Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 100 - 119)

WEDNESDAY 14 NOVEMBER 2001

MR KEVIN TEBBIT, SIR ROBERT WALMSLEY KCB AND MR STAN PORTER

  100. You could not go to Victoria Street, the Army and Navy, or somewhere like that?
  (Mr Tebbit) Not when you need 20,000 in one go in two days.

  101. You might as well do because they were no good anyway, were they, if I remember rightly?
  (Mr Tebbit) You are quite right. I should not have offered you a free shot at me.

  102. Get shorter soldiers, that is the best thing. Make sure soldiers are only 4'2".
  (Mr Tebbit) I knew when I mentioned that my generosity would not be returned.

  103. How many contracts would you think it is the case where there is, say, only one contractor?
  (Mr Tebbit) You mean available in the market?

  104. Yes. I know it is difficult. The point I am getting at is that—
  (Mr Tebbit) For aircraft?

  105. For anything.
  (Sir Robert Walmsley) Twenty five per cent.
  (Mr Tebbit) In some cases we chose to rather than were absolutely obliged to.
  (Sir Robert Walmsley) That will be about right. If it is 25 per cent by value it will be about 25 per cent.

  106. In paragraph 1.9 it tells us that NAPNOC only applies to contracts worth more than a million pounds and it occurred to me, as I think it occurred to Mr Jenkins, that there must be thousands of contracts which are less than a million pounds. I had to go out of the room just for a minute when the total was given, but I think as I went out I heard somebody say £861 million worth. Is that right?
  (Sir Robert Walmsley) That is all our contracts, competitive and non-competitive, valued between £250,000 and £2.5 million.

  107. Then I heard Mr Porter say that that is just a minute part of the defence budget. Somebody said that. It is a very small part of the defence budget.
  (Mr Porter) I suggested that in value terms the proportion was relatively low.
  (Sir Robert Walmsley) It is four per cent.

  108. Whether it is four per cent or not it is still £861 million, which is a considerable amount of money. Are you saying that there is no system to check on that one million pounds worth of small contracts? How do you check that, whether it is competitive or not?
  (Mr Tebbit) There are checking systems of course throughout the organisation. There is a distinction between whether something is mandatory and whether it is recommended best practice. Perhaps Stan Porter might say something about the way in which he takes on his contract staff. There are 2,000 purchasing staff doing this. Some of them are at relatively junior levels and we do need a thorough system to ensure that proper procedures are applied. It is one of the reasons why we have got so much guidance in the Department, much more than I would like to see, because we have to cater for a whole range of different types of people doing very different sorts of purchases.

  109. Would you also tell me why the million pounds was plucked out of the air? Why was it not one and a half million or £500,000?
  (Mr Porter) When we started the NAPNOC procedure, in order to ensure that it was introduced in the right way and staff concentrated on the techniques, we set a threshold of £10 million but as soon as the concept became properly embedded within the organisation after about only 12 to 18 months we reduced the threshold to one million pounds. That is not to say that for all of the very large number of contracts that are placed without competition below that threshold we do not price at the outset. Indeed we do and the vast majority of those contracts are also priced at the outset. It is really, as I sought to explain to Mr Jenkins, the bureaucracy that is involved and for the lower value contracts we seek to implement a more streamlined process.

  110. You assure this Committee that the contracts for a million pounds and less will get us equal value for money as if they were above a million pounds?
  (Mr Porter) Oh indeed, and in answering your supplementary on how do we ensure that that is achieved, we achieve it through the process of delegation. I look to line managers to satisfy themselves that their staff are performing their duties in a proper way.

  111. I was also intrigued when I read the report that the system has created a competitive environment similar to NAPNOC and I think it said with the competitive pressures of the market place. That intrigued me because I cannot understand how you can get such an atmosphere when you are not going to tender.
  (Mr Tebbit) I think that is a reference partly to the `Should Cost' data which the pricing teams use. These are people who have tremendous expertise in individual sectors of the market about the cost structure of individual companies.

  112. Surely you cannot beat a system where you put out a specification and you ask half a dozen people to put in a tender? I would have thought that was the pressures of the market place. They know when you come to them that they are going to get the contract at the end of the day anyway, do they not? Only two did not.
  (Mr Tebbit) As has been pointed out before, this is an effort to give the taxpayer the best possible guarantee that we are creating competitive pressures and driving down costs. I do not say it is absolutely perfect because there is no absolute measure but all the evidence and all the information I get suggests that our people do achieve driving down prices and better quality results. Companies complain about the pressure they are put under by these teams and we would not keep them in being if we did not feel that they were giving us a good return on investment. I cannot give you a precise figure of how much I think they save us through this technique. Robert Walmsley said he thought about ten per cent of what we would otherwise be paying. That is a perfectly good benchmark figure. That would be several hundred million pounds a year.

  113. According to my calculations that would be, over the 250 contracts, £2.5 billion.
  (Mr Tebbit) I do not think it would be quite that big because I am not sure we have quite that size of equipment procurement. Over several years it would be, yes. Each year we spend £6 billions on defence equipment. It certainly is, as far as I am concerned, a good investment to have. I would put it the other way round. I would not want to disband those teams and simply accept whatever price the company offers me.

  114. What was also in the report was that all contracts worth more than £250,000 should be on the equality information pricing statement made between the parties and yet we read in the report that in 31 per cent of the contracts surveyed no such statement had been signed despite the fact that it was the policy to do so and it gives some of the examples where this happened. I am not saying that those projects lost money and I am sure you will probably say that they did not lose money, but why did you break that policy?
  (Mr Tebbit) We have been round this once before. I am happy to go round it again and get somebody else to do it if we may.
  (Mr Porter) As you say, the policy is that above the value threshold you mentioned we should have a formal equality of information statement signed. The report gives some illustrations of those situations where we have not had an equality of information statement signed as to the ways in which we sought to assure ourselves that there was none the less some equality of information at the time the price was agreed and the files will record these reasons which is why the NAO were able to identify them in their study report. In one sense there was a capital "S" statement signed in 69 per cent of the cases. In most of the other cases, as illustrated in figure 5, there would have been some statement with a small "s" of the reasons why we were satisfied at the time we placed the contract that we had had the information that we judged to be necessary on which to base the price.

  115. But if there is no statement then you have to pay the contractor.
  (Sir Robert Walmsley) We have got to get our act together on that. I am going to be quite unequivocal about that. This report told me that what was our policy was not being enacted and we now do that, full stop.

  116. It is so refreshing, Sir Robert, to have somebody sitting there who admits that they actually made a mistake. It is very rare. Civil servants very rarely admit mistakes.
  (Mr Tebbit) The procedures were not being fully observed as they should be.

  117. There was something else that worried me. When I read the report I got the impression that contracts between £250,000 and a million pounds, where there was no statement and no NAPNOC, were not really being scrutinised. You gave me the impression before that the smaller the contract, particularly that small, you are not really interested in it. Have I got the wrong impression?
  (Mr Tebbit) That is certainly not my impression as the accounting officer and that is not the impression I get when I send my audit teams into the organisation. It is a question of how elaborate the process needs to be in relation to small contracts. It is a sort of de minimis issue, not a lack of control issue.
  (Mr Porter) I could certainly say that the discipline that is brought to bear on an individual as he hovers with his pen above a contract to sign is really quite great. I speak also from personal experience of a few years ago, that one will want to ensure that all of the terms of the contract and the price are right and represent the best value for money before one actually puts the pen on to the paper to sign the contract off. As I have sought to explain in general terms, I expect the line managers to be observing the way in which their staff perform.

  118. Can we turn to page 30, paragraph 3.5? In this it says that contracts are sometimes held up because the negotiations are prolonged. This is going to be inevitable because there is no tender procedure. Therefore you are going to have a situation where time limits cannot be put on because at the end of the day you have got to negotiate, negotiate, negotiate, and does this not automatically mean that defence projects are going to be held up? There have been reports over the years on major projects where, to be quite honest, there are long delays in defence procurement. Is this not another step towards prolonging them?
  (Mr Tebbit) There are delays for good reasons and delays for bad reasons. I regard the delays here as essentially being for good reasons. We have pressure from industry who say that we must come to terms quickly and accept their price. I am glad my staff refuse to be put under that pressure and say, "Not until we are satisfied that the price is right and we have an acceptable contract". I do not think there is anything in this particular neck of the woods that led to a delay that is serious in terms of introducing new equipment into service.

  119. Sir Robert inferred that we will not settle just because we need the product. If that is the case it may well be that you negotiate and negotiate. For example, on the four projects, the Astute programme is nine months late, the Landing Platform Dock (Replacement) is prolonged, the AS90 spares contract is six months late, and the Sting Ray was 12 months late. You are saying that it does not have a great effect on the defence capability but at the end of the day it has to have some sort of effect.
  (Mr Tebbit) I do not think it does have a great effect. As I say, I would not apologise for all the delays that are caused. I would agree with you that we should not have delays simply because we are not sufficiently efficient as a customer to procure the thing quickly, and to that extent I think we do need to look at our procedures and are doing so to make sure we are not unnecessarily cumbersome and slow in coming to terms. I agree with you to that extent.


 
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