Guide Weapons Contracts

– in the House of Commons at 12:00 am on 29th April 1964.

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3.31 p.m.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

I beg to move, That this House takes note of the Second Report from the Committee of Public Accounts relating to guided weapons contracts placed by the Ministry of Aviation with Ferranti Limited. I would like at the outset of my remarks to express the appreciation of the Government for the clear and objective Report which the Public Accounts Committee has made to the House on the Ferranti contract. As the Committee recognises, many of the questions posed in the Report cannot be finally answered until the results of Sir John Lang's inquiry are also in our hands. All the same, the Government have thought it right to invite the House, at the earliest opportunity, to discuss the important issues of public policy which are involved.

The immediate issue before us is the Ferranti contract. But bound up with it is the whole question of the weapons procurement policy pursued by successive Governments since the war. Before dealing with the contract itself I will say a few words about the general problem, of which it is a part.

The development and production of modern weapons is an extremely complicated business and what one is trying to do when one starts a new weapons system is to make something which will match the weapons which a potential enemy may deploy, a decade or so, ahead. This is not like printing a book, or turning out a motor car. One is making something that has not been made before. It is all at the frontiers of technical knowledge.

Admittedly, the production of new weapons is simpler than their development, but if the new weapons are to reach the Armed Forces in time, production generally has to begin well before development is completed; and the process of production is often made even more difficult by the need to introduce retrospective modifications as the military requirement changes—and it is likely to change over a 10-year cycle. It is, therefore, extremely difficult to estimate accurately how much the development or production of a new weapons system will cost or how long it will take. The House is well aware of examples of slippages in cost and time drawn from our own experience and the experience of successive Governments. The experience of the United States and the French has been much the same.

It will be clear to hon. Members that the difficulty of making accurate estimates in the circumstances is, naturally, reflected in the contractual arrangements between the Government and industry under which weapons are developed and produced. In development the uncertainties are so great that most contractors—very often the Government as well—have little choice but to agree their contracts on a basis of cost-plus. Under this system my Department pays for what is actually spent on a project, plus a margin of profit agreed with the contractor.

Under cost-plus the contractor runs no risk of loss, but he has very little incentive to efficiency, economy or punctuality. Rather the reverse. Since the bills will be met by the Government, the contractor is tempted to play safe, use more labour and take more time than might be strictly necessary. His profit will not be affected one way or the other by the use of out-of-date methods or delay. Indeed, in some cases the higher the cost the greater his margin of profit can become.

Because cost-plus tends by its very nature to be wasteful of national resources and to lead to delays, successive Public Accounts Committees—and the Leader of the Opposition has often endorsed this view—have urged the Government to restrict the area of cost-plus contracts to the minimum and to adopt fixed-price contracts wherever possible. Under fixed prices the contractor can hope—if he is efficient and punctual—to secure higher profits than he could expect under a cost-plus contract. However, if he has miscalculated, is inefficient, or late, he may meet with a loss.

We have done our best to follow this advice of Public Accounts Committees and to extend the area of fixed-price contracts as far as possible. We have done this mainly in the sphere of production contracts because very few contractors are prepared to take on fixed-price contracts for development work. The essential problem in a fixed-price contract is how to arrive at what is a fair and reasonable price for a particular programme or project. Where a contract is awarded after competitive tender—following tenders having been received from different firms—one at least has the yardstick of the competitive offers put in by the rival firms.

The Ministry of Aviation places about £200 million worth of new production contracts every year but, of this, only a bout £15 million worth are related to contracts where there is genuine competitive tendering. The remaining £185 million or so are related to contracts for which there is only one possible source of supply. This sounds a very high proportion, but it is not surprising. An aircraft or missile project is usually entrusted to a particular firm at the development stage. By the time a decision is taken to go into production the contractor who has done the development is generally the only serious candidate for the production contract.

All this means that over most of our production contracts—and we conclude about 18,000 a year—prices have to be agreed between the contractor and the officers of my Department on the basis of the best estimates that both sides can make of what is often an entirely new job. La view of the risks involved, my Department and industry sometimes conclude incentive contracts, where the liability to both sides is more limited than in a fully fixed-price contract. There are, for example, maximum-price contracts as well as target-price contracts, in which the contractor gives back a share of any savings he may make and has to pay part of any excess. There are also cost contracts in which the profit paid varies in an agreed way according to the contractor's performance.

None of these forms of contract offers as sharp an incentive to efficiency and speed as fixed-price contracts, and in the majority of production agreements we proceed on the basis of fixed prices A main reason for this is that our object is not only to secure satisfactory weapons as cheaply as possible, but to ensure delivery to the Armed Forces on time. Delay can be very expensive for a contractor, by adding to his labour and overhead costs, and fixed prices give him the maximum incentive to get on with the job.

I have said enough to show that to estimate and agree fixed prices for the kind of programme that we are considering is plainly a difficult and complicated process. Other countries have found this, too. Hon. Members who have studied the Report of the United States Senate Sub-Committee—it is called The Pyramiding of Profits and Costs in the Missile Procurement Programme—will have seen what happened over the NIKE and BOMARC contracts.

On one BOMARC contract the United States Air Force agreed to an 8 per cent. fee on a target of 112 million dollars. The actual cost of the work proved to be not 112 million dollars, but 75 million, so the Boeing Company made a substantial windfall profit. BOMARC happens also to be a first-generation surface-to-air guided weapon. I refer to this not in extenuation of what happened over Bloodhound I, but to illustrate the difficulties that face those agencies responsible for procurement, abroad as well as here, in estimating the costs.

I come now to the Ferranti contract. Ferranti's has been established in the electrical and electronic business for 80 years. It has developed and produced highly complex equipments for the Services. It has an excellent record in the export field, and has been regarded by my Department as a highly competent organisation.

In 1950, when the right hon. Member for Vauxhall (Mr. Strauss) was Minister of Supply, Ferranti's was entrusted with the development of important components of the Bloodhound I missile. The Bloodhound I was a first-generation surface-to-air guided weapon designed for the Royal Air Force. In passing, it is interesting, I think, to note that the right hon. Gentleman's original estimate of the cost of developing Bloodhound I was between £1 million and £1½ million. The actual price proved to be £32 million. I say this not from any wish to criticise the right hon. Gentleman's record, but merely to emphasise how very difficult it is to get these estimates right.

Ferranti's was made responsible for the guidance and control of Bloodhound I, and for the launch control equipment related to it. Development was carried out on the basis of cost-plus. Ferranti's share of the total development cost of £32 million was about £8 million, on which their profit was £400,000, or about 5 per cent. of the cost.

As usually happens with weapon systems of this kind, production began before development was finished. The total value of the production contract of the whole weapon system was £44½ million and production was undertaken on the basis of fixed prices. Ferranti's share in this was £13½ million. The £11 million or more referred to by the P.A.C. is, of course, the money paid in the period ending 31st March, 1961, investigated by the Comptroller and Auditor General.

Up to 31st March, 1961, Ferranti's profit, according to my Department's assessment, amounted to £4,550,000 on production including the export orders. This represents a profit of about 113 per cent., on capital employed, or 63 per cent. on cost, or 40 per cent. on turnover according to how one likes to look at it. Ferranti's has stated that its further profit for the period after 31st March to completion of contract amounted to another £850,000—again, including foreign orders. This would give a total profit of about £5·4 million out of total payments by the Ministry of £13½ million, and export orders estimated at £1¼ million.

It must be said clearly that Ferranti's share of the work——

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

The right hon. Gentleman went rather quickly over those figures. As it is the first time that we have had at least two of them, would the Minister repeat them so that we may write them down?

Photo of Mr Julian Amery Mr Julian Amery , Preston North

The total profit would have been about £5·4 million out of total payments by the Ministry of £13½ million and export orders estimated at £1¼ million. This represents a profit of about 63 per cent. on cost, or 113 per cent. on capital employed, or about 40 per cent. on turnover——

Photo of Sir Godfrey Nicholson Sir Godfrey Nicholson , Farnham

The term "capital employed" is being rather loosely employed in this inquiry. Would my right hon. Friend tell the House how the capital employed was assessed?

Photo of Mr Julian Amery Mr Julian Amery , Preston North

My hon. Friend has caught me there. I do not have details of the exact method of assessment, but I can certainly find them out and let him know. This is not a figure that I have produced today. I produced it originally in answer to a Question by an hon. Member opposite, who asked what the figures of capital employed were. The figure was produced only after considerable research by my Department.

It must be clearly said at once, and in fairness to the firm, that Ferranti's share of the work on Bloodhound I was carried out on time and to the full satisfaction of the R.A.F. The weapon was sold to Sweden and to Australia in competition with American missiles; and the sale of Bloodhound I undoubtedly paved the way for the export orders for Bloodhound II, which are already valued at about £40 million. B.A.C., Ferranti's and the other firm concerned pay a levy to the Government on exports, and these should amount to about £4 million overall on Bloodhound II.

These are very creditable achievements, but I think that it is the general view on both sides of the House that the profit secured by Ferranti's on these particular Government contracts was, by any standards, excessive and unjustified. Before I deal with the central problem of how this excessive profit arose I want to turn to one or two related matters that arise from the Public Accounts Committee's Report.

The Committee has criticised my Department for not agreeing its prices with Ferranti's at a much earlier date. It is perfectly true that if this had been done neither the Ministry—nor, indeed, Ferranti's—would be open to the charge of having agreed what have proved to be inaccurate estimates at a time when the contract was two-thirds of the way through and when both sides had access to a great deal of relevant information. If prices had been agreed earlier, there would have been a more genuine element of risk to both parties.

The reason prices were not agreed earlier was that Ferranti's was not pre- pared to conclude until it could form a clear judgment of what overheads were likely to be, and we understood and accepted that position. Here, perhaps, it is interesting to note, simply as a commentary on this issue, that in the case of the BOMARC missile, to which I have referred, the United States Senate Sub-Committee criticised the United States Air Force for having agreed the price with the Boeing Company too early in the day; for acting, in fact, on insufficient information.

I think that the House would agree that the precise moment at which prices are agreed must be a matter of judgment and balance—one has to weigh the risk and have some information on which to proceed—but in this case, regrettably, the fact remains that even if prices had been agreed earlier the loss to the taxpayer would have been no less—it might well have been greater.

The Public Accounts Committee has also criticised the Ministry's failure to compare the total technical cost estimates of direct labour employed on the project with the direct labour figures used by the accountants branch in assessing the actual expenditure on overheads. Sir Richard Way, the Permanent Secretary to the Ministry, has explained in some detail to the Public Accounts Committee how this came about.

Briefly, the reason is that the accountants branch figures relating to overheads very seldom have the same relevance to technical cost estimates as they had in this case. There are usually several different programmes, some on Government and some on private account, going on in the same group of factories. It is then virtually impossible to deduce the true figure of direct labour employed on Government business from the estimate used for overheads.

In the Bloodhound contract, as it happened, the 'Ferranti product group concerned was doing virtually nothing else except the Bloodhound I. The figures were thus directly relevant to each other. This happens very rarely. As I said, we have been placing about 18,000 contracts a year and I have been able to find—and when I say that I mean with the help of my Department—only five cases over a periled of 10 years where a check between these two has been of value. It has not, therefore, been a routine procedure to compare the two. It is however, clear that if these figures had been compared in this particular case we should have insisted on very different prices.

I have accordingly requested that in all future contracts the two sets of figures should so far as possible, be compared. I have also asked that the Department's normal practice of building up cost estimates on the basis of the three elements of direct labour, materials and overheads should be reviewed. This, of course, will include the relationship of overheads to direct labour. I am not satisfied that the present formula is the best on which to proceed. I am also looking carefully at the suggestion which is sometimes made that the profit rates that we allow in Ministry contracts do not of themselves give a sufficient incentive.

The Public Accounts Committee has a good deal to say about the part played by Ferranti's in all this. For my part, I would only say that it is clear from Mr. Sebastian de Ferranti's evidence, on page 25 of the Report, that when the prices came to be agreed, between July and October, 1960, the firm knew that it would make a very large profit. The contract, after all, was two-thirds of the way through. In those circumstances, where the element of risk was at least very much diminished, I think that it would have been commercially more prudent for a firm of Ferranti's standing to have dealt differently with an important customer.

I do not want to say more than that at this stage—[HON. MEMBERS: "Why?"]—but, when all is said and done, the central fact remains that there was a serious discrepancy—a discrepancy of nearly 100 per cent.—between my Department's estimate of the cost of the direct labour that Ferranti would use on this contract and the cost of the labour that it actually used. I am determined that we should find out exactly what happened and how this discrepancy arose. We must know this as a matter of fact and not a matter of speculation. This is not just because of the money involved, but because until we know exactly what happened we cannot be sure that this is an isolated incident; and we cannot take steps to stop it happening again.

As the House knows, Sir John Lang is inquiring both into what went wrong in this particular contract and into any consequential changes in our contracting procedures that may be needed. Sir John has had vast experience of this kind of work, but hitherto he has had to work with one arm behind his back. This is because he has not had access to Ferranti's records. Mr. Sebastian de Ferranti has felt strongly, as he told the Public Accounts Committee, that it would be wrong in principle for him to disclose his records in the case of a fixed-price contract. He has felt, I understand, that to do so would be to put in question the agreement reached between the industry and the Government in 1947.

Under that agreement, the Government of the party opposite agreed to give up their right to inspect records in the case of fixed-price contracts, but in the special circumstances of this case I have asked Mr. de Ferranti to make his records available to Sir John Lang, and, in the public interest, he has agreed to do so. He has given me an assurance that Ferranti's will give the Lang Committee all the help and assistance it can. He has told me that Ferranti's will open its books in so far as these are relevant to the Bloodhound contracts, to the Committee and its representatives. He has also said that he will give the Committee access to whatever records it wishes to examine in relation to those contracts and that Ferranti's will co-operate with the Committee in every possible way. I welcome Mr. de Ferranti's offer. I think that now, on both sides of the House, we can feel that we shall find out exactly what happened and that we shall have information on which to base any remedial measures that may be needed.

I turn now to the Amendment standing in the name of the Leader of the Opposition and the names of some of his hon. Friends. This invites the House to censure the Government for their laxity in permitting excessive profits. I can only interpret this as a censure on the administration of my Department and more particularly of the branches connected with contracts. [An HON. MEMBER: "And the right hon. Gentleman."] I have said "of my Department" and more particularly on the contracting aspects of that Department.

It is possible that the Lang report may reveal laxity or negligence, or even worse. If it does, the Government and the House will no doubt see to it that appropriate measures are taken. But it would be quite contrary to our sense of justice to condemn the Government or their officials of laxity before the inquiry is finished, and before we have the facts. I could understand it if the Opposition had felt justified in putting down their Amendment on the ground that without access to Ferranti's books the Lang inquiry could not get at all the facts, but now that Sir John Lang is to have the facts, and I have told the House about the position over this, I feel sure that the Leader of the Opposition will agree that the Amendment is wholly premature and should be withdrawn.

The Amendment can also be construed as implying that the Opposition think that the Government have allowed excessive profits not just in the case of Ferranti, but in others as well. There may be cases of excessive profit which have not come to light, but I have seen no evidence of them, and if the Opposition are to persist with this charge, and use the wording of the Amendment, they are under an obligation to substantiate it. My Department lives very close to the aviation industry and I do not think that anyone would say that the industry, taken overall, is a high-profit industry.

A few years ago five major companies in the business revealed to us that their average profits on Government contracts had been 11·7 per cent. on cost in 1951. This was the time of the Korean War, and, incidentally, when the party opposite was still in power. They were 8·6 per cent. on cost in 1954. These figures were made available to the Estimates Committee in 1956 and, I understand, accepted by the Committee. The average percentage of profits related to capital employed by the major Government contractors in the aircraft industry is disclosed in their published accounts as 6·3 per cent. in 1961 and 7·5 per cent. in 1962. I know that these are overall figures, but, frankly, any suggestion that the industry had been financing private ventures out of excessive profits on Government account would be met with a hollow laugh by the Society of British Aerospace Companies.

The Amendment censures us for allowing excessive profits. Does this imply that we should be congratulated where we inflict excessive loss on industry? [HON. MEMBERS: "Oh."] We do not hear so much from the party opposite about losses suffered on fixed-price contracts, but I think that I ought to say something to the House about this. Hawker-Siddeley recently informed me that it has made heavy losses on the fixed prices agreed with the Government for the purchase of Argosy aircraft for the Royal Air Force. The total value of the contract was about £27 million, and I am advised by my Department, which has been into the matter with Hawker-Siddeley that the net loss is at least £5 million, and may be more. I could give a number of other examples where heavy losses have been incurred on fixed-price contracts, among them the Prestwick Pioneer, the jet Provost Trainer Mark 3 and the Gazelle engine.

In my view, these losses by industry underline the extreme difficulty of the problem of getting the estimates of cost and time-scale right where the development of modern weapons is concerned. They show that the contractors themselves are quite liable to make serious mistakes. They show, also, that the officials of my contracts branch are not a bunch of incompetents who are habitually "taken for a ride" by industry, but are serious officials who are perfectly capable of striking a hard bargain.

I want to make my position quite clear. I take no pride in the losses industry has suffered from fixed-price contracts. They are just as regrettable as excessive profits, in some ways almost more regrettable because profits are at least a sign of efficiency and the Department of Inland Revenue gets something back from them. What the Government want is fair and reasonable prices, and we have continually to adjust our contracting procedures to achieve this aim.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The Minister quoted one particular case of losses—[HON. MEMBERS: "Four."] He quoted one particular case by name—[HON. MEMBERS: "Four."] I am sorry to hold the Minister up. He mentioned that case but, of course, he did not describe the income or the expenses. In its expenses, this firm has in the past included a figure of £72,000 as compensation for loss of office to one director. Was a figure like that included in the expenses before arriving at this particular loss?

Photo of Mr Julian Amery Mr Julian Amery , Preston North

Not to take up the time of the House too much, the broad picture is this. The firm tells us that its losses are about £7·7 million on the contract. There are certain features in this loss where we may have a liability I do not want to pre-judge that at this stage. There are other features which we do not accept as real loss. But, having set those aside, and taking account of what we regard as genuine loss, I am advised that it is at least £5 million and may be more.

Photo of Mr George Wigg Mr George Wigg , Dudley

Will the right hon. Gentleman draw the attention of the House to what actually happened over the Argosy? Surely he is not saying that the Argosy is in any way comparable with Bloodhound. Bloodhound was developed under Government order as a result of instructions from the Government Department concerned, but the Argosy was a replacement for the American DC6A, which was operating at 16 cents per ton-mile. The truth is that the company could not sell the Argosy and the Government helped it out of a hole. If there has been any loss, therefore, it is, perhaps, because the Government drove a hard bargain—perhaps an unduly hard bargain—in what they did, because the whole Argosy programme, which was originally developed as a civil project, failed to come off.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

The hon. Gentleman's lecture on what happened over the Argosy is interesting to all of us, but I am not here concerned with all the details by any means. I am not trying to draw an exact parallel of complete identity between the Argosy and Bloodhound any more than I was trying to draw an exact parallel between the BOMARC and Bloodhound.

All I am saying—and it is highly relevant—is that, if one criticises, as the Amendment does, the administration of our contract procedures, and if one tries to give the impression, as the Amendment does, that there are other cases of excessive profits having been allowed, it is plainly important that the House should take account of the fact that there are also a number of cases of important con- tracts on which industry has made losses on fixed prices, and in the particular one I have cited industry happens to have lost more than Ferranti made.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

The Minister introduced this comparison. It was not raised from this side of the House. Can the right hon. Gentleman confirm that the Argosy programme started off as a private venture by the company and it is, therefore, to be distinguished from Bloodhound? Heavy losses were made. The company was unable to sell the aircraft, and, as my hon. Friend the Member for Dudley (Mr. Wigg) said, the Government then placed an order which, for prestige reasons among others, the company was glad to accept. This still involved the company in a heavy loss, but, if the Government had not helped, the loss might well have been even greater.

Finally, will the right hon. Gentleman tell us who suddenly found this out and put it out to the public? The company says that it did not put it out to the public. Is this a red herring dragged in at the last moment?

Photo of Mr Julian Amery Mr Julian Amery , Preston North

The only issue relevant to the debate here, and the questions whether we have been lax in the administration of contracts or whether there have been other excessive profits, is that this is a fixed-price contract in which the contracts branch of my Department agreed with Hawker Siddeley a price under which Hawker Siddeley lost £5 million on a particular deal. This and nothing else ise relevant to the debate. I am not surprised that the hon. Gentleman finds it a little embarrassing. It pricks a little the balloon of the case which he had meant to inflate.

The point I make is this. We do not take any pride in these losses.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

That is a fair question. I mention them for three reasons. First, because I think it very important that everyone in the House should be quite clear that it is extremely difficult to get the estimates right and that not only my officials, but industry also, are liable to get the sums wrong. I mention them because I think that it is only fair to the technical costs branch, the contracts branch and the accountancy branch of my Ministry to show that they are not "suckers" who are "taken for a ride" by industry on every occasion, but are very competent people. I mention them also because, if there is any allegation, as there is in the Amendment, that there are excessive profits widely being made, it is important to have it well realised that the general profit level of the industry s not a high one and that there are several cases, of which I have mentioned four, where losses have been incurred on fixed-price contracts.

What we want to see is neither excessive profit nor excessive loss. What we want to see is fair and reasonable prices. As my Permanent Secretary told the Public Accounts Committee, I have initiated a review of our contracting policy. It may well be that we have pushed the principle of fixed prices too far. I am sure that the principle is right, though it may be that we have pushed it into an area where it does not fully apply. It may be that between the black area where cost-plus has to operate—the development area—and the white area where one can justifiably use fixed price we ought to have a larger grey area than we have where we make greater use of more limited incentive contracts.

It may be that the Government ought to share with the contractor the fruits of excessive gain or the damages of excessive loss. They do under some contracts at present, and perhaps we ought to enlarge this. For instance, one might have a target price under which the Government would recover a proportion of any profit beyond an agreed percentage and under which the firm would recover a proportion of loss beyond an agreed percentage. It is also worth considering whether, in certain contracts, there might be advantage in supplementing the efforts of the technical branch by bringing in outside consultants. We also want to consider whether there are any lessons to be learned from the procurement policies of other countries. All these matters are being studied. The Ferranti case has given impetus to these studies, and I hope in due course to report on them to the House.

Before I sit down, I should like to return to the Amendment. I have criticised its terms, but I am more seriously concerned with what lies behind it. We all know that there are several right hon. and hon. Members of the party opposite who would like to see the aircraft industry taken into public ownership or nationalised. [Laughter.] It is all very well for hon. Members opposite to laugh, but an Amendment was put down on 28th February, 1963, by the hon. Member for Swindon (Mr. F. Noel-Baker) and some of his hon. Friends; a resolution was passed by a large majority at the meeting of the Trades Union Congress last summer; and the New Statesman and Nation has very conveniently reminded us of what the Leader of the Opposition said at the Labour Party conference in Scarborough in 1960.

In case there are any hon. Members who are not readers of the New Statesman and Nation, let me read what the right hon. Gentleman the Leader of the Opposition is reported as having said in the debate on Labour in the 1960s.

Photo of Mr Harold Wilson Mr Harold Wilson , Huyton

Read the full text.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

The right hon. Gentleman said: In the interests of the taxpayer"—

Photo of Mr Harold Wilson Mr Harold Wilson , Huyton

Read the full text.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

He said: In the interests of the taxpayer there is in my view an unanswerable case for the public ownership or nationalisation of the defence industries in this country. If you do not do that there is no way of protecting you as taxpayers from hundreds of millions pounds more going down the drain.

Hon. Members:

Blue Streak, Blue Water.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

The hon. Member for Cardiff, South-East (Mr. Callaghan) has shown me that he is a little hard of hearing, so I will read the quotation again.

Photo of Mr Harold Wilson Mr Harold Wilson , Huyton

Read the full text.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

The right hon. Gentlemen said: In the interests of the taxpayer"—

Photo of Mr Harold Wilson Mr Harold Wilson , Huyton

Will the right hon. Gentleman——

Photo of Mr Julian Amery Mr Julian Amery , Preston North

I will give way in a moment.

The right hon. Gentleman said: In the interests of the taxpayer there is in my view an unanswerable case for the public ownership or nationalisation of the defence industries in this country. If you do not do that there is no way of protecting you as taxpayers from hundreds of millions of pounds more going down the drain".

Photo of Mr Cyril Bence Mr Cyril Bence , Dunbartonshire East

It has gone down the drain.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

The right hon. Gentleman added: That is only my view". Is that still the right hon. Gentleman's view? We want to know. [HON. MEMBERS: "Answer."] Is that still the right hon. Gentleman's view?

Photo of Mr George Brown Mr George Brown , Belper

Down which drain did it go?

Photo of Sir Harry Hylton-Foster Sir Harry Hylton-Foster , Cities of London and Westminster

Order. We have rather a lot to do, and a large number of hon. Members want to speak. I hope that the House will make a little less noise, so that we can get on.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

Is that still the right hon. Gentleman's view? Is that the view of his colleagues who have put their names to the Amendment? Is their criticism not so much of our administration as of the system itself?

Photo of Mr Harold Wilson Mr Harold Wilson , Huyton

I have three times asked the right hon. Gentleman to read the whole quotation. He has read a selected part, but not the whole quotation, or he would have got it better in context. However, we do not expect more than that from him. The phrase—[HON. MEMBERS: "Straight answer."] I do not want to take up too much of the right hon. Gentleman's time.

Had the right hon. Gentleman read the lot—he quoted the last few words of what I said—he would have realised that I was introducing a report in which I said that we would produce our programme for public ownership the following year. That programme was produced. The section which my right hon. and hon. Friends are prepared to deploy in this debate was drafted by myself and dealt specifically with the problem of preventing the taxpayers' money from going down the drain.

Photo of Mr Julian Amery Mr Julian Amery , Preston North

Quite frankly, I do not think that I should have interrupted if I had had so little to say.

The central question here is whether, behind the Amendment, there is a criticism not of our administration of procurement policy, but of the system as a whole. If it is a criticism of the system as a whole—and, certainly, the quotation which I read shows that the right hon. Gentleman at one time thought that the system was all wrong—then I for one will be very glad to discuss the issue in every constituency in the country.

Photo of Mr Emanuel Shinwell Mr Emanuel Shinwell , Easington

Will the right hon. Gentleman come to my constituency and debate it?

Photo of Sir Austen Albu Sir Austen Albu , Edmonton

Will the right hon. Gentleman give way?

Photo of Mr Julian Amery Mr Julian Amery , Preston North

No. I am sorry.

I hope that I have said enough to show that we are very far from being complacent about the details of our procurement policy. But if the challenge from the Opposition is to the system of defence procurement, then there is an overwhelming case to be made for this system.

This is the system which produced the Canberra and the Hunter, two aircraft which have given splendid service to the Royal Air Force and which have been sold throughout the world. It is the system which has produced the Vulcan and Victor bombers, by general consent by far the best medium bombers in the world. It is the system which has produced the Lightning, now flying at well over Mach 2.

It is the system which has produced some of the best missiles yet developed or produced anywhere in the world—Blue Steel, Firestreak, Bloodhound II, Seacat, Red Top and the Vigilant. It has earned us £575 million worth of orders for the export of military equipment since we came to power. What is more, it is the system which, despite the persistent knocking of the party opposite, will produce the TSR2 well ahead of the TFX and the Concord several years before its American rival.

Of course, mistakes will occur under any system. When they do, we shall do all in our power to correct them. The system itself, however, has stood the test of time. The equipment of our Armed Forces testifies to its success, and we shall stand by it.

4.21 p.m.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I beg to move, at the end of the Question to add: and censures Her Majesty's Government for their laxity in permitting excessive profits to be made at the taxpayer's expense on private contracts". The Minister has a curious air of smooth blandness which, this afternoon at least, did not carry conviction. [HON. MEMBERS: "It did."] Certainly, I was not convinced by his theological distaste for anything to do with nationalization. [HON. MEMBERS: "We were."] I am glad to see that hon. Members opposite were convinced, but I should like to ask them at the outset where their distaste begins and ends.

In the concluding sentences of his speech, the Minister spoke of the great success that we will have in developing the Concord. This is apostasy. The French half of Concord is being developed by a nationalised undertaking. When does the Minister propose to pull out of that project in order to preserve the sheer pristine, unsullied virginity of private enterprise?

Photo of Mr Julian Amery Mr Julian Amery , Preston North

The only suggestion that we should take steps to pull out of the project came in a Motion moved recently by the Opposition, when they said that we should have left ourselves a way out.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

If the Minister wishes to interrupt again, I suggest that he remembers the words which he used about an earlier interruption. That one was rather thin.

I propose to develop my main argument, but before I get into trouble and rough waters, as, I have no doubt, I will this afternoon——

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I deliberately forbore using the word "deep". It is the Minister who is in deep water. He is drowning. Now, let hon. Members opposite be quiet.

I want, at the beginning of my speech, and I hope that I shall carry the whole House with me, to thank hon. Members, on both sides, who serve on the Public Accounts Committee and who have done this job for us. I should also like to express, I believe, the thanks of the whole House to Sir Edmund Compton, the Comptroller and Auditor General, who originally uncovered what is admitted by the Minister and on all sides to be a rather grave matter.

Having had to study its Report, I should like to say of the Public Accounts Committee that it is frequently unhonoured and unsung, but that it does one of the most valuable jobs of work that is done by any Committee of the House. I must include in that the work of the Estimates Committee. The Committee has in this case ascertained the facts, probed the reasons and given us more authoritative, reliable, factual material than we could otherwise have had.

We see the members of the Public Accounts Committee stealing out of the Chamber just when all the Thursday afternoon excitement is at its height. Off they go to their Committee, where they are isolated for a couple of hours in doing this job on behalf of the House and of the public.

Photo of Mr Frank Allaun Mr Frank Allaun , Salford East

In agreeing with what my hon. Friend has said about the Public Accounts Committee, may I ask whether he would agree with me that it would have been an excellent thing if Mr. de Ferranti had offered to open his books to that Committee instead of refusing to open them until the Committee had finished its work?

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I am obliged. I said that the Committee had given us more material for the debate than we would otherwise have had.

I was going on to say, when I had finished with the work of the Public Accounts Committee, that it was a very great pity indeed that Mr. de Ferranti refused to the Committee information that would have made its Report absolutely complete. I do not understand why he should now be ready to give to Sir John Lang the information that he denied to the Public Accounts Committee.

I finish thanking the Public Accounts Committee by saying that in the light of its Report and of a number of others which have been produced, there is a growing case of the need to extend the system followed by the Public Accounts Committee if Parliament is to maintain its supremacy as an authoritative forum.

Whatever may be said, the plain truth is that Ferranti's is not an isolated case. It is simply the latest example of the financial chaos which has existed in the missile field during the whole of the last 10 or 12 years. It is an almost exact repetition of the experience that the House of Commons and the country had in connection with three other weapons whose financial history was examined by the Public Accounts Committee some years ago, in 1960. I refer to Thunderbird, Seaslug and Fire Streak. According to the Public Accounts Committee, of which my right hon. Friend the Leader of the Opposition was then Chairman, the total cost of those three weapons was £162 million, paid for by the taxpayer.

When the Public Accounts Committee examined what had happened in the financial history of the development of those three weapons at that time, the conclusions which it reached were that the technique of comparing cost with estimate had broken down and that the arrangements for measuring work done against money spent were deficient. There were loud protestations from the Treasury Bench that all this was to be altered, but exactly the same two criticisms are levelled by the Public Accounts Committee against the Ferranti contract as were levelled against those three contracts, which, at the time, were admitted to be deficient and an embarrassment to the Government as well as a great loss to the taxpayer. Nothing has changed.

What were the conclusions that were reached at that time? The Public Accounts Committee of 1959–60 found, first, that the original estimates made in the case of Thunderbird, Seaslug and Firestreak were so far from reality as to be useless. Is not that still true in the case of Ferranti? The Committee's second finding was that the Ministry's control over the firm was seriously inadequate. Is not that still true in the case of Ferranti? Four years have gone by. We are back in exactly the same position, as though the Public Accounts Committee had never even spoken.

Of course, the Minister of Aviation at the time promised substantial amendments. He said that what would happen as the result of this expenditure of £162 million was that there would be a review of internal organisation, that the primary responsibility for estimates would be placed on the technical staff and that the financial staff would become responsible for criticising and approving the estimates after they had been made by the technical staff.

I ask the House to note this because of something which I shall come to later, the failure of co-ordination between the accounting staff and the technical cost officers in the Ministry. This is what the Minister said in 1960 about a similar failure, that the financial staff would become responsible for approving the estimates after all the parties inside or outside the Ministry have been properly and fully consulted. This afternoon the Minister has said that because it has always been very difficult to compare these two types of figures, it is only today that he has issued instructions that in all cases in the future these comparisons are to be made, in the hope and expectation that they may prove to be relevant.

Hon. Members:

He is not your hon. Friend.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I want to get this clear with the Minister. What new instructions has he issued to the Ministry today about the comparison of accountancy figures with the estimates of technical officers which the House was not promised would be issued by his Ministry four years ago?

Photo of Mr Julian Amery Mr Julian Amery , Preston North

The hon. Gentleman puts a direct question to me. When I had the news of what appeared to have been happening in the autumn, I at once said that in future, from then on, all these contracts must be compared. An attempt to compare these things has been going on all the time, of course, but in my view not sufficiently closely or intensely. I have tried to put the matter right.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I do not think that I need to repeat the question. Four years ago, the House was promised that, whether the comparison would be strictly relevant or not, it would be made. The Public Accounts Committee finds that it was not made. At this stage, it did not blame the Ministry for not making it, and I do not do so at this stage, but the Public Accounts Committee says that it was not made and the Minister admits that it was not made.

The right hon. Gentleman says that he has had to issue new instructions. I ask why it is that he has had to issue new instructions when the House was given a definite assurance that these comparisons would be made in every case. I repeat. He said that the estimates would be approved after all the parties inside or outside the Ministry have been properly and fully consulted. It was not done.

The fourth promise made to the House on that occasion, four years ago, was that the technical staff would be responsible for ensuring that the work was executed within the budget and the time prescribed. The ironical thing about all these undertakings which were then given to the House, on behalf of the Treasury as well as by the Minister himself, was that they were given during the very period in which negotiations between Ferranti's and the Ministry were being conducted, May, 1960. That is when these very pledges were given to us, and we find four years later that we might as well not have said a thing for all the effect that it has had on the financial out-turn of these contracts.

I repeat that Ferranti's is merely the latest extension despite Ministerial promises to reform and alter and improve the system. Once again, the estimates are not related to the actual cost. I am bound to admit that the unusual feature this time is that, unlike most occasions, the cost was less than the estimate. It could have provided a bonus for the hard-pressed taxpayer, but the basis on which we seem to work is, "Heads you lose and tails you win."

Hon. Members:

That is the wrong way round.

Hon. Members:

Still wrong!

Photo of Mr Harold Wilson Mr Harold Wilson , Huyton

It is a muddle-headed penny.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

In any case, whichever way it is, the taxpayer never wins. Either we have to pay up because the estimates are grossly exceeded, or we pay up because the profits are excessive. Either way it comes to the same thing. [An HON. MEMBER: "What about Hawker Siddeley?"] I will return to Hawker Siddeley later.

An excessive profit has been given to Ferranti's. Is that a matter for congratulation? Do hon. Members opposite believe that that is proper? Do they think that it was right, if I may use the words of the right hon. Member for Wolverhampton, South-West (Mr. Powell), that the firm should maximise its profits? He believes that it is. He told us some months ago that it was nonsense to expect any firm to fix prices anywhere below where it needed to fix them. He tells us that it is nonsense to expect a firm to keep down its profits. Is that so? Is it nonsense to expect a firm to keep down its profits? Should it try to make as much profit as it can? Hon. Members do not seem to be so ready to give us an answer to that question.

We know where the right hon. Member for Wolverhampton, South-West stands on this, and he has a very enthusiastic disciple in Mr. Sebastian de Ferranti. I suspect that he has many other disciples who are a little uncertain whether they should declare their faith at this moment. It was an education to sit and watch not the Minister but the faces of his supporters while he was speaking. There were mingled expressions of alarm and apprehension and pride at what Ferranti's had done chasing across their faces like sunshine and shadow across an April hillside.

It was astonishing to see how hon. Members opposite could not quite make up their minds whether they were in favour of maximising profits in the case of a firm like this, or whether they should express some apprehension about it because the public were rightly incensed. I know, and I believe this to be commonly true, that the philosophy which was expressed by Mr. de Ferranti in his examination by the Public Accounts Committee is shared by a great many companies in this country.

If this is not so, how do hon. Members explain the refusal not of Ferranti's to give information to the Public Accounts Committee, but of all the employers to give information about their profits to the National Incomes Commission? The Commission asked for profits to be declared by the employers when the case of the heating engineers was referred to it. The employers refused. The Commission then said that the Board of Inland Revenue was willing anonymously to disclose all profits if the employers were not able to provide the information.

The employers again refused. They were busy maximising their profits. They were quite unwilling to say what those profits were. What the Commission was considering was whether it was improper for the heating engineers to have an increase of not 63 per cent., not 61½ per cent. per annum, but 4½ per cent. per annum.

The poor Chancellor of the Exchequer must despair of some of his colleagues at times when he is trying to get an incomes policy and has to come here to listen to a Minister, with a mixture of braggadocio and penance, trying to explain away a profit of 63 per cent.

Photo of Sir Douglas Glover Sir Douglas Glover , Ormskirk

The hon. Member is usually very fair on these things. I have been into the figures. He might have added that over the last 10 years this firm, which is one of the most efficient in the trade, has made a profit of 10 per cent. on its Government contracts.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I do not accept that for a moment. I have carefully studied all the Ferranti balance sheets for the last seven years since 1958 and I am ready to swap figures with the hon. Member if he has the details as well. It has paid 6 per cent. every year, but that does not reflect profits. [HON. MEMBERS: "What about the risk?"] Someone said "risk". I have always understood that profit was supposed to be a reflection of the risk taken. What risk was taken in this case?

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

No, I cannot go on giving way; let me say a sentence or two.

I agree that the rest is ploughed back temporarily, but it is later issued in the form of preference shares which provide a tax-free capital gain. I do not want to go particularly into the affairs of Ferranti's, but if hon. Members adopt this tack, I will "go to town" over Ferranti's and its profitability. I can assure hon. Members that I have been into this matter very thoroughly. There are tax-free capital gains which run into hundreds of thousands of pounds, perhaps £1 million or more, which have never paid a penny-piece in tax, due to the exertions and very clever financial abilities of one of the directors for whom I have a very great respect. I only wish that he were working for the public interest instead of for Ferranti's.

Mr. de Ferranti believed, with the right hon. Member for Wolverhampton, South-West, that it was his job to maximise his profits. He did it very successfully. The Ministry was operating on a different philosophy. The Ministry believed that if the contractor's profit was to be excessive it was his duty—the contractor's duty—to draw the attention of the Ministry to the position. The Public Accounts Committee's Report, in paragraph 8, states: they considered that between a big contractor and the Government the non-disclosure of emerging information was unsatisfactory. The Ministry hoped and expected that Ferranti's would share its knowledge of excessive profits. But what was Mr. de Ferranti's view, as quoted from paragraph 15? It was that it was thought unreasonable to expect a contractor engaged on a fixed-price contract to tell the Ministry that he was doing better than he thought he would… Mr. de Ferranti said: when discussions with technical cost officers were completed they were under no obligation to draw attention to any subsequent development. This is his philosophy, his approach. All right, I understand it—I disagree with it, but I understand it.

The Public Accounts Committee also disagrees with Mr. de Ferranti about this in its conclusions in paragraphs 25 and 26. It is important to quote the exact words in these matters. The Committee says: They consider that the special relationship between the Ministry and contractors of the standing of Ferranti, Ltd. should have evoked a desire on the part of both parties to the contract to exchange up-to-date information… Failure on the part of the Ministry to possess or to use relevant information should not in the opinion of Your Committee relieve a contractor of the obligation to facilitate negotiations on the prime condition of the contract, namely 'fair and reasonable prices'. The Minister was anxious to turn the criticism on to Ferranti's. I criticise the Ministry, the Minister and the past occupant of that office for one basic failure. They never recognised, never reconciled, the two different approaches. They thought that they were working on a basis of partnership. Ferranti's believed that they were working at arm's length. So the Ministry went on giving information to Ferranti's, as the Permanent Secretary freely admitted. He said that maybe the Ministry gave Ferranti's too much information—it thought that it was working in partnership with Ferranti's.

I do not think that one needs to talk to Mr. de Ferranti for long—I do not recall ever having met or spoken to him—but having read his evidence I think that one has to talk to him not very long to see what his philosophy was, and is. How any body of senior and competent officers could possibly believe that they were working in partnership with Ferranti's is beyond my comprehension. He was quite clear, I would say that he was almost brazen, in his philosophy and the way in which he believed that it was his job to maximise his profits.

The Ministry was, in fact, hunting a tiger, but instead of taking a gun it took a saucer of milk and then wondered why it got mauled. I must say that if there is one lesson to be drawn from this contract it is that the myth that the Conservative Party is a party of good administrators and good businessmen has been destroyed for good and all. I would not trust them with a Sunday school collection.

I wish to make clear, in this matter of relationship, whether we should be at arm's length or what one might call at grips with them, with the utmost faith between the two. In these particular circumstances I believe that we must come down in favour of the second alternative. I believe that for reasons both of finance and defence. On the finance side, the firm is, at any rate in some part of its supplies, in a monopolistic position. The Ministry must use the firm again. The Permanent Secretary told the Public Accounts Committee that there was no alternative source of supply and, of course, again, there is this fact, that, unlike the position in the past, or, indeed, at present, the Ministry of Aviation had no production work against which it could test the validity of these estimates or the cost incurred.

Take the great days of the Navy—the present days of the Navy. The Navy can build destroyers or frigates in the naval dockyards and know exactly what is the cost and can compare and trace what is happening at Vickers Armstrong, or Cammell Laird. There is a basis of comparison. Because of the nature of this work Ferranti's has a semi-monopolistic position and there is no basis of comparison at all. I shall come back to nationalisation later, because I think that this is a very serious matter which we ought to consider.

We have never, as a nation, shirked the idea that our weapons of war and defence should be built by nationalised enterprises. The right hon. Member for Woodford (Sir W. Churchill) was one of those who prepared us for the first war—and thank heaven—when he was First Lord of the Admiralty by using to the full the resources of national enterprise. I think that it is a retrograde step if, 50 years later, the Conservative Party is to tell us that there is a theological distaste which would prevent them from using national resources to fulfil our defence needs.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I said that I was going to run into rough water. I think that the volume and number of interruptions which I am provoking is the measure of the discomfiture of hon. Members opposite.

Photo of Mr Victor Goodhew Mr Victor Goodhew , St Albans

Perhaps the hon. Gentleman would give the answer to the question which we have been trying to elicit from him for so long, and for so many weeks—whether his party would shrink from nationalising this industry? And since he is disturbed at the idea of our co-operation with the French nationalised aircraft industry, will he say whether he would nationalise our share of the Concord?

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I shall make my speech in my own way, if the hon. Gentleman will allow me, and in the order in which I have developed it. I shall not be tempted from it; but may I tell him not to worry, I shall come back to him.

For defence reasons—and I am trying to address a serious argument to the House on this matter, even though passions may run high and there may be great difficulty about it—I believe it is wrong that one company should be in a monopolistic position in relation to essential items of defence. I do not impugn the patriotism of Ferranti's, obviously that would be a foolish thing to do, but I do not believe that it is right that the essential defence of this country should rest in the hands of a group of shareholders in Ferranti's.

Of course, there should be some better relationship. We should not be at arm's length, as Mr. de Ferranti believes that we are and ought to be. There should be a partnership and there should be no dispute on either side of the House about this. Therefore, I think that Mr. de Ferranti must alter his approach and his philosophy very quickly. He has to recognise that he is not only operating, as he said, on behalf of his shareholders, he is acting as agent for the nation as a whole and there was singularly little of that sort of approach in what he had to say to the Public Accounts Committee. I could quote examples about that, but I leave it to the hon. Member for Farnham (Sir G. Nicholson), who put a pertinent question which was answered in a peculiar way which showed how Mr. de Ferranti shirked that responsibility to the nation because of his greater loyalty to his shareholders. I thought it a most revealing answer.

What are the changes in relationship to be, if we are not at arm's length and are to come closer together in the way I have said? First of all, the books of Ferranti's and other companies operating in the defence field should be open to inspection at all stages. I should like to ask the Minister of Defence whether he agrees with that.

Secondly, the technical cost officers should remain at the scene of operations until the negotiations on prices are concluded. At the moment they play blind man's buff. They were there for a substantial period of time, but they left the scene of operations in January, 1960. Production had hardly got into full swing then. It got into full swing during the ensuing months. Negotiations continued in July, August, September and October, 1960. Ferranti's was operating on up-to-date knowledge on recent batches of production. The Ministry was operating on the basis of figures that were nine months out of date before production had got into full swing.

How can that be right? Does the right hon. Gentleman think that the technical cost officers left the scene of operations too soon? Will he make it a condition of future contracts that they remain on the firm's premises until the negotiations on prices are complete and satisfactory? Otherwise, there can be no doubt that the firm has an unfair advantage over the nation. In this case the Ministry's officers were playing blind man's buff, in which Ferranti was bound to be the winner.

Thirdly, there should be a continuing comparison of figures throughout the whole period of the contract. The Minister has admitted that this was not done, but he has said that it will be done in future. I hope that the promise will be carried out better next time than it was the last time it was made.

I come next to the nature of the contracts. The Public Accounts Committee adheres to fixed-price contracts. I have some sympathy and understanding with that point in view, but there is a weakness in the fixed-price contract in circumstances where there is no possibility of competitive tenders. If one has competitive tenders, one can rely on the fixed-price system with a fair degree of confidence, but one cannot do that in a case like this. The Ministry has proposed what might be a possible improvement, and that is that there should be a preliminary production run of a small batch of the final article which should be costed and a price fixed on that basis. That could well lead to an improvement, but it will be no more than an improvement. I do not think that it will be a final answer to this problem.

Photo of Sir Rolf Williams Sir Rolf Williams , Exeter

I agree that when a design is finalised one can put through a pilot production and get an estimated cost, but one cannot do that when a weapon such as Bloodhound is continuing its development, and is being modified even up to this day.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

The Minister will correct me if I am wrong, but I believe that there was a stage when development had reached 90 per cent. of finality. There certainly was a continuing element of development after the production contract had been entered into, but there was a time when one could draw the line and say that it was in production. This point would be met if we had the preliminary runs, as I believe the Ministry has suggested. [Interruption.] I hope that we do have the time, because we started production on this weapon in 1955 and it was finished in 1961.

The Times this morning suggested a form of risk-sharing between the Government and companies. It suggested that there might be some sort of partnership between the two which would entail a different form of contract. Signposts for the Sixties has much the same sort of suggestion to make in page 14. I do not know whether my right hon. Friend the Leader of the Opposition has sent the Prime Minister a copy of that document. In case he has not, let me read what it says. Referring to national research and development, and to the Corporation, it says: …the Corporation should be authorised to engage in production, either in its own establishments, through the creation of subsidiary productive undertakings, or by joint enterprises with private companies which have the expertise to develop new products but lack the resources.The Corporation could also be used for mobilising the under-used talents of groups of scientists by placing research or development contracts with them. In the past such contracts have been used at great cost and with inadequate financial control by Defence Ministries to develop new types of aircraft or guided missiles. The hon. Member for St. Albans (Mr. Goodhew), who asked what our policy was, does rot seem to have waited for an answer. If hon. Gentlemen opposite want to know what policy is to be followed by a Labour Government in relation to these weapon contracts, they will find it set out in the document to which I have referred. My right hon. Friend and I will forgive The Times for plagiarism. It is comforting to think that what we said in 1960 is being caught up by the editorial of The Times in 1964.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I have given way much more than the Minister did. I am ready to give way again, but I think that we had better try to get a connected argument.

I agree that the question of contracts should be looked at again after the Lang Report. A risk-bearing contract of this sort should mean that the company concerned will share the losses as well as the profits, but, as we pay for the losses anyway, I do not think that it will make much difference. We pay for them one way or another. It is very rare that a firm has losses, although the Minister has given us four unsubstantiated examples this afternoon of losses which are not in some way borne by the taxpayer at some time.

I am very suspicious of the examples which the Minister gave. There was one that was dropped into the Sunday Press about Hawker Siddeley, which gave us a little time in which to check the position with the company. The right hon. Gentleman produced the others out of the hat this afternoon in the course of the debate, and I dismiss them forth-with, because if he had a good case about them he should have produced it in documented form and placed it before the House.

As regards Hawker Siddeley, I repeat what I said during an intervention. My understanding is that it has not complained to the Press or to the public about its loss, and I ask the Minister, as I did before, how the complaint that went to him got into the Press on Sunday? Did he give it to the Press?

Photo of Mr Julian Amery Mr Julian Amery , Preston North

Why should I give it to the Press?

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

The right hon. Gentleman asks me that question. My answer is to try to draw a red herring across the trail of this afternoon's debate. Would he be good enough to say that neither he nor anyone in his Ministry gave this information to the Press last week?

Photo of Mr Julian Amery Mr Julian Amery , Preston North

I have had no contact with the Press about this. I told the House about a month ago that there was such a claim. I did not mention Hawker Siddeley. I told the House that a loss of between £5 million and £6 million had been reported to me. I have been studying in my Department how genuine this loss was, and I have reported to the House what I have found. No doubt many people in the Department and in the firm have been discussing this recently. I have had nothing whatever to do with the publication of this information.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

If the Minister says that he had nothing to do with the publication, I accept that.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I must remind hon. Gentlemen opposite that this is my speech, and that it is still my property at the moment. I must be allowed to say a sentence or two in reply to the Minister before I give way to anybody else. [Interruption.] Oh, do shut up. If the Minister says that he did not convey this information to the Press, I accept it forthwith, but I am told that the firm did not give it to the Press either. I wonder how it got there.

Photo of Mr Philip Hocking Mr Philip Hocking , Coventry South

The hon. Gentleman has two hon. Friends who represent part of the City of Coventry where the Argosy is being built. I represent the third constituency in the city. During the last six months this matter has been discussed in Coventry between people from Hawker Siddeley, and, I believe, all three hon. Members representing the city. The information is common knowledge in the city. It has been talked of freely and frequently, and it is conceivable that it could have got into the Press from any of those people.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

In that case I would ask the hon. Member and the Minister for the replies which I did not get to the questions I asked earlier. As this is such a well-known matter, perhaps they could provide us with the answers now. Was this started as a private venture or as a Government contract? That is a quite simple question, and it admits of an immediate answer.

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

As many other hon. Members wish to speak in the debate, and I hope to be able to reply, if the hon. Member will put his questions I will do my best to answer them at the end of the debate.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

Very well. I will put my questions directly to the Secretary of State for Defence, and hope for better behaviour from him on this occasion.

Did this start as a private venture, or, as in the case of Bloodhound, as a Government contract? Did it start because the firm itself wished to enter—as it was entitled to—into a private venture of selling the Argosy aircraft for commercial purposes? Did it fail to sell it for commercial purposes? Did it make a substantial loss as a result? I am not commenting on the question whether it was a good aircraft or a bad one; I do not know. I am merely dealing with the financial aspects of the matter.

If the answers to my previous questions are "Yes", then did the Government step in, either of their own volition or at the request of Hawker Siddeley's, with an order for a number of these aircraft for military purposes? I hope that the right hon. Gentleman is writing all these questions down. Did this aircraft require substantial modifications from its well-known civilian use? Did that involve the substantial loss to which the Minister has referred? Finally, would the loss have been very much heavier for the firm if the Government had not stepped in?

If the Minister wants us to set this off as a comparison, he might have produced all these well-known facts—which he says have been well known for months—a long time ago. We could then evaluate what he has said. But the Minister is an artful dodger. We all know that. We know the reason why this argument has been brought into the debate. His Ministry is blameworthy, and the Minister must take the responsibility for not reconciling the nature of its relationships with Ferranti's. About that there can be no doubt.

Next question: is the Ministry to be blamed for not comparing the technical cost officers' estimates with the accountants' actual costs? It is admitted that the accountants in the Ministry of Aviation knew what had been spent, while the technical cost officers were looking to the future and did not know what had been spent. But they are all in the same Ministry. Presumably they had two sets of files and they were never brought together.

The Public Accounts Committee was certainly promised that these comparisons would be made. Now the Minister says that it is an exceptional case. We are not dealing with low-level civil servants here; we are concerned with high-level civil servants. These officers, at the top of their respective branches, are being paid between £4,000 and £5,000 per annum. I do not expect routine clerical officers to do more than routine clerical work, but I expect people who enjoy salaries of £4,000 per annum to be able to see beyond the limits of their blinkered ignorance. They should be able to see what is the relationship between two sets of figures.

But the Minister comes into this. Ferranti's assumes a pose of injured innocence. When my hon. Friend the Member for Edinburgh, Leith (Mr. Hoy) asked if Ferranti's was prepared to offer a reduction in price if the Minister came back the answer was: …we knew they"— that is, the Ministry— had access…to the labour figures to date, and I thought they were bound to challenge these. That was Ferranti's view.

Then my hon. Friend the Member for Sowerby (Mr. Houghton) asked to know what the nature of the relationship was. Mr. de Ferranti was very clear. He said: If they"— the Ministry— pressed very, very hard, we might reduce the price by 10 per cent., but it would be a big battle. The Ministry knew the figures. It could have got a lower price. It did not do so. Is it to be blamed? The Public Accounts Committee says that it is premature to blame the Ministry. It does not say that it is blameless. It says that it is too soon to blame the Ministry because Sir John Lang is now investigating the whole circumstances surrounding this question.

I trust that when Sir John does this he will also examine the overhead rate applied to this contract, because when the labour costs are so grossly inflated, as they were on this occasion, the multiplier for the overheads increases the margin of error by several hundred per cent. I speak with a certain amount of temerity on this aspect of the matter, but those who have looked into the figures believe that the overheads figure adopted by the Ministry was very high—at 558 per cent. I am told that a more reasonable figure would have been 300 per cent.

Photo of Mr Daniel Jones Mr Daniel Jones , Burnley

Yes, it would. [Laughter.] I have been to the Ministry on these figures.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

My hon. Friend is well known in the engineering industry and hon. Members need not scoff if his opinion, which is based on many years' experience in the trade union movement, coincides with that of many other people. I hope that the Ministry will look into the question of the relationship between the overheads ratio of 558 per cent. and what it might have been—about 300 per cent.

I come back to the question of profitability. The Permanent Secretary, in reply to a question by the hon. Member for North Angus and Mearns (Sir C. Thornton-Kemsley), asking how he checked when everything was so unknown in this field, said: …there is a general yardstick that you can apply in this sort of case, that is to say, the general profitability of the firm". The hon. Member did not follow up that idea, but I have looked into the question of general profitability, and I wonder how the Permanent Secretary could have made such a reply.

The general profitability of the firm is higher than nearly every other firm operating in this field. The Permanent Secretary admitted this. He said that the rate was higher in that firm than in any other firm he had been able to find. Why was not this picked up and noticed by the Ministry, if this was its yardstick? I should like to give the House the net profits of Ferranti's, starting from March, 1958. They were £1·2 million in that year. In 1959, they were £2·4 million; in 1960, £4·0 million; in 1961, £3·4 million; in 1962, £2·1 million; and in 1963, £1·6 million. They went up, and then they came down again. The normal profitability is about £1 million or £1·5 million a year. Ferranti's had three fat years. Yet the Ministry did not see it, although this is the yardstick by which it judges these matters.

The Minister told us that the firm's return on capital employed was 113 per cent. Since he has given this comparison, will he give the ratio of profitability to capital employed for English Electric, which made Thunderbird? Has he looked it up?—because I have. I did not know that he was going to bring this comparison in. I have looked up the figure, and according to my recollection the profitability of English Electric in relation to the capital employed works out at about 14 per cent., as against Ferranti's 113 per cent. I have taken the same basis of assessment. If hon. Members will look at the accounts of English Electric they will see the interesting table which is set out for the last 10 years, which will give them the information they want.

My point is that the Ministry says that this was one of its yardsticks. What happened to the yardstick? If one is 14 per cent. and the other is 113 per cent.—and this can be deduced by any second-year student looking at the accounts—what went wrong at the Ministry? The Public Accounts Committee has said that it is not yet time to blame the Minister. The time will come when Sir John Lang has finished his investigations and reports.

I am very sorry that Sir John has been brought into this matter in the manner he has. I believe that he has been used as a political decoy. I have known Sir John Lang for some time. He and I served on the Board of Admiralty 15 years ago. There is no more devoted civil servant or single-minded man than Sir John. I am sure that he would not allow himself to be used as a political decoy if he knew that that was going to happen, but I do not think that Sir John knows the Minister of Aviation as well as we do.

It is all of a pattern. It took the right hon. Gentleman six months to set up the Lang Committee, and he set it up only when he knew that the Public Accounts Committee was getting on with the job. He hoped that it would be spread over the period of the election, but that was thwarted. He and Mr. Sabastian de Ferranti met the Tory back benchers last night. What is the purpose? Is it in order to get at the truth or to put the best gloss on it that they can? This is what I believe Sir John Lang has been brought in for, and I am sure that he is not likely to fall for that. I am certain that his reputation stands high and that the Committee will make a full and complete report. Then it will be for the Public Accounts Committee to say whether the Ministry was blameworthy or not. Meantime, all I would say to the Minister of Aviation, in the words of the old homily, is, "Be sure your sins will find you out".

I turn to the question of repayment, and on this I finish. The Public Accounts Committee has put some figures in its Report, on page IV, of the costs and what was allowed in prices. It established the costs incurred by the firm in this contract at £6·8 million. That, the Committee said, represented a profit of 72 per cent. of costs. The firm disputes this, and says that the Ministry undercharged for materials and that another £273,000 ought to be added for materials. I accept that. [HON. MEMBERS: "Hear, hear."] Who am I to dispute it? I cannot challenge it; I can only accept the figure if Mr. Ferranti says it is true. If that is the case, then the actual cost to the firm was not £6·8 million but £7·2 million. The profit was based, as it says on page IV, on a basis of 7 per cent. of the cost, and, as I understand it, a profit based on an agreed rate of 7 per cent. on £7·2 million would be £505,400. Making allowance for Ferranti's own suggestion that the firm was undercharged for materials—I am giving all I can to the firm—its actual profit was not £505,400 but £4,550,000. I am altering the figures here in order to give the firm the benefit of the doubt.

The profit, therefore, is £4 million greater than it should have been. It should have been £500,000 on this contract on the basis of 7 per cent., but it was actually £4½ million. And here we are trying to get an incomes policy! The Public Accounts Committee proposes repayment, as it says in the last paragraph of its Report, on the basis that both parties were in possession of up-to-date information on all ingredients of prices, etc.

Is the Minister starting off his negotiations on that basis? If so, I suggest the figures that he should use, what he should ask for. I should like to know whether he will follow the basis suggested by the Public Accounts Committee, which I propose to translate into figures. Mr. Ferranti said that he had clearly negotiated this contract on the basis of a 7 per cent. profit. My hon. Friend the Member for Leith put three questions to him. All I am trying to find out"— said my hon. Friend— is on what basis the prices were negotiated and when you negotiated the prices with Messrs. Ferranti whatever the out-turn was, the price was fixed on a 7 per cent. profit basis?——Yes. That was Question 2422. And Messrs. Ferranti knew this when the price was negotiated?——Yes.Would you confirm that, Mr. de Ferranti?——Yes. Three of the straightest, shortest and swiftest answers in the whole of that long and murky episode. Ferranti's knew what it was doing. The firm negotiated on the basis of a 7 per cent. profit, but it now disputes that 7 per cent. was a reasonable profit. It may well do. I know that the firm had no risk to take on this. Everything was with it. It had entered the harbour and was practically tied up at the finishing post.

I want to put this straight question to the Secretary of State for Defence. Is he going to start out, as I believe he should, on the basis that £4 million out of this £4½ million profit should be repaid to the State on the basis of 7 per cent., or is he going to argue—and I would not differ with this—that there ought to be a slightly higher ratio of profit than 7 per cent.? I can see reasons why it might be. [HON. MEMBERS: "Hear, hear."] I am glad to have reached a stage in my speech where I have prompted some agreement from hon. Members opposite.

My hon. Friends must realise that, because the Government have allowed interest rates to rise so high, if we gave Ferranti's much less than 7 per cent. the firm might as well sit at home and invest in Government securities and not use its capital assets at all. Of course, if interest rates were lower, then one would expect a lower return, but when they are high we might have to offer a little more than 7 per cent. Supposing the figure was double. I agree that it would be incredible——

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I will settle for 10 per cent. In that case, what the Secretary of State for Defence should be asking for is the repayment of the difference between £4½ million and£¾ million. He should be asking for repayment of £3¾ million. I think that the House has a right to demand to know on what basis the Minister is going to start the negotiations. The Secretary of State has said that he is going to reply to my questions tonight. I ask him now whether he is going to start these negotiations on the basis that there is to be repayment of something like £3½ million to £4 million out of the £4½ million profit. Mr. de Ferranti has had his pound of flesh. He has almost been brazen about the way in which he has taken it.

If the Minister feels a little chary and a little timid about asking for repayment of £4 million out of the £4½ million, I have one final suggestion to make to him. When he goes to see Mr. de Ferranti he might like to take the leaflet which I have in my hand and offer it to Mr. de Ferranti. It is a Government leaflet entitled "Changes in conditions for widowed mother's allowance". He might remind Mr. de Ferranti of what it says, that if a widowed mother supporting children goes out to work and dares to earn as much as £8 a week, 10s. will be deducted from her allowance. If she has the effrontery to earn £9 12s. a week, 41s. 6d. will be deducted. He might suggest to Mr. de Ferranti that he should read the document which says, If you earn £7 1s. or more in a calendar week you must not cash the order"— in the pension book— for the following week. Instead, you should complete the declaration of earnings overleaf. It is all set out. The widowed mother is asked to state any other income, to give the name and address of her employer and check number and to declare to the best of her knowledge and belief that the information on this form is a true and correct statement of her earnings—and she signs it. At the bottom there is a warning: If you draw benefit without declaring your earnings or if you make a false statement on this form you may be committing a criminal offence, punishable with imprisonment. We are talking about £7 1s. a week. I hope that I do not carry a chip on my shoulder, but I get sick and tired of this hypocrisy when I see the difference in treatment extended to those with power and pomp and place, those who are wealthy, and people like this.

I know that the right hon. Gentleman did not have the disadvantage of being brought up under these conditions. Nor did the Secretary of State for Defence, the Prime Minister or 95 per cent. of hon. Members opposite, but some of us did. When I see the distinction and difference made between a widowed mother earning £7 a week and the consideration with which a firm like Ferranti's is treated, I resent it. I hope that one of the early things a Labour Government will do will be to remove something which I suffered under in company with a great many other hon. Members on this side of the House. This is the way in which I was brought up. Will not Ministers understand us? Until they do, and until their policies are expressed in the form of equality between a widowed mother such as I have spoken of and a firm like Ferranti's, I say that this Government are not worthy to lead the British people.

5.22 p.m.

Photo of Mr Ian Orr-Ewing Mr Ian Orr-Ewing , Hendon North

The hon. Member for Cardiff, South-East (Mr. Callaghan) ended his speech on a very controversial note. I cannot help feeling that pensioners who know where they stood when his Government went out of power will give the answer when the time comes. The point that he made will be answered. It did not seem particularly appropriate to this debate and the censure Amendment that we are discussing.

The hon. Member was muddled in a number of his arguments. We had the business of heads or tails. It seemed that he was equally muddled by not discerning between development costs of these missiles and production costs. The Public Accounts Committee was specifically directing its attention to development costs of missiles, not production costs, but it is the control of production costs that this debate is about. I am sure that the hon. Member did not mean to misrepresent the facts, or to deceive the House, but inadvertently he did so.

As a "Shadow" Chancellor—and I think that he will remain so for a very long time—the hon. Gentleman missed a point which I should have thought, in all fairness, he should have brought out. Of all the profits he quoted as made year after year by Ferranti, rather over half goes straight back to the taxpayer. [Laughter.] Hon. Members may laugh at this, but they must know that profits are taxed to about 50 per cent. in this country, and 46 per cent. in the U.S.A.

I understand that hon. Members opposite want to put up the proportion even higher. This point was completely missed when the hon. Member asked if we were to rake back £4 million. He seemed to have forgotten that £2½ million have already been taken back by the Inland Revenue. He also did less than justice in putting the matter in perspective. The Government of the day, whatever Government there is, place contracts with industry worth £3,000 million over a year.

My right hon. Friend the Minister, in his admirable opening speech—[Laughter.] He hit fairly hard, but I do not think that experienced hon. Members will mind that, because we are used to it in the House of Commons. My right hon. Friend made the point that £200 million for development was placed by his Ministry every year. This is one instance among the 18,000 contracts in which an exceptional profit was made. It seemed very surprising that the hon. Member somehow resented that the facts should be put before the taxpayers. He seemed to resent that the Hawker Siddeley contract had become public knowledge.

If he were anxious to squeeze the maximum political propaganda out of the profit of £4½ million, it is fair that taxpayers, equally, should know that in many instances they benefit to the extent of £5 million through other Government contracts. It is extraordinary, but it reflects, as the Gallup polls are at the moment very much in his favour, the fact that he and the Leader of the Opposition get into a sort of arrogance in which they cannot put the facts and their policy before the country.

It was the same in today's speech. When the hon. Member for Newton (Mr. Lee) winds up the debate on behalf of the Opposition, I hope that he will make clear where hon. Members opposite stand on the question of taking over, nationalisation, or, to use a term of the hon. Member for Coventry, East (Mr. Crossman), "science-based industry," because this is the sort of firm which is threatened under that formula.

We should also recognise, as a House, that the taxpayers have benefited very considerably from orders which were secured by this company for the Bloodhound weapon in Switzerland and Sweden. I know from personal experience that those are two nations which are hardest to convince of the merit of any technical weapon, but this firm successfully sold the weapon there in the teeth of competition from the United States. We secured £40 million worth of overseas orders for Bloodhound I and Bloodhound II and already £4 million has gone back to the taxpayer. So, again, the taxpayer benefited from the success of this firm.

These points should be fairly pointed out. I should like my right hon. Friend to have given more facts about some other defence contracts from which, because of the levy which is put on, the taxpayer benefits. The Viscount project was carried for soma time on the Ministry of Supply or the Ministry of Aircraft Production Votes. The B.E.A. cancelled that order for a period, but it continued development. When an aircraft is sold, whether it is a Viscount or another type which has been sponsored on a development contract, a levy is paid by the firm to the taxpayers. I should like to see the global figures and to know how taxpayers have benefited from this, also.

I am rather surprised that hon. Members opposite should choose this particular subject for debate, because here is a case where the Whitehall machine has made an error and my right hon. Friend was the first to admit it. I see that the hon. Member for Newton is refreshing his mind on Signposts for the Sixties, the Labour Party policy statement. I understand that the policy of hon. Members opposite is to go further with centralisation and control from White, hall. If mistakes are made and this is only one in a large number of contracts, surely, under their régime, there will be far more and much bigger mistakes. The taxpayers will say, "We do not want to go further. We have reasonable control under the present system", as my right hon. Friend so ably showed.

This is an instance of Satan rebuking sin. Hon. Members opposite believe that all the gentlemen from Whitehall apparently have complete knowledge and sagacity and should have complete control of the whole defence industry.

Photo of Sir Austen Albu Sir Austen Albu , Edmonton

Does not the hon. Member see that the argument he is making is in support of what we are seeking? If it is so difficult to fix costs and prices it is necessary for the Government to have a share in the company in which the work is being done.

Photo of Mr Ian Orr-Ewing Mr Ian Orr-Ewing , Hendon North

I am not sure that Short's would be the best example of profit being made by a company where the Government have had a share for a number of years. It seems a poor example to cite in the aviation or the electronics industry. Some reference has been made to the difficulties of the technical cost officers. The hon. Member for Cardiff, South-East said that they were paid about £4,000 a year. I should have thought that they were paid much more modestly.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I was referring not to the technical officers, but to the heads of the departments. It was said that these co-ordinating arrangements should be done at the top, and the two heads of department each get about £4,000 a year.

Photo of Mr Ian Orr-Ewing Mr Ian Orr-Ewing , Hendon North

The technical cost officer has a desperately difficult job in industry and, if anything, he is underpaid. If he is qualified to judge what is going on in this highly technical field, he is worth a good salary. I believe that he has a rather boring and unimaginative job, and that this must be a factor which makes it difficult to attract people of the right calibre to this very responsible job.

I believe that estimating and costing by our Civil Service would be better done if we had more people with scientific and technical training in the Service. This must come about sooner or later. After all, when the Foreign Office recruit they take some pains to see that the recruit is trained in languages, because they deal in this sphere. No doubt the Church gives its recruits theological training.

But this is not done in the technical Ministries among the people who are to try to control and guide very highly technical matters. I feel that the time must come when we ask that a much greater proportion of our civil servants are trained, and should have an opportunity of being trained, in industry and have a basic scientific knowledge so that they understand the language used by the people with whom they are dealing. At present, they are often technologically blind on these subjects, and it makes life much more difficult for them and does not lead to the tightest and most successful control.

I shall celebrate the day when I see a trained scientist as a Permanent Secretary going right to the top of his Ministry. This has never happened in modern times. I should like to see a scientist at the top of a technical Ministry, just as Lord Hives is at the top of Rolls-Royce and Lord Fleck, a chemist, is at the top of I.C.I. I cannot see why, in the technical Ministries, there should not be opportunities for the brightest people to go right to the top of the Civil Service administrative structure.

But this will take time. What shall we do in the meantime? My right hon. Friend rightly told us of the action which he has taken. He has taken swift action in many respects, starting back in the autumn. I am surprised that in the Public Accounts Committee's Report there were not more references to other ways of negotiating a contract. At the one end the Committee had the cost-plus system, which, I think, is the worst of all worlds for the taxpayer, and, at the other end, there was the fixed-price contract. These are the absolute extremes—the two ends of the spectrum.

As my right hon. Friend said, it is not beyond the wit of the human mind to invent a system which gives perhaps a certain rate of profit up to a certain sum—say, 10 per cent. over the expected costs—and then after that the profit is shared between the sponsoring Ministry, which means the taxpayer, and the firm, perhaps on a reducing scale. Similarly, if a loss were made above a certain amount it would be met by the firm, but if it became a substantial loss it would be shared between the company and the taxpayer. This seems the right opportunity to provide a formula which would achieve something better than the present system.

I have worked in an electronics firm for much of my life, and I want to tell the House—I am sure hon. Members know—that working for the Government is not all beer and skittles. One often has a large research and development project which ties up half one's scientific and development staff. At the end one meets the specification, but, instead of getting an order, one finds that there has been a change and that this piece of equipment is no longer required. One has all the overheads of the production people, but no instruments to feed in for production. The space has been kept available as part of the contract, but the factory remains empty.

Similarly, when one begins to go into production there are long arguments. There are many modifications. They come in spate. I hope that there are fewer than when I was at the receiving end. When one has these long arguments, it takes a long time to get one's money. This is where I disagree with the hon. Member for Cardiff, South-East; there are also risks in the development stage that it may never come to production, and there are all sorts of uncertainties. If there were no uncertainties, research and development would not be sponsored. One is probably engaged in pioneering.

Photo of Mr Frederick Lee Mr Frederick Lee , Newton

Most development contracts are on a cost-plus basis, so there is no risk.

Photo of Mr Ian Orr-Ewing Mr Ian Orr-Ewing , Hendon North

There is the risk that they may not lead to production. One is lying up one's brain-box in the firm without feeding the production factory It is a very big risk. Even when one gets into production there may be many problems and modifications being fed back which need to be built into the weapon.

To sum up, a man in Whitehall made a mistake—a mistake which by a formula was multiplied by 5½ times. I suggest that this is a stupid sort of formula. We devise fail-safe mechanisms in the aircraft industry, but this is certainly not a fail-safe mechanism if we multiply the error by 558 per cent.

If we are frank in the House we recognise that under any system and under any Government some errors will always be made. It is wrong to suggest that the taxpayer has been mulcted. Half of all these profits have gone straight back to the Exchequer. The taxpayer has benefited enormously from the levy on overseas orders and we taxpayers have gained in every case in which a loss has been made. I should like to see an improvement in the recruiting of civil servants so that more people with knowledge of these matters are serving even in high places, particularly in technical Ministries.

Lastly, I do not believe that we cannot devise a better system for contracts. My right hon. Friend has shown sincerity and vigour, and I am sure that he will tackle this problem with great success.

5.38 p.m.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The hon. Member for Hendon, North (Sir I. Orr-Ewing) started by saying that he thought that this was one case on its own. I do not know whether he meant that it was one case out of thousands of others in which the taxpayer had been adequately protected, but he went on to say that we ought to have technical cost officers who are much more competent, different forms of contract and so on. He is therefore admitting, although implicitly, that this case was of such an order and of such a category as to demand a review of the whole of the circumstances.

Whether he is right or not—and nobody can know—in saying that this is the only case, what every cautious- minded person, what every hon. Member on either side of the House, responsible for seeing that the nation's purse is properly used, must say is that here is a case in which things have gone so extremely wrong that it must be examined from beginning to end. I agree with one thing which the Minister said—that he would not rest until he found out how the technical costs were 100 per cent. out.

Therefore, we must look at the facts carefully. We know that motives enter into all these things. There are a whole host of problems connected with the firm. I am particularly glad that the hon. Member for Morecambe and Lonsdale (Mr. de Ferranti) is in his place. I do not want to detain him, but I hope he will find it convenient to stay there, because I have many comments to make about the brothers Ferranti.

The background story is simply this. A firm which had developed a missile was asked to produce it. It was asked to produce it on the basis that the price was to be agreed later, but that the price was to be fair and reasonable. The contrast at the time of starting was a verbal one and was absolutely clear to both sides—"Get on with the work. You know what is to be done. We will agree the price later. The price will be a fair and reasonable one."

So the work started. It lasted for over five years. It was not until five years after the work had started and while it was going on that the negotiations were finally concluded. It was not until two-thirds of the goods ordered had been delivered that the price was agreed. If my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) will excuse me for adding a slight gloss to what he said, two-thirds delivered means much more than two-thirds of the work completed. Taking what was in the pipeline, the contract work was virtually completed by the time the price was agreed. Those are the circumstances.

When the negotiations were conducted, they went something like this. I am putting it very shortly. Ferranti's said to the Ministry, "We want two and a half times our labour costs". The Ministry said, "No, you cannot have that. That is too much. You can have only twice your labour costs". "Very well", said Ferranti's, "We will take twice our labour costs". Those are the figures, as simple as that.

It can be said that the Ministry did not know what the labour costs were. That is true. It cannot be said that Ferranti's did not know what the labour costs were. That would be untrue. It would be incredible, it would be unbelievable and it would be totally out of character with the distinguished financial director, who is a Fellow of the Institute of Cost and Works Accountants, who is a C.B.E. and who looks after these matters for Ferranti's with such satisfactory results that the chairman and managing director has said, "Our cost department is fine. We spend 1 per cent. of our turnover on our cost department".

As everybody knows, no responsible manufacturer—I am sure that the hon. Member for Hendon, North, who said that he is connected with an electronics firm, will agree with this—who is making a number of articles, who has been producing for five years and more, who has got very near to the end of his contract, is unaware of his labour costs. He cannot live if he is. He would be bankrupt in no time. The hon. Member knows that as well as I do. Everyone who has put his nose inside a factory, inside a set of books, or inside a set of cost accounts, knows that as well as I do. Therefore, the attempt to ride out of this knowledge was the first thing that must have prejudiced every single member of the Public Accounts Committee against Ferranti's. We have only to read the evidence given to the Committee, rather than speeches made on either side in this debate—I am conscious that I am making a speech at the moment—and read the kind of questions which were asked to know that when an hon. Member, of whatever party, is asked to serve on the Public Accounts Committee he does his duty. He does his duty and does not consider his party. He finds out what the facts are.

The facts were fully found out. The answers are there for all to see. No finer conclusion can be drawn than the Public Accounts Committee's Report: the facts speak for themselves. We know what happened. My hon. Friend the Member for Cardiff, South-East referred to the figures. The Minister gave some. A profit was made, not of 7 per cent. on cost but of 110 per cent. and more on the capital employed. One hon. Member opposite suggested that 10 per cent. was a reasonable figure. The Ministry says that between 7 per cent. and 10 per cent. is the range, 10 per cent. being the maximum. I would say from my experience that 10 per cent. is again a reasonable maximum. I am therefore anxious to give them a reasonable maximum—10 per cent. on the capital employed. These are exactly the figures I am giving.

I remind the hon. Member for Esher (Sir W. Robson Brown), if he wants to challenge this, that the whole of British industry pays less than that. If he wants to go further and ask Ferranti what it pays, I can tell him that Ferranti's borrow millions of pounds on preference shares. The three Ferranti brothers organise the firm on the basis that they own all the ordinary share capital and borrow on preference. On that preference capital they pay 5½ per cent. [Interruption.] The weighted average on the three sets of preference capital is almost precisely 5½ per cent. I try to be as accurate as I can.

Photo of Mr Ian Orr-Ewing Mr Ian Orr-Ewing , Hendon North

I am sure that the hon. Gentleman would agree that capital employed is a rather uncertain figure and that it would be better for him to say what percentage he would think reasonable on turnover or on sales price.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

Of course it is not. Capital employed is the only significant figure, and no accountant would suggest anything different. The State said that capital employed was the only significant figure when it brought in an Excess Profits Tax, and excess profit is what we are talking about. Excess can have relation only to the return on capital. Profit is what one gets for putting one's capital in. Excess profit is the extra amount. It is the return on one's capital. I do not think one wants to waste the time of the House. It is admitted by everybody that the relevant figure here is 110 per cent. and the excess profit is 100 per cent. It is therefore right that we should know what we are talking about in simple figures, namely, an excess profit of something over £4 million, representing 100 per cent. on capital employed.

Photo of Sir Albert Costain Sir Albert Costain , Folkestone and Hythe

Would the hon. Gentleman tell me of one Government contract on which the profit is based on capital employed? This contract, which it is agreed was based on cost, produced 7½ per cent. on turnover.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

Every single development contract is based on the capital employed. One of my criticisms is that there was no mention of capital employed on this contract, until I raised it myself in a Question to the Minister. During the war I myself dealt with hundreds of cases, and there was not a single case which was not based on capital employed. The hon. Gentleman knows that that was laid down. This will be repeated in the Lang Report, because he was one of the main persons responsible for laying down that in every case the capital employed had to be considered. How ridiculous it is to talk about turnover, without considering the nature of the business. Marks and Spencer, or somebody like that, can turn their capital over time and again. A small profit on their turnover is a large profit on their capital, because the capital is turned over many times. A steel foundry will turn over its capital less than once. Was there, or was there not, an excessive profit of something like 100 per cent., something like £4 million, made by this firm?

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

Unless the hon. Gentleman wants to challenge that, I would rather not give way.

Photo of Mr William Robson-Brown Mr William Robson-Brown , Esher

I want to make my own position quite clear. When I referred to 10 per cent. in my intervention I did not refer to 10 per cent, on capital employed, because that is a very elastic figure and you yourself have shown——

Photo of Sir William Anstruther-Gray Sir William Anstruther-Gray , Berwickshire and East Lothian

I hope that the hon. Gentleman, even in an intervention, will remember that he is addressing the Chair.

Photo of Mr William Robson-Brown Mr William Robson-Brown , Esher

I am sorry, Mr. Deputy-Speaker. I want to say that my reference to 10 per cent. was to 10 per cent. of the gross cost.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

It does not make very much difference in this case, so it does not really matter. If anybody cares to take considered advice on this, he will find that the whole of the technical world agrees that there is only one significant figure, and that is capital employed. There is no need to go into all this again. If hon. Members opposite are taking the view that there was not an excessive profit here, if they want to take that view and go into the Division Lobby against us, on the ground that this was not an excessive profit but was a proper profit to make, nothing would please me more than to be divided from them on that issue.

Inasmuch as this is the background to the case and this is the firm in question, we should have regard to whether the profit—this excessive profit—was, as sometimes happens and might conceivably happen in a case like Hawker Siddeley, spread over a large number of individuals, so that, in a sense, what with the tax being paid and it being spread over a large number of individuals, the harm to the nation as a whole was much reduced. However, this is not the case of this firm, and this must be recognised.

This firm consists of three brothers and their ordinary capital before the war was £300,000. The brothers, Sebastian, Basil and Dennis, receive director's remuneration, which is now running, on average, at £10,000 a year each. They receive a dividend worth about £30,000 a year each and they receive capital bonuses, which so far have totalled £1 million each. These bonuses are free of tax. That is the point of capital bonuses; they are free of Surtax and Capital Gains Tax and are converted into cash.

The share capital of the company has increased in value, without a penny of new money being subscribed by these ordinary shareholders, from that pre-war £300,000 to the present figure of well in excess of £20 million. That is not an unreasonable return for their efforts.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

It certainly does not go to the taxpayer but to these three individuals. This was arrived at under the careful guidance of the same financial architect who was, no doubt, responsible for the costing. To use a technical term which is well known to everyone in the profession, that gentleman certainly knows his onions.

The system is that one declares a small dividend to the ordinary shareholders, As I have said, at present it is running a only about £30,000 a year each. Having declared a dividend of those proportions, the balance of the enormous profit remains in the firm and is then distributed by way of capital bonuses, free of Surtax and Capital Gains Tax. That is what has happened in this firm. I must make this point clear because it is a different situation when one is dealing with, as we are here, a defence contract—an instrument being made for the defence of the nation to save the lives of human beings—and being made by a particular firm which, because of its skill in negotiating and nothing else, has managed to net for itself during this contract £1½ million for each of the three gentlemen to whom I have referred. Do we consider this a proper way to go on when arranging defence contracts?

I have read the whole of the evidence, all the appendices, the notes and the second thoughts. The firm has attempted to put the best possible foot forward, and no one can blame it for doing that. However, the essence of the matter is that the firm is now saying, in effect, "We have done nothing improper. It was right for us to try to get every penny we could out of this contract".

Why did not the firm open its books to the Minister? It would not produce the figures, although we have been told that it will be willing to show them to the Lang Committee, although I wonder under what conditions. Why would not the firm open its books to the Ministry, the House of Commons and the Public Accounts Committee? Hon. Members can draw only one conclusion from its unwillingness to do that. It is worth recalling that there was only one set of figures which the firm was prepared to show—the cost of materials, because, the firm said, that cost had been greater than it had first been estimated. The circumstances must be looked at in an embarrassing light when people will not produce their figures. In addition, the firm will not repay unconditionally the excess amount. In short, it will not say that it was an error and that we should go back to the beginning.

As the firm was doing this work for over five years it was absolutely clear that in due course, a price would be negotiated which would be fair and reasonable, but we have seen how grossly unfair and unreasonable it was by the simple process of misleading the buyer at the time the negotiations were being made. No new machines came into the picture. There were no new methods. There was no new design. The firm was carrying on year after year, for five and a half years, and at the end of the fifth year it agreed a price—and that price, to the firm's knowledge, was twice the labour cost incurred, as a result of which all the rest has followed.

I regard all this as too clever by half. To adopt this method to get £1½ million for each of three individuals out of the needs of the nation for a missile to defend itself in case of enemy attack, to refuse to acknowledge that something had gone wrong, to refuse to repay, to refuse to open its books so that all the facts could be looked into—I say that in these circumstances a firm of this structure, of this limited shareholding, with a great incentive for one man or one family to look after themselves exclusively, is not a firm with which the country is capable of negotiating or contracting. It is as simple as pie to my mind that this firm should be struck off the list and that the matter should not be left at that.

Having struck it off the list the next thing is to issue a writ. I would not dream of debasing myself if I were on the Government Front Bench by adopting the attitude at present being adopted by the Minister towards a firm which has breached one of the essential terms of contract; the term stating that it must be done on a fair and reasonable basis. This firm has misled the Ministry about its labour costs. We are not talking about 2½ per cent. but a difference of 100 per cent.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I hope I will be allowed to finish one part of my speech without interruption. I am not accusing the hon. Member for Mid-Bedfordshire (Mr. Hastings) of anything. It is the firm with which I am concerned and its greediness in this matter. The train robbers were given 30 years for £2½ million. This is twice that sum.

I am saying that the first thing to be done is to strike the firm off the list. The next is to issue a writ for the return of the excess money which was paid under false pretences—for falsely pretending that the labour costs were twice as much as they were when the firm knew what the actual labour costs were. This having been done, a writ having been issued, the books will have to be produced in court and everyone will see the true situation.

Photo of Mr Stephen Hastings Mr Stephen Hastings , Mid Bedfordshire

Is the hon. Gentleman aware that 18,000 people are employed by this company? He is suggesting that the company should be struck off. Is he also suggesting that anyone inside or outside the House has accused them of incompetence or inefficiency?

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I am saying that the firm should be struck off as contractors because this is a company with which it is incapable of contracting for a Government contract. It can seek to make its money elsewhere, as it used to do, on a smaller scale. This work can be done by other firms and the employees can be transferred to other employers. That is what I am suggesting the Tory Party could do. The Labour Party could do something else.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I cannot give way every other minute.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

Does the hon. Gentleman have something new to suggest?

Photo of Mr Stephen Hastings Mr Stephen Hastings , Mid Bedfordshire

Is the hon. Gentleman prepared to repeat what he has just been saying outside the House?

Several Hon. Members:


Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The hon. Gentleman asks a legitimate question, but why he should ask it I do not know. I am anxious to repeat what I said. The hon. Member for Mid-Bedfordshire might like to be reminded that it was arranged, through the courtesy of B.B.C. television, that in the Thursday evening programme "Gallery" Mr. Sebastian Ferranti and I should debate this, with about 5 million people viewing. That is the answer to the hon. Gentleman's question about whether I would be prepared to say this outside the House. At 5.30 p.m. on the day Mr. Ferranti and I were to discuss this matter on television he cried off and would not discuss it with me. I am going on television tonight. I hope that I will have the honour of discussing this issue with another hon. Member opposite. How curious it is that any hon. Member opposite should even begin to have the idea that I might not be pre-pored to discuss these things in public. All these are public facts that are well known—and well known to everyone who reads the Stock Exchange figures.

I turn now to the Air Ministry. The Air Ministry's job is a simple one—it is to try to protect the public purse. I take a totally different view here from that of my hon. Friend the Member for Cardiff, South-East, who thinks it necessary to wait for the Lang Report before deciding what action the Minister should take. My view is that we now have ample information on which to decide what action we could take, and that when we get the Lang Report we shall be much reinforced in our discussions as to the different kinds of contract we may be considering. That is the Lang Committee's job.

I accuse the Minister of being dilatory, foolish, negligent, complacent and misleading, and I will give my reasons for each of those five accusations.

This price was agreed virtually at the end of the contract, at the end of the production period, and was agreed on the basis of a contract whose sole justification was to give an inducement to the contractor to reduce his costs in future production. That was the whole purpose of that contract—to be an incentive. An incentive is something for the future—there is no such thing as a retrospective incentive. But here the whole incentive had gone, because the contract was practically completed. This was a totally irrelevant form of contract at that time. To call it a fixed-price contract is just to play with words. It was a cost-plus contract and—oh boy—it was some plus. Therefore, the first thing I say about the Ministry is that not to fix the price until five and a half years had gone by and the contract was practically completed was to be dilatory to the point where it cannot be excused.

I then say that the Ministry's technical cost officers were wrong by 100 per cent. The figures they finally accepted for labour costs were 100 per cent. out—not 2 per cent., but 100 per cent. And there was no new information needed—no new methods, no new machinery, no new designs. That is wrong and foolish.

Then I say that the actual labour and overhead figures were ignored, and to describe that as negligence is to put it at its kindest. Here is a case in which the buyer, in the person of the Ministry, was on one side of the table and the contractor was on the other side, and on the table itself were the figures showing—without any complicated percentages—the labour costs and overheads of the contract. When we are told in this House that the Ministry was unaware of them we must accept it, but we cannot understand it. I cannot understand it—it is beyond my comprehension. I shall be glad when the Lang Committee, or someone else, has satisfied itself about motives. I have the strangest letters coming to me with the strangest allegations, but on this issue I cannot understand why Ministry officials who at this time were interested in this aspect more than anything else, who were agreeing the prices of the contract and who had on the table in front of them the figures that gave the answers, were unaware of those figures. Again, I say that that is negligence of a kind that cannot be excused.

I go beyond that. I refer to the published accounts, as did my hon. Friend the Member for Cardiff, South-East. Anybody who has on his mind the safeguarding of the public purse, anyone who is trying to prevent too much money going from the Exchequer into the hands of defence contractors, anyone who has a vague 1 per cent. attitude of that kind on his mind, would immediately say, as no doubt did the Comptroller and Auditor General, "Let us look at the published accounts." Whatever goes on in cost accounts and whatever goes on in negotiations between a contractor and the Ministry concerned, when the published accounts are made available the auditors have to certify the facts to the shareholders, and they go to considerable lengths to try to satisfy themselves that their certificate is properly given. One therefore knows the truth, by and large, from the published accounts.

What happened with the published accounts? They show that the net profit after tax, which is the relevant figure, had quadrupled—it had multiplied by four. These were the accounts that go to March, 1960, and which were available in June, 1960. The negotiations took place in July and August, 1960, and were finally completed in October, 1960. In short, had those negotiating on behalf of the Ministry asked to see the Stock Exchange records, or anything giving the latest figures, these would be the first figures to be put in detail before them; the enormous profit—four times the average run of profit before this contract started to come home. And one gets profits on the contract being shown in the accounts towards the end of the production period.

That did not put anyone on his guard either. I therefore say that the Department did not attempt to fix the contract until so late that it was the wrong type of contract to use. The Department was 100 per cent. wrong on technical costs. It ignored the actual figures of labour and overheads on the table in front of it, and it did not attempt to look at the balance sheet, which would have put it on guard. Those four things, taken together, are not to be explained away. There is only one course of action for the Minister to take—and I now come to the Minister.

The matter was queried with the Minister by the Comptroller and Auditor General on 14th August. I do not know how any of my hon. Friends would have responded to such a query, but I am sure that I would have been considerably alerted when told of such a state of affairs by the Comptroller and Auditor General. Ministers do not usually like the thought of a first-class row in the House of Commons with the Comptroller and Auditor General on the other side—he is a powerful person to choose as an opponent.

That was on 14th August. What did the Minister do? Until after Christmas he did nothing. The only thing that happened after that date—and I refer purely to the historical record—was that the Parliamentary Secretary resigned on 30th October. The Parliamentary Secretary to the Ministry of Aviation, who happens to be one of the three brothers, resigned on that date.

Photo of Mr Ian Orr-Ewing Mr Ian Orr-Ewing , Hendon North

I am sure that the hon. Gentleman would not wish to go so far as to suggest that the Parliamentary Secretary was in any way involved. He was appointed on 16th July, 1962——

Photo of Mr Ian Orr-Ewing Mr Ian Orr-Ewing , Hendon North

The hon. Member has the date wrong, so perhaps he will withdraw that very unpleasant smear, which is not worthy of an hon. Member. I should be grateful if he would withdraw it.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I am most receptive to any suggestion by the hon. Member, because he treats me as an hon. Member, too. That is why I want to help him by saying that it was 1963. I checked it this morning——

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

Just let me reply. He was there for about four months. I am only stating an historical fact, which is that that happened. But I go further to say, as the hon. Member has asked me, that I hope that the Lang Committee will find out what is going on. When a Prime Minister is appointing a Parliamentary Secretary to a Department which has such close and direct dealings with the contractors, it is absolutely vital that he should satisfy himself that the circumstances are such that an hon. Gentleman can be properly so appointed.

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

I am sure that the hon. Member for Gloucester (Mr. Diamond) wants to be fair. I think that he made a slip, and it is one that should be corrected. I understand the hon. Gentleman—but perhaps I misunderstand him—to say that the Parliamentary Secretary had left a little time after the letter from the Comptroller and Auditor General came in. I think that the hon. Gentleman got the year wrong. But perhaps he will make it absolutely plain that the year was 1962 and not 1963. Perhaps he will make that quite clear.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

If the right hon. Gentleman says that, I must accept it from him. I had the figures from the Library this morning and I was told that he was appointed in 1963 and resigned in 1963.

Photo of Mr George Wigg Mr George Wigg , Dudley

I have an interest in this point and I took the precaution of writing to the hon. Member for Morecambe and Lonsdale (Mr. de Ferranti) telling him that I was going to raise the question of the part that he played whilst he was a Minister. It is true that he was a Minister from 16th July, 1962 until the end of October.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I accept that, and I withdraw any suggestion that the hon. Member for Morecambe and Lonsdale resigned after the inquiry by the Comptroller and Auditor General. I was not making the point. It was put into my mouth by the hon. Member for Hendon, North (Sir Ian Orr-Ewing). The point I am making and repeat is that if the Prime Minister chooses—and this has nothing whatever to do with the date on which the hon. Member resigned—as his Parliamentary Secretary to a particular Ministry a gentleman who is in the most direct financial relationship with that Ministry he must take steps to assure himself that he can be properly so appointed. I repeat that and I hope that the Lang Committee will so satisfy itself. That is all that I have to say about it.

I am not making any allegation of any kind about anybody at all. It is far better that it should be said by me, and that I should repeat that I am not making any allegation of any kind whatsoever, than that the slurs which are going round should be repeated outside. Let us have it authoritatively stated that nobody in the House regards the hon. Member's particular association as anything worse than that, but this is a matter on which the Prime Minister ought to have satisfied himself.

What I am saying, therefore, is that what happened after the Comptroller and Auditor General's letter of inquiry was nothing at all until the very day the Report was to be published, the D-day, the final possible day on which the Minister could do anything. On that day the Minister decides to set up a Committee so that he can say, "Look boys, we had better not discuss it now. We had better discuss it later when the Committee has "reported," and it might have been that it would not have reported until after the then generally anticipated day of the General Election. That is complacency of a kind which one cannot forgive.

Again what I also cannot forgive is the way in which the Minister behaved at our last debate on 17th February. We were all talking about a figure of £2·7 million which we had been told about by the Comptroller and Auditor General in his report. Nobody knew anything different from that, except the Minister. In the course of the debate the Minister told us, "My chief accounting officer is going before the Public Accounts Committee tomorrow." He went, and we know the evidence. The Minister knew that his Permanent Secretary was going to give evidence the following day. Did the Minister not know what the evidence would be? Did he not know that the first thing that the Permanent Secretary would say was that this £2·7 million was only half the story and that the full excess profit was double that figure?

Was it not up to the Minister to put to the House of Commons, "You are all uninformed, because I must let you know that the figure you are talking about—and we are satisfied about it because we are giving the evidence to the P.A.C. tomorrow—is double that amount"? Is that the way a Minister should behave to the House of Commons? [An HON. MEMBER: "Slippery."] I say that a Minister who behaves in that way, and who is the head of a Department which has behaved in that way, has only one honourable course open to him—to resign. There was a Minister of Agriculture opposite who resigned for much less than that. There was a right hon. Gentleman, who was Chancellor of the Exchequer, who resigned for much less than that.

Finally, we come to the difficulty of what we do about the future. I shall be very brief about this, because we can discuss it more adequately and fully when we have the Lang Committee's conclusions in its detailed Report. The essence of this matter, and the essence of why it has gone so completely wrong, is clearly that a Government cannot deal at arm's length with a contractor who is alone capable of making something on which the safety of the nation depends as one can in an ordinary business deal between a buyer and a seller of ladies' overcoats. It was a partnership, and the Minister said that it was a partnership. Everybody here recognises that it is a kind of partnership.

What degree of partnership there can be must be considered. There is no difficulty about a contract. A contract merely clothes in words the relationship that is established. It is getting the relationship right that matters. There is a whole variety of contracts that can be used, or new contracts that can be devised, in which the sharing of risks and of profit can be organised and arranged, but the one essential is the fundamental relationship between the Minister who is buying and a contractor who is supplying a defence article of such vital need and, as one of my hon. Friends says, is supplying it in a monopoly degree. In that kind of partnership one can only act in utter good faith. Mr. Sebastian de Ferranti's fault was that he dealt with it as a sheer business deal and wanted to make the last penny out of it. The Minister regarded it as a kind of partnership. As a Socialist I say that it can be done only as a kind of partnership and we must see to it that the partnership can be made effective and reliable.

6.16 p.m.

Photo of Sir John Barlow Sir John Barlow , Middleton and Prestwich

Some harsh and unjustified things have been said today about the great firm of Ferranti. It is in many ways a unique firm and it has served the country very well indeed. Before discussing the details and merits of the case it may be desirable to give some of the background of this firm.

I am informed that the great-great-grandfather of the present chairman came to this country from Italy by way of Belgium in 1810 and then, very wisely, married an English girl. The grandfather of the present chairman began and established the firm in 1882. He was a noted scientist and was the first man to conceive the idea of a high voltage alternating current system which was a great advance on the Edison system in America at that time. It is interesting that an exhibition to his memory is now being held at one of the South Kensington Museums. Such was the contribution that he made to the electrical industry in those days. He was one of many enterprising people who came from Europe to Manchester at that time to settle and who developed great businesses from which Lancashire in particular and the United Kingdom in general have benefited.

Ferranti has always been in the forefront of scientific research. Over the years it has developed into a very large firm almost entirely by ploughing back the profits when it was lucky enough to make them. Until very recently, I believe, all the ordinary shares were held by members of the family and at no time during the last 30 years has the firm paid more than 6 per cent. per annum, and sometimes it has paid less.

Photo of Sir John Barlow Sir John Barlow , Middleton and Prestwich

The rest was ploughed back for the benefit of research and development. [An HON. MEMBER: "Come off it."] I am telling hon. Members the facts. The profit on turnover for the last 14 years has averaged 8·4 per cent. and for the last three years, including the profits on Bloodhound I, it has averaged 7·4 per cent.

It will be realised from what my right hon. Friend said today that this is a highly speculative business. Ferranti had started and successfuly forged ahead with many developments. Other developments, after costing a lot of money, have ended in dead loss. The firm has the reputation of being one of the best and most enlightened employers. The dynamic personalities of the present chairman and, formerly, his father have attracted to the firm enterprising people who knew that they would be treated fairly.

Ferranti has by no means always been a successful firm. Before the First World War, owing to losses on fixed contracts, it went bankrupt, but it was able to reconstitute itself and carry on with its work. Needless to say, during both the last two world wars it has made great contributions to the defence and offence programmes of our country.

Owing to the unsatisfactory nature of the cost-plus basis of contract, especially for conventional production, the Government have rightly tried, where possible, to make fixed price contracts, but this method does not lend itself in the least to this type of new development. By this method, of course, the Government know the extent of their indebtedness, but the contractor has a considerable risk. Not long ago, Ferranti made large losses on a fuse contract for the Navy, and on another fixed contract it made a loss of about £2 million.

The contract that we are now discussing is for Bloodhound I. As has been said repeatedly, it is an entirely new missile in advance of anything yet invented or produced. At the time the project started, Ferranti made available a works which was particularly suitable for production, but to do this it abandoned all radio and television work going on then. The closing down of radio and television production in this factory, and the holding together of the labour during the interim period, cost the company substantially over £1 million. The pre-production or development work an Bloodhound I was done, by arrangement with the Government, on a 4 per cent profit basis, but, owing to inflation, this actually meant a loss.

For the Bloodhound contract, the Government said categorically that they must have a fixed contract which would allow for profit at a rate of 7 per cent. on turnover. This was due, I believe, to a ruling of the Treasury in pre-war days. It will be realised how difficult it is to estimate the actual cost of a new missile such as this. The Government had two teams of experts, one, the technical costs officers, the other, the accountants representing the Comptroller and Auditor General's department. The estimated cost of materials was agreed by both the Ministry and Ferranti representatives at £1,760,000. In fact, they were £500,000 too little and the materials actually cost much more, which meant a loss to Ferranti on that part of the work of about 30 per cent. This shows the impossibility of accurate estimation in matters of this kind.

The estimated cost of material, labour and overheads was about £8·3 million, This was the figure which eventually turned out to be so wide of the mark. The so-called profit of nearly £5 million does not allow for the loss of £500,000 on the under-estimated cost of materials nor the figure of over £1 million on providing works, machinery and scientific staff. Having staff, machinery and an empty works all ready to make a flying start was of immense benefit to the Government. To speak of an overall profit of 70 per cent. is not, in my opinion, to convey accurately the facts of the situation.

In addition, it will be realised that over half of any profit goes back to the Government in taxation.

Photo of Mr Archibald Manuel Mr Archibald Manuel , Central Ayrshire

Everyone pays taxes. What is the hon. Gentleman talking about?

Photo of Sir John Barlow Sir John Barlow , Middleton and Prestwich

I am talking about it because so many people do not seem to realise it. It may be said that the Government are, in fact, a partner to the extent of over 50 per cent. only in successful ventures.

The contract was not agreed and signed until October, 1960, by which time about half the material was delivered. It is repeatedly suggested in the proceedings of the Public Accounts Committee that Ferranti was under an obligation to inform the Government that the cost of production appeared to be lower than the original cost. If it had done this, the Government would have negotiated the contract on a basis of 7 per cent. profit, which, in the circumstances, would have been very unfair.

It is important to realise, also, that the Minister had the up-to-date figures produced by his representative and, apparently, by some serious oversight, the figures were not compared and coordinated by the Department. It is a well-known fact that, in production of this kind, the later stages may be relatively very much more expensive than the earlier ones owing to delays, waiting for material, and finishing particular work.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I deliberately did not interrupt the hon. Gentleman on his previous misstatements as to the date on which the contract was agreed, as to the amount of goods which had been delivered when the contract was agreed, and as to the amount of tax which the company pays, which anyone who looks at the Stock Exchange figures can see for himself.

I did not interrupt when he made those three misstatements, but I interrupt on this occasion because the point he has just raised has not been dealt with previously. It is quite wrong to say that one does not know what the upturn in one's labour graph will be, and it is quite wrong to say that it will be substantial. The pattern of the graph is always the same; it turns up very slightly at the end, and one can calculate it within shillings.

Photo of Sir John Barlow Sir John Barlow , Middleton and Prestwich

That may be the hon. Gentleman's opinion, but it is not mine, having been advised by contractors of various kinds in this type of business.

In addition, there was no certainty of continuity; indeed, there was a likelihood that there would be no further orders for the firm for this type of business, and this would have left it with an empty shop. Moreover, it has great responsibilities in making adequate provision for its staff. Unless it were known that firms of this kind doing work of this sort would look after their staff, they could not attract the best in the country. This is what Ferranti set out to do and has accomplished, and we have benefited from it, though, perhaps, we have paid rather highly for it in this particular case.

It may be of interest to the House to know that Bloodhound 1 is somewhat similar to the American Hawk, but the American production is both inferior and more expensive than Bloodhound. A development of Bloodhound 1, known as Bloodhound II, which is much more complex though far superior, is being produced by Ferranti, I believe, in conjunction with the British Aircraft Corporation, and is being supplied, I understand, to Switzerland and Sweden, in competition with other British and American firms. These two countries, Switzerland and Sweden, are very keen buyers. They will go for the best bargain that they can get anywhere in the world. They have come to Ferranti for a variety of good reasons, and they have made no complaint.

Already export orders amount to over £40 million on which, as the Minister told us, the Government get a royalty of 10 per cent., amounting to about £4 million. Although these foreign Governments are keen buyers, there have been no complaints whatever. Do we want to pare down to the last mite—[HON. MEMBERS: "Oh."]—and pay considerable compensation overseas when it is not required and not asked for? It may seriously prejudice much overseas competition if this line is unduly pursued. It seems to me that this is a political mountain arising out of a commercial molehill.

The thing which concerns me most, however, is the suggested lack of good faith, or dishonesty, on the part of Ferranti. I am convinced that this is not the case. It is a firm of very high standing which is doing an excellent job of research and production in highly competitive modern fields. It may make a big profit in one case. It has made colossal losses in others.

I should like to draw attention to Questions 693 and 693A in the Public Accounts Committee's Report where there is a suggestion by the Ministry official that Ferranti was unfair and took undue advantage of its position. I regard that accusation as most unfair. Besides being, as I believe, untrue, that kind of thing destroys any good will which may exist between the Government and the firm. If the two parties seriously mistrust each other, it is difficult for them to continue to work together in future.

We know that, technically, the Minister has responsibility for all his civil servants. The present Minister was not in the Department at the time that this went through. At the same time, I imagine that the civil servant who gave evidence was not responsible in any way. It seems to me unfortunate that there is so much moving about, both by Ministers and civil servants, that there is insufficient continuity to carry through this type of work.

On one basis, the estimated profits are said to be 70 per cent. But it can be more accurately argued that the profit on the whole transaction is more like 30 per cent. Taking the profit of £5 million, from which should be deducted the £1 million loss on pre-contract costs, and the £500,000 on the underestimated cost of materials, that leaves a profit of about £3½ million, or in the region of 30 per cent., on turnover. Of course, the tax on this is very substantial. Also the Government will get the tax on, I expect, very substantial profits from the important overseas business.

The percentage profit on Ferranti's turnover for the year 1961 was 10·8 per cent. In 1962, it was 6·5 per cent., and in 1963 4·6 per cent. This includes the period of the Bloodhound I contract. Therefore, the Government and the country get very many benefits. In all these circumstances, I do not believe the profit is outrageous. I have no doubt, however, that in future both sides will take extra care to ensure that neither excessive profits nor losses occur. But it might be worth cons Bering in such new and speculative fields that production of this kind should be entered into on a limited partnership basis on both sides—the Government and the firm.

It has been vaguely suggested that this firm should be nationalised. I totally disagree with that. Once a firm of this kind is nationalised, or unduly controlled, it will lose the spark of personal genius for research which has brought it to such tremendous eminence. I feel that the whole House appreciates the high quality of work which this firm has done over a long period of years, but I should like to see other methods adopted to prevent anything like this from occurring again.

6.35 p.m.

Photo of Mr James Hoy Mr James Hoy , Edinburgh Leith

I did not think that we could have heard a worse speech than the one with which the Minister opened this debate—but we heard it. I honestly do not believe that the hon. Member for Middleton and Prestwich (Sir J. Barlow) understood a word of what he was reading. There were so many misstatements in his speech that it is nearly impossible to correct them all. To take the simple point that even he, with his I.Q., will understand, the 7 per cent. profit that was mentioned earlier in the debate was agreed as a basis of negotiation between the Ministry and Ferranti. They both admitted that. Therefore, I cannot understand why the hon. Gentleman, at this late stage, should say that this was a most unfair profit for anyone to be offered.

Photo of Sir John Barlow Sir John Barlow , Middleton and Prestwich

I believe that that was an imposed or suggested profit by the Ministry as the basis on which it always works in this kind of thing, which I consider to be quite insufficient.

Photo of Mr James Hoy Mr James Hoy , Edinburgh Leith

It does not matter whether the hon. Gentleman considers it sufficient or insufficient. This was the figure which was agreed. It was not imposed. If the hon. Member looks at the Public Accounts Committee's Report, he will see that the Ministry and Ferranti agreed that this was the basis on which the contract should be made. The hon. Member said—and this is about the only thing on which I agree with him—that this was a unique firm. Having listened to the speech of my hon. Friend the Member for Gloucester (Mr. Diamond), I agree with him. He proved it up to the hilt.

I am grateful that the House should be discussing the Public Accounts Committee's Report. I am grateful to my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) and, indeed, to the Minister for saying a word or two about the work of the Committee and the Comptroller and Auditor General. Since this Report there has been considerable discussion about the control of public expenditure. Indeed, we have even had a speech from the Leader of the Liberal Party about it.

I have been on the Public Accounts Committee for a considerable number of years. I think that in seniority I take second place to my hon. Friend the Member for Chesterfield (Sir G. Benson), who has served on it longer than anyone in the House or in the history of the Committee. Throughout the years we have tried to direct the House's attention to the control of public expenditure. The amount of money spent by Departments without any control by this House has been getting bigger and bigger, especially in recent years. The House votes hundreds of millions of pounds to certain agencies which do not come within the purview of the Public Accounts Committee. The Comptroller and Auditor General has no right to inquire into these accounts and, because of that, he cannot report to the Committee on them. I know from my experience that this sum is going up and up.

Following the introduction of the Robbins Report and the diverting of expenditure on technical colleges, and so on, which at present get a direct grant from the House, but which, in future, will have to get it through the University Grants Committee, a further large section of expenditure will be taken outside public control. I do not want to name the institution in question, but our next Report will show what I mean.

During our deliberations, we considered another institution of a technical educational nature and we did not agree with the way in which the money had been spent. Our Report will prove this conclusively. From this year onwards, however, we will never be able to inquire into that type of organisation, because henceforward the money will be given through the University Grants Committee. Consequently, the Public Accounts Committee and, therefore, the House will no longer be entitled to inquire how the money has been spent or whether it has been well spent.

Some people think that the Ferranti case has been given undue publicity. That is an opinion with which I strongly disagree. Even if there had been a tendency for it to be played down, Mr. Sebastian de Ferranti himself has played an important part in giving it publicity. Even when we were discussing the matter as a Public Accounts Committee, and before that Committee, appointed by this House, had the opportunity of reporting, Mr. Ferranti appeared on television to explain the case for his business. I do not know what right he had to do so. I felt that at that stage it was getting near to contempt of the House of Commons, because he had appeared as a witness before the Select Committee on Public Accounts.

Indeed, if Press reports are correct—and I have no reason to doubt them—apparently Mr. de Ferranti was in this building last night briefing members of the Tory Party at a meeting upstairs. It is no use the hon. Member for Farnham (Sir G. Nicholson) nodding in disapproval. Mr. de Ferranti was here last night. Is the hon. Member saying that he was not?

Photo of Sir Godfrey Nicholson Sir Godfrey Nicholson , Farnham

If the hon. Member had been at the meeting, and knew what happened, he would not have said what he has said.

Photo of Mr James Hoy Mr James Hoy , Edinburgh Leith

Mr. de Ferranti discussed the whole of this matter with that committee last night. Does the hon. Member deny that?

Photo of Sir Godfrey Nicholson Sir Godfrey Nicholson , Farnham

I am not being cross-examined by the hon. Member. He must know perfectly well that committee meetings are confidential. All I am saying is that there was no personal briefing. Had the hon. Member been present, he would not have said what he has just said.

Photo of Mr James Hoy Mr James Hoy , Edinburgh Leith

The purpose of Mr. de Ferranti's visit last night was to discuss the debate which we are now having. The hon. Member cannot deny it.

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

I might be able to help the hon. Member. Without committing a breach of the confidence of the committee, may I say that I was in the chair and that, of the 60 minutes, 50 were spent in questioning Mr. de Ferranti on this whole business?

Photo of Mr James Hoy Mr James Hoy , Edinburgh Leith

That is exactly what I am saying. The hon. Member states that for at least five-sixths of the time the committee privately questioned Mr. de Ferranti about the affair which we are discussing today. That step was taken by Mr. de Ferranti knowing that it would be discussed today. It leaves a bad taste in the mouth of the House of Commons. Surely——

Photo of Mr James Hoy Mr James Hoy , Edinburgh Leith

I wish that the hon. Member would sit down.

During the proceedings in the Public Accounts Committee, Mr. de Ferranti went on television and last night, knowing that this debate was to be held today, he consulted certain Members on the benches opposite. It is no use hon. Members opposite saying that Mr. de Ferranti did not have an opportunity to state his case. He was given every courtesy by the Public Accounts Committee. Indeed, in reply to a question from the hon. Member for Farnham (Sir G. Nicholson), who, late on the first day of Mr. de Ferranti's visit, asked whether, having answered all the questions that afternoon, there was anything further that he would like to say, Mr. de Ferranti replied that he had a word or two. What he said fills over five columns of the Report of the Select Committee—over 2,000 words. So he had not come unprepared for the question that the hon. Member put to him. Therefore, in addition to all the questions, he got five columns.

During the debate, there has been frequent reference to research and development costs. As I have so often said, we had better remember that it is not Government money, but the taxpayer's money, that we are discussing. The Government spend considerable sums of money. Hon. Members opposite had better be a little careful. They are always saying, "What about nationalisation? "I point out to them that if it were not for public undertakings, nationalised industry and Government undertakings, comparatively little money would be spent on this work. I shall prove this from someone who is associated with the firm of Ferranti. Considerable sums of Government money are spent in this direction.

That was put clearly and succinctly in a paper issued only this morning by the Scottish Council (Development and Industry), a kind of quasi-Government agency, one of whose most distinguished members is Sir John Tothill, of Tothill Report fame and. I think, the chief of Ferranti's in Scotland, a man for whom we have the highest respect. This is what he had to say in the statement issued by the Scottish Council: In many industries, the dynamic source of growth is technology—the continuous and rapid use of scientific knowledge. This is just as true of the development and survival power of established products as it is of the evolution of new products.The greater part of all research and design in Britain is paid for by Government and nationalised industries, which also dominate the market for many of the products of industry. That is admitted by hon. Members who say that this money which the nation pays for the development of science and technology will enable not only the country, but private enterprise, to compete with its competitors in other countries. Let us, therefore, have no more nonsense about that.

Let the country be under no misapprehension about this development. The Minister has not so far said what was paid in development costs. What we are discussing today is the profit that was made on production. It has nothing to do with development. I challenge the Minister to say how much was spent on development, because neither the House nor the Committee has been given a figure.

If I have worked it out with any accuracy, the development cost came to between £5 million and £6 million. Let it also be well understood that on this money Ferranti received interest at the rate of approximately 5 per cent. [Interruption.] I will quote Mr. de Ferranti's own words. When I said to him that the interest rate was 5 per cent., he replied that it was not quite 5 per cent.; it was 4 and a bit. So we know that if it was not quite 5 per cent., it was something over 4 per cent. That is what he was paid on money every penny of which was provided by the taxpayer through the Government.

Photo of Mr George Wigg Mr George Wigg , Dudley

I have tried to do the same sums as my hon. Friend and I think that I am on the right lines. When my hon. Friend refers to the development cost of £5 million or £6 million, that was for Bloodhound Mark I. Mark II was probably a similar amount. We know from the reply to a Question the figure for Bloodhound Mark III. So we get roughly equal sums for production and development, bringing the figure to between £25 million and £30 million in all.

Photo of Mr James Hoy Mr James Hoy , Edinburgh Leith

I am prepared to rest my case and the case of the Public Accounts Committee on this project. I shall expect the Minister of Defence to tell the House tonight what the total cost of development was. I suggest that it was between £5 million and £6 million, on which Ferranti was paid between 4 per cent. and 5 per cent. profit.

It is said that Messrs. Ferranti gave up its production of wireless and television sets. The hon. Member for Middleton and Prestwich knows better than that. At least, if he does not know, he should not have delivered the speech he made this afternoon. I do not know who his script writer is, but the hon. Gentleman should tell him what it is all about. I do not believe that the hon. Member wrote that speech. He is not as bad as all that. What we do know is that Ferranti was glad to relieve itself of the production of wireless and television. I will not mention the firm which took over—[An HON. MEMBER: "Ekco."]—this problem, but Ferranti was delighted to get rid of it. That argument does not hold water.

I will not take up the time of the House by going through all the various stages, but I will content myself with the date when the price was finally agreed. This came after some years, but the price was finally agreed in October, 1960. There has been some humbug about Ferranti not knowing what the outcome was likely to be. At that time, as Mr. de Ferranti himself informed the Public Accounts Committee, more than 60 per cent. of the contract had been not only completed, but already delivered.

Will anyone seriously suggest that a firm of this stature, after completing 60 per cent. of the contract, did not know what the outcome was likely to be? I do not think that I was being in any way rash when I suggested to Mr. de Ferranti that if he could not find out for himself, at least he might have used one of his own computers. This firm is supposed to be very up to date. I did not think that its chairman did it any justice—he would never get a job as a public relations officer after this—when he said that, after 60 per cent. of the contract had been completed, he did not know what the outcome was likely to be. I do not believe it and I do not believe that there is one hon. Member here who does.

In the circumstances, I was not prepared to agree that Mr. de Ferranti did not know what the out-turn of his account was likely to be. Indeed, I think that there was something a little worse. Sir Richard Way said that this was a price which had been beaten down by the Ministry by 20 per cent. Members of the Public Accounts Committee will remember that this was not the price asked by Mr. de Ferranti, who had asked for 20 per cent. more. When I asked him he denied it, saying "No, we did not ask for all this."

Apparently Mr. de Ferranti must thave thought it over again, because on page 55 of the Report we have a lot of extra notes about it. After denying that he had been beaten down, he said, in a letter dated 17th March: …it may be that during this process some of the original labour estimates were reduced by 20 per cent. on some limited part of the contract. After his firm denial that he had reduced the price, all I can say is that I leave it to the House to judge whether Mr. de Ferranti had been quite honest with the Committee.

I should like also to deal with the subject of repayment. There was some confusing evidence about this. I suggested to the Permanent Secretary that he ought to ask Ferranti about a repayment. I did so because the Committee unanimously agreed that the profits were excessive. In paragraph 27, the Committee unanimously said, quite clearly, that negotiations should now take place as though they were starting all over again with all the facts known to both sides.

Even Ferranti had been prepared to agree to a 10 per cent. reduction if the Ministry had pressed strongly enough. I was surprised to find that when this was put to Mr. de Ferranti he sought to deny it. This was typical of his evidence. On page 31 of the Report hon. Members will find a note submitted by Mr. de Ferranti in which he said: We did not, in fact, give the hypothetical 10 per cent. reduction referred to in preceding evidence. To describe this as hypothetical is an abuse of the English language.

In reply to Question 926 Mr. de Ferranti said quite clearly and, apparently, in no doubt about it: When we put in our quotation, I remember discussing it with the team at the time, and we realised that they"— that is, the Ministry— had as much information as to the way the costs were going as we had, and we expected them to come back and say: 'Well, it looks to me as though the costs are going all right', and had they come back to us at that stage"— and let hon. Members mark what he says— and I remember the matter very clearly at the time—we thought that it would be reasonable and, if they pressed very very hard, we might reduce the price by 10 per cent.… Even at that time Mr. de Ferranti was prepared to make a cut in the price. There was no ambiguity about it, because he said that he remembered it quite clearly. Apparently, it was clear to him on the first day he came to the Public Accounts Committee, but not quite so clear when he returned. However, I am bound to say that this was typical of many of the answers which Mr. de Ferranti gave to the Committee, and once more I leave it to the House to decide who was right and who wrong.

There were many shortcomings on both sides. Obviously, the Ministry does not escape responsibility for what happened. But we ought to say that the present Permanent Secretary was not the official involved at the time. Perhaps it was one of the mistakes of the Public Accounts Committee that we did not summon before us the Permanent Secretary who came to the original agreement with Ferranti.

It is not very good for the Minister this afternoon to say that Mr. de Ferranti has now agreed to make available to the Lang Committee the books that he denied to a Select Committee of the House of Commons. Why should he? It is rather insulting that he should deny to a Select Committee of the House what he is prepared to give to a "stooge" committee served up by the Minister of Aviation—[Hon. Members: "Oh."] Yes—whose purpose was to try to prevent the Public Accounts Committee from dealing with this issue. It did not.

Why he should now offer books to this Departmental Committee which he refused to a Select Committee is difficult to understand. It means that, even though the books are now produced, there will always be a suspicion that something has happened between when they were asked for and when he is to hand them over.

It is not possible to stop people from drawing that conclusion. This request having been made many times, and having been refused every time, it is not possible to stop people getting that impression. Let us not put the responsibility for this on the taxpayer or on hon. Members on this side of the House. The responsibility lies with Mr. de Ferranti, who had the power to produce the books if he wished to do so.

We have often heard complaints about what will happen if various industries are nationalised. The state of affairs that we are discussing today has arisen under private enterprise. I find this appalling. It is nonsense to talk about loyalty to the country. The Minister said this afternoon that this firm, which was making these tremendous profits out of taxpayers' money, was able to deliver the goods on time. We are often told that we must put the defence of our country first. If my recollection of the salary that I received when I was in the Armed Forces is correct, that is the basis on which they paid us. There was certainly no financial reward for that service.

No longer will hon. Gentlemen opposite be able to make speeches about loyalty, either in the House or in the country. This is an example of the loyalty which this firm has shown to the country, and its actions will certainly not commend the firm to our people. What this firm has done is——

Photo of Mr Ian Orr-Ewing Mr Ian Orr-Ewing , Hendon North

To produce the best computer in the country.

Photo of Mr James Hoy Mr James Hoy , Edinburgh Leith

I do not want to reply to the hon. Gentleman, because I might say something that he will not like.

This firm has shattered the confidence which had grown up over the years between contractors and the Government. It has proved beyond peradventure that we can trust it no longer. The worst feature of the whole affair is it has broken faith with the country. It ought to be ashamed of itself. It will be a long time before confidence is restored and satisfaction is given to the country.

7.2 p.m.

Photo of Sir Albert Costain Sir Albert Costain , Folkestone and Hythe

I welcome the opportunity of following the hon. Member for Edinburgh, Leith (Mr. Hoy), as we are colleagues on the Public Accounts Committee. In that atmosphere of coalition we agree on most things, but it is interesting to see that today the hon. Gentleman is wearing his full party colours.

The hon. Gentleman said that this debate had not been given a great deal of publicity.

Photo of Sir Albert Costain Sir Albert Costain , Folkestone and Hythe

Since I have been a Member of this House, I have attended every debate on the Public Accounts Committee's findings, and I have endeavoured no speak on every occasion, The number of hon. Members present during the debate demonstrates as clearly as anything can that this debate has had a great deal of publicity.

The hon. Member for Cardiff, South-East (Mr. Callaghan) referred to the work of the Public Accounts Committee, and I appreciate what he said. That Committee is sometimes looked on as the lifeboat service of this country. It is accepted as something which is there, and of which we are rather proud, but it does not get much publicity. A lifeboat receives publicity only when there is a dramatic rescue from a liner, or a film-star is rescued from a yacht. Those are the occasions on which people who watch the launching of the lifeboat go on to the cliffs to cheer her efforts. Today, we have not had many people standing on the cliffs and cheering. We have heard many hon. Gentlemen opposite jeering because of the political advantage which they hope to gain out of this debate. That is the issue that we have to consider.

Photo of Mr Arthur Woodburn Mr Arthur Woodburn , Clackmannan and East Stirlingshire

I think that the hon. Gentleman will agree that it was the Minister who introduced a controversial note by referring to nationalisation and sneering at the Labour Party's policy. If the hon. Gentleman wishes to reproach anybody, he should start with his own right hon. Friend.

Photo of Sir Albert Costain Sir Albert Costain , Folkestone and Hythe

We are all the better for a lively debate.

The Opposition have tabled a censure Amendment to the Motion, and hon. Gentlemen opposite have shown their party colours—when in doubt, nationalise. The hon. Member for Leith will remember as well as I do that in its third Report, in 1961, the Public Accounts Committee criticised the cost of converting trucks. It pointed out that this conversion, which was undertaken by a nationalised section of the community, cost £1 million more than a similar operation carried out by private enterprise. The hon. Member for Cardiff, South-East talked about yardsticks. He said that we should nationalise some industries to produce yardsticks. If hon. Gentlemen opposite intend to produce yardsticks of that type of inefficiency, it will cost the public a great deal of money.

Sufficient credit has not been given in this debate to the Comptroller and Auditor General's Department. It has an enormous task before it. The hon. Member for Leith suggested that that Department did not audit certain items. I accept that, but I think we must realise that it has complete control of about 700 different audits. Anybody who realises the extent of Government expenditure on the public sector would be fooling himself if he did not accept that a lot of discrepancies may occur.

I am glad that the discrepancy which we are discussing today has been found out, because, if it had not been, I might have wondered whether the system for discovering discrepancies was wrong. I suspect that almost every accounting officer in every Government Department is saying to himself, "There but for the grace of God go I."

Photo of Mr Cyril Bence Mr Cyril Bence , Dunbartonshire East

That is what the contractors are saying, too.

Photo of Sir Albert Costain Sir Albert Costain , Folkestone and Hythe

I shall come to what the contractors are saying.

Shortly after I joined the Public Accounts Committee, I gave a thumbnail sketch in the House of how I saw the operations of that Committee. I received a number of letters, including many from civil servants, saying that they were glad that I had given the House that picture of the Committee. I made it clear in my speech that one of our greatest problems was to find a yardstick by which to judge efficiency.

Today, we are debating a contract which is connected with an extremely sophisticated weapon. No man can possibly have appreciated its final cost. I do not in any way contend that a mistake has not been made. I do not base any of my arguments on the fact that there has not been a mistake, or that a much greater profit has been made on this contract than we had reason to expect. Why should I? My experience tells me that it is not correct. The Minister himself has referred to the fact. But we must get our vision correct and appreciate the object of the exercise. These weapons have been produced on time, and to the satisfaction of the clients. They have been sold to other countries, who do not depend upon their technical costs officers or accountants, and they have been sold in open competition on world markets. That is some indication of the success of the venture.

Since contracts have been mentioned, I want to give the House an impression of the various forms of contracts. Hon. Members and the public often talk about this and that form of contract, and I occasionally wonder whether they appreciate the various kinds that exist. Let us think of the alternative ways in which a product can be bought. The nearest comparable product that I can think of, although it is much less complex, is the motor car. People buy a motor car when they see the finished product and compare various prices and various performances. They choose, on balance, a dear car or a cheap car, taking into account the cost of maintenance.

At the other end of the spectrum is the case of somebody who wants to buy something, but who honestly does not know what it is. A performance specification is produced. The prospective purchaser will say that he wants a certain throughput from an oil refinery, for example. He says: "There is the crude oil" and gives a specification of the finished product he wants it to produce. That is the nearest example to this problem that I can find from industrial life.

The client does not know what he wants. The contractor cannot price it. The client has not designed it. It is entirely nebulous. A design team is then got together to develop the project. That is the accepted practice, and the purchase goes forward on a cost-plus basis. I have had 30 years' experience in industry, and I dislike cost-plus contracts. They do not provide any incentive for individuals on either side to be more efficient. Nevertheless, in respect of certain items cost-plus contracts are necessary.

The first lesson to be learned from this exercise is that at that time of placing a development the purchasing department has the greatest power over the contractor. It has more freedom of choice in deciding who should do the job. It is at that time that the pattern and type of contract must be considered. Most contractors, naturally, dislike having all sorts of people barging about and disorganising their offices. They can never be certain that the people who are doing the audits and investigations will not at some future time join a competitor. That happens. It is not just that contractors are frightened of disclosing their profits. My industry is only too willing to disclose its profits. An hon. Member opposite criticised an industry for not being prepared to disclose its profits. The building industry is prepared to do so, but I cannot develop that point because I should be ruled out of order.

At the time of the development con, tract the purchasing officer can say, "I have a choice of two, three or four firms. I will give the development contract to the firm which is prepared to go through with me in a tighter partnership." It is fairly obvious why I dislike cost-plus contracts. Under them, the more that is spent the more the profit. People all the way down the line, even down to those who are doing the smallest jobs, ask themselves why they should hurry, because the "guv'nor" has got the job on a cost-plus basis.

That is wrong. People who work on that kind of contract can never get back their competitive spirit, and it is that which this nation must have if it is to make its way in the world. That is why I would restrict cost-plus contracts to that field where the imponderables really are imponderables, and where nobody can assess anything with any degree of certainty.

Coming from the cost-plus contract, the next stage in the spectrum is the target-cost contract. It is basically the same as the cost-plus contract, but has one real difference. The fee is based on an agreed cost. Whatever the contrac- for may spend, his fee will not be larger. If he spends less, he will receive a bigger fee, on a percentage basis. I do not think that any hon. Member would object to that. He receives a larger fee for being more efficient. It is small, but it is enough to be an incentive.

The next kind of contract, which has been adopted largely by industry, is the sharing-of-efficiency contract. That enables both parties to a deal to have a common interest in saving money. That type of contract is used extensively by large and medium-sized industrial organisations who know their onions, as one hon. Member opposite put it. That is a pretty good sort of contract, because if the contractor manages to end up with a saving on his estimated cost he gets half of it and the client gets half.

Next in the spectrum comes the maximum fixed-price contract, with the same sharing of profit or loss clause. This type of contract is used where a client does not have the resources of Her Majesty's Government. A private firm may say, "I have so much to spend on this. It is all that I can spend." We often say, when we want to buy something ourselves, "Look; I can spend this much on this article. I want the best possible article you can give me."

I now turn to the question of Ministerial responsibility. I know that it is the tradition in this House, and it may have to remain so, that ultimately a Minister is responsible for everything that goes on in his Department. That is a fundamental principle of our Parliamentary system. But let us think for a moment of the growth in the size of projects which Ministers now have to deal with. Can we imagine the chairman of I.C.I. attending every committee at which any part of his organisation was being discussed?

One could imagine the sort of letter which the chairman of I.C.I. would send to a public relations officer who said, "One of your shareholders or a client is coming to see you at twelve o'clock at night and he wants a debate with you, so you must come along." What sort of reply would the public relations officer get? Yet we expect that to happen in this House year in and year out. Is not there something wrong with the system where we have these sort of problems and yet they do not occur in industry?

Photo of Mr John Mendelson Mr John Mendelson , Penistone

Before leaving the point about the chairman of I.C.I., may I ask whether the hon. Member is aware that several hon. Members have the opportunity to meet the chairman in a Committee Room? I do not think that had the hon. Member been one of them he would suggest that the chairman of I.C.I. would not know a great deal about a project which involved £20 million.

Photo of Sir Albert Costain Sir Albert Costain , Folkestone and Hythe

Is it necessary that he should?

Hon. Members opposite are the first to criticise when a Minister is not sitting on the Government Front Bench and particularly Scottish Ministers. Hon. Members opposite will say, "Where is the Secretary of State for Scotland? He is not here and I am making a brilliant speech and he is not listening to me." Today, they are saying that the Minister ought to spend more time reorganising his Department. This debate may involve greater things than we appreciate at present. Perhaps, in the future, we shall have two Ministers, a political Minister and a commercial Minister. The policy adopted of dual Ministers in some Departments by the present Government seems to be following that process.

A Minister is rather like the owner of a motor car, if hon. Members can imagine a Ministry as a large motor car. The Minister sits in the back of the car and the accounting officer is his chauffeur. That gives a simple idea of how the policy and administration of a Ministry works. The Minister tells the chauffeur where to go and if the chauffer has an accident, regardless of the circumstances it is the fault of the Minister. That would not work in industry.

I do not intend to detain the House long because, there are other hon. Members who wish to speak. The hon. Member for Dudley (Mr. Wigg) is on the benches opposite, with his usual bunch of papers. I am most interested in what he will have to say. We all admire his speeches on such occasions as these. I think I am correct in saying that the hon. Member is a director of Tote Investments. The principle of Tote Investments is that there should be a large turnover. It takes a small profit, but is so organised that it never makes a loss. The punters make the losses, and sometimes they make large profits.

Photo of Mr George Wigg Mr George Wigg , Dudley

One difference between me and the hon. Member is that I was asked by the Government to serve and that I get neither salary nor expenses.

Photo of Sir Albert Costain Sir Albert Costain , Folkestone and Hythe

I am quite sure that the hon. Member for Dudley is doing a very good job, and I am not suggesting that he is a bloated capitalist because he is doing it.

My point is that when Tote Investors is running on a marginal profit it does it very well. It can expect its punters to make profits and losses. When the punter makes a really good profit, that is advertised, because it helps business. That is all right. But if a contractor makes a big profit, to overcome a loss, that is all wrong.

7.24 p.m.

Photo of Mr George Wigg Mr George Wigg , Dudley

The hon. Member for Folkestone and Hythe (Mr. Costain) would have clone far better to stick to contractual obligations, because I have no doubt—although I did not understand it—that he knew what he was talking about. But when it comes to racing he has to be a little more careful. There is a curious analogy between what has happened over Ferranti's and what some punters would like to happen. Like Ferranti's, if they win they take the profits. But if Ferranti's lose, the Government pay the bills. It is a formula which has the approval of the hon. Gentlemen opposite. It means to say that Ferranti's can always collect and the taxpayer can always pay.

Photo of Sir Henry Studholme Sir Henry Studholme , Tavistock

Surely, if Ferranti's lose, it—and not the Government—pays the bill.

Photo of Mr George Wigg Mr George Wigg , Dudley

If the hon. Gentleman will contain himself for a little while, I will demonstrate to him how impossible that is.

Before I start let me deal with a point which staggers me. Hon. Gentlemen opposite have consistently talked as if Ferranti's produced Bloodhound, but Ferranti's did not do that. Bloodhound was produced by the British Aircraft Corporation. Ferranti's produced the guidance and control system and the launch control posts. Presumably at an early stage the Government Department concerned asked Ferranti's to take part in a design study. But hon. Gentlemen opposite talk as if Ferranti's did this that and the other, and it is so much nonsense.

This is Shakespeare's quater-centenary, so may I pay lip-service to the blessed memory with a quotation The fault, dear Brutus, is not in our stars, But in ourselves.… We cannot put the blame on some obscure Ministry official for what has gone wrong here. It cannot be exclusively the blame of Ferranti's, which is a capitalist firm working in a capitalist market. As the right hon. Member for Wolverhampton, South-West (Mr. Powell) has so ably told us, one of the principles of firms operating in the capitalist market in peace or war is, "Profit, profit, profit—and to hell with public service". Why should we be surprised about it?

One of the things which fascinates me is to compare what happened about Ferranti's with what happened in the United States where there has been an exactly parallel case before a Congressional Committee. A report was made as recently as 9th March 1964. It refers to a firm called Tyco which was hauled before the Committee. The chairman of the Committee did not say, as was said here, "Please, Mr. Ferranti, we want to ask you some questions", and Mr. Ferranti replied, "I do not want to answer them"—the Senate Committee ordered. I am prepared to give the Minister a loan of the report of the proceedings. Every question about valuation, taxation, employees, representatives and pay was answered.

This seems the only possible way in which the House of Commons can effectively exercise its control. For we cannot have it both ways. In the United States they believe in putting in the serpent of competition. This was what all the row was about in the Tyco case. They wanted four firms to compete against each other. Then if the selected firm delivered the goods, well and good. If the firm went broke, that was that.

What Mr. de Ferranti wants is a monopoly position, to be able to make what profit he can from his monopoly position and then to be recouped if he should make a loss. This will not work. We must have either one system or the other.

Here let me say something which I have no doubt will be repeated on many platforms in the country. The charge has been made that my hon. Friends may want to nationalise the aircraft industry. Let me say again what I have said before. So far as I am concerned hon. Gentlemen opposite could go on their knees and put their hands together and plead to Heaven to be nationalised. I would not nationalised the aircraft or indeed any defence industry. I would investigate, and I should like hon. Gentlemen opposite to know that I would investigate retrospectively. I want to know what has happened in the defence industry. I ask my hon. Friends to consider this Ferranti case against the background of defence and to see what the aircraft industry has had in the last 15 years; or see what we have spent on defence in the last 20 years. I have repeated the figures before, but they roll off, like water off a duck's back. Altogether £20,000 million has been paid since 1951 out at the behest of the Conservative Administration on defence.

Let us start with the poor old Army. Its rifle is Belgian. Its field gun is Italian. Its anti-aircraft system is Swedish. Its medium gun is American. So we can go on, weapon after weapon. Where has the money gone? Then we come to the aircraft industry—and I have given the figures, and again they are obtained by the research department of the House and have been confirmed by the Ministry of Aviation—no less than £5,200 million has gone into the aviation industry in the last 15 years, £3,700 million on Government account. And what have we got for it?

Even Bloodhound I is not all that good. There is some little doubt about its ceiling. Bloodhound II is more sophisticated, has a little more height and can operate at a lower range. But Bloodhound III was cancelled. Yet we are told that Ferranti took a risk. When Bloodhound III was cancelled the Minister of Aviation told us what the cost was. It was £600,000. But it did not cost Ferranti a penny. If Bloodbound II had been cancelled, would it have cost Ferranti a penny? Of course not. When Blue Streak was cancelled, what happened? The Government put their hands in their pockets and forked out. The idea that there was any special risk arising out of the cancellation is a subject for Conservative meetings and children, the only difference being that the children are innocent.

I am not exclusively concerned with the past. I am concerned with the present and more with the future. What I have tried to do—not only on this occasion but on any other occasion—is to take the attitude that if one criticises one should make a suggestion as to how things could be done better. I believe that whether it likes it or not, the House of Commons has to come some way towards the American system. We have to find a Mr. Charles Hitch who will drill Government Departments or Conservative Parties into the meaning of cost effectiveness. I wonder how many hon. Members opposite have read the book written by him on the economics of defence in a nuclear age. Very few. I suggest that even few civil servants have done it either. Yet Mr. Hitch has part of the answer. I do not know whether it is all the answer of what we ought to do.

I have put this matter on the Order Paper again and again, without support—and I do not complain about that. But I argue that we ought to have a Defence Committee with more powers than the Estimates Committee has, perhaps something akin to the Public Accounts Committee, to look at the Estimates as a whole, with the power to take evidence on oath and to send for papers and persons and to ascertain the facts. I t should do that not only in the service of the House of Commons but in the service of the Ministries concerned.

Short of that, I do not know what the answer could be, because if we look at the Service Estimates we see that we are told less and less. What happens when we read the Report of the Public Accounts Committee? I pay my tribute to those who served on it, although I believe that some of the hon. Members on it play with a soft ball. If anyone wants to see underhand, easy deliveries they should look at the questions asked by the Chairman of the Estimates Committee of Mr. de Ferranti. If ever I were in the dock I hope that he would be prosecuting council.

Photo of Sir Godfrey Nicholson Sir Godfrey Nicholson , Farnham

If the hon. Member were in the dock I should have a soft place in my heart for him because he is always willing to admit interruptions to his speech. I am grateful to him. But he has twice misunderstood the function of the Public Accounts Committee. That function is to elicit facts. When I am Chairman of the Estimates Committee and an outside witness comes in, the first thing I ask is, "Would you like me to start by asking questions or is there anything which you would like to say to the Committee as a start?" This is not only fair to outside witnesses but extremely helpful to the Committee. The answer which I elicited by what the hon. Member calls my underhand question—a perfectly simple question—was very valuable to the Committee in the first lot of information.

Photo of Mr George Wigg Mr George Wigg , Dudley

I withdraw the use of the word "underhand" as having anything like the meaning which the hon. Member suggested. What I meant was that he played a soft ball so as to make sure that Mr. Sebastian always scored a boundary.

Photo of Sir Godfrey Nicholson Sir Godfrey Nicholson , Farnham

If the hon. Member registers Mr. de Ferranti's answer as a boundary he must be very short-sighted.

Photo of Mr George Wigg Mr George Wigg , Dudley

Not only was it a boundary but he hit the ball out of the ground. That is the impression which it conveyed to me, and that is what Mr. Sebastian Ferranti succeeded in doing.

I do not want to speak for too long, but there is another aspect with which I want to deal. I am a lover of Sherlock Holmes, and Sherlock Holmes's most famous case—and I am sure that the hon. Member for Folkestone and Hythe will not be surprised—is concerned with racing. It is the case of Silver Blaze, and the clue was the dog which did not bark. The Ferranti case had been before the House in various forms on a number of occasions, and if ever there were a case which demanded a personal statement by an hon. Member it was this case, which required a personal statement from the hon. Member for More-cambe and Lonsdale (Mr. de Ferranti), because he was a director of Ferranti. I thought that he owed an explanation to the House.

I thought that in fairness to him I should give him notice that I intended to refer to him, and I wrote to him the other day to say so. But the only time which I can trace on which he broke his silence was on 17th April when, as reported in the Guardian, he said that the missile contract was at a high risk. This was a good publicity point, and publicity in this Ferranti business has been a fairly extensive operation. I am not sure what happened last night. How can I be sure? It may well be that the Conservative Committee asked Mr. de Ferranti to come and meet them. On the other hand, it may well be that in view of his powerful position inside the Conservative Party he sent for the Committee. I would not know. Anyway, they met.

There is no doubt that Mr. de Ferranti has been active. Unfortunately, I have been abroad and I had to move rather quickly when I got back to keep pace with the news. I have a copy of his hand-out, but what fascinates me is not the hand-out which was prepared for circulation in this country but one which was circulated in the United States. This is quite fun. It is an agency report printed in the United States: The 36-year-old Mr. Ferranti smiled". He must have been thinking about the £4½ million. He was asked how he accumulated such a large margin and whether there had been some exciting new technological breakthrough. 'Yes, of course,' he said. 'We set up a special department staffed by some of our best scientists and technicians, and this concentration of effort was one major factor in our success with Bloodhound. But another factor involved the development of a new computer control process.' He did not elaborate beyond saying that the company today is selling the new computer, known as the Argus, in this country and abroad". This is quite fun.

But the hon. Member for Folkestone and Hythe asked a question of Sir Richard Way—No. 713: It would help me considerably if I could get a picture of what Ferranti's operation consists of in the widest terms. Are they manufacturers, or what do they do? The answer was: What they did in this case was to develop and produce the guidance and control system for this particular missile and the launch control posts from which the missiles are controlled on the ground. They also do a great deal of work for us on radar, and generally until recently they did a great deal of work on computers, but they have now got rid of that. That is a bit hard, because my information is that Ferranti's is still producing computers although under a different name. I think that the hon. Member for Morecambe and Lonsdale is now chairman of I.C.T., which deals with the computers. My information is that as recently as last week negotiations were being opened with a view to the supply of computers to the Admiralty. But he will know more about that than I do. How he or his brother can possibly say that the profit was made on this weapon because of its high risk is utterly and completely beyond me. Perhaps the House may be favoured later in the evening—if he catches your eye Mr. Speaker—with an explanation of just what was the high risk, remembering that the design study was paid for by the public, the development was paid for by the public and, as far as Bloodhound I was concerned, there was £4½ million profit. That may well have covered Bloodhound II. Bloodhound III was cancelled, and that was paid for out of public funds. What the risk has been for Ferranti's is beyond my comprehension.

Again I ask what the amount is. The Minister of Aviation is not present now, but he knows that I have a considerable admiration for the slickness of his observations and the ease with which he tries to get away with it. I asked when the Ferranti business started—as I have a passion for facts—what Ferranti contracts had been concluded. If I may say so in parenthesis, the House of Commons is wasting its time tonight because we are asking about facts which are possible of ascertainment and if the House had the will to copy the American model we could get at the facts. When dealing with such vast sums, it is our duty, not only to ourselves but to our constituents, to ascertain the facts.

Photo of Mr David Renton Mr David Renton , Huntingdonshire

Has the hon. Member's passion for facts led him to find that there is no family in this country which has done more to advance the technical progress in electrical manufacturing and electronics than the Ferranti family has done now for three generations? Will he therefore weigh his words very carefully before making imputations?

Photo of Mr George Wigg Mr George Wigg , Dudley

If I have to prolong my speech by only a little I will do so because, of course, I ascertained my facts. I have ascertained them so well that I need not have given way to the hon. and learned Member to make such an obvious party point. Of course the Ferranti grandfather was an electrical genius, but he has been succeeded by people who are not engineering but financial geniuses. This is what happened from one generation to the other. The old boy knew his stuff and they are celebrating. Good luck to them. The grandsons have come and they are all multi-millionaires. This firm was in fact "broke" before the war. It was saved, not by the gong, but by the war. It was nearly "broke" a second time and while others went out and served they stayed behind—[Interruption.] If hon. Members opposite wish to make obvious party points I shall reply roughly to them.

Photo of Mr Basil De Ferranti Mr Basil De Ferranti , Morecambe and Lonsdale

The hon. Member might at least allow me to reply that my father went out and fought in the 1939–45 war while we were too young to do so, although we would have gladly fought.

Hon. Members:


Photo of Mr George Wigg Mr George Wigg , Dudley

What have I to withdraw? If hon. Members want me to do so, I shall read the details.

Photo of Mr George Wigg Mr George Wigg , Dudley

Hon. Members opposite interrupt me and ask me if I am aware of the history of the Ferranti family. I say "Yes", and I pay tribute to the Ferranti grandfather. If some members of the family, including the hon. Member for Morecambe and Lonsdale (Mr. de Ferranti), feel that I have said anything wounding about them, I withdraw it, but someone stayed behind and ran the Ferranti firm which was "going bust" in or about 1938 and now they are millionaires. Does anyone deny this? Does anyone deny that before the war the firm was making only a trickle of profit and now they are millionaires?

I am glad of the opportunity to make the point. The Ferranti family own all the ordinary stock. If the hon. Member is right in saying that there was this enormous risk and they had a reward for taking the risk, they need not have taken it. They could have shared the risk. Plenty of speculators on the Stock Exchange would have taken it off their hands.

Photo of Mr Basil De Ferranti Mr Basil De Ferranti , Morecambe and Lonsdale

I must interrupt the hon. Member again. If my grandfather was so brilliant and made all this money, how does it happen that before the war we were "bust" and afterwards we were millionaires?

Photo of Mr George Wigg Mr George Wigg , Dudley

The hon. Member does not do himself credit. He should not be carried away by his supporters. His grandfather was an electrical genius but capitalist societies do not reward men who are geniuses, they reward men who can manipulate finances. This is precisely what has happened. These are the facts. In 1938 the firm made only a trickle of profit. We were told by Mr. Sebastian de Ferranti that the firm was broke once and nearly broke a second time. Now the firm has prospered so much that all the ordinary stock is owned by the Ferranti family and the risk is so great that they refuse to share it with anyone else.

All I am rebutting is the argument that the family were not taking very much risk. If I have wronged any member of the family who served in the firm and fought in the Forces, I genuinely apologise. All I am saying is that, as a result of the need for electronics and such devices, in accordance with capitalist tradition and philosophy expounded by Mr. de Ferranti, the firm is taking advantage of the market.

I come to the real thing that worries me, Ferranti's current operations. In the debate on the Navy Estimates I gave notice that I would ask some questions——

Photo of Sir Harmar Nicholls Sir Harmar Nicholls , Peterborough

Before he went into rather unpleasant personalities, the hon. Member for Dudley (Mr. Wigg) made the point that it would be better if we had committees based on the American model which could make people answer questions. Would he concede now that he prepared that particular point before the speech made by my right hon. Friend the Minister? It would be a good thing if he now acknowledged that the head of this firm has apparently agreed, so we are told, to show its books. I think that acknowledgment should be recognised; otherwise the hon. Member's speech is not up to date.

Photo of Mr George Wigg Mr George Wigg , Dudley

I was just coming to that point. This is the folly of giving way. When I was interrupted by the hon. Member on a purely party point, I was making the point that the Minister of Aviation, when I asked him questions about the total cost of the Bloodhound as recently as 7th April, said that it was not in the public interest to give the information. I asked each of the Service Departments to give particulars of the Ferranti contracts, for I wanted to establish the facts. The right hon. Gentleman refused to reply and only today in the course of this debate—this is a typical trick—in order to cancel the effect of the Amendment moved by my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan), he says that the firm has agreed to do this.

We should read his words. The firm is to show its books only in connection with the production side of Bloodhound I. If the hon. Member agrees to look at the proceedings before the Congressional Committee he will see that that body had all the information. There should be a Select Committee of this House, not the Lang Committee, which should have all the information it wants, not the information which Mr. Ferranti is prepared to supply.

If this were a genuine conversion, why was the House not told before? The right hon. Member could have made a statement at the end of Questions today or yesterday, or he could have made a statement to the Press. This statement is brought out as a kind of tour de force to cancel the Amendment moved by my hon. Friend. I welcome it and am prepared to suspend judgment on what I now have to say about H.M.S. "Eagle". I speak with my tongue in my cheek, although I hasten to add that I know a great deal more about it than when I started on this subject. I had an Answer from the Admiralty that the contracts with Ferranti's amounted to £7 million. That concerned the supply of A.D.A. and Ferranti was not doing this on its own but in association with others.

We have been told a great deal about the punctuality of the firm. I remind hon. Members that it cost £31 million for the modernisation of the "Eagle", but again let me say that only part of that has gone to the firm of Ferranti and its associated firms. My information is that a considerable amount of the A.D.A. equipment—when the right hon. Gentleman replies, perhaps he will tell the House what proportion—supplied by Ferranti's was supplied so late that it could not be evaluated and it has been installed in the fire control compartment of the "Eagle" with a yellow X on it, which means that the equipment is regarded as sub-standard.

This equipment was supplied on the understanding that it could not operate effectively at a temperature above 60 deg. Centigrade. My information is that in trials in the Channel the temperature in the control compartment has repeatedly risen far above 60 deg. I am also told that, through a fault in design, a memory storage was missing and had to be fitted afterwards, and the bulkhead was cut, with the result that the air conditioning could not operate when the plate which covers the new installation is in fact removed.

That is not all. What interests me here is the cost. I have got particulars of the amounts which were estimated for the development, for the production, and, indeed, for the preparation of the instruction manuals. My figures go only to the end of 1963—that is to say, the completed figures are not there. In each of the three cases the amount expended under this head is nearly 100 per cent. more than the original sum estimated.

I am being deliberately vague. I am quite prepared to give the right hon. Gentleman the contract numbers. I am quite prepared to give him a great deal more detailed information. What I say is that there is as great need for an inquiry into the expenditure on the modernisation of H.M.S. "Eagle" as there ever was in the case of the Bloodhound. This is one of the reasons why the words I use are guarded. There are security considerations involved in this, but there are questions here which far transcend any question of political controversy. They concern vital questions in relation to the defences of this country. I am not satisfied that either Ferranti's or the companies associated with the firm have delivered on time. In fact, I know for certain that this equipment, which was promised 18 months or two years ago, to A.S.W.E.—that is, the Admiralty Surface Weapons Establishment—was delivered so late that a great deal of the evaluation has never taken place even down to this day.

In the debate on the Navy Estimates I tried to get some replies from the Government, in the same way as I tried from the start of the Bloodhound controversies to get rational statements from the Government. We failed. When the Government say that they will not give answers for reasons of public security, they mean that they will not give answers because it impinges upon their political convenience. I respond at once and with alacrity to any plea that anything I say might be damaging from the public point of view, but I repudiate any suggestion that I shall discharge my duty as a Member of the House of Commons by keeping my mouth shut, however, inconvenient it may be to either side of the House, when in fact the reason for asking me to keep quiet is the political convenience of any other Member of the House. There is a clear-cut duty here.

Photo of Mr George Wigg Mr George Wigg , Dudley

Let me finish. I hold the view that what has gone wrong over Bloodhound and Ferranti, although it has cost £4½ million, will have been money well spent if the House will wake up to the absolute necessity of finding some method of control, some method of assisting Ministers to effect control, because we have had it from the right hon. Gentleman that he knew nothing about the Ferranti case until the Comptroller General told him. Therefore, this is in the interests of the Ministers concerned. My right hon. Friends should realise that in a few weeks or a few months Labour Ministers may be in charge. They, in their turn, will need help to ascertain the expenditure over this vast complicated field in which no man, however clever he may be, however devoted he may be, can possibly know all the facts.

I have proposed before—I do so again—that the House should seriously look at what happens in the United States. We should look at their successes and their failures and perhaps consciously and deliberately forgo some of the democratic——

Photo of Mr Basil De Ferranti Mr Basil De Ferranti , Morecambe and Lonsdale

On a matter of fact, the hon. Gentleman is quite incorrect in suggesting that we were seriously late in the delivery of the computing equipment for H.M.S. "Eagle". I suggest the hon. Gentleman checks up on his sources.

Photo of Mr George Wigg Mr George Wigg , Dudley

I have checked. I am willing to reveal my sources of information to the Minister. The Minister can ascertain the facts. He can then make a statement to the House, or I will go to the Minister. I assert—I have checked this with great care—that there was a substantial delay, a delay of such a period that this equipment was not in fact tested. That is a question of fact.

I beg all hon. Members, whatever political excitement this debate may have engendered, to remember that the serious and fundamental problem of controlling £2,000 million a year still remains with us. When my right hon. and hon. Friends form a Government, nothing they can do to ascertain the facts or try to put things right can be effective until some years have passed. Therefore, it is in the interests of every single Member of the House, every man, woman and child in these islands, that there should be a non-political approach, whilst retaining our democratic procedures. In ascertaining the facts, in pointing out what it is all about, in doing it, if necessary, behind closed doors, we should be as objective as we can be. It should be an all-party approach to find out what goes wrong, not so as to make political capital out of it, but to get things right, so that we can at least assure our constituents that they are getting value for the money which is being voted.

7.57 p.m.

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

I go a long way with some of the remarks made by the hon. Member for Dudley (Mr. Wigg) tonight. He has made a very serious allegation, which he says is based on good information, about the late delivery of equipment to H.M.S. "Eagle". Every means should be taken by my right hon. Friend tonight either to deny it or to set up some form of inquiry, otherwise the public are not in a position to know where they stand on this matter. In fairness to the firm, the public should be told.

The hon. Member said early in his speech that if the contract had been cancelled it would not have cost the firm a penny. He is probably right. It does not cost a firm cash at the day a contract stops, but it leaves the firm with several thousand men on its hands without any work. That is very big money and, what is more important, the livelihood and welfare of those employed in the plant are jeopardised.

I was disappointed to hear the reference made by the hon. Member for Gloucester (My. Diamond) to my hon. Friend the Member for Morecambe and Lonsdale (Mr. de Ferranti). My hon. Friend is quite capable of defending himself. I can see the position he is in. Unfortunately the hon. Gentleman tied up my hon. Friend's appointment to and resignation from the Ministry of Aviation with the Report. The hon. Gentleman was a year out in his reckoning. It is important to be clear that my hon. Friends' appointment took place in July, 1962. As I understood it—he was then a constituent of mine—he had trouble in arranging his affairs to dispossess himself of his family interest in the trust. That could not be done, and he resigned, I think in September. So he was in office three months and, as I understand it, had very little to do with this side of the business.

Perhaps my right hon. Friend will make a reference to this in winding up, because it is important, when the honour of a Member is concerned, that it should be stated quite clearly what the exact position is and if my hon. Friend did or did not come in contact with this contract.

I also understand that the figure of £4 million which has been mentioned contains a good proportion of ordinary shares, on which tax has been paid. Even with preference shares tax is paid at 7s. 9d. in the £. As with any firm making a scrip issue, benefit is gained only after tax has been paid in the ordinary way. I mention this in an endeavour to persuade hon. Members to check their facts before making statements.

Reference has been made to the Concord, although I do not believe that anyone wishes to score any points on this issue. We know that the French contribution is nationalised while the British is not. Nevertheless, it is working extremely well, so much so that President Johnson a few days ago had to postpone for a year the decision he hopes to make to compete with the Concord.

Although there has been some criticism, having studied the project in detail I am full of optimism and believe that the people concerned in both countries are approaching it in the right way. I am equally optimistic that the Mach 2 speed of the aircraft is correct. The Americans will find it difficult to catch up, if they are ever able to do so. While one has a great deal of admiration for the French technical ability and confi- dence in some of their projects, I am told that the Caravelle, for example, has still not made a profit, although a large number of that aircraft has been sold.

Today's debate is one of the most important from the nation's point of view. As my right hon. Friend said, there is no doubt that weapons have become extremely complex and continue to grow more complicated year by year. It is almost impossible to budget or estimate for a new piece of research and development, and the advances in technology have been greater than the machinery for controlling them. Time and again the costs exceed the original estimates owing to changes in technology which, in turn, lead to changes in specifications, resulting in modifications; and this goes on all the time.

Hon. Members are aware that until about seven or eight years ago I was a non-executive director of an aircraft company. I have declared my interest in the past, although I must admit that I have been much better in health since I have been out of the business. It is a worrying industry and that goes for the aircraft industry and everything connected with it. My experience was that the cost-plus system was an expensive one. The system we use today has been brought up over the years, so to speak, and has had nearly 50 years of use. I will try today to elaborate on how I think it can be improved because my concern is to try to improve the system on which we place and build up our contracts.

It is on this issue that I go some of the way with the hon. Member for Dudley. Hon. Members are frequently inhibited in defence debates. The hon. Member for Dudley must seek his information throughout the country and we must all scrummage for what information we can gather. Some hon. Members are well-informed while others are not. This is not the right way for Parliament to approach this important matter and, like the hon. Member for Dudley, I would like to see an all-party committee set up to consider this whole question and see how best hon. Members can approach this topic.

By suggesting this I do not mean that the committee should be comprised solely of Privy Councillors. So often when a special job must be done the Privy Councillors are given the task, possibly because of the provisions of the Official Secrets Act. It is often thought that they are the best people to do the job. In this case I would like to see the committee arranged in such a way that all hon. Members could take part in its deliberations.

As I see it, Ferranti's had an entirely separate division to deal with the Bloodhound. When most firms conduct projects like this they have a civil aircraft in one hangar and a military one in another. The drawing offices are usually mixed up and the tool shop does both jobs. In such circumstances it is difficult to separate the work and cost it. If Ferranti's did have a separate division for this work the firm must, with the aid of its computers, have had excellent knowledge, almost daily knowledge, of how the job was progressing. I imagine that that must have been so. It should not have been difficult for Government officials to see this information when it was before them in the first place. That information must have simplified the task of the Ministry.

When the chairman of the company was asked for the records of the contract he refused, apparently on the principle of the thing, to give them. Presumably he was advised not to give them. With great respect, I think he was wrong. As an industrialist I have always thought that the customer is right and that if one wants future business one should try to enhance one's reputation for delivery and fair arrangements.

We have now been told that the books will be opened. I hope that this will not be done in respect of, say, only the Bloodhound but that the books of the whole lot will be shown. When this information is given I suggest to Ferranti's that it should make all the information available, without reservation.

I understand that the average profit on Government contracts made by Ferranti's in the last 10 to 12 years was 10 per cent., although at least one hon. Member opposite has disagreed with that percentage. I hope that the Lang investigation will verify that figure, particularly since I understand that it includes Bloodhound. These facts should be known to all concerned; that the profit has been 10 per cent., with the overall percentage being 8½ per cent. and——

Photo of Mr Reginald Paget Mr Reginald Paget , Northampton

But 10 per cent. of what?

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

The gross profit on Government contracts.

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

Yes, which I would not consider as excessive. The company's dividends have been moderate, although I appreciate that various suggestions have been made to the effect that they have been moderate deliberately.

Photo of Mr James Callaghan Mr James Callaghan Shadow Chancellor of the Exchequer, Member, Labour Party National Executive Committee

Is the hon. Gentleman not aware that the payment of a steady 6 per cent. is a complete subterfuge, to avoid the payment of tax? I appreciate that he is trying to be fair, but I hope he will appreciate that he is on a very false point here.

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

The hon. Gentleman is entitled to his views and I am entitled to mine. He has, no doubt, studied the balance sheets and, perhaps, has taken advice. I have done the same and I believe that the dividends have been moderate, certainly not excessive. I appreciate that sometimes there may be other motives for firms to pay moderate dividends, but in this case I believe that a great deal of the profits have been ploughed back into the business. This is an important point. The progress made by this firm is due to the fact that money has been ploughed back. The firm has not been milked of its resources like many other companies about which one bears—firms being left high and dry when they run into trouble.

This firm is of the highest technical repute. Its deliveries in respect of the Bloodhound and other equipment—although this has been questioned by some hon. Members opposite—have, I believe, been excellent and it has been one of the few companies in Britain which have kept to their delivery dates. If we must be defended properly and if value is to be obtained for the taxpayers' money, deliveries must be made on time because in many cases if they are delayed the equipment frequently becomes useless.

Hon. Members opposite may like to be made aware of some other facts, because I am told—I was told this not at last night's party meeting but elsewhere—[HON. MEMBERS: "Oh."] I do not know why hon. Members opposite should make sounds of surprise, since they had every opportunity of approaching, Mr. de Ferranti and, if they wished, of asking him to attend a Labour meeting. [Laughter.] Hon. Members opposite can laugh, but it is well known that both parties frequently seek the advice of chairmen of the nationalised industries and ask them and other officials to speak at meetings. It is a good thing that this is done.

Photo of Mr George Wigg Mr George Wigg , Dudley

The hon. Member for Macclesfield (Sir A. V. Harvey) has been in the House for 20 years. Does he really think it proper for hon. Members to ask a witness before the Select Committee to meet them to discuss evidence given to that Committee, even before its Report is published? Was it not grossly improper that that should have been done? My hon. Friends and I are not making a song and dance about that and I intervene to point out that we do not play it that way.

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

The Report of the Public Accounts Committee is known and there has been a debate today. I saw no reason why hon. Members should not try to inform themselves of the facts, not just by listening to stories but by asking pertinent questions. That is our job. We must seek our information wherever we can. To that extent I support the remarks of the hon. Member for Dudley about the difficulty of getting information.

I was going to mention certain facts made known to me. I am told that on the private venture of the Orion computer the firm lost about £2 million. That was a private, not a Government, venture and I understand that the same officers who dealt with the costing of that equipment were engaged on the costing of the Bloodhound.

What makes me unhappy is that when the production price was agreed, two-thirds of the contract had been completed. My experience in industry is that, once one gets as far as that with a contract, unless there are such radical changes in the specification that one has practically to rebuild one knows fairly well how things are going. Why did the Government representatives get in so late?

Legally, Ferranti's is in the clear, although, with great respect, I believe the firm to be morally wrong in this matter. I should have dealt with the position rather differently. At the same time, a profit of 7 per cent. is very small compared with what other countries and other Departments allow. Where there is risk, 7 per cent. is too low. In such a case the margin should be nearer 12 per cent. or 15 per cent. That is more equitable, and provides a cushion in case of cancellation, which frequently takes place, or of a change in design——

Photo of Sir Douglas Glover Sir Douglas Glover , Ormskirk

Perhaps I might add that what strengthens the case that 7 per cent. is not high enough for the risk is that when the product is exported the Government take, as it were, 10 per cent. commission.

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

I intended to deal with that point. It is well known that when the Government finance a development contract they have a right to a return. In the case of the Viscount, which was a success, the Government collected quite a lot of money. Of course, there have been many ventures in which the Government have not collected. Here, however, it is clear that Ferranti's, being an energetic firm, went out into the world——

Photo of Mr George Wigg Mr George Wigg , Dudley

Ferranti's did not go out into the world; it was the British Aircraft Corporation which sold this equipment.

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

The hon. Gentleman is entitled to his view, but I believe that Ferranti's materially assisted in getting the Swiss, Australian and other orders. To sell £40 million worth of equipment against the strongest competition from America is a great achievement, and one of the few of its kind we have seen in the post-war years. The Government collected £4 million from it. I do not use that as an argument the other way, because it merely cancels what many of us think was an excess profits. Nevertheless, the contractors are not all the bad boys they have been made out to be——

Photo of Mr Arthur Woodburn Mr Arthur Woodburn , Clackmannan and East Stirlingshire

The hon. Member for Macclesfield (Sir A. V. Harvey) speaks so convincingly that he almost makes us feel sorry for Ferranti's. I had a great deal to do with contracts of this kind—with Vickers and de Havillands on the Brabazon, and so on—and as far as I know, when I was there the companies concerned did everything to play fair with the Government. The fact that today they are not in a state of ruin, in spite of the ups and downs of the industry—some going from nothing to millions—shows that, on the whole, they did pretty well out of the work. I agree with the hon. Gentleman in saying that a company should play fair with the Government when getting public money.

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

I do not disagree with the right hon. Gentleman, I certainly am not defending Ferranti here; I think that in my remarks I am allocating a fair proportion of blame to the firm.

There is no doubt that some years ago the technical costing officers at the Ministry were equal to those employed in industry. The equipment, aircraft, radar, and so on were not so sophisticated, and these officers were able to keep pace with development and argue prices on technical merit on an equal basis with the technical people in industry. But such remarkable progress has been made in the last 20 years that it is not the fault of the Ministry's officials if they do not compare with the people in industry. The people in industry have been the inventors, and have lived with the job since its inception. The Ministry's officers visit a factory for a week or two, and then have to go on, and are really handicapped in carrying out their duties.

Successive Governments should have realised that, and my right hon. Friend should have got in some outside help. It is well known that I.C.I., Shell, Rolls-Royce and other companies have all employed top consultants in recent years to help out with their organisation, and I think that my right hon. Friend and Ministers in previous Governments should have gone to outside consultants and accountants. My right hon Friend should have hired teams of highly-skilled cost accountants, with great experience in this type of work. He should have put six of them into Ferranti's, and said, "You will only have the contract if you accept these men." After all, a number of purely technical Ministry men are resident in many places, and I do not see why we should not have resident costing officers and accountants. We might have spent £¼ million in wages and salaries but it would have paid handsomely, the Government would have been better informed, and everyone would have been happier. These civil servants are first-class men of integrity, and it is not their fault that they have not been able to keep pace with developments.

In future, and whether the party opposite likes it or not, we have to give incentives. If we are to get the right delivery at the right price, firms must be given something to work for. Something has been said about doing things on a share basis. I do not know about that, but a firm must be given an incentive for quick delivery, with a penalty on late delivery—it must cut both ways. Incentives are good for everybody.

The hon. Member for Cardiff, South-East (Mr. Callaghan) referred to the salary of the top men dealing with contracts in the Ministry. I understand that the Director of Contracts gets just over £4,000 a year, but I wonder what his juniors get who do this important work on contracts down at the third and fourth levels. I am sure that they are underpaid. I can give an analogy. I believe that the manager of the London Airport gets about £4,000 a year, but there are 26,000 people employed on the site. The head man at Idlewild gets the equivalent, taking in things like the cost of living, of £15,000 or £20,000 a year. Is it surprising that London Airport is not the show piece for Britain, when we pay these miserable salaries?

I know that it is difficult to recruit civilians into these jobs, but we must hire people from civil life to help out——

Photo of Mr Tam Dalyell Mr Tam Dalyell , West Lothian

Is the hon. Member aware that a number of members of the Public Accounts Committee would entirely agree with him on that point?

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

I am glad to hear it, because we have to do something about it.

The other disturbing feature is that good men are constantly leaving Government service, and one can understand why. We heard the other day that Mr. Havilland, a very senior officer at the Ministry of Aviation, has gone into industry. Others have done the same. Perhaps it is good that men of their experience should go into industry, but it is not turning out to be a two-way traffic. We either have to keep men in the Government Departments or hire men to do the job.

We are not the only country in this difficulty. Not very long ago, an aircraft company in the United States, employing 16,000 men, had 800 Government officials in the plant. One can imagine the chaos there would be here with 800 civil servants checking various things and delaying the work of the various departments. One can also imagine the cost to the country. Such a system is not ideal, and it is certainly very costly. A survey of 12 N.A.T.O. projects in the United States showed that the final cost exceeded the estimates by 3·2 times—in one case it was by seven times. Only two of the 12 projects were completed within the scheduled time, and both were cancelled on delivery as being obsolete. They certainly have their problems in the United States.

Another point is that too much Government interference puts up the cost and brings about delay. I have seen it with aircraft where modifications go on month after month and year after year. Somebody must be big enough in the Ministry to advise the Minister in charge that at a given time modifications must cease and equipment must go out to production if it is to work at all and to be used. I am not at all convinced by the argument of the Hawker Siddeley loss. It helps the taxpayers. They have Argosy aircraft, fine aeroplanes which will do a good job of work. The taxpayers will save £6 million, but I want to see good housekeeping between Government and contractors.

Photo of Mr Cyril Bence Mr Cyril Bence , Dunbartonshire East

I would not like the impression to go out of the House that in all cases in engineering and in the aircraft industry where there are Government officials, like the A.I.D., almost in permanent residence that they are always an interfering body who frustrate production. They have been most helpful with the modification and development of projects.

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

I made quite clear that for a good many years there have been resident technical officers in the industry, but I was talking about those who visit the industry for purposes of technical costing. The resident officers are very few, but they have done a great deal in building up the aircraft industry over a number of years.

The Opposition frequently talk about the inefficiency of the Conservative Government and about wasted millions. They mention this in their pamphlets, but when they were in office they were no more successful with apparently simple equipment. The Princess flying boats are even today sitting down on the Calshot slipway. There was the Brabazon and, it is true under another Government, the Swift Fighter which had to be cancelled at a cost of £35 million. There was the sale of jet engines to Russia, which was done at such a very inconvenient time. In a great many things it does not do to point out the mistakes, because when the party opposite come into power they too will have the problems. It is very difficult to keep up with these technical matters.

A great deal has been achieved by the Government. I had the privilege some days ago with several hon. Members of visiting a modern R.A.F. station at Coningsby. I have never been so proud of having had some connection with the R.A.F. as I was there. This was not merely because of the bearing of the men but because of the whole organisation, the efficiency of the electronic shops and the engine repair shops, and the team spirit which was manifest all through. I came away with a feeling that British taxpayers have something worth while which is paid for and is working. Moreover, it was proved to me that the V-bombers of Great Britain have real low-level flying capability which the American aircraft do not have. One is prevented from saying too much about it, but we should be well pleased about that.

Rolls-Royce and Bristol-Siddeley undoubtedly lead the world in aircraft engines. Let the Americans remember that it was Britain that gave them the design and development of the jet engine. It was a British invention, but not one American in a thousand realises it. The Americans keep very quiet about it. Rolls-Royce engines power half the aircraft in the world. The V.T.O.L. is British. We do not push these inventions quickly enough to get full advantage from them in world markets. The TSR2 is coming along. It is a remarkable invention and is ready to fly any day now from Boscombe Down. When hon. Members are fully informed about this project they will find it far in advance of anything in the TFX, if that ever works.

Hon. Members opposite have said that they would nationalise the aircraft industry. If they do, they will have to deal with pretty big problems which they will not welcome. The Leader of the Opposition today was rather cagey when the matter was put to him and he was asked what he would do. We know that political leaders have to go along very carefully, and the right hon. Gentleman is going carefully. He is leaving the door open. The party is not as in 1959 playing the hand too big so that the cost can be estimated. The hon. Member for Newton (Mr. Lee) said in February this year that the aircraft industry is not to be nationalised in the next Parliament. That is the last utterance I have heard from a party leader. The hon. Gentleman said that it was not to be nationalised. Perhaps he will confirm that tonight.

Photo of Mr Frederick Lee Mr Frederick Lee , Newton

What more does the hon. Gentleman want me to say?

Photo of Sir Arthur Harvey Sir Arthur Harvey , Macclesfield

The Leader of the Opposition was not very explicit earlier today and rather left the door open. The 200,000 to 250,000 employees of the industry are concerned about it. They would like to know where they stand.

We shall finish the debate in an hour or two, but there is a great deal to be done. The system which has grown up over 50 years has many merits, but it has many deficiencies today. I want to see the Lang Report go into all the details and to see all the recommendations brought to the House as soon as possible. I hope that this Government and the next Parliament will try to bring about a better system to enable hon. Members to in quire into efficiency, whether it is that of the defence system in general or the method of placing and evaluating contracts. My right hon. Friend has done a very fine job indeed in difficult circumstances.

8.27 p.m.

Photo of Mr Charles Hale Mr Charles Hale , Oldham West

The House started out to discuss an Amendment censuring the Government and it is to this that I should like to revert for a few moments. Mr. de Ferranti has had sufficiently hard knocks from those who have attacked him and even more thunderous blows from those present to defend him. I should like to go back to the facts of this inquiry.

The development contract was placed in 1949. The production contract was embarked upon, but was not in writing, about 1955, and considerable progress was being made. It was at that stage that the Ministry of Aviation came into the matter. It came in by asking its cost technicians to devote 1,000 man-days to ascertaining the appropriate figure of costing for labour. After these 1,000 man-days, representing the work of four men for a full working year, a figure was arrived at of £1,170,000. The only argument about this arise from some questioning before the Public Accounts Committee, when Sir Richard Way said, "To the best of my recollection, but I am not quite sure, we got the figure down by 20 per cent.".

Mr. de Ferranti said, "No; to the best of my recollection, our figure was never anything like 20 per cent. above the £1,170,000". That was the situation at that point.

Then occurred the most fantastic thing that ever happened in the history of contract, if I read the evidence aright. Incidentally, I have no other source of information. I did consult the shop stewards on their view of the matter—I shall refer to this in a moment—because they, of course, are concerned about employment. I am concerned about employment, too. I am concerned about employment at the Ferranti works at Hollinwood, in Oldham, and at the other modern factories which the company runs. Ferranti is just about the best employer in Oldham.

I am concerned, also, about employment at A. V. Roe, in Chadderton, in my constituency. The workers are desperately concerned. Some of them are desperately unhappy now about their prospects. Although we have managed to maintain an unemployment record of about 2 per cent.—it is 1·7 at the moment—a steady series of fiascoes which have been brought about by the Government have jeopardised our employment. Obviously, this sort of thing will do no good to anybody.

The Minister who is under censure made, I thought, an appalling speech today in opening the debate, and he has hardly had one defender, except one hon. Member who said the Minister really could not be blamed for the work of a chauffeur whom he did not know intimately if the Government had an accident in their car. That was, I think, the only word said in defence of the Government, apart, of course, from the usual perfunctory peroration made by every Tory speaker when he wishes to explain that he intends to vote for the Government in the end even though he has been speaking against them.

Returning to the history of the matter, the next thing was the arrival of the cost accountants. If I understand the position aright, the cost accountants never troubled to find out what figure had been put as the estimate for labour costs. They never saw the figure of £1,170,000. They had about as much communication with the cost technicians as a couple of prisoners in adjoining cells in the Bastille. Their job was to estimate the percentage addition which should be allowed on labour for overheads. Incidentally, I find it difficult to understand why it should be on Labour at all in a contract of this kind.

The cost accountants produced, entirely unaided, the figure of 558 per cent. Let us be fair to my constituent, even if he is rich. It is not a crime to be rich. I was in a "pub" in Park Lane the other night and a most charming and delightful multi-millionaire came over to me and said, "Leslie, you and I are the only two Socialists here tonight". Their figure, as I said, was 558 per cent. Somebody has done that calculation. Up to that stage, Ferranti's behaviour had been absolutely impeccable. It had given completely accurate figures, supplying the information for which it was asked. The company had even supplied the full details of its costings on the Bloodhound department for labour, overheads and other things, but the Government mislaid the figures, never saw them, and said that they were not relevant until the Comptroller and Auditor-General came across them a year or two later. In fact, they got absolutely accurate figures of cost on which they could have based their figures, but they never used them. Up to now, it is the Government.

Many of my hon. Friends say that that is all very well, but all this time Mr. de Ferranti knew that he would make the hell of a big profit and he ought to have said, "Look here, you have put your figures on me and you have laid down your conditions. You has said that this is a cut-price contract. If the wages go over £1,170,000, it is my loss "—at least for the time being, however the situation might be helped along the lines suggested by my hon. Friend the Member for Dudley (Mr. Wigg).

Undoubtedly, at that stage, my hon. Friends say, and the Committee says, he was less than frank about it. There is no argument about that, and I do not think that even Mr. de Ferranti has attempted to say that he was. His view was quite simple, "I am a Tory capitalist and I do not think that it was my duty in a Tory society". This is almost exactly what the shop stewards say. They say, "He is the finest employer in Oldham. We like him very much, but, after all, he is a Tory capitalist, not a Socialist, and this is a lousy Government". I think that that is a fair view to put.

The Government had some reinforcement in the Press this morning from one of the most astonishing propositions ever put forward on behalf of a decaying Ministry. It is said that, "We must not blame the accountants because, although we were £5 million out on Ferranti we were £6 million out the other way on A. V. Roe. If you balance it out, we were only £1 million out on average." This proposition is not a new one, although it is in this field. It is the claim of the Oldham lawyer who, on his deathbed, said, "I have been bitterly attacked on the ground that my advocacy secured the acquittal of many rogues and criminals. But my enemies have never done me the justice to realise that my advocacy has also secured the conviction of a great many innocent men. Therefore, on the whole, justice has been done".

I ask the Minister to say whether it is true—I believe it to be true—that the people who worked out the 558 per cent. had never heard of this £1¼ million. I do not blame Mr. de Ferranti for being coy about producing his books. He was in the position of having to explain why he had overspent by £500,000 on materials. But if one overspends on materials by getting made-up materials and reduces the price of labour on the contract, one multiplies one's profit by six. I should have thought that it might be possible to effect economies in that way and through some form of sub-contracting. But why has 150 per cent. on a vague assessment of overheads, which, according to the Committee, includes inspectors and inspection—a very big item—to be multiplied by 558?

The Committee has said—it is entitled to its view; I accept it and do not dispute it for a moment—that if Mr. de Ferranti had been a good Socialist he would probably have said, "I have done too well out of this and I will let you have some back". I doubt whether the news would have been welcomed in the Ministry. When he wrote to the Minister and said "Your cost accountants were about 3 million quid out on this. They mucked up all the figures. They multiplied the figures by the wrong number. I have reached the situation which has induced me to feel ashamed of the amount which I am collecting from the Government", what would the Minister have said?

The Comptroller and Auditor General had done quite a bit in investigating this matter, apparently, by 22nd August. Whatever he wrote on 22nd August—we have not read it—it was partly the result of inquiries. Sir Richard Way said, "It was never brought to my notice for weeks after that. It was about the end of September when it came to my notice. Naturally, I thought that something should be done, so I communicated with Ferranti's". This is what happens in the Ministry.

Then nobody dared to tell the Minister. Whether they tried to shuffle it out of his sight, or whether they thought that the moment was not propitious, or whether there had been so many rows and blunders recently that it was better to cover it up a bit, I do not know. The Minister did not get to know about it until October. This is where the blame lies, and the Government should have faced and accepted it.

The House is entitled to demand that from now on different methods of costing will be introduced. The only excuse or explanation which has been given for using this form of contract is its use as an incentive. It was described as a spur to quicker delivery. But the contract was not signed until all incentive had completely passed away. That is the problem as it is put to the Minister, and that is the issue which he has to face today.

It is not the first time that this has happened. The Ministry of Aviation has a wretched record in this connection. May I say one more word about the Report? There was the astonishing remark of Mr. Clifton. As far as I remember, it was the only time that he spoke. It was rather like H. M. Bateman's one-note band. He was there to be called upon if no answer was available to a question, and the Committee asked the question to which there was no answer. The Committee said, "Has any businessman ever paid money back before? Has any businessman ever come back with conscience money and said, It is on my conscience. I want to make an offer'?" Sir Richard said, "Mr. Clifton might be able to deal with that one". Mr. Clifton said that speaking offhand, or words to that effect—certainly, he used the word "offhand"; it is a rum word for a civil servant to use when being cross-examined about the misdeeds of his Department by a Committee of the House of Commons—he could not remember. I suppose that the whole Department had been searching the papers to try to find an instance of a businessman who had paid a 1d. stamp back to the Government to advance it as an argument in their favour. No one had ever done so.

In the circumstances, we have, perhaps, been a little too rough on Mr. de Ferranti today and not nearly rough enough on the Government, who are responsible for the figures, who insisted upon them and who shoved in their own accountant. I hope that now that the House has expressed its censure, or by a vote may have expressed its rejection of the censure—although it is difficult to understand that anyone could honestly vote against us tonight on this issue—we shall start to forget this matter and think again of Oldham, of Wythenshawe and of employment, because there is one other record that Ferranti has. It has never had a reputation for redundancy.

The hon. Member who spoke about losing a contract spoke fairly. The people at Wythenshawe have been in fairly continuous employment for 17 years. The people in Oldham are not made the victims of punitive measures. I have never look up Ferranti's accounts, and I do not know how much is taken out and how much is put in, but I do know the firm has a continuous policy of the erection of first-class factories and admirable places of employment.

I can promise my hon. Friend the Member for Newton (Mr. Lee)a good deal of local support for some of his proposals. Indeed, on behalf of the workers of A. V. Roe, I express my gratitude for what he has said about Labour Party policy to come. That is a great reassurance to the workers. Apart, however, from the possibility of political action, I should like to see the firm and its employment continue. I should like these highly skilled workers to continue to be employed.

I wish, however, that we could make something more useful than the Bloodhound, because I find difficulty in understanding the utility of making a deterrent to deter other countries from attacking us and selling it to other countries so that they can deter us from attacking them. The cumulative result may be gratifying.

I hope that in these few minutes I have at least dissipated a little of the atmosphere of indignation. It has been pointed out before, at least a century ago, that the House in its moments of moral rectitude does not always express itself with the moderation which would be appropriate to all courses of moral preaching.

8.43 p.m.

Photo of Mr William Robson-Brown Mr William Robson-Brown , Esher

I will not follow the hon. Member for Oldham, West (Mr. Hale) except in his closing words. I want to take him up on that and to remind the House that earlier this evening an oblique attack was made upon the integrity of an hon. Member. The House itself should clear this matter up. Reference has been made from time to time to a meeting upstairs last night of the Conservative Party. I was neither present nor have I met Mr. Sebastian de Ferranti, but I count among my close personal friends his brother, the hon. Member for Morecambe and Lonsdale (Mr. de Ferranti). I deny and contradict any attack upon his integrity in this House at any time, whether before, during or since the time he was a Minister. If the record is examined, how he behaved and his attitude when he resigned will be seen to have been a great credit to him and his political honour. There has never been any conflict of interest on his behalf. It is in HANSARD tonight that there was an oblique attack on him, not too clearly expressed, but the poison was planted.

I want now to refer to the firm of Ferranti and its record in this matter. I do not believe that we can arrive at a proper financial accountancy judgment of the matter until the Lang Committee has reported and the whole picture has been presented. I sincerely hope that in its wisdom, as a supplier to the Government and with its record as a great industrial company—and it is a great industrial company—Ferranti will put its house in order and make such repayment to the Government as is wise, fair and just in the circumstances.

The discussion has ranged widely and has raised doubts on both sides of the House about the way in which the accountancy of various Ministries is conducted in this day and age. Some of my colleagues and I, in a document well known to most of us, Change or decay, have put forward a practical proposition. It is that every spending Department should have a Minister of State responsible solely and entirely for the placing of contracts and the accountancy that goes with it. That man should be appointed far his experience in the field and should have behind him a complete and positive and well-equipped branch to deal with these matters.

This sort of thing has been going on for far too long. It is not only Government contracts for armaments that we know about. The waste, mistakes, ill-judgments, wrong purchases, sales at the wrong time—the whole gamut of expenses is not properly supervised and never will be until it is taken out of the hands of civil servants and made the responsibility of a Minister responsible in each Department for the enormous sums of money which are now spent.

My hon. Friend the Member for Hendon, North (Sir Ian Orr-Ewing), with his technical experience, enlarged on this subject. Not only is the Civil Service handicapped because there are not enough technicians at a high enough level, not only do we not have the men, but the men do not have the opportunities of promotion to the top executive branches. They are kept in the technical branch and seem to stick there whoever they are and wherever they come from. This is very well realised in Her Majesty's Civil Service and an attempt is now being made to put matters right. But it is not a patched-up job that we want, but a complete, up-to-date twentieth century approach to these matters. My hon. Friend the Member for Macclesfield (Sir A. V. Harvey) made some very apposite remarks and I do not want to repeat them.

In this subject of Government contracts and the like, I know from practical experience that a firm accepts responsibility for these contracts and sets out its technical staff and its productive capacity and so on often with no guarantee that there will ever be a positive contract resulting. Changes in Government policy can be made at any time and result in a large section of a company being told the next morning that what it was developing is no longer required. More account has to be taken of these things.

There has been much discussion tonight about whether there should be paid a percentage of the capital of the company or of the turnover of the company, or of the cost of production and so on. Whatever method is applied, it must be a proper commercial and reasonable method. It has to be of such a nature that if the company finds that more money is coming out of the contract than is expected, that money can be repaid. That is very clear.

At the same time, these companies very often have to face the precise reverse. They have to face the position that they may suffer considerable losses. One of the great principles of the Conservative Party is that one must take the rub of the green. If one loses, that is one's bad luck. If one gains, that is what one is there to do.

Photo of Mr Edward Milne Mr Edward Milne , Blyth

They make the rules as well.

Photo of Mr William Robson-Brown Mr William Robson-Brown , Esher

They do not make the rules. There is a different atmosphere and a different approach when they are Government contracts.

In that connection, although we cannot deal with it on the Floor of the House, I think that we should pay attention to this form of contract and work out a reasonable system so that the manufacturer knows where he is, the civil servants concerned know where they are and we have a Minister of State who can stand at the Dispatch Box and answer questions and explain the way in which the matters are controlled. Under those circumstances, I do not think that we would ever again have a debate of this kind.

8.51 p.m.

Photo of Mr Eric Lubbock Mr Eric Lubbock , Orpington

In referring to the publication Change or Decay, I believe that the hon. Member for Esher (Sir W. Robson Brown) was endorsing what has been said by other hon. Members who have spoken today, that the Public Accounts Committee should be given greater power. I echo that view. The hon. Member for Cardiff, South-East (Mr. Callaghan) said that this Committee was frequently unhonoured and unsung. The hon. Member for Folkestone and Hythe (Mr. Costain) compared it with the lifeboat service which one praises when there is a spectacular wreck, but which is frequently forgotten on other occasions. Not only should I like to stand on the cliffs and cheer, but I should like to ensure that it has better boats.

I should like to see the proposals put forward by Mr. Anthony Sampson in the Observer implemented as soon as possible. He says that the most obvious answer to what has happened in this case is to increase the power of the Public Accounts Committee, and of the Comptroller and Auditor General who supplies the ammunition, to give them the opportunity to investigate not only accounts but organisations and systems, and to deal not only with extraordinary situations but with ordinary ones, so that they are able to make spot checks into any kind of contract.

Photo of Mr Ellis Smith Mr Ellis Smith , Stoke-on-Trent South

We have been saying that for years.

Photo of Mr Eric Lubbock Mr Eric Lubbock , Orpington

Many hon. Members have been saying that for some time, but perhaps it has taken a case of this kind to get that view expressed unanimously. If there is this unanimity of view, I cannot understand why nothing has been done in the past, and I hope that as a result of this loss of £4·9 million of public money some steps will be taken to implement that proposal.

I think that a lot of time has been wasted on talk about nationalisation. The Minister introduced this subject as a kind of smokescreen to draw attention away from what has been happening. Looking back at the defence contracts which have been placed in industry during the last 10 years, I do not know how any one can say that we would have been better off or worse off if the industry had been nationalised. I am a staunch believer in private enterprise, and I believe that that would not have been to the good of the country, because, just as the Public Accounts Committee has condemned the fixed-price contract as providing no incentive, so, if the industry was in public ownership, every piece of work put into it would be the equivalent of a fixed-price contract and the management of the industry would have no incentive.

I do not think that that is really relevant to what we ought to be discussing today, which is how we can prevent the kind of mistake which has been in this case from occurring again. Apparently it was the incompetence of the technical costs officers which led to this mistake, although that conclusion may be subject to modification in the light of what Sir John Lang says in his report. I think that this is far more important than whether the Ferranti family acted in accordance with their interests as shareholders. I am sorry for some of the things that have been said on this sub- ject. They have tended to take attention away from what has happened within the Ministry.

I want to go into the question of the technical costs officers in a little more detail. The hon. Member for Macclesfield (Sir A. V. Harvey) said that these people were poorly paid. I believe that the hon. Member for Hendon, North (Sir Ian Orr-Ewing) made the same point. Perhaps they got their information from the Sunday Times. I have never heard it said how much these men receive. When the question was asked in the Public Accounts Committee it was said that the head of the Department received, I believe, £4,075, but that there was a whole range of salaries, going down to Technical Grade IV. I should like to know how much the person in that grade receives, or, if it is easier to supply the information in another way, what is his salary scale. I should also like to know what qualifications are expected on entry into this grade.

Technical Grade IV was the lowest grade in this service mentioned by Sir Richard Way, in reply to a question. He said that there was a whole range of salaries within the service and that that was the lowest grade. It is important for us to know what the answer is, because only then can we form an opinion whether these people can be expected to deal on equal terms with the highly-qualified methods officers who I have no doubt are employed by all companies in the aircraft industry.

I believe that the House would be horrified at the answers to these questions. I thought that the hon. Member for Macclesfield had an excellent idea when he said that on many occasions outside consultants could be brought in to supplement the efforts of technical costs officers. This would be of advantage, because technical costs officers, by the very nature of their work, have been outside industry for many years and have lost touch with the ever-changing methods of production, whereas outside consultants would have up-to-date experience of industrial methods.

In the remaining two minutes I want to refer to the question how far we can regard a contract of this type as a partnership between Government and industry, in which neither side takes advantage of the opportunities which may present themselves for defeating the spirit of the contract or the intention to pay a fair price which is written into the wording.

If the Ministry is really making serious attempts to restrict profits to a level of 7 per cent. of turnover on this kind of contract we can hardly be surprised if the contractor, in turn, seeks to base contract prices on unrealistic labour times which will give him a more favourable margin. Even the hon. Member for Cardiff, South-East admitted that 7 per cent. on turnover was unreasonably low. In his evidence before the Public Accounts Committee Sir Richard Way said that 15 per cent. would have been a much fairer level on the Bloodhound.

Why should not we start by allowing this level of profit in contracts of this nature. That would necessitate a much tighter control of the estimates made by the technical costs officer, but that is necessary anyhow. I do not like the inference that the nominal profit must be kept as low as possible to compensate for the contractor's efforts to put in enormously inflated labour times. That means that we start with an assumption of bad faith on the part of the contractor. That is hardly likely to promote the kind of partnership between Government and industry which has been demonstrated to be so seriously lacking in this case.

9.0 p.m.

Photo of Mr Frederick Lee Mr Frederick Lee , Newton

A remarkable thing about our debate has been that no one has given any reason why he should support the Motion. Nor has anyone given a reason why he cannot support the Amendment. In other words, the Government's Motion to take note of the Report of the Committee of Public Accounts has not commended itself to anyone who has yet spoken from either side of the House. I think that we should ask the Government exactly what they mean when they say that we should take note. While leaving certain judgments until after the Lang Committee has reported, the Public Accounts Committee is of opinion that, quite certainly, excessive profits were made. What is the Government's attitude to this view? Do they condemn or condone? Is it to avoid giving an answer that they merely put down a nebulous Motion to take note of the Committee's Report?

The Amendment which my right hon. Friends and myself have put on the Order Paper condemns the Government for laxity. When we look back on Reports of the Public Accounts Committee for 1958–59 and the Estimates Committee Reports since, time after time we find it to be a considered judgment that the methods of contracting used by the Ministry are defective in the extreme. Therefore, we condemn the Government for laxity. Today, the Minister could not tell us that anything had been done to conform with the Committee's Reports. Only now are we promised shall be done that which Ministers have been promising to do for the last four or five years. Therefore, I think that no hon. Member could say that condemnation of this kind of thing is inappropriate.

We go on to say that we condemn the Government for permitting excessive profits to be made at taxpayer's expense… Does any hon. Member wish to say that that is not justified and that he proposes to vote against the Amendment because he does not agree? If so, I will give way to him at once. We cannot find a single Tory who can say why the House should support the Motion, or one who can say why he cannot vote for our Amendment.

I should like the Minister of Defence to enlarge a little on what the Minister was saying about the offer made by Mr. de Ferranti to disclose certain figures to the Lang Committee. I was disappointed when, in his evidence, Mr. de Ferranti refused to tell the Public Accounts Committee what was the out-turn of this contract. I am even more worried now, when I can be told that Mr. de Ferranti, who declined to give to a Select Committee of this House, of enormous importance, information for which it asked, and can give it to a committee which has no real standing so far as the House of Commons is concerned.

I should like the Minister to tell us whether that means that when the Lang Committee reports we shall be told details of the out-turn of this contract, that they may be made public so that we can debate the Lang Committee's Report, and we can also know that which we do not now know, namely, why the Ferranti episode came about at all.

Listening to the debate today I have been struck by the thought that we are censuring the Government not merely for what has happened in the Ferranti case, but because of the crass inability which they have displayed over the years in creating the kind of relationship which is now essential between Government and industry, in a period when the Government have become the greatest single customer for a wide range of vitally important industries in this country. It seems to me that this has never really been understood as the great problem which the Government have to face, when we can read that on two occasions the Comptroller and Auditor General was in touch with the Ministry to ask it to comment on the Ferranti case and that the best that the Ministry could say to the Auditor General was that it was trying to find out from Mr. de Ferranti what went wrong.

It is fantastic that in this day and age that there should be the kind of ineptitude of which we can read in the Report of the Public Accounts Committee. It reminds me of the scenes in this House after the South African War when, as I have read, there was controversy between members of the Chamberlain family of those days and the people who criticised them because they were making too much profit out of the war. When, in a great peroration in this House, Joseph Chamberlain remarked that the Empire had expanded, David Lloyd George replied, "Yes, the Empire has expanded—and the Chamberlains have contracted." Precisely that charge can be levelled at the Ferranti family as it was at the Chamberlain family and the proof on which such statements can be shown to be correct is as strong now as it was in those days.

Having lived in the atmosphere of the engineering industry for many years, I have a clue as to how these things are done. We had to negotiate costs with technical cost officers whom we called rate-fixers. Part of our professional skill was in the gentle art of "pulling the leg" of the rate-fixer.

Photo of Mr Daniel Jones Mr Daniel Jones , Burnley

If we were lucky.

Photo of Mr Frederick Lee Mr Frederick Lee , Newton

Yes, if we were lucky, but the very thought of induced error on the part of the rate-fixers multiplied by five would be enough to make my colleagues and I think that Father Christmas had taken up permanent residence.

This is the basis on which this kind of contracting goes on. I care not how technically equipped an officer of the type we are discussing is, if he is only a visitor to a factory he is at a great disadvantage in trying to arrive at fair costings with people who know every peculiarity of the factory and all that it means. I do not believe that it is the technical costs officer who is to blame, but those who give him the type of conditions in which he works whom we should condemn for this kind of thing.

The Guardian summed up this matter well a few days ago by saying: Whatever the moral rights or wrongs of the Ferranti affair, one central fact is plain—the Ministry of Aviation's costing system is demented. Many committees have reported adversely on that system. The Minister must reply tonight to the question why no changes have been made in this period.

The basic cause of our problem is a deep and fundamental clash between the political convictions of the party opposite and the need for change in Government industrial relations of which I have spoken. The operative word in the Committee's Report is that most fudged of words, "partnership". We have precisely the same kind of thing in describing employer-trade union relationships in which mutuality is not the most natural of impulses. The Government are trying to hide behind the word "partnership" the expensive failures they have made, whereas they were in a contractual relationship which does not presuppose either amity or partnership. We do not overcome the self-interest which is the basis of industrial contracting by private firms merely by saying that we thought there was a partnership in existence, especially if one proclaims it after getting the worst of a business deal.

In our last debate on this subject, in February, the Minister of Aviation said: I do not think that the Opposition realise quite how far the relationship between Government and industry has become one of partnership. I have been trying to strengthen this. I think that the fruits of it will appear before very long."—[OFFICIAL REPORT, 17th February, 1964; Vol. 689, c, 978.] We have not had to wait very long, and the fruit would not appear to be very palatable now that it has arrived.

The Ministry now realises that it is the form of contract which is defective. Sir Richard Way, in his evidence, agreed that he could not be sure that this is the only case of its kind, despite which, as my hon. Friend the Member for Oldham, West (Mr. Hale) pointed out a short time ago, the Government cannot point to a single case in which a contractor has volunteered the information that he is making an excessive profit. This hardly seems to be the criterion on which partnerships should be based.

We also learn from the evidence in the Report that the Minister's preference for fixed-price contracts of the type which we are discussing—generally known as "price to be agreed"—instead of cost-plus contracts is because they encourage efficiency and act as an inducement to the contractor to beat the price. He said the same again this afternoon. It would be wrong in this case to withhold from the Minister our most hearty congratulations on the out-standing success which his inducements achieved in getting Mr. de Ferranti to beat the price. Indeed, a cynic might argue that it is a little hard to criticise his most successful disciples.

But in seeking to answer the problem of how Ferranti did this, the first point which we have to eliminate is this inducement to beat the price. As has been pointed out on many occasions today, one cannot encourage a firm to beat a price which is not agreed until five years of work and over two-thirds of the products have been produced. If one looks at it from the contractor's angle, the great advantage is that while he is deemed to be taking a point of view no risks are, in fact, involved. Having completed the vast majority of the products before he agrees a price, he knows everything that he needs to know about the costs and would have to be stupid or philanthropic to agree a price which does not yield a good profit. I do not think that Mr. de Ferranti is either stupid or philanthropic. This type of contract defeats all the points which the Minister lays down as the criteria for successful contracting. It is, in fact, a cost-plus contract in the way in which it works.

During last week-end we had the Hawker case in the newspapers. I felt at the time, and still feel, that it was a red herring which had been thrown in to make the point that contractors could lose as well as gain. The first thing which one realises from it is that the argument has been that the Ferranti case should be something of a freak; but if it is right that Hawker could lose £6 million, then one thing which that shows is that the Ferranti case was not a freak and that the system is capable of producing a deviation of £11 million on the two contracts, the out-turn of which we know something about. I therefore suggest that that is no answer to the case which we are making in respect of Ferranti.

We also learned from the evidence before Sub-Committee B of the Estimates Committee, at its sitting on 1st July last year, that Hawker Siddeley believed that there was a requirement for a transport plane which had both a civil and a military use. The firm developed such a plane on its own account without any Government authorisation or a contract at all. I emphasise that the firm itself developed it, and that when there was no contract forthcoming it then produced the plane. The firm sold those planes at £600,000 each. I emphasise again that this had to take account of the development costs. After that came the Government contract for 56 of the military version of a plane which had been developed with such a version in mind. To me, it does not make sense that after Hawker Siddeley had got a military contract for 56 planes, which is a huge contract, and after it had done all the development work on its own civil aircraft, which it sold for £600,000, and after, with minor alterations, it had sold the military version at £600,000, the firm is still alleged to have made a loss of £6 million.

Quite frankly, I do not believe that it is possible. I do not want to go through all the questions in the Report, but the fact is that, knowing something of the alterations which had to be made in the military version as against the development costs, I would not accept for one second that it could possibly have made any loss at all on the purely Government contract which it took over afterwards. My belief would be that the Government order simply reduced the firm's loss to £6 million rather than created a loss of £6 million.

I have been looking up the returns of the Hawker Siddeley group. In 1960, there was a very considerable expansion of the group following the rationalisation of the industry. About 75 per cent. of the pre-tax profits earned in the United Kingdom by Hawker Siddeley are attributable to the aircraft side of the business. The reorganisation caused some discontinuity, but according to the chairman's annual statement the trading profit from the U.K. companies amounted to £29 million for the 17 months ended 31st December, 1960, £19 million for the 12 months ended 31st December, 1961, and £20 million for the year ended 31st December, 1962, after charging depreciation of £4·2 million. If the firm made this huge loss on the Government contract we are discussing while returning the profits I have quoted, from which contracts did the firm wipe out the loss and build up its overall profits?

We know from the evidence of Sir Richard Way that no firm has ever gone back to the Ministry and declared an excessive profit. We cannot leave this where it is. I suggest that the P.A.C. should examine not only this contract, but every contract going through the Hawker Siddeley organisation within the currency of this contract so that we can find out precisely where the profits came from.

Earlier this year I asked the Minister of Aviation a Question about his contracting methods. I asked him whether he would change the conditions of contracting between his Department and private firms to ensure that the out-turn of each contract, and access to the relevant books of the firm, are available to his Department. The Minister replied: Such a condition is already included in contracts when the price is determined on actual cost. It would be inappropriate in contracts let after competitive tendering."—[OFFICIAL REPORT, 15th April, 1964; Vol. 693, c. 400.] Perhaps the Minister will tell us what is the difference in principle between a contract when the price is determined on actual cost and a contract such as the Ferranti one, which was a prices-to-be-agreed contract. In the latter case, we know that prices are fixed with the contractor after the contract has been let. We know that the Ministry has access to the contractor's premises to examine manufacturing processes. Negotiations take place on the basis of costs of direct labour, materials, and so on. In this type of contract there is not the slightest semblance of any competitive element.

Therefore, if, on fixed-price contracts, it can include the desire for the Ministry to see the out-turn, why can it not on the type of contract that it had with Ferranti? I still hope that the Minister will tell us whether the Government now accept the principle that all contracts of the type named in my Question will, from now on, contain the condition that the Ministry has the right to see the out-turn of the contract. This is absolutely imperative, if we are to get to the root of problems such as this.

It would appear from the Comptroller and Auditor General's Report that everything of a competitive nature is the exception when contracting with the Ministry. In paragraph 55, the Comptroller and Auditor General said that during a period of four weeks during 1962…competitive tenders were received for only five types of valve, to a value of £23,000, out of a total of 47 types to a total value of £364,000. Competitive tenders had been invited for the supply of a further 18 types of valve but in each case only one firm had responded and contracts to a total of £191,000 were placed by acceptance of the only tender. May we know whether this is the ratio of competitive tenders against those for which no competition is invited? Does the Minister include among the competitive tenders, about which he gave Answers, tenders which have been invited but in respect of which only one person or firm has responded? The fact that over the years the Government have permitted the kind of arrangements I have been describing to continue means that they have acted as though they have a duty to acquire a vested interest in industrial ignorance. The Government's decision to opt for the fixed-price system instead of competitive contracts is more than one of preference.

The one thing which stands out in the Reports of the Public Accounts Committee and the Comptroller and Auditor General is that the Government are now having to negotiate with a firm which has a complete private monopoly position. In other words, they are trying to negotiate a contract on a competitive basis with firms which possess enormous irresponsible powers of private monopoly. If one reads the answers given to the Public Accounts Committee, particularly to questions 631 and 632, one finds that the reason the Government are still compelled to go back to Ferranti's is that there is no other firm in Britain which is capable of undertaking the sort of work that we are discussing. In any case, once a firm has done the development work it is almost certain to get the production contract.

I wonder whether, from the lessons they have learned, the Government are prepared to look at the possibility of doing far more development work, either themselves or in co-operation with firms with which they are in contract. In his evidence to the Public Accounts Committee Mr. de Ferranti argued that if there is to be partnership there must be a form of contract in which the Government share the risk. I have said that there is no reason why the Government should not take up that suggestion. Why not, as a concomitant stipulate that the new form of contract must make it clear that the Government must share the profit, and agree that the public profit made would then be ploughed back into the industry, perhaps the firm itself, so that we could make a proper basic partnership with the company with which we are contracting? We could then redress the position complained of by Sir Richard Way; to the effect that the technical cost officers cannot be trained under productive conditions because the Ministry has no production workshops and that they are always "playing away from home". It would also ensure the expansion of an industry which, in the national interest, we need to expand, and it would help break the semi-monopoly position which at present forces the Ministry to grant all contracts of a certain type to one or two firms. It would also enable the Government to share the "know-how" for development work, which is most difficult to assess.

In Signpost for the Sixties we have enlarged quite a lot—[Laughter.] There is no need for hon. Members opposite to laugh at this, because we have been aware of the problems which the Government have not even begun to tackle. We are making them abundantly clear. We are saying that where there are problems of the type I have been enumerating and which have been brought to our attention—not by the Labour Party as such, but by the Public Accounts Committee—and where the taxpayer cannot he exempt from waste because of the type of contract, we would like to see State participation, it necessary, to protect the taxpayer.

Photo of Mr Frederick Lee Mr Frederick Lee , Newton

Time does not allow me to give way.

Hon. Members opposite always seek to find out whether it was I or my right hon. Friend the Leader of the Opposition who said, "No nationalisation". Let me quote what my right hon. Friend said some time ago, in a warning on this point. On 19th December, 1960, speaking as Chairman of the Public Accounts Committee, he said: Certainly, neither the Committee nor the House can leave matters where they are, because I repeat again, quoting the Committee Report, that we are dealing here with a problem which presents something new in the financial history of this country and by which, if it is not solved, the whole edifice of parliamentary, indeed, of governmental, control of expenditure is imperilled. That is the background against which this debate takes place.

We on this side believe that because of their political ideology members of the party opposite can never begin to solve the problems that the second half of the twentieth century has brought up. We believe that they are biased against any type of participation by the people in industry which is now essential, and that private monopoly is endangering not only the nation as such but the authority of Parliament. It is impossible to believe that, with that ideological background, members of the party opposite can ever really solve this problem.

This debate will be wound up by the Minister of Defence, a right hon. Gentleman who, some years ago, resigned the great office of Chancellor of the Exchequer because he was sure that a £50 million advance in Government expenditure was more than he could stomach. He was the Minister when the contracts with Ferranti were signed. He, in his capacity as Minister of Defence, has probably been responsible for waste far in excess of the £50 million over which he resigned some years ago. We understand his problem as an individual.

I come hack to the central theme of all this, which is that Toryism is now as dead as the dodo. The fact that the Government are hanging on now for a few months more is detrimental to the interests of the nation, but when the annihilation occurs in October it will be seen to have been detrimental even to the Tory Party.

9.27 p.m.

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

As the hon. Member for Newton (Mr. Lee) has reminded the House, I was once Minister of Aviation. I was appointed in July, 1960, I had the honour to serve there until July, 1962, and I then went to the Ministry of Defence, so I have seen something of these problems both from the point of view of the responsibility for supply and procurement and, latterly, as a customer.

The matters we are discussing are grave and important. They surround problems that would confront any Government in charge of the country's affairs, and it is my desire to try, if I can, to deal objectively and clearly with the points that have been put. I am not concerned here to argue about public and private enterprise—there are other opportunities for that—for this rather good reason. It so happens that this great industry has some of the best public and some of the best private enterprise within it. It has in the Royal Aircraft Establishment one of our finest centres of scientific advance, and it has among the great firms some of the best organisations, technologically and in every way, that we have available, not only serving our defences but contributing magnificently to our export trade.

Whatever is said about anyone else's activities I would agree with what has been said about the Comptroller and Auditor General. He has made a remarkable contribution. Without his watch-dog activities we would not be having this debate, nor would it have been possible for Members of the Public Accounts Committee to direct their minds to making what I think was a prompt, admirable, and objective Report on these problems.

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

I have a lot to say. Perhaps the hon. Gentleman will let me get a little further. What I think we are concerned with here is not simply the money. We are concerned with the viability of a system, because if we suspect that the system which is operating, and has been operated not simply by one party but by all parties in the country, is not viable, it goes to the root of our relations not simply with one firm, Ferranti's, but between any Government and the aircraft and electronics industries.

I therefore want to start by making one or two observations on that theme. I recognise that the debate has gone wider. I will try to deal with some of the wider issues raised a little later, but the point of departure is the Report of the Public Accounts Committee and the Ferranti case and I am anxious that on no side of the House of Commons should we flinch from the implications of that and that we should face it quite honestly and objectively today.

I should like to tell the House what I see to be the essentials of this. There is a lot in between, but there are two main types of contract which can be entered into. There is the cost-plus contract where one does the job and costs it and everybody looks at all the facts and the figures and then one adds a percentage or perhaps, rather better, a fee. It is a fairly simple concept. It is widely applied in research and development contracts, but it has never been welcomed by any Report of the Public Accounts Committee or any other objective inquiry made into it.

The other is the fixed-price contract and, let us face it, very often in this country it is not on a competitive basis. We have not that number of firms to be able to compete in this country. We are not the United States of America and therefore very often it will be on a non-competitive basis and then we have to depend upon very elaborate technical cost estimates. It is, as the hon. Member for Newton has said, a very skilled and complicated job. Let us not be too critical of those who make mistakes. It is a complicated job for anybody to do.

If a fixed-price contract is the system, one sticks to it whether it is a profit or a loss. That system first estimates what a job will cost. The system has been very widely applauded by everybody who has looked at it. I take only one quotation from the Third Report of the Public Accounts Committee for 1953–54 where it says: …it appears to Your Committee that the building up of the price from estimates of labour, materials and overheads, checked by the appropriate experts, with a known addition for profits is the surest way of arriving at a demonstrably fair and reasonable price. I think that this is generally accepted to be the case.

It is true that it would be tempting to say that it is a good thing to look at the books. This was at one time part of the system. It was actually dropped by the party opposite—I am not saying wrongly—as part of the contract condition in 1947. It was dropped because it was in their view, and at the time in the view of the Treasury, essentially irrelevant to the situation because the whole basis was that one made this estimate and one abided by it. Sometimes it might make a profit and sometimes a loss, but it had the benefit of putting this incentive element into the operation. The fixed-price system has been in operation for over 20 years. There has been considerable experience of it and it has been approved by industry and by the Government.

What has happened here? Certain facts are known and accepted, but by far the most important fact, in my view, is that the technical cost staff of the Ministry of Aviation, over whom I was presiding at the time—I do not want to shirk any responsibility in the matter—made an error of 100 per cent. in their estimates of the direct labour cost. That is the essential element in this case, and I think that it is much better to state it plainly. It is true that that error is multiplied by the overheads and so on—I shall have a word to say about the technicality of overheads later on, perhaps—but the basic error here was in the estimate of the direct labour cost.

As a result, an excessive profit was made. By an excessive profit, I do not mean 15 or 20 per cent. I mean 63 per cent. on cost. It is easier to take it on cost, and we all know that we are talking about the same thing. But 63 per cent. is, on any standard, an excessive profit.

The account given by the technical cost department people was that they applied all the knowledge and experience which they had. They took the firm's estimate as a starting point, which was 120 per cent. of what turned out to be the true figure, they negotiated it down 20 per cent., to double the figure as it eventually turned out, and they settled the contract at that figure.

As I said, technical costing is not a simple art. It is complex, and quite obviously, errors are possible. We must all admit that errors will be made. Indeed, if we are to have the system at all, some degree of error—10 per cent. or 15 per cent.—must, I think, be acceptable. I shall refer in a moment to one or two examples which we have. But a 100 per cent. error is not acceptable. If such an error is possible, what is called in question is not the skill of individuals or the capacity of the Ministry of Aviation's technical cost officers but the viability of the system itself. It is that which comes in issue.

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

I want to finish this part. It is rather important to have it right. What matters here, therefore, far more than the size of the profit, the fortunes of an individual firm or the skill and reputation of the Ministry is the truth and the ability to identify what really happened in this case. Until we do identify it, it is not possible to be confident that such errors could not creep in in other cases.

I make no charges whatever against Ferranti or anyone else, but it is absolutely vital to analyse this case in detail and for this purpose it is necessary to have all the books and documents. This is one of 18 contracts. One must have much more than the books. One must be able to get hold of the detailed documents. It is vital to see the size of the problem which confronts us and to examine what happened.

In these circumstances, I thought it proper, the other day, to invite Mr. de Ferranti to come to see me, with the Minister of Aviation, and I put these considerations to him. I told him, in terms which I think the House and the Public Accounts Committee would appreciate, that, in the light of what I had read in the Report, it was not possible to accept a situation in which we carried out an investigation without all the facts being available. This would be intolerable to the House of Commons, and I believe that that is the right view for the House to take. Mr. de Ferranti acceded to this view. As my right hon. Friend has said, he agreed to display all the relevant documents, books, accounts and so forth so that Sir John Lang can really have an opportunity to find out how an error not of 10 or 15 per cent. but of 100 per cent. came to be made in this case.

Photo of Mr Frederick Lee Mr Frederick Lee , Newton

Will the right hon. Gentleman answer the point which I made? It will not be a lot of good to the House of Commons unless Sir John Lang has the authority of Mr. de Ferranti to publish, as we publish the evidence with the Report of the Public Accounts Committee.

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

I have already announced that the report will be published. I assure the House that the last thing that I want to do is to conceal anything. My whole effort has been bent in the other direction. It has been our absolute determination in this case—not from my own point of view but from the point of view of the future of this system and the relations of any Government with the aircraft industry—to demand that we should know how that error crept in so that we can assess whether or not this is a viable system.

Photo of Mr William Baxter Mr William Baxter , West Stirlingshire

Sir John Lang, with all his eminence, is not a Member of this House. Why not set up a Select Committee of the House to look into this matter?

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

There are many possible fields of investigation. The two investigations which have taken place have been extremely valuable. First, the Comptroller and Auditor General pointed out that something had happened. Then we had the Report of the Public Accounts Committee, which set out in very clear terms that this must be properly investigated. If we want a detailed examination, many people must look at the figures, including the technical cost officers of the Ministry of Aviation. The matter must be examined by the people who have looked at these before, who can identify where the error was. I do not think that anyone on either side of the House really wants anything other than that. We are determined that the truth should be exposed.

Photo of Mr Cledwyn Hughes Mr Cledwyn Hughes , Anglesey

Would the right hon. Gentleman make one thing clear, namely, that, whatever Mr. de Ferranti may have agreed regarding the books, the Minister of Aviation has the statutory right to call for records and books if he wishes?

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

He has not. I should like to make that absolutely plain. I do not object to being interrupted, but I want to answer some of the debate. It would be a little unfair to hon. Members who have asked questions if I did not do so. The contractual right to call for records was abandoned in 1947 and no statutory right exists.

The hon. Member for Cardiff, South-East (Mr. Callaghan) said that this was not an isolated case. He then drew attention to other Reports of the Public Accounts Committee referring to estimates of various kinds. I beg the House to realise that there is a sharp distinction between the term "estimate" as it is applied to a costed contract dealing with research and development and the term "estimate" as it is used here, namely, a technical cost officer's estimate of how much it will cost to produce—the best estimate that one can make. There have been mistakes made in the kind of estimates which the hon. Gentleman was talking about.

My right hon. Friend the Minister of Aviation referred to the Bloodhound contract itself—not the production one, but the development one. It was estimated at £1½ million by the right hon. Member for Vauxhall (Mr. Strauss). Before anyone starts to blame the right hon. Member, let it be recognised that the estimating of the future development cost of an anti-aircraft weapon designed to come into operation seven or more years ahead and to shoot down aircraft travelling at near supersonic speed is not easy. In fact, it cost £32 million. That was an error in estimating. But it is a quite different problem from the problem of the estimate of a technical cost officer on a fixed price production contract.

The hon. Member for Cardiff, South-East then said, "Should the firm have tried to make the maximum profit?" Indeed, quite a lot of hon. and right hon. Members turned to this issue. I do not believe that it is entirely a question of organisation—what people are trying to do when they are negotiating together. It is a question not so much of organisation as of human relationships. I agree with what the Public Accounts Committee said about this. When Government and industry are in contact on arrangements of this kind, there has to be open dealing between the two of them.

In a speech in the House of Commons on 11th December last, the hon. Member for Sowerby (Mr. Houghton) said: I can only conclude that what is needed in this situation is a reappraisal by private industry of its relations with the Government, who will become an ever-bigger buyer as the years go by. We need a frank and meaningful acceptance by industry, suppliers and contractors that the public interest is at stake and that the public are footing the bill. They are engaeed in a service and not a commercial enterprise in this respect."—[OFFICIAL REPORT, 11th December, 1963; Vol. 686, c. 426.] There is a great deal in that.

I add one other consideration. There is commercial sense in that as well, because anyone with experience of big business will recognise that, even from a narrow commercial viewpoint, it does not always pay a big firm to seek to extract the maximum profit from anyone, particularly if the person from whom the firm seeks to extract it happens to be its biggest or, in some cases, its only customer. Looked at, therefore, from whichever point of view one takes, I rather agree with the hon. Member for Sowerby in saying that a special relationship exists in cases of this kind.

The hon. Member for Cardiff, South-East then asked me about a number of other points, including the Argosy. The hon. Member was right. It was started as a private venture—and I give credit to the firm for starting it. About £10 million was spent on it. It was ordered by the Royal Air Force because the R.A.F. wanted it. It was not a rescue operation. In recent operations, I might add, it has more than proved its worth.

The point which the hon. Member was making was whether the comparison was a fair one. I do not want to misstate it. I am not a great believer in the swings and roundabouts kind of argument. One cannot justify a firm making a great profit because somebody else makes a big loss. That is not a viable position in which to stand. The point is not taken for that purpose. It is taken to try to ascertain whether this is always a case of a group of well-meaning but rather ineffectual gentlemen who have been taken for a ride in all cases and who are always making the mistakes the same way. The answer is that they are not always making the mistakes the same way.

When one has made all the allowances one likes for the nature of the Argosy contract, for writing in something on the private development side and the rest, it appears fairly plain that in that case, too, although in a different direction, there was a mistake both by the technical cost officers of the firm and by the Ministry of Aviation which in that case resulted in a loss.

The hon. Member asked about overheads. Many hon. Members have pointed out that if one makes a mistake, it is obviously much worse if one multiplies by a very big overhead factor. Like most other parts of the problem, this is an immensely complicated and difficult subject. Hon. Members may say that it should not be 558 per cent. and that it ought to be 300 per cent. It is easy to say that, but when one gets down to it somebody must assess the overheads. When trying to assess the overheads, one problem is how much of them should be allocated to the whole of the concern, how much to certain branches of production or, in the case of the men who work, whether an inspector is part of the overheads, whether a machine setter is part of the overheads or whether they are both part of the direct labour. There is room for endless argument about this.

All I would say to the hon. Gentleman is that, however one looks at the problem, in some way or the other multiplication must be introduced. In firms as highly capitalised as aircraft firms, with overhead factors in many cases running above 558, one is bound to multiply the direct costs, however they are estimated, by a substantial factor. There is no technical way of avoiding that.

I appreciated what the hon. Member for Cardiff, South-East said about Sir John Lang, with whom he served in the old days on the Board of Admiralty. I agree with him that there is not the slightest chance of Sir John Lang allowing himself to be put into the position of a political decoy, although I need hardly say that that is not the purpose for which he has been appointed anyway.

He finally asked about the basis of repayment. Let us be clear: there is no legal right to repayment in this case. I want to make this absolutely plain. We have to face facts in the House of Commons. Secondly, it is a little premature to start debating in any detail the precise basis upon which repayment ought to be made until, carrying out what the Public Accounts Committee has suggested, we can find out precisely what the error was and how it occurred. From that moment we will be able to talk about repayment on a far more practical basis than in theory without anybody having had access to the books.

My hon. Friend the Member for Macclesfield (Sir A. V. Harvey) made a number of points, not all of which I propose to reply to this evening. He asked me about my hon. Friend the Member for Morecambe and Lonsdale (Mr. de Ferranti). As his position has been mentioned once or twice in the debate, may I refer to it? An hon. Member does not ask to be a Minister; he is invited to be a Minister, and the hon. Member for Morecambe and Lonsdale was invited to be a Minister. He sought to divest himself of his interests in this firm. For reasons which are perfectly obvious to anybody who looks at the matter, it became obvious to him that he could not do so in a manner which could satisfy himself that he could or had cut himself off completely from his family and firm and so on.

Therefore, in those circumstances he said to the Prime Minister that he felt that he had not been able and could not divest himself to the complete extent which an hon. Member would wish before taking on responsibilities of that kind. He accordingly laid down the opportunity of serving in the Administration in that particular capacity. Quite simply, that is the story of the hon. Member for Morecambe and Lonsdale. All I would say is that there is not the slightest stain of dishonour upon him whatever.

The hon. Member for Dudley (Mr. Wigg) asked me a number of questions, including one about the "Eagle". I made an inquiry about this immediately. I am assured that the Royal Navy has absolutely no complaint about either the delivery or the cost of this equipment. It is completely satisfied—[HON. MEMBERS: "Withdraw."] Many things are said in this debate and we do not withdraw them. It was a perfectly fair point to make and I am sure that the hon. Member for Dudley will be as pleased as I am that the Royal Navy is being well served in this matter.

Photo of Mr George Wigg Mr George Wigg , Dudley

indicated assent.

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

The hon. Gentleman went on to say that in the United States of America there was a system different from the one we had here. In particular, there were Senate committees and so on. He followed a line which he has often developed in debates of this kind about the importance of having something comparable to the Senate committee system. There are arguments for all sorts of systems. Let us not underestimate the system we have here. Let us not underestimate the effectiveness of the Comptroller and Auditor General. I say to the hon. Member for Dudley, do not let us underestimate the Public Accounts Committee.

The hon. Member was criticising the fact that questions are asked in this rather mild way, that it is all done so quietly, saying that we were only bowling underhand. I do not believe that many accounting officers who appear before the Public Accounts Committee regard it as other than a pretty formidable undertaking.

Photo of Mr George Wigg Mr George Wigg , Dudley

The right hon. Gentleman was good enough to say that he had made inquiries of the Royal Navy and that it was satisfied. That is not the point. The point is, are the figures and facts which I gave the House right or not? The question of the satisfaction of a particular officer in the Royal Navy is a subjective consideration. Is what I said tonight right or wrong? If the right hon. Gentleman says that I am wrong, I shall withdraw what I said. If I am right, there is need for an investigation.

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

I shall not ask the right hon. Gentleman to withdraw anything. I do not believe in everybody withdrawing everything. I confess that I went out to have a bite to eat when the hon. Gentleman was giving the figures, but if what he was saying implied that this equipment was delivered very late, or was much more costly, or something of that kind, I can tell him that I am assured by the Royal Navy that it was satisfied both about delivery times and with regard to the cost.

Photo of Mr George Wigg Mr George Wigg , Dudley

The point is whether this equipment has been evaluated as being fit for service. Will the right hon. Gentleman give the House an assurance—not what the Royal Navy says but what he says—that in the light of these facts he is satisfied that this equipment will operate under Service conditions?

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

The hon. Gentleman asked this question, and I got in touch with the senior officer personally responsible for this. He told me that I could give a complete assurance, which I do, that the Royal Navy is satisfied with this equipment. I hope that the hon. Gentleman will now be satisfied with what I have said.

The hon. Member for Edinburgh, Leith (Mr. Hoy) asked me about the development costs of the Bloodhound. As I have already said, they were estimated at £1½ million on a cost-plus contract in 1950. The cost was £32 million. Ferranti's share was £8 million, and the profit at £400,000, represents about 5 per cent.

My right hon. Friend the Member for Folkestone and Hythe (Mr. Costain), and other hon. Members, indicated that there were other methods than simply cost plus on the one hand or fixed price on the other. This is true. There are other methods, but the more closely the House insists—and we may be right about this—that books have to be examined at every stage, that people have to be looking in on the work sheets, and all that kind of thing, the further away we get from the fixed price, and the nearer we approximate to cost plus.

We can make this system absolutely safe, or as safe as anything reasonably can be made, on the profits side by going further and further towards cost plus, but I must tell the House that we are in a dilemma, because the experience of all parties is that the further we go in that direction the more we minimise the profits but we maximise the cost, and that is not to the benefit of the taxpayer either.

Hon. Members:

Sit down.


We are debating an Amendment which censures the Government, and I want to ask the Minister one simple question. Why is it that we are debating such a Motion as this? On at least four occasions the Minister has referred to the objective and admirable Report of the Public Accounts Committee. Why is he refusing to accept it?

Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth

I am glad that at one minute to ten o'clock the hon. Gentleman has called my attention to this matter. We are debating an admirable and objective Report. The Motion is that we should take note of that Report. We have not only taken note of it, we have acted on it, because we have taken steps to ensure that the very thing which the Public Accounts Committee has called for, which was a full, frank, fair and thorough examination of this matter, should take place. We do that determined to ascertain the truth, but confident in the broad system which we have adopted and which has brought to the Services of this country some of the finest equipment in the world.

Question put, That those words be there added:—

The House divided: Ayes 236, Noes 302.

Division No. 88.]AYES[10.0 p.m.
Abse, LeoHerbison, Miss MargaretParker, John
Ainsley, WilliamHewitson, Capt. M.Parkin, B. T.
Albu, AustenHill, J. (Midlothian)Paton, John
Allaun, Frank (Salford, E.)Hilton, A. V.Pavitt, Laurence
Allen, Scholefield (Crewe)Holman, PercyPearson, Arthur (Pontypridd)
Awbery, Stan (Bristol, Central)Holt, ArthurPeart, Frederick
Bacon, Miss AliceHooson, H. E.Pentland, Norman
Barnett, GuyHoughton, DouglasPopplewell, Ernest
Baxter, William (Stirlingshire, W.)Howell, Charles A. (Perry Barr)Prentice, R. E.
Beaney, AlanHowell, Denis (Small Heath)Probert, Arthur
Bellenger, Rt. Hon. F. J.Hoy, James H.Proctor, W. T.
Bence, CyrilHughes, Cledwyn (Anglesey)Pursey, Cmmdr. Harry
Benn, Anthony WedgwoodHughes, Emrys (S. Ayrshire)Randall, Harry
Bennett, J. (Glasgow, Bridgeton)Hughes, Hector (Aberdeen, N.)Rankin, John
Benson, Sir GeorgeHunter, A. E.Redhead, E. C.
Blackburn, F.Hynd, H. (Accrington)Rees, Merlyn (Leeds, S.)
Blyton, WilliamHynd, John (Attercliffe)Reid, William
Boardman, H.Irvine, A. J. (Edge Hill)Reynolds, G. W.
Bottomley, Rt. Hon. A. G.Irving, Sydney (Dartford)Rhodes, H.
Bowden, Rt. Hn. H. W. (Leics, S. W.)Janner, Sir BarnettRoberts, Albert (Normanton)
Bowles, FrankJeger, GeorgeRoberts, Goronwy (Caernarvon)
Boyden, JamesJenkins, Roy (Stechford)Robertson, John (Paisley)
Bradley, TomJones, Dan (Burnley)Robinson, Kenneth (St. Pancras, N.)
Brockway, A. FennerJones, Elwyn (West Ham, S.)Rodgers, W. T. (Stockton)
Broughton, Dr. A. D. D.Jones, J. Idwal (Wrexham)Ross, William
Butter, Mrs. Joyce (Wood Green)Jones, T. W. (Merioneth)Royle, Charles (Salford, West)
Callaghan, JamesKelley, RichardShinwell, Rt. Hon. E.
Castle, Mrs. BarbaraKenyon, CliffordSilkin, John
Chapman, DonaldKing, Dr. HoraceSilverman, Julius (Aston)
Cliffs, MichaelLawson, GeorgeSkeffington, Arthur
Collick, PercyLedger, RonSlater, Mrs. Harriet (Stoke, N.)
Corbet, Mrs. FredaLee, Frederick (Newton)Slater, Joseph (Sedgefield)
Craddock, George (Bradford, S.)Lee, Miss Jennie (Cannock)Small, William
Cronin, JohnLever, Harold (Cheetham)Smith, Ellis (Stoke, S.)
Crosland, AnthonyLever, L. M. (Ardwick)Snow, Julian
Cullen, Mrs. AliceLewis, Arthur (West Ham, N.)Sorensen, R. W.
Dalyell, TamLipton, MarcusSoskice, Rt. Hon. Sir Frank
Darling, GeorgeLoughlin, CharlesSpriggs, Leslie
Davies, G. Elfed (Rhondda, E.)Lubbock, EricSteele, Thomas
Davies, Harold (Leek)Mabon, Dr. J. DicksonStewart, Michael (Fulham)
Davies. Ifor (Gower)McBride, N.Stonehouse, John
Deer, GeorgeMcCann, J.Stones, William
Delargy, HughMacColl, JamesStrauss, Rt. Hn. G. R. (Vauxhall)
Dempsey, JamesMacDermot, NiallStross, Sir Barnett (Stoke-on-Trent, C.)
Diamond, JohnMcInnes, JamesSwain, Thomas
Dodds, NormanMackie, John (Enfield, East)Swingler, Stephen
Doig, PeterMcLeavy, FrankSymonds, J. B.
Driberg, TomMacMillan, Malcolm (Western Isles)Taverne, D.
Ede, Rt. Hon. C.MacPherson, MalcolmTaylor, Bernard (Mansfield)
Edelman, MauriceMahon, SimonThomas, George (Cardiff, W.)
Edwards, Rt. Hon. Ness (Caerphilly)Mallalieu, E. L. (Brigg)Thomas, Iorwerth (Rhondda, W.)
Edwards, Robert (Bilston)Mallalieu, J. P. W. (Huddersfield, E.)Thompson, Dr. Alan (Dunfermline)
Edwards, Walter (Stepney)Manuel, ArchieThomson, G. M. (Dundee, E.)
Evans, AlbertMapp, CharlesThornton, Ernest
Fernyhough, E.Marsh, RichardTimmons, John
Finch, HaroldMason, RoyTomney, Frank
Fitch, AlanMayhew, ChristopherWade, Donald
Fletcher, EricMellish, R. J.Wainwright, Edwin
Foley, MauriceMendelson, J. J.Warbey, William
Foot, Dingle (Ipswich)Millan, BruceWatkins, Tudor
Foot, Michael (Ebbw Vale)Milne, EdwardWeitzman, David
Fraser, Thomas (Hamilton)Mitchison, G. R.Wells, William (Walsall, N.)
Galpern, Sir MyerMonslow, WalterWhite, Mrs. Eirene
George, Lady Megan Lloyd (Crmrthn)Moody, A. S.Whitlock, William
Ginsburg, DavidMorris, Charles (Openshaw)Wigg, George
Gourlay, HarryMorris, John (Aberavon)Wilkins, W. A.
Greenwood, AnthonyMoyle, ArthurWilley, Frederick
Griffiths, David (Rother Valley)Mulley, FrederickWilliams, W. T. (Warrington)
Griffiths, Rt. Hon. James (Llanelly)Neal, HaroldWillis, E. G. (Edinburgh, E.)
Griffiths, W. (Exchange)Noel-Baker, Francis (Swindon)Wilson, Rt. Hon. Harold (Huyton)
Grimond, Rt. Hon. J.Noel-Baker, Rt. Hn. Philip (Derby, S.)Woodburn, Rt. Hon, A.
Gunter, RayOliver, G. H.Woof, Robert
Hale, Leslie (Oldham, W.)O'Malley, B. K.Wyatt, Woodrow
Hamilton, William (West Fife)Orem, A. E.Yates, Victor (Lady wood)
Hannan, WilliamOswald, ThomasZilliacus, K.
Harper, JosephOwen, Will
Hart, Mrs. JudithPadley, W. E.TELLERS FOR THE AYES:
Hayman, F. H.Paget, R. T.Mr. Rogers and Mr. Short.
Healey, DenisPannell, Charles (Leeds, W.)
Henderson, Rt. Hn. Arthur (Rwly Regis)Pargiter, G. A.
Agnew, Sir PeterForrest, GeorgeLoveys, Walter H.
Allan, Robert (Paddington, S.)Foster, Sir JohnLucas. Sir Jocelyn
Allason, JamesFraser, Rt. Hn. Hugh (Stafford & Stone)Lucas-Tooth, Sir Hugh
Amery, Rt. Hon. JulianFraser, Ian (Plymouth, Sutton)McAdden, Sir Stephen
Arbuthnot, Sir JohnFreeth, DenzilMacArthur, Ian
Ashton, Sir HubertGammans, LadyMcLaren, Martin
Atkins, HumphreyGardner, EdwardMaclay, Rt. Hon. John
Awdry, Daniel (Chippenham)Gibson-Watt, DavidMaclean, Sir Fitzroy (Bute & N. Ayrs)
Balniel, LordGilmour, Ian (Norfolk, Central)McLean, Neil (Inverness)
Barber, Rt. Hon. AnthonyGilmour, Sir John (East Fife)Macleod, Rt. Hn. Iain (Enfield, W.)
Barlow, Sir JohnGlover, Sir DouglasMacLeod, Sir John (Ross & Cromarty)
Barter, JohnGlyn, Dr. Alan (Clapham)McMaster, Stanley R.
Batsford, BrianGlyn, Sir Richard (Dorset, N.)Macmillan, Rt. Hn. Harold (Bromley)
Beamish, Col. Sir TuftonGodber, Rt. Hon, J. B.Macmillan, Maurice (Halifax)
Bell, RonaldGoodhart, PhilipMadden, Martin
Bennett, F. M. (Torquay)Goodhew, VictorMaginnis, John E.
Berkeley, HumphryGough, FrederickMaitland, Sir John
Bevins, Fit. Hon. ReginaldGower, RaymondMarkham, Major Sir Frank
Bidgood, John C.Grant-Ferris, R.Marshall, Sir Douglas
Biffen, JohnGreen, AlanMarten, Neil
Biggs-Davison, JohnGresham Cooke, R.Mathew, Robert (Honiton)
Bingham, R. M.Gurden, HaroldMatthews, Gordon (Meriden)
Birch, Rt. Hon. NigelHall, John (Wycombe)Maude, Angus (Stratford-on-Avon)
Bishop, Sir PatrickHamilton, Michael (Wellingborough)Maudling, Rt. Hon. Reginald
Black, Sir CyrilHarris, Frederic (Croydon, N. W.)Mawby, Ray
Bossom, Hon. CliveHarris, Reader (Heston)Maxwell-Hyslop, R. J.
Box, DonaldHarrison, Brian (Maldon)Maydon, Lt.-Cmdr. S. L. C.
Boyd-Carpenter, Rt. Hon. JohnHarrison, Col. Sir Harwood (Eye)Mills, Stratton
Boyle, Rt. Hon. Sir EdwardHarvey, Sir Arthur Vere (Macclest'd)Miscampbell, Norman
Braine, BernardHarvey, John (Walthamstow, E.)Montgomery, Fergus
Brewis, JohnHarvie Anderson, MissMore, Jasper (Ludlow)
Brown, Alan (Tottenham)Hastings, StephenMott-Radclyffe, Sir Charles
Browne, Percy (Torrington)Hay, JohnNeave, Airey
Bryan, PaulHeath, Fit. Hon. EdwardNicholls, Sir Harmer
Bullard, DenysHendry, ForbesNicholson, Sir Godfrey
Bullus, Wing Commander EricHicks Beach, Maj. W.Noble, Rt. Hon. Michael
Burden, F. A.Hiley, JosephNugent, Rt. Hon. Sir Richard
Butcher, Sir HerbertHill, Mrs. Eveline (Wythenshawe)Oakshott, Sir Hendrie
Campbell, GordonHill, J. E. B. (S. Norfolk)Orr, Capt. L. P. S.
Carr, Rt. Hon. Robert (Mitcham)Hirst, GeoffreyOrr-Ewing, Sir Ian (Hendon, North)
Cary, Sir RobertHobson, Rt. Hon. Sir JohnOsborn, John (Hallam)
Channon, H. P. G.Hocking, Philip N.Page, Graham (Crosby)
Chataway, ChristopherHolland, PhilipPage, John (Harrow, West)
Clark, Henry (Antrim, N.)Hollingworth, JohnPannell, Norman (Kirkdale)
Clark, William (Nottingham, S.)Hope, Rt. Hon. Lord JohnPartridge, E.
Clarke, Brig. Terence (Portsmth, W.)Hopkins, AlanPearson, Frank (Clitheroe)
Cleaver, LeonardHorny, R. P.Peel, John
Cole, NormanHornsby-Smith, Rt. Hon. Dame P.Percival, Ian
Cooke, RobertHoward, Hon. G. R. (St. Ives)Peyton, John
Cordeaux, Lt.-Col. J. K.Howard, John (Southampton, Test)Pickthorn, Sir Kenneth
Corfield, F. V.Hughes Hallett, Vice-Admiral JohnPike, Miss Mervyn
Costain, A. P.Hughes-Young, MichaelPitt, Dame Edith
Coulson, MichaelHulbert, Sir NormanPounder, Rafton
Courtney, Cdr. AnthonyHutchison, Michael ClarkPowell, Rt. Hon. J. Enoch
Craddock, Sir Beresford (Spelthorne)Iremonger, T. L.Price, David (Eastleigh)
Crawley, AidanIrvine, Bryant Godman (Rye)Price, H. A. (Lewisham, W.)
Critchley, JulianJames, DavidPrior-Palmer, Brig. Sir Otho
Crowder, F. P.Jenkins, Robert (Dulwich)Proudfoot, Wilfred
Cunningham, Sir KnoxJennings, J. C.Pym, Francis
Curran, CharlesJohnson, Eric (Blackley)Quennell, Miss J. M.
Currie, G. B. H.Johnson Smith, GeoffreyRamsden, Rt. Hon. James
Dalkeith, Earl ofJoseph, Rt. Hon. Sir KeithRawlinson, Rt. Hon. Sir Peter
Dance, JamesKaberry, Sir DonaldRedmayne, Rt. Hon. Martin
d'Avigdor-Goldsmid, Sir HenryKerans, Cdr. J. S.Rees, Hugh (Swansea, W.)
Deedes, Rt. Hon. W. F.Kerby, Capt. HenryRees-Davies, W. R. (Isle of Thanet)
Digby, Simon WingfieldKershaw, AnthonyRenton, Rt. Hon. David
Donaldson, Cmdr. C. E. M.Kimball, MarcusRidley, Hon. Nicholas
Doughty, CharlesKirk, PeterRidsdale, Julian
Drayson, G. B.Kitson, TimothyRippon, Rt. Hon. Geoffrey
du Cann, EdwardLagden, GodfreyRoberts, Sir Peter (Healey)
Duthie, Sir William (Banff)Lancaster. Col. C. G.Robinson, Rt. Hn. Sir R. (B'pool, S.)
Eden, Sir JohnLangford-Holt, Sir JohnRobson Brown, Sir William
Elliot, Capt. Walter (Carshalton)Leather, Sir EdwinRodgers, John (Sevenoaks)
Elliott, R. W. (Newc'tle-upon-Tyne, N.)Leavey, J. A.Roots, William
Emery, PeterLegge-Bourke, Sir HarryRopner, Col. Sir Leonard
Emmet, Hon. Mrs. EvelynLewis, Kenneth (Rutland)Royle, Anthony (Richmond, Surrey)
Errington, Sir EricLilley, F. J. P.Russell, Sir Ronald
Erroll, Rt. Hon. F. J.Lindsay, Sir MartinScott-Hopkins, James
Farey-Jones, F. W.Linstead, Sir HughSeymour, Leslie
Farr, JohnLitchfield, Capt. JohnSharpies, Richard
Fell, AnthonyLloyd, Rt. Hn. Geoffrey(Sut'nC'dfield)Shaw, M.
Fisher, NigelLongbottom, Charles
Fletcher-Cooke, CharlesLongden, Gilbert
Shepherd, WilliamThatcher, Mrs. MargaretWebster, David
Skeet, T. H. H.Thomas, Sir Leslie (Canterbury)Wells, John (Maidstone)
Smith, Dudley (Br'ntf'd & Chiswick)Thomas, Peter (Conway)Whitelaw, William
Smyth, Rt. Hon. Brig. Sir JohnThompson, Sir Kenneth (Walton)Williams, Dudley (Exeter)
Soames, Rt. Hon. ChristopherThompson, Sir Richard (Croydon, S.)Williams, Paul (Sunderland, S.)
Spearman, Sir AlexanderThorneycroft, Rt. Hon. PeterWills, Sir Gerald (Bridgwater)
Stainton, KeithThornton-Kemsley, Sir ColinWilson, Geoffrey (Truro)
Stevens, GeoffreyTiley, Arthur (Bradford, W.)Wise, A. R.
Stodart, J. A.Tilney, John (Wavertree)Wolrige-Gordon, Patrick
Stoddart-Scott, Col. Sir MalcolmTouche, Rt. Hon. Sir GordonWood, Rt. Hon. Richard
Storey, Sir SamuelTurner, ColinWoodhouse, C. M.
Studholme, Sir HenryTurton, Rt. Hon. R. H.Woodnutt, Mark
Talbot, John E.Tweedsmuir, LadyWoollam, John
Tapsell Petervan Straubenzee, W. R.Worsley, Marcus
Taylor, Sir Charles (Eastbourne)Vane, W. M. F.Yates, William (The Wrekin)
Taylor, Edwin (Bolton, E.)Vaughan-Morgan, Rt. Hon. Sir John
Taylor, Frank (M'ch'st'r, Moss Side)Vickers, Miss JoanTELLERS FOR THE NOES:
Taylor, Sir William (Bradford, N.)Walker-Smith, Rt. Hon. Sir DerekMr. Chichester-Clark and
Teeling, Sir WilliamWall, PatrickMr. Finlay.
Temple, John M.Watkinson, Rt. Hon. Harold

Main Question put and agreed to.

Resolved,That this House takes note of the Second Report from the Committee of Public Accounts relating to guided weapons contracts placed by the Ministry of Aviation with Ferranti Limited.