Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  40. We are saying it has stuck at 75 per cent since, whenever it is, 1992.
  (Mr Tebbit) Yes.

  41. It does not appear to be getting any better now. Does this mean that as the contractors contract in numbers that the situation is going to get worse?
  (Mr Tebbit) It means that we put effort into sustained long term competition. For example in the shipbuilding industry we are actively engaged in not necessarily looking at what the cheapest thing to do today is but to look at what sort of competition we would still want to be able to have in 15 years' time.

  42. Have we let contracts recently whose main point was to ensure the company was retained in business?
  (Mr Tebbit) I would not put it that starkly and I would not like to comment in detail about that but it is certainly a consideration we have in mind. That has to be part and parcel of it. It is of course about value for money. We come back to the fundamental point and competition is the route to it rather than an end in itself.

  43. Sure. Can we look then at figures three and four which my colleague, Mr Bacon, was mentioning earlier. I would like to go into this in a little more detail, if I may. If we can look at the different categories, one by one. The top category listed in number three, although not the top in terms of the proportion is `No competition rights'. How much of the equipment or services, whatever, that you are purchasing under `No competition rights' are things for which you would have expected a lot of other purchasers to have made purchases already so that one would expect an off the shelf price to be there and perhaps even in somebody's book telling you you can buy the goods as at Marks & Sparks?
  (Sir Robert Walmsley) I think that is an absolutely fair point. I think technically we sometimes say by competition or in some other way by reference to market forces. Without naming the company, there is an electronics company that used to do a lot of its sale of quite complicated articles literally by catalogue, the catalogue was out there in the open market. We knew they made sales from the catalogue so we negotiated a discount against the catalogue prices, and we did not go to competition, we did not have any rights but we bought them at what we regarded as a very good market price.

  44. You said "used to".
  (Sir Robert Walmsley) The reason I said "used to" is because in that particular case the company no longer exists, not because of us but because it has been taken over by somebody else and they have a different policy.

  45. The purchasers that are listed here under `No competition rights' are there none of those for which there were, so to speak, fixed prices on the books which you could have looked at and said "That is the price that we will pay".
  (Sir Robert Walmsley) There probably were but it still would be true that there would be some where there would be no competition rights. We wanted a particular article and we knew we wanted it and we bought some more of them.

  46. If you find an area where there is something which has a price, do you normally include that, when you calculate whether you met the 75 per cent target, are those included as competitive or non-competitive?
  (Sir Robert Walmsley) It is a judgment. If we are absolutely satisfied that the price is by reference to market forces and genuinely a feeling as though it had been evaluated on a competitive basis, then we would class it as competition. Quite often we do not though because we have not got that evidence. We try not to delude ourselves that we are doing better than we might be.

  47. Let me pass on, if I may, to the second category of "Design/Development risk". This seems to indicate that were you to lock into your original contract certain rights you could overcome this problem?
  (Sir Robert Walmsley) Yes.

  48. Locking in the right to go to a second contractor, locking in the right to intellectual property. You seem to indicate that you do not make much effort to lock that sort of thing into the original contract.
  (Sir Robert Walmsley) We do. We ask for it to be done at a fair and reasonable price. You cannot ask for things that are not yours for nothing but you can ask for the right to employ them for UK defence purposes at a fair and reasonable price. Going back to my example of the aircraft, the risk that we would entail by running a subcontract competition for a modification to an aircraft whose design authority, whose safety was being assessed and certified by another contractor, would simply be wholly disproportionate.

  49. I quite understand that, but that surely is different from saying that you go for the same contractor because the contract "Entails changes to the existing design where insufficient scope exists for competition owing to Intellectual Property Rights . . ." It seems to me it is purely intellectual property rights which says you may not go for another contractor rather than you choose not to because you think it is dangerous.
  (Sir Robert Walmsley) Owing to intellectual property rights is part of it but if we have not secured in the original contract access to those intellectual property rights at a reasonable price then clearly we do not have it. If it is a reasonable price it may still not be worth paying.

  50. When you are estimating whether something is a reasonable price or not what estimate do you put in for the risk you may want to go for a further contract and may not be able to go for competition?
  (Sir Robert Walmsley) I do not recall ever putting a formal estimate of the value on that.

  51. If you believe in competition should you not be trying to estimate that?
  (Sir Robert Walmsley) What I believe in, Mr Rendel, is competing large costs. I think it is wholly wrong to compete a very small cost, which might be one tenth of one per cent of the value of the original article in order to, so to speak, prove a point which actually results in huge risks being transferred back to the MoD. If it was a large contract then I absolutely agree with you we should be looking to explore ways of doing competition.

  52. You will not necessarily know when you purchase the original goods.
  (Sir Robert Walmsley) You have got a pretty good idea that most of the modifications are going to be a very small proportion of the value.

  53. Okay. Can we go on then to the third item which is "Production risk or capacity". While you are talking about follow on contracts and spare parts and so on, should you not be looking at the original contract, how you are going to pay for the spares?
  (Sir Robert Walmsley) Yes, we should and we do that increasingly. We quite like the contractor now to own the spares so we are trying to look at far more imaginative ways of providing spares so that there is an incentive on the contractor to minimise the cost of the spare parts rather than to maximise the profit he gets through supplying us articles which we should not have required in the first place if the original thing had worked properly. I absolutely agree with you, we are learning and we are developing that. That is why many of our new acquisition contracts such as Astor, the five planes with an airborne radar, now come with, included in the design and development contract, ten years of support.

  54. Presumably spares are not just when the machine does not work properly. Are we talking about ammunitions maybe used in an unexpected war or are you talking about replacements?
  (Sir Robert Walmsley) Ammunition I would not regard as spares. I was really meaning aircraft spares or ship spares which you have to fit because the original article has broken.

  55. All those you expect to fit because equipment wears out or because planes occasionally crash which are nothing to do with the plane itself, those are all in the original contract?
  (Sir Robert Walmsley) No, we buy them progressively through the life but as I have tried to explain on newer contracts we are trying to load into the original design and development contract an obligation on the contractor to be incentivised to reduce the cost to us of spare parts through the life which does not come if you do not let the contract at the same time.

  56. Can we look at the final item, the "other reasons". I notice included in here are repeat orders. It strikes me as surprising that if you have got a repeat order you have not got a price built into the contract?
  (Sir Robert Walmsley) Quite often there are option prices built in to the original contract. We do have options and we take them up but of course we are not compelled to take up those options, we would have the choice whether we wished to compete it again or not, sometimes we take up the option prices, sometimes we do not.

Mr Jenkins

  57. Some easy questions, I only ask simple question. What is post-costing?
  (Mr Tebbit) After the contract has been completed these splendid teams from the DPA go in and see whether the costs which were used were in line with the original assumptions.

  58. There is a chance you might get a reduction in the price after the job has been completed?
  (Mr Tebbit) No, it is more of a measure as to how accurate one is and therefore good learning for the future. I do not know if Stan wants to say more but this is part of the expertise of the in-house teams. We have 2,000 odd commercial officers and the pricing teams are about 400 specialists who do this sort of work. Stan, would you like to comment further?
  (Mr Porter) Post-costing a contract is for one of three reasons. To test the accuracy of our original estimating techniques for that particular contract or to help us price follow on contracts or to determine on a selective basis, as Mr Tebbit has said, the outturn on the particular contracts. Post-costing does not necessarily automatically lead to a change in the price of the contract. The issue that we are particularly interested to determine is whether there was Equality of Information at the time the price was agreed. If there was not then clearly we would determine whether a discussion with the contractor was appropriate in relation to that supposed absence of Equality of Information.

  59. Is it not a process of trying to also improve the efficiency of the systems?
  (Mr Tebbit) That was my point. It is interesting that most overseas partners of ours do not use this technique. It is a technique that we use but I am sorry to say that it does not seem to happen very much overseas, I wish they did more of it.

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