The following is a transcript of a keynote speech given in Parliament by Gareth Davies, the head of NAO, to MPs and civil servants on 16 January 2024. You can also watch a recording of the speech.
Getting the most from every public pound – a blueprint for value for money
Good afternoon everyone. As an Officer of the House of Commons it’s a pleasure to be speaking to you in Parliament this afternoon.
Our two main tasks at the NAO are to give Parliament and taxpayers assurance that public money is properly accounted for and spent well. This afternoon I’m focusing on the second of those, our assessments of value for money. I live in hope that one day you will be equally keen to attend a speech on accounting and auditing standards.
Indeed, the importance of timely and effective public audit is currently being highlighted by serious delays in the audited accounts in England’s local authorities. While the position on timely accounts is much better for central government, the need for a stronger focus on value for money and ensuring people receive high quality public services is just as pressing at the national level too. That’s where the independent NAO operates: we help Parliament scrutinise how government spends public money.
Today I’d like focus on what the NAO’s work tells us about getting the most out of every pound that government spends. I’ll use the shorthand of efficiency and productivity to cover a range of opportunities for delivering more effective services at a lower cost.
The tax, spending and borrowing forecasts supporting November’s Autumn Statement show that government of whatever complexion faces a tough challenge in the years ahead. The reasons for this are well known to you in this room, so I will only summarise them briefly.
- Demand for many services will continue to rise as the number of older people increases.
- Parts of our national infrastructure are crumbling. Maintenance backlogs persist in large parts of the public estate, impeding service delivery and costing more to put right in the long run.
- On the digital front, out-of-date IT systems slow the modernisation of many public services and they interfere with the efficient working of government, as well as increasing the risks of successful cyber-attacks – which we have seen recently – and maladministration.
- Higher inflation has increased costs, particularly for large infrastructure projects.
- The public sector is finding it harder to retain staff. Turnover in social care roles reached 37% in some areas in 2022. Neither is this problem confined to ‘frontline’ roles as evidenced by the thousands of digital vacancies across government.
These factors and others have combined to leave public services with a productivity problem. When you add to this the sharply increased cost of servicing government debt, this is a challenging fiscal picture.
In this speech I take that fiscal challenge as my starting point. Potential policy measures on tax and spending to address the challenge are outside my remit. Quite rightly, the NAO does not opine on policy priorities.
But I do want to make the case that there is good evidence from the NAO’s work to believe that government can achieve more with what it already spends. And that this amounts to a material contribution to the fiscal challenge, certainly tens of billions of pounds a year.
Now, I am not going to arrive at a specific figure as this will depend on the extent to which government prioritises pursuing the savings I will identify.
Of course, if greater efficiency on this scale was easy, we’d be doing it already. So, I also want to set out what the barriers to improved efficiency and productivity are, and what may be done about them.
How can we make public money work harder?
There are in my view five main areas of financial opportunity: major infrastructure projects; asset management; procurement; digital transformation and reducing fraud and error. This is not an exhaustive list and I make no claim for the novelty of any of these themes – government is already working on all of them. My point is that the potential financial benefit is far from being fully realised. To take these in turn…
Firstly, major infrastructure projects
Work by the NAO and the government’s own Infrastructure and Projects Authority has built a strong body of evidence on good practice in delivering major projects.
This has helped to drive better performance on some projects, yet we still see failures of value for money and delivery in others, at enormous cost to the taxpayer.
Why is that? Our work on HS2 and the New Hospital Programme suggests that for the biggest projects, Whitehall has a governance problem. These two programmes are examples of what I call mega projects which are arguably too large for the risks to be manageable by the relevant departments and their arms-length bodies. They have overall budgets of many tens of billions and project lifetimes spanning decades, let alone Parliaments.
In both cases, decisions to proceed were not accompanied by sufficiently robust and realistic assessments of affordability. If overspends emerge, it’s likely that they will be too large for the host department to manage, and the question becomes one of government’s overall priorities.
So I think a new approach to the governance of the small number of genuine mega projects is needed, reflecting the scale and nature of the risks involved. This is likely to require governance expertise from outside the relevant department. This would increase the chance of making better go/no-go decisions and effectively holding the project to account for cost control and delivery.
Better governance of our largest projects offers significant financial benefits.
The next of my five areas is asset management
The efficient maintenance and improvement of existing assets is as important as getting value for money in building new infrastructure. After all, new assets will only deliver promised benefits if they are properly maintained.
Capital assets, such as schools, hospitals, prisons, roads and flood defences must be adequately maintained to meet their purpose.
All too often the NAO’s recent work has highlighted the false economy of allowing maintenance backlogs to build up. Our recent report on the condition of school buildings showed that more than a third are beyond their design life, leading to higher running costs and in some cases, to emergency repairs which continue to affect pupils, teachers and parents even now.
The same issues are significantly impacting on patient care and costs at many NHS hospitals. So a disciplined approach to asset management, with optimised maintenance plans for each part of the public estate, is an essential component of the government-wide efficiency drive that I am recommending.
Thirdly, procurement
Each year government spends around a third of its money buying goods and services. In a recent report we found that of £100bn worth of contracts awarded by major departments during 2021-22. Of those, around a third were either direct awards or contract extensions.
Government has taken important steps to professionalise procurement by creating the Government Commercial Function. Doing so has already created a significant financial benefit.
Despite this, performance remains patchy in places. Government still spends more than it should in some areas because it relies too much on expensive temporary contracts, and too often we see misaligned commercial incentives.
Our report on competition in public procurement identified ways of securing further significant savings through improving data, market engagement, and active contract management. Government’s spend on IT services is an excellent example of where further efficiencies lie. Maximising government’s buying power in that market dominated by global giants is essential.
The new Procurement Act is a good opportunity to redouble efforts in all these areas. Getting this right is worthwhile as government’s own estimate is that better use of competition can deliver between £4bn and £8bn of further annual efficiencies. And that’s just in central government – embedding best practice across the wider public sector would secure further savings.
Indeed, our report last Friday showed that the NHS spent some £3bn outside its dedicated procurement service. This means that 43% by value of NHS consumables are bought outside the system designed to deliver value for money.
There is still considerable value to be achieved in driving better deals for taxpayers and services.
Fourthly, digital transformation
The technology already exists to transform service delivery, reduce costs and improve the user experience. Government is working to improve its approach to realising benefits and identifying services requiring transformation, led by the Central Data & Digital Office.
This work must replace antiquated IT systems, improve the quality and shareability of data, and recruit and retain scarce skills in high demand across the economy. The challenge is vast. In 2020 Defra estimated that it would need to spend more than three quarters of its digital budget on addressing legacy system issues.
The MoD is in part reliant on kit dating back to the Cold War for its defence inventory management.
But there is good news. Parts of government are showing that it can be done.
Following our report on the backlog of new passports caused by the lifting of COVID-19 restrictions in 2022, the Passport Office has responded by improving its customer contacts, building capacity to better manage demand, and continuing its digital transformation. The customer experience is much improved and the Passport Office is saving money by reducing ‘failure demand’.
The potential efficiency gains in those services dependent on high volumes of data processing are enormous, with fewer, better paid civil servants delivering more modern and responsive public services, and wasting less of their customers’ time.
In the last of my five opportunity areas, reducing fraud, error and tax evasion
Fraudsters, both organised and opportunistic, target public expenditure, often using new technology to do so. Tax evasion deprives government of the resources it is legally due and can ill-afford to lose.
Government needs up to date intelligence on what’s happening in these areas and well-targeted defences and interventions to prevent, detect and recover as much as possible.
The losses to the public finances from fraud, error and tax evasion run to billions of pounds a year. Our work provides much evidence of where more effective defences against fraud and better detection and recovery of losses could realise large sums. I’d point to Universal Credit, where fraud and error currently costs taxpayers £5.5 billion a year; and tax fraud, where the compliance yield achieved by HMRC has reduced since the pandemic and is not yet back to its pre-Covid level as a percentage of the tax take.
Progress is being made. DWP and HMRC continue to explore how new technology can prevent and detect fraud. The new Public Sector Fraud Authority has created a specialist cadre of fraud investigators. We will continue working with them and others across government to identify and tackle this scourge.
So that’s five areas with significant savings each at stake. So why is progress on them not faster? How can we get better at turning these opportunities into real resources?
A large part of the answer lies in improving productivity.
What needs to change to realise these savings?
Before turning to what I think are the most important enablers for better productivity, Iet me acknowledge the context of the last few years. Civil service leaders have been responding to a succession of extraordinary challenges, from EU Exit to Covid-19 to war in Ukraine and an energy and cost of living crisis. These events have consumed the capacity of those who could otherwise have been driving some of the strategic changes I’m outlining.
The challenge now is to focus the energy of civil service leaders, managers and teams on making the changes necessary to drive better productivity and release resources, despite the inevitability of new emergencies.
So what will enable these changes?
Firstly, better data. Consistent standards and definitions, along with a greater a focus on quality, are essential if citizens are to see service levels rise and costs fall. Without it, government ambitions on artificial intelligence will not be realised, as poor data means arriving at wrong answers, only faster.
Secondly, innovation and evaluation – which itself relies on good quality data. In our work we see plenty of innovative thinking from teams across government who spot the need for operational improvements. Creating an environment where this is encouraged, tested, evaluated and scaled up is proving more challenging.
One of the best examples we’ve found of this approach in government is the Department for Education’s programme for funding and evaluating promising innovations in children’s social services. This is helping the Department identify and promote the projects that have the greatest potential to make a difference for children and their families, and saving money for the taxpayer down the line. The aforementioned New Hospital Programme is establishing a new approach to hospital design and construction by using a standard template, offering the prospect of savings in the cost per hospital, provided of course that the template is based on realistic assumptions.
Thirdly, the planning and spending framework can better support this drive for efficiency and productivity. Our recent report on combatting the harm from illegal drugs provides a good example of how government needs to work across existing departmental boundaries to get the most from the available resources. The Shared Outcomes Fund is aimed at encouraging this approach. Yet examples like this are still the rare exception and many other opportunities for better allocative efficiency remain to be exploited.
The planning and spending process also needs to address the personal and organisational incentives for high performance on efficiency. By personal incentives, I mean demonstrating to talented staff that developing delivery skills is a route to career progression and success. For the organisation or department, there’s a strong argument for retaining a share of the financial return to invest in further improvement.
Each of these enablers must be underpinned by a stronger focus on leadership and delivery skills. Whenever we look at a project or service, the best predictor of success is the quality of leadership and management. Crucially, the right skills for the job.
It is relatively easy to cut spending. It requires skilled leaders and managers to deliver genuine efficiencies that release resources for government priorities. We need leaders that have the capability to deliver what’s required, achieving the right blend of homegrown talent and expertise from outside. We will soon be reporting on the civil service’s approach to getting the most from its leaders and managers, with recommendations aimed at consistently better results in efficient service delivery.
As mentioned earlier; bringing these enablers of greater productivity together and making them work at scale is a big task. I welcome the launch last year of the government’s new efficiency framework which sets out a more rigorous approach to identifying and measuring efficiency gains across departments.
We will only realise the full potential if government makes improving its own productivity a high priority, with serious cross-government weight behind it. Some of the savings can be realised quickly, others require up-front investment and will grow over time.
So in conclusion, Paul Krugman’s well-known line that productivity isn’t everything, but it is ‘almost everything’ seems particularly relevant to the fiscal challenge facing the UK at the moment.
I know that government shares this ambition to make a step change in productivity. There’s enough evidence from the positive examples we have found in our work to be confident that significant amounts of public money can be freed up for government’s priorities. But it will take a disciplined, focused, cross-government approach over several years to fully realise the potential, and make the exceptional the norm.
For our part, the NAO’s programme of value for money work will continue to identify opportunities for better results and greater resilience. We’ll also continue to produce our lessons learned reports, where we synthesise the learning from multiple reports on the same theme. And our good practice guides, offering practical advice to those running services and tasked with delivering more efficiently.
I look forward to challenging and supporting those of you in government to deliver for taxpayers in the coming year.
There’s a lot to do. But for now, thank you very much for listening.
Watch the speech
Author
Gareth Davies
Gareth Davies was appointed C&AG in June 2019. Before his appointment as C&AG, he was Head of Public Services at Mazars, a global accountancy firm specialising in audit, tax and advisory services. Prior to this, he was Managing Director of the Audit Commission’s Audit Practice. His experience spans financial and value for money audit, organisational leadership and Board governance. Gareth is a Fellow of the Chartered Institute of Public Finance and Accountancy and a Fellow of the Institute of Chartered Accountants in England and Wales. He is a non-executive Board member of the INTOSAI Development Initiative (IDI), which supports Supreme Audit Institutions (SAIs) in developing countries to sustainably enhance their performance and capacity.
