Examination of Witnesses (Questions 80
WEDNESDAY 14 NOVEMBER 2001
KCB AND MR
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
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,
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
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
(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
(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
(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
(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 itI am thinking of a particular examplethan
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
(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.
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
(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
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 contractsand this might
be impossible to answerwhere 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