Monday, July 31, 2006
Britain's Simple Shopper
As we've blogged before, the government is Britain's biggest customer. Every year it spends about £170bn of our money among its chosen commercial suppliers: that's about £7,000 for every household, which to put it in perspective, is five times more than Britain's biggest retailer Tesco spends among its suppliers.
The government buys everything from drugs and arms, to computer systems and management consultancy. And all the evidence is that it's an innocent at large, routinely paying through the nose for goods that are not what we need.
Two more examples have hit the news recently. First, the appointment of a commercial buyer for £4bn pa of NHS supplies: Texas-based Novation will reportedly take over the purchasing and distribution of everything from bandages to hip replacements.
Novation is a GPO (a group purchasing organisation), that have plied their trade among US healthcare providers for many years. They bulk up orders, negotiate hard with end-suppliers, and get low prices for clients. At least that's the theory, and just like PFI, in theory they could offer a good deal for taxpayers. But as always, that Detail Devil means there's a big gap between theory and practice. It only works if the government is capable of negotiating a watertight contract and then managing its implementation.
In the US, where everyone's got actual experience of these contracts, Novation and other GPOs are in big trouble:
"The US Justice Department launched an investigation into the company and other GPOs over claims that they had overcharged federal healthcare programmes for goods.
GPOs are controversial because of legislation that allows them to accept “kickbacks” from suppliers. The size of these payments depends on the size of the contract, which means, critics say, that GPOs inflate costs to increase their fees. So complex are the relationships between suppliers, GPOs and hospitals in the US that understanding who profits most is difficult."
Which is clearly a major problem. How would you ever know you'd got a good deal? The NHS reponse is said to be a contract that emphasises price. But sadly life isn't that simple:
"In one recent case a contract for surgical gloves was awarded by the NHS to a low-cost provider. The NHS boasted that the reduction in cost meant a saving of several hundred thousands of pounds. But to get the same protection from tearing or perforation, health workers had to wear two pairs of the gloves, negating the savings."
So do we think the Department of Health will be able to manage a big American GPO that's hungry for international revenue to offset pressure in its litigious domestic market?
More likely, it will follow established practice, highlighted in our second recent case: the decision by HM Customs and Revenue to pay bidding suppliers for its new £3bn IT system (ASPIRE) just for putting in a bid. In the words of the National Audit Office:
"It is not usual practice for the purchaser to create the competition by contributing to firms’ costs of bidding, paying the winner’s costs in taking over from the existing supplier, discounting the transition costs for the purposes of comparing bids and paying the incumbent supplier to effect the transfer."
It certainly isn't "usual practice"- in fact I can't think of a single case of such payments in the commercial sector. The normal rule is very clear. If you want to pitch for new business, you pick up the tab. But:
"In the case of ASPIRE the premium paid by the Department to secure a competition was £8.6 million in contributions to bidding costs, and £43.3 million in paying for contractors’ transition costs."
IE over £50m of our money just to get the suppliers out of bed.
As we've said before, Big Government is a hopeless and naive shopper, routinely wasting squillions and coming home with stuff that doesn't work properly. We'd all be much better off if we did our own shopping directly.
PS This latest HMRC snafu happened on the watch of Sir David Varney, who'd sometimes been thought to be one of the few "good guys". See this Observer piece on how that fits with his move to HMT.
PPS That eye-popping pic is the front cover of the NAO's ASPIRE report. Who says accountants don't have a sense of humour?
Posted by Mike D at 9:50 am