Examination of Witnesses (Questions 180-199)
SIR NICHOLAS MONTAGU KCB, MR JOHN YARD CBE, AND MS LIS ASTALL
MONDAY 3 DECEMBER 2001
180. And of the scale of the possible on-going contract? What I am trying to get at is why you were not taken to the cleaners, now I understand why. They have their eyes on the nice fat follow-up contract, and I do not blame them, that is their job, but they did a better deal than they needed to do with you because it is in their interests to do that if they want to go for the longer one.
(Sir Nicholas Montagu) We would not have done a deal which took us to the cleaners. As Sir John's Report shows, we did a deal which did not and which was good value for money. As far as 2004 is concerned, it would be for Accenture to decide whether they wanted to compete and if so how. Again, as I have explained, this will be a serious and robust competition, and we expect to get a good deal with whomever we contract at the end of it.
181. A final area is the risk element relating to the development work. Unlike the first contract where it was deemed that the company should take on the costs of the development work, in the second contract the Department was taking on the costs of the development work. Can you tell me what this has cost so far and what is the projected possible cost of the development funding?
(Mr Yard) We estimate that the total spend on the contract extension through to April 2004 will be about £100 million.
182. £100 million! Development work that the Department is picking up?
(Mr Yard) Sorry, that is the money that we will be paying Accenture.
183. No, sorry.
(Mr Yard) Have I misunderstood the question?
184. I am reading from a briefing so I may not be using the same piece of paper you are using. Under the contract extension, development work is funded by the Inland Revenue. Sir John, that is correct, is it not? It is page 3, bottom line of our supplementary briefing.
(Mr Gordon) Yes, that is right.
185. It is obvious the Department is misunderstanding what I am saying. You tell me what that means to the NAO?
(Sir Nicholas Montagu) Can I, Mr Williams, just before the NAO do, just make crystal clear for the record that the 100 million figure that John gave is what we expect to be the total cost of the contract. It is unrelated to development work.
186. I can understand the mistake. Let's go to the one I was trying to get to. If you have it, what up to now has been the cost of the development work that you have funded and what do you envisage that on-going development cost to total eventually as far as you can project it?
(Mr Yard) I have not got a breakdown of the development cost within that overall forecast or the amounts we have spent to date.
187. Why not? You have taken the risk on them.
(Mr Yard) I have not got it with me, I am not saying it is not available.
188. This is all risk, is it not? With PFI contracts it is always about risk. You have chosen to take a risk in this contract that you did not take in the first contract and you tell me now you cannot quantify that risk?
(Sir Nicholas Montagu) I think it is very difficult to split out that risk separately, Mr Williams. What Table 9 shows is that most development risks are shared. What paragraph 3.22 says is that: "The provisions correspond closely to the Treasury Task Force principles of PFI IT contract risk management and the recommendations of the McCartney report".
189. Can you tell me why it was decided to let the property rights despite the fact that you are bearing the development costs? Why was it decided at the end of the contract to leave the intellectual property with the company so you will have to buy it out if you want to use it?
(Sir Nicholas Montagu) This goes back to the original contract, Mr Williams. We have a provision that at the conclusion of the contract we can buy it out for £14 million. Had we sought to buy out the intellectual property rights outright at the point where we were negotiating the extension it would have added considerably to it. It is another element in break costs. The original decision taken by the Contributions Agency to leave the intellectual property rights with Accenture were part of the balance of the negotiations.
190. You say it would have cost them more and saying it would have cost more is a quantified answer. It would have cost more than £14 million, how do you know? Were you given a figure? Did you ask the question in the first place?
(Mr Yard) We were looking at making sure that we were no worse off in terms of our rights to use the system afterwards, including any developments that we undertook through the extension. In paragraph 3.28 it points out that we obtain all those rights for the extension as well as for the original at no extra cost. That was what was driving us around, that we did not want to pay any more for the right to use any further development that came out of the extension than we already had to pay, given that the IPRintellectual property rightsrested with Accenture.
Mr Williams: I think now you have lost me and that is a good time for me to finish.
Chairman: Mr Davidson, the last questioner.
191. Could I start by apologising for being late. I am afraid the planes were running late from Glasgow by about three hours this afternoon. I wonder if I could start off by picking up this point which does confuse me about the unpredictability of this expansion of the scope of work. Like my colleagues, I would have thought that our manifesto commitments were pretty clear. Even the dogs in the street knew that we were going to win the election. We constantly read as students of politics that the Civil Service is such a finely honed machine that when new ministers arrive they are constantly impressed by the way in which the Civil Service has every detail prepared, often the details that they, the ministers, have not themselves thought of. Is that all bullshit or Civil Service spin? Were our policies so impenetrable you were unable to see what would happen? Is that a yes?
(Sir Nicholas Montagu) No. It is a "what can I say to you that I have not already said to your colleagues on this point?" Essentially, of course, civil servants prepare for incoming governments of every possible complexion, within reason perhaps I should say.
192. Even the dog in the street knew that we were likely to win the General Election.
(Sir Nicholas Montagu) I am not going to be drawn on that one, Mr Davidson.
193. Perhaps you should get out more.
(Sir Nicholas Montagu) Equally, I come back to the point that I made earlier that an Accounting Officer who spends money on trying to scope what might be needed if a particular party wins the General Election places her or himself, I think, in a doubtful position. What is true, also, is that I do not think it would have been totally clear until the election was won, the detailed welfare proposals were known and I do not think it would have been sensible for that work to be undertaken and the costs worked out.
194. I simply do not accept that and certainly that is not what we have been led to believe the Civil Service do but, there again, maybe the Treasury can tell us whether or not you do actually take into account anything to do with the result of an election and have any plans whatsoever or do you just wake up in the morning after the election and get taken by surprise?
(Mr Hull) There is only a certain amount which can be done under the rules of propriety and regularity. There are the New Services Rules which are set out in Government Accounting which prevent accounting officers from spending resources on speculative activity.
195. Speculative, I do not think there is much speculation. The bookies closed their books on the last election about three weeks out, if I remember correctly.
(Mr Hull) It is speculative until the enabling legislation has been passed. The rules in Government Accounting are fairly clear that you can only spend money up to a certain point on very broad scoping issues until the legislation reaches a certain point.
196. This is something we ought to pick up, Chairman. I find that really unnecessarily restrictive. It might be at some point in the future your party will win the election, although not perhaps within my lifetime.
(Sir Nicholas Montagu) I am glad that is not a question, Mr Davidson.
197. That is a yes. That is the nearest you have come to confirming anything. I was speaking to somebody in this general field of IT before last week and they were saying to me that the secret of success is to get your foot in the door, a sort of wedge. Once your foot is in the door things expand and that is where your money comes from. I have got Rolls Royce in my constituency and they tell me they are now taking orders for engines at a loss on the expectation that by the time they deliver they will have made efficiency savings which allow them to sell at a profit. Anyway, they make their money on spares. Is this not how this whole field works, basically, anyway, and has worked in these particular circumstances?
(Sir Nicholas Montagu) No, I do not think so at all. As you have heard, the contract with Accenture recognises the need for them to make a return. Over and above that return we share the profits, if I can put it that way, 50:50. The same is true of our contract with EDS. If I might just say, because it is an important point, Mr Davidson, we are not talking about fly by nights who will pack up their stall when the police appear, we are talking about people who depend on Government for references.
198. They have changed their name which many would see as an equivalent. How is this different then from cost plus? Basically, as I understand it, they are going to get an agreed rate of return as a minimum, no argument, whatever happens, and their costs will be met by you.
(Mr Yard) No, they will not get their return come what may. If things go wrong they will fail to meet their return because we will impose penalties which I talked about earlier.
199. Can you remind me how many penalties have been levied so far?
(Sir Nicholas Montagu) Yes, I can indeed. So far penalties total £4.1 million.