Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



  20. That obviously has had a cost. On one side it has had a cost to the Agency, on the other side it has had a cost to CMG. What I was asking was do you think that you have gained more than you have lost in financial terms by not sticking rigidly to the contract in all terms?
  (Mr Hendon) I think I have to say yes to that because what we have achieved is a substantial reduction in the desktop pricing which is a very worthwhile improvement on the contract, and that is entirely outside the scope of the contract, CMG did not have to agree to that at all. We have retained all the other methods of testing that were in the contract. Just in case it appears we have not done anything, we have had two value for money studies. Capita did one of those and will be able to tell you about it. I think the partnership is working well in terms of reacting quickly to our change in demands. We have got a lot of development work under way at the moment and I am very comfortable with it. I regard many of the provisions in the contract as safeguards against a situation which is not going well. I think it is better to apply the safeguards intelligently to the situation you find yourselves in than to slavishly follow some model that was set down years ahead.

  21. I understand that there may be other reasons for not sticking strictly to the contract other than purely financial ones, but I think I have identified, unless I have misunderstood your answers, that there is some conflict between the two of you. Both of you seem to think that on purely financial terms you have done rather better out of not sticking strictly to the contract. I wonder if I could just ask C&AG if he has any comments on which side has done better financially out of not sticking strictly to the contract?
  (Sir John Bourn) I think that what has happened has been a general advance in the level of business and the range of services provided so that it has enabled both sides to the agreement to make advances. I do not think as it has turned out that it is something where if one gains the other has lost, it is a developing situation. Perhaps, Ms Leahy, you would like to add to that?
  (Ms Leahy) I wonder whether perhaps the different timescales also have an impact in that looking at the reduction in income to CMG early on the Agency can say they have benefitted and CMG were looking a bit further ahead and perhaps they have a different timescale that matters to them in this. Overall, it does appear to us that both parties have gained from this arrangement. We have not analysed the changes to the contract in financial terms.

  22. Can I come back to you now, Mr Hendon. Mr Williams was talking earlier about the question of the 30 per cent financial holding. Can you just explain to me once more why, given that you have not got overall control, you think that 30 per cent is better than just nought and a straight contract, in effect out-sourcing?
  (Mr Hendon) First of all, if you will allow me maybe I can say that when I answered Mr Williams' question just now and I talked about £250,000 profit last year, what I should have said was that was our share and the total profit was £740,000, our share was £241,000. I am sorry if I gave a slightly misleading answer there. I am sorry, I have lost the thread of your question, I do apologise.

  23. I was asking why, once you decided you had to have less than 50 per cent because you did not want to be publicly owned, you thought 30 per cent was better than going to nought and out-sourcing it?
  (Mr Hendon) I think the first thing to say was we needed 25 per cent so that it was not possible for the other shareholder in the business to renegotiate the shape of the business to remove our control altogether. It had to be more than 25 per cent. We could have set it at 25, I suppose, but that was not where we decided to go. I think, quite honestly, 30 was probably fairly arbitrary as compared with 25 or 35 or whatever. We were negotiating a figure that represented, firstly, a desire not to have this business classified as a public body and, secondly, we were trying to get at a number which still gave CMG some encouragement for engaging in the business. Perhaps another thing to say is it might be tempting to imagine the contract as a fairly straightforward document but it is not actually, it is an extremely complex document. In fact, we have brought a copy with us in case anyone wanted to see how thick it was. I know this is not a measure of its effectiveness but we are talking about perhaps four or five inches of paper. The point in mentioning that is there are a large number of provisions in the contract which give us control over what happens in the contract so we get good control over the business even though we do not have a controlling interest in the business. Ms Davies could explain, as our advisers at the time, some of those things perhaps.

  24. It would be lovely but there is little time, I am afraid, I have been told we have to press on. Can I just ask you one final thing. Paragraph 1.15 of the Report indicates that the Agency knew all along that there was going to be a need for flexibility in how you deliver IT services, IT is a fast moving area and you recognised the need for flexibility. That seems to conflict somewhat with the fact that later on you did not have enough flexibility in the charging structure. Given that you knew you were going to need flexibility, why did you not have flexibility in the charging structure?
  (Mr Hendon) The charging structure that you are referring to is the desktop charging structure which is the provision of office systems for e-mail, word processing, spreadsheets, internet access and that sort of thing. The part that this is talking about is the development of other applications and, in fact, the larger part of the provision of our IT services is, for example, licensing systems, systems to keep track of which radio frequencies are in use in different places, systems to underpin the development of auctions, those sorts of systems.

  25. Did the fact that you needed flexibility in those sorts of systems not indicate to you that you need that flexibility because the whole thing is moving fast and, therefore, you need flexibility also in your desktop side?
  (Mr Hendon) No, not particularly. They are separate things, quite honestly. The desktop is basically off-the-shelf PCs with off-the-shelf software systems running on it.

  26. Which is also changing fast.
  (Mr Hendon) Yes, but not so fast. E-mail is e-mail is e-mail perhaps. What I am talking about with our licensing systems is systems that had to change from a system where we were charging people for their licences on the basis of recovering our costs, that was the old system, and now we were going to be charging people for licences on the basis of the economic value of the spectrum. There was a whole different ball game in terms of the differential cost of licences and the licences would be charged depending on whether the spectrum was shared or not, how many mobiles people had on it, all sorts of factors were being brought in. At that stage we still did not know what all of these factors were. The charging of the applications and the systems behind the desktop was where the flexibility needed to be. The desktop we did not see was going to need to be flexible. Frankly, I think we were wrong in that, it did need to be more flexible because of the fact that IT changes so quickly and we were finding that the standard IT that you can buy in Dixons was beginning to run ahead of the sort of IT that we were expecting to use ourselves.

  27. Can I have one final question? If you were asked by some other public function for your advice about setting up new contracts of this sort, would you now say that it would be sensible for them to maximise the flexibility in all aspects of the contract because IT is such a fast moving area?
  (Mr Hendon) I think IT is moving more quickly than any of us expected. I would certainly advise anyone that they should not think that what they are negotiating now is going to be directly applicable in more than a year or two's time. What we need, and in fact we have, is a situation of partnership with our supplier which enables us to renegotiate on the basis that we want them to supply systems and they want to supply systems for the long-term.
  (Mr Topp) If I could butt in there briefly. In fact, we are in the position where the systems we are developing now are ones that were not envisaged when the partnership was signed. Things like supporting auctions and a major regional system and a data warehousing system are all big new projects which are moving the Agency's business forward, which were not the systems we envisaged we would be working on when the contract was signed.

Mr Griffiths

  28. Good afternoon, gentlemen. Appendix 3 shows the six critical delays that appeared during this project. I would like to know a little about the quality of the board of management in 1995. I notice, for instance, the board members could not find the time to review and read the papers. What were they doing?
  (Mr Hendon) Life does not stop just because you are wanting to negotiate a big new deal. You will be aware that a number of things happened to us during the time that we were negotiating this deal, including, for example, the IRA bombing South Quay. The bomb was immediately outside our headquarters building, it was not at Canary Wharf as some people think. Indeed, some of my staff were evacuated when the bomb warning came and actually leaned against the lorry that turned out to be the bomb for some time before they went home. It was a horrific situation. The headquarters was completely destroyed, we were not able to occupy it. We had to move into other temporary accommodation and then into long term temporary accommodation. As well, at the same time as all of this, we were putting a Bill through Parliament for the Wireless Telegraphy Act 1998. Also having to do the preparatory work to get the third generation auction in place and to put spectrum pricing in place and running the business, as it were. I am afraid that some of those things took priority over this project. I think probably they should not have done, it was unfortunate.

  29. Pretty extenuating circumstances. However, there were a couple of delays again because of reorganising the procurement team. Were any of those related to the Docklands bombing?
  (Mr Hendon) I do not know. Can you tell me which appendix?

  30. Sorry, yes, of course, Appendix 3, it is the first delay the third one down which was basically from February 1996 to September.
  (Mr Hendon) Yes.

  31. The second one was the one just below that, another five months delay, including reorganisation of the procurement team. To misquote Oscar Wilde, that seems either a misfortune or careless. That is why I put the question.
  (Mr Hendon) Yes. I think it is not only that, of course, it is the other things which are listed here as well: "investigations into structuring the partnership through a joint venture company".

  32. Sure. Really what I am focusing on is that between February and August/September there were delays and there was a reorganisation of the procurement team and then immediately afterwards, the next immediate period to the following May or April, there was another reorganisation of the procurement team and I really ask why? It is para 2.7 as well.
  (Mr Hendon) Yes.

  33. I do not at this stage mind a general answer if you have one. Who was responsible for the procurement team?
  (Mr de Grouchy) I can begin to answer that question. The procurement team was the responsibility of the then chief executive who took personal responsibility for running the project and he did so with a board which included, obviously, representatives of those working in the Agency and also a number of external advisers. It is a very general answer, I am afraid, but I think the reasons why this situation occurred were because we were in a very experimental period. During that time there were discussions with the various other parties involved in other departments and it took time to conduct those against the background that Mr Hendon has described.

  34. Thank you for that. There was a further five months delay from April 1997 because there were material changes to the procedures and there were specification changes. That was after the documents had been sent out to potential bidders, is that right?
  (Mr Hendon) Yes, that is right.

  35. The question, therefore, is why did the Agency not sort this out before it sent documents out to bidders?
  (Mr Hendon) I think the answer to that is that we were feeling our way in a new venture. No-one had done this before and we were trying to find the right way to describe the sort of operation we were looking for and we had to take a second go at it.

  36. The problem then is though that you had been on the go for two years then, even a baby can walk by then.
  (Mr Hendon) The problem we ran into was this question about whether the joint venture company was going to be a public sector body if we went ahead in the way that we were proposing. Because changing the structure of the company to avoid that was a material change to what we were proposing to do, we had to re-issue the tender document so the bidders could consider the new proposal.

  37. Just let me be clear about the change, Mr Hendon. When the documents were sent out, and before the changes, what did you want your partner to be, the nature of it?
  (Mr Hendon) It is quite clear that to start with the Agency had the view that they would need to be a majority partner in order to control what the joint venture did but that is not where we ended up, of course.

  38. Of course. In the previous two years was there anything indicating that there were any private sector firms out there queuing up to be minority partners in such an organisation?
  (Mr Hendon) I think companies are reluctant to say no to anything. Never is a long time. So probably they were less than clear in saying no to us. Perhaps we were not sufficiently aware of what they were saying.

  39. Did any potential bidder drop out because of this change?
  (Mr Hendon) None came back in.
  (Mr Topp) My understanding of this is that the Agency decided to make this change and then to avoid that problem went out to people who had already dropped out and said "We are now making this change, do you want to come back in?".
  (Mr Hendon) And no-one did.
  (Mr Topp) That is what took time, to go through that process of giving the other bidders time. That is how it was explained to us at the time.

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