Examination of Witnesses (Questions 40
WEDNESDAY 14 NOVEMBER 2001
KCB AND MR
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
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
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.
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.