We are lucky today to have a copy of Dame Lucy’s reply to Dr Spendlove:
Dr Roy Spendlove
Division for Miscellaneous Projects
Thank you for your letter. You seem to be doing excellent work to ensure full compliance with best practice and world procurement standards. I do think you are right to wish to introduce real terms adjustments into your appraisal of past apparent cost overruns on projects. I am glad to say Whitehall thinking has pressed on rapidly in the last few months in this very area.
Firstly, you should study carefully the improved presentation we adopted for total current public spending. As you know, some outside commentators have foolishly suggested the overall apparent cash increase of 15% or £92.5 billion a year is the significant figure over the five years. Ministers have been right to equate this to 25% cuts, taking year 5 compared to year1 and adjusting it for public sector forecast inflation and concentrating on DEL spending rather than AME spending. They were also right to exclude the ring fenced areas of Health, EU, Overseas Aid and Pensions. Leaving in areas of spending that are going up as a result of policy decisions would clearly distort the overall figures, especially when they are large areas. I think we may have underdone the inflation factor, but we had to allow for a possible pay freeze in years 2 and 3. We also assume, of course, that the pay freeze relates only to rates and will still permit seniority and responsibility enhancements to avoid the bad effect on morale of an actual cash freeze in pay. We may also need to tweak the bonus system for presentational reasons, but keep it to reflect all the extra stress and work the cuts impose.
Secondly, you are right that capital projects have their own extra inflationary pressures. I like your idea of linking the true price to SDRs to get away from the weaker pound. Linking to gold might be even more helpful and realistic, given the recent performance of the gold price as a true store of value in a world of depreciating paper currencies. Ministers might like a gold base, as some outside might unfairly remember the previous government’s gold sales, but that of course is not a proper consideration for us and should not be used in emails or public correspondence.
I think it most important that you include the Contingency allocation in the base cost, as that was always there to allow for the very drift you are concerned about. It may also be necessary to adjust Contingencies upwards. Indeed I would ask your Division to review all Contingencies retrospectively and suggest to Ministers upgrading them all to avoid future embarrassment. I am sure no Minister in this climate would want to report a cost overrun to Parliament, and with the new transparency rules the overruns may be clearer sooner should they occur.
I will be shortly sending out further guidance to all departments on Quangos. As you know there has been some suggestion we have too many. I do not think we should fight this notion. There is a lot to be said for assimilating more of them into Whitehall. It will give us more direct control, and will allow more flexibility over job titles and remuneration levels than we have been used to in the core service. We should willingly help implement a policy of fewer quangos whilst ensuring the much good work they do is retained. I hope improving our grip over quangos will also allow more of the honours that were kept for quango Chairmen to be available for hard working senior officials who have undertaken to do this work. It will also make it easier to justify pay comparable to private sector levels for tasks that previously were performed by quango heads. We should tell Minsiters to claim that the aim of the reform is improved accountability, which we can deliver to our own special standards through taking possession of the information.
I think you also study the rear end loading of some of the cuts in public spending. There are some which we advised against which ended up in the 2013-15 period in the final figures. I have always found that past governments become less keen on fiscal stringency the closer an election comes. I strongly suggest that anything you need to sacrifice should be surrendered for the outer years of the five year plan. That will leave Ministers more time to come to see the advantges of what we do and how we do it in good time before any irreparable damage is done.
I am finding that this new approach is very helpful insofar as I have much less to do recruiting more people for additional quangos. I fear you are right we will need more translators for our Overseas Aid and Trade strategy. I will see if I can spare a few people to work out a proposal for a new capital projects tender translation service to support your excellent work.
You should also remember that the EU is our friend and longstop. There is usually a Directive or Council requirement to cover most of the things we need to do and keep. We are under a duty to report non compliance to Brussels for enforcement. You should of course warn Ministers when they are in danger of straying outside their permitted area of decision that there could be infraction proceedings. I think you should anyway check the question of tender documentation with UKREP to make sure we have not slipped up and to stress to Ministers the very real constraints we work under.
Dame Lucy Doolittle