§ 3.55 p.m.
§ LORD SHACKLETON
My Lords, with your Lordships' permission, I should like to intervene to repeat a Statement which is being made by my right honourable friend the Minister of Aviation in another place on the pricing of Ministry of Aviation contracts. The Statement is as follows:
§ "When my predecessor made a statement on the Second Report of Sir John Lang's inquiry into the pricing of Ministry of Aviation contracts [OFFICIAL. REPORT, Commons, February 9, 1965; Written Answers, Col. 63], he said that a number of the conclusions and recommendations about contracts and procedures were in line with views already formed in the Department, and that action on them was in hand. He pointed out that others would need a good deal of study; but he specifically welcomes one important recommendation in the Report, which also accorded with the view expressed by the Public Accounts Committee: namely, that there should be equality of information between the Ministry and its contractors up to the time prices are fixed.
§ "Since then the Government have given these matters further consideration, and there have been preliminary discussions with industry. Our view 712 is that equality of information ought, as Sir John Lang suggested, to be secured by means of a contract condition, and that any uncertainties in existing conditions and procedures should now be resolved. The Government also believe that post-costing, which provides knowledge of the out-turn of completed contracts, is an essential part of equality of information (except when contracts are priced by competitive tender). The Lang Report argued that post-costing would conflict with the principle underlying fixed price contracts, and diminish their effectiveness as incentives. But follow-on orders form a very substantial part of the field for fixed price contracts, and Departments cannot get full equality of information for such orders unless they have post-costing. Post-costing also provides a valuable check on the reliability of Departments' own estimates and on the pricing information supplied by firms. It is not of course necessary, nor is it the Government's intention, that post-costing should be used to renegotiate prices for contracts already placed. But post-costing does mean that profits grossly in excess of those allowed for when prices are negotiated (as in the Ferranti case) will be brought to light; and, in such cases, the Government will not be precluded from seeking some reimbursement outside the terms of the contract.
§ "Revised standard contract conditions securing the Government's rights to equality of information (including post-costing) are now being drafted and will shortly be discussed with the representatives of industry. Meanwhile, we hope to have the co-operation of all the firms concerned as fresh contracts are placed.
§ "My predecessor also said that the Government would review the profit formula, and would take account of the comments of industry in doing so, as Sir John Lang's Report suggested. The Government are engaged upon their own review, and are now inviting comments from industry. In this review, attention is being paid to the encouragement of efficiency and to incomes and prices policy.
§ "The Government propose to review the situation afresh, in the light of 713 progress in all these discussions, in six months' time, in order to see if further action is needed to secure the rights they require."
My Lords, I am grateful to the noble Lord for repeating this Statement. I should have been even more grateful if the Government had managed to make it yesterday, because, as your Lordships will recall, we were discussing the aircraft industry and this very question came up. I think it would have been helpful if we could have had the Statement yesterday and, for that matter, it would have been more courteous to the House, although I acquit the noble Lord who has repeated the Statement, and the Government, of any intentional discourtesy.
In the Statement it is said that the Lang Committee recommended against post-costings, and as I understand it, recommended on this admittedly very difficult question in fairly firm language. May I ask two questions of the noble Lord? First, in the Statement it is said that it is not the Government's intention that post-costings should be used to renegotiate prices for contracts already placed, and then, later, that nevertheless the Government will not be precluded from seeking some reimbursement from the firms concerned outside the terms of the contract. Can the noble Lord say what practical difference that means for the firms concerned? Secondly, I notice that there will be discussions—and I am glad that this is so—between the Government and industry, both on the question of post-costings and on the possible new profit formula. I take it that this means that these two factors, which are closely linked, will be, or could be, discussed at one and the same time?
§ LORD SHACKLETON
My Lords, first of all I would apologise to the House for not being in a position to deal with this yesterday and I am grateful to the noble Earl for acquitting me personally of discourtesy. The fact that I adverted to this myself at one point was, I am sorry to say, purely coincidental.
The noble Earl has asked why the Government in this respect have differed from the Lang Report. I think it is important to appreciate that the Lang objections, which were fairly well 714 balanced—that Committee saw the advantages of it also—were against the background of the possibility of renegotiating a fixed price contract following the post-costing; and this the Government are not intending to do. Then the noble Lord goes on, quite reasonably, to ask what is the difference between that and the Government's statement that in certain circumstances they might seek reimbursement. There is an important difference. There would be no contractual obligation on the company, any more than there was in the Ferranti incident, to repay, and although in a matter as delicate as this, which is still subject to negotiation, I would not wish to speak with final authority, it is not my understanding that this technique would be applied, except perhaps in rather more serious instances. Indeed, one would hope that it would not be applied; and I myself should not regard the Ferranti incident as in any way typical of the action on the part of contractors in their dealings with the Government.
As the Lang Report says, there is, after all, moral responsibility on the contractor not to exploit the nation unfairly in defence contracts; and, if I may say so, I should have thought this was consistent also with general commercial morality, certainly in those parts of industry with which I am familiar. But if there were an excess profit, in such circumstances the Government might seek reimbursement, although I would hope it would never arise. Indeed I think the objections of industry to this proposal do not rest on this particular point.
I do not think I can answer the question whether the new profit formula and this particular question of post-costing will be discussed at one and the same time, because I am not myself familiar with the way in which these negotiations are being carried out. But I do not doubt that satisfactory discussions will take place on them, and I can see that there is a definite relationship between the two. May I also add that post-costing is a well-established, familiar technique in the United States of America, where it is normally practised, and where in fact they do not go in for fixed price contracts to the same extent as we do in this country.
§ LORD WADE
My Lords, would the noble Lord agree that, in the type of contract considered in the Lang Report, the Ministry is often the most important customer and therefore it is in the interests of industry and the Government that there should be as much co-operation and exchange of information as possible? My second point is the more specific one on the question of post-costing. I understand from the Statement that post-costing is to be regarded as an essential part of equality of information except where the contracts are priced by competitive tender. I take it, therefore, that where the contract is placed with one concern and the firm estimates its profit margin and takes the risk involved, afterwards it will be expected, under this new procedure, that information will be disclosed as to the profit made and the anticipated profit margin on future orders?
§ LORD SHACKLETON
My Lords, I am much obliged to the noble Lord, agreeing with the views of the Government on equality of information. His understanding of the meaning of the Statement in regard to competitive tendering is in fact the same as my own, but I can see circumstances even here where post-costing may seem to become necessary, although, having enunciated the principles, I think that is as far as I can go now.