Select Committee on Defence Appendices to the Minutes of Evidence

Annex A

Copy of the National Audit Office Assurance Audit—Summary (May 2002)

  1.  The Warship Support Agency Board commissioned the National Audit Office to provide an assurance audit of the process for exploring the scope for new management arrangements at the Naval Bases. The National Audit Office provided the Board with an Interim Report in October 2001, covering the overall process and construction of the benchmarks, and a Final Report in January 2002, examining the evaluation of the bids. This paper summarises the National Audit Office's observations on the process.


  2.  The Integrated Business Team has been required to manage a complex project with a demanding timetable. The Team has done very well to take the project forward, and in doing so has had to develop innovative ways of maintaining momentum.

  3.  The Business Case incorporates appropriate economic and financial appraisals. These appraisals necessarily include a number of uncertainties and assumptions, and changes to these could generate different results to those reported in the Business Case. The Warship Support Agency Board therefore needs to recognise that wider factors could come into play:

    —  the Department has to consider the risks associated with implementation of the management benchmarks and weigh these against a contractual arrangement to deliver savings through partnering. Much remains to be negotiated before the Department would be able to sign partnering contracts;

    —  there would seem to be significant scope for synergies between Naval Base and dockyard activities—one of the original drivers for this project. These synergies should result in a reduction in dockyard overheads and are not incorporated directly in the partnering contracts. In the longer term the move towards competition in surface ship refitting should enable the Department to realise benefits from synergies;

    —  the Board should consider the strategic issues involved in this case, such as the over-capacity that currently exists in surface ship repair and refit work. The Department needs to be alive to the fact that partnering may constrain it from taking difficult decisions in the future. The contract negotiations therefore cover variations in workload and scope for amendment in the event of substantial change. The Board must also not ignore the human and political consequences flowing from the high level of job losses incurred with partnering.


  4.  The Trade Unions and the Companies have generally supported the Naval Base management benchmark proposals although believing that some initiatives and timings may be over optimistic. We consider the process of constructing the benchmarks might have been improved by benchmarking the various activities common to each Naval Base (such as engineering support, logistics and estates), and establishing an overall "should cost" for each Naval Base. The risk adjustment process has been generally well handled. There may have been a case for including a further risk adjustment to cover our concern that the benchmarks may not have represented the lowest cost by the Naval Bases. Whilst the further scrutiny of the benchmarks in October 2001 resulted in some additional savings, which were also credited to the Trade Union proposals, no additional measures from cross benchmarking were identified. We consider the risk adjusted benchmarks could provide a practical alternative to partnering if implemented by vigorous Naval Base management teams.


  5.  The benchmarks have been compared to the public sector comparator in private finance initiative projects. The Treasury has developed guidance on how public sector comparator costs should be used. In competitive situations the bidders should be given the overall public sector comparator costs, but where there is limited competition, Treasury guidance is that public sector comparator costs are not to be provided to bidders as they may simply bid at marginally below these costs. In this case from the outset the Department had embarked on a non-competitive process. The Integrated Business Team took careful soundings on how best to use the benchmarks and agreed a sensible strategy for releasing elements of the benchmarks to the companies. The Team has successfully used the management benchmarks to influence the negotiations with the Companies to generate better proposals.


  6.  In the Business Case the Department compares the partnering proposals and the Trade Union Benchmark Plus proposals—those management benchmark measures supported by the Trade Unions plus additional proposals generated by them—with the management benchmarks, thereby determining which option offers the best value for money in relation to the management benchmark. The Business Case includes appropriate coverage of all options. However, in our view the comparison should have been between the partnering proposals and the management benchmarks plus the benefit of any additional Trade Union proposals accepted by management, adjusted for risk. In the Department's view, this would have presented considerable difficulty given the confidential nature of the Trade Union proposals, and that the Trade Unions had rejected some of the measures in the management benchmark.

  7.  In assessing the various options in the Business Case the Department has assumed that any timing differences as regards the introduction of competition in surface ship repair would not affect the financial analysis. But under the management benchmark the Department would cancel existing Sales Agreement contracts, pay compensation (where applicable and it seems as if compensation would only arise at Rosyth), and seek to compete all surface ship repair work as soon as possible. Under partnering "transition arrangements" mean that full competition would not be achieved until 2004-05. The Department considers that the prices obtained in these "transition arrangements" are similar to those that might be gained from competition—savings of some 15 per cent. But no matter how keenly such allocated work is priced, these prices would not be tested in competition, and there is a risk that the Department could miss out on potentially higher levels of savings. The transition arrangements should, however, allow the companies time to adjust to the reduced volume of refit work and so support a competitive market in the longer term.

  8.  Redundancy costs are rightly included in the financial affordability appraisal in line with Treasury and the Department's guidance. The Business Case also shows adjustments to the benchmark for insurance and unfounded risk and these are appropriately handled. Under partnering arrangements there are a number of transition costs. These costs are identified in the separate affordability analyses for each Naval Base but are not expressly highlighted. The Department will also incur costs through partnering because of the requirement to establish and maintain an intelligent customer and contract monitoring capability. The Business Case refers to these costs in general terms and the Department expects that these additional costs will be offset by savings in "out of scope" activities once Naval Base Commanders have completed their assessments of the requirement for intelligent customer capability. While the Business Case includes appropriate adjustments, treatment of transition and partnering costs could have been made more explicit in summary tables.

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