Examination of Witnesses (Questions 200-219)
SIR NICHOLAS MONTAGU KCB, MR JOHN YARD CBE, AND MS LIS ASTALL
MONDAY 3 DECEMBER 2001
200. Could you remind me just what the total size of the contract is?
(Sir Nicholas Montagu) As John has indicated, this extension is going to mean that we probably pay out in the region of £100 million. I have to say, Mr Davidson, I am delighted when I do not need to pay penalties because it means the contract is performing.
201. Can I just clarify whether or not the £4.1 million in penalties, where the super profit point kicks in? If you have a super profit point, it will be reduced by £4.1 million to take account of the penalties they have suffered otherwise the Government is paying the penalties for them.
(Sir Nicholas Montagu) The £4.1 million was paid for delays in 1997 and 1998. The point about sharing above a given level of return is a quite separate one.
202. Why? Surely the
(Sir Nicholas Montagu) Because no penalties are payable beyond those. The contract is performing.
203. I am a simple man, maybe I cannot understand this. If you are saying they are allowed a ten per cent return and they also get say £20 million worth of penalties, do they get ten per cent after the penalties have been paid by them on any future section or do they get ten per cent profit minus the charge on penalties before the profit sharing kicks in?
(Mr Yard) The profit share is on the profit they make. If they are paying penalties, it is going to reduce the profit they make.
204. That is excellent. If they therefore have penalties charged to them it reduces their profit, it is therefore less likely to get them to the stage where they have to divide the profit, so effectively, because you are profit sharing 50-50, you are actually paying half the penalty you charge them potentially?
(Mr Yard) I do not think that is correct.
205. Maybe give us a note on that and explain to us why it is not, because I am quite clear it is. Ms Astall, you bid low initially and, as I understand it from the explanation, it was the value to you of the ownership of intellectual property rights which was the difference. Can I clarify whether or not these intellectual property rights have been used in other contracts elsewhere? Have they been shown to be of value to yourselves as expected?
(Ms Astall) No, they have not been used in other contracts to date.
206. Did you anticipate they might be but they have not been?
(Ms Astall) We anticipated they could be. Other countries might want to buy a similar system, they might want to buy components, but to date they have not done.
207. Nobody else thought that these intellectual property rights were worth what you thought they were worth?
(Ms Astall) I assume that would be the case.
208. The position, as I understand it, despite everything that has happened, is that you have continued to make a surplus out of this contract?
(Ms Astall) I think it is worth going back because this was the point you were touching on before. If we make a profit, yes, the share is 50-50. If we go back to the productivity rates which I talked about with Mr Gardiner, if we do not make those productivity rates we have to put extra people on and that is a cost to us, so we might actually make a loss out of this. When we are actually looking at the contract extension, yes, we are looking at a profit share now, if you look at the contract in totality I have been very clear with the Committee we have not ever made a profit out of it.
209. You have not made a profit?
(Ms Astall) No. The whole of the contract, including the contract extension, we have not made a profit.
210. Do you have a different understanding from Mr Yard on the question of how penalties affect the profit?
(Ms Astall) I think we said we were going to let you have a note on that.
211. That seems reasonable. How many of your senior staff, in percentage terms, are on performance related pay in this contract? Is it all of them? None of them? Some of them? Half of them?
(Ms Astall) I am not sure I am at liberty to disclose that here.
212. I am not sure what the rules are. I think you are actually.
(Sir Nicholas Montagu) Chairman, if this is commercial in confidence, perhaps we could include it in our confidential note.
213. I would also want to know whether or not, if there are people on performance related pay, any of them have had anything less than the maximum, what they have actually received in performance related pay, because it would seem very odd if a contract is running at a loss they were getting
(Ms Astall) I can answer that specifically without being commercial in confidence. The performance related pay we have is not related to a particular contract.
214. So it is a general bonus?
(Ms Astall) Yes.
215. So there is nobody with performance related pay relating to this particular contract?
(Ms Astall) Yes.
216. That is very sensible for those in that position.
(Sir Nicholas Montagu) I think that relieves us of the need for that particular note.
217. Yes, indeed it does. In paragraph 3.18, there is the question of lawyers and the European procurement rules. The European procurement rules, as I understand it, did not bring anybody else into this contest, did they? The fact they were advertised in this particular way did not really make much difference to the way in which the applicants came forward, is that correct?
(Sir Nicholas Montagu) I think the point is this, Mr Davidson, and it is quite complex, European rules say that if you are changing the terms of a procurement then you must recompete. The advice we received was that in all respects save one, essentially the payment mechanisms as set out here, the scope was completely unchanged. So far as the payment mechanism was concerned, it was slightly less clear. There was a very remote possibility of challenge and a remote possibility only if that challenge was mounted that it would succeed.
218. That is a fascinating and constructive answer which bears very little relationship to the question I was trying to pursue, which perhaps was my fault for not expressing the question clearly. I am interested in just checking whether or not the operation of the European rules in this particular circumstance made any real difference to the number of bidders who came forward. Is this just simply an unnecessary hoop that we had to jump through in conducting the contest within these parameters?
(Sir Nicholas Montagu) Bidders did not come forward, that is the whole point. We decided to proceed without a competition having undertaken all the due diligence that Sir John's report details. It was on that basis that I, as Accounting Officerplease let me finish thisagreed personally that we should extend the contract with Accenture. There was no competition and that is what this is about.
219. There was no competition for the exception but presumably the question of EU rules applied to the original contract?
(Sir Nicholas Montagu) Yes, it would have done.
8 Note by the National Audit Office: The £100 million quoted is the projected cost of the contract extension, the original agreement is projected to cost in the order of £76 million. See Fig 1, p 1 of the C&AG's Report NIRS 2: Contract extension (HC 355, Session 2001-02). Back
9 Ev 23, Appendix 1. Back