Examination of Witnesses (Questions 1
WEDNESDAY 14 NOVEMBER 2001
KCB AND MR
1. Good afternoon. Welcome to this meeting of
the Committee on Public Accounts. Today we are taking evidence
on the Comptroller and Auditor General's Report on Non-Competitive
Procurement of the Ministry of Defence. I am very pleased to welcome
Mr Kevin Tebbit, the Permanent Secretary at the Ministry of Defence.
Can I thank you very much for coming today. I imagine it is a
very busy time with the Prime Minister's announcement about the
commitment of ground troops in Afghanistan.
(Mr Tebbit) Thank you very much. That
is very kind of you. I did not want to excuse myself for the first
meeting, as it were, of the new Committee for the MoD.
2. Would you like to introduce your colleagues?
(Mr Tebbit) On my right, Sir Robert Walmsley, who
is the Head of our Procurement Agency, Chief of Defence Procurement,
whose expertise is covered mainly in this report. This is mainly
about the Defence Procurement Agency. There are bits about the
Defence Logistics Organisation and there is relevance to the whole
of defence. This is essentially Rob Walmsley's territory. On my
left is Stan Porter who is the contractual expert within the Defence
Procurement Agency, the man who knows most about the detailed
aspects of purchasing and contracting.
3. Thank you very much. May I start by asking
a question to you, Sir Robert. In June 1998 you said "Having
said so firmly that I believe competition is the most certain
route of securing value for money I cannot then claim to secure
best value for money if I do not have competition". Presumably
that is a statement which you continue to abide by. Yet, although
there are obviously times when you have to have non-competitive
procurement, why do you still undertake 25 per cent of procurement
of defence equipment worth £2 billion a year in that way?
(Sir Robert Walmsley) We use competition wherever
it is a practical and sensible thing to do, Chairman. We continue
to monitor the percentage because I believe if we do not monitor
it you would not know what the outcome was. We do as well as we
can. It has stayed pretty stuck at 75 per cent despite strenuous
efforts on our behalf.
4. I just wonder, are you convinced that this
75 per cent performance measure is relevant nowadays? Is it too
arbitrary a task?
(Sir Robert Walmsley) I think it is arbitrary. I think
what is important is that we do measure it. I think measuring
it keeps attention to whether there is a trend. I think also it
gives you an indication of the volume of non-competitive pricing
work which helps to set the resources against which we need to
size our pricing staff.
5. You would accept the culture in the defence
procurement world is changing? What might have been a useful target
to try and change your own part in the Ministry of Defence may
no longer be necessarily applicable.
(Sir Robert Walmsley) I think that is absolutely right.
I do not see it as a hard and fast target. It has been removed
as a performance measure but I think it is really important that
we continue to count what proportion of our contracting is done
by competition because competition remains the bedrock of not
just the Ministry of Defence but the Government's procurement
6. Mr Tebbit, only two of the 1,850 NAPNOC negotiation
processes to date have not resulted in a contract being awarded.
That is a very small proportion, indeed it is 0.1 per cent. How
can you convince us that such a small number is indicative of
a rigorous negotiating process if only two out of all these negotiation
processes have not resulted in contracts?
(Mr Tebbit) I think, Chairman, there is a definitional
issue here. NAPNOC is not about not placing a contract, one has
already decided before those procedures go through that one wishes
to place a contract with a particular single source supplier,
it is about how we ensure after that decision in principle has
been taken by us that we get the right price, the right quality,
the right terms and conditions out of that contract. So I am not
surprised that there are only one or two where we do not finally
go forward but the point is the whole principle is to secure that
single contract on terms acceptable to us rather than to go somewhere
else because we have already taken the prior decision to go single
7. Could you or could those on either side of
you tell me which were the two contracts in question?
(Mr Tebbit) You are correct, I cannot immediately
tell you that. I know there is a third one, Bowman, which is discussed
in the report but I do not know if any of my colleagues can immediately
say which those two are.
(Sir Robert Walmsley) Not me, I am afraid, Chairman.
(Mr Tebbit) Out of 1,850, I could not tell you.
(Sir Robert Walmsley) What I would like to just add
is that the report also points out that we have taken too long
to negotiate some of these contracts. What I think that is really
an indication of is that we are not prepared to settle in an arbitrary
timescale, we will only settle at the right price. I would just
like to suggest to the Committee that the fact that we are prepared
to wait until we get the right price shows our determination not
to settle just at any price.
8. All right.
(Sir Robert Walmsley) Of course we do not start a
contract negotiation unless we really want what it is the contract
is designed to produce for us.
(Mr Tebbit) I think Mr Porter may have the answer.
(Mr Porter) I speak to some extent from memory, Chairman,
therefore I may not be entirely accurate. My recollection is one
was for a piece of anti-armour weaponry where we were unable to
conclude satisfactory terms for the procurement of the particular
equipment and the need for that equipment became wound up with
the more general consideration of defeating anti-armour activity.
The decision was taken not to proceed with that particular requirement.
Another was for the modification of Sea-systems equipment where
again we were unable to achieve a satisfactory conclusion with
the contractor and we devised an alternative approach to that
9. Thank you for that information. Presumably
you will be able to confirm that to us in writing later, if not
later in the meeting.
(Mr Porter) We can add a note, yes.
10. Could I ask about the Profit Formula which
is to be completed and implemented by April 2002. Could you give
us a flavour, Mr Tebbit, of the broad objectives you have set
yourself as a satisfactory outcome of that review and how will
you assess whether your objectives have been met?
(Mr Tebbit) Of course it is not just our own review,
Chairman, it is a broader review involving the Department of Trade
and Industry and the Treasury in which we are actively participating.
It is about the Profit Formula for the Government as a whole.
The basic issue, as I understand it, and I do not pretend to be
an expert in this, is whether we should remain with the existing
system which is a sort of accounting rate of return: simple, objective,
easy to understand; or whether we move to an economic rate of
return for the supplier which is a much more complex and difficult
thing to do but is an attempt to replicate the sort of judgments
companies themselves make when they decide whether or not to bid
for a contract. The proposition is that we should exchange the
present simple but some may say over simple formula for a much
more complex but some would say more accurate formula. This is
proving extremely difficult to negotiate with industry. It is
quite difficult in itself because if you think of the way in which
we operate, we have a mass of very tiny contracts as well as a
few very large ones, major projects you obviously see as a Committee
annually but there are tens of thousands of small contracts going
all the time. For our own staff to be able to apply these proposed
very complex systems and judgments would not be an easy task.
So I am not surprised it is taking a long time to discuss this
and as of now I could not predict precisely when that discussion
will end. Meanwhile we stick to the existing formula which has
served us well.
11. If ever Sir Robert wants to comment, because
he is obviously so knowledgeable in these areas, then he can;
not that your knowledge is not vast.
(Mr Tebbit) I am the first to say, Chairman, that
my colleagues I think will probably be able to outline in more
detail what the difference really is but in general terms I am
12. One general question I can ask you on that.
Are you on track to meet your timetable for this review? It sounds
as if it is very complex.
(Mr Tebbit) I would not be surprised if it slipped
and, as I say, it is not just us, it is the Treasury, the DTI
and industry as a whole.
(Mr Porter) If I could just follow on that point,
Chairman. The C&AG's report suggests that they do not expect
the matter to be resolved before April 2002 and I think that is
a realistic assessment.
13. That is a realistic assessment?
(Mr Porter) Yes. Not before April 2002. We are, as
Mr Tebbit said, very much engaged with industry in discussions
on the issues which will influence the way in which we implement
any new formula arrangement, as Mr Tebbit said, based on an economic
rate of return rather than an accounting rate of return. The economic
rate of return really draws on the approach that industry itself
adopts at the moment when deciding whether to invest in a particular
project or programme to determine whether that is going to give
them an adequate rate of return on their investment to satisfy
their shareholders, to support the share price and so on. The
difficult issues for Government in that context are how to measure
the volume of capital that is likely to be deployed on a particular
contract and what actually constitutes that capital. As Mr Tebbit
said, many of our contracts are of fairly low value and therefore
identifying the precise capital that is deployed on a low value
contract has enormous complexity associated with it. These are
the sorts of issues that we are currently engaged in dialogue
with industry, to determine whether there is a way through these
complexities which would be satisfactory to both parties. In terms
of how will we judge whether there has been a satisfactory outcome,
clearly one element of that will be the fact of an agreement with
industry because most of our contracts by number are low value
and therefore we would want staff to have a pretty straight forward
way of calculating profit for those low value contracts.
14. I will stop you there. Some Members will
probably come in on this important area and you can come back
then. Can I ask you a bit about partnering, which is another major
issue. Can you tell us about the potential benefits that have
come to fruition so far?
(Mr Tebbit) Yes. I think partnering is a very big
issue for the Ministry of Defence, as a whole, not just in this
area. It is something which is developing across the whole of
our relationship with the private sector, with industry, whether
it is in procurement, whether it is in logistics or indeed in
the construction industry where it is a very big issue indeed.
Increasingly I think we are finding that to extract best value
for money for the taxpayer one almost needs a combination of competition
and partnering, partnering in the sense that often if you can
give suppliers a long term view of what might be possible for
them, the stability of a long term relationship with a Department,
while at the same time pinning down all the measures necessary
to ensure value for moneythings like open book accounting,
transparency of their own pricing arrangements, transparency of
their own supply chain arrangementsone can then drive through
efficiencies in that contract, offer the opportunity to the supplier
to innovate and find new ways of solving issues along the way
which give you a better value for money through the life of a
contract, because sometimes even these procurement things take
a very long time indeed between the first one off the production
line and the last one. But of course it is even more true of service
contracts, supply contracts or indeed construction contracts.
Then we think we can drive better value for money out of it than
simply re-competing at very regular events which do not give the
supplier enough time to get economies of scale or innovate himself.
Increasingly we are combining straight forward competitive approaches,
where there is a stand-off relationship between us as the customer
and the supplier, with these closer partnering arrangements, not
cosy arrangements but not conflictual either, ones where we try
to share our overall objectives with the contractor so that he
is in a better position to see how he can contribute to the end
and make a profit too. Smart acquisition is obviously one of the
main themes of what we are doing which is about closer partnering
with the private sector, getting them involved earlier in contracts
so as to mutually see the benefits for both of us as we go through.
We are now doing it also in things like Smart construction where,
for example, we are bulking what are about 102 different contracts
at present into five prime contracts throughout the country for
the maintenance of our huge defence estate. So this is very much
the thing of the day, it is not just the Ministry of Defence,
it is about the public sector as a whole. It is being pushed hard
by the Office of Government Commerce and we are involved in various
industry and public sector groups of various kinds, trying to
drive forward best practice. There are various codes of practice
to make partnering work better. I see it as complementary to competition.
15. Thank you very much for that. As you know
my colleagues only get 15 minutes each so your answers are very
interesting but if we can keep it fairly crisp.
(Mr Tebbit) I do apologise, I am quite keen on partnering,
Chairman, and I tend to talk about it rather a lot to other people
16. That is fine.
(Mr Tebbit) I do apologise.
17. I just want to ask you one last question
about pricing becoming more complicated, a point we were making
earlier. Would it make sense to out-source the provision of this
activity? Are you convinced that your own people working for you
can cope with the kind of commercial pressures that are placed
on them? Put it simply, are they being taken for a ride by industry?
(Mr Tebbit) No. I am very impressed by their professionalism,
the training they go through, the qualifications they get, the
role they play in understanding what is going on in industry.
I am satisfied as the Accounting Officer but the guy who has to
do it in detail is Rob Walmsley, because it is within his budget,
so perhaps I can ask him.
(Sir Robert Walmsley) We have looked at it, Chairman.
The reason that we cannot out-source this task is that industry
will be so reluctant to share this fundamental data of their performance
and their competitiveness with anybody other than a Government
department. We have asked them again and again, we always get
the same answer and I believe them.
Chairman: All right. Thank you. I will stop
there and ask Mr Richard Bacon to come in.
18. I am delighted to hear you are keen on defence
procurement, Mr Tebbit.
(Mr Tebbit) Keen, we spend £6 billion a year,
I have to take an interest.
19. That is very reassuring. Can we start with
the Executive Summary. Paragraph one says that there are compelling
reasons for going a non-competitive route. In figure four on page
15 you set out the various reasons for not going down the competitive
route which is a summary of those compelling reasons. The biggest
by far is design and development risk. Can you just say a bit
more about this business of design and development risk? What
are its characteristics which make it different from the design
and development risk you encounter with a normal, if I can call
it that, non defence related manufacturing letting of contracts?
Does that mean it is essential therefore a compelling reason to
go down this non-competitive route?
(Mr Tebbit) If I may I would like to ask one of my
colleagues to answer that specific question. I will just comment
initially. I am not sure I regard that as the single most important
1 Note by witness: Our enquiries so far have
produced details of only one such negotiation which took place
in 1995 for the refurbishment of the Guidance Main Assembly (GMA)
for Conventionally Launched Sea Wolf missiles. Following extensive
negotiations with the company (then BAe), involving the project
team and staff from the Directorate of Pricing, the MoD was unable
to agree a price for this requirement. The difference was over
£600,000 in a potential contract which we believed should
be priced at no more than £3.5 million. The MoD therefore
decided to initiate a surveillance programme to build up detailed
data on the quality and ageing of the components so that better
decisions could be made on the need to replace or refurbish them. Back
Note by witness: The annual expenditure on contracts for
equipment and related services is £9 billion. Back