Examination of Witnesses (Questions 60-79)
SIR NICHOLAS MONTAGU KCB, MR JOHN YARD CBE, AND MS LIS ASTALL
MONDAY 3 DECEMBER 2001
60. In the next bullet point it says that one of the other things it did not do was provide a mechanism to distinguish changes required to meet legislative requirements from routine change requests. Does the procedure you have talked about also take account of this distinction?
(Ms Astall) The legislative requirements go through a slightly different route because they tend to be quite major, and they come in and, as Nick described, they are estimated then and feed-back is given. They would then go through a slightly different route to end up in the same place. But, yes, it does clearly differentiate between them.
61. Did it necessarily matter whether it had been a legislative change, in that from your point of view as the provider a change is a change is a change and you have to implement it.
(Ms Astall) Sometimes it matters because of the date that legislative change is required for. If you have a change that somebody wants because it is a nicety or something they want to do, and there is a piece of legislation which comes in, we might move the "nice to have" back to a later release to fit in legislative change. So, yes, it is important to know which source it is.
(Mr Yard) There are some clear Government procedures set out on Table 3 on page 8 so that in the event that there is a need to prioritise the work then those various bodies which are set out in that table would look at the aggregate impact and decide what should be done first and what perhaps should be put on the back-burner.
62. I want to ask the C&AG some questions first. During the responses so far we have received from Sir Nick, he rests heavily on your endorsement of the outcome of the model. Do you also feel that you have authenticated the outcomes of the process as well as the process itself?
(Sir John Bourn) Yes, I do think that.
63. Because Table 7 clearly seems to endorse the outcomes, does it not? The headline is, "Accenture's proposal offers better value for money than breaking the contract." I want to come in a minute to the reasons why the £44 million costs were going to fall and therefore had to be added. If we were to take the £44 million out of the equation for a moment, would Accenture still have been financially advantageous?
(Sir John Bourn) At that point you look and see there are a number of suppliers and they look as if they could have been there or thereabouts. The £44 million was a crucial factor.
64. Is it not true though that it is really the interplay of two fairly simple numbers which determine whether or not another tender would be more or less advantageous to the public purse, and those two numbers really are the cost of labour and its productivity? One is a function of the other. The result is the function of those two mathematical factors, is it not?
(Sir John Bourn) Yes.
65. What test did you undertake then to authenticate that since the price of the labour, we know, was substantially higher with Accenture than it was with at least some of the competitors, what gave them the competitive advantage, as Ms Astall herself has said, was the productivity gap between themselves and anybody else, or alleged productivity gap? I wonder what steps you took to authenticate the difference. In my mind it is something like 11Ö units for competitors to 7Ö units for Accenture. Are you qualified to make such a judgment about productivity?
(Sir John Bourn) We are, but perhaps I can ask Mr Gordon.
66. What is the methodology by which you arrived at that?
(Mr Gordon) In looking at the productivity estimate we relied on the Inland Revenue estimates and the fact they had been independently validated by another firm of consultants, PA Consulting. We did not second guess the Inland Revenue estimates.
67. Putting aside PA Consulting for a second, actually what you have done is taken the figures provided to you by the people you are supposed to be auditing, and you have then said the maths is correct?
(Mr Gordon) We know where the Inland Revenue source their estimates and we think they used a correct procedure to give a proper financial evaluation.
68. It seems to me there are two ways of finding out the productivity. We know what the price of labour was, and we can put that to one side. Either we try to use some external consultant to endorse the figures or to suggest figures to the Inland Revenue or we can go to tender. We did not go to tender so we relied on somebody's estimates of the rates of productivity which other firms could achieve. I wonder what process you used to endorse that, since we are now going beyond checking the maths to say, "We think that estimate of productivity is correct"?
(Mr Gordon) We were satisfied that the productivity estimates had been produced by Inland Revenue experts and validated independently and, had we employed consultants, it would have been just be a second guess.
69. It would not lead me to endorse it, I have to say. If I were in your shoes, Sir John, I am not necessarily certain that I would endorse that. I would say I endorse the methodology and describe the methodology, but it seems to me you have gone one step further than that in this Report and have actually said, "This was not only a correct methodology but also the outcomes were correct as well." Are you satisfied, having listened to the questions I have just asked?
(Sir John Bourn) I am because the crucial thing is the £44 million which you would have had to pay if you had changed. If that had not been an issue in the equation, all the points you make are very relevant and we would have done much more to test them but taking them together we reached the view we did.
70. It reminds me of the old joke where the person in the car stops and asks a passer-by, "How do I get to Z" and he says, "Well, I wouldn't start from here." I think probably none of us would want to start from a £44 million penalty and that really does seem to be the issue. I have to say, I am not totally convinced that we have got to the bottom of the productivity differential which is very substantial. It is more than 50 per cent, is it not, Ms Astall? You are claiming it to be more than 50 per cent more efficient than your comparators?
(Ms Astall) If I can perhaps explain a little bit more about productivity rates at the risk of boring you. It does vary a lot depending on the complexity and the timescale. For one release, as an example, you might have three and a half man days at one end of the spectrum, you might have 15 man days at the other end of the spectrum. It is a very difficult science and I think PA Consulting did put together a very robust model. Yes, in some cases it can be 50 per cent higher, as you say, and that was the case in this model.
71. Seven and a half to over 11 is more than 50 per cent but was the difference alleged of the productivity. Now earlier on, I think it was Mr Steinberg who was saying that because the C&AG's report, Sir Nick, indicates there were options which might have been taken, that demonstrated that you were not locked in, as has been suggested by the questions, to a particular contractor. Having listened to the exchange between myself and Sir John just now actually you were locked in by the 40 odd million pounds differential which made all the difference in the world really according to the C&AG's figure. I would have been rather less sanguine, if I was in your seat now, about the statement you made a few months ago about not being locked in. Do you feel that?
(Sir Nicholas Montagu) No, I feel no less sanguine, I am afraid, Mr Trickett. Let us try and unpick this into its component parts. As the Comptroller and Auditor General has said, the costs of breaking the contract with Accenture, which are detailed in table six on page 14, are a major element. Why were there break costs? Answer, because if you enter into any commercial contract, whether you are Government or not, whether it is a PFI contract or not, if you break the contract there are associated costs. The earlier contract was looked at and regarded by the National Audit Office as providing particularly good value for money. The break costs stem, at least in part, from that contract. What I, as Accounting Officer, have to do is to look at the totality of what we would pay and what we would get in return. I concluded that extending the Accenture contract represented the best value for money and that is the view of which I remain, and which I share with the C&AG.
72. It strikes me the £40 odd million penalty which would have been incurred had you changed contractor was the determining factor. That has clearly come up in the report and from my exchanges with Sir John just now. I think you accept it as well. The reason for extending all this was because errors were made earlier and this comes back to the point that I was making, does it not, that I would not start from here if I was trying to get from A to B?
(Sir Nicholas Montagu) I think, Mr Trickett, I would not accept that errors were made earlier.
(Sir Nicholas Montagu) When the Contributions Agency signed the original contract in 1995, again as the report recognises, the scope for enhancements was on all reasonably foreseeable assumptions adequate.
(Sir Nicholas Montagu) What was not foreseeable was the extent to which, following an election two years later, there would be an explosion almost in legislative requirements. I have to say that I think it is questionable whether it would have been a sensible or, indeed, a proper issue for the then Accounting Officer to take into account, if there was a change of Government then we would need it, nor I think would it, at that point, even have been predictable.
75. Well, I beg to differ. I must not take you down a political route but nevertheless elections form the background of your work and this contract. Indeed, this contract was clearly going to span two Parliaments. I think it was predictable that the two main parties were taking different views about the whole taxation regime. I think it was predictable in 1995 that had the election gone in one particular way that you would have been faced with major changes. That is why I stay with the point that an error was made at the time the original contract was made.
(Sir Nicholas Montagu) I have to dispute that, Mr Trickett. I really do not think it is reasonable to expect the then Chief Executive of the Contributions Agency to have foreseen in 1995 that a massive increase in what was already substantial provision for enhancements would be required regardless of who won the following election.
76. Okay. You and I disagree on that point. I remain firmly of my view. I want now to move on to something else which is the penalties. No doubt the contract is going very well and the productivity levels estimated have been achieved, and I am very pleased to hear that. Contracts are sometimes tested in extremis when elections take place or some other cataclysmic event of that kind, whether it is a change of Government, a change of statutory regime and so on. In relation to the penalty clauses which are inside the contracts, this really, I think, is the point at which the question of risk is articulated between the public and the private sector. I understood the penalty to be 150 per cent of some figure and I would just like that to be repeated should cataclysm occur?
(Mr Yard) If there was a particular development which had taken place then the maximum penalty which could be charged, if there was, as you describe it, a cataclysmic failure, would be 150 per cent of the project manpower costs.
77. What proportion of the total manpower costs?
(Mr Yard) It would be a significant proportion of the development costs, a major part of the development costs.
78. Okay. What if the cost to the public purse is larger than the 150 per cent then, as could well be the case?
(Mr Yard) I think it is very unlikely that would be the case but that is the contractual maximum on a development.
79. You are satisfied the cost to the public purse could not be greater than the capped amount then?
(Sir Nicholas Montagu) I think it is an extraordinarily remote possibility.