Examination of Witnesses (Questions 100-119)
MONDAY 30 APRIL 2001
MR KEVIN
TEBBIT, CMG AND
MR IAN
ANDREWS, CBE
100. Given the amount of money that is at stake
here do you agree this is a fair statement, that you, the Department,
have no formal strategy for managing risks of fraud either for
the organisation as a whole or across specific areas of activity?
Neither have you carried out an assessment of risks of fraud across
the Department on which the strategy could be based. Complicated
organisational responsibility for fraud reporting and investigation
have made it difficult to discern the roles of the various fraud
units. Do you think that is a fair criticism of you?
(Mr Tebbit) No, I do not think it is. My guess would
be that the NAO themselves—although I am putting words into
their mouths and I should not -would not say that was the case
today. This report was written 18 months ago. What I would say
about the strategy is that we have all of the elements of the
strategy in place. We have not pulled them together and written
them out with the word "strategy" written on the top
but it is as near as damn it. The key issue is that we have not
had a risk based strategy fully in place as opposed to a process
based strategy. The key missing element there was the model that
the NAO pioneered and which we have carried further forward since
then using the private sector that developed it and that will
enable us to focus our efforts more effectively on the main areas
of risk. It is quite right that you put the onus on the Department
but we are dealing here with an industry in which, as the NAO
themselves said, fraud has been endemic. Although you are quite
right to criticise us for not having moved fast enough earlier,
I think it is fair to say that the MoD is in the lead, with the
Department for the Environment, DETR, in trying to reform industry
and to make the whole process of construction much more efficient
and effective than it was. You are absolutely right to criticise
us but we are dealing with a very difficult subject and a lot
of our work is now being put in with industry in co-operation
to actually improve the whole running of that private sector.
101. Okay. Now prime contracting which, as you
say, will give a single contractor final responsibility for delivering
work services in a single geographical area. Is it not possible
that initiation of prime contracting will just serve to increase
the potential of fraud as the MoD steps further back from the
process?
(Mr Tebbit) I do not think we will step further back
from the process in several key respects. We will agree with the
winning bidder, as it were, the details of how he will carry out
the contract against clear performance measurements and targets.
So at the outset there will be a much more thorough partnership
between the Department and the contractor, so we will have a much
clearer start line agreed. We will also be operating in an integrated
project team environment where the Department will be there with
the contractor working together in delivering the contract. As
I said, there will be open book accounting so we will have visibility
of all of the costs on which he is operating, not just the contractor
himself but his own subcontractors. The requirement to open book
accounting will extend down the supply chain. We will have, as
I said again, not just targets but reward shares. So there will
be no incentive on the contractor to fiddle because he will be
fiddling himself. His incentive will be to drive down the cost
to him so he can share in profits. So there will be a positive
element to this, not just the usual negative one in rooting out
and discouraging fraud. I think we will be engaged but in a rather
different way, we will not be micro managing in quite the same
way we have had to do at present.
102. This is the last question, which may be
slightly unfair, but you yourself have drawn the distinction between
the situation that operated 18 months ago and that which operates
now. What confidence can we have in a Department that did little
to address the risk of fraud until it was forced to by the NAO?
(Mr Tebbit) I do not believe it was quite like that.
We were working on this before the NAO Report, and I am sure the
NAO would agree with this. There is a report called the Wheelers
Report, which was commissioned by Defence Estates, who were established
in 1996, which says much the same thing as the NAO. As you have
also pointed out to me, much to my embarrassment, our own figures
of the amount at risk were higher than the NAO's generated through
this model, so we certainly were not complacent nor not facing
up to the need to introduce more modern methods to manage risk.
Our action plan that we are implementing, and that I waved around
at the beginning, has got 63 actions in it, of which nine came
from the Department and the rest through the NAO Report. Although
we had a hiccough a little earlier in our discussion about whether
we accepted the detailed element of the NAO Report, I would basically
say that it was produced very much in co-operation between the
Department and the NAO. It is not a question of us being forced
to implement something brought to us by the NAO, this is a joint
activity in best practice.
Mr Williams
103. It is a fact, is it not, that the greater
the improvement within the last 18 months the clearer is the evidence
of the neglect previously?
(Mr Tebbit) I expect you could put it like that. I
tend to try to put things in a more positive context. We are trying
to move forward with a better system.
104. I apologise to the Committee for following
up quickly on this one. You referred to the co-operation with
the NAO—
(Mr Tebbit) I am sorry to interrupt you, if I may.
You have used the word "neglect" and I have been trying
to say, I think quite clearly, that the previous system was perfectly
right as long as it was fully applied but it was based on measuring
processes in a rather indiscriminate way and, therefore, it was
not necessarily concentrating in the key areas and some of the
controls were not being applied as fully as they should have been.
We now have a much better risk based approach and we have a much
better awareness of what needs to be done. If I were to try to
put my finger on the most important single issue that we need
to have in place to be confident that it is going to work better
in future, it is the cultural change of everybody regarding this
as their problem and not somebody else's in the whole system.
That is why we have been talking about so many different measures
that we are taking because the important thing is to get through
to people, including senior line managers, that they need to take
this seriously. I do not want to keep making speeches, I am sorry,
but it is a central point.
105. What you are saying is that the co-operation
you had with the NAO has helped you to identify risk and has helped
you in the analysis of risk.
(Mr Tebbit) Yes.
Mr Williams: That is an important thing to have
on record. I draw it to the attention of the Treasury because
there are certain Ministers who think that the NAO and this Committee
have quite the opposite effect as far as Departments are concerned.
I am glad to have that recommendation and we welcome that.
Mr Steinberg
106. Having read the report it was my view that
if such a slipshod sort of working was to take place in local
government a number of people would have been sacked, frankly,
because if you read the report the way I certainly interpreted
it it is just a load of incompetence, to be quite honest, regardless
of what you have been trying to make excuses for. I appreciate
the report is 18 months old and lots of things may well have been
done to put right what are clearly crazy systems. Just as a matter
of interest, how many military establishments are there that have
these systems in being?
(Mr Tebbit) I expect we have about 220-odd major military
establishments. The system applies throughout the estate.
107. So 200-odd establishments where this system
was in being?
(Mr Tebbit) Yes, the system is in being everywhere.
108. So it is 200-odd establishments.
(Mr Andrews) There are 200 clusters of establishments
in the way it is organised at the moment, if that is helpful.
109. On figure 9a, page 39, I read this and
just the whole procedure and the mechanics of controlling the
cost is bureaucratic, it is cumbersome, it is open to mistakes
and, at worst, it is open to fraud. For example, would the procedure
in 9a go for replacing a window that had been broken?
(Mr Tebbit) Yes. Can I just say two things. Firstly,
we have improved this.
110. That is not the question. Would a window
have been replaced on the basis of what is in 9a? Your officials
are saying yes.
(Mr Tebbit) I am just trying to—You must understand
that sometimes I am not as good at this as they are. Yes, it would.
Perhaps clusters of windows but certainly windows.
111. So if there was a window to be replaced
you would go through the system in 9a?
(Mr Tebbit) Yes.
112. That just shows how daft it is from the
very beginning, does it not? If this was local government—People
have criticised local government and the maintenance departments
in local government but if this had been going on in local government
then people would have been given their cards and told to get
on their bikes. It is quite incredible. Why was such a complicated
procedure necessary?
(Mr Tebbit) I cannot comment on local government but—
113. I can. I was in it for 15 years.
(Mr Tebbit) I am grateful to you for doing so. It
is an insight to me and I shall be very interested to compare
the success of our Defence Estates with local government because
benchmarking and best practice and peer group reviewing and all
of that is a very important element for the Ministry of Defence
at the moment. Just three things. Firstly, when you write something
down involving a system of checks and controls it always looks
complicated. Secondly, the system has been changed anyway from
the one that you see here, we now do not operate quite on that
basis, and I am sure Mr Andrews could elaborate.
114. Let us replace a window on 9a. So the property
management staff base an estimated cost for each job on standard
reference costs to replace a window. So a limit of expenditure
is incorporated into the Works Order and approved by the Property
Manager and the Works Order is passed to the Works Services Manager.
If the Works Services Manager disagrees with the limit of expenditure,
he makes a counter offer. It is then up to the Property Manager
to decide whether to approve an increase in the limit, after seeking
advice from the Establishment Works Consultant where necessary.
Then the job is done. If the Works Order is passed to the Works
Services Manager, I am not sure where it goes to but if unforeseen
difficulties cause costs to rise, the Works Services Manager will
apply to the Property Manager for an increase in the limit of
expenditure to replace the window. That is incredible.
(Mr Tebbit) We do not do that any more. We have done
away with this limits of expenditure business and we simply ask
somebody in this case "how much are you going to ask us to
do the window?" which I think is what you or I would ask
somebody who came along to repair a window. We do have expert
advice available to us, the consultant, if we have reason to suspect
that the prices suggested are too high. Now, a window is an absurd
example but—
115. It is not an absurd example.
(Mr Tebbit) You and I usually know how much it costs
to do a window. The principle is obviously important. We have
replaced the idea of the limit with a straight forward estimate
of how much it is going to cost.
116. That system has now changed.
(Mr Tebbit) We have improved the system under what
I—
117. How long has that system gone on for?
(Mr Tebbit) I would guess from the date that the old
Property Services Agency was abolished ten years ago.
118. So for ten years this went on?
(Mr Tebbit) I think you are correct.
(Mr Andrews) These processes were put in place when
the former Property Services Agency ceased to exist and Departments
took responsibility for their works procurement. I think, as the
Permanent Secretary was saying, in the past the approach has been
very much a process based on too much micro management. The designers
of this system had good intentions, they were trying to put effective
controls in place, and what we now understand is that they were
not sufficiently focused on risk. It is because we recognise the
difficulty of micro management and dealing with individual windows,
as you point out, that we are seeking to move towards a very different
contractual relationship with industry, which is our prime contracting.
119. I wish I understood that.
(Mr Tebbit) We are fixing the existing system to make
it a little less micro managing. We are also moving to a new system.
Under prime contracting we will not have this at all, what we
will have is an element in the contract which will say "...
and in maintaining this estate you will make sure that any broken
windows are repaired". Now there will be a small part of
the negotiation which will say "How much for the windows?"
What will be an assumption over a contract for seven to 10 years
for broken windows. We will look at the evidence from standard
industrial practice and say "The assumption is this amount
of money should be spent on window replacement". If more
windows are broken than that, that becomes a problem for the contractor
because he will be losing money in having to replace more windows
than was otherwise the case. So there will immediately be the
removal of one of the fraud incentives which is when you employ
people to go round these large estates they smash a few more windows
so as to have to replace more than was otherwise the case. That
will no longer happen.
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