Executive Summary

The leadership of the civil service needs the skills to meet today’s challenges if it is to deliver value for money, according to the National Audit Office. There has recently been progress in developing a new approach. The Government now accepts the urgent need for a leadership group that can think across departmental boundaries and lead change, and there is action in hand, but there is still a long way to go to change the long-standing culture of the Senior Civil Service.

The spending watchdog earlier this year welcomed the ambition of the Civil Service Reform Plan and emphasized the urgent need to make progress, given that the plan underpinned the Government’s chances of achieving further efficiency savings.

The Minister for the Cabinet Office and the Head of the Civil Service want the civil service of the future to be ‘skilled, unified, open and accountable’. At present, however, there are significant skills shortages, particularly in the areas of commerce, project management, digital delivery and change leadership. In December 2012, only four out of 15 Permanent Secretaries at major delivery departments had significant operational delivery and commercial experience. The government is now placing a stronger focus on these skills in the recruitment and development of senior and future leaders.

The Government’s five-year plan for improving skills and performance describes a new corporate approach that is coherent, innovative and ambitious, but there are challenges. The 24 professional networks in the civil service lack influence across departmental ‘silos’ and may not be the right groupings to meet the needs of the modern service.

The Senior Civil Service cannot be described as a unified leadership group at present. Below the ‘top 200’ civil servants, senior civil servants see themselves, first and foremost, as members of a department and many have no expectations of moving. The Government intends to open up the service, with more internal transfers and free flow of skills to and from the private sector, and build on an approach already in place for the top 200. But the proportion of new recruits from the private sector fell in 2009-10 as departments cut spending, and has yet to recover.

Today’s report also cites evidence that promotion to the Senior Civil Service is becoming so financially unattractive as to put off talented people. Owing to the pay freeze, and changes to pensions and benefits, the total reward for senior civil servants has been reduced by around 17 per cent in real terms over four years. The NAO warns that the latest moves to increase pay flexibility and offer incentives for business critical roles may not be enough to recruit, motivate and retain the right people. While there is currently a low rate of resignations, there is a risk that economic recovery could see an exodus of the most talented and marketable senior people, at the very time when effective corporate leadership is needed to meet the challenges of the remainder of the Parliament.

The Government’s fiscal consolidation programme is now expected to last longer than originally planned, and wide-ranging service reforms are being implemented. The role of financial managers is therefore critical to ensuring that opportunities to improve value for money are realized.

Today’s report acknowledges that the finance profession now has a greater presence in the upper levels of Whitehall. The Finance Transformation Programme has been set up to develop the skills and capabilities of finance professionals, and qualified professionals are better represented at senior levels. The publication of two sets of Whole of Government Accounts by the Treasury has also offered an opportunity to hold government to account more effectively for the money it spends and the activities it undertakes.

However, given the importance and urgency of the challenges presented by fiscal consolidation and public service reform, the report cautions that further improvements will be needed to support sustainable public service delivery with fewer resources in the longer term. Government is a long way from ensuring that decision-making is routinely based on robust information. Departments often do not integrate financial management with their strategic and operational planning. An absence of planning prevents departments from achieving the best results by linking resources and outcomes.

Departments and other public bodies have generally managed within reduced spending limits up to now, but some of the savings they have made are more sustainable than others. Some initiatives are primarily geared towards controlling spending. Of these, reforms such as changes to pensions and higher education funding can be expected to lead to long-term savings. However, others are less sustainable, such as pay freezes and moratoria on the use of consultants and temporary staff. In order to respond to financial and demand challenges, government needs to go further than controlling spending, by redesigning public services so that they operate permanently at lower cost.

The NAO recommends that the Treasury ensure a more effective leadership to better enable and incentivise the finance profession to confront the challenges it faces. The Government’s Finance Leadership Group should take responsibility for diagnosing the key current financial management challenges facing the finance profession and the wider civil service, and for addressing them quickly.

The NAO report, published as a memorandum for the Committee of Public Accounts, finds the Department took a structured, logical approach to measuring and reporting costs and benefits. The Department forecasts that benefits will slightly exceed costs over the whole life of the systems, £10.7 billion compared with £9.8 billion.

There is, however, very considerable uncertainty around whether the forecast benefits will be realised. Around two-thirds (£6.6 billion) of the total estimated benefits are forecast to arise after March 2012. For three programmes, 98 per cent of the total estimated benefits were still to be realised. Some £2.5 billion (26 per cent) of the total costs are also forecast to arise after March 2012.

There is a range of risks to the realisation of future benefits. In particular, for some programmes, future benefits rely on the successful deployment of a set number of systems at a set time. Experience over the last ten years suggests this will be challenging to achieve, particularly in the case of the local care records systems.

Today’s report identifies some good progress in building intelligence overseas, with the expansion of HMRC’s network of intelligence officers. HMRC estimates that these officers helped overseas authorities seize goods equivalent to a prevented revenue loss of £658 million between 2011-12 and 2012-13. However, HMRC has limited powers to carry out an independent verification of the volume of seizures, which is reported by foreign customs authorities.

HMRC met all but one of its key operational targets for tobacco in 2011-12 but failed to meet any of its targets in 2012-13. HMRC is unlikely to achieve its plan to prevent £1.4 billion in revenue being lost to tobacco smuggling from investment in new tobacco initiatives over the spending review period. Key initiatives funded as part of its spending review settlement have been delayed or cancelled, including one designed to tackle the over-supply of genuine tobacco overseas, as the proposed approach was abandoned because of legal concerns. HMRC achieved £328 million by the end of 2012-13 from these new initiatives, less than two-thirds of the benefit expected so far (£527 million).

HMRC recognizes the need for better intelligence on distribution networks, if it is to target its domestic enforcement activities efficiently. It also lacks a good understanding of the volume of prosecutions and other sanctions needed to deter effectively the trade in illicit tobacco.

HMRC is concerned that supplies of certain brands to specific countries are higher than legitimate local demand . Supply chain legislation was introduced in 2006 but HMRC analysis shows a continuing problem of over-supply of genuine tobacco products. Tobacco manufacturers have a legal obligation not to facilitate smuggling so far as is reasonably practical, and HMRC has worked with them to review supply chain policies. However, so far it has issued only one warning letter and no penalties.

However, delays of more than three years in agreeing the contract to buy new trains mean that delivering value for money from the Programme as a whole is at greater risk than the National Audit Office would have expected at this stage.

According to today’s report, there continues to be a robust transport case for the £3.552 billion (at 2006 prices) Programme. Thameslink services have consistently been among the most crowded London routes with passengers amongst the least satisfied with space on trains; and demand is forecast to increase. The Department estimates that the Programme will make net present benefits of £2.9 billion through reduced journey times, reduced overcrowding on trains and quicker interchanges between services.

The Department needs to manage a complex interaction between completing the infrastructure project; buying new trains; and letting a new franchise. Delays to any of these projects can delay significantly or complicate delivery of other parts of the Programme. The award of the estimated £1.6 billion contract to buy new trains is currently delayed by over three years and this has implications for the rest of the programme and also plans for electrification of other parts of the rail network.

The delay raises questions about whether the Department underestimated the scale of the work, time and skills and resources it needed to negotiate a PFI deal of this complexity. And until the contract is let it will not be clear whether delivery of the whole Programme by 2018 is still feasible.

As work begins on phase two of the Programme, the Department needs to ensure it has the necessary capacity and skills to keep it on course alongside other rail projects it manages, such as Crossrail and High Speed 2.

According to today’s report, the Department’s methodology for appraising the project puts a high emphasis on journey-time savings, from faster and more reliable journeys. However, the relationship between these savings and the strategic reasons for doing the project, such as rebalancing regional economies, is unclear.

It is also unclear to the NAO whether the business case covers just the route between London and the West Midlands (phase one, due to open in 2026) or the full Y-shaped network with lines from Birmingham to Manchester and Leeds respectively (phase two, due to open in 2032). The Y-network has a stronger economic case but this is much less certain as route designs are less well-developed.

The benefit-cost ratio calculated for phase one has twice contained errors and the Department has been slow to carry out its own assurance of the underlying analysis. The NAO’s opinion is that the Department and its advisers HS2 Limited should update the data underpinning some key assumptions in the ratio.

The most recent benefit-cost ratio (published in August 2012) is 1.4 to 1 but is likely to change. This to be expected as the ratio is sensitive to changes in data underpinning assumptions, such as GDP growth forecasts. It does not, however, reflect the Department’s current assumption on the relationship between passenger numbers and GDP growth. The Department now expects passenger numbers to grow more slowly when GDP increases. It should also carry out research into how business travellers use their time on trains. HS2 Limited has also not yet analysed the effect on passenger demand, revenues and the benefit-cost ratio of charging passengers premium prices.

The report notes that the estimated cost of phase one will change as costs become firmer. In some documents, the estimated cost is between £15.4 billion and £17.3 billion but a new estimate is being developed based on a clearer route and more information. The NAO estimates that there is a £3.3 billion funding gap over four years (2017-18 to 2020-21) which the government has yet to decide how to fill.

The NAO’s findings include the following:

• The BBC successfully completed the complex challenge of relocating to Salford, by using the right skills and processes, developing clear delivery plans and maintaining good communications. The BBC recruited staff with expertise in managing relocations and set up a project team that developed and implemented plans for the move.
• The BBC exceeded its target to relocate 30 per cent of staff from the 1,500 roles transferring from London to Salford (38 per cent relocated).
• To encourage sufficient staff to move, some of the allowances the BBC offered to incentivise and compensate relocating staff and minimise redundancy costs were more generous than it normally offers. For example, the remote location allowance covered the cost of renting property in Salford and travelling to and from London for two years. This allowed staff who were unable or unwilling to commit to moving permanently to keep their homes in the southeast. The BBC benchmarked some allowances, but controls over exceptions to its relocation policy for Salford were inadequate.
• The BBC estimates that the final cost of fitting out the buildings at Salford and moving people in will be £224 million, £9 million less than the revised budget approved by the BBC Trust in February 2011. The lifetime budgeted cost of relocation and operating costs up to 2030 is £942 million (or £573 million after discounting future costs to their present values). This cost does not take into account reduced spend on the BBC’s estate in London and Manchester as a result of the move.
• Whether the move delivers value for money will depend on the BBC’s ability to achieve a sustained improvement in audience approval in the north, embed new ways of working to achieve efficiencies of £151 million and provide sustainable economic benefits for the region.

Among the NAO’s recommendations are that the BBC Trust should periodically review progress against the aims in the original business case for the move; that the BBC should establish robust systems and maintain clear records when paying allowances, so that it can demonstrate they are appropriate in all cases; and that it should continue to seek recovery of all allowance payments repayable by staff who leave the BBC.

The BBC Trust accepts these recommendations and will ensure that they are implemented.  In its published response to the NAO’s report the Trust has said that:

• It welcomes the NAO’s overall conclusion that the BBC managed the relocation to Salford on time and within budget, while successfully maintaining broadcast continuity for audiences.
• The BBC was able to maintain continuity for audiences and minimise redundancy costs by establishing a Salford relocation allowances policy that encouraged staff to move. The Trust accepts that such a policy was justified but, having established it, it considers that any exceptions should have been rare, clearly justified and supported by well-documented business cases. It is unacceptable, therefore, that the NAO found BBC management did not adequately document the reasons for all exceptions to the standard policy.
  • There are encouraging signs that the anticipated benefits of the move are beginning to be realised. The BBC’s relative share of overall television viewing and reach to BBC radio in the north-west has increased when compared to the UK average, more collaborative and flexible ways of working have been introduced, some efficiency savings have been delivered and there has been significant economic investment in the region. However, the Trust agrees that it is too early to conclude that the move has met its long-term objectives and it will continue to periodically review progress against the aims for the move, including efficiency savings, at the appropriate points.

The Bill provides for the introduction of the Government’s preferred model for the audit of local public bodies. This includes a new responsibility for the head of the NAO, the Comptroller and Auditor General, to prepare and maintain the Code of Audit Practice setting out the framework within which auditors of relevant local bodies carry out their work.

The Bill also clarifies the Comptroller and Auditor General’s power to undertake examinations regarding the economy, efficiency and effectiveness with which relevant local public bodies have used their resources.  This will facilitate the completion of a small number of additional ‘value for money’ examinations providing a more ‘end to end’ view of the use of public funds – helping to inform Parliament while adding value at the local level.  As it develops its future work programme, the NAO will continue to consult and work closely with local sector bodies and representative organisations, such as the Local Government Association.

The Secretary of State announced in August 2010 the Government’s decision to introduce a new framework for local public audit. Since then, the NAO has engaged with the Department and other stakeholders to make a positive contribution to developing arrangements, while being mindful of its independent status, and will continue to do so.

It is vital that people have confidence in local public audit arrangements.  The NAO therefore welcomes the Government’s commitment to a post-implementation review of the new audit framework once it is in operation.

Amyas Morse, head of the National Audit Office, said today:

“Publication of the Local Audit and Accountability Bill provides welcome clarity about the Government’s intentions for the future of local public audit.

“However, much work remains to be done. As the new devolved approach develops, the Government will need a firm grasp of what is going on, so that it can be assured that the system overall is working well, in line with its policy objectives.  The NAO remains committed to playing its part in the new framework, consistent with its core role and independent status.”

By February 2012, the estimated cost of converting the aircraft carrier for the carrier variant of the JSF, requiring the ship to be fitted with catapults and arrestor gear (‘cats and traps’), had increased by 150 per cent: from £800 million to about £2 billion.  As a result, the Department estimated that, over the next ten years, the STOVL option would be £1.2 billion cheaper than the carrier variant. This difference halves to £600 million over 30 years.

Another key factor was that the carrier variant option of the JSF could also not be delivered until 2023, three years later than the planned date of 2020. The Chief of Defence Staff judged that, in the emerging security environment, such a gap in capability would be undesirable. When the Department reverted to the STOVL option, it announced that it would deliver the Carrier Strike by 2020. However, a week later, it delayed investment in Crowsnest, the helicopter based radar system making up the third element of Carrier Strike, meaning that the system is not now scheduled to be fully operational until 2022, two years later than the carriers and aircraft.

Resolving the future of the Carrier Strike programme (comprising the Queen Elizabeth class aircraft carriers, the Joint Strike Fighter aircraft operating from them and Crowsnest) was central to the Department’s efforts to balance its ten-year equipment budget. When the implications of the 2010 decision became clear, the Department acted quickly to put in place a unique, streamlined approvals structure, with focused attention from senior officials. This was crucial to the pace of decision-making.

The Department expects to write off £74 million as a result of the reversion decision; but this cost could have been ten times higher if the decision had been made after May 2012.

Successful delivery will require the Department to manage significant affordability and technical risks. There are cost, schedule and technical risks across the JSF programme over which the Department has limited control. The highest risk phases of carrier construction and integration are yet to come and the Department must successfully conclude complicated negotiations with commercial partners.

Today’s report notes that the carrier variant of the JSF has a greater range and payload than the STOVL variant and would have provided a more effective strike capability. However, STOVL creates the option to operate Carrier Strike from two carriers, providing continuous capability. By contrast, the carrier variant could operate from only the one carrier installed with cats and traps and therefore could provide capability for only 70 per cent of the time.

The NAO recognizes that the Treasury was given a difficult challenge in setting up the payment Scheme. It had to set up a complex operation in a short period of time so that the first payments could be made by June 2011.But not enough preparation work was done before the Scheme went live. Once the Government announced the decision to launch the Scheme, the Treasury had to design the Scheme’s policy in parallel with delivering the service within a tight timetable. Also, systems had to be developed in the Treasury’s partner in operating the scheme, National Savings and Investments (NS&I), which was a significant departure from normal operations.

The Government’s target of making the first payment by June 2011 was met, but further payments to former policyholders have been severely delayed. It was initially planned that £500 million should have been paid out by the end of 2011-12. This target was not met. By March 2013, the Scheme had made 407,000 payments, totalling £577 million. The Scheme has made only 35 per cent of its total payments and spent 72 per cent of its original administration budget.

The Scheme’s objective of paying all traced former policyholders by the end of March 2014 is at risk. The Treasury plans to close the Scheme in April 2014 having made all the payments to Investors and Groups, and the first two annual payments to those who held an annuity. However, a large number of payments remains to be made in the final year of the scheme.