Technology

House of Commons Committee of Public Accounts

Central government's use of consultants
Thirty-first Report of Session 2006–07
Report, together with formal minutes, oral and written evidence
Ordered by The House of Commons to be printed 4 June 2007

HC 309
Published on 19 June 2007 by authority of the House of Commons London: The Stationery Office Limited £11.00

The Committee of Public Accounts
The Committee of Public Accounts is appointed by the House of Commons to examine “the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit” (Standing Order No 148). Current membership Mr Richard Bacon MP (Conservative, South Norfolk) Annette Brooke MP (Liberal Democrat, Mid Dorset and Poole North) Chris Bryant MP (Labour, Rhondda) Greg Clark MP (Conservative, Tunbridge Wells) Rt Hon David Curry MP (Conservative, Skipton and Ripon) Mr Ian Davidson MP (Labour, Glasgow South West) Mr Philip Dunne MP (Conservative, Ludlow) Mr John Healey MP (Labour, Wentworth) Mr Edward Leigh MP (Conservative, Gainsborough) (Chairman) Ian Lucas MP (Labour, Wrexham) Mr Austin Mitchell MP (Labour, Great Grimsby) Dr John Pugh MP (Liberal Democrat, Southport) Rt Hon Don Touhig MP (Labour, Islwyn) Rt Hon Alan Williams MP (Labour, Swansea West) Mr Iain Wright MP (Labour, Hartlepool) Derek Wyatt MP (Labour, Sittingbourne and Sheppey) The following were also Members of the Committee during the period of the inquiry: Helen Goodman MP (Labour, Bishop Auckland) Mr Sadiq Khan MP (Labour, TootingI) Sarah McCarthy-Fry MP (Labour, Portsmouth North) Powers Powers of the Committee of Public Accounts are set out in House of Commons Standing Orders, principally in SO No 148. These are available on the Internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/pac. A list of Reports of the Committee in the present Session is at the back of this volume. Committee staff The current staff of the Committee is Mark Etherton (Clerk), Philip Jones (Committee Assistant), Emma Sawyer (Committee Assistant), Pam Morris (Secretary), Anna Browning (Secretary), and Alex Paterson (Media Officer). Contacts All correspondence should be addressed to the Clerk, Committee of Public Accounts, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5708; the Committee’s email address is [email protected]

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Contents
Report
Summary Conclusions and recommendations 1 2 3 4 The failure to implement good practice The lack of information on the use of consultants Using internal staff instead of consultants Being an astute customer Annex: Key terms used in the Report
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3 5 9 11 13 15 17

Formal Minutes Witnesses List of written evidence List of Reports from the Committee of Public Accounts Session 2006–07

18 19 19 20

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Summary
In 2005-06 the public sector in England spent approximately £2.8 billion on consultants, with central government accounting for £1.8 billion. Aside from the scale of expenditure on consultants, they are routinely used on key government initiatives such as the Identity programme at the Home Office and the Capability Review programme at the Cabinet Office. In the past three years spending on consultants has risen by a third, from £2.1 billion in 2003–04 to £2.8 billion in 2005–06, largely due to increases in spending by the NHS. Only two departments have shown a consistent decrease in their spending on consultants over the period. Central government is repeatedly using consultants for core skills, including project and programme management and IT, and is increasingly turning to a select list of suppliers. Central government has made some progress in implementing previous recommendations and good practice in using consultants but much more can be done to improve value for money. In particular, departments are making good use of framework agreements and qualified procurement staff are regularly involved in the buying process. However, areas where departments require significant improvement are: collection and use of management information; the assessment of whether internal resources could be used instead of consultants; controls on awarding contracts by single tender; completing and sharing post-project performance reviews; actively engaging with and managing the relationships with key consultancy suppliers; and planning for and carrying out the transfer of skills from consultants to internal staff. Consultants, when used appropriately, can provide considerable benefits for clients. There are examples where consultants have added real value and enabled departments to make improvements they would not have achieved otherwise. For example, the Ministry of Defence is saving on its procurement, having used consultants to help implement a new approach and develop its internal procurement capability. Nevertheless these benefits will only be secured if departments are much smarter in their use of consultants and more commercially astute in how they procure them. Getting a better grip on the use of consultants would lead to efficiency gains of more than £500 million a year. On the basis of a Report by the Comptroller and Auditor General,1 we took evidence from the Office of Government Commerce (OGC) on six main issues: using internal resources instead of consultants; the poor quality of information on the use of consultants; gaining a better understanding of suppliers; getting better deals by using different payment methods and making more use of competitive tendering; the effectiveness of OGC’s good practice work; and OGC’s own use of consultants. Key terms used in this Report are listed in the Annex.

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C&AG’s Report, Central Government’s use of consultants, HC (2006–07) 128

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Conclusions and recommendations
1. Only half of the recommendations in the Committee’s 2002 Report, Better value for money from professional services, have been properly implemented. Lack of progress has meant the government is still not achieving good value for money from the £1.8 billion spent on consultants. OGC initially worked with departments but in 2003 left departments to implement the Committee’s recommendations themselves, despite its own review showing that progress was still required. Departments should develop early action plans for implementing the recommendations from this Report, assigning responsibility for implementation to a senior official. OGC should use its new programme of procurement capability reviews to determine whether departments are getting a better grip on how they use consultants. Departments and OGC do not routinely know how much money is spent on consultants. Without such information departments cannot be sure whether value for money is achieved. Departments need to have comprehensive reliable data on consultancy expenditure, including the types of service provided and the suppliers used. This data should be used to assess whether the benefits obtained are justified by the costs, and whether the best prices are secured where a consultant has considerable on-going business. OGC should use the information to determine whether collectively government is making best use of its buying power to get competitive prices. Consultants are often used when in-house staff have the necessary skills and are less expensive. Internal staff can provide better value for money than using external suppliers, for example if the requirement is long-term or generalist. Departments should always routinely consider whether they have the skills in-house before turning to external consultants. If consultants are the only option departments need to define from the outset the added value they expect to receive. Departments do not routinely assess the value of the work they receive from consultants. Project specifications agreed with consultants and contractually binding should set out the intended benefits which should whenever practicable be defined in a way that is capable of measurement. Post project evaluations which capture the lessons learned and assess the performance of suppliers should be routinely used. Higher value assignments should be assessed as part of Gateway 5—Benefits Realisation. The capability of departments to be intelligent customers is weakened by insufficient sharing of information on consultants’ performance. A consultant may not perform well for one department but still be employed by another, charge a significantly higher price for the same service, or redesign a similar process from scratch which they have successfully implemented elsewhere in the public sector. To minimise these risks departments need reliable and easily accessible market intelligence on the use of consultants and their performance. OGC, working with departments, needs to develop communication channels such as on-line customer forums to make it easier for departments to share information and experience.

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40% of clients consider they have used consultants when it was not necessary.2 A feature of both the public and private sector is a tendency sometimes to use consultants for inappropriate reasons. At worst these can include, for example, employing them as a means for deflecting blame for failure should a project underperform. The reasons for employing consultants need to be clearly articulated and transparent in rigorous business cases, which should be subject to independent challenge such as peer or professional review to test their validity. For the last three years the most frequently purchased consultancy was IT and project management skills, accounting for 54% of government’s total expenditure on consultants. Consistently relying on consultants for basic skills is expensive and repeated use suggests poor value for money. Departments need to identify where core skill gaps exist in relation to medium to long term programme requirements, determine the most cost effective division of work between internal and external resources and plan their recruitment and training accordingly. Departments do not regularly plan for, or achieve, the transfer of skills from consultants to their staff to build internal capabilities. Three of the five departments examined by the Comptroller and Auditor General had made only limited progress in transferring skills which would reduce the need to rely on consultants in the future. Departments should identify where there are opportunities for skills transfer through for example, consultants providing training; making skills transfer a specific requirement of the contract with appropriate financial and nonfinancial incentives; and having in-house staff work alongside consultants either formally in joint teams or informally as observers. Some consultant charges lack transparency, making it difficult to verify that all costs are justified. Consultancy contracts need to be clear about the basis on which departments will be charged for costs such as travel and subsistence, fees and other expenses, and how they will be reimbursed for rebates firms may obtain for travel and accommodation, and for time not worked or where lower graded staff are used. Departments’ finance teams need to be more vigilant in checking the appropriateness of expenses which consultants charge. Only 1% of consulting projects use incentivised contracts and much work is still paid for on a time and materials basis. Departments, where practicable, should base payment to suppliers on what they produce through fixed price or incentivised contracts, instead of based on the amount of time they spend working which carries the risk of being open ended. Key to using these payment types is having welldefined outputs and outcomes when engaging consultants. Departments are appointing some consultants through single tender, which puts value for money at risk. Single tender reduces the potential to secure competitive prices and get a broader range of approaches. Departments should reduce the amount of contracts awarded by single tender by routinely involving procurement staff in the buying process to provide commercial expertise and making use of

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Public and private sector clients as reported in Perceptions of consultancy in 2005 (MCA,2005).

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framework agreements which provide for competition while generally reducing procurement costs and securing better prices. 12. Central government spends over £100 million with each of its top four suppliers, yet does not take full advantage of that spending power. In its new more strategic role OGC should work with public bodies to identify key information and then aggregate this information to provide a pan-government view. OGC should also coordinate cross-government meetings to help government act as a single customer to its key consultants and in particular use its buying power to secure the best deals for the taxpayer.

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1 The failure to implement good practice
1. Consultants, when used correctly and in the appropriate circumstances, can help clients achieve things that clients do not have the capacity or capability to do themselves. Organisations use consultants for three primary reasons: 1) People: for additional resources or specialist skills; 2) Process: for knowledge on how to approach a task; 3) Perspective: to provide an objective or independent view or new and innovative thinking.3 2. In 2005–06 the public sector in England spent approximately £2.8 billion on consultants with central government accounting for £1.8 billion. Aside from the scale of spend on consultants, they are routinely used on key government initiatives such as the Identity programme at the Home Office and the Capability Review programme at the Cabinet Office. There have been several high-profile value for money reviews of the government’s use of consultants; in particular done by the Efficiency Unit within the Cabinet Office in 1994, the C&AG in 2001, and this Committee in 2002. 3. There has been limited progress against the recommendations made in the Committee’s 2002 Report, Better value for money from professional service.4 Similarly, many of the recommendations from the 1994 Report from the Cabinet Office’s Efficiency Unit remain unfulfilled.5 The 1994 Report identified the need to transfer skills from consultants to civil servants, for example, but three of the five case study departments reviewed by the C&AG have made minimal or patchy progress and the others only ‘some’ progress.6 Figure 1 lists the recommendations from the 2002 Report which departments and OGC have made inadequate progress in implementing.7 4. The C&AG’s Report sets out how annual efficiency gains of 30% (equivalent to more than £500 million a year) could be achieved within three years if departments were to implement a number of good practice recommendations.8

3 4 5
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C&AG’s Report, para 1.6, Figure 5 Qq 32–33 Qq 102, 104, 106 Q 106 C&AG’s Report, Figure 2, Figure 12; Qq 108, 134–137 C&AG’s Report, para 6

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Figure 1 – PAC recommendations not adequately taken up by departments and OGC Departments Departments to improve the quality of information on spend on professional services Departments to assess how best to divide work between internal and external staff

Departments to reduce the number of contracts awarded by single tender

Departments to share consulting contract information, in particular volume, value, services, and suppliers with other departments and across their own department to help identify opportunities for collaborative purchasing OGC OGC stopped working with departments to implement their action plans in 2003, despite further progress being required9 OGC stopped collecting information on the spend on consultants across government in 2003 OGC distributed guidance on the use of single tender procurements, however did not track its application OGC does not share information about the performance of consultants among departments
Source: National Audit Office

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Q 11

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2 The lack of information on the use of consultants
5. In the past three years spending on consultants has risen by a third, from £2.1 billion in 2003-04 to £2.8 billion in 2005-06, largely due to increases in spending by the NHS.10 Only two departments have shown a consistent decrease in their spending on consultants over the period (the Department for Trade and Industry and the Department for Work and Pensions).11 6. Departments do not routinely collect information such as types of services purchased and procurement route used.12 OGC has collected information on consultancy spending in the past as part of an exercise looking at government expenditure. This activity was stopped in 2003, however, as the information received from departments was inconsistent and incomplete, diminishing the value of the exercise.13 7. OGC issued a definition of consultancy in February 200614 and the Treasury issued guidance on classifying consulting expenditure in November 2006 to facilitate aggregation and comparison. Without this key information on the use of consultants, departments, and OGC across government, cannot make informed decisions on their use. 8. Departments, and OGC across government, do not regularly assess the value of the work of consultants.15 There are significant challenges in assessing value for money from consulting projects. For example, it can be hard to identify useful measures that are suitable for all types of projects and attributing cause and effect is not always easy, even where performance has improved. Departments can nonetheless assess consultants’ performance against what they were set out to do in the business case and requirements specification. 9. Business cases and requirements specifications are necessary to explain, justify, and make clear the role and expectations of the consultants before they are hired. Post project evaluations that capture lessons learned and assess the performance of consultants are not consistently carried out nor shared throughout the organisation.16 Furthermore, OGC does not share this information across government. 10. The nature of the consulting market creates substantial challenges for managers who are seeking to hire or work with consultants. Clients find it difficult to differentiate between consulting firms and to assess whether they are getting value for money. The relationship between client and consultant is a balancing act. On the one hand, clients value objectivity and perspective from their consultants which requires the consultants to remain ‘outside’ of the organisation, yet on the other hand, clients need consultants to show ownership and
10 11 12 13 14 15 16 C&AG’s Report, para 2.2 C&AG’s Report, para 2.4 C&AG’s Report, para 2.12; Qq 8, 88 C&AG’s Report, Figure 12; Qq 9, 10 C&AG’s Report, para 3.5 C&AG’s Report, para 3, 2.17, 2.18; Qq 51, 73–74, 123 C&AG’s Report, para 4; Qq 91, 114–115

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accountability to implement their work, which requires consultants to work within the organisation, potentially for long periods of time. 11. The way a consulting firm is structured and how its consultants are incentivised can focus on the needs of the supplier rather than those of the client.17 It can be difficult for clients to select the correct consultant, decide how consultants will work alongside internal staff, and have effective negotiations. All of these challenges make it more important for departments to work together. However, departments have not done so and do not regularly learn from each others’ experience to improve their use of consultants.18 Departments do not share information about the performance of consultants, contract information, general market intelligence, and lessons learned about the procurement and management of consultants across departments or even within the department.19

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C&AG’s Report, para 1.8 Qq 49, 144 C&AG’s Report, Figure 2, Figure 12

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3 Using internal staff instead of consultants
12. While it will sometimes be the case that departments need to purchase specific expertise from consulting firms, more generalist requirements can often be met more costeffectively by internal resources. The Ministry of Defence, for example, can supply internal consultancy staff for half the cost of external consultants.20 Public bodies do not have adequate mechanisms or information to find appropriately skilled internal staff (from within the organisation or from other public bodies), nor to understand the costs of internal staff, or make firm commitments to resource these posts on time.21 Without this information they are turning to consultants.22 It is important to maintain accountability for work programmes, which is at risk if key programme roles are not held by internal staff. 13. Departments do not have an adequate understanding of their medium to long term requirements upon which to base their recruitment and training plans, as well as their use of consultants.23 Recruitment of full-time personnel and training of existing personnel can provide better value for money than continued use of consultants. The same skills are being purchased again and again from consultants. For the past three years, for example, IT and project and programme management skills have consistently been the top two consultancy skills purchased.24 14. Departments need to be clear why it is that they need to use consultants. 40% of clients acknowledge they have used consultants when it was not necessary.25 In some cases, particularly when an independent view is required, consultants can be the most appropriate resource option. Consultants can however be used for inappropriate reasons, such as to re-assign blame, to compensate for the perceived poor quality of civil service management, to substitute for civil servants who have been made redundant, and to delay implementation of policy.26 lnternal staff can feel threatened or pushed aside by consultants if the Department fails to communicate the reason for their use. 15. The reason for using consultants will affect how they are used. For example, if consultants are brought in to implement an IT system that the department will maintain in the long-term, it is appropriate to have mixed project teams with clients and consultants working side by side and to put an emphasis on transferring skills from the consultants to the client team. However, this approach will not be appropriate if consultants are brought in to provide an independent perspective. 16. Departments do not adequately identify opportunities for skills transfer from consultants to their own staff to increase internal capabilities.27 Although the transfer of

20 21 22 23 24 25 26 27

C&AG’s Report, para 4; Q 71 C&AG’s Report, Figure 2 Qq 26–30, 89 Q 84 C&AG’s Report, para 2.8; Q 72 Public and private sector clients as reported in Perceptions of consultancy in 2005 (MCA,2005) Qq 77–79, 124, 127–133, 140 Qq 52, 92

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skills is often encouraged in departmental guidance, it is not consistently carried out by project teams. Three departments were rated as having made little or patchy progress for achieving skills transfer and the other two as made only ‘some’ progress in the C&AG’s Report.28

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C&AG’s Report, para 4, Figure 2, Appendix 1

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4 Being an astute customer
17. Consultants’ charges can be complicated; in particular, aspects such as the relocation of staff, use of flat rate expenses, and travel rebates which require close monitoring to ensure they are in line with departmental policies and contracts.29 18. Departments do not actively engage with or manage the relationships with key consultancy suppliers to better understand how they work. Most departments are not aware of all the consultancy projects that are done by their key consultancies within their department. Departments rarely identify their key consultants or have regular, open communications to discuss pricing strategies, the capabilities of their suppliers, or their performance. Discussions often take place at project level, but departments rarely act as a single, joined-up customer when dealing with their consultancy suppliers. In some cases, suppliers are better informed about the consultancy work done at a department than the department itself.30 19. There was an increase in the value of central government business for the top 15 suppliers in 2004 and again in 2005.31 At the time of the C&AG’s Report, estimations suggested that small and medium sized firms accounted for less than half of the consultancy spend in central government, despite often being better placed than larger firms to provide specific expertise.32 Between 2003 and 2005, central government reduced its total spend on consultants, indicating that the top 15 suppliers have increased their share of the central government consulting market.33 OGC makes available to departments financial, contract and strategy information on some consulting suppliers, however of these, only one is in the top five and only four are in the top 10.34 20. In 2003 OGC identified use of incentivised contracts as an area to improve.35 But still only 1% of central government consulting contracts are paid this way. Time and materials remains a common form of payment.36 Incentive and fixed price payment mechanisms can help control costs and formalise the joint objectives between clients and consultants. The different payment options require a strong understanding of the project’s objectives, outputs, outcomes, risks, and approach. For example, in fixed price arrangements, public bodies need to be clear on how to deal with changes in scope; in incentivised ones, they may need to incorporate potential price variations into their financial planning. 21. Departments do not have adequate controls on awarding contracts by single tender which means departments do not get the benefits of competition such as better prices and a

29 30 31 32 33 34 35 36

C&AG’s Report, para 1.9; Qq 1, 62, 110–111 C&AG’s Report, para 3.2; Q 104 Qq 7, 65 C&AG’s Report, para 2.11 C&AG’s Report, para 2.10 C&AG’s Report, para 3.4 Ibid C&AG’s Report, para 2.15, 2.16; Qq 63, 68–70

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broader range of ideas.37 Of the C&AG’s case study departments, four rated as having only made ‘some’ progress and one as minimal or patchy progress in this category.38 22. It is important for departments to create the right environment to make a consultancy project a success and to invest in getting their staff fully engaged with consultancy projects.39 Projects may fail to deliver the expected benefits when there is little incentive for departmental staff to make the project a success.40 Fewer than half of central government organisations consult with the responsible senior manager involved in the consulting projects on their satisfaction with the consultants, and only 64% collect this information from project staff.41

37 38 39 40 41

Q 90 C&AG’s Report, Figure 2 C&AG’s Report, Supporting Paper I, Para 4 C&AG’s Report, Supporting Paper I, Para 2 C&AG’s Report, Para 2.18

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Annex: Key terms used in the Report
Consulting: Work is defined as ‘consulting’ if it has two characteristics. First, individuals or companies are engaged to work on specific projects that are outside the client’s business as usual, and there is an end point for their involvement. Second, responsibility for the final outcome of the project (for example achieving cost savings or improving quality of service) largely rests with the client. As such, consulting is distinct from ‘outsourcing’ or ‘staff substitution’. Framework agreement: A framework agreement is a general term for agreements with suppliers which set out terms and conditions and standard prices under which specific purchases can be made throughout the term of the agreement. Fixed price: Refers to contracts whereby the supplier receives payment based on a fixed price agreed at the project outset. Flat rate expenses: Refers to expenses that are charged at a set amount per period or as a percentage of fees, without matching or validation against actual expenses incurred. Incentivised contracts: Refers to contracts where a proportion of the payment is based upon their performance. For example payment may be linked to delivery of products against an expected timeline throughout the project or linked to the time taken to complete the project. Time and materials: Refers to contracts whereby payment is based on the time worked rather than on the production of specific output.

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Formal Minutes
Monday 4 June 2007 Mr Edward Leigh, in the Chair Mr Richard Bacon Mr Ian Davidson Mr Philip Dunne Mr Sadiq Khan Draft Report Draft Report (Central government’s use of consultants), proposed by the Chairman, brought up and read. Ordered, That the draft Report be read a second time, paragraph by paragraph. Paragraphs 1 to 22 read and agreed to. Conclusions and recommendations read and agreed to. Summary read and agreed to. Resolved, That the Report be the Thirty-first Report of the Committee to the House. Ordered, That the Chairman make the Report to the House. Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134. [Adjourned until Wednesday 6 June at 3.30 pm. Mr Austin Mitchell Mr Alan Williams Mr Don Touhig Derek Wyatt

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Witnesses
Tuesday 6 February 2007
Mr John Oughton, Chief Executive, Office of Government Commerce. Ev 1

List of written evidence
Office of Government Commerce Ev 19

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List of Reports from the Committee of Public Accounts Session 2006–07
First Report Second Report Tsunami: Provision of support for humanitarian assistance Improving literacy and numeracy in schools (Northern Ireland) Collections Management in the National Museums and Galleries of Northern Ireland Gas distribution networks: Ofgem’s role in their sale, restructuring and future regulation HC 25 (Cm 7018) HC 108 (Cm 7035)

Third Report Fourth Report Fifth Report Sixth Report

HC 109 (Cm 7035) HC 110 (Cm 7019) HC 111 (Cm 7018) HC 112 (Cm 7019) HC 133 (Cm 7020)

Postcomm and the quality of mail services Gaining and retaining a job: the Department for Work and Pensions support for disabled people Seventh Report Department for Work and Pensions: Using leaflets to communicate with the public about services and entitlements Eighth Report Tackling Child Obesity—First Steps Ninth Report The Paddington Health Campus Scheme Tenth Report Fines Collection Eleventh Report Supporting Small Business Twelfth Report Excess Votes 2005–06 Thirteenth Report Smarter Food Procurement in the Public Sector Fourteenth Report Ministry of Defence: Delivering digital tactical communications through the Bowman CIP Programme Fifteenth Report The termination of the PFI contract for the National Physical Laboratory Sixteenth Report The Provision of Out-of-Hours Care in England Seventeenth Report Financial Management of the NHS Eighteenth Report DFID: Working with Non-Governmental and other Civil Society Organisations to promote development Nineteenth Report A Foot on the Ladder: Low Cost Home Ownership Assistance Twentieth Report Department of Health: The National Programme for IT in the NHS Twenty-first Report Progress in Combat Identification Twenty-second Report Tax credits Twenty-third Report The office accommodation of the Department for Culture, Media and Sport and its sponsored bodies Twenty-fourth Report Ofwat: Meeting the demand for water Twenty-fifth Report Update on PFI debt refinancing and the PFI equity market Twenty-sixth Report Department for Work and Pensions: Progress in tackling pensioner poverty—encouraging take-up entitlements Twenty-seventh Report Delivering successful IT-enabled business change Twenty-eighth Report ASPIRE—the re-competition of outsourced IT services Twenty-ninth Report Department of Health: Improving the use of temporary nursing staff in NHS acute and foundation trusts Thirtieth Report The Modernisation of the West Coast Main Line Thirty-first Report Central government’s use of consultants

HC 157 (Cm 7020) HC 244 (Cm 7076) HC 245 (Cm 7020) HC 262 (Cm 7076) HC 346 HC 357 (Cm 7077) HC 358 (Cm 7077) HC 359 (Cm 7077) HC 360 (Cm 7077) HC 361 (Cm 7077) HC 64 (Cm 7077) HC 134 (Cm 7077) HC 390 HC 486 HC 487 HC 488 HC 286 HC 158 HC 169 HC 113 HC 179 HC 142 HC 189 HC 309

The reference number of the Treasury Minute to each Report is printed in brackets after the HC printing number

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Oral evidence
Taken before the Committee of Public Accounts on Tuesday 6 February 2007
Members present: Mr Edward Leigh, in the Chair Mr Richard Bacon Annette Brooke Helen Goodman Mr Sadiq Khan Mr Austin Mitchell Mr Don Touhig Mr Alan Williams Mr Iain Wright

Sir John Bourn KCB, Comptroller and Auditor General, Keith Davis, Director, National Audit OYce, were in attendance. Mr Marius Gallaher, Alternate Treasury OYcer of Accounts, HM Treasury, was in attendance. REPORT BY THE COMPTROLLER AND AUDITOR GENERAL CENTRAL GOVERNMENT’S USE OF CONSULTANTS (HC 128) Witness: Mr John Oughton, Chief Executive, OYce of Government Commerce, gave evidence. Q1 Chairman: Welcome to the Committee of Public Accounts, where today our hearing is on the Comptroller and Auditor General’s Report Central government’s use of consultants. We welcome back John Oughton who is Chief Executive at the OYce of Government Commerce. I was sent a book by a man called David Craig called Plundering the Public Sector. I sent this book to Sir John and he has mentioned it in his Report in paragraph 1.9. He says: “David Craig lists ‘techniques [that consultants] have used when working in the British Public Sector’: not passing on travel rebates to clients; charging for the relocation of staV; billing clients for time not worked; adding overheads to charges; charging flat rate expenses and keeping what is not spent; charging for people at a grade above their level; and tax avoidance”. Have you read this book? Mr Oughton: Yes I have. Q2 Chairman: What do you think of it? Mr Oughton: It is an interesting one-sided view of the Government’s use of consultants. The descriptions that you have just used I recognise as being present, but I also recognise, as the NAO Report itself does, that there is good performance as well as less good performance. Mr Craig’s book puts only one side of the story. Q3 Chairman: If we look at paragraph two, page four of the Report, which is an overview, we can see that public sector spending on consultants increased by a third from £2.1 billion to £2.8 billion over the past three years. You have 550,000 civil servants, have you not? Why do you need to increase spending on consultants by quite so much when you employ half a million people already? Mr Oughton: You will see that the breakdown of the figures shows that in central government— Q4 Chairman: I knew you were going to say that. Mr Oughton: I am sorry; I am very predictable.

Q5 Chairman: Go ahead, get your point out. Mr Oughton: The point is this. In central government there are indeed some 500,000 civil servants; that number is now starting to decline and the spend on consultancy in central government is declining. You will see from the figures that the major increases in spend are in local government and in the National Health Service and those are accounted for by the implementation and delivery of major programmes, so I am not surprised by the overall figures.

Q6 Chairman: Okay, if you are going to make this argument, let us look at this paragraph. It says that the decline can be attributed to three departments rather than a wider trend. Mr Oughton: That is certainly true, that is how the figures come out, but overall in central government the cost of consultants is declining. That happens to be spread across some departments and not others, but overall the figure is declining.

Q7 Chairman: In the past three years £7.2 billion of taxpayers’ money has gone to big consultancy firms. Are you really happy with £7.2 billion of taxpayers’ money going to a few big consultancy firms? Mr Oughton: I am happy with that, Chairman, so long as the business is being placed on a sound value for money basis and so long as we have good mechanisms for ensuring that we get value for the consultancy.

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Q8 Chairman: That leads me precisely to my next point. If we look at paragraph four and the first bullet, we see that nobody apparently knows routinely how much central government spends on consultants. Mr Oughton: The Report itself does show a figure for spend on consultants in central government and I have agreed with the Comptroller and Auditor General that that is an accurate figure. Q9 Chairman: It says here, in the Report that you have agreed, “However this activity is no longer carried out as the information received from departments was inconsistent and incomplete”. What I have to put to you is that we had a hearing, we asked you to get this information, the data was poor and you have given up on the job. It was too hard. Mr Oughton: I would not put it quite like that Mr Chairman. Q10 Chairman: Why does the paragraph here say that this activity is no longer carried out? Mr Oughton: That activity is no longer carried out because, if you look at the material later in the Report which describes the OYce of Government Commerce’s response to the 2002 PAC report, you will see that, in terms of collection of information, we collected data on three separate occasions. The whole point about collecting data was to establish a mechanism, a routine in departments whereby departments themselves collected that information. There was no particular reason then to hold that information centrally, if the systems were operating in departments. In good departments, and you see a range of them spelled out here in the case studies in the five departments covered, in the good departments that information is adequate, in other departments there is still more to do. Q11 Chairman: There is. If we look at page 26 “Progress made by the OYce of Government Commerce”, this action that you have taken in response to this Committee’s recommendations, we see there also that in 2003 you abandoned your work with departments on their action plans. Mr Oughton: I would not put it quite in those terms. What we did, following the PAC Report, was to set up arrangements with departments and they are described in more detail in figure 12 on pages 28 and 29. We set up arrangements with departments not only to collect information but also to develop systems and develop better approaches. Our judgment was that it was indeed diYcult to collect consistent data on spend on consultants, but we did judge that progress was being made on embedding better approaches to securing consultancy. As the NAO Report itself says in paragraph 3.2, good progress has been made in implementing some of the recommendations, but there is still much work to be done in other areas and I accept that judgment.

Q12 Chairman: This is not going to be your last hearing in front of us; there are still further delights to come. We would like to have a little legacy session with you; a bit like the Liaison Committee is going to have with the Prime Minister, but with you. Mr Oughton: I think I am closer to my end date than perhaps he is. Q13 Chairman: So you know the date. Mr Oughton: I know my date. Q14 Chairman: Would it be unfair to put to you that you were just swamped? Your problem with your department, no criticism of you personally, is that you have responsibility without power and you were swamped with so much information, which has been the basis of the questions I have put to you, that the OGC is now being restricted to high levels of strategic procurement. Would that be a fair comment? Mr Oughton: It would not be entirely fair. Q15 Chairman: Explain why not. Mr Oughton: I think you have a copy of the Financial Secretary’s document Transforming Government Procurement which was published on 23 January. You will see in that document that the Government wish to move forward by focusing their eVorts on procurement in central government, that is simple procurement of commodities, complex acquisition of major programmes and projects, the sorts of thing that are supported here and the management of the civil estate. To do that, as the document makes very clear, the Government are giving the OGC new powers; very much, if I may say so, working with the grain of your encouragement to us in having more assertive powers to mandate and direct and intrude on the actions of departments to encourage best practice. Q16 Chairman: Let us just look at your own department. In this supporting document, Supporting Paper III, figure three, page five—we can pass you a copy—it says in the OYce of Government Commerce you have tripled your own use of consultants; this is where you do have power. You have tripled your use of consultants from 2003–04 to 2005–06 and are now spending £11 million. Why is that? Mr Oughton: That is correct. You will see set out in the Report, and also in the NAO’s accompanying document of December from the Management Consultancies’ Association, a number of justifications for using consultants. One of them is to bring in specialist skills that do not exist inside Government, another is to surge rapid implementation of new policies when they are established. The reason for increases in the OGC’s own spend relates really to two main areas. First is our implementation of the Gershon eYciency programme as a programme where in 2005–06, in the first year of that programme, we spent £1.3 million. That was clearly money we were not spending before.

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Q17 Chairman: So it is largely due to Gershon. Mr Oughton: This year, that figure has reduced to £400,000. More significantly, in order to make progress on delivering the £6 billion of procurement eYciency savings that Sir Peter Gershon expected, we invested some £6.5 million in procurement eYciency work. That figure has now reduced to just over £2 million and we are running ahead of our target in meeting that £6 billion, so that is money well spent. Q18 Chairman: May I just ask you one more question which is on this figure one which is on page seven. If you look at that figure, it is quite an interesting little figure. You can see that when in the consultancy industry their income starts going down from the private sector, hey presto, the income from the public sector starts going up. Are you a soft touch for the consulting industry to tide them over lean times? Mr Oughton: I do not think so. Q19 Chairman: It is an interesting graph though, is it not? Mr Oughton: It is an interesting graph. We could have a long and deep discussion about the incidence of Government’s investment in the last three public spending rounds in major capital projects being delivered and that has generated activity in the economy at a time when the private sector economy was perhaps not in such good shape. If you were to talk to management consultants who come to talk to me, they would say that the Government are not a soft touch. We have had very, very strong representations made to us about our procurement under the new framework agreements which have been regarded as a very tough approach, significant reductions in overall cost of some 30% compared with previous average figures and a tough selection process, which has meant not all of the major consultancies have got through the gate. I do not think they would regard us as a soft touch. Q20 Mr Touhig: You came before us on 27 November when we were examining Delivering successful IT-enabled business change. In answer to a question from me you said you report to the Prime Minister periodically, quarterly, on key mission critical projects. Mr Oughton: That is correct. Q21 Mr Touhig: Have you discussed with the Prime Minister the 33% increase in the amount of spending on consultants? Mr Oughton: No, I have not raised that as a major issue in my reports. Q22 Mr Touhig: Has he raised it with you? Mr Oughton: No, he has not. Q23 Mr Touhig: Any reason why? Mr Oughton: Because I regard the support that is given to these major programmes and projects as necessary for their delivery. Therefore I would regard that as a perfectly acceptable spend.

Q24 Mr Touhig: The key phrase you used is key mission critical projects. This kind of growth, 33%, is probably the biggest growth area in Government, is it not? Mr Oughton: It is significant spending, but it is intended to deliver on successful projects. You will recall that, when discussing the NAO’s Report on delivering successful IT projects in the autumn of last year, we drew attention to a number of successful programmes, the pension credit programme, payments modernisation in the DWP, the Transport for London congestion charge programme, all of which were supported throughout by consultants. I regard that as a good reason for spending money: to support the successful delivery of major programmes. Q25 Mr Touhig: Are consultants considered to be greater experts than people we have employed in the various government departments? Mr Oughton: In some cases, in some skills, yes. In the case of the Transport for London congestion charge, PWC supported the procurement work, Deloittes supported as a management consultant, there was PR support and of course Capita now run the system. All of those investments were necessary to deliver that project which is running very successfully. Q26 Mr Touhig: Forgive me, but I am always wary of experts. An old friend once said to me: “Beware of experts, they built the Titanic; ordinary folk like thee and me, we built the Ark”. Why is there not a greater use perhaps of departments’ own core staV, rather than bringing in consultants? Mr Oughton: There is a use of departments’ core staV. Q27 Mr Touhig: There is some use. Mr Oughton: There is some use, but in cases where there is either a shortage of skill—remember it is not that the departments do not have skill, but it is the case that we are attempting to deliver a very large number of major programmes and projects in support of the Government’s modernisation agenda—or there is more than one thing to be done at any one time, it is important that we have suYcient resource to support each of those programmes and projects. I could, in another context, say to you that one of the major findings out of the gateway review process is that one of the risk factors to the successful delivery of programmes is under-resourcing them. So it is very important that we do have suYcient resource in order to do these well. Q28 Mr Touhig: But you have worked for some considerable time in the MoD and you know they have had considerable success. In fact, if we look at page five of the Report, the bullet point halfway up the page says “The Ministry of Defence, for example, has a relatively well-developed process for comparing using internal staV versus consultants on projects. As an illustrative example, the average

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daily cost of a Ministry of Defence internal consultant is £550 and an external consultant £1,245”. Is that not better value for money? Mr Oughton: That is very good value for money and if those internal consultants exist, then of course they should be used. My point is that in cases where we do not have suYcient skilled resource internally, if we go out to the marketplace to secure it, we must ensure that we secure it on the best value for money terms. I recognise the £1,245 average figure. I could also say to you that in the recent procurement that we have undertaken to set up new frameworks, we have managed to reduce the average daily rate for consultancy to £930, so we are making progress in that direction. Q29 Mr Touhig: Some progress, but not enough. Should departments not as a matter of course consider whether using their own core staV to solve a problem is better than rushing oV and employing consultants? Mr Oughton: Yes, I agree with that and one of a number of actions that I have under way that follow from this Report is that I have asked my oYcials to explore whether we can establish a common checklist to be used in all cases where departments are making proposals, both to ministers and Permanent Secretaries, for approval of consultancy spend to ensure that a number of questions are being asked in every case. Q30 Mr Touhig: So you are taking that initiative now and saying to all departments across Whitehall that before they look at consultants they should look at their own core staV who have the talents. Mr Oughton: I have asked my staV to develop a checklist that we could then put to departments which would cover using internal staV rather than consultants, using specialist contractors who are less costly than the traditional consultancy firms, looking at alternative payment mechanisms to ensure we get good value for money and we are not just paying on the basis of time and materials, looking at IPR issues and looking at opportunities to collaborate across government departments so that we buy once rather than many times. That is a whole agenda that we are trying to develop. Q31 Mr Touhig: Some progress? Mr Oughton: Yes. Q32 Mr Touhig: Nevertheless the Report does point out, does it not, that there has been a lack of developing good practices recommended by this Committee, by the National Audit OYce and by your own OYce? Mr Oughton: Yes, that is fair comment. Development and then adoption of best practice across Government go more slowly than all of us would like. Q33 Mr Touhig: You are head of the OGC and they are not taking much notice of you either, are they?

Mr Oughton: Which is one reason why it is very important that, in the context of the Transforming Government Procurement document which was published last month, new powers are coming to the OGC, in a sense to oblige and enforce compliance with best standards across government departments. This is an approach that has been signed up to across Whitehall before the document was launched. Q34 Mr Touhig: On the discussion we had last time, I did point out to you that in my experience as a minister in this Government, when the Prime Minister became engaged in something, something happened. Perhaps you ought to raise it with the Prime Minister at one of your quarterly meetings and then we would get some across-Whitehall directions and be able to improve on what is happening at the present time. At the moment it seems to me the NAO is ignored, we are ignored, you are ignored, government departments are giving us the old two fingers, are they not really? Mr Oughton: I would not put it like that. Development and adoption of best practice are moving more slowly than we would like. There is some evidence of it, which the report fairly and correctly identifies. We can move faster with the new powers that are coming to OGC as the result of last month’s document and I look forward to exercising them. Q35 Mr Touhig: Until 31 March. Mr Oughton: My successor will look forward to exercising them also. Q36 Mr Touhig: Have you thought of creating your own in-house cross-government consultancy, drawing on people who have core skills and talents that you could access across government to create a distinct department or distinct team that could compete with outside consultants? Mr Oughton: We have operated with some internal consultants as full-time employees of OGC on our books and we have used those consultants to support development of our own products and services inside OGC. Q37 Mr Touhig: The Report does point out on page seven that departments “. . . do not regularly plan for and carry out the transfer of skills from consultants to internal staV”. The Report does not quite sustain what you are saying. Mr Oughton: What I am saying is that within OGC we have indeed considered and we have had a group of internal full-time employees of OGC who are used as consultants. The issue for me, however, as I look at how to use our resource in the future, is whether we are getting best value out of those internal consultants. They are essentially an overhead unless they are engaged in productive activity. What I have decided to do, as a result of the Transforming Government Procurement outcome and the zerobased review of OGC, is to move to an arrangement whereby, rather than having consultants full time on

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my books employed for 365 days a year, I call oV consultants on a daily basis from my wider pool of existing strategic consultants— Q38 Mr Touhig: But there would be enough, if you created a distinct team, to work across Government. The Chairman pointed out the graph where the private sector work of these independent companies has gone down and the public work has gone up. One of the examples I found from local government, and I touched on this in previous times, is that having our own local government DLO meant that other people had to compete very hard for the business and that was quite eVective. It kept prices down and made sure there was good competition. Mr Oughton: I accept that and it is very important, as we did as we went through the market testing programme some 10 or 15 years ago, to be able to compare in-house costs and external costs and the answer does not always come out the same way. Q39 Mr Touhig: Well in the short time you have left, Mr Oughton, if you do take up my idea and set up a distinct department, I shall waive my £1,245 a day fee for the idea and give it to you as a parting present. Mr Oughton: Very generous; that is quite an incentive. Q40 Chairman: It is cheaper than £7.3 billion anyway. Mr Oughton: Indeed. Q41 Annette Brooke: Could we look at the traYc light page, page 8? The Home OYce seems to be a particularly poor performer. Have you identified any factors behind particular poor departmental performance? Mr Oughton: I would draw attention to the same issues that emerged in the Home OYce’s departmental capability review which was published last summer. There has been an issue about overall capacity in the Home OYce which the Secretary of State and the Permanent Secretary and his team are addressing. There have been issues about prioritisation, there have been issues about management of the size of portfolio, the number of major programmes and projects that are being run in that single department of state. What you are seeing coming through here is the reflection of a very heavy agenda in one department and a department that is trying to make progress on a number of fronts all at one time. I am not surprised that those traYc lights are mixed. Q42 Annette Brooke: Is this a department, because it is not fit for the purpose, that has actually to reach out and pull extra staV in? Mr Oughton: That is not a term I would use to describe the Home OYce. It is a department with challenges and it is clear from what has been said publicly that it is facing up to those challenges. We have very close relationships with the permanent secretary and his central team who are engaged in that change programme. They are a good team and they are making progress. We are supporting them

with some specialist skills of our own to help them make progress on the programme and project management issues as part of this. Q43 Annette Brooke: Can you comment a little bit on the Department for Education and Skills which actually, in terms of reds, seems to be the worst department here? I notice later on in the NAO Report that quite a lot of improvement is referred to, but is this report here not pretty alarming for the Department for Education and Skills? Mr Oughton: It is again a very mixed picture. There are several reds, as you say. On page 25 of the Report, where there is a more detailed analysis of the department, that does show some improvement. I will say two things about DfES. Q44 Annette Brooke: Is it making enough improvement relative to other departments? Mr Oughton: Clearly not yet. There is clearly more to be done. Q45 Annette Brooke: What are you doing to make it catch up with the other departments? Mr Oughton: What we are doing is supporting the work that they are doing on programme and project management. They have had very strong leadership on programme and project management in the department; that has been good. However, some of the programmes they are managing are very complex and are very challenging, so the help we have been giving them is around the skills agenda. There is strong support from David Bell, the relatively new Permanent Secretary. Q46 Annette Brooke: Is that not a bit of a misnomer, having to help the Department for Education and Skills with its skills agenda? Mr Oughton: DiVerent sort of skills I would say. Q47 Annette Brooke: DFID actually comes out as a top spender in proportionate terms and presumably DFID is not actually buying in lots of IT consultancy, so why cannot people be trained inhouse particularly for DFID projects? Surely we have a great deal of expertise in that field? Mr Oughton: There is great deal of expertise in DFID and DFID is a well-rated department, not just in UK terms but it is a top-rated aid ministry worldwide. It is recognised as being the world leader as an aid and development ministry. The point about DFID is this. Many of its programmes are delivered abroad. They are delivered in-country, they are supported often by local support rather than UKbased support and that has cost benefits too. DFID has to bring in skills from a number of diVerent places, some from within the department but some from outside, to deliver major aid programmes. How do they rate in terms of their programme and project management? In my view they rate strongly. They have developed some of the best of the techniques for delivering aid programmes that the World Bank and the other development banks have developed. They are very good at programme and project management, they are very good at

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evaluation of benefits and those are indeed strengths that I would like to see spread more widely across the way we do business in Government. Q48 Annette Brooke: So you do not think that DfID has too many lessons to learn. Mr Oughton: Relative to other departments, no. They are a strong performing department, certainly in the areas where I have dealings with them, and they are eVective at delivering their aid programmes abroad. Q49 Annette Brooke: Can you just tell us a bit more about applying lessons across departments? There does seem to be, from my reading of the report, almost an inability to pool all these lessons. You are saying there is really good practice in some departments. What is it that is the barrier to sharing good practice and making progress on all fronts, as it were? Mr Oughton: The Chairman invited me to a reflective session at some stage before the end of March. One reflection now, if I may? There is still quite a strong resistance to ideas that come from elsewhere and this is not just a public sector issue, it is a private sector issue as well. Other people’s ideas are never treated as warmly as one’s own; that is just human nature. Breaking through those barriers and encouraging the sharing of good practice and the adoption of good practice is a big issue. It is slightly reinforced by the system of, and this is very much a personal view, accountability that we have here, where each department is accountable for its own delivery and feels, rightly, very strongly that it must do the best job it can. That rather discourages them from looking at other people’s ideas and other ways of undertaking business. We can shift that if we are good at demonstrating what good looks like and frankly we can shift it if we move from quite a softedged encouragement and persuasion, which is rather the position OGC have been in for the last six years, to a much more frankly intrusive and demanding approach, which says there is no choice about whether you do best practice, you cannot choose not to. Frankly, why should anybody want to choose not to do good practice, you have to choose to do good practice if it exists and that is what we should be demanding of departments. Q50 Annette Brooke: Right. That was not really my question. It is almost as though the departments seemed to be waiting for you to issue the guidance because they were not getting on with it themselves. You on the other hand say it is diYcult to collect consistent information and it is not clear whether all the departments actually do a proper evaluation of the outcomes from the consultants. Who is actually going to do this job of telling them that they have to do better and how they can do better? Mr Oughton: It has been hard to collect some of the spend information and the report accurately reflects that. It is easier to collect examples of successful projects. Slightly earlier I referred to several in the NAO Report that were undertaken at the end of last year. So seeing successful outcomes is easier. What

is a bit harder, and the NAO Report is very fair about this, is disentangling the outcome in terms of the project as a whole from the outcome in terms of the support and the contribution the consultant has made to delivery of that project. It is absolutely true that we have not been systematic enough and comprehensive enough in post-project evaluation, the gateway five reviews that are supposed to be undertaken of benefits once a project is finished. As I explained to the Chairman and the Committee on a previous occasion, we are making progress by putting pressure on to increase the incidence of those final gateway reviews being undertaken, so we can learn the lessons from completed projects rather than just learning of the challenges of projects that are underway. Q51 Annette Brooke: May I just make a final comment? I take your point about disentangling the input of the consultants from the outcome of the whole project, but, as the Chairman said, we are talking about such large sums of money that I think you would say yes to me, that it is essential to do a proper evaluation of the actual success or otherwise of the consultants’ input. Mr Oughton: No question, the answer to that has to be yes and we should evaluate all projects when they are complete. Q52 Helen Goodman: In 1990 I was on the Energy Desk in the Treasury and a telegram came in from our embassy in Prague saying that they wanted advice on the energy market. S

Technology 7.2 of 10 on the basis of 2643 Review.