More value less money

The cheapest option can often turn out to be very expensive indeed. David Aeron-Thomas hunts out ways of reconnecting sustainability with value for money.

The average taxpayer might just be wondering how the simple process of buying things became so fraught with complexity in the public sector that we need a Task Force to reassert some simple priorities. Spending their money wisely – to maximise the public good – and getting value for money (or VFM, as it’s known in the trade) doesn’t sound like it ought to be hugely difficult. And yet these two ideas – wise choices and value for money – have become the battleground of sustainable procurement. So much so that the drive to achieve VFM is actually seen by procurement professionals as one of the greatest barriers to more sustainable practice. That’s the alarming finding of a recent survey carried out by Forum for the Future for the Sustainable Procurement Task Force – while the Accounting for Sustainability Group laments the “short-term, compartmentalised outlook” of the existing financial modus operandi. “Sustainability demands that people are guided by a longer-term and wider perspective,” the group says sternly, in Realising Aspirations: Or, Using Value for Money to Make the Public Sector More Sustainable (www.princeofwales.gov.uk/speeches/asg.html). All very well, but what if you are actually doing the procuring? The practitioner’s tale is one in which value for money, reframed as ‘efficiency’, has turned out to be a pretty blunt instrument, used to beat down short-term costs - and to hell with the long-term impacts. Even though everyone from former environment minister Elliot Morley to Sir Peter Gershon, author of the government’s efficiency review in the public services, seems to agree that value for money and sustainable procurement go hand in hand, and that efficiency is all about getting the best social and environmental results for your buck. Even though those ultimate bean-counters, the National Audit Office, together with the Office of Government Commerce, lay down categorically in Getting value for money from procurement (www.ogc.gov.uk/sdtoolkit/ reference/ogc_library/procurement/ vfmprocurementguide.pdf) that “value for money is not about achieving the lowest initial price: it is defined as the optimum combination of whole life costs and quality”. In countless purchasing and procurement decisions, on everything from school dinners to hospital construction, wisdom is still being traded for efficiency in the crudest manner. Which leaves two possibilities – either value for money can deliver sustainability but is not being applied properly, or being sustainable is not always best value for money. And the reality? A bit of both. HARD TO PROVE
‘Whole life value’ holds the key to these different interpretations of value for money. Factoring in the initial purchase price, subsequent running costs and disposal costs, and taking benefits into account as well, is a much more rational way of thinking about the real cost of a procurement decision. But to the pressured procurement professional it constitutes a vast amount of information to collect and evaluate. It’s often difficult to decide what to include, and even harder to get meaningful numbers, particularly on social and environmental benefits. Meanwhile, your performance is being judged on savings in this year’s capital budget, and the running costs fall into someone else’s budgets anyway. It’s not hard to see why many buyers go for the lowest purchase cost that meets the spec. But VFM isn’t the cheapest option, and it isn’t sustainable. When public organisations decide financial costs are the only real costs, and fail to factor in environmental and social impacts when considering two alternatives, they’re delivering neither. Assuming that they are not being deliberately negligent, it’s testament to the pressures they’re under to reduce costs that money talks and everything else still walks. Robert Barr is weary of hearing about “short-term budgetary constraints preventing whole life cost saving measures”. He’s head of strategic estates at the South West London Strategic Health Authority – and, he says, there are examples across the sector: “it’s like a stuck record”. The issue also affects private sector organisations doing business with the public sector. For Chris Topper, Head of Sourcing at Anglian Water Services, “whole life costing is very often sacrificed for short-term budgetary gain. The whole ethos of Gershon-inspired purchasing efficiency savings militates against whole life cost decisions.” RETHINKING EFFICIENCY
How can we escape this trap? Some of the answers lie in lateral thinking about procurement practice. The ‘three Rs’ mantra of resource efficiency – Reduce, Reuse, Recycle – could do with a fourth R for procurers: Rethink. The choices involved in buying paper may be familiar – virgin bleached pulp versus bleach-free 40% post-consumer waste, and a multitude of variations on the theme – but the big sustainability gains are likely to come from different questions. How much paper do you need? Are your printers set to automatically print double-sided? Or, more radical still, do you need to print, process, file and store that document at all?

“Patients actually eat the better quality local ice cream – which cuts the spend on nutritional supplements”.

The same rethink response has yet to be applied to a vast range of goods and services. It involves radical questions, people outside the traditional procurement process, and, ultimately, behavioural change – not the traditional realm of the procurement professional. If you are already wise to rethinking on paper – more and more people are, though consumption still keeps rising – then here’s a fresher, tastier example – Cornish ice cream. The Royal Cornwall Hospitals NHS Trust has made great efforts to use high-quality, local food, at a competitive cost, including sourcing their ice cream from a quality local company. Prices were initially too high, because the company was used to supplying nationally, in higher volumes. But further rethinking brought an innovative solution: they brought down the price by removing the packaging, and simultaneously decreased the environmental impact. The Trust also found that the nutritional content of the ice cream was higher than some of the nutritional supplements they were using. Net effect: nicer desserts, which patients actually eat, and reduced expenditure on nutritional supplements, which more than offsets the extra investment in ice cream. A win-win, even without taking into account the wider picture now emerging – better patient morale and recovery times, lower future hospital readmissions thanks to reduced malnutrition, and more general benefits to the economy as a result of local sourcing. SUSTAINABLE, BUT NOT BEST VALUE FOR MONEY?
Admit it – all the lateral thinking in the world won’t save us from the fact that being sustainable isn’t always best value for money for a particular organisation. There are times when better options are just too expensive. When measured conventionally, that is. But this is mostly because, to use the language of economics, the externalities are not being internalised.

Put simply, this intimidating phrase just means that the impacts arising from an activity (for example the effects of pollution from a car) are not charged to the person causing the impacts (in this case the car driver). And, if they are not being charged, then by and large they are being ignored. So the apparent heresy that sustainability might not be best value is really better understood as an accounting error. The same public sector that is ignoring the cost of an externality in one decision is – you guessed it – paying for it somewhere else. It’s the NHS that pays for looking after people with breathing difficulties caused by vehicle pollution, or putting people back together after road accidents. And dealing with these impacts downstream is generally far more expensive than avoiding them in the first place. A huge inefficiency results from the pursuit of efficiency. Realising the role of externalities is one thing; hunting them down is quite another. The upstream solutions to all these unwanted and hidden costs lie in regulation and taxation: in the car example, regulation sets limits on the maximum levels of car pollution, and taxation has the potential to make the cost of driving closer to the ‘true cost’ including the externalities. If the tax and regulatory regime were set appropriately, applying value for money through procurement would indeed deliver the optimal sustainable solution as well, given the available financial resources.

But is the tax and regulatory regime working like this? Consider how we address the problem of climate change. To cut carbon emissions by 60% by 2050, we should be investing now in low-carbon technology (from energy-efficient light bulbs and boilers through to wind farms and whatever). But at the moment these technologies generally have higher initial costs than the conventional alternatives. Some grant schemes are available, but there are also perverse incentives in place – like zero VAT on new houses, but VAT charges on renovations. Why not level the playing field – or restrict this tax break only to energy-efficient houses that qualify for the energy-efficient ‘excellent’ rating? If the odds are stacked like this against sustainability and real value for money in so many situations, what’s the solution? Lobby your MP for more enlightened national energy policy? Find ways to work around the system? The good news is that many organisations are coming up with solutions in their own spheres. At Wyre Forest District Council they’re working on a procurement strategy that will extend existing good practice (such as buying fairtrade goods and Energy Star IT equipment) so as to give consideration to buying local, buying recycled and energy efficient products, and applying whole life costings across the Council. They’re also thinking about how to account for the greater upfront costs. “We’re looking at allowing a 5% cost premium for more sustainable products,” says Wyre Forest’s health and sustainability officer Vicky Dunn. “You might want to debate this weighting – whether cost is really 20 times more important than all other considerations – but it does have the advantage of defining in simple terms what can and cannot be purchased, and allowing some sustainability-driven buying decisions to go ahead without further discussion.” There’s optimism about the potential of some other newly emerging methodologies, too, to help organisations bring whole life costing into procurement decisions – about everything from vehicle replacement to new buildings. Barry Higgins, assistant director of finance (procurement) at the University of Birmingham, puts it like this: “We are really still at the start of a long journey. For procurement staff it is an issue of buy-in and of culture. Awareness is growing from a low base. Sustainability is at least considered in the evaluation of centrally administered tenders, even if it is given a relatively low potential score in those evaluations due to other priorities. But the tender evaluation model that we have just obtained looks to have potential in terms of giving the correct weighting to sustainability, and justifying spending more for the long-term benefit.” A step in the right direction, surely – though the sustainability buffs might well baulk at treating it as just one among competing priorities. As Higgins says, it’s a long journey... Value for money should be an enabler of sustainable procurement. All too often it isn’t – because it isn’t being applied properly, due to lack of time, understanding or external short-term cash pressures. So what’s the solution – apart from renaming it ‘whole life value for money’? The big picture on taxation and regulation is in the hands of government. But in the meantime there is plenty of room for action by procurement professionals. So long, that is, as the willingness is there to ask a simple question: “Is there a better way to do this?” David Aeron-Thomas is head of Forum for the Future’s Sustainable Economy Programme.

For many products and services, there are cost-effective sustainable alternatives. They are widely available... so why not buy them? As part of its Action Plan, the Task Force builds on the Office of Government Commerce’s ‘Quick Wins’ specifications to create mandatory minimum standards for public procurement. We offer you our starter for ten: PCs, printers and office equipment Many laptops, desktops, monitors and printers meet Energy Star standards. These should feature automatic low-power ‘sleep mode’ as default. Of course, printers and copiers must print double sided and allow recyclable cartridges. Better still, at the end of their lives, replace the lot with a single networked multifunction device instead. Electrical appliances
All white goods should be EU Energy Label A-rated. Washing machines must use less than ten litres of water per kilo of laundry; dishwashers must be no thirstier than 15 litres per cycle. Lighting
Again, energy consumption is key – all bulbs and tubes must be A-rated and preferably long-life. Cars
Leasing cars within Vehicle Excise Duty bands A and B should limit CO2 emissions to below 165g/km... but hybrids and some diesels can achieve nearer 100-120g/km. Cleaners and detergents
Avoid products labelled as toxic, harmful, irritating or harmful to the environment. Surfactants must be biodegradable in all conditions. Batteries, where you have to use them, make them rechargeable. Timber
Virgin timber must carry proof of legal logging and trading, and should come from sustainably managed forests. Avoid tropical hardwood unless it’s certified as sustainable. Paper
No excuses. Recycled paper performs well for all uses: buy 100% recycled content for all office printing and tissue paper products and specify a minimum of 60% recycled content for publications, ensuring that any virgin pulp originates from sustainably managed sources – such as those certified by the Forest Stewardship Council. Buildings
Still some way off being a widespread quick win, but all buildings should be constructed to the appropriate BREEAM excellent standard. Building materials
All building materials should be A-rated in accordance with BRE’s Green Guide to Specification.

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If Canada can We could learn a lot from Canada’s FBI. Its Federal Buildings Initiative, that is – the programme under which private energy service companies (ESCos) carry out energy-and water-efficient retrofits of government properties, raising the upfront investment for this work themselves. They are repaid over a number of years from the resulting savings in the buildings’ utility bills – and, once they are paid off, the continuing savings are kept by the government body. The FBI contracts even ensure that there is a net saving – it’s guaranteed by the ESCo. The FBI was established in 1991, making it one of the longest established programmes of its kind in the world. Its method is a proven way of overcoming the split between operational and capital budgets, a barrier that bedevils similar efforts in the UK. It enables Canadian government bodies to pay over the long term for the capital renovation of their properties, and, in its 15-year existence, the FBI has been applied to 35% of all such buildings. There are now 80 energy efficiency contracts in place, covering 7,500 buildings, yielding £14.2 million in annual savings, and eliminating some 200,000 tonnes of greenhouse gas emissions. www.oee.nrcan.gc.ca/fbi

2 July 2006