Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. This afternoon the Committee are considering the C&AG's report on the risk of fraud in property management in the Ministry of Defence. The main witness is Mr Kevin Tebbit, Permanent Under-Secretary, and he is accompanied by Ian Andrews, the Chief Executive of the Defence Estates Agency. Welcome to you both. Mr Tebbit you are used to our style and I will go straight in, if I may. The first question I have to raise with you relates to paragraphs, 2.7 and 2.8. Best practice suggests that organisations that perform most effectively in fighting fraud have a formal strategy to attack the problem, normally including a statement of, "where we are now" and another one of, "where we want to be" and a plan of action of getting from one to the other. Paragraph 2.8 states that the Department has no such strategies for managing the risks of fraud, either for the organisation as a whole or for specific areas of activity, such as property management, when do you intend to develop such strategies, will they be based on formal risk assessment, and what is your view of, "where you want to be" in five years' time?

  (Mr Tebbit) The short answer to that is that in September this year we will publish the formal strategy. That will essentially be a pulling together of all of the strands which are currently in play. We have a report here which tells us that we are essentially 85 per cent risk-free, as it were, it is an assurance that we can give that both our systems and our management of this area are effective. Clearly we need to move to 100 per cent. We should have zero risk of fraud in our processes, in our business. My aim will be, once we have the strategy fully operating, to set targets which will get us progressively to the 100 per cent. In getting there we already have a major programme of action, which is in this large document, the project management plan, which essentially covers all of the elements of the strategy which will be pursued over the coming years.

  2. Thank you for that. Others may want to pursue that. I will move on to some items covered in paragraph 2.28, the use of contractors in the form of Work Services Managers to manage Property Management work, who then engage and monitor subcontractors means, inevitably, a degree of control over fraud has been passed over to contractors. This delegation of control could well increase if prime contractors are used. What progress have you made in moving to a system of prime contracting and what are you doing to ensure that all contractors are encouraged and incentivised to prevent, detect and report fraudulent practices?
  (Mr Tebbit) You are right in saying that we are moving from our present system—which has a lot of controls and best practice prescribed in it, but where we are not absolutely certain that it is being fully honoured on all sides—to a system which will give us much greater assurance, that is really what prime contracting means, because it puts in to the industry and on to the industry much of the obligations of making sure that things are operating correctly that are at present placed almost entirely on the Department. Under prime contracting we will apply all of our existing conditions on fraud and anti-corruption to all members of the process, that is to say to industry, which will have to satisfy us that it has its own standards for fraud prevention which are as good as our own, and also to our own integrated project team members. The arrangements for ensuring that this works well will be controlled and drawn up by our own people, that is to say Ian Andrews in Defence Estates, together with all of our fraud community, ensuring that everything works properly. You may be referring to an area in an earlier draft where there was some concern that the way in which some of the earlier papers were written would not give us the full assurance that we required. That was very much work-in-progress and we are working on that now. Essentially prime contracting will be a much better and more robust arrangement than we have at present.

  3. Paragraphs 3.5 and 3.6 relate to my next question. You mentioned earlier that 15 per cent of £135 million of the Department's annual management expenditure was at risk of fraud. The NAO's finding suggests that is likely to be a conservative figure, that is what 3.6 tells us. Do you agree that that is unacceptable, I think you do, but let me hear that in terms? What do you assess the level of risk is now, since this was some time ago?
  (Mr Tebbit) Let us be clear about what that figure was, it was not saying we were losing £135 million a year, it said there is an 80 to 85 per cent assurance that our processes are working properly, which puts it at risk if it was calculated in that way. I am not disputing that judgment or assessment, indeed our own assessments were very similar that we were making in the Department before then as well. As I said, I would like to be able to say to you the figure I would judge now is 90 per cent or 95 per cent. I cannot do that yet. The reason I cannot do that is because we need to run our model, the risk model that we have developed from the one used by the NAO for this work, we need to run that through more cases than we have at present. I am quite certain, I will stake my reputation on this, that it is better than it was then because of all of the things we have done since the report was produced. It is about 18 months old and since then we have made progress with a huge number of different initiatives, among them I would mention the Blue Skies Inspections, coming out of the blue, as it were, on to establishments. We have now had about a dozen of those. That has not only given us more assurance it has put the whole industry on a completely different awareness of what we are doing. We have rolled out our arrangements and our requirements to combat fraud, not just to ourselves but to our contractors. They are now, quite clearly, much more alive to the problem than they were. There are 21 major companies involved and last June we wrote to them and asked them to tell us what their own strategies were for combating fraud. We have had replies from them and we made it clear we will judge, to some extent, whether we employ them in the future on their responses. We have had some very positive responses to that, and some of them have provided details of their own fraud strategies, which are models. I will not go on, Chairman, because I know you want to get on to more issues. There are a large number of initiatives. We have now trained 1,450 of our own staff on the right procedures since the report was written. These give me confidence that we are getting better. I am not yet in a position to say whether it has moved to 95 per cent, but it is certainly getting better.

  4. I am little surprised you said you would stake your reputation on it being better and you cannot quantify the coverage. I would have thought you would be able to.
  (Mr Tebbit) This was based on inspection by the NAO of three establishments, Tidworth, Devonport and Wittering. I am absolutely certain that those three establishments are up to scratch in this area, because we have had two successive rounds of inspections in those places. These days Commanders-in-chief write to me about these issues. I see the Commanders driving this one forward, when two years ago I would not have thought they had any visibility of these problems.

  5. Moving on to paragraph 3.6 and paragraphs 4.11 and 4.12. This shows that the Defence Estates Agency has found evidence of overcharging, some of over 100 per cent, of the true cost of materials and labour. What action has been taken in response to these findings? They are quite alarming, such a level of overcharging? Can you confirm that the Department is not using the contractors involved? Can you assure us that that overcharging is not widespread?
  (Mr Tebbit) In general terms we have made some important changes. One change is that we used to use a rather strange method of setting a limit, of saying, "We want you to bid within this limit", which seemed to me to be a rather strange way of doing it because everyone would bid up to the limit. Now we actually require people to give detailed estimates of the work we ask for and we require our consultants to check that before we issue the contract. That is one thing. Another thing is under prime contracting this cannot happen because the whole contract would be built up on agreed prices between us and the contractor before it starts, so that any cost overrun is essentially taking profit away from the contractor so he will not have the incentive to do that in the future. I am hoping, Mr Chairman, to try and find the specifics of these cases to give you the assurance that you are asking for.
  (Mr Andrews) 4.11 and 4.12.

  6. One of my points may appear minor, but it is symbolic that the contractors are no longer used.
  (Mr Tebbit) In 4.12 the first contractor that was referred to, contractor A, is no longer being used. We did find some undercharging as well as overcharging, which puts it in a slightly better light. We had difficulty in finding hard evidence that would have enabled us to prosecute this as opposed to the findings that the NAO had which did not require a level of proof that could stand up in court. We have changed contractors which means that the audit trails have gone cold, so we have not been able to recover this, but we have certainly not stayed with the same people in those cases. I am sorry I did not have that before.

  7. My next point refers to 3.12, 3.44 and 3.48, not actually in that order, physical inspections are key in preventing and detecting fraud, indeed your own guidance stresses, "Property Management should regularly and frequently walk their estate, since there is no substitute for seeing what is happening firsthand". It is disturbing to see that Property Managers and Works Services Managers carry out very few inspections at any stage of the work cycle. What are you doing to improve this unacceptable situation?
  (Mr Tebbit) In the first instance we have, as I say, improved training to draw the attention of people to do it. We have now trained 1,450 people since the report was written. We are also bringing out clear best practice guides. There will be a series of 16 of these, four of which have been done so far, and these guides will explain not only what needs to be done but why. They will be available not just to our own staff but to our contractors. By these processes we expect to do a lot better. The Blue Skies Inspections, of course, which really are blue skies—there is no notice whatsoever to the establishment concerned, 24 hours to the Command, as it were, to the Top Level Budget holder—have also had a real effect. I know from what Defence Estates tell me that there is a different attitude by contractors now they know they can be inspected at no notice whatsoever. You are absolutely right, it is changing the culture and ensuring that people do what they know they should be doing. They have been cutting corners because they are so experienced they think they do not need to bother. These are the things we need to put right. At the establishments that were seen I can give you the assurance that it does happen.

  8. So experienced they do not need to bother is the opposite to the truth. 4.42 tells us, "Many Property Managers have no prior experience of property management and few have any technical or engineering qualifications. Worse still, over 60 per cent have received no fraud awareness training or last did so more than two years ago".
  (Mr Tebbit) On that last point, they have all had fraud awareness training.

  9. This general point, it is quite an important point, and it is not just your Department, we find it in other parts of Whitehall where we have a management skill necessary—we have had this with the Foreign Office, fraud cases there—they simply are not there. People have come as general civil servants into a particular position and simply do not have the proper experience in some very high risk areas, and Property Management must be one.
  (Mr Tebbit) The second point I would mention is that in January last year we published the first version of the functional competencies that we require in our Property Managers, so we now have clear job specifications that we will measure people against in terms of their recruitment and in terms of their performance. We do have improvement in that area. Of course the important thing is that they use the services of the consultants that we also employ. That, as I say, is being improved by the guidance we put out and by the training we provide. The fraud awareness training has been given throughout the Department to Property Managers and to other people as well in something like 44 different seminars at about 20 different locations throughout the country since the report was written. We are very active in these areas.

  10. My last question to you relates to paragraph 4.18 and Figure 18, which tell us that in the last five years the Department has not prosecuted any fraud cases relating to property management nor has any case resulted in internal disciplinary action. You mentioned the case going cold, the one that the NAO raise but, surely, this cannot have been the case across the board?
  (Mr Tebbit) I have just been looking at the latest statistics, it is something that I take rather seriously myself. In the last three years, 1998 to 2001, we have had three successful prosecutions for property works services fraud and we have had one acquittal. Putting that in context, we have about 25 cases going on each year, of which between 7 and 12 are in the property management area. It is an area where it is very difficult to get the evidence that one needs to secure convictions, therefore it is an area where we also have to look carefully with the Crown Prosecution Service at the prospects for securing convictions and to look at other ways of recovering our money if we do not think a criminal prosecution is going to work, and we are doing that as well. As I speak, we are looking at about £2.5 million of recovery which we are seeking to secure possibly without court cases happening. The position, I do not think, is very satisfactory but we are working with the Crown Prosecution Service to make sure where we can prosecute we do. Our policy is always to prosecute but it is not easy to achieve the results we want.

  Chairman: Thank you for that.

Mr Williams

  11. Thank you, Chairman. Mr Tebbit, you adopted a rather sanguine approach to this by starting off with the claim, "Well, look how good we are, we can guarantee 85 per cent", as if 15 per cent is an insignificant sum that might be at risk. Can I tell you, having read this report I find—and I know the two of you have only had about three years—it an astonishing report in that it shows the Ministry of Defence of being guilty of an almost profligate disregard of their duty to the taxpayers' money. The figures that you have signed up to show it. If we start then with £900 million a year that you accept could be at risk, that in itself makes rather derisory your dismissal, "Ah, well it is only 15 per cent", a lot of the public would think that is a considerable amount of money, would they not, do you not think?
  (Mr Tebbit) I was not agreeing very much with what you were saying to me, I was waiting until you finished.

  12. You realise that over the five years of this report that means that £675 million worth of property contract money has been at risk of fraud, 675 million. You cannot sit there and say it is only 15 per cent, this is mega money.
  (Mr Tebbit) With respect, I did not say it was only 15 per cent.

  13. No, what you said was, "Have we not done well where we are on 85 per cent?"
  (Mr Tebbit) I did not say we had done well. Firstly, let me assure you, I do not take this lightly or in a sanguine way, it is a very, very serious issue and one which, as I did say at the beginning, we are concerned about and have been as concerned about as the NAO, and this was a cooperative report. We are dealing with risk management. The reason we said that £900 million is at risk is that it is true. Every activity of Government in procurement constitutes a risk of some kind. Our job is to manage that responsibly and reduce it to the minimum, commensurate with reasonable action. I do not believe that this is a positive situation at all. I think it is something which we need to do a lot of work on and that is why we are. If you wish me to do so I can list about one dozen key measures that we are taking and have been taking since the report was written. I can read out to you my own speeches to the Department about fraud.

  14. I am sure you will spare us, much as I will enjoy them.
  (Mr Tebbit) That will certainly answer your point, that we are taking this lightly or in a sanguine way. Nothing could be further from the truth.

  15. You have seized on 15 per cent.
  (Mr Tebbit) The report tells us this.

  16. But your own Department produced a figure of 20 per cent, which is even worse, and did the NAO say that 15 per cent was a, "conservative estimate", "conservative" was the word it used, is that correct?
  (Mr Tebbit) I think you can infer those things, firstly from the report that was provided by the NAO, it is their figure. Since our figure was 20 per cent it is perfectly reasonable to say that 15 per cent is conservative, I do agree with you. The fact that I accept these does not mean I am being complacent.

  17. There are plenty of grounds for you not to be complacent. The figures I am talking about, which is 4.5 possibly, the expenditure, which on the NAO's conservative figure over five years £675 million could have been at risk, is actually just the tip of the iceberg, because if we look back over five years utterly inadequate precautions have been in place. What about overall? If we went back 10 years or 15 years and the sums of money that have been at risk—I am not blaming you for this—for which successive predecessors of yours, if one can put it that way, have paid absolutely no regard whatsoever to their duty to protect taxpayers' money.
  (Mr Tebbit) I sense there may be a degree of exaggeration there, if I may say so.

  18. Where is the exaggeration?
  (Mr Tebbit) Firstly, certainly over the last 10 years I do not think it is the case that procedures have not been there. The concern has been they have not been fully and properly implemented by those responsible for doing so. We have always had a fairly extensive set of rules, regulations and guidelines.

  19. Which had not been formally communicated to the Department's contractors. That is not much good, is it?
  (Mr Tebbit) Not always to the contractors, but certainly to the Department and it has had to take the responsibility for doing this, so in that sense I think there is slight exaggeration. Also, as I say, we are dealing with managing risk, we are not dealing with proven loss. The proven losses are much smaller. One of the problems we always have in this area is how much money should you invest in reducing risk when the proven losses are not of that order. The challenge that we have, and it is true of all risk management areas, is how much do you spend on your insurance policy. We are committed to spending as much as we possibly can to reduce these risks.

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