Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 100-119)



  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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