Compulsory Competitive Spending (Hansard, 29 June 1995)

§ Mr. Robert B. Jones

In August 1994, my Department issued a consultation paper inviting comments on possible changes to the way in which DSO redundancy costs should be handled for evaluation and accounting purposes under compulsory competitive tendering.

The consultation paper proposed a number of ground rules: first, that the redundancy costs of any proposed reduction in DSO staff should be chargeable to the DSO revenue account—the date and point for this would be the time of notification to contractors of those eligible for transfer in the event of the Transfer of Undertakings (Protection of Employment) Regulations 1981 applying to the contract; secondly, that any further DSO redundancies made in the course of carrying out the work would be treated in accordance with the Chartered Institute of Public Finance and Accountancy code of practice for compulsory competition; and, thirdly, the consultation paper also proposed that where there was no revenue account in existence—which is currently the case, for example, with the white collar CCT—all prospective redundancy costs should be added to the DSO tender price for evaluation purposes.

A number of responses were received. Broadly speaking, private contractors supported the proposed rules, while local authorities supported the rules to an extent but resisted the proposal that redundancy costs incurred in advance of the establishment of a revenue account should invariably be added to the DSO bid. The Audit Commission supported the local authority view.

I have today written to the trade and local authority associations informing them of my conclusions. I have decided, first, that all costs relating to DSO redundancies should appear on the face of DSO accounts with an accompanying explanation, in accordance with current accounting practice. Redundancies during the course of the agreement between an authority and a DSO should be charged to the DSO revenue account, irrespective of whether those redundancies are triggered by the client side or the DSO management.

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Secondly, redundancy costs incurred prior to an invitation to tender should be recorded in the appropriate local authority accounts but should not feature in the DSO bid. This is because these costs would need to be met whether or not the DSO was awarded the work; in addition, to charge these costs to the DSO would be a disincentive to local authorities to take action to restructure in advance of competition, since authorities would not only pick up the costs of redundancy when they were incurred but have these costs counted against the DSO bid.

Where there is no existing DSO revenue account as with the first tenders for white collar CCT, redundancy costs incurred prior to the invitation to tender should be recorded in the local authority account to which the pay of the redundant staff has been traditionally charged but should not feature in the DSO bid.

Thirdly, where a DSO submits a bid based on fewer staff than notified to external contractors for the purpose of TUPE, the cost of any consequential redundancies, which will fall after the date for the commencement of the work, should fall on the new trading account and the DSO should therefore have made adequate provision for these costs in its bid. The submission by a DSO of a bid based on fewer staff than notified to external contractors may call into the question the validity of the work force information provided by the authority. It may be appropriate to arrange the execution of redundancies for the costs to fall on the new account.

Fourthly, although it was not an issue raised in consultation, I have also considered how far the Secretary of State should take action against DSOs subsequently failing to meet the financial objective solely because of redundancy costs. Historically, Ministers have been sympathetic to DSOs in these circumstances and statutory action has been initiated. However, where financial failure is incurred as a result of redundancy costs instigated by the DSO to enable it to live within its bid price, then there is no case for treating these costs as unusual in any way, and for withholding statutory action. However, if redundancies are, in effect, imposed on the DSO by client changes to the volume and specification for the work, then providing that these are allowable under the contract conditions, they should not be held against the DSO in assessing the case for statutory action. In future, therefore, the Secretary of State may take action in appropriate cases in which financial failure is attributable to redundancy costs.

The Welsh Office conducted a parallel consultation exercise on these proposals. My right hon. Friend the Secretary of State for Wales agrees with my conclusions and his Department will write to local authority associations in Wales in the near future.