Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. Good afternoon. Welcome to this meeting of the Committee on Public Accounts. Today we are taking evidence on the Comptroller and Auditor General's Report on Non-Competitive Procurement of the Ministry of Defence. I am very pleased to welcome Mr Kevin Tebbit, the Permanent Secretary at the Ministry of Defence. Can I thank you very much for coming today. I imagine it is a very busy time with the Prime Minister's announcement about the commitment of ground troops in Afghanistan.

  (Mr Tebbit) Thank you very much. That is very kind of you. I did not want to excuse myself for the first meeting, as it were, of the new Committee for the MoD.

  2. Would you like to introduce your colleagues?
  (Mr Tebbit) On my right, Sir Robert Walmsley, who is the Head of our Procurement Agency, Chief of Defence Procurement, whose expertise is covered mainly in this report. This is mainly about the Defence Procurement Agency. There are bits about the Defence Logistics Organisation and there is relevance to the whole of defence. This is essentially Rob Walmsley's territory. On my left is Stan Porter who is the contractual expert within the Defence Procurement Agency, the man who knows most about the detailed aspects of purchasing and contracting.

  3. Thank you very much. May I start by asking a question to you, Sir Robert. In June 1998 you said "Having said so firmly that I believe competition is the most certain route of securing value for money I cannot then claim to secure best value for money if I do not have competition". Presumably that is a statement which you continue to abide by. Yet, although there are obviously times when you have to have non-competitive procurement, why do you still undertake 25 per cent of procurement of defence equipment worth £2 billion a year in that way?
  (Sir Robert Walmsley) We use competition wherever it is a practical and sensible thing to do, Chairman. We continue to monitor the percentage because I believe if we do not monitor it you would not know what the outcome was. We do as well as we can. It has stayed pretty stuck at 75 per cent despite strenuous efforts on our behalf.

  4. I just wonder, are you convinced that this 75 per cent performance measure is relevant nowadays? Is it too arbitrary a task?
  (Sir Robert Walmsley) I think it is arbitrary. I think what is important is that we do measure it. I think measuring it keeps attention to whether there is a trend. I think also it gives you an indication of the volume of non-competitive pricing work which helps to set the resources against which we need to size our pricing staff.

  5. You would accept the culture in the defence procurement world is changing? What might have been a useful target to try and change your own part in the Ministry of Defence may no longer be necessarily applicable.
  (Sir Robert Walmsley) I think that is absolutely right. I do not see it as a hard and fast target. It has been removed as a performance measure but I think it is really important that we continue to count what proportion of our contracting is done by competition because competition remains the bedrock of not just the Ministry of Defence but the Government's procurement policy.

  6. Mr Tebbit, only two of the 1,850 NAPNOC negotiation processes to date have not resulted in a contract being awarded. That is a very small proportion, indeed it is 0.1 per cent. How can you convince us that such a small number is indicative of a rigorous negotiating process if only two out of all these negotiation processes have not resulted in contracts?
  (Mr Tebbit) I think, Chairman, there is a definitional issue here. NAPNOC is not about not placing a contract, one has already decided before those procedures go through that one wishes to place a contract with a particular single source supplier, it is about how we ensure after that decision in principle has been taken by us that we get the right price, the right quality, the right terms and conditions out of that contract. So I am not surprised that there are only one or two where we do not finally go forward but the point is the whole principle is to secure that single contract on terms acceptable to us rather than to go somewhere else because we have already taken the prior decision to go single source.

  7. Could you or could those on either side of you tell me which were the two contracts in question?
  (Mr Tebbit) You are correct, I cannot immediately tell you that. I know there is a third one, Bowman, which is discussed in the report but I do not know if any of my colleagues can immediately say which those two are.
  (Sir Robert Walmsley) Not me, I am afraid, Chairman.
  (Mr Tebbit) Out of 1,850, I could not tell you.
  (Sir Robert Walmsley) What I would like to just add is that the report also points out that we have taken too long to negotiate some of these contracts. What I think that is really an indication of is that we are not prepared to settle in an arbitrary timescale, we will only settle at the right price. I would just like to suggest to the Committee that the fact that we are prepared to wait until we get the right price shows our determination not to settle just at any price.

  8. All right.
  (Sir Robert Walmsley) Of course we do not start a contract negotiation unless we really want what it is the contract is designed to produce for us.
  (Mr Tebbit) I think Mr Porter may have the answer.
  (Mr Porter) I speak to some extent from memory, Chairman, therefore I may not be entirely accurate. My recollection is one was for a piece of anti-armour weaponry where we were unable to conclude satisfactory terms for the procurement of the particular equipment and the need for that equipment became wound up with the more general consideration of defeating anti-armour activity. The decision was taken not to proceed with that particular requirement. Another was for the modification of Sea-systems equipment where again we were unable to achieve a satisfactory conclusion with the contractor and we devised an alternative approach to that particular requirement.

  9. Thank you for that information. Presumably you will be able to confirm that to us in writing later, if not later in the meeting.
  (Mr Porter) We can add a note, yes.[1]

  10. Could I ask about the Profit Formula which is to be completed and implemented by April 2002. Could you give us a flavour, Mr Tebbit, of the broad objectives you have set yourself as a satisfactory outcome of that review and how will you assess whether your objectives have been met?
  (Mr Tebbit) Of course it is not just our own review, Chairman, it is a broader review involving the Department of Trade and Industry and the Treasury in which we are actively participating. It is about the Profit Formula for the Government as a whole. The basic issue, as I understand it, and I do not pretend to be an expert in this, is whether we should remain with the existing system which is a sort of accounting rate of return: simple, objective, easy to understand; or whether we move to an economic rate of return for the supplier which is a much more complex and difficult thing to do but is an attempt to replicate the sort of judgments companies themselves make when they decide whether or not to bid for a contract. The proposition is that we should exchange the present simple but some may say over simple formula for a much more complex but some would say more accurate formula. This is proving extremely difficult to negotiate with industry. It is quite difficult in itself because if you think of the way in which we operate, we have a mass of very tiny contracts as well as a few very large ones, major projects you obviously see as a Committee annually but there are tens of thousands of small contracts going all the time. For our own staff to be able to apply these proposed very complex systems and judgments would not be an easy task. So I am not surprised it is taking a long time to discuss this and as of now I could not predict precisely when that discussion will end. Meanwhile we stick to the existing formula which has served us well.

  11. If ever Sir Robert wants to comment, because he is obviously so knowledgeable in these areas, then he can; not that your knowledge is not vast.
  (Mr Tebbit) I am the first to say, Chairman, that my colleagues I think will probably be able to outline in more detail what the difference really is but in general terms I am able.

  12. One general question I can ask you on that. Are you on track to meet your timetable for this review? It sounds as if it is very complex.
  (Mr Tebbit) I would not be surprised if it slipped and, as I say, it is not just us, it is the Treasury, the DTI and industry as a whole.
  (Mr Porter) If I could just follow on that point, Chairman. The C&AG's report suggests that they do not expect the matter to be resolved before April 2002 and I think that is a realistic assessment.

  13. That is a realistic assessment?
  (Mr Porter) Yes. Not before April 2002. We are, as Mr Tebbit said, very much engaged with industry in discussions on the issues which will influence the way in which we implement any new formula arrangement, as Mr Tebbit said, based on an economic rate of return rather than an accounting rate of return. The economic rate of return really draws on the approach that industry itself adopts at the moment when deciding whether to invest in a particular project or programme to determine whether that is going to give them an adequate rate of return on their investment to satisfy their shareholders, to support the share price and so on. The difficult issues for Government in that context are how to measure the volume of capital that is likely to be deployed on a particular contract and what actually constitutes that capital. As Mr Tebbit said, many of our contracts are of fairly low value and therefore identifying the precise capital that is deployed on a low value contract has enormous complexity associated with it. These are the sorts of issues that we are currently engaged in dialogue with industry, to determine whether there is a way through these complexities which would be satisfactory to both parties. In terms of how will we judge whether there has been a satisfactory outcome, clearly one element of that will be the fact of an agreement with industry because most of our contracts by number are low value and therefore we would want staff to have a pretty straight forward way of calculating profit for those low value contracts.

  14. I will stop you there. Some Members will probably come in on this important area and you can come back then. Can I ask you a bit about partnering, which is another major issue. Can you tell us about the potential benefits that have come to fruition so far?
  (Mr Tebbit) Yes. I think partnering is a very big issue for the Ministry of Defence, as a whole, not just in this area. It is something which is developing across the whole of our relationship with the private sector, with industry, whether it is in procurement, whether it is in logistics or indeed in the construction industry where it is a very big issue indeed. Increasingly I think we are finding that to extract best value for money for the taxpayer one almost needs a combination of competition and partnering, partnering in the sense that often if you can give suppliers a long term view of what might be possible for them, the stability of a long term relationship with a Department, while at the same time pinning down all the measures necessary to ensure value for money—things like open book accounting, transparency of their own pricing arrangements, transparency of their own supply chain arrangements—one can then drive through efficiencies in that contract, offer the opportunity to the supplier to innovate and find new ways of solving issues along the way which give you a better value for money through the life of a contract, because sometimes even these procurement things take a very long time indeed between the first one off the production line and the last one. But of course it is even more true of service contracts, supply contracts or indeed construction contracts. Then we think we can drive better value for money out of it than simply re-competing at very regular events which do not give the supplier enough time to get economies of scale or innovate himself. Increasingly we are combining straight forward competitive approaches, where there is a stand-off relationship between us as the customer and the supplier, with these closer partnering arrangements, not cosy arrangements but not conflictual either, ones where we try to share our overall objectives with the contractor so that he is in a better position to see how he can contribute to the end and make a profit too. Smart acquisition is obviously one of the main themes of what we are doing which is about closer partnering with the private sector, getting them involved earlier in contracts so as to mutually see the benefits for both of us as we go through. We are now doing it also in things like Smart construction where, for example, we are bulking what are about 102 different contracts at present into five prime contracts throughout the country for the maintenance of our huge defence estate. So this is very much the thing of the day, it is not just the Ministry of Defence, it is about the public sector as a whole. It is being pushed hard by the Office of Government Commerce and we are involved in various industry and public sector groups of various kinds, trying to drive forward best practice. There are various codes of practice to make partnering work better. I see it as complementary to competition.

  15. Thank you very much for that. As you know my colleagues only get 15 minutes each so your answers are very interesting but if we can keep it fairly crisp.
  (Mr Tebbit) I do apologise, I am quite keen on partnering, Chairman, and I tend to talk about it rather a lot to other people as well.

  16. That is fine.
  (Mr Tebbit) I do apologise.

  17. I just want to ask you one last question about pricing becoming more complicated, a point we were making earlier. Would it make sense to out-source the provision of this activity? Are you convinced that your own people working for you can cope with the kind of commercial pressures that are placed on them? Put it simply, are they being taken for a ride by industry?
  (Mr Tebbit) No. I am very impressed by their professionalism, the training they go through, the qualifications they get, the role they play in understanding what is going on in industry. I am satisfied as the Accounting Officer but the guy who has to do it in detail is Rob Walmsley, because it is within his budget, so perhaps I can ask him.
  (Sir Robert Walmsley) We have looked at it, Chairman. The reason that we cannot out-source this task is that industry will be so reluctant to share this fundamental data of their performance and their competitiveness with anybody other than a Government department. We have asked them again and again, we always get the same answer and I believe them.

  Chairman: All right. Thank you. I will stop there and ask Mr Richard Bacon to come in.

Mr Bacon

  18. I am delighted to hear you are keen on defence procurement, Mr Tebbit.
  (Mr Tebbit) Keen, we spend £6 billion a year, I have to take an interest.[2]

  19. That is very reassuring. Can we start with the Executive Summary. Paragraph one says that there are compelling reasons for going a non-competitive route. In figure four on page 15 you set out the various reasons for not going down the competitive route which is a summary of those compelling reasons. The biggest by far is design and development risk. Can you just say a bit more about this business of design and development risk? What are its characteristics which make it different from the design and development risk you encounter with a normal, if I can call it that, non defence related manufacturing letting of contracts? Does that mean it is essential therefore a compelling reason to go down this non-competitive route?
  (Mr Tebbit) If I may I would like to ask one of my colleagues to answer that specific question. I will just comment initially. I am not sure I regard that as the single most important one.

1   Note by witness: Our enquiries so far have produced details of only one such negotiation which took place in 1995 for the refurbishment of the Guidance Main Assembly (GMA) for Conventionally Launched Sea Wolf missiles. Following extensive negotiations with the company (then BAe), involving the project team and staff from the Directorate of Pricing, the MoD was unable to agree a price for this requirement. The difference was over £600,000 in a potential contract which we believed should be priced at no more than £3.5 million. The MoD therefore decided to initiate a surveillance programme to build up detailed data on the quality and ageing of the components so that better decisions could be made on the need to replace or refurbish them. Back

2   Note by witness: The annual expenditure on contracts for equipment and related services is £9 billion. Back

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