Select Committee on Public Accounts Third Report


Managing the supply chain

14. At the beginning of the crisis the Department did not have an extant air broker contract. Their arrangements for seeking quotations from two companies had expired in December 1997. Between 31 March and 1 July 1999 the Department provided 61 airlifts for the Kosovo crisis. For 54 of these airlifts, costing £2.3 million, they used aircraft chartered through Hanover Aviation, one of the previously selected firms. The Department did not obtain written quotations for the 54 air charters. They requested and reviewed paperwork from Hanover Aviation on two occasions, but they did not retain any documentation and they could not demonstrate whether they had obtained the best available price in each case.[11]

15. Asked how this situation had arisen, the Department said that because they increasingly worked through international organisations, they had not expected to find themselves again in the business of directly contracting air charters. As soon as the crisis began they renewed the previous arrangements by means of an oral contract with Hanover Aviation. The Department considered that their oral contract to continue the previous contract had not led to any loss of value for money or competitive pressure, because each individual air charter had still been subject to a requirement for competitive tender. They said it was difficult to say what would have happened had they sought quotations from two brokers as provided for under the previous arrangements. But bearing in mind the limited number of planes that had been operating in a very constrained market, they thought it probable that two brokers would have been competing for the same air capacity, which would have done little more than create a paper chase. The Department had concluded that it was not sensible to have two brokers working in competition. They had subsequently had a competition to find the best broker and had awarded a single brokerage contract to two companies in equal partnership. They accepted the need to keep appropriate documentation and told us that they were now doing so.[12]

16. The Department's contract with the Crown Agents to provide an emergency response service is central to their capacity to respond to crises. The Department did not re-tender their original 1995 contract with the Crown Agents until eight months after the original expiry date, and did not sign a new one until six months into the Kosovo crisis. During this period services were provided on the basis of extensions to the original contract. The extensions introduced a significantly revised cost structure. This included an increase in core staff and the introduction of a management fee for additional staff provided under the call-down services element of the contract.[13]

17. We asked the Department how this situation had arisen and what it said about their state of preparedness. They told us that they had extended the original 1995 contract for a further year to March 1999 to ensure continuity of response to emergencies ongoing at the time, including Montserrat. They did not believe it would have been sensible to re-tender then. They had done so six months before the extended contract was due to expire and had selected the Crown Agents as the preferred bidder about a week after the Kosovo crisis broke. In view of the grave humanitarian crisis they were then in, the Department had amended the existing contract several times to take them through until the end of the crisis and the completion of their post-tender negotiations with the Crown Agents. They signed the new contract on 28 October 1999.[14]

18. During post-tender negotiations with the Crown Agents the cost of the core element of the contract rose from £893,000 (the winning bid) to £2,298,000.[15] In the light of their experience of Kosovo and other recent crises the Department had recognised that it was essential to have the capacity to implement six simultaneous operations—two rapid onset disaster responses, two chronic crisis responses and two UN support operations. It had been clear to the Department that this would require a permanent increase in the core team of six staff specified by the Crown Agents in their bid. The Department had therefore asked the Crown Agents, as the preferred bidder for the new contract, to present a new budget covering the cost of an enhanced core team of 15 people for the three-year period of the contract. The revised budget of £2,298,000 was incorporated in the contract signed by the Department.[16] The Department accepted that the contract should have been re-tendered but they considered it impractical to do so given the complex and uncertain nature of operations in Kosovo during this period.[17]

19. The people employed by the Crown Agents to staff the field offices were on short-term contracts specifically for the operation. They were not given detailed written guidance on financial controls, on procurement practices, or on key personnel matters—security, local employment contracts, and health and safety.[18] Asked why this had been the case, the Crown Agents told us that they had not had standard operating procedures because it had not been a standard operation. They had briefed their people as best they could and the staff they had employed in the field were experienced and well-qualified—for instance, the head of the Skopje field office had worked for them in Bosnia and Sierra Leone. There had been a presumption that it was difficult to draw up standard requirements for this kind of emergency, but experience had persuaded them of the benefit of having standard operating procedures which the Crown Agents had now produced.[19]

20. The Department's procurement policy for their field offices was to use local suppliers because it would help revive the local economy. Where this was not possible, field offices passed requests to ELMT headquarters at the Crown Agents in the UK. ELMT headquarters competed some requirements among potential suppliers themselves and referred others, which were complex or outside their competence, to the Crown Agents Procurement Services Group. By 31 October 1999, the Crown Agents Procurement Services Group had handled £3.3 million of the £5.5 million of field office purchases involving procurement fees payable by the Department of some £228,000.[20]

21. In view of the potential conflicts of interest in Crown Agents' field staff placing work with their employer, we asked the Department what they had done to ensure that procurement decisions taken on their behalf by employees of the Crown Agents had been appropriate and had resulted in value for money. The Department told us that they had looked very carefully at the pattern of procurement by ELMT and they had not found any evidence that ELMT had behaved as if influenced by conflicting interests. They wanted these procurement arrangements to continue as they considered them to be effective and fast. They had, however, now instructed their own procurement team to visit ELMT four times a year to audit the way in which they were using their discretion under the procurement arrangements.[21]


22. The Department have now let a new contract for arranging air charters. They now use one broker, whereas previously they had two. This arrangement will only achieve better value if it succeeds in generating sufficient competition between prospective suppliers. In the past the Department have had insufficient documentation to demonstrate that the broker is getting the best deal on their behalf. They assured us that they would now keep appropriate documentation to be able to show that they were getting value for money.

23. The Crown Agents had been working in the region during the crisis for six months by the time the Department signed a new contract with them. These were less than ideal circumstances in which to be conducting post-tender negotiations and agreeing a contract. We note that over this period the cost of the core elements of the contract rose from some £900,000 (the basis on which Crown Agents won the competition) to more than £2 million. Without re-tendering the Department could not demonstrate that they got the best price. By allowing post-tender negotiations to run on for so long and by initiating a major change to the basis of the contract, they ran the risk of unfairness to other bidders.

24. By agreeing the new core element when they were under pressure during the crisis, the Department may have become locked into a contract at too high a rate. The Department should review whether the level of support agreed at the height of the Kosovo crisis is what they require, and re-tender the contract at the earliest opportunity.

25. Although staff recruited to run the field offices in the region were experienced people, they received little in the way of written guidance on how to run the operation. The absence of such guidance may increase the time staff have to devote to administration and divert attention from the emergency. It also increases the risk of inappropriate systems being put in place. We note that the Crown Agents have now established standard operating procedures, and we look to the Department to ensure that they draw on these for future operations.

26. Crown Agents staff working in the Department's field offices made the decisions about whether or not to arrange procurement of items through the Crown Agents in London which incurred a separate management fee for the Department to pay. This represents a potential conflict of interest. The Department will need to act on the assurance they gave us that they would carry out regular checks on the procurement decisions made by local staff on their behalf.

11  C&AG's Report, paras 2.28-2.32 Back

12  Evidence, Qs 3-4, 31, 98-100 and Evidence, Appendix 1, pp 17-18 Back

13  C&AG's Report, paras 11, and 2.21-2.23 Back

14  Evidence, Qs 3, 39 Back

15  C&AG's Report, para 2.26 Back

16  Evidence, Q43 and Evidence, Appendix 1, pp 17-18 Back

17  C&AG's Report, para 2.26 Back

18  ibid, para 2.7 Back

19  Evidence, Qs 16, 26-27 Back

20  C&AG's Report, paras 4.6-4.9 Back

21  Evidence, Q15 Back

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Prepared 14 February 2001