This is the eighth in a series of notes which provide more detail about, and comment on, the many attempts – some successful, most not – to ‘reform’ the UK Civil Service. It focuses on the suspension and subsequent reinstatement of three senior Department of Transport (DfT) officials following Virgin Rail's successful legal challenge to the award of the West Coast Main Line franchise to First Group.
West Coast Main Line Shambles
The performance of a small part of the civil service came under severe scrutiny when Virgin Group forced the Department for Transport (DfT) to withdraw its offer of the West Coast franchise to First Group, blaming civil servants for failures in economic and financial modelling and - it was hinted - for concealing the problems and/or giving too strong assurances to Ministers that all was well. See Note 1 below for further detail on the error. But the amazing thing was that no-one in DfT (including the whole of its senior civil service, and its Ministers) appear to have seriously challenged a clearly absurd decision. Modern railways summarised this decision as follows: '... as a deterrent, the Subordinated Loan Facility (SLF) has to be big enough to hurt the parent Group. Its aim is to make bidders think twice about winning franchises with over-optimistic premium profiles. DfT had set First Group's SLF at £190m. Virgin ... reckoned the First SLF should have been £600m. Another unsuccessful bidder thought [it should be] nearer £1bn.'
It turned out that there were several underlying causes of the fiasco, including the Government's attitude to civil service numbers and remuneration. The franchising process itself was clearly far from perfect. Mistakes may have been made by the numerous and expensive lawyers and consultants employed by the department. DfT may have cut the numbers of officials too much. And maybe we should be paying higher salaries to attract better skills and experience?
Indeed, Jonathan Portes made this interesting comment in his blog: "This decision was hardly uncontroversial or low profile - even leaving aside Virgin's sour grapes, many informed commentators clearly thought that First Group's revenue projections were hopelessly optimistic. So Ministers had months in the run up to the franchise award in August, and two months since, to require DfT senior management to explain to them - not with pages of numbers, but with convincing analysis - why this view, now apparently vindicated, was wrong. No remotely competent Minister would accept the explanation "That's what the model says" on an issue like this. So either they didn't ask the right questions, or they were incapable of understanding that they were getting the wrong answers. Neither interpretation reflects well."
And ex-Cabinet Secretary/Head of the Civil Service Lord (Gus) O'Donnell popped up to say that "the civil service was suffering in some areas where there are skills shortages - in the commissioning area, in the procurement area ... Some hard-headed commercial procurement staff were being lured away by bigger salaries in the private sector ... paying bigger salaries in the civil service was part of the answer and 'we should be prepared to do that' and 'having an arbitrary constraint like the prime minister's salary isn't helpful'. It is interesting to note, however, that he was entirely responsible for these matters until late 2011 and, although he probably felt that the UK's huge and rising debt burden meant that significant savings needed to be made, there was no sign that he opposed the detail of the way in which the cuts were being implemented across Whitehall.
Margaret Hodge, Chair of the House of Commons Public Accounts Committee, made a very sensible contribution on the Today programme on 4 October. Unlike Jonathan Portes, she didn't try to pin the blame on Ministers, nor did she agree with Lord O'Donnell that the answer was to increase the pay of civil servants. Instead, she pointed out that it was in practice almost impossible to find out where the blame lay for this and similar disasters and that the job of the civil service has changed a great deal over recent years, and attention needs to be paid to the way in which officials are trained and gain experience. [Comment: It is surely also necessary to question whether we are recruiting and promoting officials with appropriate attitudes to management - and especially project management - and to public accountability. A high proportion of the most senior civil servants are excellent courtiers and behind-the scenes politicians, but they do not find 'management' or 'delivery' to be at all interesting or personally rewarding.]
Here are extracts from Mrs Hodge's interview:
[This episode] exposes ... that the present conventions on accountability between the civil servants and Ministers to Parliament and the public [are] not working. Today, the job of a civil servant is much more delivering programs and that requires a different set of skills. [There is some truth in the suggestion that senior officials are not paid enough, but] they enter the public service because they want a different sort of job. They have a different set of values. Civil servants are never left in the job long enough. The way that you climb the greasy pole in the civil service is that you change your job every couple of years. We need to leave people in post so that they take proper responsibility for the very difficult and complex jobs that they have to do. And then we have to open up this issue of accountability so that they cannot hide behind lack of accountability for not telling us what the outcomes are. ... if we had proper accountability it would immediately raise the game.
Then, writing in The Times, Mrs Hodge said:
The Department for Transport has had six permanent secretaries since 2001 and their accountability also stops when they change jobs. So Mr McLoughlin and the new Permanent Secretary have shifted the blame to anonymous, middle-ranking civil servants who cannot speak out because they are accountable only to ministers, not Parliament or the public. That's not good enough. We need to understand clearly what ministers and, separately, what civil servants are responsible for. And they must be accountable to Parliament and the public. That's why Commons committees should have the power to call individual civil servants to explain their actions ... The old convention of ministerial accountability has become a charade that allows incompetence and waste. Transparency is the best guarantee of efficient, effective public services. If we can truly hold civil servants and ministers to account, nailing down who was responsible for this debacle or that mistake, the sooner we can have better government, better value for money and better public services.
Mrs Hodge was supported by her colleague Bernard Jenkin, Chair of the Public Administration Select Committee. Indeed, writing in The Financial Times, he went further and argued that there should be a Commission which would make wide-ranging recommendations concerning the future of the civil service:
... successive governments have ended up with the civil service for which they are responsible. Many recent failures of government stem from a tendency to think less about the long term than about the daily news agenda. It has been sad to see eminent and able figures who have devoted their lives to public service caught up 'in the thick of it'. Now the recriminations threaten to turn a series of expensive and embarrassing mishaps into a crisis of governance. A trend to move top people around departments, intended to aid cross-departmental working, has led to permanent secretaries who are too often jacks of all trades and masters of none. Only three of 16 departments has the same permanent secretary as at the election. At the Department for Transport, they are on their third permanent secretary. Little wonder things go awry. I propose that parliament should ... establish a carefully chosen commission on the future of the civil service to lay out a comprehensive programme of reform, with cross-party support and the endorsement of parliament as whole. Its recommendations would be a foundation for future stability. At present, reform, however right and necessary, appears to be a hasty response to political pressures and frustration. We can't go on like this.
The focus then moved back to the question of whether DfT had been over-zealous in the way it had reduced its headcount whilst also cutting back on its use of consultants. First up was Sam Laidlaw who had been asked to lead an independent inquiry into what had gone wrong. As well as clarifying the process errors ('lack of transparency .. bidders .. not provided with adequate information ... amount of subordinated loan facility (SLF) ultimately required by DfT .. not determined in compliance with DTp's own guidance'), Mr Laidlaw's interim report noted that:
- There is a body of evidence that strongly suggests that the DfT's approach .. was developed late, in a hurry and without proper planning and preparation ..
- .. there are firm indications that the organisational changes and structure of the DfT resulted in a lack of clarity around allocation of responsibility for the ICWC refranchising competition. As a general observation, the organisation has undergone a significant reduction in size accompanied by frequent changes of leadership at a time when the DfT's agenda has been expanding. In particular:
- a matrix organisational structure was put in place at the DfT in late 2010, with full implementation of the organisational redesign in May 2011. This resulted in the splitting of rail franchising across the Director-Generals, instead of just one;
- there was a lack of continuity in senior leadership roles within the DfT and the continuity in oversight of the ICWC franchise process was impacted by the fact that the Senior Responsible Officer for the franchise programme changed three times throughout the course of the competition;
- within the ICWC franchise project team, there was a lack of clarity in roles and responsibilities;
- a number of senior, experienced individuals had left the DfT prior to important stages of the ICWC franchise process competition and key members of the ICWC franchise team were relatively junior and inexperienced in comparison with the bidder representatives they were facing;
- in implementing substantial costs savings, the DfT had significantly reduced both its headcount and its use of external consultants and specifically financial advisers to support the refranchising programme; and
- there were a number of other significant projects running concurrently with the ICWC franchise competition that resulted in resource at the DfT being stretched.
- a matrix organisational structure was put in place at the DfT in late 2010, with full implementation of the organisational redesign in May 2011. This resulted in the splitting of rail franchising across the Director-Generals, instead of just one;
Governance Framework
A number of different committees and boards performed governance functions in relation to the ICWC franchise process. Serious concerns have emerged as to the efficacy of these bodies. In particular:
both as a matter of form (in the drafting of the relevant terms of reference) and in practice, for certain of these bodies there is ambiguity as to their precise functions, authorities and interrelationships; for example, there appears to have been a lack of clarity around which body (if any) was responsible for approval of determination of SLF levels; ..
IfG Report on Transforming Whitehall
Mr Laidlaw was followed by the Institute for Government which published a report in November 2012 on 'Transforming Whitehall: Leading major change in Whitehall departments'. The IfG reported that 'the DfT was among four departments that made the quickest reductions. It cut its workforce by 22 per cent, with the process largely completed in less than a year .. To some in the department, the change seemed to be too deep, too fast .. Some departments have 'salami-sliced' services without establishing a clear direction for the future .. In attempting to deliver such deep reductions, Whitehall is seeking to achieve a feat that has no previous parallel in central government. However, the experience of similarly radical 'change programmes' in the corporate world is not encouraging'.
The IfG also highlighted the large turnover of permanent secretaries since the coalition came to power, pointing out that only two remained in the post they held at the last general election and some have moved several times. Centrally imposed restrictions on paying for consultants also meant departments had 'virtually no access to outside expertise' while the traditionally 'siloed' nature of departments was 'holding [them] back from realising savings and working more effectively across boundaries'.
But the report of course covered much more ground than is suggested in the previous two paras. Anyone seriously interested in managing change in Whitehall will wish to read the whole report, but the Executive Summary sets it up nicely - and rather worryingly:
A revolution is underway in Whitehall. Confronted by budget cuts on a scale far greater than any since the end of the Second World War, a radical policy agenda and supporting a coalition government, Whitehall is facing enormous challenges. Following the 2010 Spending Review, most departments faced a blunt fiscal challenge with huge savings required at pace. Departments - except for health and international development - saw an average overall settlement reduction of 19% in real terms over four years, and all departments committed to at least a 33% reduction in their administrative spending. Departments have moved rapidly to deliver savings and are ahead of the planned 'run rate'. In August 2012 Francis Maude, Minister for the Cabinet Office, announced independently audited savings made by central government of £5.5 billion (bn) in the last financial year, which came on top of £3.75bn the year before.
Overall the Civil Service has shrunk by over 54,000 full-time equivalents or 11% since the 2010 Spending Review. It is now the smallest it has been for almost 70 years. To put this in context, Margaret Thatcher attempted to reduce the size of the Civil Service by a little over 10% in four years. This time round the Civil Service has shrunk by at least that much within 18 months. Many departments are now fundamentally changing how they work to maintain their effectiveness and, in some cases, build whole new capabilities. Departments have restructured, introduced new operating models and developed major policy initiatives and programmes such as Universal Credit. A critical turning point: Whitehall is at a turning point. The rapid pace of change to date belies a deeper fragility and challenges ahead. Two out of three large change programmes fail to achieve their aims in the private sector and there are reasons to think Whitehall may fare worse:
- only 27% of staff across the Civil Service think that change is well led and managed in their department
- there is limited experience to draw on of leading change on this scale
- centrally imposed restrictions mean that departments have virtually no access to outside expertise.
Embedding this round of changes and making further savings, without severely undermining morale and capability, places a huge onus on leaders throughout Whitehall. The way they lead these major changes will in large part determine whether or not Whitehall emerges not just smaller, but more confident and effective in years to come. The stakes are high, not just for the Civil Service and the Coalition, but also for the public. Success will help ensure that high-quality services can be provided at a lower cost than before. Failure will mean not only a demoralised Civil Service but inadequate services and a dissatisfied public. But at present there is no roadmap for leaders to follow. There is virtually no relevant literature or documented examples of how to lead major change in central government departments. Moreover, no-one else, either in government or beyond, has attempted to learn the lessons from change so far in Whitehall or to set out the challenges and the risks that lie ahead. This report attempts to bridge that gap, drawing on our independent research.
West Coast Main Line - Mr Laidlaw's Final Report & NAO Report
Pretty much the same points were repeated in respect of the WCML errors when Mr Laidlaw's final report, and an NAO report, came out in early December 2012. Some civil servants had made inaccurate reports to Ministers but also, according to the FT: 'Swingeing cuts at the Department for Transport, together with rushed implementation of changes to rail franchising policy, lie at the heart of the West Coast rail fiasco ... The DfT was one of the first departments in Whitehall to implement staff cuts, accompanied by a wide-ranging reorganisation in 2010, as well as a decision by ministers to push through significant changes to rail franchising policy. ... Both the NAO and Laidlaw reports reveal staff cuts of up to 30 per cent at the department, with experienced managers, including the head of rail policy, axed. ...
The reports came amid broader Whitehall concern about the impact of budget cuts on the civil service. Peter Riddell, director of the Institute for Government, a think-tank, warned: 'This is possibly an early glimpse of what happens when parts get stretched too far doing too many things at the same time.'
Comment: The Laidlaw/IfG analysis diverted the criticism away from the three officials who were immediately suspended after the problems came to light (and later reinstated, yet another sign of dreadful senior management at DfT). But responsibility nevertheless remained very unclear. It is easy - and to some extent no doubt correct - to blame Ministers for requiring such rapid and poorly planned cost saving. But should senior officials have accepted Minsters' instructions? And surely officials were to blame for the organisational and senior management failings identified by Sam Laidlaw.
Labour Party Policy
The Opposition, unsurprisingly, were not very focused on civil service issues at this stage of the electoral cycle. But Jon Trickett MP did pick up on some of the issues associated with the WCML shambles when he made a speech in May 2013 promising in particular to address inward secondments and the civil service/private sector 'revolving door'.
Notes
The underlying WCML problem seems to have been as follows. DTp's franschising model produces a ready reckoner which is given to the bidders and tells each bidder the financial implications of their respective forecasts of how much they think they can increase revenues. In particular, it tells a bidder how much capital its otherwise thinly capitalised Train Operating Company (TOC) would have to hold as a protection for taxpayers against the risk that in the course of operating the franchise the TOC went bust or risked going bust. But DfT discovered that the capital protection being offered was far too little because of assumptions in the model about what would happen to inflation and passenger numbers - which in turn meant that the ready reckoner given to bidders was wrong. The department's mistakes meant that all the bids were offering far too little protection to taxpayers against the possibility of a franchise holder being unable to hold the franchise for the full 15 years. (Except possibly Virgin who, it is reported, realised the mistake and corrected for it - and told DTp who are said to have ignored them.)
Even worse, as Henrietta Royle has pointed out, it is standard practice for an experienced expert, possibly a consultant, not previously involved in the project, to check/audit the spreadsheets to look for the sort of mistakes that have been made in this case. Maybe this did not happen because of the near-ban on using outside consultants? And the most senior managers (and Ministers) should have used their intuition and number sense to make sure that the outcomes looked sensible. It would appear that none of this happened, maybe because the speed of turnover of senior officials and Ministers meant that there was no-one around with the necessary experience.
The next, ninth note in this series focuses on the debate, from 2013 onwards, about whether there should be an independent commission to review the relationship between Parliament, Ministers and the Civil Service.