§ Mr. Kenneth Carlisle
asked the Chancellor of the Exchequer whether the arrangements for remunerating Government non-competitive contracts are to be changed as a result of the fourth general review carried out by the review board for Government contracts.
§ Mr. Peter Rees
The review board for Government contracts was asked to expand its fourth review to cover the arrangements for remunerating Government non-competitive contracts established under the 1968 agreement between the Government and the Confederation of British Industry.—[Vol. 21, c.289–90.] In its report, submitted to the Government and the CBI at the end of January 1984, the review board recommends that the principle of comparability with rates of return elsewhere in the economy should continue to play a key role in determining the target rate of profit paid on Government non-competitive contracts. But comparison should be made with an analogue group wider than that relating to manufacturing industry, which has previously been used. The existing arrangements for triennial reviews of the target profit rate should be supplemented by limited annual reviews so that changes in the rate of return elsewhere in the economy, and in other economic circumstances can be 250W reflected more quickly in the profit rate. The target profit rate should be expressed on a "semi-CCA" basis, allowing for the historic cost figures to be adjusted by the inclusion of current cost based depreciation and fixed asset values.
Specifically the review board recommends that a target rate of profit on capital employed of 11 per cent. on a "semi-CCA" basis should be introduced as soon as possible. The historic cost-based equivalent is 15.5 per cent. which will apply until the transition to a "semi-CCA" basis is achieved by individual contractors. The present profit rate is 20 per cent. on capital employed —historical cost basis.
The review board report, copies of which have been placed in the Library, also contains a number of other recommendations proposing changes in certain arrangements and accounting conventions, a few of which are unacceptable to the Government. The negotiating committee of the CBI representing the contractors has not been willing to accept the exclusion of those unacceptable recommendations.
The Government having considered the representations made to them, have decided on the following:
- (i) Acceptance of the recommendations of the review board summarised in paragraphs 13 to 22 of its report except for the unacceptable changes to the accounting conventions, including the guidance document on private venture research and development expenditure.
- (ii) Implementation of the new arrangements with effect from 1 April 1984 in the manner proposed in paragraph 23 to 24 of the board's report.
- (iii) Application by the Government of the "two tier" arrangements referred to in paragraph 20 of the report to risk contracts of £1 million or more covered by the profit formula, where the price is not agreed at the outset.
- (iv) Proposal to be made by the Government to the review board and the CBI negotiating committee about a forum for further consideration of cost-effective incentives for increased efficiency in the performance of non-competitive contracts, referred to in paragraph 17 of the report.