Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 80 - 99)



  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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