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 have a 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.