Report

by the Comptroller and Auditor General

Cabinet Office

The 2013-14 savings reported by the Efficiency and Reform Group

HC 442 Session 2014-15 16 July 2014

Our vision is to help the nation spend wisely.

Our public audit perspective helps Parliament hold government to account and improve public services.

The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 820 employees. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of £1.1 billion in 2013.

Report by the Comptroller and Auditor General

Ordered by the House of Commons to be printed on 16 July 2014

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act

Sir Amyas Morse KCB Comptroller and Auditor General National Audit Office

10 July 2014

This report examines the Efficiency and Reform Group’s processes to produce their savings claims for 2013-14. We reviewed: their methods to calculate the savings; how they used those methods to make the savings figures; and their assertions to explain the savings claimed.

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10480 07/14 NAO

The National Audit Office study team consisted of:Adam Crossley, Iain Forrester, Ezenwa Osuji and Sarah Pearcey, under the direction of Keith Davis and John Thorpe.

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Summary

Introduction

1 The Efficiency and Reform Group (ERG) is part of the Cabinet Office and works to help government departments make savings. Since 2010, ERG has reported annually on government savings, in the areas where it aims to influence spending in departments, and, increasingly, the wider public sector. In doing so, it has raised the profile of and injected a sense of pace into, the efficiency agenda.

2 As in 2012-13, we have reviewed ERG’s performance as it collated and announced the savings in 2013-14. This report shows our findings on ERG’s methods for calculating the savings it claimed this year, and how ERG has presented them to the public.

Our remit

3 We reviewed ERG’s methods, and how it used them to calculate savings for the 14 categories of savings that they claimed for government during 2013-14.

4 We reviewed the individual savings categories and assessed the evidence to support ERG’s savings’ claim against criteria to examine if:

its methods are adequate, to support the savings they claimed;

it used the methods consistently; and

its assertion accurately describes the savings.

5 Our review has focused on ERG’s methods and processes to calculate its 2013-14 savings claim. We also considered the Cabinet Office internal auditor’s work to assure those processes.

6 We have not:

tested departments’ data or their processes (or their suppliers’ processes) to produce this data; or

assessed the accuracy of the claimed savings figures – we only comment on how ERG calculates the savings.

Key findings

7 Figure 1 sets out a summary of our findings.

8 Of the 14 savings lines, nine have strong methods and evidence. The savings lines where evidence (and the ERG process) is strongest are those where the evidence comes from operational data and its production and review is embedded into ERG’s way of working.

9 In the remaining five savings lines, the methods are less strong but significant savings are still likely to have been achieved. Commercial models is a new category this year. While the current method is adequate to support the one saving reported in 2014-15, ERG will need to develop this process as more savings are claimed in future. In both commercial relationships and construction, although there was a formal process in place, we found some inconsistencies in the level of evidence provided. In major projects and Government Digital Service (GDS) controls savings, the internal processes were less strong overall. Some poorly-evidenced savings were identified and removed from the savings claim before publication. ERG should embed information gathering for each of these lines into standard business-as-usual processes, to strengthen the quality of evidence. This will also ensure that the data is gathered throughout the year and not as a one-off year-end exercise, and allow more time for review by ERG, the internal auditor and the NAO.

10 ERG has improved its calculations and reporting in 2013-14. ERG has responded to our, and internal audit’s, recommendations in 2012-13. ERG set up a formal audit improvement process, to act on our recommendations. ERG has improved the savings lines we identified as weaker in 2012-13. For example, it has standardised how it calculates pensions contributions and improved how it collates construction evidence. ERG has also improved how it discloses the savings figures to the public, issuing the technical note with the savings announcement.

11 There are some areas where we identified issues in 2012-13 and they remain of concern. We identified savings lines that needed improvement in 2012-13: GDS controls; construction; and major projects. Although some improvements have been made in 2013-14, these areas continue to have weaker methods. ERG has not acted on our recommendation that they gain additional assurance by reconciling estimated figures used in some lines with outturn, except for pensions. ERG has also not tried to reconcile departments’ information on some key lines, for example workforce savings, with their audited annual accounts when these are available. This would give ERG extra assurance over future savings claims.

12 ERG is acting prudently to remove double counting. Where there is potential overlap between different savings lines, it takes a prudent approach to removing double counting wherever the risk is identified. However, given the range of activity it is not possible to check this exhaustively and some risk remains.

13 The savings announced are now much wider than originally reported in 2010-11 as ERG’s engagement has broadened. The first announced savings focused on those areas where ERG had worked directly with central government. However, some savings areas, particularly centralising procurement and pensions, now also include ERG’s less direct influence on the wider public sector. ERG should explain more clearly the impact of the change in scope, of some savings areas but not others, on the savings over time.

14 ERG’s public reporting now clarifies the range of savings it includes. The calculation uses many separate savings methods. These differ in what they set out to measure, and how; what baselines they use; what sort of evidence they expect; and where the data comes from. The savings are therefore different in nature, and care needs to be taken not to aggregate them inappropriately. In its reporting for 2013-14, ERG has improved how it shows the savings, splitting the types clearly.

Recommendations

15 Appendix Three shows our recommendations from 2012-13 and how far ERG has acted on them. ERG has worked to strengthen its own processes. It has acted on most, but not all of our recommendations which were designed to increase assurance throughout the year, including after the announcement has been made.

16 During our 2013-14 review, we have also made several new recommendations. We set these out against the specific savings lines in the main body of this report. Our recommendations are in three categories:

Process improvements

Particularly gathering more evidence throughout the year, or allowing additional time at year-end to review evidence in depth.

Detailed review

More detailed review within ERG, and working with departments to understand what assurance they have over their data.

Everyday information-gathering

Putting information-gathering into ERG’s day-to-day work, to link government activities clearly to the savings they are claiming.

17 These recommendations come from our observations of where savings are strongest. Our recommendations aim to show how ERG can apply that good practice into areas where evidence is weaker.

Part One

Savings process

1.1 The Efficiency and Reform Group (ERG) is part of Cabinet Office. Its purpose is to help departments reduce their costs. Its ambition is to identify a £20 billion reduction in central government departments’ spending by 2014-15 by: reductions in waste and administrative costs; fraud, error and debt; and government reform.

1.2 ERG identifies savings by collating data from departments and third parties. It analyses that government data, and data from private sector suppliers to government. It has various methods for calculating the savings, based on what data departments supply. For some savings lines, ERG collates data throughout the year. For some it waits until year-end to produce a figure.

1.3 ERG validates the savings calculations. It has processes to ensure the savings claimed match its methods. These processes vary by line of saving. There is also variation between the different savings claims in: what they seek to capture; the nature of the saving claimed; and how ERG calculates those figures.

Changes in 2013-14

Public reporting

1.4 ERG announced the savings on 10 June 2014. They published a detailed Technical Note with the announcement, in response to our recommendation last year.1

1.5 In the Technical Note, ERG has broken the savings into three areas:

Operational savings

These are mostly for day-to-day expenditure. The savings come from certain controls on spending. They mostly reduce spending, compared with 2009-10 baselines.

Savings through identification of low priority spend on projects, leading to project cancellation, funding re-prioritisation, or cost reduction; implementation of projects to reduce revenue requirements and construction savings

These savings mainly relate to project spend in departments. There may not be a clear reduction in spend, compared with spend in 2009-10, as project funding varies year-on-year.

Receipts from asset sales and new commercial models

These are cash payments to the Exchequer this year. They come from the sale of assets, for example a building or piece of intellectual property.

1.6 The announcement uses a separate breakdown, into:

procurement and commercial savings;

transformation savings;

projects savings; and

workforce reform and pensions savings.

1.7 ERG has separated the different types of savings in the main announcement in a different way to how they appear in the Technical Note. However, there is a summary of some of the main issues that affect how ERG measures the savings, and clear signposting that there is extra detail in the Technical Note.

1.8 The announcement also mentions three specific additional savings that are not included in the savings total:

£1.1 billion workforce savings by constraining wage inflation.

Nearly £250 million savings from rail network repair.

Over £400 million savings from tackling fraud, error and debt in the welfare system and student loan applications.

1.9 We do not review these savings in this report, and there is no extra information about them in the Technical Note.

Method changes

1.10 ERG set up a formal audit improvement process this year to address our, and internal audit’s, recommendations. Its responses to our recommendations on detailed savings lines are in Appendix Three. Figure 2 sets out our main recommendations in 2012-13 and how ERG has responded to them.

1.11 ERG has also updated some methods to give new estimates of the savings. These changes have substantially affected the savings claims in the following areas:

Major projects

There are new methods for ERG to measure savings from cancelled and re-scoped projects, and to measure the reduced expenditure from successful projects, as well as lower actual project costs.

Consulting and contingent labour

ERG has decided that it should inflate the baseline 2009-10 expenditure, as a more accurate counterfactual for current spend.

1.12 Over the four years that ERG has reported savings, it has extended the remit of what it includes:

Extra areas of savings

In 2011-12, ERG included savings from the construction process for the first time. In 2012-13, ERG introduced savings on pensions, sale of land and buildings and ICT networking. There is a new savings claim in 2013-14 for commercial models.

Including the wider public sector

The remit of three savings areas has changed over time to include the NHS and local authorities as well as central government. More than £500 million of the centralising procurement savings line this year comes from bodies in the wider public sector – where it is known that they use government procurement frameworks. The increase in pension contributions includes teachers, firefighters and NHS staff as well as civil servants. The major projects saving from modernising health also includes savings across the NHS. None of the other eleven savings areas include savings from the wider public sector, even where ERG could calculate them. For example, the construction savings line includes projects such as further education colleges and road repairs where costs are shared with local authorities. The 2013-14 claimed saving for construction includes just the central government share of the overall project saving, based on cost contributions.

1.13 ERG is right to wait until it has reliable evidence before claiming savings. However, it could do more to highlight changes in savings, particularly when showing savings trends. It should also explain how it has changed the basis and scope for the savings in its year-on-year comparisons. As the savings broaden into the wider public sector there are risks of selective reporting, because the information on wider public sector spend is less complete. ERG may not have captured overspends or cost movements and netted them off against the savings claimed.

Other review of savings

1.14 Internal audit has reviewed the savings that ERG claims. Its objective was to: “Provide independent assurance to the Cabinet Office Accounting Officer that the processes established within ERG to validate savings claimed as a result of efficiencies and reforms, are robust and deliver evidenced-based and supportable benefit claims.”

1.15 Internal audit reviewed methods, processes, draft assertions, and risks that ERG identified. It conducted detailed sample testing of savings claimed, to verify the published figures.

1.16 A summary of the internal audit findings is at Appendix Five.

1.17 Our first report on ERG explained its challenges but concluded it was too soon to judge its success.2 We reviewed ERG’s 2010-11 savings claims and found that substantial savings had been made.3 Our second report on ERG found that ERG had helped departments make substantial spending cuts.4 In this second report we concluded that we have confidence in the £5.5 billion savings that ERG reported in 2011-12.

1.18 In 2012-13, we did an early review of ERG’s systems for reporting savings.5 We found ERG had made significant improvements to its measurement of savings. However, there were several types of saving in the combined figure, which ERG could have explained better to the public. There were also significant differences in how ERG used methods, and weaknesses in how it managed, and gave assurance over, the process to estimate savings. We did not review the departments’ processes, nor did we assess the accuracy of the claimed savings figures.

Scope and approach

1.19 We have examined ERG’s methods, how it used that method and reported savings in each of the savings categories used to produce the 2013-14 savings claim. We reviewed the documentation against the same criteria we used in 2012-13. These are based on ERG’s own guidance and our previous work assessing savings. Our criteria, and how they fit with previous work, are in Appendix One. Appendix Two shows what we reviewed, and how.

1.20 In the following parts we give detail on our work on individual savings lines. Part Two covers those savings lines where there is a strong process in ERG for calculating the savings. Part Three sets out those savings lines where ERG could improve its process.

1 The announcement and Technical Note are both on Cabinet Office website: www.gov.uk/government/publications/government-savings-in-2013-to-2014

2 Comptroller and Auditor General, The Efficiency and Reform Group’s role in improving public sector value for money, Session 2010-11, HC 887, National Audit Office, March 2011.

3 Comptroller and Auditor General, Cost reduction in central government: summary of progress, Session 2010–2012, HC 1788, National Audit Office, February 2012.

4 Comptroller and Auditor General, The Efficiency and Reform Group, Session 2012-13, HC 956, National Audit Office, April 2013.

5 Comptroller and Auditor General, The 2012-13 savings reported by the Efficiency and Reform Group, Session 2013-14, HC 126, National Audit Office, July 2013.

Part Two

Savings lines with stronger methods

2.1 ERG is improving how it calculates and evidences savings. This section shows the savings lines with stronger methods, as set out in Figure 3.

2.2 Most of these savings areas have used the same methods and sources of data as previous years to calculate the savings. All data sources are clear and well-evidenced. Neither we nor internal audit found any significant errors. ERG has also improved some key areas, particularly in centralising procurement. There, the evidence brings together the complex range of methods used more clearly.

2.3 Data sources remain the same. However, ERG has updated some methods where it felt improvements were necessary to accurately capture the saving. For example, adding inflation to the baseline for the savings in consulting and contingent labour, which has increased the saving by £277 million.

Line-by-line detail

Workforce

2.4 Cabinet Office has frozen recruitment for central government departments, and encouraged departments to reduce staff numbers. The saving is calculated by comparing the total 2009-10 paybill with the current paybill. Departments give ERG monthly data for themselves and their arm’s-length bodies, and this should be signed off by a senior member of staff in the department. ERG adjusts the two sets of data to reflect changes in government. For example, when arm’s-length bodies are formed, abolished or moved between departments.

2.5 The baseline data is consistent with that used in 2012-13 and ERG has correctly altered it for changes in how government is organised. Internal audit reviewed a sample of 24 monthly returns and confirmed that their data had been accurately included in the calculation. However, in around a third of their sample, there was no evidence for the expected senior sign-off from the department. This is an important part of the assurance process. The rate has improved from last year, but ERG should ensure that data is signed-off.

2.6 We tried to match the staff figures and payroll costs reported to ERG in 2012-13 to those published in departmental annual reports. For many departments, the bodies included in departmental accounts differed to that included for calculating the saving and figures could not be matched exactly. There has been a downward trend which gives general assurance that departments have made savings. We recommend that ERG considers a detailed one-off exercise to reconcile the two published data sources and give extra assurance over the savings figures. This would sit alongside the work it currently does to reconcile the data to information published by the Office for National Statistics.

Pensions

2.7 Over the last two years Cabinet Office and other bodies responsible for public sector pension schemes have renegotiated scheme terms. Staff now pay a larger contribution. This reduces the public money needed, for people drawing their public sector pension. ERG calculates this saving by estimating what the staff contribution would have been based on employer contributions, which have remained fixed. It compares that to the Office of Budgetary Responsibility’s latest estimate of actual contributions.

2.8 We have reviewed ERG’s evidence, which it bases largely on information from the Office of Budgetary Responsibility. The Office of Budgetary Responsibility produced the data for the Budget Statement in March and it is an estimate of the total contributions in 2013-14. ERG has compared the 2012-13 forecast to actual receipts and over the pension schemes included the difference was less than 1 per cent.

Centralising procurement and the common infrastructure programme

2.9 The Government Procurement Service (GPS – now part of the Crown Commercial Service) seeks to drive down prices and demand by bulk-buying goods across government. GPS has developed guidance on how to evidence and calculate savings from savings initiatives. Using this guidance, GPS has developed benefit methodologies for different categories of procurement. These follow a standard template and require senior managers to approve them, before they can be used to calculate and claim savings. Over 100 benefit methodologies were used in 2013-14 to claim savings. Each benefit methodology is specifically tailored to reflect the type of commodity, the nature and source of the savings and the data used.

2.10 Most savings reflect one of the following basic calculations:

Saving = (2009-10 baseline price – current price) x current volume.

Saving = (2009-10 baseline demand – current demand) x current price.

2.11 The 2009-10 prices are adjusted for inflation for those commodities where inflation has had a significant impact on the baseline price.

2.12 The data for savings calculations comes from spend data, which suppliers provide monthly using an online tool. GPS’s own internal audit department periodically reviews suppliers to check the figures supplied.

2.13 We reviewed a sample of the benefit methodologies, covering more than £500 million of the claimed savings. The benefit methodologies all followed the same underlying logic. But there were differences in what data GPS used as a baseline and whether it had inflated it over time, depending on what they thought was most appropriate. GPS updates methodologies when they think it is necessary – the methodologies reviewed varied in start date from 2010 to 2013.

2.14 We examine supplier data as part of the audit of GPS. In general we found that the data held was accurate. We could not be sure that GPS had captured all spend with suppliers – this would lead to savings being under-reported. Internal audit has also reviewed a sample of transactions to check that the savings made were as expected. Internal audit identified some minor errors but they came to less than 1 per cent of the total sample value checked and do not indicate significant weaknesses in the process.

Consulting and contingent labour

2.15 Cabinet Office has reduced government’s spend on consultancy and on contingent labour, using restrictions on departments putting new contracts in place. Savings are calculated using two specific benefits methodologies within GPS, which compare expenditure in 2013-14 to expenditure in 2009-10. The benefit methodologies have been updated in 2013-14 to take account of inflation. This has increased the saving by £277 million. This contrasts with the workforce savings where ERG decided not to inflate the baseline in this year’s claimed savings. The announcement did set out the effect this would have had on the saving, which was to increase it by over £1 billion.

2.16 Information on spend comes from specific returns from departments. Contingent labour is included in the same returns as workforce information (see paragraphs 2.4 to 2.6 above). The same issues around lack of senior sign-off and inconsistency with the audited accounts are applicable here. Internal audit reviewed a sample of the consultancy returns. It found that senior departmental sign-off was either missing or unclear in almost half of their sample. Again, this is a key control over data quality so ERG should ensure that departments provide it.

Marketing

2.17 Cabinet Office has introduced tighter controls over departmental spending on advertising, marketing and communications. They measure the success of these by comparing spend in 2013-14 with a published baseline of spend in 2009-10. They include all major departments and arm’s-length bodies with more than 250 staff in the survey. ERG separates the data into operational spend, which includes staff costs, and proactive spend, which focuses on external costs. ERG shows savings on proactive spend only, to reduce the risk of double counting with other savings areas.

2.18 We reviewed the departments’ data, the level of sign-off provided, and the baseline data used for comparison. ERG sends out a standard template, for consistent data collection and ease of calculation, which strengthens the process. They require the Director of Communications (or equivalent) to sign-off the data for each department and its arm’s-length bodies. Departments do this after year-end. This increases the risk that ERG may not receive data in time for review. This year, ERG received the final pieces of data more than two weeks after it first presented a savings figure for audit, which increased the burden on internal audit to review it in time.

Property portfolio optimisation and asset sales

2.19 Cabinet Office is reducing spending on property. Departments must work with the Government Property Unit (the Unit) when they want to buy new freehold property, sign a new lease, or extend a lease past a contract breakpoint. The Unit keeps information on departments’ office and non-specialist property on two databases: an online database for all property called e-PIMS, and a specific National Property Controls management database. The data in the databases comes from various sources, including uploads directly by departments, specific data requests and annual benchmarking information.

2.20 The Unit takes the benefits from assets sales directly from the data, minus a standard 7.5 per cent of the proceeds for the costs of selling the property. Savings from exits are built up from several years. For exits in 2010-11, 2011-12 and 2012-13, the saving is the total annual costs as recorded on e-PIMS. For exits in 2013-14, the saving is estimated as the occupancy costs unpaid for the year, less exit costs estimated at 60 per cent of the annual occupancy costs.

2.21 We reviewed the basis of the calculation for property portfolio optimisation. The Unit calculated the savings according to its stated methods. We found that savings from exits in previous years were higher than reported previously. The Unit has made additions to its databases when departments have told them about historic exits of properties.

2.22 We tried to reconcile savings to our knowledge of in-year costs for a sample of exits. This was difficult because of the number of properties where the Unit took savings from sources other than in-year cost figures. Internal audit’s review of a sample of items did not find significant errors, but found that data came from several sources.

2.23 We reviewed several sales for the year, to check that asset sales figures were as expected. We matched proceeds to departmental records more easily than exits of leasehold properties. The figure announced for asset sales does not take into account whether the sale maximised the value of the property, it simply reflects the amount received.

GDS transformation

2.24 The Government Digital Service (GDS) has built a single GOV.UK website to replace many departmental websites. GDS has worked with departments on digital transformation work, such as building databases and using agile software development techniques.

2.25 GDS uses staff and other costs that departments provide and publish in annual report(s) on central government websites as evidence of website closure costs claimed as savings. GDS takes most baseline costs from the 2009-10 annual report, with others sourced from subsequent annual reports where that was not possible. The other transformation savings are calculated based on the difference between actual cost data and data from the original plans or budgets.

2.26 We reviewed the evidence and the baseline data that GDS used to compare each of the different savings that made up the total. We found that all were well documented and supported, and used reasonable baselines. Almost all savings based on the website used 2009-10 numbers, which had been reported at the time. The definition of the savings was reasonable in all cases except one smaller saving, which GDS removed from the final figure.

Part Three

Savings lines with scope for improvement

3.1 There are several savings areas where Cabinet Office needs to improve their processes and strengthen the evidence collected as set out in Figure 4. We raised many of these areas in 2012-13 and ERG has made some improvements based on our recommendations. However, our work this year shows that more work is still needed.

3.2 The detailed findings for individual savings areas are set out below. There are several common issues that underpin our findings, and which ERG should address:

In most of these spending areas, the data ERG collected for the savings figure is not used directly as part of other business processes. This means that there is little pressure to improve or understand the data, and is a clear contrast with stronger savings lines, such as centralising procurement, where the savings are based on key information used to manage the business. This is the case for commercial models, GDS controls, and major projects.

Most data collection within ERG for the savings calculations happens only at the end of the financial year. Because of the tight time frame between this and the announcement, there is little opportunity for detailed review within ERG, or by internal audit, before figures must be finalised. Some genuine savings may not be counted because they cannot be evidenced.

3.3 Some savings attempt to capture work done in inherently complex areas. Particularly major projects or commercial relations, where Cabinet Office is trying to change working practices across government. These savings will always be more difficult to capture and evidence consistently than more straightforward areas. However, ERG could do more to show its processes and what it expects from departments, and to review what it receives so it is adequate.

3.4 We believe that departments are making genuine savings in these areas. However, ERG should improve its process for quantifying these savings, both their own processes and sometimes what they receive from departments.

Line-by-line detail

Commercial models

3.5 Commercial models is a new savings area this year. ERG expects savings to come from the government’s joint ventures, or other ways of providing public services which make extra value to what government would make alone. The benefits to government may come from capital receipts, increased income or reduced costs. According to the Technical Note, government has set up three joint ventures this year. One of which – AXELOS – has made an evidenced benefit: a £10 million capital receipt for setting up a joint venture to take advantage of Cabinet Office’s intellectual property. It is a receipt in addition to the regular income stream, which replaces the direct income Cabinet Office used to receive from the intellectual property.

3.6 We reviewed the broad principles ERG uses to calculate benefits from commercial models. The principles used to calculate benefits are in line with ERG’s rules for calculating savings, and allow ERG to include one-off cash payments. This has been made clear in the Technical Note this year.

3.7 We reviewed information on the pipeline of projects the commercial models team is examining, and the detailed evidence for the figure actually claimed. The information provided across all the projects was specific to each project and could be hard to follow. The government will increase the number of joint ventures and have more new ways of working. ERG should give more detailed guidance now on how to evidence benefits across the work, to ensure that the information is consistent as the number of projects increases. This does not affect the specific figure claimed in 2013-14, which matches the evidence provided and what we have seen in our financial audit.

GDS controls

3.8 The Government Digital Service (GDS) operates controls on certain types of ICT and digital spending at the business case stage. It calculates savings based on cases where it directly enforces a change in plans and cancels or reduces costs, and also where its intervention changes a project, which results in lower costs. The method is largely the same as that used in 2012-13. GDS compares the revised and approved spend forecast to the original spend forecast submitted for approval. GDS counts cancelled projects as having savings, and deducts additional short-term costs from the cancellation from those savings.

3.9 We reviewed GDS’s planned method for the controls savings. We then reviewed internal audit’s work and a sample of the evidence that supported the calculated savings.

3.10 The evidence for savings is hard to follow. There was uncertainty over some numbers with aspects of the cases still being removed or evidenced well past year-end. There were also cases where the evidence did not support the decision on whether some savings-related activities were a cancellation of previous activity or a continuation of previous activity. While GDS’s business model is based on an ‘agile’ approach, developing proposals flexibly, it still needs to ensure that it gathers sufficient robust evidence to support savings claims.

3.11 In many cases, GDS did not calculate savings correctly in accordance with the guidance and method. In some cases, not all relevant costs were included. For example, in one contract, the business case included costs for customised software support for the chosen option but they were not initially deducted from the savings.

3.12 GDS corrected the savings figure to account for all the errors identified. However we reported similar issues in 2012-13. Since the data and the process are entirely within Cabinet Office, GDS could have made more progress to resolve them.

Major projects

3.13 There are four different types of savings under the major projects banner this year, three of which are new in 2013-14. The first two are cancelled and re-scoped projects. This is where departments have identified projects of limited value or low value for money and decided to either stop the project or eliminate specific elements. ERG calculated the savings by comparing the actual in-year cost of the project with the latest forecast from before the re-scoping or cancellation. The other new set of savings comes from implemented projects, which have reduced the costs of service provision. ERG measures the savings by comparing the cost of running the service before the project was carried out with the current costs of running the service and implementing the project. The final type of savings comes from reducing the cost of carrying out major projects. ERG measures these by comparing initial and current forecasts of project costs.

3.14 We reviewed the detailed evidence for each department that presented savings figures. A full list is in Figure 5. This included examining how ERG calculates the savings, to ensure it was consistent with Cabinet Office’s method. We also reviewed ERG’s detailed calculations underpinning savings figures and any assurance departments provided. Where possible we reviewed the reported savings against our reports on the relevant projects.6

3.15 ERG sought to improve its methods in 2013-14 and calculated over £2 billion of the savings using new methods. These methods try to capture savings that are wider than the day-to-day management of major projects. More than 20 of the almost 200 projects which the Major Projects Authority listed in its annual report were put forward for savings, and the final figure includes seven.7 The final claimed savings also covers seven of the seventeen major government departments, although some other departments put forward savings which did not make it into the final figure. Cabinet Office should consider how it can better capture the impact of the Major Projects Authority on the projects they scrutinise and support.

3.16 The nature of the savings on cancelled and re-scoped projects means it is also challenging for departments to evidence and explain them. Most departments relied on sign-off from senior officials. ERG could give little additional evidence to prove that projects had been cancelled or re-scoped because they were wasteful or low priority as implicit in ERG’s assertions. It was also difficult to get assurance that spending on cancelled or re-scoped projects had not reappeared elsewhere, outside the project.

3.17 There was also no standardised way for departments to evidence the reductions in ongoing expenditure after implementing projects. Departments provided poor evidence, and double counting was highly likely as projects reduced staff or estates requirements. Therefore, to be prudent ERG only included five projects, out of the 16 initially put forward, in the final savings figure.

Construction

3.18 Departments that carry out construction have been working to reduce the cost of that work. ERG has measured cost reductions by looking at the cost of standard elements in 2009-10 and comparing them to the cost in 2013-14. In some departments, this analysis is done at the beginning of a project and fed into the price agreed with contractors. Some departments calculate savings for every project they carried out. Others examine costs on a subset of projects and extrapolate out to their whole work programme.

3.19 We reviewed the detailed evidence for each department that presented savings figures. A full list is in Figure 6. This included examining how savings were calculated to check it was consistent with Cabinet Office’s standards. We also reviewed the detailed calculations underpinning savings figures and any assurance departments provided. Where possible we reviewed the reported savings against our reports on the relevant building programmes.8

3.20 The complexity of construction savings is reflected in the diverse nature of the evidence provided and how ERG calculates the savings. ERG is trying to improve how it collates the evidence, by introducing a standard framing format to collate evidence from departments. However, it was still difficult to follow the figures and calculations between individual documents. For example, in a number of cases, savings were apportioned between years, but the basis of the apportionment was not explained. Although the evidence issues were eventually overcome, more review within ERG would be valuable in strengthening the process.

3.21 ERG collates most of the information for the savings at year-end. Internal audit carried out a mid-year review of seven of the savings areas, but there were substantial gaps in the evidence provided in some areas. ERG also provided additional supporting evidence needed for some savings lines very late at year-end. This made it difficult for internal audit to review it in time for the announcement.

Commercial relations

3.22 The government has changed its approach to managing contracts, and is trying to save money as a result. ERG calculates the savings largely using department verifications of savings, backed up by documentary evidence. Sometimes the savings data does not originate from departments, so ERG uses other evidence such as documented negotiations carried out within Cabinet Office. ERG calculates savings against a 2009-10 baseline where possible, or subsequent years where procurements began later on.

3.23 We reviewed the overall method and process for the savings. We also reviewed internal audit’s work and looked at the full evidence supporting a sample of savings claimed.

3.24 ERG has changed its control process from last year. It no longer tries to confirm savings from suppliers where the evidence comes from the department.

3.25 Both internal audit and our review found cases of insufficient evidence to back up the savings claim. In addition, ERG added a large savings item for various projects rather than a single contract late in the process, and removed it when it could not be evidenced. The effect was to reduce the savings claimed by £218 million.

3.26 Some claims seemed to relate to normal business practice rather than making extra savings, compared with baseline activity. For example, ERG includes savings based on compensation for over-billing for electronic monitoring contracts. This is government getting back money that it should not have paid initially, rather than getting the same service for less money.

6 These included the following reports: Comptroller and Auditor General, Crossrail, Session 2013-14, HC 965, National Audit Office, January 2014; Assurance of reported savings at Sellafield, Session 2013-14, HC 778, National Audit Office, October 2013; Managing the transition to the reformed health system, Session 2013-14, HC 537, National Audit Office, July 2013; Restructuring of the National Offender Management Service, Session 2012-13, HC 593, National Audit Office, September 2012.

7 Cabinet Office, Major Projects Authority Annual Report 2013-14, May 2014, available at: www.gov.uk/government/publications/major-projects-authority-annual-report-2014

8 Comptroller and Auditor General, Maintaining Strategic Infrastructure: Roads, Session 2014-15, HC 169, National Audit Office, June 2014.

Appendix One

Our audit approach

1 We examined ERG’s processes to produce their savings claims for 2013-14. We reviewed:

their methods to calculate the savings;

how they used those methods to make the savings figures; and

their assertions to explain the savings claimed.

2 We judged the savings line against the criteria in Figure 7. Our criteria are the same as those used to evaluate the 2012-13 savings figures.

3 They are based on those we have used to examine previous ERG savings reports.9 We have modified them to reflect the broader range of what ERG is claiming. This includes some areas of planned spend rather than realised savings, and some one-off savings (Figure 8 and Figure 9).

4 Our evidence base is described in Appendix Two.

9 Good practice for accurate public reporting of savings as set out in Comptroller and Auditor General, The Efficiency and Reform Group’s role in improving public sector value for money, Session 2010-11, HC 887, National Audit Office, March 2011.

Appendix Two

Our evidence base

1 We reached our independent conclusions on the savings ERG claimed after analysing evidence we collected between March and June 2014.

2 We used criteria that consider the ideal way to measure savings. Our audit approach is outlined in Appendix One.

3 We assessed whether the methods ERG used to calculate the savings gave an adequate basis for the saving claimed.

We reviewed the principles for savings, as set out by Cabinet Office.

We reviewed the individual savings methods for each line, which set out the detail of how ERG calculates each saving.

We reviewed savings calculations in practice, to check that ERG made them according to those methods.

4 We assessed whether ERG consistently applied those methods to make the savings figures.

We reviewed the detailed evidence that Cabinet Office gave internal audit for their review.

We worked with internal audit to understand their work in sampling and testing individual saving items – and did extra testing, where we felt this was necessary.

We used evidence from our other work, either previous VFM reports or the work of our financial audit teams, to verify that savings were genuine.

5 We assessed whether ERG’s assertions accurately described the savings claimed.

We reviewed the Technical Note and announcement made by Cabinet Office.

Appendix Three

Follow-up on 2012-13 recommendations

Appendix Four

Technical Note

1 This is Cabinet Office’s text that accompanies the Efficiency and Reform Group’s savings for 2013-14.

Summary

2 This report sets out the government’s assessment of the impact of actions taken by government departments, supported by the Cabinet Office, to release cashable savings, to identify savings through identification of low priority spend on projects, leading to project cancellation, funding re-prioritisation, or cost reduction; implementation of projects to reduce revenue requirements and construction savings and gain receipts from asset sales and new commercial models in FY 2013-14.

Context to this work – what did it set out to achieve?

3 In May 2010, UK Gross Domestic Product (GDP) had shrunk by almost 5 per cent in the recession of 2008-09 and public spending made up 47 per cent of GDP, a level that was considered by all major political parties to be unsustainable. The deficit between government revenue and public spending, including debt repayments, was the largest percentage of GDP of any developed country.

4 The government embarked on a programme of spending cuts aiming to reduce this fiscal deficit over the lifetime of the current Parliament. The June 2010 Budget removed £6.2 billion from in-year public spending, £3.2 billion of which came from central government budgets.

5 The Cabinet Office began programmes of work with departments to address both these areas.

6 Immediate steps included:

starting a programme to centralise procurement of common goods and services and renegotiating deals with some of the largest suppliers;

putting in place moratoria governing;

non-essential recruitment;

new ICT projects;

marketing and advertising spend;

potentially wasteful expenditure on consultants and temporary agency staff; and

performing a review of major government projects, and of existing ICT projects to identify where spend could be curtailed in-year.

7 Longer-term programmes of reform to embed sustainable change across the public sector, included measures to:

reconsider the delivery models for public service and establishing employee owned mutuals;

implement a programme of civil service reform;

establish a Major Projects Authority to provide appropriate governance to influence delivery of our largest project commitments;

improve government transparency; and

create new forms of social investment in the voluntary and community sectors.

8 For FY 2010-11 the government reported savings of £3.75 billion. The benefits statements and values we have included in this figure were verified by the independent auditors and subsequently the NAO confirmed savings of this scale had been made in their report Cost reduction in central government.10 The PAC welcomed the form with which these savings were reported and commended to government to continue with its work on improving efficiency and bringing about reform.

9 In FY 2011-12 the government built on this success delivering an operational savings total of £4.8 billion, and prevention of wasteful spend by major projects and construction of £758 million, totalling £5.5 billion. The benefits statements and values we have included in this total were again verified by the independent auditors.

10 In FY 2012-13 the government accelerated the savings delivery, delivering an operational savings total of £8 billion, and prevention of wasteful spend by major projects and construction of £2 billion, totalling £10 billion. Again the benefits statements and values we have included in this total were verified by the independent auditors.

11 In FY 2013-14, further savings have been achieved. This report sets out operational savings of £10.6 billion, prevention of wasteful spend by major projects, reduced revenue requirements and construction of £3.5 billion and receipts from asset sales and new commercial models of £0.1 billion, totalling £14.3 billion.11

What do these figures represent?

12 These figures represent our best assessment of the government’s progress against meeting the above objectives.

13 The government has worked hard to put in place robust savings assertions using detailed savings methodologies that provide as accurate an estimate as possible of the impact of our work. However, these savings figures are not national or official statistics; they are management information evidenced, normally, by department reports; and they have been assured by our internal auditors, and scrutinised by the NAO.

14 Where these reductions are ‘one-off’ and do not recur, there is an associated programme of work to embed longer-term change throughout this Parliament.

Technical presentation

15 Wherever potential double counting between the datasets has been identified, this has been removed.

16 When formulating benefits statements, we have rounded the precise figures to the nearest £10 million to reflect an appropriate level of precision.

17 Throughout the year we have discussed this approach with the NAO, and at the year-end we invited independent verification of our work from our internal auditors.

18 Cabinet Office internal auditors found that the values and benefits statements below are a reasonable reflection of the savings made with no significant weaknesses. This was based on a review of the evidence that Cabinet Office has collated in support of these assertions.

What are the figures?

19 The figures that have been verified by our internal auditors are as follows:

10 Comptroller and Auditor General, Cabinet Office and HM Treasury, Cost reduction in central government: summary of progress, Session 2010–2012, HC 1788, National Audit Office, February 2012. The report states, “In July 2011, the Cabinet Office’s Efficiency and Reform Group reported to the Public Accounts Committee that it had helped save some £3.75 billion through these initiatives. Our analysis of the audited accounts of the 17 main departments confirms that spending in the areas targeted was reduced on this scale.”

11 Figures may not sum due to rounding.

Appendix Five

Internal Audit findings

1 The cross-departmental internal audit service was asked to provide independent assurance to the Cabinet Office Accounting Officer that the processes established within ERG to validate savings claimed as a result of efficiencies and reforms, are robust and deliver evidence-based and supportable benefit claims.

2 Internal audit carried out a detailed review of all 14 savings assertions. The work did not test the accuracy nor completeness of data supplied to ERG by government departments, only that ERG had compiled sufficient evidence to support the savings claimed, and that any assertions drawn were reasonable and consistent with the evidence.

3 Internal audit was able to provide a reasonable assurance over ten of the fourteen work streams and moderate assurance over four using the following criteria:

Reasonable assurance. A sound evidence base supporting the claimed savings and assertions reported by ERG.

Moderate assurance. The evidence base supports claimed savings and assertions with some weaknesses.

4 A summary of internal audit’s findings is at Figure 10.

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