Examination of Witnesses (Questions 80
- 99)
WEDNESDAY 28 JUNE 2000
SIR JOHN
VEREKER KCB, DR
MUKESH KAPILA,
MR DAVID
SANDS SMITH,
MR PETER
BERRY AND
MR ALAN
MATTHEWS
80. It is not a criticism, I want to know.
(Sir John Vereker) I am terribly sorry, Mr Rendel,
I do not know how many tendered in 1996. Can we let the Committee
have a note on it[2]?
81. If you could, please. Do you know—you
probably will not if you do not know how many were tendering—what
the range of fees was? I imagine the level of fees that they were
asking you for would have been one of the things they were competing
for?
(Sir John Vereker) The fee rate is an industry standard
set at five per cent so in a sense this tendering is about the
quality of the service and the reliability of the service and
its ability to cope with things such as we had in Kosovo with
the complex nature of the operation[3].
82. And presumably the standard is that they
do not then take a commission or the commission is passed on to
you as is agreed?
(Sir John Vereker) The Report is entirely accurate
on this subject, Mr Rendel. We had an odd position here where
the contractual requirements and what actually happened were different
but the effect was the same. I agree, it is pretty puzzling.
83. The standard in the industry is that the
commission is passed on to the client. Is that right?
(Sir John Vereker) The standard in the industry, as
I understand it, and I stand to be corrected by my colleagues,
is that an air broker receives commission of five per cent from
the charter company. Is this right?
(Dr Kapila) Yes.
84. Five per cent of what? The cost of the charter?
(Sir John Vereker) I am going to ask Dr Kapila to
answer this.
(Dr Kapila) It is exactly as Sir John says. The broker
gets five per cent of the cost of the charter, the cost of the
aeroplane.
85. That is the cost of the charter, not five
per cent of what the plane company gets but five per cent of what
is charged to the client?
(Sir John Vereker) Five per cent of the cost of the
charter.
86. In other words, what the client pays?
(Sir John Vereker) That is my understanding.
87. You pay 100 per cent, five per cent went
to the broker, 95 per cent went to the company providing the plane.
(Sir John Vereker) I am sorry, Mr Rendel.
88. There is obviously a slight difference.
(Sir John Vereker) There is a slight difference and
I do not know the answer.
89. Perhaps you can let me know later what the
position is. Assuming that was the arrangement, that you were
paying 100 per cent, of which the broker took five per cent, that
seems to be the same as what eventually happened. I am not quite
sure why there is any difference.
(Sir John Vereker) That is my understanding precisely,
that it was exactly the same but it does not happen to be what
was in the contract with the air broker.
90. In what sense? What did the contract with
the air broker say?
(Dr Kapila) I believe that under the old lapsed contract
the way the contract would have worked is the broker would have
received his five per cent from the aviation company and then
passed on that money to us and we would have given five per cent
as the brokerage fee. That did not happen because the commission
charge and the brokerage fee are exactly identical amounts so
it would have been a paper transaction. That is why even though
the contract said that is what should have happened, it did not
happen. That is what I think Sir John is saying.
(Sir John Vereker) It is exactly as is set out in
2.32 of the Report. It is puzzling that our lapsed agreement with
Hanover required us to pay five per cent to the broker and for
the broker to give us anything they got by way of commission but
that is what it said.
91. It depends what it is five per cent of.
There may be a small difference between those two figures.
(Sir John Vereker) I believe it is the same five per
cent but you are making, if I may say so, an extremely good point
and I will go away and check it and let the Committee know[4].
92. It is not a huge sum of money but it clearly
could be significant and they could be in a sense getting some
more money out of you than they would have done out of the original
contract.
(Sir John Vereker) It is quite possible that our colleagues
in the Auditor General's Office know this because they crawled
over it.
(Mr Burr) We cannot answer this immediately, no.
93. I will leave that if I may. When you did
approach the other broker presumably you were offered exactly
the same charges, were you? There was one instance according to
2.30 when you did approach both brokers you selected, although
your original contract said that you were going to approach them
every time.
(Sir John Vereker) We selected two possible brokers,
Hanover and Chapman Freeborn. We therefore had the basis in competition
for using either of them. We tended to use Hanover more because
experience showed they could cope with this kind of complex situation
and they served us very well. As you can see from 2.30, we did
on two occasions try another broker.
94. On one occasion you tried the other broker.
(Sir John Vereker) On one occasion, that is right.
95. What was the point of that and what was
the result?
(Dr Kapila) I do not know, I am afraid. We will have
to check our facts on that[5].
(Sir John Vereker) It may simply have
been we needed more capacity at the time but I do not know.
96. It was not for a different job, it was the
same job apparently. You approached both brokers for the same
job.
(Sir John Vereker) An alternative quote for the same
job.
97. It could not be more capacity.
(Dr Kapila) I recall there was certainly one instance
when we needed to do a charter for passenger air lift not for
cargo and because that was not such an emergency (this was in
the later stages of the crisis) we tested the market by going
out to both brokers. What I cannot recall is which one got the
contract in that particular case.
98. The original written contract, which I understand
was later extended, said they had to provide within four hours
three fully costed options. Even in an emergency it would make
some sense to ask both brokers in that situation. You are not
holding things up if you are getting it back in four hours. Was
there any good reason you did not approach both all the time?
(Sir John Vereker) I would say that workload is a
factor here. It does substantially increase the workload if you
have got to talk to two brokers every time. There is a sense of
keeping a dog and barking yourself. We had this arrangement so
as to ensure we did not have to do it ourselves. If the broker
is securing value for money in the market-place for charters then
that is our reassurance on value for money.
99. Presumably all you have got to do is ring
up the broker and say, " I want three quotes within four
hours", and then look at those four figures when they come
in, or the best figure, so you look at one figure from one broker
and one figure from the other broker and choose the best. It does
not sound like a huge amount of work given there may be thousands
of pounds involved?
(Sir John Vereker) It is difficult to say what would
have happened had we done that but bearing in mind the limited
number of planes operating in a very constrained market I think
it is overwhelmingly probable that the two different brokers would
have been chasing round after the same air capacity and I doubt
if that would have done much other than create a paper chase.
2 Note: See evidence, Appendix 1, page 117 (PAC 1999-2000/237). Back
3
Note: See evidence, Appendix 1, page 117 (PAC 1999-2000/237). Back
4
Note: See evidence, Appendix 1, page 118 (PAC 1999-2000/237). Back
5
Note: See evidence, Appendix 1, page 118 (PAC 1999-2000/237). Back
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