§ 4.25 p.m.
§ THE MINISTER WITHOUT PORTFOLIO (LORD SHACKLETON)
My Lords, with permission I should like to repeat a Statement which has been made in the other place by my honourable friend the Minister of State at the Ministry of Technology about Bristol Siddeley Engines, Limited. Perhaps I may preface my remarks by saying that this is, in a sense, partly a personal Statement to another place, but since it contains matters of policy which will be of interest to your Lordships I propose, with permission, to repeat it here.
My honourable friend said:I should like first to deal"—and this is the personal part— with the events of March 25. Following the newspaper reports and comments that appeared after my previous Statement in the House I telephoned my officials from Cornwall on Easter Saturday, advising them to answer Press inquiries with such information about the background to this case as was already available in the Department. I added one political comment which I said could go out, from me, if required. My instructions 996 were misunderstood, and following a whole series of telephone calls between officials working from their homes or holiday addresses this background information, together with my own comment, was, in error, issued as a Statement by me. As drafted it did not, and could not, have my authority, and it was withdrawn as soon as this was understood.
"It has been brought to my attention that some of the words in the Statement that was issued erroneously are open to misinterpretation. I should like to make it clear that the Company did not put a figure to the amount of the over-charging when first reporting it in December, 1964. Nor at any time later did they suggest that it was only a few hundred thousand pounds. This was the impression formed by officials at the end of 1964, and the full extent of the sums involved only became apparent after the most detailed investigations later.
"I should also like to make it clear that there was no contradiction between my criticism of the Company for its original over-charging and double-charging and the fact that the senior directors behaved with correctness in reporting the matter and throughout my dealings with them about the repayment. The long delay in negotiating this repayment, which I reported to the House, arose in part from the fact that it was not until February of this year that we were able to obtain from them the full information that we required on the actual costs incurred.
"Nor is there any truth whatsoever in the allegation that my right honourable friend the Member for Sheffield Park who preceded me as Minister of Aviation, gave any sort of an undertaking to the firm that if a prompt and full payment was made the Government would moderate its comments in the subsequent announcement to Parliament. "With regard to the case itself, which raises important matters of public interest, my right honourable friend"—
that is, the Minister of Technology—
"has decided to institute a full and independent inquiry. The terms 997 of reference of this inquiry and the names of those who will conduct it will be announced shortly.
"I think the House will wish to have some background information with which of course the inquiry will be concerned.
"For the years 1959–60 to 1962–63 fixed prices were agreed with Bristol Siddeley Engines for engine overhaul contracts and repair of spares contracts for, amongst others, Sapphire and Viper engines. These prices were based on quotations made by the firm and were agreed by the Department. By the middle of 1964 the Ferranti case had come to light and as a result instructions had been issued by the Department that prices should not be fixed solely on the basis of estimates of work which had already been done and on which it was to be expected that actual cost information was available. In relation to the 1963–64 and 1964–65 contracts the Department therefore asked for figures of actual hours worked and materials used on the earlier contracts, but we had not obtained the firm's agreement by the end of 1964. In December of that year the firm drew attention to the fact that the quotations given for Sapphire and Viper engines for 1963–64 and 1964–65 were too high by a considerable margin and would be reduced. This was the first indication which the Department had that excess profits might have been made in earlier years.
"In February, 1965, the revised quotations were received from the firm and showed considerable reductions, in some cases of the order of 50 per cent., on the previous quotations. A detailed examination was then launched by the Department into the pricing of engine overhaul contracts with special reference to Sapphire and Viper engines and as a result a report was produced in December, 1965, based on the actual costs of certain work done in 1964–65 which were made available to us by the firm. This showed that there had been over-estimation of the costs of overhaul and also revealed for the first time that there had been double-charging in respect of the stripping and rebuilding of certain assemblies which, although covered in the specification and price for the 998 engine overhaul contract had been charged to the repair of spares contract. I should here make it clear that this double-charging arose through errors in the operation of the firm's procedures and from the time of its discovery the firm has been willing to make restitution in full.
"As regards the over-estimation of price, negotiations with the firm continued until February, 1967, with a view first to obtaining details of the firm's actual costs from 1959 onwards and secondly to agree what a reasonable level of retained profit should be. I would remind the House that these were fixed-price contracts. The firm had quoted prices and the Department, after an examination—in the outcome clearly an ineffctive one—had accepted them and it was clear to the Department that a legal claim could not be pursued. Nevertheless, the negotiations led the firm to offer a refund. In February, 1967, we obtained separate cost figures for Sapphire and Viper engines on the one hand and the remaining engine overhaul and repair at the Coventry and Bristol factories on the other. This disclosed for the first time that there had been excess profits on the overhaul of other engines. On the basis of the figures a refund was agreed at £3.96 million including repayment of double-charging of about £500,000.
"As for the future, I must make it clear—once again—that the Government require equality of information, including post costing in contracts of this kind."
§ LORD CARRINGTON
My Lords, I thank the noble Lord, Lord Shackleton, for repeating that Statement, and may I say first of all how greatly I welcome the decision of the Government to have an independent Inquiry. I am quite sure that that is right. There must be absolutely no suggestion of concealment on either side. I take it—perhaps the noble Lord will confirm this—that this will not in any sense be a departmental Inquiry, but that its members will come from outside the Department.
I think most of the points of substance raised by the latter half of the Statement can well await the results of the Inquiry, but with regard to the first part of the 999 Statement I imagine that the passage about the conflicting Statements is intended to be an apology. I hope I am not wrong in that. I think we may leave the rather unusual behaviour of Mr. Stonehouse to Members of another place. At any rate, it now transpires that the first Statement was right and that most of the second Statement was wrong. There is one question which I should like to ask the noble Lord, and it is this. May we have an assurance that the Government will give instructions that when statements go out from Ministries which are non-attributable and are for background information only, they should not contain contentious Party political propaganda, as was the case in the matter under discussion? It seems to me that if this were done it would stop at once what might be the beginning of a most pernicious practice.
§ THE EARL OF SWINTON
My Lords, like my noble Leader, I am extremely glad that there is to be this impartial Inquiry. I should like to have an assurance that it will be well within the competence of that Committee of Inquiry to consider whether one satisfactory way of preventing this sort of unhappy affair developing would be that which we found so extraordinarily successful when I was Minister for Air—what we called a "target" or "bogey" price, plus a share in savings. Of course machines were very much simpler in those days, as the Minister knows. At the same time, we were operating in an entirely unknown element, in that firms had to make machines which they had never made before, and they had no idea what the cost was going to be.
We laid down two very definite principles. The first was that we never made a time and line contract, but where it was unknown what the cost was going to be an estimate was made of what was a reasonable amount to allow, say 7½ per cent. If you thought that the price ought to be about £15,000, you then said that 7½ per cent. of that was so much. If on costing it turned out that it cost more then, of course, the out-of-pocket expenses of the firm had to be paid; but they did not get an increased commission on that extra amount. They got 7½ per cent. on the target price, on the £15,000, but even if it cost £30,000 they received 1000 only the same profit as they would have received if it had cost £15,000.
The other principle was that, having arrived at a fair knowledge of the sort of price for which a machine or an engine could be made, it was agreed that you started with a "bogey" price. Then if it could be done more cheaply there was a saving in which both the firm and the Government shared. The result was great efficiency, a considerable saving to the Government, and a larger profit to the firm where they made a genuine and effective economy. All I ask is that it should be well within the competence of the Committee of Inquiry to consider this, and I am sure the Minister would gladly agree with that.
§ LORD BYERS
My Lords, I do not wish to comment on the personal statement of the Minister in another place, but I should like from these Benches to welcome the Inquiry. I would ask only two questions. First of all, will the terms of reference of the Inquiry be wide enough to lay down clear rules of conduct for the relationship between the firm and Departments for future Government contracts? Secondly, is it not a fact that the second Lang Report of February, 1965, recommended equality of information as a principle; and will the Government say why this recommendation was not implemented?
§ LORD SHACKLETON
My Lords, I appreciate the reception which noble Lords have given to this Statement. In regard to the one possibly slightly contentious part of the remarks made by the noble Lord, Lord Carrington, I would say that it was certainly not my honourable friend's intention to put out a contentious Party political statement (if that is the correct term) on an unattributable basis. I think that I will not go into this very vexed question of attributable and unattributable Statements, on which many views are held.
First of all, as to the nature of the Inquiry, I can certainly assure noble Lords that it will be conducted by outsiders, and although I do not know what the composition of the Committee will be, it is certainly the intention that it shall be under the chairmanship of an impartial individual. In that sense, it will be comparable to the Lang Inquiry; and its Report will be published. Since the noble Lord, Lord Byers, referred to the Lang Report, perhaps I may say that 1001 while it is certainly true that the Lang Report recommended equality of information, it did not go the whole way—and the Lang Committee were speaking then about production contracts—in regard to post-costing. I must say in fairness that, although the Government attach great importance to this, it is not a matter which this Government or the previous Government, or any other Government, could simply impose by will. It is a matter—and I am sure this is to everybody's advantage—that should be negotiated within industry. I should prefer not to say very much on it, because I am sure that we are more likely to arrive at a satisfactory solution if it is conducted on a friendly basis.
I listened with the greatest interest to what the noble Earl, Lord Swinton, had to say. No-one knows more about this subject, and although his experience may relate to an earlier age, knowing the immense (and I would say on the whole unappreciated) contribution he made to this country's defences, I would naturally heed his views. This question of target costing is an interesting one. I shall not be drawn beyond saying that this will be noted. Obviously the Inquiry will be wide enough, but it will not itself be in a position to lay down the rules. Ultimately, the Government will have to negotiate these within industry.
§ THE EARL OF SWINTON
My Lords, all the plans to which I referred were agreed with industry and were welcomed by industry.
§ LORD SHACKLETON
It is a complicated subject and I do not doubt the Report will throw further light on it. Meanwhile the Government have made their position clear in regard to the desirability of equality of information, and I welcome the support of the noble Lord, Lord Byers, for that. I hope I have dealt with all the points raised by the noble Lord, Lord Carrington.
§ VISCOUNT STUART OF FINDHORN
My Lords, may I just mention something on this subject, of which I have some recent knowledge? I am a little worried about it. I never dare to disagree with my noble friend Lord Swinton—I am too frightened, for he is always right. But he was building up for war and had to get the flying machines made. He was 1002 really working on what was called in my time "the cost-plus system".
§ VISCOUNT STUART OF FINDHORN
If you say that you will pay the firm the cost of producing whatever it may be, flying machines or roads or bridges, plus 7½ per cent., there is no incentive to keep down the cost. That was all that worried me. I beg my noble friend's pardon if I misinterpreted him.
§ LORD SHACKLETON
I think we ought not to be drawn further. I did not think that the noble Earl, Lord Swinton, was advocating a purely cost-plus system.