Examination of Witnesses (Questions 20
WEDNESDAY 14 NOVEMBER 2001
KCB AND MR
20. It is in the chart, 38 per cent.
(Mr Tebbit) The others are also very important. Intellectual
property rights are important constraints, the proprietary nature
of a lot of defence equipment is a real point as well. Also when
we get at the lower level, how prime contractors organise their
own supply chain is another factor.
21. I was coming on to that. This is all within
(Mr Tebbit) I quite accept that. If I may I will ask
Rob Walmsley to give you a more detailed account.
(Sir Robert Walmsley) Quite a lot of the contracts
surveyed you will know are of very small value. The reason they
are of very small value is they are support contracts to existing
much larger perhaps pre-existing procurements. A typical example
would be what is called post-design services for an aircraft and
that is effectively keeping the drawings up to date and undertaking
the through life modifications that are inevitable on a large
article like an aeroplane or a ship. To swap design contractor
between the aircraft design authority and some new company would
raise so many issues about who was actually responsible, given
the necessary interface between the new thing and the aircraft
itself, that the design and development risk of that all comes
back to the Ministry of Defence. If the two companies do not get
the interface right or if the safety of the aircraft is in any
way threatened because the competitively chosen sub-contractor
for the small component did not understand anything, it is sometimes
very, very difficult for the Ministry of Defence to escape and
even if we can there will be inefficiencies at the interface.
22. I am going to ask you about post-design
services in a second so can you please hold that thought. More
generally I want to ask you a question about intellectual property
rights. The MoD came under some criticism a few years ago because
quite a lot of contracts were being let on the basis that somebody
went away and did all the design but then effectively after the
design test runs, the first proper batch was let competitively
which led a lot of manufacturers to say "Why are we bothering".
Could you update the Committee on where we stand on that now?
What is the attitude?
(Sir Robert Walmsley) The general attitude is that
to move away from the designer for the production phase of a modern
large defence equipment entails far too much risk. It is subject
to all the same arguments I mentioned before. Who is holding that
risk, in the end it comes back to us. There are some defence equipments
who have been much more successful and notable amongst those would
be frigates where we have found some success in competing successive
batches of the Type 23, so that there was a competitive batch
of three awarded to Swan Hunter and I have absolutely no doubt
in my mind that set a benchmark for the subsequent gains we had
in later ships from competition. What we had to do in order to
enable that competition was the Ministry of Defence itself had
to place a contract with the designer for him to supply the information
to the follow on competition winner. We carried that extra cost
but even so it represented value for money for us.
23. You mentioned risk and management of risk
is central to all this. In paragraph 15 of the Executive Summary
at the front of this report it says: "Very few contracts
used joint risk registers although the Department's guidance encouraging
their use was only introduced in late 1998 after many of the contracts
in our survey had already been let." What is the current
situation with the joint risk register?
(Sir Robert Walmsley) The current situation is that
I want them everywhere where the contract is worth more than a
de minimis value, I think below a million pounds it would
be too much effort. There will of course be a need for each party
I think to maintain a separate risk register. We will have risks
that we do not wish to discuss with the contractor about some
aspects of his commercial performance which we might not wish
to disclose to him and I am sure he will have some issues that
he will want to keep private from us but by and large the attitude,
the policy is to maintain joint risk registers for any contract
of a significant value.
24. Paragraph 1.7 talks about Sentry E-3D Post
Design Services where the Department used innovative or seemed
to use innovative solutions to overcome the difficulties that
can arise. Can you say more about those innovative solutions?
(Sir Robert Walmsley) The innovative solution in that
case is that the design authority is Boeing, headquartered in
Seattle which is where most of the work has been done. These aircraft
are based at RAF Waddington. We have a perfectly competent company
called Marshall Aerospace who were appointed the sister design
authority so that small modifications, fitting a different sort
of camera or anything you like, the detailed work could be done
in Cambridge rather than sending it all the way back to Seattle.
It was Marshall's job then to undertake the liaison with Boeing,
not the Ministry of Defence. It just made it all the more responsive,
that was innovative.
25. I would like to ask you about the quality
of information post costing. Paragraph 1.12 says: "No precise
definition of the phrase Equality of Information exists".
Now obviously I understand that post-costing encourages contractors
to play the game straight but nonetheless it does not seem to
be a reason for not having a precise definition. I am just interested
in how you evaluate whether you have got quality of information
and if you do not have a precise definition what it is that they
(Sir Robert Walmsley) I think the words here are absolutely
accurate but I am quite clear what it is intended to convey. It
means that you have the same information. What that is is a reflection
of an open book policy, it is a reflection of a relationship between
us and the contractor which says "We may argue about pricing
but we are not going to do it on the basis that we have information
that the other party does not". It goes on to explain here
that quite a substantial proportion of the contracts did not in
fact have an Equality of Information statement signed. I think
if one reads the report very carefully it makes clear that there
were substitutes for that. I do not regard that as satisfactory.
I think this was a failure of control on my part and we are now
pushing very hard to make sure such statements are signed and
are available whether or not they are redundant, it does not matter,
they should be there. I think it is good drill.
26. Standard practice.
(Mr Tebbit) My view as an accounting officer is that
I expect that Equality of Information to be available, whether
it is a statement or not, I prefer it, but I expect us to do that
as a sort of condition of contract before we get into the deal.
27. You mentioned open books, I wanted to ask
you about the open book accounting and earned value management.
Could you say how widespread is their use and what has the benefit
been so far?
(Sir Robert Walmsley) Open book accounting is more
and more part of the condition of partnership. It is very hard
to imagine that you get into a partnership on a serious long running,
non-competitive contract without such an arrangement. It is widespread
now throughout non-competitive procurement, although we would
not bother with a huge number of tiny contracts, less than £50,000,
it just is not sensible, it is not worth it. We know what those
articles cost and we expect to see them get cheaper year on year
unless there are some extraordinary circumstances. Earned value
management is a much more difficult question. I simply say we
are absolutely convinced that it is best practice project management.
We have seen this with the best performing companies. We have
seen it in their performance of contracts, not with us. We have
increasingly expected it but not mandated it as a feature of contracts.
Other countries sometimes have mandated it, they spend more effort
trying to make earned value management work and it has not always
been a success. We believe it is best practice and it should be
encouraged but not 100 per cent use.
(Mr Tebbit) If I could just comment. We are something
of a leader in the UK public sector in using earned value management.
A lot of the integrated project teams that Rob Walmsley runs,
for example the new Carrier project, are applying earned value
management as they go through their own project programming and
approach. This is something I am talking to other Government Departments
about within the UK as a technique which they might like to be
using as well. So although it is not mandated we are pretty well
the leaders in that sort of approach in Whitehall.
28. I would like to ask you about paragraph
2.9 which talks about reciprocal audit and pricing arrangements,
in particular the example of the Gazelle from France. Although
it says the project team had no oversight of their work, they
did receive an assurance at the time of pricing that the Department
was not paying a higher price for spares than the French Ministry
of Defence. The National Audit Office report that they were ".
. . concerned that the arrangements in place for pricing contracts
with overseas contractors should always offer complete assurance
that value for money is being achieved. Greater visibility of
reciprocal pricing reports in such circumstances would enable
a more informed judgment of value for money to be made".
What are you doing to ensure that we get this greater visibility?
(Sir Robert Walmsley) We run the reciprocal agreements
with other countries. I am quite happy that one of the best ways
of securing value is to make sure that we are getting as good
a deal from the contractor as the, if I can put it like this,
host government is getting for an identical piece of equipment.
As long as we have visibility of the evidence that supports that
I would regard that as case closed. It would be quite intolerable
to the French Government, you see, if we were able to buy Gazelle
spares more cheaply than they were from a contractor. We can assume
they behave as sensible beings and try to get as good a price
as possible and all I want to see is evidence that we have got
that price and we get that signed. The same routine applies in
the United States. I think that does lead me to a slightly technical
point. The expertise of our pricing staff depends on a deep understanding
by individuals of how the costs arise in a given industrial facility.
They do not move around much. They are not specialists in aircraft,
they are specialists in a particular facility. The idea that we
could parachute our own pricing staff, even if a foreign industry
would agree, into a foreign company, understand all their accounting
methods, etc, etc., I think is really leading us down a rather
dangerous path. I would rather rely on host governments who do
understand those costs and get as good a deal as them.
29. Another question about this section, page
23, paragraph 2.12, it talks about `Should Cost' data and how
the Department makes use of `Should Cost' data, mainly on large
projects. Could you say, first of all, how much do you use external
consultants for providing advice on `Should Cost' data?
(Sir Robert Walmsley) Not much. We have the best available
costs for existing defence equipment in the United Kingdom. If
that is not the case it would be astonishing. I mentioned that
our pricing staff stick with an industrial facility and become
experts in what the costs are in that facility. `Should Cost'
data though is extremely difficult to get hold of for something
that has not yet been designed or constructed and for some of
these articles, we are placing a design and development contract.
At that stage we do try to do benchmarking and we have been trying
to get going a benchmarking study on ship pricing by relating
it to efficient merchant ship construction and some factors that
relate the complexity of a warship to the relative simplicity
of a merchant ship. We are working hard at that as we are in a
number of other areas. We are always looking for better `Should
Cost' data. I think the idea that it is available if you only
look hard enough, that simply is not the case.
30. I am running out of time so I will ask you
one more question which is about the process one goes through
in deciding what the requirement is. For example you have a lot
of one to one relationships with individual suppliers. Let us
take an extreme example, if say there was only one helicopter
manufacturer, to what extent would you go through a process of
saying "Well actually the requirements have moved from A
to B and we can compete by saying let us buy a Hovercraft instead".
In a general sense to what extent do you look at the world like
(Mr Tebbit) That is how we now do it. That is the
essence of Smart Acquisition and Smart Procurement. We now define
the output that we are looking for and we start upstream, as it
were, at an early stage, talking to industry about how best to
meet that output objective rather than to pre-define the system
that might deliver it. One of the keys of Smart Acquisition is
that partnering and discussion with the industry well before we
finally try to go to project definition still less go to main
31. Culturally, how well do you think that is
embedded in the MoD and each of the Services?
(Mr Tebbit) It is new and it is growing. Some of the
biggest challenges are to say to the RAF "Well it may not
be a manned aircraft in future, the best way of delivering that
capability may be by a remotely controlled pilotless vehicle or
indeed not from the air at all". We also look at capabilities
now. The way we organise ourselves within the Department we have
capability managers who run a range of equipment indirect fire,
for example. They look at the effects to be achieved on the battlefield
rather than the systems that might deliver it. That is also good
for individual project development, it is also good for looking
at trade-offs between different ways of achieving the military
effect. So part of Smart Procurement is with the integrated project
teams doing that approach, the other part of it is right up in
the headquarters themselves as the customer in trying to be smarter
about the way in which we plan our equipment programme.
32. I wish you luck, Mr Tebbit, in persuading
the airforce to have pilotless aircraft.
(Mr Tebbit) I thought I would just throw that in.
There are real debates about these sorts of issues arising from
that type of approach.
33. Firstly, in general terms are profit levels
for the suppliers higher with competitive or non-competitive deals?
(Mr Tebbit) I am glad about these sorts of reports
because reports like these make me think about those sorts of
issues. I have to say until I read the report I had not paid quite
so much attention to this as the report drove me to. The information
that we have shows that it comes out about the same, that there
is no evidence that non-competitive procurement is any less under
control, as it were, from our point of view as a customer than
by competition. That does not surprise me entirely because we
do put a huge effort into our `Should Cost' work and our own pricing
teams but it seems to come out about the same in terms of the
profit that the supplier gets.
34. Do you believe that is because of the introduction
of things like NAPNOC or was it always the case?
(Mr Tebbit) Historically we have gone back quite a
long time, I am not sure if it is in the report but we have looked
at data over about 20 years and it seems to be relatively stable.
I would like to say that NAPNOC has created a complete breakthrough
but I am not aware that the trend is particularly distinct. It
has certainly not got worse, that is one absolute clear thing.
I do not know if Stan would like to say more about this. I think
the trends have tended to be quite stable.
(Mr Porter) They have been stable, Mr Rendel. I think
one of the benefits of NAPNOC is in agreeing a price at the outset
it places the maximum incentive on the contractor to an efficient
performance. Whilst that may mean that he achieves a higher profit
on that particular contract, the impact of the efficiency that
is generated is felt by the Ministry in downstream activity.
35. Sir Robert you said in answer to the Chairman,
I think, that you use competitive systems wherever sensible and
practical but that despite this the 25 per cent that is purchased
under non-competitive deals is still stuck despite strenuous efforts
you describe. Can you describe those efforts?
(Sir Robert Walmsley) Yes, I can. When we came to
approach the Batch 2 Trafalgar Class or Astute Class of nuclear
attack submarine, which is one of the cases that this report studies,
every single new submarineapart from three that were constructed
at Cammel Laird in the 1960shad always been built at Barrow.
As we approached that programme in the mid 1990s we were beginning
to get hold of this idea of prime contracting so that the shipbuilding
element of the contract, which was essentially what was done at
Barrow-in-Furness, was not the sole determinant of the contract
by any means. The prime contractor who would supply and purchase
the weapons systems and integrate them into the ship need not,
in other words, necessarily be the same as the shipbuilder. We
also thought it would be a good thing to shake up the shipbuilder,
he did not enjoy that. We had noticed that there were some very
advanced construction techniques being employed for essentially
offshore oil and gas platforms and we were able to establish quite
a keen competition with the then Marconi company as a prime contractor
supported by some North Sea fabricators who had got these very
advanced design techniques on the one hand, compared with the
shipyard at Barrow competing against them, supported very interestingly
by an American prime contractor who would help to be the integrator
because the shipyard did not have those skills. We ran that quite
sharp competition which ran through 1994 until the Marconi company
then decided to buy the shipyard. So we closed the competition
but I can remember quite well that the two bids we had at that
stage showed approximately a £200 million advantage of the
Marconi led bid over the one prepared by the traditional shipyard.
We loaded that price of prime contracting into the then subsequent
single tender action negotiations with the new team.
36. Are you saying they are counted in the end
as single tender actions and therefore not competitive or not?
(Sir Robert Walmsley) It counted as non-competitive
because the contract was closed on a non-competitive basis but
we had made these huge efforts to start the competition. We got
the benefits of competition because we got the prime contract
price down by the £200 million.
37. When you talk about strenuous efforts, are
you sayingthere is another example in paragraph 1.7that
all these efforts in the end did not produce competition and that
is why it stuck at 25 per cent?
(Sir Robert Walmsley) No. Each one of them is an effort
to produce competition where it is sensible to do so. It stuck
at 25 per cent for reasons that just come out of the arithmetic,
there is no magic about the numbers, as I think the Chairman was
saying, we just keep trying.
38. Not succeeding.
(Sir Robert Walmsley) Well not succeeding except each
one is a success and then the industry quite frankly has reduced
in a vast reduction in the number of defence contractors and people
have been saying we would not be able to hang on to the 75 per
cent level. I thinkme included actuallywe have been
quite surprised and very pleased that we have managed to keep
the level up and that is by always looking for new suppliers.
It is quite interesting that we bought ammunition from South Africa
recently as a result of a competition between Royal Ordnance South
Africa, something we would not have contemplated a few years ago,
that was going out round the world and looking for a new supplier.
39. You are essentially chasing your tail all
(Sir Robert Walmsley) I do not know whether it is
my tail or other people's tails but we are always chasing competition.
(Mr Tebbit) It does not feel that bad. 20 years ago
or so we only did about 60 per cent
of our procurement by competition, it has risen, I think, over
the years. There are pressures in the opposite direction now.
Consolidation and amalgamation of companies. One way of overcoming
that, as Rob Walmsley has said, is through looking overseas where
it is not absolutely a vital area for us to retain a strategic
3 Note by witness: On reflection the figure
was nearer 40 per cent, rather than 60 per cent. Back