Efficiency in government, postponed?

Conversations this week have, inevitably and again, been dominated by the implications of unfolding gloom in the economy. One such focussed on the eternal quest for efficiency in public services.

Mr Darling’s “spend now, pay later” Pre Budget Report (PBR) included a commitment to find an additional £5bn of efficiency savings from public services, on top of some £30bn that departments are committed to return to the public purse by 2011 (Under the 2007 Comprehensive Spending Review).

The additional £5bn savings are designed to release cash to pay for additional government spending under Gordon’s ‘fiscal stimulus’ banner (the previous £30bn efficiencies were announced before credit was crunched, just to pay for business as usual).

So where are these new efficiencies going to come from, and will they materialise at all?

The government spends £175bn per year on goods and services and around £80bn of this is spent on things that multiple departments need to run their organisation and provide services to the public. With such huge sums in play, it is not surprising that the Treasury has a keen eye on value for money in public procurement, and on the opportunities available from ‘collaborative procurement’ in particular. The economy of scale advantages available to the government (and the taxpayer), seem obvious. So why don’t the departments just get on and club together? And why haven’t they done this already?

HM Treasury is looking to see what can be learned from big commercial sector firms that have succeeded in getting business units and international divisions to buy together, such as BP. But the rules of the game for public and private sector finance can be very different indeed. When it comes to spending shareholders’ (that’s tax payers’) money, the raw logic of efficiency rarely wins out.

In normal times, the debate about improving productivity and value for money in the public sector focuses on inertia; the difficulty of bring about change in long established public sector practices. Government after government has tried, and mostly failed, to ‘transform services’. In normal times, productivity excuses focus on the peculiarities of public sector organisational culture and trials of managing change in century old structures that have, by definition, transient leadership.

In normal times, debate about what’s stalling efficient and collaborative procurement would focus on these pathologies of public sector life. But will the recession, as with everything else, change the game?

What complicates the efficiency issue today is Government’s commitment to “support people (and business) through these difficult times.” With consumer buying unpredictable and slack, and the commercial sector demand looking decidedly shaky, the last thing suppliers need is an additional squeeze on margins from big public sector customers. If government really did demand more for its money, and really did make the most of its colossal aggregate buying power, many suppliers could expect significant additional pain.

In fact, the price paid for goods and services is only a small part of the story when it comes to understanding efficiency in public sector procurement – but more of that in later updates.

The crux of the issue is this: decision makers that rely on the cold hard logic of efficiency can reach very different conclusions to those that must take a broader view. Government procurement leaders will be instructed to take the health of today’s wider economy into account in their decisions - that’s people in supply market jobs. And the same goes for a multitude of Departmental ‘transformation programmes’: concerning people in civil service jobs.

In the commercial sector cuts are now king; but the public sector plays by different rules.

The post-Thanksgiving rally only lasted one day this year.

Usually the markets enter December in a good mood, as the first weekend after the Thanskgiving holiday is when US consumers start their spending and stock markets rally as the sound of ringing tills signals Christmas shopping season is underway and earnings forecasts remain achieveable.  This year the world is clearly a different place.  After a feeble 100 point climb in the Dow on Friday, yesterday we closed down close to 8% and the broader based S&P 500 ended the day close to 9% in negative territory.  Evidently earnings estimates are still expected to be tough to meet.

Asian markets picked up on the negative sentiment with indeces closing down between 4% and 6%.  Negative economic data continues to flow out of the region with the previously impervious Chinese manufacturing sector now pointing towards a recession.  This time last year such thoughts were not even on the agenda.

The European markets initially opened with red flashing everywhere, and with bond credit risk indeces reaching new wide levels, it seemed as though the mood was going to continue.  However even with recession news stories abound, with the UK MPC meeting on Thursday now expecting to produce another 100bp cut, and the Fed making noises that, if needed, zero rates are not off the agenda, the mood shifted.  Stock markets bounced into positive territory in Europe, and in the US futures rallied to signal a positive open.

We are expecting December to be a quiet month as we move towards the end of what has been an historic year.  General themes we are looking at : continued deleveraging, risk appetite reduction, the effects this will have as we move into 2009, and any sign of potential improvement to the global economic outlook.