11 January 2008
... and repent at leisure. The saying could not be more apt for the merger of the Inland Revenue and Customs & Excise, and for many other government reorganisations. Hurried change and simultaneous staff cuts are an obvious recipe for disaster. Paul Gosling reports
Revenue & Customs is in a mess. It has lost 25 million personal data files, had six previous 'significant' data losses, been accused by the accountancy institutes of delaying new companies' VAT registrations by months and failed to meet ministers' targets for collecting taxes. Critics point to failures coming from a rushed departmental merger and over-ambitious efficiency savings that have a resonance across Whitehall.
A decade of Labour government has been characterised by hyperactive reorganisations and ambitious, perhaps impossible, demands for efficiency savings. The merger of the Inland Revenue with Customs & Excise in 2005 is a case in point. When the merger was announced, the then Chancellor Gordon Brown said that 10,500 jobs would go at the same time. A few weeks previously, it had been decided that the investigative arm of Customs & Excise would become part of the Serious Organised Crime Agency another new body that is now criticised for under-performing.
From the very beginning, the civil service unions declared that achieving a successful merger simultaneously with making swingeing job cuts was bound to lead to disaster.
Talking of the swathe of efficiencies and job cuts planned for Whitehall, Public and Commercial Services union general secretary Mark Serwotka asked at the time: 'Where is the evidence that 104,000 job cuts can be made and that these cuts will improve efficiency?' PCS members at R&C are currently being balloted for strike action over job cuts and office closures.
The department's organisational weaknesses go deep and were identified in its Departmental Capability Review, published in the week before Christmas. While not as devastatingly critical as the earlier review of the Home Office, it demonstrated the scale of the task facing R&C's new leadership when it is appointed. In four out of ten evaluation categories, the department requires 'urgent development' and nowhere is it regarded as strong. Leadership is a particular problem, says the review.
Colin Talbot, director of the Herbert Simon Institute for Public Policy and Management at Manchester Business School, agrees. He points out that David Varney was appointed chair to oversee the merger, but then transferred in September 2006 to become a personal adviser to Gordon Brown without completing the job; and then there was not a permanent replacement for a year. Deputy chair Paul Gray was acting chair until confirmed in the post in February 2007, before resigning in November over the lost disks scandal. Now R&C has another acting chair in Dave Hartnett. Throughout this, the department has been subject to 'ludicrous efficiency savings targets', adds Talbot.
Paul Whiteman, lead official on R&C for the First Division Association the union for senior civil servants makes a similar case. 'The project to merge the Inland Revenue and Customs & Excise is ambitious and creates problems,' he says. 'There is pressure on a department going through that kind of change.' But Whiteman is concerned both at the pace of change and that the capability review recommends that this should now accelerate. 'If you want to speed it up, you have to fund it,' he says. 'Some efficiencies take time to realise in terms of pounds and pence. We have lost a lot of jobs quite quickly. Fast change isn't necessarily good change.'
Other well-placed observers similarly concentrate on the way the merger has been handled. John Whiting, senior tax partner at PricewaterhouseCoopers, says: 'I start from the principle that it's the right thing to do. At one stage, having two tax authorities was a luxury we shared only with Israel and Malawi. It was the right starting point because there were efficiencies, streamlining, etc [to be achieved]. I continue to believe that.
'And, aside from the headlines, there are some very good things coming out of the merger including [improved] relations with big business and the thinking on penalties. Slowly, slowly there are some dividends coming. But it was unrealistic to think that two well-entrenched departments could merge quickly without any hiccups.'
Whiting adds that outside Whitehall most people will say that the secret of the successful merger is in the implementation. 'The PwC merger [of Coopers & Lybrand with Price Waterhouse in 1998] was successful because we stuck at it,' he says. 'It's not unrealistic to expect a merger dividend, but that merger dividend doesn't happen on day two. Also, there was constant change in the tax system.'
Labour's efficiency-driven permanent revolution of government permeates far beyond R&C. For all the recognised failures of the Ministry of Agriculture, Fisheries and Food particularly in handling the outbreak of foot and mouth disease its transformation into the Department for Environment, Food and Rural Affairs in 2001 has not gone well. Defra, and its executive agency, the Rural Payments Agency (also formed in 2001), made an almighty mess of replacing the European Union's Common Agricultural Policy payments with single grants to farmers. Defra chose 'to implement the most complex option for reform, in the shortest possible timescale', while taking on an extra 46,000 claimants and a new digitised mapping system, according to the National Audit Office.
The new system coincided with the introduction of a radical business change programme at Defra intended to rationalise operations and cut 1,800 jobs. The change programme cost £258m and led to a loss of £305m in EU refunds on farmers' payments, but is now expected to save a mere £7.5m by March
2009. For the farmers let down by the new single grants scheme, there was widespread economic hardship, and even suicides.
'The story of the inept handling of the scheme& should make a richly rewarding study for senior civil servants across the whole of government for some time to come,' Public Accounts Committee chair Edward Leigh said after the PAC completed its study into the catastrophe. 'The Single Payment Scheme is relatively small, but its implementation& to a near-impossible timetable was a masterclass in bad decision-making, poor planning, incomplete testing of IT systems, confused lines of responsibility, scant objective management information and a failure by the management team to face up to the unfolding crisis,' he concluded.
According to a study by Talbot, it takes five to seven years for a policy change in the public sector to bed down to the extent that it starts to produce real benefits. Yet public sector reorganisations under the current government have seldom been given that long to produce results before a further reorganisation comes along. This was especially true in the Department of Health, where the frenetic restructuring was termed 'the Reid disorganisation', says Talbot. Those left behind in the Home Office to reshape the jigsaw pieces that John Reid threw into the air as home secretary might understand the sentiment.
Across the NHS there has been a near-constant tinkering of health structures. The Audit Commission's review of the NHS for the financial year 2006/07 found that the NHS bodies showing improvement were those not affected by reorganisations. Conversely, those unable to demonstrate improvement were those being merged or reorganised. Only 7% of newly merged NHS bodies were in the top two categories, compared with 35% of unchanged organisations.
The commission also expressed concerns that too much was being reformed at the same time. 'As well as changes to the financial regime, changes were also made to the structure of the NHS,' it said. 'Implementation of the Department of Health's Commissioning a patient-led NHS initiative led to the number of strategic health authorities reducing from 28 to ten and the number of primary care trusts reducing from 303 to 152. In addition, the number of ambulance trusts was reduced from 29 to 12.' The cost to the NHS of the restructuring, just in redundancy and severance payments, was £192m to achieve savings of £90m by the end of the past financial year. Clearly, further costs and savings will follow in later years.
The challenge is equally severe for health and social care inspectorates. The Department of Health has admitted that the merger of the Healthcare Commission and the Commission for Social Care Inspection (both established less than four years ago) with the Mental Health Act Commission, will cost £140m upfront, with the objective of eventually saving £60m a year.
There are worries that government expectations for efficiency savings elsewhere are over-optimistic. The Cabinet Office has estimated that departments could save £1.4bn a year by sharing finance and human resource functions. But a recent NAO report found that departments that had set up shared service centres had achieved 'relatively small' savings. The report criticised the Cabinet Office for heavily promoting shared services without having a clear idea of what the benefits would be, or providing models on how to adopt them.
The NAO has also expressed concerns about the lack of evidence for efficiency gains. Halfway through the three-year Gershon efficiency programme, departments claimed £13.3bn in annual savings. But only a quarter of these 'fairly represent efficiencies made', the NAO found. More than half the claims represented some efficiencies, but were uncertain, while almost a quarter failed to demonstrate any efficiencies, or might be substantially incorrect. Departments' claims regarding job losses were more reliable, with the NAO confirming a cut of 45,551 jobs.
We are left with fears that 'efficiency savings' are unverified, possibly false, and might as with R&C actually be cuts made at the expense of efficiency. This anxiety was addressed head on just before Christmas by the Treasury select committee in its consideration of the government's 2007 Comprehensive Spending Review. The committee described the objective of further £30bn efficiency savings as 'stretching and highly ambitious'.
'During the period up to March 2008, many departments have been able to claim efficiency savings which are not cash-releasing and which are not offset by the implementation costs to make the efficiencies work,' says committee chair John McFall. He warns that departmental claims about efficiency savings should not be made where they lead to service deterioration and the claims should be audited by the NAO to ensure they are not simply cuts. In future, he says, the Treasury will take a more robust line regarding vague efficiency claims, demanding proof of savings.
There is a very good argument, though, for saying that being tough after the event is only half the solution. Being more rigorous before the reorganisations, checking that planned efficiency savings were not going to be counter-productive, might have made a lot of people's lives much easier today especially Gordon Brown's.
PFjan2008
