Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 14 FEBRUARY 2001
SIR RICHARD
MOTTRAM, KCB, MR
PETER GERSHON,
CBE AND MR
DERYK EKE
40. Does the industry itself want any changes?
(Sir Richard Mottram) I think the answer to that is
that the industry itself comprises companies and firms of a very
different kind, as we all know. In dealing with big companies
in our public lives, so to speak, and dealing with smaller companies
in our private lives they are very variable in the quality of
the output and their interest in improving. What we are trying
to do is work with the people who are interested in improving,
capture their enthusiasm and then help spread that practice around
the industry. They should be interested in picking all this up
because, as we were trying to discuss before, it is in their business
interest. These are things which should improve the lot—the
shareholder, the manager and the worker in the industry.
41. Has the public sector been a very attractive
and lucrative source of income to the building industry over many,
many years?
(Sir Richard Mottram) I do not think so, because profitability
in industry is quite poor.
42. They won contracts, as I see in the report,
not on best value but on the lowest tender, which they have always
been able to come back and say, "We cannot really manage
on that, we need a little bit more, a little bit more and a little
bit more. I fought for years to try and not give it to the lowest
tender, but to try and give it to the one that would do the best
job. I think the Audit Commission used to have strict rules about
that. It seems to me, you are coming down to the way many of us
were thinking 10, 15, 20 years ago.
(Sir Richard Mottram) This report absolutely meets
your first requirement, the lowest tender in terms of the immediate
project is the worst possible way of doing this.
43. They have had a very lucrative source of
income. Dare I say it, I suspect many contracts were won because
of cartels anyway—you will not comment on that, I am sure—we
always suspected that that happened. There was a system in the
building industry which passed around the contracts over the years
to ensure that they got the best deals. Why should they want to
change now?
(Sir Richard Mottram) If you are talking about the
level of the big firms, we have not dealt or delivered a particularly
successful industry. It has delivered an industry which is struggling
to compete in international terms, in not all of it do we have
world class firms. It has delivered an industry which struggles
to make lots of profit. I quite agree with your fundamental point.
I have appeared before this Committee before talking about Ministry
of Defence projects in which, quite clearly, we have entered into
contracts where the contractor—I have to be careful how
I put this—intended to get back what they lost in the process
of contracting through the claims process. We have tried in that
department, I tried, with the help of others, to get us out of
that system. That was a long process. You can see in this report,
I think, significant progress in that department in relation to
what it is trying to do—I am not claiming any credit for
because it all happened after I left.
44. I am sure it was the seeds you sowed. Is
it not a bit perverse, in the report it says that the department
will save something like £600 million in construction costs
if delivery is improved. Who would then not get that £600
million? Who would be the losers of that £600 million?
(Sir Richard Mottram) Are you referring to the Ministry
of Defence?
45. I am talking about this report. The department
will save £600 million. Who will not get that £600 million?
Look at the industry itself.
(Sir Richard Mottram) If we took as an example one
of the cases which is in here, which is about two Ministry of
Defence training establishments, I think, which have been procured
on the revised way in which the Ministry of Defence now procures
the construction of these establishments, they regard the result
as being they have paid less and their contractors have earned
more. The truth is that everybody won. You might say, how can
that be? There is a very simple reason why it could be like that.
The answer could be that the labour force has been used more productively.
The planning system that was used ensured that you produce a building
which was fit for purpose and the whole life costs were lower,
so the ministry gained. Partnering allowed you to incentivise
both sides and share the benefits. You can conceive of circumstances
where both sides win as long as you frame the process so that
is the result. It is obviously not simple but we can talk about
how do you it. These can be win, win.
46. I am very cynical. I cannot see.
(Sir Richard Mottram) If you look at the Ministry
of Defence, they have more projects than they can afford to do
which have a positive cost—benefit ratio. This report is
not saying, and the whole process that Peter Gershon is applying
with the Treasury—if departments improve their performance
in relation to construction from the broadest sense and are saving
money, as long as they have high priority projects they can spend
it on that—they do not surrender it to the Treasury, the
people are incentivised to go down that route.
(Mr Gershon) The report makes it clear in the Defence
Estates the number that we are talking about is a reduction, both
on the cost of construction and running costs, not just a reduction
on the construction costs.
(Sir Richard Mottram) Both sides can win.
47. Reading the report I notice that the Construction
Industry Board was set up in 1995, that represents all sides of
the industry. It reviewed its role in June 2000, frankly it does
not seem to have done anything for five years if you read the
report. Why not? Now it intends to achieve its objective six years
later. What has it been doing for six years?
(Sir Richard Mottram) If one thinks about what has
happened in those six years, out of the Latham Report, which was
produced in 1994, there was a recognition that the industry had
to improve its performance and needed more effectively to work
together. I think you will find that the Construction Industry
Board has been beavering away at achieving that agenda. It is
now actively involved in achieving the agenda from the Egan Report.
You can say, "Why do you keep on having to have these reports?"
I will answer, "Because this is an industry that actually
needs a lot of help to modernise itself".
48. It does not want to change.
(Sir Richard Mottram) I think bits of it want to change.
(Mr Gershon) Both Latham and Egan made it very clear
that if change was going to come it has to be client-led, customer-led,
it will not be led by the supply side.
(Sir Richard Mottram) Which is, in a way, your point.
49. Yes, I think so, yes.
(Sir Richard Mottram) Why change it unless somebody
makes you.
50. If any industry wants to improve they invest
in research and development, the construction industry has not,
has it? If you look at page nine of the report it tells us that
industry turned over in the year 1999-2000 something like £65
billion, yet their investment was £147 million in research
and development. I worked that out, they added 0.3 per cent—
(Mr Gershon) Can I point out, not that long ago I
joined from the private sector, if you are making less than one
per cent profit it is very difficult to find more money for research
and development. Unless the industry makes more profit it will
not have headroom to invest in research and development and the
training of people.[2]
51. You are saying that the industry is making
less than one per cent profit.
(Sir Richard Mottram) It is making a return of about
5 per cent.
52. I find that hard to believe. The construction
industry is making less than one per cent profit.
Chairman
53. What are we talking about here?
(Mr Gershon) Margin.
Chairman: Is that an average? The best players
make a lot more than that.
Mr Steinberg
54. I cannot think of Mr Laing or Mr Wimpey
or Mr Barrett earning one per cent.
(Mr Gershon) The best players do not. The other way
of looking at it is, look how poorly rated this industry is in
the stock market compared to some other sectors?
55. I would not know anything about the stock
market. I have a few shares in the Halifax that I look at each
day. It says in the report that Japan itself invests in research
and development, something like one per cent of their turnover.
(Sir Richard Mottram) Yes, they do.
56. It seems to me there is not much commitment
by the industry itself to improve, all of way through the report.
I have this feeling that government and your department have been
trying do something for years and years and years, and it is the
industry itself which does not want to improve.
(Sir Richard Mottram) At the risk of repeating myself,
I would say that it is the following things. In relation to the
research and development there is issue over profitability, which
we have touched on. There are issues over whether we are capturing
all of the research and development that is done. Some of the
research and development is innovation in the way in which individual
buildings are built. I am not making a big point about that. The
industry itself consists of many, many small firms, who are not
naturally into this, as well as some bigger firms, as you say,
obviously. I do not think it is the case that we are trying to
impose all of these various changes on a completely unwilling
industry. What we are trying to do is work with those who are
absolutely committed to these changes. These are not government-led
processes. My department sponsors a lot of this work and we depend
on the industry and members of the industry giving their time
to make a success of it. We are not imposing it on the unwilling.
57. One area that always disturbed me when I
was a member of local government is the frustration, how long
it takes for a project, once it has been agreed in principle,
to actually coming into fruition. There always seems to be a huge
gap between when a decision is made to when digging the first
sod, if you like. I was just talking to a colleague of mine about
the Gateshead Music Centre. It was agreed over two years ago.
Nothing has been done. No decision has been made, and the cost
has gone up by £7 million. I was also very surprised to see
that often when a decision is taken to build something that they
have not even got planning permission, they do not even have a
site, they have not done the design. Unless I misread the report.
That seems a crazy way to look at projects. Is that the way it
has gone on for years?
(Sir Richard Mottram) I think it would be quite unusual
for people to be in a position where they would spend a lot of
money where they did not know where they might put the building.
In order to have planning permission you have to have a concept
of what you want to plan.
58. Unless I read the report wrong.
(Sir Richard Mottram) That is clearly what it says.
59. It seems to me a very cumbersome way to
do business. If that is the way that construction industry works
in partnership, with both local government and central government,
no wonder it is in such a state?
(Sir Richard Mottram) I agree. One of the areas that
we are looking at in my department is how long it takes to construct
a road—this is not a prelude to building up to roads—how
long it takes to construct a road from the point at which you
take the decision to do it, you know what the site is, and so
on and so forth, these are very elongated processes. Those are
examples of a failure to apply a proper procurement process, it
is all very sequential. There is scope, actually, for accelerating
those sorts of things by the application of some of the best practice
in this report. I agree with you, that much construction, including
the public sector, takes far too long. If people applied these
techniques, including investing more effort in the beginning and
thinking about what they are doing, sequencing it properly, the
end product would be produced as a better quality and it would
be produced more quickly.
2 Note: See evidence, Appendix 3, page 19 (PAC
2000-01/166). Back
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