Examination of witness (Questions 60 -
79)
WEDNESDAY 10 JUNE 1998
SIR ROBERT
WALMSLEY
60. It is not the case that you ever take
a contractor to court, is that right?
(Sir Robert Walmsley) No, we do take contractors
to court.
61. You do take them to court. Does that
happen very often?
(Sir Robert Walmsley) No.
62. Presumably you would have a concern
in that regard about taking a contractor to court because of the
kind of evidence that would have to be given in public and there
may be some security matters. Would that be a concern?
(Sir Robert Walmsley) It is partly that. It is
partly that when we have disputes, we prefer to settle them before
we get to court because the process costs money, a huge amount
of time and sometimes involves destroying relationships which
we would rather keep on an even keel.
63. So there are some considerations about
the small number of contractors you can turn to, say, who are
home-grown in respect to some of these kinds of projects that
you undertake. You describe your relationship with contractors
as arm's length and adversarial and I think that is a slightly
harsh description of the arrangements that you probably would
normally have with your contractors, is it not?
(Sir Robert Walmsley) I said I would try to move
away from that.
64. You said you wanted to move away from
that, but the interesting thing that I noticed was that that was
your description of how it has been in the last few years, arm's
length and adversarial.
(Sir Robert Walmsley) I think it has had tendencies
in that direction. Of course that is a generality and in some
cases it is not like that, but we must be very careful to remember
that we are a customer, we spend taxpayers' money and we have
to be tough with contractors.
65. And you think that you are?
(Sir Robert Walmsley) I do.
66. I just want to look at TUL/TUM. I am
looking at paragraph 3.65 on page 48. These are utility vehicles.
They are not exactly Land Rovers, but they are not the most complex
kind of defence equipment that you might procure as a Department.
Here we have had problems resulting in in-service date slippages
which were 33 months for TUL and 28 months for TUM. It says, "The
delays are primarily due to deficiencies in the vehicles submitted
by Land Rover for trialling in 1993, together with the company's
initial failure to perform in accordance with the" contract
which you then signed. Those are straightforward faults by your
contractor. These are not problems with difficult R&D in respect
of producing the specifications that you want, this is straightforward
sloppy work by your contractor, is it not?
(Sir Robert Walmsley) I do not know about the
description sloppy. It is certainly a straightforward deficiency
in performance.
67. I will accept that as a substitute for
sloppy. That is a fair enough description. You have had liquidated
damages in respect of this case. I think paragraph 3.68 on page
49 indicates that the contract made provision for one per cent
of unit price per month to a maximum of six per cent, equating
to about £200 per month for each vehicle and no additional
compensation after six months. Your liquidated damages which you
have taken have amounted to less than two per cent of the additional
costs of the delay and that is paragraph 3.71. The NAO estimated
the costs of the delay at £23 million. Why on earth are your
contracts not tougher? That is not what I call being tough on
contractors.
(Sir Robert Walmsley) I do not think I explained
terribly well before that we have two separate contracts here.
The first contract was to undertake trials with a limited number
of vehicles and it was a relatively small contract. We did the
trials. The vehicles failed the trials and Land Rover, the company
involved, developed a new variant vehicle.
68. Which then did not perform.
(Sir Robert Walmsley) Which was the WOLF II not
the WOLF I. What that meant was that by the time that WOLF II
vehicle had been produced and we were in a position to let the
main contract we were already looking at a very substantial delay.
When we came to place the main contract we were then looking at
liquidated damages against the performance of that main contract.
So the problem arises because we are adding in the run-on costs
of the vehicles because of the delays which occurred before the
main contract. During the execution of the main contract we then
got into technical trouble. I have to say that I find it defies
belief that a company as reputable as Land Rover should produce
a vehicle which when you put the breaks on pulls to the left and
I have found the explanations almost incomprehensible. The difference
is in these two pieces of rubber which for most people would look
identical. That one caused the problems and this one fixed them.
The explanation is technically excruciatingly difficult, but if
you would like to look at how similar they are then I will pass
them round. The one with ribs inside is the good one. That is
the whole source of the problem and nobody appreciated on the
spec change what it would do to the steering of the vehicle.
69. That is interesting. The difficulty
for you is, however, that you have largely ended up paying for
these problems and they are problems that have been caused by
the contractor, and one would normally expect in a contractual
relationship that was arm's length and adversarial and tough that
the contractor themselves would have been made to stem to a little
bit more of that problem. If this kind of problem is writ larger
in more complex, difficult vehicles and systems then I wonder
whether or not you are being too easy on your contractors generally.
It strikes me as a possibility.
(Sir Robert Walmsley) I cannot deny the possibility.
I would simply say that the first vehicles were delivered in July
1996 and by September 1996 we had taken about 160 of them into
our depot and we discovered this braking problem and we stopped
accepting the vehicles. Land Rover, of course, were continuing
to build them. We were not paying them because we had stopped
accepting them. I regard this as good behaviour by us. The problem
was attacked very vigorously by Land Rover, it was quite difficult
and the vehicles then resumed delivery in January 1997.
70. I am aware of that. The point is that
you have largely paid for these difficulties.
(Sir Robert Walmsley) We only had the liquidated
damages clauses that were in place for that contract.
71. Are you happy that they were adequate?
(Sir Robert Walmsley) I think they were adequate
in relation to that contract. Of course they could not recover
the 23-months delay that occurred before that contract was let.
72. I do not wish to pursue it any further.
Thank you.
(Sir Robert Walmsley) It allowed us six months
delay was the point.
Mr Davies
73. You mentioned in passing that you viewed
this meeting as an end of term report. I am looking at the top
level figures, nine per cent of costs above estimate, £3
billion of taxpayers' money and an average delay on 25 projects
of over three years. I was wondering whether you think that is
a good end of year report?
(Sir Robert Walmsley) Of course I do not. I regard
it as extremely unsatisfactory. When I was mentioning before about
the trend may have levelled out, that is in a sense what is open
to me to do because a lot of this is history that is inevitably
coming down the pipe with the projects. My people are working
very hard indeed to try to turn the corner, but it will take a
while because a lot of this is project history.
74. Maria Eagle asked about you being a
soft touch. I am wondering about the negotiating power inherent
in the relationships you have. Am I right to say that the people
who sell you products essentially know up front that you are operating
to a very tight brief in terms of what you are required to buy
and know how much money you have got to buy it with and in what
timescale you are supposed to buy it and, therefore, when they
approach you at the bargaining table they really have got the
whip hand and the so-called maximum price inevitably is very close
to what we actually deliver as the actual price if not above?
(Sir Robert Walmsley) They do not know in general
how much money we have. We have not adopted a design to cost philosophy
in general. The second thing to say is that as long as we are
operating through competition there is no question of contractors
feeling that the Ministry of Defence is a soft touch. They want
the business and they know they have to put the best offer in
to get it. Our job is then to make sure that a competitively awarded
contract is framed in such a way that they must fulfil their obligations.
75. Would it be reasonable for me to say
one of yours problems, and this is something that you cause, is
over-prescription in the sense that you are told, "We want
to buy so many tanks within this timeframe. Go out and get it"?
An intelligent analyst would be able to work out in broad terms
how much money is earmarked implicitly for different projects
and therefore people know you have got to get this by a certain
time and obviously they use that in negotiation not to push down
their costs and their prices but to obviously maximise their profit.
That starting point gives us no room to manoeuvre and you end
up with a situation where you run out of money and have delays
and all sorts of problems.
(Sir Robert Walmsley) If the contract is based
on performance of the article, and we have a tightly defined scope
for that performance, then I do not believe a contractor can escape,
but I agree that there is a tremendous problem in getting them
to adhere to the timetable. Liquidated damages are not, as a matter
of experience, a sufficient incentive for a contractor to perform
to time. The biggest incentive in my view is that he makes a big
profit if he performs to time. That suggests to me that we should
hold back as much of the price as possible until the article is
delivered in proper working order. That is a tremendous incentive
on them to complete not just to standard, but also to time. I
think competitively-awarded contracts provide an environment in
which we can negotiate that. It is far harder, as we have discussed
already, when we are relying on NAPNOC.
76. So in a normal sort of contract hypothetically,
say, it is something which is being delivered in two years over
the following three years, for argument's sake, when would you
pay and what proportion of the costs of that contract to the contractor?
How does that work?
(Sir Robert Walmsley) It is so variable from one
contract to another.
77. In general, how much is paid of that
and when?
(Sir Robert Walmsley) Well, in general if it was
that period, it is not a very complicated thing, so, as a figure,
30 per cent might be payable on delivery, but over a longer period,
it would be a much higher proportion because we do not want to
pay them to borrow money, but it must always be better for the
contractor to complete the contract than to stop.
78. So 70 per cent is paid upfront-ish and
30 per cent at the end?
(Sir Robert Walmsley) Well, we never pay upfront
in the sense that we pay money before he has earned the value.
We pay against milestones and those milestones indicate real achievement
and we tend to hold back a proportion of the payment of each milestone
that would be due so that we can aggregate that and attach it
to the final payment, so there is a huge incentive to finish,
but the result of these progress payments is sufficient to avoid
us paying substantial borrowing costs, but it is a balance.
79. Because it strikes me that if the majority
of the money is paid upfront, the actual opportunity costs of
that in terms of interest paid on that money is considerable and
meanwhile in highly-sophisticated projects, the technology costs
are actually going down and meanwhile the specification has become
obsolete. In the extreme example, when you have got cases of delays
of over three years, often over five years in many cases, you
have got a situation where a war could have been started and actually
would be over by the time that you get the material that you need
to fight the war, so the actual cost could be expressed in lives
as well. It is not simply, it seems to me, a delay in other projects
that the Government might buy, but we are talking about quite
a complex situation where these sort of delays are enormously
costly and what sort of analysis have you put on these costs in
analysis terms or have you not?
(Sir Robert Walmsley) Well, in terms of the costs
of running on existing equipment, I have indicated that we do
need to communicate that pressure to the process and we will do
that, not least through the introduction of resource accounting
because that provides us with reliable costs for running equipment.
In terms of the military risks that we run through the non-appearance
of equipment, we do not quantify that in cost terms. That is a
hugely serious defence point and I do not think I could add much
to the response I made in terms of the anti-submarine warfare
Merlin helicopter.
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