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16 June, 1927.]

Sir WALTER F. NICHOLSON, K.C.B., and Sir SIGMUND DANNREUTHER, C.B.

[Continued.

5940. I understand that it was the same firm. My point was this. In answer to a question that was put to you you said you had had an experimental section made?—Yes.

5941. Under that contract for the experimental section did you have any larger sum to pay than you originally contracted for through any delay, or was it just an easy contract that was delivered up to specification?-We had to pay extra on it. If the Committee wishes to know about that particular contract, it was made originally on the basis of two parts: one of them we attempted to fix a fixed price for; the other one was to be costed out. It proved that the cost of the fixed price half that we attempted to fix was inadequate, and we had to pay extra on the actual proved costs.

5942. Was there any delay in the way of plans and that sort of thing which caused a delay in this case?-The two things worked in together. The delay in one case did affect the other.

5943. But you entered into the second contract afterwards?-No.

5944. Did you enter into the two contracts simultaneously?-No, we entered into the second contract subsequently, but overlapping the first.

5945. So that you had no opportunity of benefiting from your experience with your first contract?-The experience was continuous. The whole process must be regarded as continuous collaboration between the Air Ministry staff and the firm.

5946. Although there were two separate contracts?--Yes.

5947. They were for the same object? -They were for the same object, yes.

Sir Fredric Wise.

5948. Would you state the name of the firm invited to tender?-Messrs. Boulton & Paul.

Chairman.

5949. Now we will take paragraph 8 of your report, Sir Malcolm, dealing with rates charged for petrol issued on repayment in Iraq.-(Sir Malcolm Ramsay.) The instructions of the Air Ministry were not put in force in Iraq, but after considerable delay and correspondence Iraq has now been brought into line with other

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stations. This matter, I might say, is not a very large one as far as the amount of money goes. I cannot say what is the sum involved, but it is perhaps in the neighbourhood of £200 or £300 a year.

5950. Sir Walter, as has been indicated by Sir Malcolm, the sum involved is not large, but in any brief statement regarding this paragraph which you might make to the Committee could you tell us the position with regard to the question of control. Was not there a definite instruction to the authorities in Iraq, or why was there this great delay in carrying out what I understood to be the decision of the Air Ministry? (Sir Walter Nicholson.) I have to confess to delay on the part of the Air Ministry in giving effect to the Treasury decision The matter was argued with the Treasury, and the Treasury came to a conclusion that this local price ought to be charged, but instead of immediately issuing orders to that effect to Iraq we delayed doing so because we were disinclined to accept the Treasury decision. That I think might have been legitimate for three or four weeks while we were determining whether to go to the Treasury again or not, but as we determined not to go there ought not to have been this delay. If desired, I could explain further the reasons why we wished to go again to the Treasury, but perhaps that is not necessary.

5951. That point may be put to you possibly by some Member of the Committee who wishes to pursue it. I gather that this was not any local delay in Iraq; it was a controversy between your Department and the Treasury? Have you anything to say on that, Mr. Fass?— (Mr. Fass.) I have nothing later than our letter of the 31st July in which we required the Air Ministry to follow the War Office practice for reasons which we submitted were good and sufficient.

Sir Assheton Pownall.

5952. In what year was that letter of the 31st July?-31st July, 1926. If petrol is issued at less than the current contract price that is really a concealed subsidy to the man concerned. Then you have to be sure that he only uses it for himself and does not sell it and make profits and create difficulties. If an Air officer or any other officer in Iraq is in a position which entitles him to some

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16 June, 1927.]

Sir WALTER F. NICHOLSON, K.C.B., and Sir SIGMUND DANNREUTHER, C.B.

thing extra it should be given him by way of an allowance and not by a concealed subsidy such as this.

Sir John Marriott.

5953. What do you mean by the local officer being possibly entitled to something extra? If in Iraq, he would be getting colonial allowance to compensate him for the hardship he suffers in having to serve in an out-of-the-way place away from convenience and comforts.

5954. I quite understand that, but has that anything to do with contracts?Nothing at all. The suggestion here was that because these men were serving in out-of-the-way places it would be reasonable to let them have the petrol to enable them to get about at a less rate than they would have to pay for it locally in purchasing it from the ordinary petrol dealer in Iraq. We thought there was nothing in that argument because if a man is in an out-of-the-way place such as Iraq, for the discomfort and possible extra expense he already gets compensated by means of the colonial allow

ance.

5955. I quite appreciate that. What I do not quite understand is the advan tage which would accrue to him by this anticipation. The Government are able to buy their petrol supplies in bulk at it very much cheaper rate than the ordinary individual.

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are

5956. Buy it where do you mean locally in Iraq? No, I mean that under our contract with the Anglo-Persian Oil Company and other contracts buying in great quantities, and therefore are able to buy it much more cheaply than an individual would be able to buy it.

5957. But how would the local officer get any advantage from that?—The suggestion was that we should issue to the local officer at a price lower than the local retail price.

5958 In fact, you sold to him at cost price? (Sir Walter Nicholson.) No, cost price plus 25 per cent. plus freight. I do not wish to enter into an argument with Mr. Fass, though there is very much to be said on either side, but I should like to make it perfectly clear to the Committee that we were not losing any Government money whatever. (Mr. Fass.) I do not suggest that.

[Continued.

5959. I do not think Mr. Fass suggested that to me at all, but I was trying to clear up the actual facts?-The effect of this would be to give the officer a beneficial rate. There seems to us no reason why he should have that beneficial rate, and there are a good many objections to giving him a special rate, whatever it may be, as long as it is less than the ordinary market rate.

5960. I think there probably were reasons for not doing so, but would you tell us what your reasons were?-I was trying to put the reasons. In the first place, you would have to be sure that he used the petrol himself and did not sell it locally and so undercut the local prices. I dare say it would mean checking of some sort, and then you would have to have a staff for checking the issues and receipts. It would make a bigger turnover and make more work, which means more clerks.

5961. In other words, you are totally opposed from the Treasury point of view to this practice?—We think it is a wrong practice. The War Office do not allow it, and we could see no reason why the Air Ministry should allow it.

5962. What is the reason of the Air Ministry for allowing it?-(Sir Walter Nicholson.) I am quite prepared to answer that, but as we have now accepted the Treasury decision I do not wish to waste the time of the Committee on it if they do not consider it is necessary to go into it. But as Mr. Fass has made this rather long statement about it, perhaps you will allow me very briefly to state our position. Firstly, we do not in fact issue petrol on repayment at home, or in Egypt, or in Palestine at all, although if it were issued it would have to be issued at local rates under the Order. In Iraq, where so many officers are in out-of-the-way places and there is no normal local market, we continued the War Office practice of issuing at contract rates plus freight, plus 25 per cent. Departmental Charges, which is obviously very heavy, and in fact gives a substantial profit on the transac

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tion.

5963. But I understand that that was precisely not the War Office practice?— It was the War Office practice in Mesopotamia. It may have been altered in other places. All I am saying is that we took it over from the War Office; we found it as an existing practice in Iraq.

16 June, 1927.]

Sir WALTER F. NICHOLSON, K.C.B., and Sir SIGMUND DANNREUTHER, C.B.

When the matter was called in question we felt considerable doubt as to how far we were entitled to what I might perhaps without offence call profiteer on our officers, and in particular we felt very grave doubt about one difficulty, namely, that the local price charged by the Anglo-Persian Company in Iraq to civil customers, which of course is a high monopoly price, necessarily includes an element of Customs Duty which has been paid to the Iraq Government. By charging that local price we are in fact taking that Customs Duty in respect of any such issues out of the pocket of the Iraq Exchequer.

Mr. Ellis.

5964. But if somebody buys a pair of trousers in Iraq, if he happens to be a soldier or sailor he has to pay Customs Duty on that?-But we are taking that Customs element.

5965. That is a direct statement that you would be justified in avoiding the payment of Customs Duty in a Government in which you are operating because the benefit goes to your own servants. That is what it comes to. Can you justify that? We do not pay this duty.

5966. But you are giving that as argument.

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Sir John Marriott.] You are giving it as an argument of the non-payment of the duty.

Mr. Ellis.

5967. We are not saying whether it is right or wrong, but the argument is that you are doing it to benefit your own men? There is no impropriety in benefiting our own men, who have certain rights of exemption from Customs Duty, but what is very doubtful is whether we are honourably justified visa-vis the Iraq Government in charging a man a price which includes the Customs Duty which has not been paid to the Iraq Government.

5968. If you go into the native bazaar and bargain in the ordinary civilian way, what you pay includes the duty on anything that has been brought into the bazaar? (Sir Sigmund Dannreuther.) The Navy, Army, and Air Force Institutes do not pay Customs Duty.

5969. The Air Force Institute is entitled to go in there and buy these things, and they have to pay no duty,

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men

[Continued.

but there are certain limits to what is sold in the Air Force Institutes. Take a soldier going into the bazaar for anything which is of a civilian nature, you would not expect to have him exempted from duty with respect to anything he might buy in the bazaar. Then there is the further added danger that all these are subject to very considerable temptation by their friends, when they know they have cheaper petrol, to pass on the benefit to them? (Sir Walter Nicholson.) I do not wish to argue the point, but I do not think it ought to be suggested that the sort of officer who keeps a private car in Iraq is likely to be using it as a means of chaffering petrol.

5970. I do not suggest that for one moment, but officers are not the only people there?-Any issues are, of course, only made, and were only made, under the authority of the A.O.C. to properly authorised people. The casual airman cannot come along and say: "Please give me a 4-gallon tin of petrol for so much."

5971. I quite agree. But yet he can get enough petrol under this arrangement to satisfy himself and to use his motor car or aeroplane not strictly for Government purposes. That is the danger in all these things, and surely that is the reason why the War Office altered it?We have issued orders at home and in Egypt and Palestine, and in all the places where you can get petrol in the ordinary way, that no private issues on repayment shall be allowed. That is the normal and desirable practice.

5972. For the reasons given?-Certainly.

Chairman.

5973. Then we pass to paragraph 9. Have you anything to say on that, Sir Malcolm? (Sir Malcolm Ramsay.) This matter has been settled since I wrote this Report, and the claims of the contractors outstanding on these wartime contracts amounting roughly to £200,000 have been settled on legal advice for the payment of £25,000. The matter is now, I believe, closed.

5974. Then we come to paragraph 10? -This paragraph illustrates the expense which Government Departments may be put to by change in general policy. The short point is that the Air Ministry had ordered a series of sheds, and

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Sir WALTER F. NICHOLSON, K.C.B., and Sir SIGMUND DANNREUTHER, C.B.

then the Government decided that the expansion of the Air Force was to be slowed down. There were three contracts for these sheds. They had immediate use for the deliveries under the two contracts, but in the third case the modification of the programme made it necessary to store the stuff. There was a clause in the contract which provided for a payment for storage, but that did not contemplate the circumstances that actually occurred. The Air Ministry then then approached the contractor and were successful in getting him to reduce the rate of storage which was specified. The short point is that by the end of June, 1928, probably £8,000 will have to be spent on storage and painting this material.

5975. The central point is really the deceleration of the rate of expansion of the Air Force ?-Yes. I think the Ministry were the victims of policy.

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5977. Are we using up the stock of material?-Oh, yes, we are using it up. We expect now that the total cost will not be quite as much as £8,000. We expect it will be limited to £7,500.

5978. Would the cost be increasing by keeping the stuff, or will you be using up the material?-We are using it up.

5979. When do you hope to be able to utilise the material?-By early in 1928 we expect to have used up this batch.

5980. I suppose this is not the only contract on which the slowing down has caused the loss of money?-I think, subject to correction, there are very few specific cases of this sort.

There may have been indirect expense, but I do not think there are many cases of specific extra charges on contracts.

5981. The slowing down only really means that you have not so much altered your programme as postponed it? Yes.

5982. And therefore it will continue over a longer period? Of course, in various ways expense was incurred which would not have been incurred if we had

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5985. Now we come to paragraph 11 which deals with unsettled claims in Palestine ? (Sir Malcolm Ramsay.) This paragraph relates to the Kantara-Rafa military railway. That railway was built by Imperial funds and was valued in 1920 at about E£750,000, but the rolling stock and the locomotives belong to the Palestine Government, and since 1920 the railway has been maintained and worked by that Government. There is a bargain nominally in force as to the division of the profits on working, but for the last three years, though there have been profits, the Air Ministry has not been credited with any share of them, and the matter, according to my latest information, depends upon a report of the Special Commissioner who was sent out by the Colonial Office. I have not heard of any fresh development since this paragraph was written in February.

5986. I gather, Sir Walter, that you have withheld £10,000 against the settlement of the claims?-(Sir Walter Nicholson.) We were withholding that in consideration of a counterclaim in respect of the railway. Then with the consent of the Colonial Office and the Treasury we released this amount, and as stated in this paragraph, we issued instructions that payment should be made, but before payment was actually made our local authorities quite properly pointed out that a certain further claim in respect of hutting had not been cleared up, and that as a matter of fact is still withheld.

Sir Fredric Wise.

5987. Sir Walter, I understand from Sir Malcolm that this railway is making

16 June, 1927.]

Sir WALTER F. NICHOLSON, K.C.B., and Sir SIGMUND DANNREUTHER, C.B.

[Continued.

a profit. Is that right?-If the Committee would allow me, I should very much wish to take the attitude that the question of what profits have been made on this railway and the question of how they should be allocated is a matter entirely for the Colonial Office and the Treasury in discussion with the Palestine Government. It is perfectly true that the account passed in some form through our books, but except in so far as our local auditor is responsible for calling attention to certain facts in connection with it the agency is really purely nominal. (Mr. Fass.) The position was that there were surpluses up to 1923, and then suggestions were made that there had been considerable under-charges in the maintenance account and operation account and inadequate provision for depreciation, and things of that sort. Upon that it was decided to send out an expert to go into the whole of the accounts-I do not know for what period -to see what the real position so far as profit-earning is, and we are still awaiting the report of that expert. I do not think I can say anything more.

5988. Do I understand that the profits referred to by Sir Malcolm were gross profits?—I think they were described as surpluses. (Sir Malcolm Ramsay.) They were described as profits; they amounted to about £87,000 in three years. Whether they were net profits or not my figures do not show.

Chairman.] In any case, I should say offhand it would be very difficult for anybody to make any statement about this until the expert's report is received.

Sir Fredric Wise.] How much has been spent on this railway?

Chairman.

5989. Is that covered in the original cost of E€750,000?-I cannot tell you the original cost. (Mr. Fass.) £436,000 was the amount of the British Government's capital. What the cost was I do not know.

Sir Fredric Wise.

5990. Then what is the E£750,000?(Sir Malcolm Ramsay.) That is what is called the Wickham capital valuation which was made in 1920.

Chairman.

5991. Then paragraph 12 deals with rates for enroachments in Iraq. The Committee has already disposed of this paragraph on the Treasury Minute, I think. That matter has now been arranged on the basis shown at the end of paragraph 12. Paragraph 13 refers to irregularities in the sale of works stores in Iraq? None of these cases is very large in money as far as I can identify, but there were several cases which led to very grave suspicion as to the honesty of the subordinate officials involved, and as to the honesty of the contractor. There have been two inquiries held. There was a Court of Inquiry at Bagdad, and then the Air Ministry held a further Inquiry on the top of that. The officials concerned are no longer employed, and the Air Ministry have under consideration the whole matter of the contracts and sales practice in Iraq, and when I wrote this Report the inquiry was still proceeding.

5992. Sir Walter, will you tell us the present position, please?-(Sir Walter Nicholson.) The position is as stated by Sir Malcolm. At the time he wrote this Report we had set up a Special Committee of Inquiry at the Air Ministry to go into the matter. They examined witnesses, though not on oath, as far as they were accessible in England at that time, and the Ministry made a considered report on the various transactions about which audit queries had been raised. I forwarded a copy of that report to Sir Malcolm. I have not heard if he wants further information about any of it. The only general statement I should like to make on the matter is that the position undoubtedly for a period, that is to say, during the Winter of 1925-26, was disquieting when we came to know about it at the Air Ministry. There was lack of supervision in this Department, and some of the subordinate officers, as Sir Malcolm has said, were doing irregular things, and one, at any rate, of them we are satisfied, though we have not got anything amounting to absolute legal proof, must have been guilty of taking bribes, I think. We cannot otherwise explain his action.

Sir John Marriott.

5993. Taking bribes from a contractor? -From a contractor. There is only one

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