Examination of Witnesses (Questions 40
- 59)
MONDAY 12 MARCH 2001
MR DAVID
HENDON, MR
CHRIS DE
GROUCHY, MR
PETER TOPP
AND MS
LYN DAVIES
40. That is only one part of the change.
(Ms Davies) Would it help if I gave some clarification
here as advisers? We were actually appointed during this period
that you are referring to but what had happened, up until that
point, as far as we understood it, was there had been quite a
lot of market consultation with regard to the model that was envisaged
and the vision that RA had in mind. It was clear from that model
that RA was looking for a controlling interest, they were looking
for influence. What then became clear over several months with
our support and with the legal advisers' input was that this controlling
interest could constitute a change to the entity such that it
would create a public body which would provide its own limitations
and that was not what RA was seeking to do. RA then went to the
market place, again, as you say, because it was seen as a substantive
change to the procurement exercise, so as to make sure that the
playing field was as level as it ought to be in these circumstances.
It went to the market place again and no new bidders joined the
competition at that stage.
41. Your company was brought in at the final
stages of the procurement, was it not?
(Ms Davies) Yes.
42. What was your biggest success?
(Ms Davies) I think the biggest success was being
able to help RA create a vehicle through which it could realise
the prospects that it was envisaging, the sort of influence that
it was envisaging, without it stifling the relationship. There
was a lot of nervousness in the system, a lot of anxiety over
wanting to maintain and retain control. What we were able to do
was to demonstrate that you can do that in a number of ways, it
does not actually have to stifle the relationship.
43. How helpful would it have been to have brought
your company in two years before?
(Ms Davies) I suppose one of the things that we might
have been able to identify was the limitations that a controlling
interest might actually bring to bear and, therefore, maybe some
of the delay could have been avoided in that sense certainly.
44. If I can just go back to what we were talking
about that you illuminated a few moments ago, that is the changes
in paragraphs 2.22 and 2.24 which concern the full specification
material changes. We know that there was a decision to drop a
minority stake, were there other changes?
(Ms Davies) No, there was no other significant change
that I am aware of.
45. That is reassuring. By May 1997 you knew
there was a 12 month delay on what had then been going for 25
months, I think. Clearly, of course, the bomb disrupted things
fairly severely but a budget had been fixed originally of half
a million pounds. At what stage had you spent this level of money?
While you are gleaning that information, can I follow that up
by saying I am interested to know when and at what level you revised
the budget and how you monitored it, or your predecessor as it
happened?
(Mr de Grouchy) What we do not have in front of us
is a timetable as to exactly when that initial estimate of £500,000
was exhausted. What is also clear from the NAO's Report is that
the cost of the whole procurement increased during its duration.
For example, the total cost is specified there as £3.4 million,
of which about £2 million was for external advisers. I think
there are a number of points made in the report which we would
recognise about the need within a budget of that kind to know
what the cost and timescale of each component is. I think it is
fair to say that there are some lessons which the Agency has learned
from that and if you were to ask us about some of our budgetary
control systems now and how we manage our projects, the results
in a report of this kind might read a little differently. Nonetheless,
we are confident that during the time of the project under the
management structure which I have described, which as I said included
three independent members, that expenditure was monitored by that
group and each increase had to be accounted for in terms of the
rates of the staff who were employed in the procurement project
and the time they spent on those activities and, indeed, the activities
on which they were spent.
46. The three independent members, where did
they come from?
(Mr de Grouchy) One was from the CCTA. One was an
individual who had managed a rather similar project in the public
sector at English Heritage.
47. Were they full-time members?
(Mr de Grouchy) They were not full-time members, they
were members who were appointed to the board, who saw the papers
of the board meetings and attended the board.
(Mr Hendon) They were non-executives.
(Mr de Grouchy) The third was—I do not know.
48. Did they have problems reviewing the documents
quickly, which is the second point down causing a delay?
(Mr de Grouchy) I do not believe that it was their
problem in reviewing the documents. I think the problem, in so
far as there was an issue there, was in providing them with the
documentation on which to make the decisions. Again, there is
a lesson we have learned about how much detail you should put
into that review process. In implementing our project management
system I think it is true to say that we may have got somewhat
bogged down in the detail in trying to maintain the utmost control
of the project which may have been counterproductive in terms
of how the timescales operated.
49. Mr Topp, you have got four contracts in
foreign countries: Russia, Greece, Egypt and India. Can you divulge
what they are worth?
(Mr Topp) Gosh, I am trying to remember. The Indian
one was—
50. I am just looking for a total figure. Is
it millions?
(Mr Topp) It is probably about £1.5 million.
51. And how are the costs and the profits split?
(Mr Topp) Do you mean what the profit is?
52. No. If there is a profit I am very pleased
to hear it. Is it split with the Agency?
(Mr Topp) Yes.
53. It is?
(Mr Topp) A profit would be split with the Agency.
The losses are borne within RSI by CMG.
54. And the profit split is what?
(Mr Topp) In proportion to the shareholding.
55. Fine.
(Mr Topp) It is all a bit more complicated than that
but that is the principle of it.
(Mr Hendon) Can I just add, Mr Griffiths, if RA staff
are used in carrying out one of these contracts then they are
repaid by the company in the same way that CMG staff are paid,
so the costs of what we contribute to any work is covered.
Mr Griffiths: I hope this is going to be a good
news story.
Mr Williams
56. Thank you. Looking at figure 15 on page
33, in the first six months in the international consultancy a
loss of £13,000 was made. That was quite understandable in
the early stage. In the following year a further loss of £128,000,
ten times as much, was made. Can you give us a bit of background
to this situation? We understand that there would be the initial
costs of penetrating the markets and so on, explain the build
up of the costs and how you see them developing from now?
(Mr Topp) The main part of the costs is in the man
time of the people involved in marketing, producing proposals.
The typical timescale of these projects is after a certain amount
of marketing we get an opportunity to bid for something and we
have to produce a big proposal. That is unlikely to produce revenue
earning work for six, nine, 12 months afterwards. Both India and
Egypt did take a calender year which tends to involve a lot of
discussions, negotiations, off and on during that period. There
are a lot of costs. When the international business was set up
the expectation was that we would make money out of licensing
the IPR in the RA systems rather than making lots of monies out
of consultancy work. We have now refocused the business so we
are aiming to make money out of the consultancy work rather than
just cover the costs. In recent months we have actually been month
on month profitable in the international business. We have been
doing a lot of work in Nigeria, which is not covered in this report
at all, helping them with the auction of their 2G mobile licences.
57. Do you feel the market opportunities are
expanding?
(Mr Topp) They are changing, I think. There are opportunities
in things like auctions which were not there some years ago. It
is a very difficult market because it is very fragmented. One
of the things, for instance, that we have learned is that the
RA in the UK has a particular set of functions but the equivalent
organisations in each country tend to be set up on a rather different
statutory basis, so they all do a slightly different mix of work.
Systems that did ideally everything that the RA did would not
actually match other countries' requirements particularly. A lot
of developed countries have a good depth of knowledge themselves,
have very good systems. In developing countries there are always
problems in getting the funding, etc., long approval timescales.
The work we did in Egypt was very well received and we have further
agreement for an extension, but because the Government in Egypt
has not been able to pass the legislation to put the telecommunications
regulatory authority on a permanent basis they are handicapped
in recruiting people and it is not worthwhile them getting more
consultancy in which is hindering us picking up and doing more
work there. It is that sort of thing that is making international
business difficult.
58. Mr Hendon, you said that the risk had been
passed to your colleague, yet if I understood correctly in reply
to Mr Griffiths the reality is since the benefits are reflected
in the dividends, etc., etc., and that reflects capital share,
in fact inevitably you still retain some of the risk and if there
are losses you carry a share of the loss?
(Mr Hendon) No, that is not the case. We do not carry
a share of the loss. I think the only way that there is a risk
that we might carry some of the loss is if the whole thing foundered
and then in that case, of course, we would have to put in place
something to replace it because we need to carry on managing the
radio spectrum. I am satisfied that we have in our intelligent
customer function sufficient people and sufficiently qualified
people that we will be able to both engage with and manage any
sort of business that is going to take over the IT provision.
I do not believe that we do face any loss, in fact.
59. Mr Topp, after this initial experience of
it, would you describe your frame of mind today on the international
side as less optimistic or more optimistic than when you entered
into this project?
(Mr Topp) I would say the same. When we went into
it there was a lot of unknown but we could see a lot of potential.
We are now in the position where we have explored some of the
potential and found it wanting. On the other hand, we have identified
other avenues connected with auctions, etc, which look very promising.
We have some good opportunities.
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