Examination of Witnesses (Questions 20
MONDAY 12 MARCH 2001
20. That obviously has had a cost. On one side
it has had a cost to the Agency, on the other side it has had
a cost to CMG. What I was asking was do you think that you have
gained more than you have lost in financial terms by not sticking
rigidly to the contract in all terms?
(Mr Hendon) I think I have to say yes to that because
what we have achieved is a substantial reduction in the desktop
pricing which is a very worthwhile improvement on the contract,
and that is entirely outside the scope of the contract, CMG did
not have to agree to that at all. We have retained all the other
methods of testing that were in the contract. Just in case it
appears we have not done anything, we have had two value for money
studies. Capita did one of those and will be able to tell you
about it. I think the partnership is working well in terms of
reacting quickly to our change in demands. We have got a lot of
development work under way at the moment and I am very comfortable
with it. I regard many of the provisions in the contract as safeguards
against a situation which is not going well. I think it is better
to apply the safeguards intelligently to the situation you find
yourselves in than to slavishly follow some model that was set
down years ahead.
21. I understand that there may be other reasons
for not sticking strictly to the contract other than purely financial
ones, but I think I have identified, unless I have misunderstood
your answers, that there is some conflict between the two of you.
Both of you seem to think that on purely financial terms you have
done rather better out of not sticking strictly to the contract.
I wonder if I could just ask C&AG if he has any comments on
which side has done better financially out of not sticking strictly
to the contract?
(Sir John Bourn) I think that what has happened has
been a general advance in the level of business and the range
of services provided so that it has enabled both sides to the
agreement to make advances. I do not think as it has turned out
that it is something where if one gains the other has lost, it
is a developing situation. Perhaps, Ms Leahy, you would like to
add to that?
(Ms Leahy) I wonder whether perhaps the different
timescales also have an impact in that looking at the reduction
in income to CMG early on the Agency can say they have benefitted
and CMG were looking a bit further ahead and perhaps they have
a different timescale that matters to them in this. Overall, it
does appear to us that both parties have gained from this arrangement.
We have not analysed the changes to the contract in financial
22. Can I come back to you now, Mr Hendon. Mr
Williams was talking earlier about the question of the 30 per
cent financial holding. Can you just explain to me once more why,
given that you have not got overall control, you think that 30
per cent is better than just nought and a straight contract, in
(Mr Hendon) First of all, if you will allow me maybe
I can say that when I answered Mr Williams' question just now
and I talked about £250,000 profit last year, what I should
have said was that was our share and the total profit was £740,000,
our share was £241,000. I am sorry if I gave a slightly misleading
answer there. I am sorry, I have lost the thread of your question,
I do apologise.
23. I was asking why, once you decided you had
to have less than 50 per cent because you did not want to be publicly
owned, you thought 30 per cent was better than going to nought
and out-sourcing it?
(Mr Hendon) I think the first thing to say was we
needed 25 per cent so that it was not possible for the other shareholder
in the business to renegotiate the shape of the business to remove
our control altogether. It had to be more than 25 per cent. We
could have set it at 25, I suppose, but that was not where we
decided to go. I think, quite honestly, 30 was probably fairly
arbitrary as compared with 25 or 35 or whatever. We were negotiating
a figure that represented, firstly, a desire not to have this
business classified as a public body and, secondly, we were trying
to get at a number which still gave CMG some encouragement for
engaging in the business. Perhaps another thing to say is it might
be tempting to imagine the contract as a fairly straightforward
document but it is not actually, it is an extremely complex document.
In fact, we have brought a copy with us in case anyone wanted
to see how thick it was. I know this is not a measure of its effectiveness
but we are talking about perhaps four or five inches of paper.
The point in mentioning that is there are a large number of provisions
in the contract which give us control over what happens in the
contract so we get good control over the business even though
we do not have a controlling interest in the business. Ms Davies
could explain, as our advisers at the time, some of those things
24. It would be lovely but there is little time,
I am afraid, I have been told we have to press on. Can I just
ask you one final thing. Paragraph 1.15 of the Report indicates
that the Agency knew all along that there was going to be a need
for flexibility in how you deliver IT services, IT is a fast moving
area and you recognised the need for flexibility. That seems to
conflict somewhat with the fact that later on you did not have
enough flexibility in the charging structure. Given that you knew
you were going to need flexibility, why did you not have flexibility
in the charging structure?
(Mr Hendon) The charging structure that you are referring
to is the desktop charging structure which is the provision of
office systems for e-mail, word processing, spreadsheets, internet
access and that sort of thing. The part that this is talking about
is the development of other applications and, in fact, the larger
part of the provision of our IT services is, for example, licensing
systems, systems to keep track of which radio frequencies are
in use in different places, systems to underpin the development
of auctions, those sorts of systems.
25. Did the fact that you needed flexibility
in those sorts of systems not indicate to you that you need that
flexibility because the whole thing is moving fast and, therefore,
you need flexibility also in your desktop side?
(Mr Hendon) No, not particularly. They are separate
things, quite honestly. The desktop is basically off-the-shelf
PCs with off-the-shelf software systems running on it.
26. Which is also changing fast.
(Mr Hendon) Yes, but not so fast. E-mail is e-mail
is e-mail perhaps. What I am talking about with our licensing
systems is systems that had to change from a system where we were
charging people for their licences on the basis of recovering
our costs, that was the old system, and now we were going to be
charging people for licences on the basis of the economic value
of the spectrum. There was a whole different ball game in terms
of the differential cost of licences and the licences would be
charged depending on whether the spectrum was shared or not, how
many mobiles people had on it, all sorts of factors were being
brought in. At that stage we still did not know what all of these
factors were. The charging of the applications and the systems
behind the desktop was where the flexibility needed to be. The
desktop we did not see was going to need to be flexible. Frankly,
I think we were wrong in that, it did need to be more flexible
because of the fact that IT changes so quickly and we were finding
that the standard IT that you can buy in Dixons was beginning
to run ahead of the sort of IT that we were expecting to use ourselves.
27. Can I have one final question? If you were
asked by some other public function for your advice about setting
up new contracts of this sort, would you now say that it would
be sensible for them to maximise the flexibility in all aspects
of the contract because IT is such a fast moving area?
(Mr Hendon) I think IT is moving more quickly than
any of us expected. I would certainly advise anyone that they
should not think that what they are negotiating now is going to
be directly applicable in more than a year or two's time. What
we need, and in fact we have, is a situation of partnership with
our supplier which enables us to renegotiate on the basis that
we want them to supply systems and they want to supply systems
for the long-term.
(Mr Topp) If I could butt in there briefly. In fact,
we are in the position where the systems we are developing now
are ones that were not envisaged when the partnership was signed.
Things like supporting auctions and a major regional system and
a data warehousing system are all big new projects which are moving
the Agency's business forward, which were not the systems we envisaged
we would be working on when the contract was signed.
28. Good afternoon, gentlemen. Appendix 3 shows
the six critical delays that appeared during this project. I would
like to know a little about the quality of the board of management
in 1995. I notice, for instance, the board members could not find
the time to review and read the papers. What were they doing?
(Mr Hendon) Life does not stop just because you are
wanting to negotiate a big new deal. You will be aware that a
number of things happened to us during the time that we were negotiating
this deal, including, for example, the IRA bombing South Quay.
The bomb was immediately outside our headquarters building, it
was not at Canary Wharf as some people think. Indeed, some of
my staff were evacuated when the bomb warning came and actually
leaned against the lorry that turned out to be the bomb for some
time before they went home. It was a horrific situation. The headquarters
was completely destroyed, we were not able to occupy it. We had
to move into other temporary accommodation and then into long
term temporary accommodation. As well, at the same time as all
of this, we were putting a Bill through Parliament for the Wireless
Telegraphy Act 1998. Also having to do the preparatory work to
get the third generation auction in place and to put spectrum
pricing in place and running the business, as it were. I am afraid
that some of those things took priority over this project. I think
probably they should not have done, it was unfortunate.
29. Pretty extenuating circumstances. However,
there were a couple of delays again because of reorganising the
procurement team. Were any of those related to the Docklands bombing?
(Mr Hendon) I do not know. Can you tell me which appendix?
30. Sorry, yes, of course, Appendix 3, it is
the first delay the third one down which was basically from February
1996 to September.
(Mr Hendon) Yes.
31. The second one was the one just below that,
another five months delay, including reorganisation of the procurement
team. To misquote Oscar Wilde, that seems either a misfortune
or careless. That is why I put the question.
(Mr Hendon) Yes. I think it is not only that, of course,
it is the other things which are listed here as well: "investigations
into structuring the partnership through a joint venture company".
32. Sure. Really what I am focusing on is that
between February and August/September there were delays and there
was a reorganisation of the procurement team and then immediately
afterwards, the next immediate period to the following May or
April, there was another reorganisation of the procurement team
and I really ask why? It is para 2.7 as well.
(Mr Hendon) Yes.
33. I do not at this stage mind a general answer
if you have one. Who was responsible for the procurement team?
(Mr de Grouchy) I can begin to answer that question.
The procurement team was the responsibility of the then chief
executive who took personal responsibility for running the project
and he did so with a board which included, obviously, representatives
of those working in the Agency and also a number of external advisers.
It is a very general answer, I am afraid, but I think the reasons
why this situation occurred were because we were in a very experimental
period. During that time there were discussions with the various
other parties involved in other departments and it took time to
conduct those against the background that Mr Hendon has described.
34. Thank you for that. There was a further
five months delay from April 1997 because there were material
changes to the procedures and there were specification changes.
That was after the documents had been sent out to potential bidders,
is that right?
(Mr Hendon) Yes, that is right.
35. The question, therefore, is why did the
Agency not sort this out before it sent documents out to bidders?
(Mr Hendon) I think the answer to that is that we
were feeling our way in a new venture. No-one had done this before
and we were trying to find the right way to describe the sort
of operation we were looking for and we had to take a second go
36. The problem then is though that you had
been on the go for two years then, even a baby can walk by then.
(Mr Hendon) The problem we ran into was this question
about whether the joint venture company was going to be a public
sector body if we went ahead in the way that we were proposing.
Because changing the structure of the company to avoid that was
a material change to what we were proposing to do, we had to re-issue
the tender document so the bidders could consider the new proposal.
37. Just let me be clear about the change, Mr
Hendon. When the documents were sent out, and before the changes,
what did you want your partner to be, the nature of it?
(Mr Hendon) It is quite clear that to start with the
Agency had the view that they would need to be a majority partner
in order to control what the joint venture did but that is not
where we ended up, of course.
38. Of course. In the previous two years was
there anything indicating that there were any private sector firms
out there queuing up to be minority partners in such an organisation?
(Mr Hendon) I think companies are reluctant to say
no to anything. Never is a long time. So probably they were less
than clear in saying no to us. Perhaps we were not sufficiently
aware of what they were saying.
39. Did any potential bidder drop out because
of this change?
(Mr Hendon) None came back in.
(Mr Topp) My understanding of this is that the Agency
decided to make this change and then to avoid that problem went
out to people who had already dropped out and said "We are
now making this change, do you want to come back in?".
(Mr Hendon) And no-one did.
(Mr Topp) That is what took time, to go through that
process of giving the other bidders time. That is how it was explained
to us at the time.