Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 80 - 99)



  80. So if you have one partner and he in turn puts out to tender with sub-contractors, the sub-contract bits will count towards the 75 per cent, will they, even though you have only got one prime contractor?
  (Mr Tebbit) Not necessarily. I was talking about the totality of the environment. It is true that as we go to partnering it does tend to mean you bulk up contracts into larger bundles, at least over a longer period of time, but if they were competed originally it does not necessarily mean you are getting a lower percentage of competitive result, if you see what I mean. You could still have 75 per cent of a smaller number of total contracts. I hope my colleagues have a view. It is not something that I feel defensive about or something that would demonstrate one thing one way or the other. I just do not have a sense of the environment moving clearly in one direction.
  (Sir Robert Walmsley) I cannot remember a year when it has not been predicted that next year we would have less competition than this year. Sometimes we have but then we have clawed our way back. It is quite interesting that the Joint Strike Fighter which was so much in the media just a few weeks ago is a competitive procurement, and with the new aircraft carrier for the Royal Navy we have a prime contract competition on the way for that now. Both of those are things where people might have wondered whether that was possible, but it has been possible.

  81. Can I come back on the other question that the Chairman asked Mr Tebbit. I really found your answer, Mr Tebbit, unacceptable. His question was about the fact that only two out of 1,850 NAPNOC contracts were turned down, and your answer was that you had already decided to use that particular supplier; therefore there was going to be a contract. NAPNOC stands for No Acceptable Price No Contract. It is a technique that you want to apply when there is only one supplier, when there is no competitive environment, so your answer was almost tautologous. Of course you have only got one supplier; that is why you are using NAPNOC. That cannot be an acceptable answer to the question from the Chairman about why there were only two contracts turned down. My worry is that NAPNOC is really just a nonsense and that because you want this product from the supplier, you have an imperative to have it, it is the only supplier that supplies, the imperative for getting the product will overrule the imperative for good negotiations. Am I right in this?
  (Mr Tebbit) The condition we are talking about is where we have decided that there is one supplier and it is then a question of making sure as far as we can that the price we pay and the terms and conditions of the contract are acceptable to us.

  82. What if they are not acceptable?
  (Mr Tebbit) In principle one would walk away but if there is only one supplier you are not going to have the product, are you?

  83. What is the point of having this technique then if you are never going to walk away?
  (Mr Tebbit) The point is the judgement that it is better to do that in safeguarding the taxpayer's interest than to carry on as before and accept a contract before we had agreed the price.

  84. That is not NAPNOC; that is up front pricing at the outset, is it not?
  (Mr Tebbit) I agree with you. That is why we have got NAPNOC rather than the earlier activity.
  (Sir Robert Walmsley) Pricing at the outset is a component of NAPNOC. It is a key part and it is what I was trying to explain to Mr Jenkins. The main thrust of NAPNOC was to force the Department not to be allowed to place a contract until it had previously agreed the price.

  85. I accept that, which is called pricing at the outset.
  (Sir Robert Walmsley) Which is part of NAPNOC.

  86. In what sense is it part of NAPNOC? They sound like two different techniques to me. One is pricing at the outset. Everything I buy I have to say I price at the outset. That is an obvious thing to do in any sensible way of managing money, but in terms of NAPNOC I do not really see that you do that. I do not see that you have ever not engaged in a contract where there has been a not acceptable price. How do you make sure the price is acceptable?
  (Sir Robert Walmsley) Open book accounting helps because that means that we can learn, we can understand, how it is that the price arises. That is what open book accounting does. Then the question is, is the industry operating efficiently? That is a much more difficult thing to assess. It is particularly hard and complicated for a small piece of electronics which only the company that is offering it to you understands. You then fall back on what people call, I think rather unkindly, parametric estimating. It is true that weight is a very good technique for seeing how much electronics costs. It is almost the same with modern combat aircraft. You can use these very simple rules of thumb. I can remember when nuclear submarines used to cost a million pounds a foot. It was an absolutely robust pricing rule. You get the detail and then you need to do a reality check. I think the reality check is a really important part of this. We have experts who can do that. An example of when we were not prepared to accept a different price was on this famous ship which appears on almost every fifth page of this booklet, where we spent ten months knocking a very substantial proportion of the price out of that initially offered to us on just the grounds that Mr Jenkins was talking about. We did not accept that the productivity being offered by the shipyard was anything approaching what was appropriate for warship construction in the year 2000. Nor did we accept their overhead structure. The firm came round to our way of thinking and completely reorganised and the price reduction we got was extremely substantial.
  (Mr Tebbit) Indeed. One of the tests of this would be demonstrating the difference between the price we were first asked to pay and the one we finally negotiated before we were prepared to place a contract. I cannot give you all the details because it is commercially confidential and it would embarrass a lot of companies, but our experience has been very positive in this. I would not have so many companies complaining to me about the tenacity of my prices under the NAPNOC process if it was not having an effect on them in forcing them to drive down their prices. That is why I think it works but Mr Porter does it all the time. I do not know if he would like to add anything.
  (Mr Porter) The crucial point is the one you made, Mr Gibb, about how you react in your private life. You price at the outset and that is when your negotiating position is at its strongest and when you are able to negotiate the best deal with your supplier. That is the technique that we absolutely introduced in the ways in which Sir Robert and Mr Tebbit have suggested. We have the staff that we have referred to before from the Directorate of Pricing who will produce estimates to us to indicate what in their judgement is the right order of price that we should be paying for the product. Therefore NAPNOC is certainly about not placing a contract until we have an acceptable price for the product we wish to buy.

  87. But you will always place the contract. If I were a supplier I would know that. I would have thought that a track record of not accepting quite a lot of contracts would be quite a good way of battling with your suppliers but, given that your track is that almost none is turned down, you are weakening your hand, are you not?
  (Mr Porter) But we are able to check through the process Mr Jenkins touched on of post-costing to determine in a selected number of cases whether the deal we have actually struck was a right deal to strike.

  88. In post-costing how many times doo you get a refund from the supplier once a post-costing survey has revealed a bigger than, say, ten per cent difference in what you have been told?
  (Mr Porter) If there is information in the post-costing that suggests that there might have been some semblance of inequality of information in the way in which the price was arrived at originally, we would discuss that with the contractor and in appropriate circumstances we would indeed negotiate a refund. I am afraid I have not got immediately to hand the number of refunds that we have secured in recent times but we do certainly do that and we do achieve refunds from our suppliers.

  89. In paragraph 3.3 it says that 90 per cent of all non-competitive contracts are priced at the outset. Again, I cannot work out why that is not 100 per cent. Even when I have my car serviced I get a price at the outset or a price before I agree for the work to be done.
  (Sir Robert Walmsley) We have done much better than that. What that says is what we agreed with the Treasury. We very sensibly agreed a target and we have more than delivered.

  90. What is the figure then?
  (Sir Robert Walmsley) If you look down to the figure shown underneath figure 10 it shows you that pricing at the outset in the last year was about 98 point something per cent.

  91. And the difference between that and 100, what is that for?
  (Sir Robert Walmsley) To be honest, it might have been something for an urgent operational requirement. I can recall a few where I have said, "Get on with it. It is more important to do it now than to spend three weeks arguing about the price", that sort of thing.
  (Mr Tebbit) One example is that when we were sending a lot of troops into Kosovo we needed camp beds very rapidly and we simply bought them straightaway from where we could find them fastest. It was not the most glorious example of the Ministry of Defence's purchasing history but we do get operational urgency at times.
  (Sir Robert Walmsley) A repair is another example. Sometimes a repair has to be got on with and it is a lot cheaper to get on with the repair while the thing is continuing to have bits falling off it—I am thinking of a particular example—than it is to send the pricing staff to try to price what it will cost to repair it.

  92. Do you have any cost-plus contracts let from the MOD?
  (Sir Robert Walmsley) None of our own. I want to give you the exact picture. There will be some contracts which we place through the United States which effectively inside the United States are cost-plus.

  93. Is the intention that when those contracts expire you will move to these more modern methods?
  (Sir Robert Walmsley) We have had more discussions with the United States Department of Defense about getting them to accept fixed price contracting than you would care to know about. We are not going to shift them. There is a fundamental difference in philosophy and a lot of it is to do with the profitability of industry. They had a terrible example with the development of a naval aircraft programme where they eventually decided that fixed price contracting for contracts with a major development content did not make sense and they just do not accept it, so if we want American stuff we go with the way they do it.

  94. What measures do you have at the MOD to ensure that there is good safeguard of the assets that you have procured? I hear stories that once a paintbrush has been used on painting the side of a ship once it is flung overboard and you get a new brush out of the stores.
  (Sir Robert Walmsley) It jolly well is not because I have painted a few ships a long number of years ago. The way that is done is that if it is the fo'c'sle part of the ship they get given their paintbrushes and they are told to look after them and they are expected to paint it. The devolution of budgets throughout the Ministry of Defence has done more to alert people to the value of what it is that they are using or are steward of than anything else. Making people au fait with what things cost and making them responsible for them has made a huge difference.
  (Mr Tebbit) This is particularly important in maintenance contracts. Just to give you an illustration of the change, we used to pay a contractor for every broken window so there was an incentive really for the contractor to encourage people to break windows because he got more money each time. Indeed, he may have broken them himself. Contracts now say, "You will maintain this building, this part of the defence estate, in an unbroken window condition". That is part of the contract and we agree right at the beginning with him the fair price for that and he then has an incentive to avoid any broken windows because it costs him more each time there is one. We are moving into that sort of contractual relationship with suppliers rather than the old-fashioned one.

  95. On page 27 there is a whole table of sub-contracts on non-competitive prime contracts where there has been competition for the sub-contract. I was staggered by the low percentages in the final column, 25 per cent, one per cent, 25 per cent, 20 per cent, five per cent. Why is the competition among the sub-contractors so low?
  (Mr Tebbit) I was very surprised too when I saw that and it must be true because it has been done by the NAO and we have accepted it. I can only assume that it must be the particular nature of the sample that was chosen or a lot of this was, as it were, repeat items within the context of a then existing contract rather than new things. It must have been that sort of distinction rather than the way that I know sub-contracts usually operate.
  (Sir Robert Walmsley) There are two examples I can pick up. I admit these figures shocked me. Sting Ray Life Extension, three rows down, one per cent. The Sting Ray development programme cost the Department enormous sums of money, probably more than a billion pounds at today's value. The life extension is simply to validate the components that exist and make sure that they can continue to run. The idea that you would change a contractor and therefore have to go through all those in-water runs, all the safety issues, the immensely complicated computer modelling, is unimaginable. I can understand why it is quite low. I thought one per cent did seem very low and it will cause me to go away and see why is it that low. If you look down the column about six blocks further down you will find a new product, so that is life extending an existing product: do you want to change the manufacturer of the motor or the computer or anything else? If you go a bit further down the column you will see Batch 2 Trafalgar Class (Astute) and you will see that 60 per cent of it was sub-contracted. An article that will not have been sub-contracted, which I would submit is extremely sensible, would be the nuclear power plant, partly because there is only one person in Britain who makes it. The idea that you would change the manufacturer of a nuclear power plant is quite frankly undo-able as well as preposterous. I think that is quite encouraging and I thought, "That number looks right to me".
  (Mr Tebbit) It is the prime contractor's responsibility for deciding how he organises his supply chain. That said, we have an interest in seeing what he is doing and in understanding what he is doing and in influencing it. We have an insight into what he is getting up so as to have a general sense of whether he is performing properly and whether we should be intervening, whether to not extend the contract or use break points or negotiate different arrangements. But we do not have the oversight of a prime contractor so I would not want to suggest that we could or should simply intervene and say, "You must increase competition there" because he has won the contract and he is the prime contractor. We do not want to re-import the risk back to ourselves. He is bearing the risk. It is up to him. That said, I would feel uncomfortable if I saw contracts going along with a very little bit of competition from the sub-contractor and I would expect Rob Walmsley and his people to ask questions.

Mr Steinberg

  96. So 25 per cent of the contracts are let without competition: a number of members have brought that point up. On page 15, figure 3, we are given an estimation on why this happens. Mr Rendel went into this quite comprehensively. I have just one point that was not pursued which was the "Other reasons". Just define why it seems that 15 per cent of the 25 per cent is for other reasons. Give us a little more detail.
  (Mr Tebbit) I thought Rob Walmsley did rather well at that.
  (Sir Robert Walmsley) I do find that a very hard question to answer except to say that we are absolutely committed to securing competition where we can. There should be, I very much hope, no doubt in the Committee's mind about that. If that is what it came out to, then that is just a fact and you see things like collapse of competition, you see things in here like classic client requirements, and that might be all our cryptographic chips. We only have one company in the United Kingdom which makes cryptographic chips. We do not compete it. It is a fundamental ethos of cryptography that you know where the things are made and you keep the factory under control.

  97. I do have the worry that if something is just pushed into that category, "Other reasons", nobody will ask any questions about it.
  (Sir Robert Walmsley) People do ask questions.

  98. Do they?
  (Sir Robert Walmsley) Oh yes.

  99. How many contracts—and this might be impossible to answer—where just one contractor could supply? For example, Mr Tebbit, the bed business. Was there only one contractor who could supply beds?
  (Mr Tebbit) Yes, there was only one contractor who could supply the number required in the time available. That was true.

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