NATIONAL AUDIT OFFICE
REPORTBY THE COMPTROLLERAND AUQITORGENERAL
Ministryof Defence:Competition in the Provisionof SupportServices
ORDERED BY THE HOUSE OF COMMONS TO BE PRINTED 10 JULY 1992
LONDON: HMSO 133 f7.25 NET MINISTRY OF DEFEhKEz COMPETITION IN THE PROVISION OF SUPPORT SERVICES
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.
John Bourn National Audit Office Comptroller and Auditor General 22 June 1992
The Comptroller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies haveused their resources. MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUFPORT SERVICES
Contents
Pages
Summary and conclusions 1
Part 1: Introduction 8
Part 2: Progress in applying competition to the provision of support services 11
Part 3: Maximising the benefits of competition 19
Part 4: Monitoring the performance of contractors 23
Appendices
I. Examples of services provided wholly OI in part by contractors 27
2. Locations visited by the National Audit Office at which activities had been market tested 29
3. Market testing proposals: 1991-92 to 1993-94 30
4. Progress in mandatory areas 32
5. Use of the private sector in the provision of training 34 MNISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES
Summary and conclusions
1 Government policy is that, where possible, work carried out by departments should be market tested-that is, subjected to competition and a contract let if it makes management sense and will improve value for money. Departments estimate that market testing has produced average savings of 25 per cent.
2 Greater use of the private sector for provision of public sector services has been Government policy since 1979. And in November 1991 the Government White Paper “Competing for Quality” (CM 1730) set out proposals for expanding competition in the public sector. This does not mean necessarily choosing the cheapest service - it means finding the best combination of quality and price. The Ministry of Defence (the Department) have been placing contracts for services with the private sector for many years. Their policy is that work should be carried out by their own staff only if essential for clearly proven operational reasons or if there is significant financial advantage to the taxpayer.
3 The National Audit Office focused on the support service activities of the Department and examined three aspects of market testing in this area: 0 progress in applying competition . maximising the benefits of competition 0 monitoring the performance of contractors
The National Audit Office examination excluded major Defence equipment procurement projects and a number of other activities where different arrangements apply (paragraph 1.14).
Progress in applying 4 The National Audit Office were unable to quantify the Department’s overall competition to the progress because the Department have still to assess the value of activities with provision of support potential for competition. Nor do they have a comprehensive record of services contracts let before 1987. But they have put to contract, wholly or in part, over 100 activities. They market tested activities to a value of El03 million over four years to April 1990. This represents a major contribution to market testing in Government. In the three years to April 1994 they aim to test activities to a total value of El40 million (paragraphs 2.2-2.4).
5 A number of factors have affected the Department’s ability to sustain a high level of market testing (paragraphs 10 and 11) and their programme has not been progressing as quickly as planned. A little over one-third, by value, of planned tests were completed in 1990-91. Assuming these tests would have generated savings at the average level experienced by the Department in recent years, this could mean that savings were deferred at a rate equivalent to over f9 million a year (paragraphs 2.6-2.10).
6 In 1985 the Government made it mandatory to market test catering, cleaning, laundry, security guarding and minor maintenance. The initial round of testing was to be completed by April 1987, 1988 for catering. In 1986 the Department decided to look beyond domestic support areas in the expectation of achieving
1 MINISTRY OF DEFENCG: COMPEnTTON IN THE PROVISION OF SUPPORT SERVICES
more worthwhile savings. This was consistent with the recommendations of a Multi-Departmental Review in that year. The Department maintained their commitment to working through the mandatory areas, which accounted for nearly four-fifths of market testing between April 1987 and April 1991. But testing of these functions has been uneven and in some areas is still incomplete (paragraphs 2.11-2.16).
7 The Department have also made less progress than they expected in other, “non-mandatory”, areas. But testing in these areas has confirmed the potential for significant savings, and has recently increased-accounting for around 90 per cent, by value, of tests in 1990-91. Their forward plans for market testing are dominated by a diverse range of non-mandatory areas (paragraphs 2.12-2.14 and 2.17-2.18). But taking a wider view, there is scope for further progress on several broad fronts - much of which the Department already have in hand. For example: * clerical, executive, specialist and professional skills of the kind identified in the 1991 White Paper (paragraphs 2.18-2.19); . progress in putting training out to contract has been patchy. Further competition is being considered as part of a wider view of rationalisation of 39 areas of training. A decision has already been made to re-locate and market test elementary flying training for the Royal Air Force and the Royal Navy (paragraphs 2.20-2.21); . the Department are considering the scope for greater use of the private sector for major equipment maintenance and repair (paragraph 2.22); . competition has so far affected mainly civilian posts, although the proportion of Service posts saved through competition has increased in recent years. The Department are encouraging this trend in the light of their favourable experience of working with contractors under operational conditions during the Gulf conflict (paragraph 2.23); . the Department continue to explore the possibilities of combining suitable activities within single contracts and to extend the practice, including management of complete installations. Progress has been mostly confined to combining cleaning and catering contracts, although some contracts embrace wider ranges of services (paragraphs 2.24-2.26).
8 The Department recognise the need for a planned and centrally co-ordinated approachto competition.To this end they havea centralMarket Testing Consultancy whose staff develop and push the market testing concept vigorously, provide guidance and encouragement and carry out detailed feasibility studies. Within the context of the Department’s strategy of devolved management however, responsibility for applying policy rests with individual areas of the Department. Although encouraged to do so, these areas have not yet drawn up inventories of activities suitable for competition. In the absence of a comprehensive review of activities by each area, the Department lack assurance that centrally determined market testing targets reflect the full scope for competition. Nor do they have, in the absence of a comprehensive review, a firm basis for pushing market testing as far as possible into new areas, and doing so on the basis of folly informed decisions about priorities. The Department plan to develop suitable systems for reporting the required information on market testing opportunities as part of their New Management Strategy (paragraphs 1.10 and 2.27-2.30).
2 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES
9 There are variations in the extent to which areas of the Department have already adopted more thorough approaches to identifying competition opportunities. In 1989 The Air Force Board Member for Supply and Organisation set up a working group to consider market testing across all Royal Air Force establishments and as a result a range of new proposals was identified. Similar initiatives within the Quarter Master General and Fleet Support areas are now underway. Following the 1991 White Paper all Government departments’ market testing targets are to be informed by studies undertaken with private sector help to determine the most promising new areas. In February 1992 the Department appointed a senior private sector adviser (paragraphs 2.30-2.32).
10 The Department’s New Management Strategy, which has only been in place since April 1991, may give managers an incentive to explore opportunities for competition as they seek ways of making better use of the resources available to them. And as privatisation and contractorisation are options evaluated in the early stages of consideration of possible Agency status, the Department’s ambitious “Next Steps” programme provides an additional mechanism to promote market testing. However, other factors influencing progress are: availability of staff resources to carry out market testing, a process which often takes two years or more; the availability of funds to meet redundancy payments; and the fact that market testing cannot be carried forward in isolation from other initiatives to improve value for money such as action to reduce the support area following Options for Change, and the “Next Steps” programme (paragraphs 2.35-2.40).
11 Also, the Department have gone through a period of unprecedented change in recent years: not only to make radical changes to their own systems of management and financial control, but also to reflect the new political and defence situation in Europe and NATO. The Department point out that there are practical limitations on the rate at which an organisation can absorb change without detriment to its ultimate objective (paragraphs 2.33-2.34).
12 The National Audit Office’s main conclusions are that to exploit fully the potential for market testing of Defence support services improvements are needed in the following areas: . Clearer identification of the potential for competition in each area of the Department. A comprehensive review of activities within each area of the Department would help strengthen their programme by providing a firmer basis for setting targets and priorities, and pushing into new areas of activity. The Department’s plans for developing information systems will be the key to this. Private sector involvement in helping to identify new opportunities for market testing will also be important. But the Department should also consider the scope for wider, and early, application of the more thorough planning approaches being adopted or considered by some areas of the Department. . Greater momentum in market testing areas with potential for competition. Specifically the Department need to ensure that planned market testing is carried out, and slippage fully investigated, to ensure that potentially significant savings are secured as soon as possible; to create and maintain momentum in areas such as those identified in paragraph 7 above; and to complete the mandatory programme. Accountable managers under the New Management Strategy should be encouraged to apply an appropriate level of 3 MINISTRY OF DEFENQ?: COMPETITION IN THE PROVISION OF SUPPORT SERVICES suggest that to avoid delays and make best use of limited staff resources, the Department should consider putting out to contract elements of the market testing process itself, such as preparation of statements of requirements. Maximising the 13 To maximise the benefits of market testing the choice between retaining an benefits of activity in-house or going to contract should be based on a strong and healthy competition competition process. Competitive tendering was adopted in most cases examined by the National Audit Office. But in 84 per cent of market tests in the four years to April 1991 there was no evidence that the in-house option had been strengthened by identifying scope for greater efficiency. Also, many work packages relate to specific activities rather than complete functions, and are thus less attractive to potential contractors. Greater advance publicity for the Department’s forward programme of market testing might help contractors to respond to the Department’s requirements and suggest new areas for market testing. And to promote competition within the European Community, a Community Directive on contracting for services is being negotiated currently with a view to being issued in 1993 (paragraphs 3.1-3.6). 14 The Department subject contracts regularly to further competition, although the duration of contracts is sometimes extended non-competitively. This is often due to contracting strategy, in particular to allow tendering of tasks on an amalgamated basis with a view to securing better value for money. Delays can also occur for other reasons such as difficulties in the production of statements of requirements, obtaining financial approval or unforeseen complications in the tendering process. Delays inhibit competition and effective planning on the part of contractors. The Department recognise, therefore, the need to minimise non-competitive contract extensions. When reletting contracts renewed in-house operation is rarely considered a practical option. The Department rely on market forces to deliver value for money rather than attempt to reconstruct an in-house option at this stage: in many cases staff who previously supplied the service will no longer be in post (paragraphs 3.7-3.11). 15 As regards the Department’s evaluation of the options of contract or in-house operation, the National Audit Office observed investment appraisal errors in each of the six cases they examined. In the four cases where the Department awarded a contract and one of the cases where work was retained in-house the errors had not affected the Department’s decision. But in one case relating to a wider programmeof markettesting of cateringsupport at RoyalAir Force stations activities were incorrectly retained in-house, and a further programme of testing was dropped. This mistake was identified in 1990 and the Department took steps to reinstate the market testing of these functions: the first re-test will take place this year, but because of its scale and limited resources the full programme is expected to take several years to complete. The Department have taken steps to improve their application of investment appraisal techniques (paragraphs 3.12-3.18). 16 The Department estimate that since 1979 competition for Defence support services has saved 17,300 posts and that, as a result, cumulative savings were running at some E64 million a year by 1991-92. Estimated savings on activities market tasted are in line with the 25 per cent reported by other government departments. The National Audit Office were unable to confirm these estimates because, for example, they are based on average annual savings when contracts are first let, taking no account of subsequent amendments and 4 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES m-lets. Also, the six cases examined by the National Audit Office were affected by errors and omissions in the investment appraisal process, and clerical errors in the recording of savings which may be indicative of further inaccuracy in the Department’s figures (paragraphs 3.19-3.20). 17 Because of their decentralised system of management, the Department have no arrangements for monitoring centrally that when activities are retained in-house (22 par cent of cases) they achieve cost and performance expectations. And local monitoring in some cases falls short of the “Service Level Agreements” approach recently endorsed in the 1991 White Paper. However, the Department had already adopted this approach in more recent cases and new Departmental guidance will underline the need to make this standard practice. Contracts are let on a firm price basis (see footnote) for periods of up to five years. The Department look carefully for signs of conservative inflation assumptions in tender prices and rely on competition and negotiation to secure realism. They also continue to bear in mind the availability of alternative approaches to pricing (paragraphs 3.21-3.26). 18 The National Audit Office concluded that to ensure that the benefits of competition are maximised the Department should: 0 Further strengthen the competition process. This would be helped by: greater advance publicity for the market testing programme; ensuring that internal options take into account any scope for more efficient ways of working; consolidating the steps already taken to improve investment appraisal techniques; and further action to minimise the need for non- competitive contract extensions. . Ensure that expected benefits are fully achieved. The Department should, as planned, extend the use of Service Level Agreements, and audits, to ensure that when activities are retained in-house, cost and performance expectations are met. Whilst recognising the clear benefits of firm price contracts the National Audit Office suggest that the Department should keep its policy on firm prices under review. If and when a suitable opportunity presents itself, they should consider inviting tenderers to bid on different bases. Monitoring 19 The contracts examined by the National Audit Office varied in the extent to contractor which they specified the service and standards required from contractors, and performance how contiactors’ performance would be measured. However, the contracts set out adequately the responsibilities and liabilities of the Department and contractors. The Department are conscious of the need to avoid being prescriptive about how work is to be carried out and that very detailed specifications, such as those examined by the National Audit Office, may prevent contractors from suggesting alternative approaches which give lower cost and/or better service. They acknowledge that “cardinal points specifications” may offes more scope in this regard, but point out that detailkd descriptions of the task are necessary in some cases (paragraphs 4.6 and 4.8). 20 Standards can be hard to define for some types of work such as accommodation cleaning. However, contractors had not been asked to produce quality plans specifying in detail proposals for their own monitoring and control Note: Firm price contracts contain agreed prices which cannot be subsequently adjusted for inflation. 5 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES of contracts. And in the support services area, registration of contractors under British Standard 5750 is not widespread. The Department envisage making registration a mandatory requirement in most areas (paragraphs 4.7, 4.94.10). 21 The Department have set out broad principles to guide monitoring staff, and for the most part local monitoring arrangements had been developed and implemented. But there was a lack of detailed guidance and training and there were significant variations in the approach to monitoring routine activities such as catering. Record keeping and analysis of performance was patchy and the Department made little use of contractors’ own performance monitoring data. Despite serious concerns about performance in some cases contract terminations and deductions from payments to contractors were rare, mainly due to lack of firm evidence to support such action. On contract cleaning Internal Audit found that monitoring was not always being carried out. They also found that arrangements for authorising cleaning bills at unit level lacked adequate safeguards against fraud; the Department are taking steps to remedy this. Internal Audit concluded overall that although in many areas value for money was not being achieved the advantages of contract cleaning outweighed the disadvantages (paragraphs 4.114.16). 22 The Department have taken steps to foster good practice in contract monitoring. For example Royal Air Force Support Command and Strike Command have established sections which act as a focal point for implementation of market testing, disseminating advice to customers and drafting contract specifications: and the Army and Navy have created focal points for advice and assistance on market testing and monitoring catering activities, and produced instructions. There was, however, further scope for different areas of the Department to learn from one another on some aspects (paragraphs 4.17-4.18). 23 The National Audit Office examination of the monitoring of contractor performance has brought out two crucial areas, recognised in the Department’s guidance, where improvements could be made. . More attention to quality before the contract is let. Areas requiring specific attention are: improvements in defining the required performance, including consideration of the scope for using “cardinal points specifications”; requiring potential contractors to produce quality plans specifying detailed proposals for their own monitoring and control of contracts: and greater use of purchasing standards such as registration under BS 5750 for assessingthe suitabilityof potentialcontractors. l Performance monitoring once the contract has been let. Improvements are necessary in the following areas: training in the practical aspects of monitoring different types of contracts (in recognition of the fact, for example, that monitoring a catering contract involves different detailed considerations than monitoring a cleaning contract); the frequency and depth of monitoring; record-keeping and analysis of contractors’ performance; and use of contractors’ own performance data, such as that required to be prepared under BS 5750. The Department are taking steps to reinforce their defences against fraud as a result of the Committee of Public Accounts’ recent Report on Fraud and Irregularities at Defence Establishments (37th Report Session 1990-91). Bearing in mind the shortcomings identified in Internal Audit’s review of contract cleaning, they should pay particular attention to ensuring the adequacy of safeguards in other areas put to contract. More generally, there is a need for firm action when contractor performance is unsatisfactory. 6 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Overall conclusions 24 Over the years the Department have exposed a wide range of activities to competition and achieved significant savings from putting activities out to contract. But the size of the Department and the scale of achievements to date, suggest considerable further potential. 25 The Department have long recognised the benefits of moving into more complex areas of market testing and have already achieved significant results. The challenge they face is to push market testing into as many new areas of activity as possible without impairing operational effectiveness. In the National Audit Office’s view this underlines the need for the Department to improve their arrangements for reviewing the scope for competition, within the framework of the Department’s devolved management strategy. They should also continue to encourage an open approach of encouraging industry to identify suitable areas and giving potential suppliers early notice of prospective opportunities to provide support services. 26 Given the major investment of time and effort involved in exposing activities to competition, it is essential that the Department have adequate arrangements for ensuring that the full cost and performance benefits are being achieved. 7 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Part 1: Introduction 1.1 Government policy is that where possible work 1.5 In 1986 The Treasury and the then, Prime carried out by departments should be market Minister’s Adviser on Efficiency commissioned tested-that is, subjected to competition and a s Multi-Departmental Review of competitive contract let to the private sector if it makes tendering and contracting for services in management sense and will improve value for Government departments. The Review money. recommended that all activities should be examined for scope for competition and where 1.2 Competition can help to identify waste, suitable, market tested. It stressed that there achieve more economic and efficient use of should be a clearer emphasis on value for manpower, save management time and effort, DlOlX?Y. improve services and save money. 1.6 In taking forward the market testing concept Departments estimate that on average the cost the 1991 White Paper (Paragraph 1.3) of activities market tested has been reduced emphasises the need to provide incentives to by 25 per cent. managers to pursue competition by allowing them to apply savings for the benefit of their 1.3 In July 1991 the “Citizen’s Charter” signalled programmes, and to promote competition by the Government’s intention to subject more setting targets and spreading best practice. It work to market testing than ever before, and in also points to the need to ensure fair November 1991 the Government’s White Paper competition by removing obstacles and on “Competing for Quality” (CM 1730) set out disincentives to contracting out, and to proposals for expanding competition in the encourage the private sector to identify new public sector. The White Paper stresses that opportunities for providing services under competition does not mean necessarily contract. choosing the cheapest service: it means finding the best combination of quality and 1.7 Prior to the White Paper the Ceniral Unit on price which reflects the priority of the service. Purchasing within the Treasury organised training courses, published guidance, organised seminars and acted as a focal point The development of competition for advice on market testing matters. They policy reported progress annually to the Prime Minister on the basis of annual returns by departments. The work has now been 1.4 The Ministry of Defence (the Department] have transferred to the Efficiency Unit in the Cabinet been placing contracts for services with the Office. The Unit supports Sir Peter Levene who private sector for many years. Examples of combines the roles of Efficiency Adviser and servicesprovided wholly or in partby Adviser on Competition and Purchasing. contractors are at Appendix 1. However, greater use of the private sector has been a specific objective of Government policy since The market testing process 1979, and the Department estimate that the cumulative effect of action they have taken 1.8 Figure 1 shows in outline the stages of market since then is that they are now saving over ~60 testing in the Department. The process starts million a year. Their use of contractors has with a preliminary study to assess the scope increased considerably since 1983. The then for competition. A detailed specification of the Secretary of State for Defence decided that task should then be written, outside work should only be carried out by public organisations invited to bid for the work, bids sector personnel within the defence support evaluated and compared with the cost of in- organisation if essential for clearly proven house operation, and a contract let where this operational reasons or if there was significant offers the best value for money. Performance financial advantage to the taxpayer. should then be regularly monitored, and the activity subjected periodically to further competition. 8 MINLSTRYOF DEFENCE:COMPETITION IN THE PROVISION OF SUPPORTSERVICES 1.9 In the light of the Multi-Departmental Review The National Audit Office recommendations in 1986 (paragraph 1.5) the examination Department m-organised their approach to market testing. They delegated to their 25 1.12 The National Audit Office examined three main Management Areas the responsibility for aspects of the Department’s approach to devising and operating the programme: on competition in the provision of support introduction of the Department’s New services: Management Strategy in April 1991 Management Areas were replaced by Top 0 progress in applying competition to Level Budget holders [currently 22). References support services (Part 21; in this Report to the Royal Navy, the Army and . maximising the benefits of competition the Royal Air Force are intended to embrace (Part 3); the management entities within each Service, covering individual units and the Departmental . monitoring the performance of contractors level. The bulk of market testing by the three (Part 4). Services has been at individual units and establishments. 1.13 The National Audit Office examined activities market tested at six locations - four where 1.10 The Department’s Director General of contracts had been let and two where activities Management Audit is responsible for co- had been retained in-house (Appendix 2). ordinating and monitoring the market testing These activities were selected, after discussion programme on behalf of the Permanent Under with the Department, as being representative Secretary of State, encouraging consistency of support services market tested. In the area across the Department, maintaining a database of contract cleaning, the National Audit Office and giving guidance to managers. He is drew on recent work by the Department’s supported in this by the five staff of the internal auditors. Touche Ross Management Department’s Market Testing Consultancy. A Consultants assisted the National Audit Office guidance booklet on the principles and in examining the Department’s arrangements practice of the competition process was for monitoring the performance of contractors. issued by the Market Testing Consultancy in December 1988 and is currently being revised. 1.14 The National Audit Office’s present examination excluded commercial management arrangements (the Royal Committee of Public Accounts Dockyards and the Atomic Weapons Establishment], privatisation (the Royal 1.11 In their Report on the “Control and Use of Ordnance Factories], hiving-off, manpower Manpower in the Ministry of Defence” (41st substitution and contracts in support of major Report, Session 1988-89) the Committee of defence equipment procurement projects. It Public Accounts noted the Department’s also excluded the work of Defence Executive intention to use contractors where cost- and Support agencies in supplying services to effective and consistent with military other parts of the Department, and requirements and trusted that~quicker progress competition for building repair and would be made. In reply (CM 964) the maintenance work which until April 1990 was Department confirmed that they were carried out under contract by the Property concerned to achieve the most cost-effective Services Agency. Following untying from the mix of manpower, including the employment Property Services Agency the Department have of more women and civilians, and a separate programme to market test property contractorisation, wherever these options are management activities. feasible and compatible with operational needs. 9 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Figure 1: Stages of the Market Testing Process PRELIMINARY STUDY Review nature and level of service required . Confirm scope and suitability for camp&don Identify potential efficiency measures COMPETITION PHASE Prepare and agree statement of requirements and specficadan Obfain financial endorsement 4 4 Confirm and agree in-house Contracts branch issues invitadons efficiency measures to tender I I Prepare in-house costing Evaluate and Claris tenders Evaluate in-house and conbact options In-house L J COntrauoption Implement agreed in-house efficiencies Award contract and phase-in contractor MANAGEMENTPHASE COntinUouSlymonitor performance and overall cost of operation 1 PERIODIC REVIEW Periodically review operation and expose to freshcomMition at endof contractterm 5ixwe: MinisOy of Defence Guide to Competition in Defence Senices This figure shows the various stages of the full market testing cycle. 10 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Part 2: Progress in applying competition to the provision of support services 2.1 This part cwers the Department’s progress in How successful the Department identifying and exploiting opportunities for have been in carrying out competition. planned market testing 2.2 The size of the Department’s overall budget, 2.6 In 1967 each of the Department’s 25 s24 billion for 1990-91, bears little relation to Management Areas established a three-year the potential for market testing. For example, it rolling programme of market testing. Under the includes expenditure on existing contracts for. Department’s New Management Strategy equipment, services and supplies: committed introduced in April 1991 market testing targets military pension costs; and large areas of cost for the value of activities to be market tested associated with the operational role of the are set centrally by the Department, and Armed Forces. included in the Departmental Plan. Objectives in this Plan are reflected directly in the plans 2.3 The Department recognise, however, that of Top Level and, as appropriate, lower level many support activities have potential for budget holders. All budget holders are competition. But they have not made a accountable for achieving the objectives in detailed assessment of the value of such their plans. activities, and they do not have comprehensive records of the many activities exposed to 2.7 The Department aim to make market testing competition and put to contract before 1967, targets realistic but challenging. In March 1991 when the Market Testing Consultancy set up a the Department’s target of testing activities to central database. Consequently, whilst noting a value of f140 million by April 1994 exceeded that the Department had put to contract, by fS8 million the total value of specific wholly or in part, over 100 activities (Appendix market testing opportunities identified by Top 1), the Nat+al Audit Office were unable to Level Budget holders; those opportunities quantify the Department’s overall progress and identified are detailed at Appendix 3. specify the range and value of activities remaining to be tested. 2.8 The National Audit Office noted that market testing had not progressed as quickly as planned: 2.4 The National Audit Office noted, however, that over the four years to April 1990 the . at the beginning of 1988-89 the Department market tested activities to a value Department planned to market test of f103 million. This represented a major activities to a value of E81 million by April contribution to market testing in Government. 1991. They actually tested activities to a In March 1991 the Department’s target was to value of f67 million; market test activities to a value of El40 million l by the start of 1990-91 the revised plan by April 1994. for the year was to complete 140 market tests on activities costing E61.2 million. 2.5 Against this background the National Audit Only 26 tests were completed, on Office examined: activities witiavalue of f22.5 million. The Royal Navy completed only 4 out of their 0 how successful the Department have been 10 planned tests, 8.3 per cent by value in carrying out planned market testing: (f1.8million) of thef21.9million planned. 0 progress by the Department in increasing the range of activities market tested; 2.9 Slippage in the market testing programme means deferment of potentially significant 0 factors influencing progress in carrying out savings. The 24 per cent average savings on market testing. activities market tested (paragraph 3.19) could 11 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES mean that slippage in the 1990-91 programme move out of the area of simple domestic alone led to savings being deferred at a rate support and increase their efforts in other equivalent to over f9 million a year. (“non mandatory”] areas. As they planned to give priority to other areas they did not set an 2.10 In the summer of 1991 the Department’s alternative timescale for completing the Financial Planning and Management Group mandatory programme. reviewed performance against the 1990 Departmental Plan and noted the disappointing 2.13 The Department’s decision to move into new performance on market testing. The then areas of market testing was consistent with Secretary of State for Defence expressed the recommendations of the Multi- concern at this performance and called for a Departmental Review. It reflected the report on steps being taken to enhance the Department’s assessment that: cleaning had programme in 1991-92. already been largely transferred to the private sector; catering and other domestic support activities were being considered; and other Progress by the Department in areas of activity were more likely to yield increasing the range of activities worthwhile savings. market tested 2.14 The Department nonetheless maintained their 2.11 In 1985 the Government announced that commitment to working through mandatory departments would be required to market test areas but they made less progress than they five activities (“mandatory areas”]: catering, expected in other areas. National Audit Office cleaning, laundry, security guarding and minor analysis of market testing between April 1987 maintenance. Departments were expected to and April 1991 showed that 78.5 per cent of complete the initial round of market testing by market tests, just over half by value, were in April 1987, 1988 for catering. mandatory areas (Table 1). Cleaning, which in 1986 the Department judged to have been 2.12 In 1986 the Department decided that if their largely put to contract (paragraph 2.13), efforts in exposing activities to competition together with catering, dominated the were to continue, they would scxm have to Department’s market testing programme. Table 1: Progress of Market Testing 1987-88 to 1990-91 (inclusive) by activity Activities Total numberof % oi tota, number Valueof activities % Of mal EstimatedBrst year savings markettests of markettests markettested f’QQ0 value horn activtiiestesied Sy activihl % Of A “Mandatory” Activities Cleaning 11 5 1,133 1.2 306 1.3 catering 67 30 20,491 22.1 3,950 16.1 CambinedCleaning a Catering 65 29 21,288 23.0 5,265 21.5 security 26 11 5,191 5.6 2,089 8.5 taundly 1 0.5 203 0.2 45 0.2 Minor Maintenance 7 3 297 0.3 91 0.4 Sub-Total 177 78.5 48.603 52.4 11.768 48.0 it. “Non-Mandatory” Activities Engineeringand Supply 2 19,257 20.8 8.023 32.7 RangeOperation and Support 3 10,885 11.8 2,441 10.0 TminingAnstruction .i 5,762 Bird Control 3 1,092 6.21.2 W1101 '2 Tank CleaningLighters 0.5 1,267 1.4 100 0.4 GroundClothing Warehousing 0.5 1,490 1.6 620 2.5 GroundDw Posts 0.5 967 1.0 143 0.6 Giber Non-Mandatoryadivities 9 3,357 3.6 1,494 6.1 individuallvless than f750.000 Sub-Total SO 21.5 44,077 47.6 12,760 52.0 Grand total 227 100 92,680 100 24,528 100 SwxNtionalAudif Office AnaivsissiDeoartment'srecordsofflrstfimemar~~ftests. Table 1 shows the number,nature, value and resultsof markettesting. Although a fltth 01tests relate to non-mandatoryareas. they accountfor morethan half the estimated savings.But savingsvary horn case to case. 12 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES 2.15 Although only about a fifth of all market testing of planned and actual tests by value. But in was in non-mandatory areas, it accounted for line with the general lack of progress in more than half of estimated savings in this carrying out planned testing in 1990-91 period (Table 1). This was due mainly to (paragraph 2.8), the Department tested non- contractorisation of engineering and supply mandatory activities costing only f21 million, functions, involvingmanymilitarypersonnel,at against a target of E54 million. However, a Royal Air Force Flying Training Stations. But diverse range of non-mandatory areas the potential for savings from market testing dominates the Department’s plans for market varies from case to case, “mandatory” or testing up to 1994 (Appendix 31, representing “non-mandatory”. This underlines the need for 75 per cent by value of the market testing careful setting of market testing priorities proposals so far identified by the Department. based on identification of the full range of market testing opportunities in each area of 2.18 The 1991 White Paper “Competing for Quality” the Department (paragraph 2.30). stresses that all departments should open up to competition new areas, closer to the heart Progress in “mandatory” areas of Government. For example, it points to the need for all departments to test the scope for 2.16 Progress in each of the five “mandatory” a greater private sector contribution to the areas is described in Appendix 4. The National delivery of clerical and executive operations, Audit Office noted that despite the and specialist and professional skills (Table 2). Department’s continued emphasis on these areas, market testing was still incomplete, 2.19 The extent and importance of the activities in particularly in catering. Further, at many Table 2 varies between departments, and establishments across the three Services, only many of these activities have been put to part of the catering function had been exposed contract at least in part by the Ministry of to competition, and there were inconsistencies Defence. However, there is a clear need for the in the approach adopted: in some cases the Department to consider the scope for further Department supplied the food used by the testing because: contractor, and in others the contractor was responsible for this. . clerical, executive, specialist and professional skills are applied by Service Progress in “non-mandatory” areas and civilian personnel to a wide range of tasks throughout the Department; the 2.17 The Department recognise the need to push estimated pay of non-industrial civilian ahead with market testing in “non-mandatory” personnel alone amounted to some f 1.6 areas. And in 1990-91 the proportion of billion in 1991-92; testing directed to such areas increased significantly, accounting for about 90 per cent Table 2: Promising Areas for Market Testing/Contracting Out [iI Professional and specialist sewices Thesemay includem audit, consultancy,inspection and rwiew, informationtechnology, operational research, legal, library,training, laboratory and researchservices, designservices. research, survey and statisticsand project management. Ii) Executive and clerical operations Thesemay includepayments of grant,subsidies, suppori operations,charges. fees, licences,bulk mailing,data collection.counter operations, &grant administrationand advisory services. (i) Office sewices Thesemay includeinformation technology services, including project management,system design, operations, maintenance, data processing.software development;supply and distributionof other office services,typing/word processinq. records storageand retrieval.travel, transportand conferences.messenger and courier swices. [iv) Estate and construction services Thesemay includeproject managementfor new construction.estate managementand maintenance,equipment maintenance and support. No&: No market Ming has been car&-d out on those acliv~ies undedined. Source: “Competingfor Quality” (CM 1730)and the NatiooonalAudit Ok e.wminabM. Table 2 shows promisingareas for markettesting and that wme have not been tested at all. 13 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES . in the four years to April 1991 less than 5 l Army - as a result of a 1984 review of per cent by value (E4.4 million) of all the Royal Electrical and Mechanical market tests related to headquarters Engineers’ static workshops, which support activities and the Procurement followed the Committee of Public Executive; and Accounts’ 16th Report, Session 1981-82, the Department decided to double the . in a number of areas, those underlined in amount of United Kingdom base workload Table 2, there had not been auy market contracted out from 18 per cent to 36 per testing by the Department. cent over three years. In 1991 the Department told the National Audit Office 2.20 The National Audit Office enquired about that this target had been achieved and progress in putting work out to contract in the maintained, and that 39 per cent of work key area of training. Progress is described was currently contracted out. more fully in Appendix 5, but overall it has been patchy: in 1990-91 the annual value of The Department are currently engaged in a the Department’s contracts for training was wide ranging review of the whole of the f36.5 million of which f25 million related to Army Base Repair Organisation, involving training for Army personnel. The Department workshops in Germany and the United plan to market test training activities to a value Kingdom. Their aim is to propose a future of f5 million in the three years to April 1994. third line engineering and maintenance support organisation for the post Options 2.21 The Department are considering the potential for Change era. In the meantime, the forfurtherprivatesectorinvolvement intraining Department have set up a feasibility study as part of a wider review, started in October team to investigate the scope for further 1990, of the scope for rationalisation of market testing. The Department training in 39 areas (Appendix 5, Annex A). confidently expect the anmunt of work Their intention is to go to contract wherever contracted to the private sector to rise practicable and cost effective. They have substantially: already decided to relocate and market test elementary flying training for the Royal Navy 0 Royal Air Force - in 1989 the National and the Royal Air Force. Some elements of Audit Office Report on the Department’s driver training have also been put to contract. Control and Use of Manpower (HC 342, Thepositionregardingflyingtraininganddriver Session 1988-891, pointed out that in 1981 training is described in more detail at a Departmental review of Royal Air Force Appendix 5. support areas had suggested that if all third line repair (deep repair, modification 2.22 Maintenance and repair of equipment is an and reconditioning work) was contracted area where the Committee of Public Accounts out, potential savings of 5,000 posts could have consistently urged the Department to be achieved. The National Audit Office assess the capacity and capability they require Report explained that this was not to meet their operational needs, and to make implemented because, unlike the Royal maximum use of the private sector where cost Navy and the Army, the Royal Air Force effectiveto doso. The National Audit Office decidedon operational grounds that they did not examine this area in detail as part of must retain predominantly military third their current, more broadly based, examination. line capability. In their 41st Report, They noted. however, that the scope for further Session 1988-89, the Committee of Public private sector involvement in maintenance and Accounts noted that little progress had repair for the three Services remains under been made by the Royal Air Force since consideration by the Department: 1984 when the Committee’s predecessors examined Royal Air Force maintenance. 0 Royal Navy-following a 1991 review by consultants of the Fleet Maintenance and In 1990 the Efficiency Unit reviewed the Repair Organisation at Portsmouth, the arrangements for allocating deep repair of Department are considering the possibility airframes and engines between in-house of Defence Support Agency status for the and the private sector. As a result, the Organisation. Market testing will be Department have now defined the size and considered as part of the process of nature of core aerosystems maintenance determining whether agency status would tasks which need to be retained in-house be appropriate; to meet operational needs. The remaining 14 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SWPORT SERVICES aerosystems work will be subjected to a justified by the nature of the activities involved. programme of market testing, to be The expected benefits are: economy of assembled, beginning in 1993-94. A administrative effort; allowing and encouraging similar review of core tasks in the flexible use of labour; a requirement for the Communications-Electronic discipline is contractor to have on-site management: and about to start. The Department’s Action better conditions for contractors’ staff Plan includes the commissioning of a [improved morale, greater security of tenure, commercial accounting system to allow improved promotion prospects -all of which valid cost comparison between the third improve retention). line and industry for new work. 2.25 Progress in extending the use of multiple activity contracts has been limited, and mostly The balance of market testing between confined to combining cleaning and catering Service and civilian tasks contracts at Royal Navy and Army 2.23 The National Audit Office Report on the establishments. However, the Department have Department’s Control and Use of Manpower some contracts which embrace a wider range (HC 342, Session 1988-89) pointed out that of activities. For example: engineering and contractorisation efforts had largely been supply contracts at five Royal Air Force flying directed towards civilian posts, and that the training stations account for some 33 per cent Department accepted that there was scope to of the Department’s estimated savings from extend competition to more areas involving market testing since April 1987 (Table 1). The Service posts. Competition has continued to Department also have multiple activity cover predominantly civilian manned tasks, but contracts for management of the Procurement the proportion of service posts saved has Executive’s range operations and associated increased in recent years [Table 3). This is domestic activities. largely due to the letting of contracts for engineering and supply services at Royal Air 2.26 The Department consider that the largest Force flying training stations. Operational savings, together with less quantifiable benefits considerations do not necessarily rule out use to management, usually accrue under facilities of contractors even in transition to war and management arrangements where services for war. The Department told the National Audit an installation are provided under a single Office that they are looking to encourage contract. They are trying to promote further further market testing of Service manned posts use of this approach where they judge it in the light of their favourable experience appropriate. At present they have 20 such during the Gulf conflict of the role played by contracts, including a variety of operational the private sector. and site scrviccs at the Ballistic Missile Early Warning System at Fylingdales. This is one of the Department’s longest running Table 3: Service and Civilian Posts saved since contractorised operations having been 1979 as a result of putting work out to contract successfully with the same contractor since Posts saved as at Increasein 1964. the period March 1983 June 1991 Number % Civilian 11.380 13.900 2.520 22 Factors influencing progress in Sewice 1.860 3.400 1.520 80 carrying out market testing Total 13,260 17.300 Planning and co-ordination Source:Miflistiy of Defence 2.27 In 1986 the Department saw a need to give Table 3 SLOWSthat compefnionhas saved mainlycivilian posts and thai the managers clearer guidance on the type of proportionof Service posts saved has recently increased. activity suitable for competition. They also recognised that there had been an unevenness Multiple activity contracts about their competition programme which may 2.24 As part of their offorts since 1986 to broaden have been avoided by better co-ordination. the scope of market testing (paragraph 2.12) Hence the central co-ordinating role which, and achieve better value for money, the whilst working in the context of the Department have been seeking to extend the Department’s strategy of devolved use of multiple activity contracts (combining a management, the Market Testing Consultancy range of support services at a particular site exercise on behalf of the Director General of into a single contract) provided that this is Management Audit [paragraph 1.10). 15 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES 2.28 The Market Testing Consultancy have adopted security aspects, that the drive for a vigorous approach to pushing end competition had focused on routine developing the market testing concept within domestic activities. the Department. They provide assistance and advice to managers throughout the The Department point out that to identify the Department on a day to day basis: they have full range of market testing opportunities in carried out over 20 detailed reviews of each area would require extensive and activities on behalf of managers; they maintain continuing collection of information, but they a central database of all first time market tests plan to develop suitable systems for reporting since 1987; end in 1988 they issued a detailed the required information on market testing guidance booklet which underlined the need opportunities. for a systematic approach to competition and advised on the procedures to be followed. To 2.31 There are variations in the extent to which help managers identify competition areas of tbe Department have already adopted opportunities it gave examples of over 100 more thorough approaches to identifying services provided by contract. To widen the competition opportunities, with most progress search, Management Areas (now Top Level made within the following areas: Budget holders) were advised to draw up an in 1989, the Air Force Member for Supply inventory of activities suitable for competition, end Organisation identified a need for a and required to provide the Market Testing more strategic approach to competition. Consultancy with details of activities Most earlier competition measures in this considered unsuitable. area had stemmed from responses to urgent financial planning exercises and 2.29 The National Audit office noted, however, that had in general been applied to non- Top Level Budget holders had not drawn up operational units with routine tasks. A inventories of all activities suitable for Working Group was set up to identify and competition. And as the Market Testing consider market testing opportunities Consultancy had not received details of all across all Royal Air Force establishments. those activities considered unsuitable for The Group identified a range of new competition they were unable to offer advice in proposals - virtually all in “non- the light of their wider experience of market mandatory” areas, which together with testing. measures already in train, exceeded the Departmental Plan target. Criteria for 2.30 In the National Audit Office’s opinion a assessing the suitability of activities for comprehensive review of activities by each market testing included the impact on area of the Department is essential to: trade group balance: on morale; and on operations in peacetime, transition to war . enable the Department to ensure that and war. The Group continue to consider centrally determined market testing targets opportunities for market testing in a variety are based on knowledge of the full scope of support areas: for competition in each area of the Department.Through a clearer early in 1991 the Fleet Support area of the appreciation of the full range of Royal Navy recognised that a systematic opportunities available, managers in these and comprehensive approach to market areas would be better placed to direct testing was essential to achieve maximum resources to market testing those activities efficiency and confirm that tasks offering the best return: undertaken in-house remained efficient, and competitive with outside options. The . enable managers in individual areas to see approach being considered is to develop clearly how functions interrelate, thus criteria for identifying a core of essential providing a firm basis for pushing the in-house tasks and market test all market testing programme into more remaining activities over the next five complex subjects. whilst remaining years. They see this as a potentially more confident that operational effectiveness is challenging goal than their existing target not being impaired. In 1986 the which, in an area with staff-related Department recognised themselves that it expenditure of ~300 million a year, is to had been because of the interdependence market test activities to a value of El7 of operational functions, many with million by April 1994; 16 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES 0 late in 1991 the Army’s Quarter Master 2.34 At the same time the Department and the General initiated a major drive to identify Armed Forces have been required to fulfil their and exploit opportunities for competition primary objectives, including successful within his wide area of responsibility. prosecution of the United Nations operations in the Gulf. The Department stress that all of 2.32 The 1991 White Paper “Competing for Quality” these pressures have affected their ability to stresses the role that the private sector have in sustain a high volume of market testing, and identifying scope for competition. In future, that there are limitations on the rate at which departments’ market testing targets are to be an organisation can absorb change without informed by studies undertaken with private detriment to its ultimate objective. sector help to determine the most promising new areas for market testing and contracting 2.35 The Department’s New Management Strategy, out. In February 1992 the Department introduced in April 1991, gives managers appointed Mr Christopher Littmoden, Finance throughouttheDepartmentdirectresponsibility Director of Marks and Spencer plc, to be the for making best use of the resources available part-time private sector adviser on the to them, and greater flexibility within annual competition process to Ministers, in order to budgets. However, savings from market testing provide an outside perspective on the ace not necessarily applied directly for their Department’s procedures and progmmmes, benefit but, through the annual resource and on whether the targets set are sufficiently allocation process, for the benefit of the overall ambitious. Defence progr-e. 2.36 The time and effort required for market testing, Other factors a process which needs to be handled with 2.33 The Department acknowledge that their market care, varies according to the size and testing programme is long-term and attribute complexity of the activity concerned. The this to pressure on staff resources. They point process up to contract award can be out that the period since 1988 has been one of completed in 12 months, if sufficient priority unprecedented change for the Department. and resources are allocated to the project They are in the process of restructuring front- (Figure 2). But in practice a major project line and support activities to reflect the new which results in a contract is unlikely to be political and defence situation in Europe and completed in less than two years from NATO’s revised strategy: there are demanding acceptance of the feasibility study report; in targets for reducing the numbers of military some cases it has taken significantly longer. and civilian personnel: the budgetary and The most time consuming and resource management structure has been entirely intensive parts of the process are the changed; and far-reaching efficiency initiatives feasibility study, the preparation of the have been taken, including plans to transform statement of requirements, and the preparation many support areas of the Department into and evaluation of tenders. Next Steps Agencies (paragraph 2.40). Figure 2: Sequence of events for a major market testing exercise Months -r 5 6 7 6 1 9 1 19 Draft Invitationto Tender ISSWInvitation to Tenderand 3 Consultationwith the sponsor arrangefor publicationof the s competnionin the Ministryof 2 Defencecontracts bulletin 5 Et Cmy out technicaland PrepareStatement of Requirements, commercialevaluation of obtain Rnancialendorsement etc tenderers’ofters. including Preparecosting ior in-house‘bid’ supplement;uyclarification taking into considerationemciency measures Implementin-house efficiency measures Source:Mhisty of Defence This figure shows the indicativetimetable for a majormarket testing exercise assumingfull-time dedicated personnel. 17 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES 2.40 The Department have an ambitious Next Steps 2.37 The Department’s guidance booklet stresses programme and, as privatisation and the need to allocate staff resources to those contractorisation are options evaluated in the market testing exercises offering the best early stages of consideration of possible return. But in view of the pressure on the agency status, this provides an additional Department’s staff resources, the National mechanism to promote market testing. The Audit Office suggest that the Department Department have set up two full Executive examine the feasibility of putting to contract Agencies (the Defence Research Agency and elements of the market testing process itself, the Meteorological Office), and six Defence such as preparation of statements of Support Agencies run on Next Steps lines but requirements. In this regard the National Audit within the Department’s chain of command. Office suggest that one way of speeding up They are considering for Support Agency the tendering process might be to consider the statusfurtheractivitiesinvolvingexpenditureof scope for grater use of “cardinal points some c5 billion a year, many of them with specifications” (paragraph 4.8). potential for market testing. The Department have recognised the need for continued market 2.38 Financial resources can also influence the pace testing of support activities after conversion to of market testing. Progress had, in some Agency status. The two Executive Agencies instances, been impeded by the limited and the six Defence Support Agencies have availability of funds for redundancy costs. put some work to contract and plan to test other areas. Links with other initiatives 2.39 Market testing cannot be carried forward in isolation~omtheDepartment’s other initiatives to improve value for money. For example: efforts to reduce the support area following restructuring of the Armed Forces under “Options for Change”: and implementation of the Next Steps Initiative. 18 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Part 3: Maximising the benefits of competition 3.1 To maximise the benefits of market testing the view to being issued in 1993. Community Department must make the right choice, based Directives on contiacting for supplies and on a strong and healthy competition process, works require member states to advertise in between retaining an activity in-house or going the Official Journal of the Community to contract. They must also ensure that, requirements for supply and works over a whatever the outcome, the expected benefits certain value, and to publish the contract are achieved. Accordingly, the National Audit award details. Although not required to do so Office examined: under the Directives, it is the Department’s practice to de-brief unsuccessful tenderers 0 how the Department evaluate the individually. alternatives of retaining au activity in- house or going to contract, including the 3.4 Although the Department give advance notice strength of the competition process; of likely requirements in the “Future 0 the expected financial benefits of Purchases” section of the Defence Contracts competition, and whether they are Bulletin, the National Audit Office suggest that achieved. more advanced publicity of their forward The monitoring of contractor performance, programme of market testing might place essential to maximising the benefits of contractors in a better position to respond to competition, is considered in Part 4. the Department’s requirements and, through a clearer insight to the Department’s longer term intentions, enable them to suggest additional Evaluating the alternatives opportunities for market testing. Also, it is crucial that the Department package activities 3.2 Market testing involves competition between in a way which makes them attractive to the in-house operation and, generally, more potential bidders and, at the same time, allows than one firm in the private sector. The number more cost-effective market testing. The of firms invited to tender in five of the six National Audit Office noted that many market cases examined by the National Audit Office tests relate to specific activities rather than to (paragraph 1.13 and Appendix 2) ranged from complete functions. 7 to 18 and in each case there was a good response. A non-competitive approach was 3.5 Competition should result in work going to the adopted in the sixth case, catering support lowest fully compliant “bidder”, which can be work in Junior Ranks Mess at RAF Brampton - the in-house workforce. In all six cases which eventually remained in-house, because examined by the National Audit Office the the intention had been to add to an existing Department’s evaluation of tenders took into contract for provision of other services. account both cost and quality, with technical evaluation based on unpriced copies of 3.3 The Department operate the “restricted” tenders to help ensure an independent tender procedure, considering bids only from professional and technical examination companies who have been invited to tender. uninfluenced by cost considerations. However, the issue of tenders is announced in the twice-monthly Contracts Bulletin, which is 3.6 To be as competitive as possible the in-house available on subscription. Companies “bid” should reflect any scope for improved expressing interest, as a result of Bulletin in-house efficiency. However. National Audit advertising, may be added to the list of firms Office analysis of market testing carried out already compiled under the Department’s between April 1987 and April 1991 showed normal procedure. To promote competition a that in only 16 per cent of tests did managers European Community Directive on contracting report that the in-house “bid” was lower than for services is being negotiated currently with a the pre-competition cost of carrying out the 19 MINISTRY OF DEFF,NCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES activity. This suggests that there may be scope 3.11 ln only one case has an activity returned in- for the Department to strengthen the house when the contract has expired. Once a competition process by a more vigorous function has been market tested and the approach to identifying efficiencies when private sector has been found to be more preparing in-house “bids”. The 1991 White cost-effective, and where there continues to be Paper “Competing for Quality” stresses that is adequate competition, the Department’s policy should not be necessary to extend the market is to rely on market forces to deliver value for testing timescale to achieve this. money rather than to attempt to reconstruct a cost comparison; in many cases staff who 3.7 To ensure that prices remain competitive and previously provided the service will no longer to keep pressure on the cwent provider to be in post. This means that, in practice, the achieve and maintain an acceptable standard Department rarely prepare an in-house option of service, activities should be re-exposed to upon relet to compare against bids from iirms. competition periodically. Departmental Cost comparisons guidance states that activities retained in- house after market testing should be re- 3.12 To identify the best financial option the in- exposed to competition at intervals of not house cost of providing a service must be more than five years. However, this is not compared on a realistic and equal basis with always achieved because the Department are, prices quoted by potential contiactors. for the time being, concentrating on those Accordingly, managers need to know the full areas which have yet to be market tested for cost of providing a service in-house, which the first time. may include overhead costs charged to central and other budgets. Under the Department’s 3.8 For work which goes to the private sector the New Management Strategy information on the Department generally limit the duration of full costs of activities should become con*acts to three years for continuous or increasingly available. routine work - five years or longer for more complex areas. Their aim is to balance the 3.13 In assessing in-house costs the Department need to test the market regularly, against the work on the principle that it is necessary to need to avoid contract instability as a result of consider only those resource costs (for excessively frequent re-tendering. example, manpower, materials, equipment, accommodation) expected to change as a result of going to contract. Their guidance 3.9 However, the Department sometimes extend booklet points to the need to gauge the extent the duration of contracts non-competitively. 1n to which, for example, Headquarters costs are some cases this is done with a view to likely to be affected by withdrawal of a service, amalgamating several activities into one but stresses that the estimated savings must contract to secure better value for money. In be achievable. In the six cases examined by other cases, however, extensions are caused the National Audit Office, Headquarters costs by delays in the relet process such as were not included in the in-house costing. In difficulties in the production of statements of larger and more complex areas of market requirements, obtaining financial approval or testing involving large numbers of Service and unforeseen complications in the tendering civilian staff, it is more likely that Headquarters process. This can inhibit competition and, costs and, for example, accommodation and because of the uncertainty it creates, the training costs of Service personnel, would be ability of the existing contractor to plan affected. The National Audit Office suggest effectively. that, when separately market testing activities at a number of locations, the Department 3.10 ln one month chosen at random by the should look to the cumulative effect on , National Audit Office, extensions to the value Headquarters costs. of El.5 million were authorised on 14 contracts with a total value of just over ?ZlO million. The 3.14 As regards redundancy costs, the 1991 White Department recognise the need to reduce non- Paper “Competing for Quality” noted that front competitive contract extensions to the loading of redundancy payments to the first absolute minimum. Experience has shown that year of investment appraisal builds a heavy it is usually best to market test new tasks bias in favour of in-house bids. It separately rather than in conjunction with the recommended that departments adopt re-tendering of existing requirements. appraisal periods of not less than five and not 20 I MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES mere than ten years. The Department budget managers. In April 1991 the Treasury explained that although they have been issued revised guidance to departments on following this practice, the availability of cash economic appraisal techniques, and this has to meet redundancy payments in the first year been widely promulgated within the can sometimes be the deciding factor. Department. Senior Finance Officers have been made responsible for ensuring that investment 3.15 The National Audit Office were unable to carry appraisals are properly carried out and have to out a full validation of the cost comparisons in report periodically to the Principal Finance the six cases they examined because detailed Officer on appraisals conducted within their investment appraisal records had not been areas, and on any proposals accepted without retained by the Department. But, in five cases, an appraisal. the National Audit Office were able to identify from the papers available emus and omissons in the investment appraisal process. Because The expected financial benefits of the large difference between in-house costs and firms’ bids, the Department’s overall and whether they are achieved evaluation and decision to go to contract in four of the cases and to retain the work in- 3.19 As at June 1991 the Department estimated house in one case was not affected. In the that since 1979 competition for defence sixth case, catering support work in the Junior support services had saved 17,300 posts and Ranks Mess at RAF Brampton, the Department that, as a result, cumulative savings were had themselves found that investment running at sane f64 million a year by appraisal errors had led to a decision to retain 1991-92. Estimated savings since 1987 the activity in-house when it should have gone totalled 24 per cent of the pretest cost of to contract. These errrxs were identified activities market tested, which is in line with following re-appraisal of the decision after average savings of 25 per cent by other complaints from a consultant acting on behalf departments. of the catering industry. 3.20 The National Audit Office were unable to 3.16 The RAF Brampton case was one of 14 Royal confirm these estimates because: Air Force stations out of a proposed series of 64 for which catering support in junior ranks 0 the Department’s estimate of savings is messes was market tested in 1987 and based on average annual savings when retained in-house. In 1990 the Department contracts were first let. As many hundreds found that the investment appraisal was of contracts have since been relet at flawed: costs associated with necessary shift- different prices the estimate could be working were not taken into account; and under or over stated; contract and in-house costs were not . in accordance with Treasury guidance compared on the same basis. On cost grounds one-off redundancy costs are not required 12 out of the 14 messes should not have been to be included in the calculation of retained in-house, and estimated savings of Sl savings. Redundancy costs amounted to million cwer three years were lost as a result. f 1.3 million in the six cases examined by 3.17 Moreover, the Department dropped plans to the National Audit Office. However, test the other 50 stations, but they have taken redundancy costs are identified and taken steps to reinstate the programme and combine into account in the final decision whether it with other activities in order to offer greater to contract out or not; scope for economies of scale. The Department . in four of the six cases examined by the told the National Audit Office that they expect National Audit Office, estimated savings the programme to take several years to had been overstated by a total El.6 million complete because of its size, and the limited (40 per cent] due to clerical ~ITCJI‘Sin resources available to carry it out. The reporting figures to the Market Testing Department propose to start retesting this Consultancy; and as mentioned in YtXlT. paragraph 3.15, there were errors and 3.18 The Department have recognised the need to omissions in the original investment ’ improve their application of investment appraisals process. appraisal techniques They have issued extensive guidance on investment appraisal and have established a training programme for 21 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Achieving the benefits expected from retaining 3.25 The Department pay particular attention to the activities in-house after market testing provision for inflation in tenderers’ firm price bids. Even though they have been obtained in 3.21 The Civil Service experience generally is the competition, tenderers whose prices seem reverse of that in local authorities and the excessive are invited to review their proposals National Health Service, where work tends to on a best and final or post-tender negotiation be won by the in-house workforce. Consistent basis. The Department also keep their firm with the Civil Service trend, since April 1987, price policy under continuous review and have some 22 per cent of the Department’s market retrospectively conducted ad hoc checks of tests have resulted in activities being retained contracts to reassure themselves that contract in-house. Because of their decentralised prices fairly reflect the actual level of inflation. system of management the Department have Alternative pricing arrangements such as not established arrangements for monitoring agreeing fixed prices subject only to inflation centrally that, when contracts are retained in- increases can present difficulties. For house, they achieve the cost and performance example, the identification, monitoring and expectations which led to the decision not to application of appropriate indices would go to contract. This responsibility falls to line involve considerable time and effort on the part management. of the Department, particularly in view of the wide range of services for which they have 3.22 The 1991 White Paper “Competing for Quality” contracts (Appendix 1). The Department told states that where a service remains in-house, a the National Audit Office that they continue to Service Level Agreement should be drawn up bear in mind the availability of alternative to replicate as far as possible the disciplines of approaches to pricing. a contractual relationship. In particular, managers should audit the performance of the 3.26 Inevitably sane contracts will be amended to in-house operation as rigorously as an external reflect new requirements which did not exist at contract to ensure that the required standard the time the contract was let. However, the of service is delivered at the price at which the National Audit Office noted examples (outside in-house organisation won the competition. their case studies] of amendments due to existing requirements being omitted from the 3.23 Although the Department had already adopted original specification. Accordingly, the this approach in some areas, they estimated savings were not fully achieved in acknowledged that in others this degree of these cases, although this did not invalidate rigour was not always present in local the original decisions to go to contract. The monitoring arrangements. They intend to Department’s arrangements for monitoring extend the use of such agreements, and new contract amendments do not separately guidance being prepared by the Market identify amendments due to such causes and, Testing Consultancy underlines the need for therefore, the overall impact on expected this to be standard practice. savings. Achieving the benefits expected from 3.27 A recent internal audit of contract cleaning activities put out to contract identified instances of very substantial price 3.24 To tie contractors to the price quoted the increases on reletting - for example 64 per Department use firm price contracts. Firm cent, 114 per cent and 154 per cent. And prices, unlike fixed prices, mean that there is overall, the rise in expenditure on no subsequent adjustment for inflation so the accommodation contract cleaning between Department’s liability is capped. By the same 1987 and 1990 was significantly higher than token contractors take the financial benefit of the rate of inflation, rising by 40 per cent any efficiencies they may build into the way between 1987-88 and 1989-90. The Internal they do the job. This underlines the need for Audit Report did not identify the extent to monitoring arrangements which provide which these increases reflected changes in the assurance that contractors provide the required Department’s requirements. The Department service, and with due regard for efficient use of point out, however, that in scum cases keener the Department’s resources. The Department’s prices were being obtained on relet. revised guidance booklet (paragraph 1.10) will Nevertheless, they accept the National Audit point to the need for incentives and Office view that they should pay closer encouragement for contractors to make attention to price movements over ranges of efficient use of the Department’s resources. functions and contracts. 22 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Part 4: Monitoring the performance of contractors 4.1 This Part covers the Department’s contracting parties: channels for decision- arrangements for monitoring activities put to making and communications: criteria for contract. Effective monitoring is essential to: measuring performance; and procedures for dealing with unsatisfactory performance. keep contractors’ performance up to the Formulation of the contract is the joint required standard: responsibility of the Departmental customer provide clear and documented evidence and the Department’s Contracts Branch, who where necessary to invoke the default are the formal contract authority. provisions in contracts; 4.4 The contracts examined by the National Audit provide a clear basis for assurances that Office typically consisted of separate value for money is being obtained; schedules covering: specification of the task; contractual conditions pertaining to the service allow anticipation of problems; required; conditions of contract applicable to inform management, at the time of any work performed by contractors’ personnel retendering, of the need for any changes at Government establishments. The contracts in the work specification, contractor or referred extensively to Standard Conditions of contractual arrangements. Government Contracts including conditions relating to contractor default. These were To maximise the value of putting activities to developed to ensure uniformity, and economy contract, monitoring effort should be kept to of effort. the minimum necessary to achieve these objectives. 4.5 The contracts provided for monthly payments to contractors, subject to the Departmental 4.2 The National Audit Office considered three customer confirming that performance has aspects of the Department’s monitoring been satisfactory. The contracts did not have arrangements: specific payment plans lining up payment against demonstrated performance milestones. . whether they plan for quality before letting But there are arrangements, not actually contracts; specified in the contract, for withholding payments. 0 how they monitor performance once contracts have been let; 4.6 In the National Audit Office’s view the contracts set out adequately the 0 dissemination of good practice. responsibilitiesandliabilitiesoftheDepa&nent The National Audit Office’s findings are based and contractors, and general arrangements for mainly on their examination of the six cases at decision-making and communications. But Appendix 2 (only the pre-contract processes they did not specify the procedures to be were covered in the two cases where the followed in the event of unsatisfactory activity remained in-house) and a recent performance. And they varied in the extent to Internal Audit Report on contract cleaning. which they specified how contractors’ performance would be measured, and the service and standards required from Planning for quality contractors. For example: . at RAF Cranwell the contractor was The contract required to have a minimum number of 4.3 To provide a clear basis for monitoring serviceable aircraft available for flying contractor performance it is important that the training each day: this is an unequivocal contract adequately defines the task required; statement of output by which contractor the responsibilities and liabilities of the performance can be judged. For the 23 MINISTRY OF DEFENCE: COMPETITION E’4 THE PROVISION OF SUPPORT SERVICES operation of the station’s mechanical fully any potential for increased efficiency i3msport services the contractor was and/or better service. The Department required to provide a service within the confirmed that they were hoping to extend the capacity of the vehicle fleet for all use of cardinal points specifications to service authorised journeys and notify the contracts although they consider that detailed Department’s contracts branch when description of the task is necessary in some authorised journeys could not be effected. areas of customer service-for example, There was no requirement to have a catering. specified number of vehicles available each day, or to respond to a minimum Quality plans number of requests for transport within a 4.9 The National Audit Office noted that, contrary set time; to guidance issued by the Department, in the 0 the catering contract for HMS Collingwood six cases they examined potential contractors did not set measurable performance were not asked to produce quality plans standards for the quality of prepared food specifying in detail proposals for their own or service. By contrast the draft contTact monitoring and control of contracts. Failure to for the Junior Ranks Mess Hand (Catering obtain a quality plan limits the assurance Support) task at RAF Brampton, which in available to the Department that prospective the event remained in-house, contained a contractors have fully addressed the issue of number of measurable standards. quality of service. 4.7 However, it can be difficult to define standards Use of purchasing standards for sane types of work. For example, an accommodation cleaning contract might 4.10 In their 32nd Report of Session 1989-90 the typically specify the frequency of service and Committee of Public Accounts endorsed the the tasks to be performed without defining use of standards in public purchasing. British “cleanliness”. Internal audit identified the Standard 5750 requires suppliers registered difficulty of defining an overall standard as a under the Standard to establish, document and factor leading to unsatisfactory performance on maintain effective quality assurance systems. sane cleaning contracts. Up to a point the Customers may specify that services they buy base level of residents’ satisfaction with the be controlled by management systems which service provided could be regarded as a proxy comply with the Standard. Only a minority of measure of contractors’ performance. But the Department’s contractors for services ape Internal Audit found that in 39 per cent of at present registered under British Standard cases they examined staff had not been 5750. The Department envisage that in most informed of the requirements of cleaning areas this will in time become a requirement contracts and in 35 per cent of cases there and will be signalling their intentions to was no mechanism for staff to register industry. comments on the standard of cleaning. 4.8 The National Audit Office noted that the Performance monitoring Department have not yet adopted for service 4.11 Responsibility for contract monitoring rests contracts the “cardinal points specifications” with the Department’s “designated officers” at method used to encourage a more commercial the locations where services are provided. approach to their equipment procurement They liaise with contractors, monitor contracts. Under this approach the Department performance and check that contractors are express requirements in terms of key paid only for work done in accordance with the performance criteria (cardinal points) and leave contract. The National Audit Office noted that, the contractor to determine how to meet them, for the most part, monitoring arrangements rather than defining rigidly the exact had been developed and implemented and specification. Very detailed specifications such that these included aspects of good practice as those for the service contracts examined by (paragraph 4.17). However, there was cause the National Audit Office can carry the risk of for concern in a number of areas: promoting the customer’s view of what the job entails at the cost of preventing potential . the Department have set out broad contractors from suggesting alternative principles to guide designated officers in approaches -thus, enabling the Department, carrying out monitoring, but they have not through the competition process, to exploit provided detailed guidance and training on 24 MINISTRY OF DEFENCE: COMPETITION n\T THE PROVISION OF SUPPORT SERVICES practical aspects (such as the areas 4.13 As a result of their examination internal audit identified below). Internal audit recently concluded in July 1991 that the advantages of reported that designated officers for continuing use of contract cleaning outweigh conixxt cleaning were inadequately the disadvantages. However, they reported trained and that they were often not that in many areas value for money was not properly staffed, qualified or motivated to being achieved, due mainly to lack of control monitor contracts effectively; in monitoring contracts at individual establishments. A survey of 64 designated l there were significant local variations in officers revealed that only one-third considered the approach to monitoring similar, that the Department were achieving value for routine, activities such as contract catering money horn cleaning contracts. (paragraph 4.18) and cleaning. As regards cleaning, in response to an internal audit 4.14 Internal Audit believed that in a number of survey of 64 designated officers, only 38 instances contractors saw potential for making gave positive confirmation that contracts sizeable profits by taking opportunities to cut were being monitored. Of the remaining cmners and input far less resources than were responses, 13 revealed deficiencies in the required to do the task. In srxne cases Service frequency 0~ completeness of monitoring personnel,had been used to make up for and in a further three cases no monitoring deficiencies in contractors’ work. By contrast, was being carried out. The Department contractors’ bills were settled expeditiously have not developed standard approaches and only very occasionally were financial to monitoring such activities: deductions made. . record keeping and analysis - essential to supporting judgements about contractor 4.15 National Audit Office enquiries of the performance, and for default procedures - Department’s Contracts Branch established was patchy: that contract cancellations, and deductions from payments to contractors, were rare. Two 0 the Department had not sought out of 200 catering contracts have been opportunities to strengthen and reduce cancelled because of poor performance. their monitoring effort, and inform the relet Despite widespread crxwan about contractor process, by making use of conixctors’ performance noted by Internal Audit own performance data. In this respect the (paragraphs 4.13 and 4.14), only 3 out of srxne absence of contractor quality plans and ZOO cleaning contracts have been terminated registration under British Standard 5750 since December 1969. The Department told are limiting factors (paragraphs 4.9 and the National Audit Office that the problem has 4.10). In smne cases Internal Audit found been mainly a lack of firm evidence to support that the Department’s monitoring staff such action. spent so much time and effort checking that contractors fulfil their obligations that, 4.16 The majority of Internal Audit’s in effect. the Department’s staff were recommendations on contract cleaning have supervising the contract workforce on been accepted by the Department. Internal behalf of the contractor; Audit plan a series of follow-up visits to 0 Internal Audit found that the Department’s determine the degree of implementation. arrangements for authorising cleaning contractors’ bills at Unit level lacked adequate safeguards against fraud. The Dissemination of good practice Department were taking steps to remedy the weaknesses. 4.17 The Department have taken steps to foster good practice in contract monitoring. For 4.12 The importance of effective monitoring was example: underlined by the recent internal audit of 0 the Department’s Market Testing accommodation cleaning contracts referred to Consultancy give advice on contract above. Contract cleaning has become the monitoring in response to requests for accepted method for accommodation cleaning assistance: throughout the Department and is regarded by them as virtually irreversible. They have almost 0 the Department have set in train a project ZOOcontracts with a total annual value of wer aimed at pulling together information f40 million. available throughout the Department on 25 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES the performance of individual contractors. 0 the Army Catering Service provide a focal The aim is a co-ordinated view of the point for advice and assistance on Army performance of firms who work for a contract catering. They are preparing number of sponsors in the Department: guidance for staff responsible for supervising catering contracts. in 1989 Royal Air Force Support Command set up a Command 4.18 The National Audit Office noted, however, that Contiactorisation Section to drive there was further scope for different areas of contmctorisation initiatives in accordance the Department to learn from one another on with the Command action plan. The sxne aspects. For example, in the area of Section acts as a focal point for advice on contract catering, each Service had adopted or contractual matters, including production identified aspects of good practice which of specifications and day-to-day might usefully be adopted by the other two: monitoring of the contracts in place. A HMS Collingwood had developed processes similar section was established at Royal for daily contractor monitoring which were not Air Force Strike Command in 1991: in place at the Army School of Mechanical the Directorate of Proof and Experimental Transport, Leconfield; the Army had a system Establishments [responsible for of regular regional level checks on standards Shoeburyness and other establishments) at individual establishments, whereas the Royal had responsibility for establishing a Navy did not have a similar arrangement: and corporate policy and approach for in the draft contract for Junior Ranks Mess monitoring of contractor-operated ranges catering support at RAF Brampton (which and for applying best practice across all remained in-house) the Royal Air Force had ranges; succeeded in defining some measurable performance standards (paragraph 4.8) in the systematic approach to monitoring some areas which might usefully be applied by and record keeping for the catering the Royal Navy and the Army. contract at HMS Collingwood formed the basis for guidance to be applied in monitoring all the Royal Navy’s catering contracts. And the Royal Navy have established a focal point for assistance and advice on catering contracts; 26 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Appendix 1 Examples of services provided wholly or in part by contractors Academic & academic support tasks Hostel operation Administrative air trooping Janitor services Automatic data processing training Labouring Air Publications Forms Store Laundry Air & sea supply to the Hebrides Lecturing Air traffic control Machinery maintenance Aircraft servicing and support Manufacturers training Aircraft storage Medical Services Ammunition package, storage and Metal recovery refurbishment Military survey Apprentice training Motor insurance Architect services Mechanical transport driving Audit Mechanical transport maintenance and repair Auto laboratories Newspaper business management Balloon flying and hanger servicing Noise surveys Bird control Non-specialist vehicles - provision and Calibration of test equipment maintenance Cash in transit Ocean weather ships Catering Operational analysis Catering support Operation & maintenance Chimney sweeping Passenger carrying Civilian staff restaurants Passive electronic warfare analysis Cleaning Patent renewal payment Clothing repair Pest and rodent control Computer maintenance Photography Computer operations Printing Conservancy Procurement training Deleading of ranges Radar maintenance Dental technical services Railway carriage and wagon repair Dockyard operation Range operation Domestic assistance Range support Driver training Research and development establishments Engineering & supply support support functions Engineering services Reprographics Estate agent services Sanitary services Exercise reconstruction Scavenging Ferry services School transport Film making Security guarding Flying training Ship weapon system engineering Footwear repair Simulator maintenance Funeral arrangements Snow clearance Furniture removal Statistical support Gardening Steam frigates post-design services Glass blowing Storage and distribution of accommodation Graphics stores Grounds maintenance Submarine command systems management Hairdressing support Helicopter support 27 MINISTRY OF DEFENW COMPETITION IN THE PROVISION OF SUPPORT SERVICES Sullage disposal Transport Surface freight movement Travel arrangements Tailoring Vehicle hire Tank cleaning lighters Vehicle sales Target towing aircraft Veterinary services Technical publications Ward assistants Technical training Waste disposal Torpedo recovery Window cleaning Translation/interpretation Saurce:Mini&y of DefenceGuide to Gom,~titionin DefenceServices and the National Audit Ofice exminotion. MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Appendix 2 Locations visited by National Audit Of&e at which activities had been market tested Location AtiN@ Market Tested Result of Competition Proof and ExperimentalEstablishment, Shoeburyness Operationand Maintenanceof RangeFacilities including Contractawarded in 1987for five years. instrumentation,engineering, stores. transpod HMS CollingwoodWeapons Engineering School Full cateringservice for studentbody and officer’s mess Cantractawarded in 1989for three years to includethe supply of foodstuffs. RAFCranwell All engineeringand supportfunctions, including those for COntractawarded in 1990for three years with option to aircraft, and operationof the stationvehicle Ssst extend for further hvo years. Army School of MechanicalTransport Leconlieldand Combinedfull catsting and cleaningactiiities usingService- Contractawarded in 1988for three years. Relet in 1991, DrifSeld suppliedfood. Senricespmvided to studentbody and omcer’s meSSeS 14 MaintenanceUnit RAFCarlisle Operationof the GroundClothing Warehouse function only Retainedin-house in 1938. RAF Brampton Provisionof meszand cateringsuppal functionfor Junior Retainedin-house. But is to be w-tested Rank Messes.One of a serieSof markettests conducted See paragraphs3.16-3.17. wkh a view to contractorisingthe function at all Junior Ranks MWE . 29 i MINISTRY OF DEFENCE COMPETITION IN THE PROVISION OF SUF’PORT SERVICES Appendix 3 Market Testing Proposals: 1991/92 to 1993194 inclusive Mandatory Activities Laundry Catering (at least 34 locations) Cleaning (at least 3 locations] Grounds Maintenance Maintenance Security Guarding Non-Mandatory ACtiVitkS LOCdiOll Boat Maintenance DartmOUth Chart and Book Issues, Chart Correction, Chart Maintenance Hydrographic Department Ground Radio Maintenance HMS GANNET, Prestwick, HMS OSPREY, Portland Harbour Ferry Services Portsmouth Machinery Maintenance HMS GANNET, Prestwick Maintenance and Survey of Royal Navy Auxiliary Service Vessels Mechanical Transport Functions Portsmouth Mechanical Transport Operation and Maintenance HMS SEAHAWK, Culdmse, HMS HERALD, Yeovilton, HMS GANNET, Prestwick Mechanical Transport Workshops Gibraltar Microfiche HMS CENTURION, Gosport Motor Transport Pool Bath Operation of Royal Marine Auxiliary Service Vessels Falmouth, Kyle of Loch&h Operation of Tank Cleaning Lighters Sail Training Joint Services Adventurous Sail Training Centre, Gosport Target Operations Portland Army Defence Accommodation Stores Escorts for Services School Children’s Visits Management of Mould Hill Top Sites Motorcycle Training Junior Leaders Regiment, Royal Corps of Transport 30 MINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT SERVICES Army cant Location Repair and maintenance of Mechanical Handling Equipment Typing Central Ordnance Depot, Bicester Royal Air Force LOCdiOll Aircraft Storage RAF St Athan Andover Flight Checking Depth D Surface Finishing RAF ST Athan Electronic Warfare Training and Canberra Support Elementary Flying Training RAF Topcliffe Engineering and Supply RAF Scampton Exhibition Production Flight RAF Henlow Front of House Activities, Gateway House RAF Brize Norton Fuelling (Petrol, Oil and Lubricants) Facilities RAF Brize Norton Ground Clothing Task RAF Carlisle Hawk Target Facilities Maintenance, Operations and Balloon Squadron RAF Hullavington Mechanical Transport Vehicle Lease Hire Number 2 Motor Transport Squadron RAF Stafford Parachute Packing RAF Hullavington Passenger Handling RAF Brim Norton Range Support RAF Cowden, RAF Holbeach, RAF Jurby, RAF Rosehearty Simulator Maintenance RAF Brim Norton SUPPlY RAF Locking Support Facilities RAF Spadeadam Othr Airfield Services Boscombe Down Engineering Workshops, Farm Services, Fire Services, Chemical and Biological Defence Motor Transport, Occupational Health Services, Establishment, Porton Down Reprographic Tasks Workshops and Vehicle Maintenance Defence Operational Analysis Establishment, West Byfleet Automated Shipboard Aerological Programme, Office Support Facilities Meteorological Office Source: Ministrv of Defence 31 MINISTRY OF DEFENCE: COMPETITION E’J THE PROVISION OF SUPPORT Appendix 4 Progress in mandatory areas 1 In 1985 the Government announced (Hansard 4 March, Column 746) that Government departments would be required to test the following services. 2 Royal Navy and Army establishments have made significantly more progress than Royal Air Force stations in market testing catering and, where appropriate, putting it out to contract. The Royal Air Force have put catering out to contract at only 17 per cent of their stations. The Royal Navy have achieved this in 75 per cent, and the Army 86 per cent, of their units/establishments and achieved commensurate savings in civilian and military posts [Table 1). Table 1: Market testing of catering as at June 1991 NAVY ARMY RAF Total NumberOf UnitsiStatiQnslEstabiishmenb 32 240 81 Numbersoi Unks markettested[‘l 31 220 47 Percentage 97% 92% 58w Numbersof Units with cateringcontracW 24 206 14 Percentage 75% 86% 17% posts saved 1,650 3,712 670 Sowce: The,Uinistry of Defeoce Notes: I11Market testing and wntrads did not in all cases relate to all cateringfunctions at the units/establishmentsconcerned PI Includesmaket testingof cateringsupport ior Junior RanksMesses at 14 RoyalAir Force stations(but see paragraph3.15 of main Report). 3 In 1990 the Department proposed to market test all civilian mess hands tasks in all Royal Air Force messes. Savings of some 1,644 posts costing El9 million were suggested. This proposal was set aside after doubts were expressed about its practicality and real value. The Department decided subsequently to carry out an internal study to determine the minimum level of Service catering manpower required by the Royal Air Force in peacetime, transition to war and war and to identify where it would be in the Service’s interest to employ contract catering. Following completion of this study the Department told the National Audit Office that they had drawn up a detailed plan to carry out extensive market testing of up to 2,000 catering posts. 4 Meanwhile, the Department have decided to remarket test the provision of mess hands for Junior Ranks Messes because the original programme of market testing was flawed (paragraphs 3.15 and 3.16 of main Report]. Market testing will be phased, starting in 1992-93 and to help ensure value for money will be combined with testing of other functions. cleaning 5 In 1991 there were 197 contracts let centrally with an annual value of E40.9 million. 6 National Audit Office enquiries revealed that there werti areas in the Department where the scope for market testing cleaning activities had either still to be explored or re- tested. In 1991 Internal Audit found some 300 directly employed cleaning staff, mainly working alone or in small groups, had been excluded from market testing. The 1991-92 market testing programme did not suggest much likelihood of progress towards reviewing these posts. 32 MNISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT Some kinds of 7 The Department have interpreted this as meaning grounds maintenance, and other minor maintenance maintenance. In 1987 a Departmental review established that grounds maintenance had been considered for contracting out in all but one mea of the Department. But since 1987 they have market tested grounds maintenance at seven locations to a value of f0.296 million. Further, a recent review following the Department’s untying from the Property Services Agency, has highlighted additional activities for market testing. As a result plans for the period 1992 to 1994 include market testing of grounds maintenance to a value of f2.644 million. Laundry 8 In 1985 the Department established that 95 per cent by value of the laundry function had been contracted out and that there was little scope for further contracting out. The Royal Navy plan to market test laundry services to a value of f0.5 million in 1991-92. Security guarding 9 In considering the Department’s Coniml and Use of Manpower (paragraph 1.11) the Committee of Public Accounts decided not to take evidence from the Department on de provision of security services (41st Report, Session 1988-89). The Committee had regard to the fact that the House of Commons Defence Committee intended to examine the subject in the light of the explosion at the Royal Marine Establishment, Deal, on 12 September 1989. The Committee of Public Accounts stressed, however, that in considering how to provide security services the Department’s prime consideration must be the safety of the Service and other personnel employed there. As a result of their inquiry into aspects of physical security of military installations the House of Commons Defence Committee recommended (HC 388, Session 1989-90) that the Department continue to exercise caution in contracting out Defence support services, but did not question the general aim of seeking to use the private sector when it is cost-effective to do so. 10 In April 1991 Ministers announced that a new Ministry of Defence guard service was to be established in 1992. The service is to be formed from the Department’s various existing civilian guard forces. It will have a common uniform. professional standards and training, pay and conditions of service, and staffing structures. Armed guarding will continue to be carried out by the Armed Services or the Ministry of Defence Police. The Chief Constable of the Ministry of Defence Police will be responsible for the professional standards of the new service. Local Commanding Officers will be responsible for other aspects. 11 The Department have prepared revised guidelines for the use of Security Directors/ Commands when the employment of a commercial guard force might be considered to offer better value for money. The guidelines identify which tasks would not be appropriate for commercial guarding arrangements and provide advice on how market testing of suitable tasks can be achieved. 12 In 1990 the Department had some 50 contracts with 19 commercial security firms covering both civilian and Service establishments and employing 500 guards. Since then there has been a reduction to 16 in the number of guarding companies employed, together with a corresponding reduction in contracts to 45. 33 ivIINISTRY OF DEFENCE: COMPETITION IN THE PROVISION OF SUPPORT Appendix 5 Use of the private sector in the provision of training 1 In 1990-91 the Department had training contracts with the private sector with au annual value of nearly f37 million, excluding product training provided by manufacturers. They included academic training at the Royal Electrical and Mechanical Engineers Training Centre (Arborfield) and the Royal Military College of Science, Shrivenham; Army Air Corps Flying Instruction; and Driver Training. 2 As at March 1991 the Department had plans to market test training activities to a value of nearly f25 million by April 1994; and they are considering the potential for further private sector involvement in training as part of a wider review, started in October 1990, of training in 39 areas (Annex A). They have affir&d their intention to go to contract wherever practicable and cost effective. The areas under consideration include flying training and vehicle licence acquisition (that is, driver training). Flying training 3 The Royal Air Force are involved in five types of flying training: pre-entry (Flying ScholarshipsandAirCadetFlying): UniversityAirSquadrons;ElementaryFlyingTraining; Basic Flying Training and Advanced Flying Training. Courses for flying scholarships are run at selected civil flying clubs; Air Cadet flying is largely manned by volunteers; and the Department’s view is that the recruiting role of University Air Squadrons makes the use of contractors inappropriate, although some instructors are to be replaced by civilians. 4 Elementary flying training, for students who have no significant pre-Service flying experience, is to be market tested with a view to letting a contract by July 1993. The Department view elementary flying training as suitable for market testing because, being an early stage of training, there is less emphasis on Royal Air Force orientated flying skills. And as the course only takes 18 weeks they consider that any undesirable effects of the student being away from a purely military environment can be accepted. Plans are well advanced to market test all elements (aircraft, maintenance support and both ground and flying instruction) of a joint Royal Air Force and Royal Navy elementary flying training squadron at Topcliffe. 5 As regards basic flying training the Department regard this as the foundation on which all other flying training is based. There is a very large general Service training element in the existing year-long courses which in their view makes a continuous and predominant Service input vital. Many of the skills taught on Basic and Advanced level training (I courses are unique to military instructors and there is often no equivalent commercial aircraft. 6 However, the Department see some scope for using contractors for advanced training on multi-engine aircraft as there are commercial equivalents. Although they do not have firm plans to market test this area at present, a study into the future of multi-engine advanced training is about to start. Otherwise they see virtually no scope for using contractors for advanced flying training because of the purely military nature of the training and the aircraft. 34 MINISTRY OF DEFENCE COMPETITION IN THE PROVISION OF SUPPORT 7 The Army put flying training out to contract in 1963. The services provided include instruction and the maintenance of all aircraft. The contractor provides elementary fixed wing flying training and basic rotary wing training. The pupils are usually Non- Commissioned Officers with extensive military service. Driver training 8 The Services require a large number of their personnel to acquire a variety of vehicle licences ranging from motor cycles and cars to Large Goods and Passenger Carrying vehicles, sometimes as a prelude to learning how to drive purely military vehicles. The National Audit Office examined the extent to which driver training has been put out to contract. 9 Regular Army soldiers who drive as a primary occupation, as well as those who are required to drive as part of their primary trade, acquire their basic driver training at several military locations under contracts which include the provision of both vehicles and tuition. Those who need to’ acquire Large Goods and Passenger Carrying Vehicle licences are mostly trained at the Army School of Mechanical Transport, Leconfield. The exceptions are the Royal ElectZcal and Mechanical Engineers and Royal Engineers who undertake such specialised training at their own establishments. Leconfield also provide a service to the Royal Navy, Royal Marines and Royal Air Force as required. Following market testing the three establishments obtain their instructional vehicles under commercial lease-hire agreements. But they have retained the driving instruction role in-house. Territorial Army soldiers are provided with driver training at all levels by contractors. 10 Royal Air Force personnel whose primary function is driving, are trained at the Royal Air Force’s School of Technical Training at St Athan using both Ministry of Defence civilian and service instructors. As mentioned above some of the specialist Large Goods Vehicle and Passenger Carrying Vehicles training is provided at the Army School of Mechanical Transport, the remainder at units. Technicians and other trades who are required to drive only as part of their main function are trained at their units under contracts with the private sector. 11 The Royal Marines employ driver tradesmen in the same way as the Army. But the Royal Navy no longer have a need for the military driver trade; they employ a large number of civilian drivers in industrial grades. Those who join the group without a licence are trained by Ministry of Defence civilian instructors at various Naval Bases. Royal Navy military personnel required to drive as part of another trade acquire their basic driver licences through the driver training section of HMS Nelson at Portsmouth where a contractor is employed to provide the training. Those who require Large Goods or Passenger Carrying Vehicles licences are trained either at the Army School at Leconfield or at Royal Air Force St Athan. MINISTRY OF DEFENCE: COMPETlTION IN THE PROVISION OF SUPPORT Appendix 5 Annex A Training areas with potential for rationalisation Post entry 1. Graduate Entrants 2. Elementary Fixed Wing 3. Basic Rotary Wing 4. Rowallan Scheme 5. Academic Row&m Scheme Staff, Leadership, 6. Officer Education Managerial and Personal 7. Officer Career Development Development a. Leadership [senior rates] 9. Staff 10. Foreign & Commonwealth Training Agency 11. Language 12. Command 13. Adventurous 14. Civil Service/Military 15. Defence Training Centre Engineering training 16. Officer Technical 17. Electronics 18. Airframes 19. Engines 20. CommunicationslSignals 21. Apprentice 22. Royal Military College of Science, Shrivenham and Royal Navy Engineering College, Manadon Supply, Logistics and 23. Training Technology Administration 24. Vehicle Licence Acquisition 25. Catering 26. Survival Equipment 27. Police Dogs 26. Volunteer Reserve 29. Information Technology/Computer 30. Industrial Relations 31. Musicians 32, Firefighting 33, Aircrew Survival 34, Explosive Ordnance Disposal 35, Diving 36 Physical Training Instructors 37 Flying 36 Communications Medical, Dental, 39 Medical Nursing, Legal and Education Officers, Service Chaplains 36