UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 520-iiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFORETREASURY COMMITTEE(TREASURY SUB-COMMITTEE)
EVALUATING THE EFFICIENCY PROGRAMME
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This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935
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Oral Evidence
Taken before the Treasury Committee (Treasury Sub-Committee)
on
Members present
Mr Michael Fallon, in the Chair
Nick Ainger
Mr Graham Brady
Mr Colin Breed
Ms Sally Keeble
Mr Andrew Love
John McFall
John Thurso
Mr Mark Todd
Sir Peter Viggers
________________
Memorandum submitted by HM Treasury
Examination of Witnesses
Witnesses: Mr Andrew Hudson, Managing Director, Public Services and Growth, HM Treasury, Ms Louise Tulett, Finance Director, Treasury Group, and Mr Nigel Smith, Chief Executive, Office of Government Commerce, gave evidence.
Q76 Chairman: Ms Tulett, can we welcome you back to the sub-committee. Perhaps you could formally introduce yourself and your colleagues.
Ms Tulett: Indeed. Andrew Hudson is on my right, who is the new Managing Director of PSG within the Treasury, and Nigel Smith, who is the Chief Executive of OGC.
Q77 Chairman: Could we start off with this five billion pound figure that suddenly emerged in the Pre-Budget Report? Where did the five billion actually come from?
Mr Hudson: May I take that one, Chairman. This is was a judgment that was reached, in the light of the early progress of the work of the Operational Efficiency Programme and of the Public Value Programme, as to what additional savings on top of the 30 billion that was already baked into the spending review settlements were possible to be delivered in the course of 2010/2011. The Government's approach to value for money has broadened and deepened over the years and this represented a further extension of that.
Q78 Chairman: Where did the figure of five come from? I can see the Government wanted to produce some more savings. It had the initial findings of the OEP and PVP programmes, but where did the calculation of five come from? It seems a rather convenient number.
Mr Hudson: A judgment had to be made. Clearly, the more value for money savings that can be secured the better, and this five billion was actually a reduction in overall spending, which helped the fiscal position. The judgment was how much could be achieved, given the time available, that were genuine value for money savings, and, after looking at the emerging findings, five was the figure that was arrived at.
Q79 Chairman: How can you be so sure that that kind of target does not impact on the quality of work that is being produced across the Civil Service?
Mr Hudson: The Government has published, in the Value for Money update document that was published on budget day, some very clear statements about the sort of thing which will be taking place, the sort of activities that will be taking place, partly to explain the additional five billion, partly to explain the original 30 billion, and that makes clear that these are genuine value for money savings. They will be reported on regularly in departments' autumn performance reports and in departmental reports and the NAO will be auditing the work. So, having worked on public spending for a time, on and off, over the years, it seems to me there is more transparency about what is being done than ever before in terms of this Value for Money programme.
Q80 Chairman: I understand the transparency and the reporting, but how can you reassure us that these further savings will not impact on quality?
Mr Hudson: That is the very clear commitment of ministers and permanent secretaries, and the acid test will be: are departments delivering on their original targets in terms of quality? All that is reported on as well. The document I referred to makes very clear that the allocations to front-line services - to give some examples from health to PCTs, schools, police and so on - are, exactly as planned, consistent with the ability to deliver the five billion savings.
Q81 Chairman: Will the five million be harder to achieve than the original target under Gershon, or easier?
Mr Hudson: I think the programme goes on. As I say, there has been a development, and the process of delivering savings and value for money gains, in the broader sense, has both broadened and deepened over the course of the last few years. Gershon was the first comprehensive approach to delivering value for money savings across the public sector, looking at some specific work streams following Peter Gershon's report. Since then the programme has developed and both broadened its focus, looking for value for money in a broader sense. The definition over efficiencies has become more rigorous, in that they now all have to be cash releasing, sustainable and net of both up-front costs and of on-going costs, and now we are moving on to the work of the Operational Efficiency Programme and other yet broader and deeper approaches.
Q82 Chairman: You said "broader and deeper" there a number of times, but my question was: is it easier or harder? Is it easier because you are becoming better at being more efficient, or is it harder because you have taken out the easier savings at the beginning?
Mr Hudson: I think it is possible, Chairman, that those two could net off. I recognise from experience that some people will say it gets harder because we have taken the low-hanging fruit, but at the same time experience, tools and techniques, approaches to delivering savings develop all the time, technology improves all the time and that creates further opportunities. As I think Martin Read said in his evidence to the committee last month, this is a process that goes on. I suspect it will vary from sector to sector, department to department, as to whether it is harder, depending on opportunities.
Q83 John Thurso: I am not sure if this is for Mr Hudson or Ms Tulett, but the memorandum that we have shows that the Treasury group exceeded its efficiency targets by 11.2 million. Did you always expect to exceed the target?
Ms Tulett: We did not. We had quite a rigorous programme of efficiency in place and we were surprised, I think, in some instances, how successful we were. We were quite cautious in the early quarters of reporting not to over report, because we wanted to make sure that what we were reporting were genuine efficiency savings. So I think you will see in some of the final outturn adjustments there is a bit of a switch between what we have claimed and some of the lines, and some of that is around making sure that we had eliminated things, for example, fortuitous savings on the valuation of the building, non-cash savings - elements like that. The final reporting is properly sustainable, and we had under reported in the early years because we did not want to over grab savings that we were not then sure would actually be sustainable to the end. So it was quite a robust review.
Q84 John Thurso: How confident are you, or are your departments, that the final Gershon claims represent genuine efficiency savings?
Ms Tulett: I can speak for the Treasury domestic. If you want to broaden that out, then Mr Hudson will take the broader question. On the Treasury domestic, we are quite confident that these are sustainable. We have undergone a series of cultural changes. Also there are structural changes. For example, one of the initiatives was the group shared services. We took out corporate services from the DMO, OGC and core Treasury and pulled that together under the management umbrella of core Treasury, and we now provide shared services. So that in itself was quite a good structural change and did bring about considerable efficiencies, and we are continuing to explore that. We also looked at work that we could stop doing and reallocated, I think, about 89 posts within the core towards new priority work. The way that we set our budgets structurally has something that we call the "strategic reserve", which means that every year we will give out non-current funds to some of the directorates on an invest to save type basis or some pump priming, and every year they have to bid back to the central pot. We have tried to design the resource distribution in such a way that there is quite a detailed examination constantly so that we are looking to reprioritise and point resources at the priorities.
Q85 John Thurso: The reason for my question is that the NAO, during its evaluation of the efficiency savings, said that, of the 13.3 billion claimed, only £3.5 billion was considered to fairly represent the efficiencies it had made, for £6.7 billion, it was concluded, the reported figures represent efficiencies but carry some measurement issues and uncertainties, and for £3.1 million it was considered there may be efficiencies taking place but the measures used either do not yet demonstrate efficiencies or the reported gains may be substantially incorrect. Does any of that apply to what you have reported?
Ms Tulett: Not to the Treasury domestic. It might be that Mr Hudson can pick up on the broader position.
Mr Hudson: Let me talk about the position more broadly. Obviously, I recognise the NAO report that you are referring to. The report was published in February 2007, so the Gershon Programme still had some way to run at that point. Putting the first two of your figures together, this meant that even at that mid-point, shall we say, the NAO were recognising that over three-quarters of the savings did, indeed, represent efficiencies and that there were some question marks over the measurement. Since then we took steps to make sure the measurement was, indeed, properly rigorous. Also each saving had to have a service quality indicator and the saving was not banked, if you like, or confirmed until the service quality indicator was signed off. Putting all those things together, at the end of the programme we are confident that the £26.5 billion savings are, indeed, real compared to a target of £21.5 billion.
Q86 John Thurso: So if the NAO look again, as I am sure they probably will, they would reflect that confidence.
Mr Hudson: The NAO are welcome to look again, of course, if they choose to. I am pleased that they are looking forward; that they are actively involved in auditing the value for money work that is taking place now as part of the current spending review cycle.
Q87 John Thurso: One further point. You have talked about the quality of service, and it is a core issue and I am sure there will be other questions on it, but what evidence do your departments have that the staffing reductions made to date have not affected the quality of service? How do you evidence that assertion?
Mr Hudson: I think it comes back to progress. First of all, as I say, for the Gershon savings each indicator had to have a quality confirmation put to that. For the continuing work, the NAO will clearly look at that in their audit, and I am sure other stakeholders, including select committees, as they look at departments' performance over the years, will look closely at not just what is happening to costs and particular value for money measures but what is happening to the service that is being delivered. I would say departments have clearer targets in terms of their departmental strategic objectives, clearer targets probably than ever before -performance is reported against those regularly - and so stakeholders have the opportunity to judge for themselves, based on that information, whether these value for money gains are indeed real, as we are determined that they should be.
Q88 John Thurso: You listed earlier three criteria. I think they were net of costs, sustainable and cash?
Mr Hudson: Cash releasing.
Q89 John Thurso: Cash releasing. What, if any, percentage of the efficiency gains were offset by unreported costs? What, if any, was netted off there?
Mr Hudson: I do not have the answer to that immediately, I am afraid.
Q90 John Thurso: Perhaps that is something you could let us have.
Mr Hudson: If we do have information on it, then I will happily let the committee have a note.
Q91 Mr Breed: You indicated some of the differences between the nomenclature of Gershon efficiency savings and value for money savings, because that is what they were. Can we drill down a bit more into that? Under Gershon there were important controls in respect of service quality to ensure that these efficiency improvements were not simply going to be cuts in public services, but that seems to have been relaxed under the CSR/07. Why was that?
Mr Hudson: I do not think it has been relaxed. These value for money initiatives have been scrutinised very carefully to make sure that they are precisely value for money measures rather than just cuts, and I have talked about the level of scrutiny that will be available. The measures, or major examples of them, have been set out in this document, and there is every opportunity for stakeholders to scrutinise that and satisfy themselves that these are, indeed, value for money gains.
Q92 Mr Breed: So you do not say there was any relaxation; they are just as robust, just as rigorous in terms of the original Gershon---
Mr Hudson: I think, overall, the programme is more rigorous, because, as I say, the savings are cash releasing, net of costs, both up-front and on-going costs, and sustainable.
Q93 Mr Breed: How can the departments demonstrate adequately to you and, indeed, to us that the savings that they have claimed in parts of the report represent the fact that they have done things in a new way, that they have really vigorously looked at these things and made these savings and are not just rolling out previous efficiencies and calling it the fact that they are doing something new?
Mr Hudson: First of all, the £30 billion value for money savings are baked into the spending review settlements alongside the strategic objectives, and so that is already baked into the base on top of assumptions that will have been made about what was achieved under Gershon. I imagine that was before I was in this post. So the savings are already baked into the base and a lot of detail has been provided in this document, for instance, about the value for money measures on which departments will be held to account, as I say, not just by the Treasury but by the NAO.
Q94 Mr Breed: So somebody had actually gone and looked at the facts and identified that they are doing things in a new way and that these have produced savings, not just looking at the figures and saying, "Oh, that looks good."
Mr Hudson: As I say, the NAO will be auditing this value for money work.
Q95 Mr Breed: So they audit not only the figures but the processes which produce the figures?
Mr Hudson: Yes.
Q96 Mr Breed: What about the charge that you are encouraging short-termism to the long-term detriment of public services? The most obvious thing in more recent times is that you do not mend the roads, so you are not spending any money on that, but, of course, you are stacking up major problems in the future because you will have to resurface the whole lot. Therefore, you get short-term savings but you are not balancing that against long-term detriment. That is just an example. How are you stopping that in what you are doing or demonstrating that you are not encouraging short-termism?
Mr Hudson: One move over time that has encouraged longer-term planning is moving to longer-term budgeting. I can remember a time when there was more short-termism, because budgets were set year on year on year. Now we have longer-term planning, departments are better---
Q97 Mr Breed: What is long-term in your budgeting?
Mr Hudson: Typically the spending reviews have operated over a three-year cycle in recent years.
Q98 Mr Breed: That is not very long, though, is it?
Mr Hudson: So departments have been able to plan. It is, again, down to scrutiny, down to good management across departments about how they plan their work. On maintenance, one of the examples of savings that has been achieved is through the Highways Agency getting improved cost-management of maintenance contracts.
Q99 Mr Breed: So you are confident that there is no encouragement of short-termism to long-term detriment in that sense.
Mr Hudson: Yes.
Q100 Mr Breed: Okay. Why did you decide against introducing specific staffing targets under CSR/07? There is a suggestion that the advances, such as they were, made under Gershon are now potentially being reversed?
Mr Hudson: As part of developing the approach to value for money, it was felt that it gave departments more scope for how to deliver these savings if it was looked at in terms of an overall efficiency gain which might well be reflected in changes to staffing but did not have to be. So rather than add an additional constraint, it gives more scope for genuine exploration of where the best value for money can be gained to focus on what is being achieved for the funding that is available; how the department can best achieve its objectives within that funding that is being agreed without having a specific sub-objective, if you like.
Q101 Mr Breed: So the original idea of staffing targets was probably not a very good way to go.
Mr Hudson: I talked about the way that the Government's approach had developed over time, and this may be an example of it, in that, as part of getting this process underway on a comprehensive basis, the head count reductions were judged to be the right thing to do in the early to middle part of this decade when the approach to delivering value for money, and the culture, if you like, was less well entrenched than it is now. Having over delivered on the Gershon staffing reduction targets, as well as over delivered on the financial targets, the judgment was that it was now more appropriate to specify value for money in the way that I have described. It does not mean that administrative savings, if you like, are not an important part of the approach, because each department is having to reduce its administrative costs by 5% over this period as well.
Q102 Mr Breed: So having got rid of too many people, the service to the public having declined substantially, you had to go out and re-employ them, and now we call it something different under value for money savings. Is that it?
Mr Hudson: I explained earlier that I do not accept that the service to the public has declined, and there is plenty of evidence---
Q103 Mr Breed: You do not sit in our surgeries, then, at appropriate moments. In the Budget 2009 HMRC was given an additional recyclable target of £80 million. Where do you expect these additional savings to be found and what is the Treasury looking for HMRC to do with these recycled funds, should they arise?
Mr Hudson: As far as the details of HMRC's work is concerned, I would have to refer the committee to Lesley Strathie, who I think is giving evidence later this afternoon. The judgment on HMRC was that, although they have, as you say, identified further value for money savings that they can make, given the pressures on the department overall, it was appropriate for that to be redirected to priority work areas within HMRC rather than, as with most departments, reflected in a reduction in their spending level.
Q104 Mr Breed: So they are being let off then, are they?
Mr Hudson: As I say, the details, I am sure, will be covered by Lesley Strathie, but I am confident she will not regard herself as let off the drive for value for money; far from it. Having been part of HMRC until a couple of months ago, I can confirm that they have got their foot as firmly on the value for money pedal as others have.
Chairman: We will check in a few minutes time.
Q105 Mr Love: Can I press you a little further on the staffing reductions? In the final report on the Gershon Efficiency Programme, the table in that report showed that across the Chancellor's Department, although there had been a gross reduction of 19,000 odd, the net reduction was 16,000, about three and a half thousand lower. What happened to those three and a half thousand members of staff? Where were they reallocated to?
Mr Hudson: Are we talking about headcount reductions or reallocations?
Q106 Mr Love: It is on table 3.A of the Treasury final report on the Gershon Efficiency Programme. It shows in there, if you look at it, a gross reduction of 19,718 and a net reduction of 16,218. That is a gap of three and a half thousand people who must have been reallocated somewhere. Just give us some idea where those people went?
Mr Hudson: I am sorry for the interruption. I have got the point now. These were 3,500 staff, all within HMRC rather than the other Chancellor's departments, who were reallocated to other work. So, as the table brings out, for the vast bulk of departments the gross and net figures are the same. For I think just Work and Pensions, and the Chancellor's Departments and here (meaning HMRC), the staff were redirected. The difference between the two is staff who were redirected to other roles.
Q107 Mr Love: Perhaps at some point you could give us more information on that?
Mr Hudson: Again, in terms of speed, Mr Love, Lesley Strathie may have the details of the redeployment of those three and a half thousand staff.
Q108 Mr Love: I can see the second part of our session may be a bit longer than the first part, as you appear to be passing on quite a lot to her! You mentioned earlier, in answer to questions from Mr Breed and Mr Thurso, the controls on service quality that were part and parcel of that Gershon process. Obviously, it is a significant number, the 16,000 odd net reduction figures. We heard extensively from the trade unions that this was having a very adverse effect on particularly HMRC. This question will undoubtedly come up again, but I wanted get your view in relation to how confident you are that the controls on service quality contained in Gershon were adequate to the task.
Mr Hudson: It was a serious requirement for permanent secretaries, I think I am right in saying, to sign off these controls formally, so, yes, I am confident.
Q109 Mr Love: Let me ask you a very specific question. Again, this will be come up in the second part. It was put to us that the amount of tax outstanding had gone up considerably, and the trade unions believed that that was at least partially the responsibility of the net reduction figure in staffing. Was there any concern that the effect of the net staffing reductions would have an impact on the tax figure, the tax gap, if I can call it that?
Mr Hudson: That is clearly something which we need to keep an eye on, though I note that the actual tax collected went up year on year through 2006/2007 and 2007/2008. So, although I recognise the concerns that have been expressed, I think that is the outcome and, again, I am sure HMRC will expand.
Q110 Mr Love: Can I ask you about redundancy payments for the people who were released from their employment? Do you have any idea of what the overall redundancy payment was for the reduction in staff?
Mr Hudson: I do not, I am afraid. I do not know whether we collect this.
Q111 Mr Love: We will come back to that. Finally, we talk about gross and net figures. Would the redundancy payments have been netted off your final efficiency savings as a matter of principle, if you do not know the practicality of it?
Mr Hudson: I do not know. Again, rather than give an answer straight off, perhaps we can let you have a note on the detail of that.
Q112 Chairman: There is a principle here. Either you include the figure in your final savings or you do not.
Mr Hudson: I am advised that Gershon allowed both gross and net figures. I think this is one of the differences between the Gershon approach and the approach to the 30 billion savings. For the 30 billion, those savings have to be net of both on-going and up-front costs. For the Gershon savings, they did not have to be.
Q113 Mr Todd: When we saw Dr Read, he impressed on us that efficiency programmes do not have an end; they become a part of the skill-set of the organisation involved. To what extent has that actually happened?
Mr Hudson: I think it is happening more and more, and the value for money is more deeply embedded in the culture certainly than when I was last working on public expenditure issues ten years ago. It is more entrenched, for instance, in the process of capability reviews, and that is going to be taken further following the document on working together which was published back in March, saying that future capability reviews will give much greater weight to value for money. I think it is a bigger part of people's daily work, and that is down to working on things like Gershon and the initiatives we have been talking about.
Q114 Mr Todd: There is an argument for saying that the initial programme was focused on relatively incremental change and some low-hanging fruit on procurement, for example and that the next stage would involve a substantial organisational change and repurposing, which demands a completely different skill-set. First, would you agree with that and, secondly, if you do, does that skill-set exist within the departments who will have to carry out these programmes?
Mr Hudson: Whether we are moving to a totally different type of change will vary from department to department and service to service. As to the skill-set, one thing that we are very keen to do is to learn from best practice that is already in place in the public sector and to spread that. One of the points that came out of Martin Read's report is that he found some excellent practice within the public sector, and one of the things we are trying to do through the Public Value Programme, for instance, is to identify people who have already delivered major value for money improvements within particular departments, or particular sectors, and make sure that we are learning from their success, and, as we get better benchmarking data on the HR and IT areas that Martin Read looked at, we will be still better able to identify who those people are and spread and use that skill-set.
Q115 Mr Todd: The work that he did focused very substantially on back office, IT and shared resource issues, in relation to which we have a track record of at best patchy in achieving. It involves substantial cultural challenge of working across departments, for example, or in local government working across completely different organisations. To be honest, is that skill-set there to carry out those sorts of tasks: because that is well beyond the function of simply saying that we have got to find a way of making 10% savings here?
Ms Tulett: Perhaps Mr Smith could help us on this.
Mr Smith: You mentioned procurement. I would say, quite clearly, on procurement, having had a look at it, a lot of the increases or savings have been, in the past, tactical, if I can call it that. Looking forward, I think you have to go to a more strategic approach. It will require more sophisticated systems - there is no question about it - and, on procurement in particular, the heart of OEP is about collaborative procurement. Of course this hits the other issue that you raise, which is a problem: how do you get government to work together for a common cause, which committees have many times talked about? On collaborative procurement that is what this is about. Later on, you may want to ask about the collaborative procurement part of OEP, but certainly in setting that up we have now got collaborative boards in place on six categories; we are going to extend it by a further three categories. That is not just for central government: we have got representation from the wider public sector and we have strategies being developed, or which have been developed, for each of those categories. So the answer is, yes, I think it does require a more strategic approach and a new process in order to get these savings, certainly on the procurement side.
Q116 Mr Todd: Can I query the balance between top-down and bottom-up to the culture of this?
Mr Smith: Yes.
Q117 Mr Todd: The two recent programmes, the OEP and the Public Value Programme, appear to be substantially top-down programmes: this is what must be done. Whereas other programmes started in the last CSR exercise appear to be more bottom-up and departmentally led. Is there a difficulty there?
Mr Smith: I will certainly take it from the procurement point of view. I do not want to sound too trite, but I think it is both.
Q118 Mr Todd: It cannot be both in accountability terms.
Mr Smith: It cannot, but the accountability actually is driven by the joint accountability as far as the collaborative board is concerned. So the process has inevitably got to be put in at the top. The involvement and the information that we put into that process will as much come from the bottom, if I can call it the bottom. I feel uncomfortable calling the bottom the people that deliver out of the departments or the wider public sector, but, in my experience on the collaborative programme there have been as many benefits coming from understanding, for example, what is going on in local government - framework agreements, good ways of buying, procuring particular categories - and so actually getting people in that room against a common strategy which is not one developed by the top, it is developed by the team, which has the wider public sector included, and then saying, "Right, we are now jointly going to go ahead and ensure compliance with that as a group. That is not me saying we have got to have compliance. So, I think it is both: I think it is top-down in terms of a cross-departmental process.
Q119 Mr Todd: One last point. The Public Value Programme does not appear to touch the Chancellor's departments. Is that correct?
Mr Smith: I think we are still waiting to find out, actually, how that will be impacted on the Chancellor's departments.
Q120 Mr Todd: It may do, but it has not been one of the items that have been separately identified to date?
Mr Smith: Yes. That is my understanding.
Chairman: Let us move on and hear a little more about the OGC. Graham Brady.
Q121 Mr Brady: How profound an effect has the introduction and development of e-auctions had on public sector procurement?
Mr Smith: I would not describe it as
profound. In fact, one of the
recommendations of the OEP is that we should actually look at the possibility,
the feasibility, of setting up a centre of excellence for e-auctions. I would say, quite openly, that was one which
I basically pushed to be included in the report. We have had some success on e-auctions; there
is no question. OGC itself has been
almost pump priming and marketing e-auctions.
We have run ten. The spend
covered about 150 million, and average savings against last bought cost against
that ten is 31%. So, in terms of the
volume, we have saved £43 million on those ten e-auctions. Could we do more across government on e-auctions? Of course we could. I would just make the point, though, that e-auctions
are not appropriate for many parts of procurement of third party goods and
services. So it is not a panacea which
you can say: "We spend 175 billion.
Let us get everything done by e-auction." It will be a small part of that, but we do
not do it and use it as much as we should.
It has got a tremendous opportunity.
In my private sector career, one of my
Q122 Mr Brady: Do you have an estimate of the total savings that have already been achieved in the Chancellor's departments?
Mr Smith: I do not. I can give you the total savings for OGC and also Buying Solutions. The total saving over the last three years is about £60 million, just from around about 20 e-auctions. There are many, many more e-auctions happening in local government and in the wider public sector. The issue is that e-auction is all about how can you get common specifications that you can go to market with a commonly assessed quality of service coming back from the supply base? So actually this collaboration in procurement presents a tremendous opportunity. For the first time we can collect the requirement from across government, we can see how that would be appropriate for e-auctions and then we can go to market, but, I have to say, e-auction will take, on average, about six months - five months to set up - because it requires qualifying the supply base, getting the right specifications. So all of the participants agree the specification, the service, the delivery and the quality; it is not just about price.
Q123 Mr Brady: Could you perhaps write to us with an estimate of the total savings which have been achieved in the past in the Chancellor's departments, or the closest you could get to them?
Mr Smith: I can give you an estimate, yes.
Q124 Mr Brady: Also, you said that, whilst it is not a magic bullet, there is more that could be done and that it could be used in more places than it is at the moment. Do you have particular thoughts about where it should be rolled out to?
Mr Smith: I think it is appropriate right across the wider public sector. In terms of categories, I think it is more appropriate to procurement of product than it is to service, but I would have to say, I have got personnel experience of large service contracts being put to e-auction successfully. If you look at the history of government, I was reading about an e-auction that took place three years ago, two and a half years ago, in the Ministry of Defence, which was actually about refitting, I think it was, part of their service fleet, repairing and refitting. So you can do some complex stuff, but it is mostly about product - for example, product with service around it: so tin ware, if I can use that expression, for IT, so for lap tops, for multi-dispersed devices; those are the classic sort of pieces of product which lend themselves to e-auction.
Q125 Mr Brady: Can I move you on to relocation of staff? What proportion of the OGC's £5.7 million of efficiency savings was achieved through staff relocation?
Mr Smith: In terms of the OGC, the
5.3 million, just for clarity's sake, was split between OGC at 3.5 million
and 1.8 million from Buying Solutions.
Buying Solutions is not part of OGC.
Buying Solutions does report to me, but it is not part of OGC. There was a small part associated with
relocation, although in terms of Buying Solutions the majority of the savings actually
came out of 2.2 million, not 1.8, because they relocated 22 staff out of
Q126 Mr Brady: How many of those staff did move to follow their jobs and how many appeared to balance that?
Mr Smith: I have not got that information. Certainly there were five posts relocated and 22 for Buying Solutions.
Ms Tulett: I can talk to the core
Treasury relocation. There were ten
posts which moved from
Mr Brady: Thank you.
Q127 Ms Keeble: This efficiency programme is also then returning the public finances back on to a sustainable basis. I am not sure if you have seen the PWC report, which spelt out three options: year on year cuts in spending of 1.4%, a freeze in tax increases or very substantial efficiency savings. I wondered if you had looked at those and could comment on the plausibility, or possibility of each of them?
Mr Hudson: I think the Government set out its plans for fiscal consolidation in the Budget. It remains committed to ensuring sound public finances over the medium term and has set out consolidation measures that will halve the deficit within four years and reduce borrowing by a total of 50 billion, and that is the Government's judgment on the appropriate pace of consolidation, which is, I think, the issue that PricewaterhouseCoopers were addressing there.
Q128 Ms Keeble: I do not remember seeing options specifically around spending cuts, because 1.4% was more than the restrictions that we had from 1996 to 1999, I also do not remember seeing anything substantial about tax increases and I also do not remember seeing anything substantial about efficiency savings either, not on the £37 billion scale.
Mr Hudson: I think the efficiency savings that PricewaterhouseCoopers were talking about when we got behind the headline figures, their figures turned out to be fairly similar to those which the Government is driving through, through the operational efficiency programme. Nigel Smith may be able to say more about it.
Q129 Ms Keeble: Your figures go up until 2011, do they not, and the PWC figures are going up until about 2013, 2014. So they are incremental, are they not?
Mr Hudson: The operational efficiency programme figures that are in the budget, the total of £15 billion worth of savings from back office and so on, do go up to 2013/14.
Q130 Ms Keeble: But £15 billion is less than half of what the PwC proposals are; they are £37 billion, are we not?
Mr Hudson: We are talking about slightly different things and, again, the big difference is about the procurement figures. Nigel Smith will be best able to explain that particular element.
Mr Smith: In fairness to PwC they did put a fairly heavy caveat on this. This was not exactly the back of a fag packet but this was not with any in-depth study, but having said that the figures that were quoted were for 2015/2016 and we have got comparable figures on procurement for 2013/14. The range of PwC savings on procurement ---
Q131 Ms Keeble: They said that you should aim to restore the current budget back to balance by 2013/14 instead of 2015/16.
Mr Smith: Sorry, I was just talking about the procurement element where they were talking about the potential for savings from procurement. I cannot really comment on the overall government budget side. On their range for procurement, the range they gave was between £9 billion and £24 billion. The Government's OEP programme only talks about procurement in respect of the collaborative programme; there will be other procurement efficiency benefits within the departments where they are not doing things through collaboration, where they are purely doing things about improving their procurement on things that they only buy for themselves. If you look at the way that PwC split it down, the first is e-commerce benefits, the second is renegotiation of contractual spend, which is largely the departments on their own, and the third is the buying landscape. If you look at where the equivalents are to the OEP, most of it is actually on the buying landscape and here they expressed a view that between £1.5 billion and £3 billion of benefit could be achieved by 2015/16. Actually in the OEP for collaborative procurement there is £7.7 billion of collaborative procurement benefits built in to 2013/14, so we are actually comparing a bit of apples and pears, certainly on the procurement side, I cannot talk about the others.
Q132 Ms Keeble: You seem to be as a group being very complacent if I might say about the prospects for getting the budget back into balance, whereas from what we have seen and heard in this and other reviews and certainly in our visit to the States where we heard very similar kinds of figures and projections to what we have got here, the prospects look much more difficult and I really wonder how you think you are going to manage to get the public finances back into balance in a very difficult time.
Mr Hudson: As I say, the Government set out its fiscal plans in the Budget and that takes a judgment on the appropriate pace of consolidation, recognising uncertainty around the prospects given the exceptional nature and strength of the global downturn, the need to support the economy through the earlier stages of recovery and the need, of course, to deliver sustainable public finances. That is the judgment that has been reached.
Q133 Ms Keeble: You say that you have not got particular projections for the job losses that will come out of this or the head count reductions, but how can that be when you must know roughly what the public sector or the civil service employment - central government employment - projections are going to look like. You must have some projections about the number of jobs that you expect to go as a result of this. Out of the Gershon savings you lost 86,000 jobs head count so it is going to be upward of that, is it not, looking at the kind of spending cuts you have got?
Mr Hudson: These are value for money savings rather than spending cuts and over the period up to 2011 we have got increases in spending in the Comprehensive Spending Review, after that again the Budget publishes the forward figures for current and capital spend, so we are talking about value for money gains and the implications for head counts will vary depending on how departments choose to deliver those gains. Nigel Smith talked about the scope for procurement gains, for instance, and whether there are net head count reductions will then depend on whether staff who are not needed for one purpose may actually be redeployed to another purpose.
Q134 Ms Keeble: In the last round of savings you had 86,000 head count reduction and that was at a time when people could easily find other jobs. Now it is completely different, we have rising unemployment, and if you are making efficiency savings of greater value then you are going to be doing it at a time when we have got high unemployment. You must have looked at the impact of the loss of civil service jobs on overall unemployment figures.
Mr Hudson: As I say, these savings, value for money improvements, are delivered department by department, the impacts will vary considerably and I do not think it is possible to generate a single net figure for the impact overall.
Q135 Ms Keeble: You must also have looked though, given that we are in the middle of very difficult times, at the impact that public sector spending has on the overall shape of the economy and the impact, given that we are going to have these efficiency savings and other savings to get the budget back into balance. Have you done any projections as to what the impact on the overall shape of the economy will be of making that kind of contraction of public spending at a time when the private sector might not have expanded to take up the slack?
Mr Hudson: What happens to the overall shape of the economy will depend on a number of factors and this is only one. The decisions taken by private sector employers - clearly there are other measures in the Budget, there are plenty of measures to support the economy and to foster the recovery through these difficult times, and that will have a much bigger impact on the overall shape of the economy than what we do in the public sector.
Q136 Ms Keeble: Finally, have you ruled out any efficiency savings for example from things like offshoring?
Mr Hudson: How departments deliver is a matter for them - I do not know whether anybody wants to add to this. If there were to be proposals for offshoring then the department in question would want to consider that very carefully in the light of all the circumstances.
Q137 Ms Keeble: Have you looked at it yet or not?
Mr Hudson: It is not something I have looked at.
Mr Smith: If I could just make one comment about outsourcing, because offshoring is a part of outsourcing, outsourcing is legitimate to look at but it should not be deemed to be the preferred route. You have basically got to look and see where value is going to be created, and if I can just say, looking around the areas in government where, for example, shared services have been created, there have been some bad ones and there have been some good ones. The issue is getting benchmarks on what good looks like and then assessing whether or not it could be achieved in-house or through outsourced services. We have a number of initiatives at the moment which I am involved with which are effectively outsourcing but within government, if you know what I mean - outsourcing from a department but within government. There is a tremendous amount that can be done within the procurement landscape on actually getting a more efficient process for procurement. The idea that we are going to duplicate - for example on energy we spend £3.5 billion a year, we are by far and away the largest buyer of energy in the UK, almost the largest buyer of energy in Europe, yet we procured energy 250 times out of the wider public sector in the last 18 months. That cannot be efficient, this is duplication on a commodity product, so that is why on the collaborative agenda - I am sorry to keep coming back to this, but this is what I am interested in - we have got everybody together and next year we will go from dealing in the retail part of the market. This year we are dealing in the wholesale part of the market and next year we will look at common single point procurement from government with generators. That is what I was saying before about the sophistication of the systems that are needed. It is not tactical, it is strategic, so there is undoubtedly a shared service opportunity for government inside government.
Chairman: All right. Peter Viggers.
Q138 Sir Peter Viggers: I did not hear a clear answer to Sally Keeble's main point. The PwC report Dealing with Debt points out that the Government's plan in the Pre-Budget Report was to return the current budget to balance in 2015/16 and of course since the PBR the situation has deteriorated significantly. PwC says "We think the Government should aim to restore the current budget balance in 2013/2014 rather than waiting until 2015/2016." Do you agree with that?
Mr Hudson: I do not think I have got anything to add to the previous answer, Sir Peter, in the sense that the Chancellor set out the plan for ensuring sound public finances over the medium term in the Budget in the light of the factors that I described.
Q139 Sir Peter Viggers: Very well; that question obviously needs to be addressed to somebody else. Turning to Gershon, which of course resulted in a jobs reduction of some 86,000, we then moved on to CSR07 which had rather different parameters and that was focusing on value for money rather than on the number of jobs. I wonder whether the Government has lost the plot because in fact public sector employment has increased significantly in each of the last three quarters. Public sector employment increased by 15,000 (seasonally adjusted) in the fourth quarter of 2008 for instance and employment in central government increased by 19,000. Has the Government lost the plot in terms of numbers of jobs?
Mr Hudson: As I explained we do not now have head count targets, what we do have is a path for spending and some strenuous value for money targets overall to make sure that within that spending path the maximum is delivered for the taxpayer and for the customer. I am afraid I have not seen the figures that you refer to but if employment is going up then it is within those planned totals.
Q140 Sir Peter Viggers: It is worrying that employment in the private sector decreased by 13,000 in the fourth quarter, so we are getting more public sector employment and less private sector employment; I just wonder whether Gershon was simply squeezing the balloon and the Government rather lost the plot at this point.
Mr Hudson: Not at all in terms of value for money. What the Government is doing is investing in public services, bringing out a number of improvements in public services, some of which will involve more staff - I understand that civil service numbers are actually down this year, so the extra staff must be elsewhere. Overall the Government is investing in public services in parallel with, as I say, taking a very stringent line on value for money so as to get the maximum out of that investment.
Q141 Sir Peter Viggers: Then PwC puts forward two very stark choices and I suppose you are telling me that the Government is not proposing to address these stark choices because, as you explained to us, this is its policy.
Mr Hudson: I am saying that the Government has addressed the issue of the appropriate pace of consolidation of the public finances and set out its policy in the Budget.
Q142 Chairman: We are going to leave it there, but just two final questions, Louise Tulett, on more general issues. You got into a tangle last year producing your report and accounts slightly late.
Ms Tulett: We did.
Q143 Chairman: Are you going to be on time this year?
Ms Tulett: We are. We are producing a combined document this year which is better than last year where we had to split them, and that will be published pre-recess. We are currently on track to deliver that and are taking it to our own audit committee next week. Quite a lot of the audit work has already been done on it as well.
Q144 Chairman: The issues with the National Audit Office will not delay it.
Ms Tulett: No, we have been working closely with them actually since about last November, addressing issues as they have been arising.
Q145 Chairman: Finally the Line of Sight Project, which we take quite an interest in, would it be possible to have an update note on that, as to where they have got to?
Ms Tulett: Yes, surely. I will speak to my colleagues who are in charge of that.
Chairman: I would be grateful because we want to see them in October. Many thanks to all three of you for helping us today, and can we have the next witnesses please?
Witnesses: Ms Leslie Strathie, Chief Executive, Mr Simon Bowles, Chief Finance Officer, and Mr John Keelty, Director Departmental Transformation Programme, HM Revenue & Customs, gave evidence.
Q146 Chairman: Leslie Strathie, welcome to the Sub-Committee; could you briefly introduce your two colleagues and then I understand you have got a short opening statement.
Ms Strathie: Thank you very much, Chairman. On my left I have Simon Bowles, who is the new Chief Finance Officer for HMRC and who joined the department on 17 March of this year, and on my right I have John Keelty who was the Director of the Departmental Transformation Programme who worked on the governance of our change and who has only recently taken up the challenge of our latest efficiency board. I just simply want to say very quickly that whilst I did not live through the efficiency SR04 period in HMRC I did in my previous job as chief executive of Jobcentre Plus as part of DWP, but a lot has happened in the last year for HMRC. We have a new governance model, I am the principal accounting officer and permanent secretary but occupying the chief executive role and we have a non-executive chair. We have recruited six new non-executives to that board of governance and we have issued our purpose, vision and ways, our business plan for 2009/10 which shows our six new objectives and how we will measure them, so part of that of course is realising efficiencies.
Q147 Chairman: Thank you very much; obviously we will be seeing quite a bit of you, I think, as we get into the annual reports. Could you just tell me what you understand by the terms "efficiency savings" and "value for money". Are they interchangeable for you?
Ms Strathie: Efficiency is inputs and outputs and it means reducing our costs at the same time as maintaining or improving service, and I absolutely do believe that if you drive efficiency from the customer's perspective you can both reduce cost and improve service levels.
Q148 Chairman: The PCS have called for a period of reflection before you embark on further efficiency gains so that you can more properly measure the effect on customer service; do you have any sympathy with that?
Ms Strathie: I have a lot of empathy with a trade union ---
Q149 Chairman: Empathy not sympathy.
Ms Strathie: Yes, I think I choose the right word. I have empathy for trade union officials representing their members and, inevitably, technology, modernisation, new ways of doing business is a real balance for those employed in the organisation and the efficiencies that can be offered through new technologies versus what that means for redeployment of the workforce or potential redundancies. In many respects we are reflecting; we have spent about three months over the winter reflecting on almost every penny and certainly every pound, making sure that it counts, we have paused in our workforce change programme to look very hard at redeployment first rather than redundancy, first of all across lines of business within HMRC and then more broadly in the department, and we have had quite a bit of success in redeploying to other government departments - in fact we signed a memorandum of understanding with DWP and Jobcentre Plus in seeking out areas where people could move from one department to the other. I do think we are reflecting on how we realise our efficiencies.
Q150 Chairman: The PCS have also alleged to this Sub-Committee that you have given up on retrieving debts under £10,000, is that true?
Ms Strathie: No, it is not, but to be fair I would say I can see why it could be construed as such. We do not ever give up on debt and indeed HMRC has a very, very good record of collecting nearly all debt eventually, we only write off 1%. In terms of prioritising resource in debt management, priority one is those debts above £10,000 in terms of tax and indeed we have had a number of campaigns recently that have started on varying levels of debt that come down way below that figure. We are looking at new ways of collecting debt, including piloting some of the tougher and harder to collect stuff with private sector providers - that is just in its infancy, but there is no central policy not to collect debt under £10,000.
Q151 Chairman: Mr Pete Woodyatt wrote a paper for you on 18 February this year saying DMB - that is part of your organisation?
Ms Strathie: Yes.
Q152 Chairman: Currently do not have the resource to reach these debts under present privatisation methods.
Ms Strathie: Exactly.
Q153 Chairman: What do you mean "exactly", is that true? Do you have the resource or not?
Ms Strathie: We have priority one and priority two. In terms of the amount of much larger debt that we are focusing our efforts on through new risk tools, new risk-based approaches, then most of that resource was targeted on much larger amounts. It is not acceptable to simply deal with the high value, nor would it be fair to the total taxpayer base, but to add capacity we said that we needed to focus on a number of risk-based campaigns. The reason that that has been construed as we have not got the resource is that we are fully committed on much bigger debt and we want to find new ways and test the market in new ways to deliver it, not least by learning from the work that DWP has had much success in doing and looking at a similar approach. This is very much debt which is about visiting people, often at home, but actually very much around the part of debt collection that our own staff are not very keen on doing.
Q154 Chairman: I understand your points about priority but I just want to be clear about the factual accuracy of this, this says "DMB currently do not have the resource to reach these debts", is that true or false?
Ms Strathie: I would say that that was true. That was an internal audit terms of reference and we were making absolutely clear two separate strands of work. We have actually redeployed resources to debt management and in fact we have refreshed the whole debt management strategy.
Q155 Chairman: It was true but it is not true now.
Ms Strathie: Yes.
Q156 Chairman: How much debt is amounts under £10,000?
Ms Strathie: I do not know if I have got the actual number of individuals. If I can say at the moment we are running a very successful debt campaign for 520,000 ---
Q157 Chairman: I want the figures; if you have not got them now can you send us the figures, please, the percentage and volume of your debt that is under £10,000?
Ms Strathie: Yes, we will do that.
Q158 Chairman: If you have got problems resourcing that kind of debt collection are you likely to outsource it?
Ms Strathie: As I said, we have already agreed with the financial secretary that we will look at new ways, much more modern ways of collecting debt, and that absolutely includes a mixed economy using providers that match our standards. We have already agreed that and started to test the market in that area.
Q159 Chairman: There is no hang-up about using private debt collection agencies.
Ms Strathie: Lots of people have hang-ups about debt ---
Q160 Chairman: But do you?
Ms Strathie: No, but I would be very, very careful where I went to market. We had several experiences in my days in DWP and in different parts of the agencies and there were very few companies that matched the standard we were looking for, and rather than HMRC start from square one, we are starting from that learning. We are also working across the piece with DWP to look at our shared customer base over a period of time to see how we can collect each other's debts as people move in and out of work, which will create much more capacity too.
Q161 Sir Peter Viggers: To move forward, of course, one has to establish where one is. How do you feel about the present situation because Dave Hartnett has said that HMRC contact centres are under pressure, "There's more demand from people wanting to contact us than we've ever seen before ..." How do you see the present situation?
Ms Strathie: HMRC has achieved a lot and come a long way but as far as our contact centre performance is concerned, which is an improving trend, it is nowhere near where I would like it to be on first contact. It is delivering very good satisfaction levels when people get through and their queries are resolved et cetera, but at the moment the number of peaks we have in business on the various taxes and tax credits renewals means we have a customer demand growing at just under 8% a year, and that presents an enormous challenge in moving a lot of that demand out, eradicating waste, so that we can reach my aspiration which is the industry standard, which is that we would answer 90% or more of calls offered first time. At the moment outside of the peaks we are delivering 75% apart from about three weeks, but if you take the difficulty in the peaks of tax credit renewals and others it averages out at about 57% across the year. That is not the standard that we want to give in terms of customer service.
Q162 Sir Peter Viggers: Have you closed too many offices? How are you going to cope with the improvement and ensure you get improvement?
Ms Strathie: In terms of offices it is important to say that apart from where we had two offices very close together in one or two cases we have not closed any face to face service; our office closures or rationalisation of our estates and consolidation is around back office. We are still delivering face to face where we were, there is not anything like the demand that there was in the past and if you look at online filing, there has been a huge success this year where we increased the number of people doing that by 55%. It is showing that customers are choosing other channels and we really believe that most people want to engage through the internet or the telephone, and for us we want to focus our face to face services on our most vulnerable customers.
Q163 Sir Peter Viggers: Tax advisers have expressed concern that the additional efficiencies announced in the Budget could harm your services; do you agree?
Ms Strathie: If we do not manage it properly, yes, that could happen, but I do believe that there are real opportunities there for us and I also think that Treasury has recognised just how much HMRC has done, just how big our challenges were in SR04 and SR07 and, because of that, have agreed that we can recycle the additional £80 million we have taken on. We need that because we actually need to move people from back office to front office and we want to recycle to improve frontline service. We have plenty of opportunity to do our work differently and better.
Q164 Sir Peter Viggers: The most recent staff survey really was appalling in terms of staff morale with only 16% saying they are strongly satisfied with the Department. Why is staff morale so low and it is likely to improve?
Ms Strathie: The senior team take these results incredibly seriously and in fact we have already started taking action to address it. There are lots and lots of reasons why morale is low; one of them you could look at as an extension or as an impact of redundancy avoidance measures. We have taken a long time to reduce our head count, we have not made anybody compulsorily redundant, we have done lots of it through natural wastage and that inevitably means that people are left uncertain for a very long time about their future. It means that to be a fit for purpose tax administration in the 21st century many of our people need to move to different types of work and lots of people have had to move from one location to another, and they do not know what the end is yet. Right now we have three times as many people who want to stay in the organisation as would say it is a good place to work to their friends or family, and we have three times as many people who want to stay with us than would strive for the organisation's success. It behoves us all, from me and the board and right through our leadership team, to engage with our people because it is going to be honesty, cultural change and being clear what the future looks like for those people who have a future in HMRC.
Q165 Sir Peter Viggers: What is the relationship between the efficiency savings programme and morale, is it direct?
Ms Strathie: If you start with here is the efficiency programme and here is the number of head count reduction, you actually are pedalling backwards for quite a long time. For people to hear in the media rather than through the organisation or in an announced way of how we do it, I think has been difficult. I was not in HMRC but I certainly lived through it in my previous job. I really believe that if we drive the efficiency, working together with our people, they are the best people for telling us what works and what does not work and we have developed a programme, developed with our people, which we brand as Pacesetter but is simply the top three layers of management and our staff and working through visual management. We have an opportunity there to up-skill our people, improve the quality of our leadership and our performance management, and involve our people in all of those decisions. It is a huge task that we have to do but it is what I believe in and it is opening up the dialogue to new ways of working. All of our testing, all of what we have done in that already, has shown that we can make real improvements in that way.
Q166 Sir Peter Viggers: We would wish you well in that; thank you.
Ms Strathie: Thank you very much.
Q167 Mr Todd: You mentioned about private sector suppliers matching your standards; what are your standards, because this is a sector that is quite notorious for extraordinarily low standards?
Ms Strathie: If I approach it from the work that we did in DWP you always start off with is there a market there or do you need to build a market, are you efficient yourself or do you feel that you can drive more efficiency et cetera. When we went to market, because clearly there is a market there, we were very clear about whoever does this for us does it in the same way that we would ask our people to do it, and we need those assurances. Being even-handed in the tax system is very, very important to us, it is part of our way, and that means being sympathetic to people who have some difficulty paying at that time versus being pretty tough and relentlessly pursuing those who we know could pay but are avoiding paying.
Q168 Mr Todd: It may help if you set out your standards and your performance and send them to us because I would find some value in that; I spend quite a lot of time on constituency issues relating to debt collection agencies and I am alarmed a little at the way they are used.
Ms Strathie: I can certainly say in going through the process, without going into any commercials, it came down to a very narrow number of companies that met our standard.
Q169 Mr Todd: Can I turn to the relocation programme? I have written separately about an office relocation issue in my area and, if I might use it as an example, there I wondered whether you had attempted to put some recession corrective to some of the assumptions that had been made in the original design of the programme. The marketability of office space that you are freeing up I would imagine has diminished dramatically over the last 12 to 18 months and any assumption that was made on the savings that might be achieved from giving up office space is likely to have been extraordinarily optimistic.
Ms Strathie: In principle for the country, yes, I agree all of those. We are slightly more fortunate than the person who supplies to us here because the terms of our relationship with Mapeley are that once we have declared that we are moving out, 12 months later they have to take the estate back, so we can be pretty clear on when we would harvest those savings.
Q170 Mr Todd: Those savings are genuinely realisable.
Ms Strathie: Yes.
Q171 Mr
Todd: And Mapeley have the unfortunate task
of trying to find a home for the odd floor of office space in
Ms Strathie: Yes.
Q172 Mr Todd: Regardless. What about the cost of relocating staff? I believe there is a supported transport arrangement for people to deal with that, but can you set out the costs of that programme?
Ms Strathie: I cannot give you the total cost of what we have spent on that particular element; it is a small amount in the overall workforce change programme but basically what we have done is tried to create additional support for people who really want to stay with the organisation, are prepared to move to a location but without a bit of support we could not, either because there is no public transport or there are affordability issues.
Q173 Mr
Todd: In my local case there is certainly a
public transport network between the two locations you have chosen to shift
staff between,
Ms Strathie: Yes, exactly. We are striving to ensure within all of our rules around the benefits in kind that we can accommodate any additional costs and that for a period of time for adjustment.
Q174 Mr Todd: Could you provide us with some sort of breakdown of the staff who have been affected by this transformation programme? Is this a shooting the Indians exercise? Do some of the chiefs also bear some of the effects of this programme? Is there any difference in the gender balance, for example, in the impact that is taking place?
Ms Strathie: We could give you what the baseline was in terms of the diversity of our numbers and the grade mix.
Q175 Mr Todd: That would be helpful.
Ms Strathie: And where we are now. We cannot do that here today but I can say to you generally that particularly where we redeployed about 3,500 of our SR04 savings there were a lot of managers in that redeployment because our effort was to push people from back office jobs that we did not need because of automation, but rather than recruiting we actually moved people to where we needed them for front line services.
Mr Todd: You have mentioned your relationship with Mapeley; what view do they take over dilapidations and that kind of issue in terms of vacating the space that you are freeing up?
Q176 Chairman: Perhaps we could bring in your colleagues to give yourself a rest.
Mr Bowles: If I can respond to that, we are responsible for turning over the property in good condition to Mapeley.
Q177 Mr Todd: Presumably, again, there is a cost hidden in this exercise of that transfer to Mapeley.
Mr Bowles: If I can just carry on with what Leslie was saying, that was factored into the overall evaluation of the benefits of the workforce programme, so that was one element to it but overall the programme is planned to give substantial cash savings.
Q178 Mr Todd: Just going back to that question I asked at the start, has there been some sort of reality check of saying "Well, that is what we said in the projection for this particular office transformation, what has been the reality?" because there are a large number of variables. Some of the staff may have chosen not to move, there may have been a substantial dilapidation that had not been predicted, you may be carrying the entire lease for a 12 month period which may not have been anticipated, all sorts of things which would be different from the original projection. Has there been an attempt to examine the reality of the saving as against the projected model that was already in place?
Mr Bowles: Yes, as part of the departmental transformation programme run by my colleague John Keelty we would review those benefits of those cases that were ongoing.
Q179 Mr Todd: Perhaps he would like to volunteer his thoughts on how we are actually doing in reality against the projections because I must admit the perception in my area from the offices affected is that this seems unlikely to produce savings at any time in the short term.
Mr Keelty: Because we can actually get rid of the property we do actually make the savings. Many people forget the Mapeley dimension and they just look at the current high street with the offices that are unoccupied and therefore we must be in that market, but we actually do realise the savings. We are currently making significant savings.
Q180 Mr Todd: I had not realised that that contract was quite as balanced towards you as that and I am relieved in some ways.
Mr Keelty: It does make quite a significant difference and we are making significant savings.
Q181 Mr Love: Has HMRC made any assessment of the head count reductions that will be necessary to achieve your value for money commitments?
Ms Strathie: If we go back to the SR04 there was an assessment over the longer period of 25,000 in total. We are clear from where we stand at the moment that most of our money goes on our people, our IT and our estate, so wherever we get the savings it is going to come from those areas and the head count numbers depend on the grade mix and the job design, so it is not as specific at this stage because the head count is just a cashed-up budget. We know that we have more to go, just as we have delivered more since the end of the SR04.
Q182 Mr Love: PCS, in a press release that they put out, suggested 25,000 jobs and 200 offices to close; does that bear any relation to the reality for you?
Ms Strathie: The 25,000 was always a planning assumption from the start of SR04 through the longer period over a five year period. I do not think it is far out but like any chief executive you constantly stop and review if you are delivering your savings where they are, and if you are not whether that is still the right way to do it. My view is that I went to do this recognising that the labour market has changed, economic conditions have worsened, and to work with our workforce in terms of what is right for them over the period of time. We can never rule out compulsory redundancy but we will take every step we can to avoid it.
Q183 Mr Love: We heard about the morale difficulties in HMRC earlier and of course PCS appeared before us, but also the President of the Association of Revenue and Customs is on record as saying that there "is no dead wood left" to cut. Are they being over-dramatic in saying that there will be a very negative effect from any further cuts in headcount?
Ms Strathie: I would not use the term "dead wood" although I know Terry Cook did; I simply say that there is always another way to do things and if you are working efficiently and you simply take out the numbers we have taken out or more and carry on doing everything the same old way, then it would be terribly detrimental. The challenge is to keep moving on the journey and learning from others who have done things, exploiting technologies. I believe that the biggest stress and morale issue is where people are trying to hang on to the past. We are not short of good ideas of how to make it better, from our frontline staff all the way up, and the challenge for us is getting people to let go of the old ones.
Q184 Mr Love: Let me ask you about the mix in the headcount in the Gershon efficiency savings where you made more than the required target. Did you lose a lot of very experienced staff in that and are you happy with the balance that you reached in terms of the people who left your employment?
Ms Strathie: In an ideal world if I had been around I would have liked to right size, right shape the organisation, explain exactly how it was going to look by the end of the period and then work about moving. When an organisation embarks on natural wastage as its strategy, inevitably you will lose good people that you would like to have kept and you will not necessarily lose them in the right place. Contact centres, for example, as an industry have the highest attrition rates of any part of our administration; therefore you will constantly be changing people there, but in other areas of work there are people who have invested a lot in the organisation and would like to stay even though we do not have a demand for their particular skills in that location any more.
Q185 Mr Love: Under value for money it is net savings rather than gross as it were under Gershon; that means you have to take into account things like redundancy payments.
Ms Strathie: Yes.
Q186 Mr Love: What sort of level of redundancy payments did you have to make during Gershon and will the need not to have those sorts of levels of redundancy payments mean that there will be more compulsory redundancy rather than voluntary?
Ms Strathie: I would say first and foremost that for all the disadvantages of a
natural wastage strategy HMRC has got probably the best record in
Q187 Mr Love: But you could choose who to make compulsorily redundant.
Ms Strathie: We would comply with the law, we would determine that the jobs have gone, we would determine they are going into redundancy and then we would agree the method of selection, and we would do that alongside our trade union colleagues too. It is a stage that we may have to face but we need to recognise that there is a high cost to that too.
Q188 Mr Love: Can you let us have the figures and the numbers in Gershon and the cost to HMRC?
Ms Strathie: We have 4,959 staff who left under approved early retirement, which is the cheapest form of exit, at a cost of £236 million over the SR04 period.
Mr Love: Thank you.
Q189 Sir Peter Viggers: What percentage of your costs are salaries?
Mr Bowles: About two-thirds of our cost is payroll.
Q190 Sir Peter Viggers: So any cost reduction impacts self-evidently upon jobs very heavily. What consultation was there with you before the announcement in the Budget that there was a money-saving target of £80 million? To what extent were you asked about this and had discussions about it?
Ms Strathie: Quite a lot over a period of weeks. Bearing in mind Simon was fairly new to his job and I had not been all that long there we spent quite a long time looking at how we might do that and how we would find a way of identifying savings that could be made, and it being desirable to make them, but of course there is the opportunity cost associated with change and being able to then move people to other jobs - because we always have turnover - rather than recruit. We eventually recommended that package to the financial secretary and to the chief secretary.
Q191 Sir Peter Viggers: It came as no great surprise to you and you were managerially accepting of it.
Ms Strathie: Yes.
Q192 Sir Peter Viggers: Very good.
Mr Bowles: Sir Peter, might I just clarify the comment that any cost reduction must affect salaries and people, because there is the remaining third of our cost base around property and around our IT services, and clearly we will be focusing across all of the piece as we look at rebalancing from back office towards the customer end.
Q193 Sir Peter Viggers: You are submitting to us that this was a natural process. I was going to ask if the targets are realistic and achievable why were they not included in your original value for money savings target?
Mr Bowles: If I may pick that up, you are aware that in SR04 we over-achieved; part of that was some conservatism and part of that was that an efficiency culture was being embedded. By the same token as we look at the SR07 savings we feel that we can plan to deliver an additional £80 million; that was not planned originally because although it was before my time I understand that we wanted to take a reasonably prudent approach to the efficiency savings that were committed.
Q194 Sir Peter Viggers: Why did your revised value for money delivery agreement not provide a breakdown of expected savings by CSR year as with your original value for money delivery agreement?
Mr Bowles: I believe that is because we are working through how we will phase the achievement of those savings.
Q195 Sir Peter Viggers: I was going to ask if that was because you were unsure as to when these savings might be delivered, but you are turning them around in a more positive way and so you have not yet made that decision.
Mr Bowles: There is a choice in these situations because you can sometimes have a trade-off between a saving early in a process or perhaps taking a bit more investment and a longer time to secure a larger saving.
Sir Peter Viggers: Very well.
Q196 Mr Love: Can I turn to something that Mr Todd mentioned earlier and it relates to a revision in your estimates? You had originally suggested that you could make savings from estates consolidation of £110 million but then in the revised figures that fell to £70 million. We assume this is related to the marketplace for selling assets; is it sensible to be selling them now or in the near future, or should you not wait until the commercial property market begins to improve?
Mr Bowles: There is an argument which says that we should get on with this because we need to increase the pace of change, firstly, and secondly it is difficult to have a clear outlook on where the property market may ultimately end up. Thirdly, our arrangements with Mapeley do insulate us to a good degree from that.
Q197 Mr Love: You are confident that you can resist the criticism that you are not getting the best value for public assets.
Mr Bowles: Yes, I believe we can.
Q198 Mr Love: Okay. There are additional value for money savings of £80 million estimated by HMRC; what proportion of that is a direct result of the operational efficiency of the public value programmes? Is it all related to that or are there other activities in there that you can make savings from?
Mr Bowles: These are savings that we will deliver within HMRC. As you point out there are the public value programmes and the operational efficiency programmes and we have committed leaders within our organisation in a number of areas - in the estate area, in terms of Pacesetter (which is our organisational process model) and in other areas to help share the expertise that we do have across government, but that is additional and separate from the £80 million value for money saving.
Q199 Mr Love: This £80 million is termed as being recyclable.
Mr Bowles: Yes.
Q200 Mr Love: A great word. What activities would you be thinking about recycling them to and is there any hint that there will be cuts as a result of this £80 million saving?
Ms Strathie: I go back to what I said about customer service and focusing our face to face efforts and our labour-intensive processes on those customers who most need our help or those customers where it takes most effort to collect tax. It is very difficult to do a transformation at no cost and therefore if we want to reduce the cost, increase the efficiency of our back office, our whole stewardship, all of our corporate structures and our support services, exploit shared services to a greater extent than we have already, then that is going to mean moving people either out of the organisation or moving them out of their existing jobs and moving incrementally forward. That is why there will be costs associated with those transfers, there will be costs of exits for that, but our overall approach is to push more onto customer service and more onto compliance effort. We spend about a quarter of our total budget on compliance and closing the tax gap.
Q201 Mr Love: Mr Bowles, you are confident that this money will be able to be recycled within HMRC and, in the wider context of the pressures on public expenditure, the commitments you have been given from the centre are ones that you think they will abide by?
Mr Bowles: That is my expectation.
Q202 Mr Love: We will hold you to that.
Ms Strathie: We offer very good value in terms of what we spend and what we collect.
Q203 Chairman: Finally can I ask whether any of the three of you can estimate for us the gross level of savings delivered as a direct result of the merger of Revenue and Customs?
Ms Strathie: Do you want to have a go at that one John?
Mr Keelty: The target that was thought to come out of the merger was about 3,200 staff savings and that is going to come from the corporate services where we do not need two finance sections as a result of the merger, and various other areas as well. From the estimates that we have had it looks as though we have delivered about 3,000 of those savings.
Q204 Chairman: Out of 3,200.
Mr Keelty: Yes.
Q205 Chairman: Was there a figure? Was there a cost?
Mr Keelty: A cashed-up figure - I do not have a cashed-up figure for that, there was never one set as far as I am aware.
Q206 Chairman: Right, so these two organisations were merged without any particular target figure for the savings that would result.
Mr Keelty: The reasons why they were merged were not just on cost savings, it was to actually give the customer a much better service through the integration of the two organisations and to give a much more effective service generally as well as make economies of scale, and we are doing that through the departmental transformation programme. We have talked a lot about the relocation and the shutting down of offices - a lot of that is due to the fact that we had two offices often in the same area. We had about 550 offices in about 333 sites at the formation of HMRC so you can see from that figure that there was duplication of those offices, so that is something that we are driving out through the departmental transformation process. We have always seen that we would get those efficiencies but I am not aware that an immediate figure was put on them, although of course it was factored into the SR04/SR07 settlements that we had.
Q207 Chairman: What about the finance structure, is it possible now to look back and say, okay, what were the costs involved in merging these two organisations and what were the overall savings as a result?
Mr Bowles: I have not done that exercise in the two months that I have been at HMRC.
Q208 Chairman: But you came from the private sector.
Mr Bowles: Yes.
Q209 Chairman: In the private sector that would be done, would it not?
Mr Bowles: My focus since joining has been on how I can help move the efficiency agenda forward in terms of delivering what I think are some great scopes for improvement.
Q210 Chairman: I hope you do not misunderstand me; we were told there would be all these improvements, there was logic to merging the two organisations, a huge saving in offices and so on. What I am asking is now, four years later, how did the arithmetic pan out, what were the actual costs of the merger and what were the savings?
Mr Bowles: I have not looked at the arithmetic.
Q211 Chairman: Can you look at it?
Mr Bowles: I think it would be possible to look at it, yes.
Q212 Chairman: Perhaps you would let us have a note. Good, thank you very much.
Ms Strathie: Could I just correct one thing before you close, Chairman, just on the debt management issue when you were pressing me for was it a yes or was it a no in terms of resources. I just want to make clear on the record that that was only specific to the debt management office, one element of our debt collection. We actually write to everybody and we use contact centres to pursue, so there is only the question about where the resources are in the organisation, not that any of the debt is completely ignored just because that part of the organisation is not doing it. We will provide you with the numbers but I just wanted to put that on the record.
Q213 Chairman: Fine, you have done that. Thank you very much to you and to your colleagues and we look forward to seeing you in the autumn with your chairman.
Ms Strathie: Thank you very much.