends over £13 billion a year on goods and services, ranging from complex medical diagnostic equipment to examination gloves and stationery. Most is spent by NHS organisations, mainly NHS acute trusts. They deal directly with suppliers for most of their procurement, but around £4.8 billion of NHS procurement expenditure is made through, or with advice from, the NHS Purchasing and Supply Agency (the Agency), an executive agency of the Department. One of the Agency's core functions is to negotiate national framework contracts on behalf of the NHS, ensuring good practice, compliance with European Union regulations and economies of scale. The Department itself spends some £367 million a year on commercial contracts and deals with around 1,700 suppliers. The Department also uses the Agency to procure vaccines as part of its routine vaccination programme.[6]

2. Deficiencies in the Department's procurement procedures were pointed out in four separate Internal Audit reviews carried out between 1997 and 2000. Many of the same weaknesses were again highlighted in May 2001 by an independent external review commissioned from a consultant recommended by the Office for Government Commerce.[7] This review reached the following conclusions:

• Procurement practices within the Department were variable, depending on the importance and interest attached to them by local management.
• The Procurement Policy and Advisory Unit was under-resourced and the role afforded to it was at variance with other government departments. For example, the Unit did not have systems to provide readily available data on what was being spent with a particular supplier and the goods or services received, or develop e-commerce for procurement purposes as required across Whitehall.

3. The review recommended that the Department enhance the role of the Unit to cover the monitoring of procurement activity within business units; to promote collaboration where beneficial; to pursue the e-commerce agenda; and to maintain professional standards. An enhanced Unit taking these initiatives forward had the potential to achieve better value for money, estimated at savings of some £5-6 million of public money a year.[8]

4. In October 2002, the Department commissioned the Deputy Chief Executive of the Office of Government Commerce to lead a review of its commercial and procurement activities, which was completed in March 2003. The review's key recommendation was that the Department should appoint a Commercial Director to provide a strong focus for the procurement activity of the Department and the NHS, and this appointment was made in August 2003.[9]

5. The Department acknowledged that action in response to these reviews might have been taken more quickly, and that savings would have been realised sooner as a result. It had not been able to take action earlier because there had been some changes in the Department and under-resourcing of its Procurement Policy Advisory Unit. In the last year, however, the Department believed it had made a number of improvements which would enable it to achieve the savings of between £5 and £6 million a year predicted by the 2001 review.[10] These changes included:

• the strengthening of the Procurement Policy Advisory Unit and the appointment of the Commercial Director to link the relatively small amount of procurement done within the Department with the very large amount of procurement in the NHS;
• the introduction of Office of Government Commerce Gateway review procedures for all major projects which include procurement and procurement activity; and
• the implementation, from April 2004, of a new financial and business management system which will give the procurement group a supplier database and increased control over procurement activity.

6. The Department also reported to the Committee that it had identified additional savings of £4.8 million in 2000-01, £5.1 million in 2001-02, and £5.6 million in 2002-03 by the application of good procurement practice to the Department's commercial expenditure.[11]

On procurement arrangements

7. Procurement arrangements within the Department are highly devolved to business units within the Department. Procurement activity within each business unit is supported by Corporate Development Teams based in each Directorate, many of which have still been developing their procurement role. The Department's central Procurement Policy Advisory Unit disseminates procurement policy and best practice and provides direct support to business units on major procurement exercises. Following recommendations made in the internal and external reviews, the Department has expanded the Procurement Policy Advisory Unit from seven to ten staff. In August 2003, the Department also appointed a Commercial Director who is responsible for all the Department's commercial activity. These changes are also expected to develop better links between the relatively small amount of procurement activity in the Department and that done in the NHS as a whole.[12]

8. Since 1 April 2003, the Office of Government Commerce Gateway Project Review Process has applied to all high risk investment and procurement programmes and projects within the Department and the NHS. It is not mandatory for all procurements undertaken locally by individual hospitals. In assessing whether or not to use the Gateway process, bodies assess the level of risk associated with a potential project using a model which takes into account whole life cost, complexity, experience of the client and contracting organisations and other significant risk factors. The assessment of risk is not solely based on the capital cost of a programme or project.[13]

On financial and business information systems

8. The Department has recognised that its own financial and business information systems are not satisfactory and do not provide all the information that is needed. A new information system, provided by Oracle at a forecast cost of £4.3 million, is due to be in place in April 2004.[14]

9. The Department is in the process of reforming the NHS specifically to devolve as much responsibility as possible to local health bodies. The Department recognises that there is always tension between achieving the benefits of local autonomy in purchasing decisions and exercising the considerable negotiating power of a buyer as large as the NHS. Achieving the right balance depends on establishing appropriate incentives for local bodies to be part of any national system. For example, in its current development of the NHS Programme for Information Technology, the Department does not intend to pay local bodies for participating in the national systems, but will incentivise them to use these by allowing them to keep savings made as a result of being part of the national network. The Department has also maintained pressure on overhead costs throughout the NHS, and will challenge organisations whose costs are rising faster than others.[15]

10. The NHS Purchasing and Supply Agency too has identified weaknesses in its contract management arrangements. These include a lack of information routinely available on its contract portfolio, multiple supplier databases maintained by buyers, from which the Agency was unable to analyse supplier information that might have improved its negotiating position, and an inadequate monitoring system. The Agency has been developing a single supplier database that will be accessible to buyers across the Agency.[16]

7   Qq 2, 62-65; C&AG's Report, para 2.12 Back

8   Q 4; C&AG's Report, para 2.14 Back

9   Qq 62, 66-67; Ev 15 Back

10   Qq 2-6, 49-52, 69-71; Ev 19 Back

11   Ev 15 Back

12   Qq 50-51, 71; C&AG's Report, paras 2.7-2.8 Back

13   Qq 71, 112-117; Ev 20 Back

14   Qq 43-51; C&AG's Report, para 2.16 Back

15   Qq 53-56 Back

16   Q 52; C&AG's Report, paras 2.17-2.18 Back