Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  60. How is the efficiency measure and monitored? Have you got a software programme? Do you feed this into a system? Are you comparing a system job after job? How do you know if there is efficiency?
  (Mr Porter) In essence this is what the post-costing exercise tells us. It tells us how efficient the contractor was in undertaking the work. For example whether he introduced new processes that made him more efficient, whether he was able to complete the task for less manhours than was the case previously. To the extent that we identify those issues, then the staff in the Directorate of Pricing who, as was said earlier, have a detailed knowledge of the company, of the sector of industry that they are dealing with will register that information to inform their future estimating of work with that particular supplier.

  61. These staff are they accountants, on the financial side or do they understand the technical side as well?
  (Mr Porter) The Directorate of Pricing staff include both professionally qualified accountants and technical cost engineers.
  (Mr Tebbit) But they are within our organisation.

  62. We use this funny thing called NAPNOC for contracts worth more than a million pounds. What do you use if they are less than a million pounds?
  (Mr Porter) In essence exactly the same procedure but perhaps not with the same bureaucracy associated with it.

  63. What is the total amount of contracts under one million pounds, what does that total up to, do you know?
  (Mr Porter) We place on average nearly 50,000 new contracts each year and the vast majority of those will be under a million pounds, certainly in excess of 90 per cent, by number. I could give you a more accurate figure if you wish.

  64. Does it work out that it is 8.5 billion pounds under?
  (Mr Porter) No. It will be a relatively small sum. In terms of the contracts worth less than a million pounds, the overall value would be about 10 to 15 per cent of the total of our procurement activity.
  (Sir Robert Walmsley) I have some figures here which might be helpful. We segment contracts by the value appropriate to the seniority of the person who is entitled to sign them, that is the way we do it. As it happens we bridge the gap between £250,000 and £2.5 million, that is one segment. In the year when we had 47,000 contracts, I just put it in round number terms, we had just under 2,000 of these contracts between a quarter of a million and two and a half million and they totalled up to £861 million.

  65. Quite a large amount of money, is it not?
  (Sir Robert Walmsley) Yes.

  66. How much has this NAPNOC saved us since 1968? Have you estimated?
  (Sir Robert Walmsley) It is very hard to tell because we do not run a parallel universe. I often wish we could say how much something had saved us. What I think it did was to introduce this discipline of not placing a contract until you had agreed a price. However hard you may find it to believe we used to let contracts on a "price to be agreed" basis. What that effectively means is that a contract is churning away and all the costs that the company has incurred, when it comes to equality of information, are there on the table; there is no argument about those, and there is not much incentive on the company to keep those down. I would guess (and it is a guess) that you would save about ten per cent because that is the figure that we use as a rule of thumb on competition. If you do not have a competition, if you do not do anything, then it will cost you ten per cent more and NAPNOC tries to replicate that pressure on companies to be efficient. As Mr Tebbit said earlier on, settling the price at the beginning is a fantastic incentive on the company to improve their performance because the better they do the more profit they make, subject to that ten per cent remark you made about post-costing.

  67. Most industry costs as you say are falling due to improvements within the manufacturing methods over the last decade or more, probably greater than ten per cent, so why should you not be looking for a greater fall then ten per cent?
  (Sir Robert Walmsley) I was trying to compare the price we had got from NAPNOC as compared with the price we would have got if we had not done NAPNOC at that time.

  68. So this ten per cent is additional to the actual costs that have been falling anyway?
  (Sir Robert Walmsley) I do not want you to get too fixated on my ten per cent. I am saying that if we did not have NAPNOC, if we just priced the thing at the end effectively on a cost-plus basis, my instincts tell me that it would cost about ten per cent more.
  (Mr Tebbit) We are assuming at the same moment in time in other words, whether it was ten years ago or now—both at the same time.

  69. We have progressed in general over time and things change and that is one of our problems. It is a major problem. You talk about partners and I notice when you involve partners you go into a partnership arrangement. When you made this decision to go into a partnership you must have undertaken some quite extensive studies as to this as the way forward and you must have had some methodology, some risk based assessment, as to what you were getting into.
  (Sir Robert Walmsley) Perhaps I can give you an example which might help. We used to buy ammunition in three-year lots. We bought enough ammunition to use for practice or for replenishing that used in operations over about a three-year period. Exactly as you suggest, we went to the contractor, who was quite often Royal Ordnance, and we noticed that their export orders were really good at the beginning of the three year period and then tailed away as it came to the end of the three-year period. They explained that to us in this way, that, as they got near the end of a contract, they simply were not prepared to invest in new manufacturing machinery to achieve the improvements that we talked about in case they did not win the subsequent competition. We thought, with them, this simply did not make sense. We ran a very big competition for all our ammunition requirements which Royal Ordnance won. We then said, "We would like to see if we can extend this with you on a partnering agreement and the conditions of that partnering agreement will be that we get a better price year on year and you can imagine now that you have got a rolling three-year contract." There is therefore always the incentive for them to invest, and of course their performance has hugely increased. They can take a long term view. The workforce have an understanding that there is a career there, not something which is going to dry up the year after next or which has got these tremendous peaks and troughs of good news and sad news. To a very large extent we tried to do this to align their objectives, profits, competence, exports, with our objectives, which are better quality and of course a better price year on year. I think that is a real partnering. I do think it is a very dangerous thing to imagine it is an easy thing to do. It should be at least as tough a relationship as a fixed price contract. There should be very clear reasons for exiting from it too.

  70. So is there a distinct difference between a partnership arrangement and a sole source arrangements?
  (Mr Tebbit) Oh yes, very different. The thing about a partnership is that you are looking for a long term strategic relationship between you and the supplier to sort out the requirements more cost effectively than otherwise. The other thing has nothing about this long term perspective and it is in the long term perspective that you can get the innovation and the economy of scale and the gain sharing between the supplier and the customer provided you have got important things in place, like open book accounting, transparency of information, transparency of their own supply chain, things like this, so that you can see what is going on in their own cost structure.

  71. So when you have a partnership you are now both involved. What mechanism is put in place to ensure that the Department does not feel it needs to support the supplier, even though it costs more and they are maybe not getting the best deal at that point; otherwise they will walk away and say, "We have got this wrong"? How many times have you got it wrong and walked away?
  (Sir Robert Walmsley) That is a really difficult question to answer. Some of these are quite sensitive because the ones I can remember are rather current. All I can tell you is that we have walked away from suppliers and we are in the process of walking away from another one. I do not think I would want to go any further than that.

  72. Is there a mechanism there to go back in and check on the fact that this is working?
  (Mr Tebbit) You can have break points, you can have review points, all those sorts of things.

  73. Who checks it?
  (Mr Tebbit) We check it.

  74. But you are the Department. You entered into the contract to start with in this partnership.
  (Sir Robert Walmsley) The conditions should be quite apparent to a contracting authority which is what the Department is, and we will as part of a partnering agreement set out what you could call exit criteria or anything else which would cause both parties to move away from a partnering agreement. If those are not explicit then I think we would get into that sort of trouble, but so long as they are explicit it will not be just our judgement. It will be our partner's judgement as well.
  (Mr Tebbit) We have had quite a lot of these. For example, there is the Defence Fixed Telecommunications Service which has been done by a partnering arrangement. It is worth about 1.2 billion over ten years and the NAO looked at this and said it was a very good example of value for money achieved through a partnering arrangement. The Committee has had these sorts of examples drawn to its attention from the MOD.

  75. So all your stuff is now IT, it is logged, it is open to all areas of the Department, so people contract in in different sections and have access to this system. Do you go across government?
  (Mr Tebbit) That is building up. I would not say that that perfect world has yet been achieved. We are building up our database of experience on that sort of thing.

  76. Do you look at any other departments? The one that springs to mind is the Health Department because they have contracts within the Health Service with almost sole suppliers etc. Are they better or worse than you at negotiating contracts?
  (Mr Tebbit) You are absolutely right that we work together more these days and benchmark each other and the Office of Government Commerce now exists to get departments together to look at these sorts of issues.

  77. Which of all the non-competitive projects which you handle has been the poorest value for money?
  (Mr Tebbit) The one we pulled out of which was Bowman, I should think. That is the one I can remember most recently. We got out of it and then competed it and we got a much better result.
  (Sir Robert Walmsley) Or some of these ones where we placed them without agreeing a price to start with. I remember being given the most terrible time by previous ministers and them making us promise that we would never do it again. That is where NAPNOC came from. It was bad.

Mr Gibb

  78. I want to come back on two of the questions that the Chairman asked Mr Tebbit. The first one relates to this 75 per cent figure. David Rendel touched on this as well but I want to ask you a kind of inverse question really which is, as we do get a more concentrated industry surely that 75 per cent figure will decline in the next few years? Am I right and, if I am, what do you see that figure declining to?
  (Mr Tebbit) It could decline. I must say I do not see a trend so sharp as to be able to predict where it will go to. It is true there is a lot more merger going on, but on the other hand the international competitive environment is moving in the opposite direction. I would find it difficult to give you a prediction about that. Another aspect is that as we go to prime contracting more we look to the prime contractor to sort out his own supply chain and therefore we have to ask ourselves whether he, in sub-contracting arrangements (which are just as important), is going for competitive or non-competitive approaches. It is very difficult to give you a clear judgement. I would not be surprised if it went down. I would not be desperately unhappy if it did provided we still had got all of the disciplines in place to ensure that we still get value for money, but I do not see a clear trend ahead or a sharp decline ahead. It is going to be quite hard, I suspect, to keep it up at 75 per cent. That is one of the reasons why I would like to keep that measurement in place. As I say, it is not a performance target we put on the DPA but it is interesting information on the way in which the overall environment in which we operate is moving.

  79. What impact do you see increased partnering arrangements will have on that number?
  (Mr Tebbit) As I say, it does depend on the subordinate supply chain that the partner uses as much as anything else.

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