Examination of witness (Questions 1 -
19)
WEDNESDAY 10 JUNE 1998
SIR ROBERT
WALMSLEY
Chairman
1. Today we shall be taking evidence on
the Comptroller and Auditor General's Report on progress with
the major defence and equipment procurement projects, the so-called
Major Projects Report 1997, and our witness today is Sir Robert
Walmsley, Chief of Defence Procurement. Welcome again, Sir Robert.
You are used to the routine. It seemed to me today that I ought
to say to you that I think next year when we address this issue
we may well be changing the method slightly to give us a little
more time to deliberate over some of the big chunks of this very
heavy and serious report. This year we will continue with the
current procedure. The first question relates to paragraph 1.8
which records a £3 billion cost overrun across the 25 projects,
and I also note from figure 11 that the cost overrun has got worse
every year since the 1993 report. Can you tell us why such large
cost increases occurred and when will they stop?
(Sir Robert Walmsley) The report itself in Part
2, Chairman, sets out the major causes for cost increase as programme
changes, inflation and specification changes. This is absolutely
consistent with our experience over the past few years and emphasises
the seriousness of the message which we take on board, both myself
and my staff, from this report. When they will stop is very difficult
for me to answer, but I can only say that we are working extremely
hard to do everything we can to make sure they do stop. I might
just say that the period covered by this Report covered the co-location
of the Procurement Executive staff at Abbey Wood in Bristol. We
started moving there in substantial numbers in March, just before
the April report started, and we finished in November 1996. So
that has seen a move of 4,500 people to a new place of work during
the 12 months covered by this report and, of course, it is my
responsibility to make sure we exploit the opportunity of Abbey
Wood which I think will be a great help in securing a better outcome.
2. Your predecessor four years ago told
this Committee that "three-point costings", his phrase,
maximum, minimum and most likely estimates, would counter the
tendency towards optimistic original estimates. There is no improvement
four years later. Can you explain that?
(Sir Robert Walmsley) It is of course true there
is no improvement, although in percentage terms, and I know that
statistics can be misleading, we have levelled off or perhaps
even slightly turned the corner this year. Three point estimating
remains extremely valuable as the technique for focusing the minds
of all of us in the Procurement Executive on the possible outcomes
and we still use it, but it does nothing really, I am afraid,
to help us guard against programme changes or inflation, both
of which are large subjects in themselves and I think we do have
better ways ahead.
3. Others may come back on that. We will
press on and deal with some of the issues you are raising. I see
from paragraph 1.9 that nearly half the total cost overrun of
£3 billion is due to the Eurofighter project. Has the cost
overrun on this project now stabilised or is there a risk of further
overruns as the aircraft enters the production phase?
(Sir Robert Walmsley) We are now protected by
maximum price contract so I believe in any very substantial sense
yes, we are protected against cost overruns. Of course the production
period over which Eurofighter will be built is a very substantial
one and to guarantee that we are immune to specification changes
or work on obsolescence over a 14-year production run would be
a very brave act on my part, but I would expect to offset any
upward tendencies in those respects by better manufacturing techniques,
what is called the learning curve, ie, a reduced price for making
the 100th one as compared with the tenth one.
4. When you said maximum price contract
did you mean without an inflation clause in it?
(Sir Robert Walmsley) It does have inflation,
but it does, nevertheless, set a maximum price.
5. That brings me to my next point, which
is that paragraph 2.6 shows that on average inflation adjustment
payments to defence contractors continue to escalate faster than
general inflation. Why do you agree such inflation adjustment
mechanisms with defence contractors?
(Sir Robert Walmsley) It has been an agreement
with industry entered into many years ago now that we should use
indices related to their industry for adjusting prices. I have
to say that I think we should now review that. It does seem to
me to be a difficult proposition for the defence budget that programmes
should automatically become an increasing burden since the defence
budget uplift is never more than the gross domestic product inflation
index, whereas these indices are usually greater than the GDP
index and I think we should try to move away from that.
6. One of the primary reasons for that is
that the GDP index has some productivity saving in it, the very
point you were raising with the Eurofighter contract, and by taking
input inflators you are losing that in the contract, is that not
right?
(Sir Robert Walmsley) That would be right, although
because this message has been so seriously drummed home in a succession
of reports, when it came to negotiating with the main contractors
the maximum prices for the Eurofighter contract in fact we have
not used input indices. At the back end of last year we put in
place arrangements which are based on a five-year firm price,
that is no index for the first five years and then using related
output indices for subsequent uplift. I think that is a very big
step forward. It has not been achieved on every contract, but
we were determined because of the size of the Eurofighter contract
that we should move in that direction at least on the aircraft
construction.
7. Thank you. I am sure others will come
back to that. I want to jump backwards again to paragraph 1.12
and figure 12 which record that the average in-service date slippage
exceeds three years and the slippage on 20 common projects increased
between 1996 and 1997. Why do projects continue to be subject
to long delays and what are you doing to reduce that slippage?
(Sir Robert Walmsley) The principal reason is
technical difficulties and I think I should say, and I hope it
does not sound aggressive, that technical difficulties are usually
associated with problems of research and development and they
arise in contractors. We place contracts at an agreed price and
difficulties arise because, of course, we are trying to procure
articles that do not exist, that require substantial R&D.
So by far the biggest cause is technical difficulties. I think
we have to look very hard at why it is that these technical difficulties
arise. It may be that we do not do enough to understand them before
we start. It may be that both industry and ourselves are so anxious
to see the contract placed that we do not look hard enough at
the realities, that we do not look hard enough at our own experience
of working together. I think we need to do more of that. We need
to invest more perhaps in the early stages of projects before
making these major commitments to development contracts, and many
other techniques, some of them associated with developing people
responsible for placing the contracts.
8. Sir Robert, I am very happy for you to
be aggressive with the contractors. Please do not let us inhibit
you. Paragraphs 3.51 and 3.71 on the Hercules and the TUL/TUM
projects respectively show that the liquidated damages clauses
have widely varying success on contract use for the cost of slippage.
Why did your contract arrangements on TUL/TUM not provide adequate
protection, and what tools do you apply to incentivise the industry
to avoid slippage in the first place?
(Sir Robert Walmsley) It is true that the run-on
costs of the TUL/TUM-truck utility/light medium have exceeded
what we have recovered on liquidated damages, although it is also
true that the delay in placing the production contract for the
two types of utility trucks meant that we postponed paying for
them. The liquidated damages provision was set at six per cent
of the production price, that has been our practice for a number
of years now and because of the substantial nature of the delays,
of course, it is true, given that many of them were incurred before
the contract itself was placed, that those liquidated damages
could not recover the costs of delays which occurred before the
contract was placed.
9. Well, again others may want to come back
again on that. Paragraphs 3.6 and 3.17 to 3.18 detail two projects,
that is the Astute-Class submarine and the Bowman radio system,
where your preferred procurement strategy of competition collapsed
after the erstwhile competitors joined forces. Are such enforced
changes of procurement strategy likely to become more common and
would it be sensible in the future to make contingency plans for
such occurrences?
(Sir Robert Walmsley) I think it is likely to
become more common—that is almost intuitive—as the
industry reorganises, restructures, in effect rationalises, but
it is also good news on the other side of the coin that today
we are still achieving our target of placing 75 per cent by value
of our contracts by competition. I think many people, myself included,
wondered whether we would be able to continue to achieve that,
and we are doing so. That of course remains the most certain route,
in my view, for securing best value for money. These two particular
contracts of course are of a very special nature and we have never
procured a nuclear-powered submarine through competition. Since
we first bought the Dreadnought in the early 1960s, they have
been procured by single-tender action. In the case of Astute,
we did have a prime contract competition which meant that the
existing incumbent recipient of all those single-tender action
contracts did not in fact himself get the prime contract. Of course
to some outsiders, if I can use that word, that might look like
a rather academic distinction since GEC Marconi, who did receive
the prime contract, in fact took over the shipyard, VSEL at Barrow,
and, therefore, there is a sense in which one might think, "Well,
the same old team have got it", but very far from it. I was
very proud to have the opportunity of opening the prime contract
office, which is located not very far from here in the south of
England, because so much of our submarine capability is dictated
by the weapons fit, by the electronics and by the whole approach
to prime contracting which requires somebody outside the shipyard,
so they look at the shipyard essentially as a sub-contractor.
That is a new environment for nuclear submarine production. So
although it is right that competition collapsed, it did not collapse
before we had had some benefits, but I think the idea of the prime
contract office well away from the shipyard set a completely new
tone in terms of submarine procurement.
10. Those cases which I have just referred
to, Bowman and Astute, lead to questions about the outcomes of
NAPNOC. Are you sure you are getting value for money from NAPNOC
contracts or is there a possibility that negotiating delays and
the lack of competition have all led to the situation where you
are paying too much for equipment that is too late?
(Sir Robert Walmsley) It is possible. Having said
so firmly that I believe competition is the most certain route
to securing value for money, I cannot then claim to secure best
value for money if I do not have competition. We are of course
learning how to undertake NAPNOC, but it is not a good plan, in
my view, to start such negotiations saying, "Well, we will
finish them on the 1st November". It does tend to lead to
your contractor folding his arms and waiting for the 1st November.
What we need to do and what we did with Astute and what we will
do and are doing with Bowman is get a very clear and immensely
complicated price breakdown structure agreed with the contractor,
and I mean sheets and sheets of spreadsheets, enormous pieces
of paper if you try to do it in longhand, which allows one to
have very detailed negotiations on each component of what we are
buying and it does mean that we do not get into muddles in terms
of negotiating and not understanding what we are talking about.
It requires openness and trust between us and the contractor and
although it takes a long time, it is a technique we first employed
on the placement of amphibious assault ships, the LPD(R)s, developed
on Astute and will apply on Bowman. I think it does give us the
best chance for both parties of undertaking a sensibly risk-priced
contract. I think it worked on Astute.
Chairman: Thank you.
I think you will find there are follow-ups on almost all of those
points, so let us open matters up, starting with Alan Williams.
Mr Williams
11. First of all, there are just a couple
of points of detail I would like to clarify. The summary sheets
you have provided to the Committee have arrived virtually a year
late. Why was this?
(Sir Robert Walmsley) They do have to be agreed
between the National Audit Office staff and my own and it is also
true to say that we do seem to have an almost incomprehensible
degree of difficulty in producing these sheets to an accuracy
that would be suitable for this Committee.
12. We will come to the accuracy in a second,
unless you are saying that that was the reason for the delay.
(Sir Robert Walmsley) That is why it takes us
so long.
13. Looked at from the naive point of view
of this Committee, none of us or few of us are experts in the
intricacies of this industry, why are you so incapable of producing
just synopses of information which you are using constantly in
a much more detailed form possibly at the heart of a lot of your
management, and how can you get the wider scale right if you cannot
even produce these summary sheets for us of what you are doing?
(Sir Robert Walmsley) The textual information
is not the problem; it is getting the numbers right that causes
us the difficulty.
14. So you are okay on words, but not very
numerate. Is that what you are saying?
(Sir Robert Walmsley) Well, we know what has happened
because we would feel it and experience it, but putting a number,
and these are accurate numbers, to everything, and bear in mind
the sense in which it arrived at the speed of the slowest one,
the most difficult one, it takes us too long, I agree.
15. You see, I could understand if just
the odd one was wrong, but the NAO tell us that of the 13 you
have submitted, 13 were wrong. It is a pretty good strike rate,
is it not?
(Sir Robert Walmsley) I cannot but agree. I am
embarrassed about this, but I have looked at the work that individuals
do to generate these figures and underneath each simple page of
this Report lies a huge number of costs aggregated across a great
many subsystems often and until it is all right, it is always
susceptible to a mistake being found.
16. But statistics suggest that at least
you had the likelihood of getting one or two of them right the
first time around. We are not asking you to have them all right,
but is it asking too much for you actually to give us confidence
by showing us you can get some of them right?
(Sir Robert Walmsley) We should, and I do not
think, when we talk of mistakes, that we are talking about huge
mistakes. We are talking about relatively, I know it is all-important,
but relatively small mistakes, but I am not trying to hide behind
that to say, "Yes, we should be allowed to make this many
errors". We must try to get it right.
17. Why, for example, did you—"renege"
may be too strong a word—but not conform to the guidance
you had agreed with the NAO in relation to Apache where you did
not exactly give the information about the original in-service
date that would have been required had you conformed to the agreement
you had with the NAO?
(Sir Robert Walmsley) The Report is factually
correct and describes our view of the in-service date, but the
NAO view is also well expressed in the Report and I have no difficulty
with the factual nature of the Report. The Apache was unusual.
18. But most of your projects are unusual,
are they not? That is always your excuse, that it is their innovative
nature which is your biggest defence normally, so what was unusual
about this one? It was based on an American design, was it not?
(Sir Robert Walmsley) No, the in-service date
issue with Apache very substantially relates to the fact that
we were introducing a new capability, so there was a degree of
judgment entered into when we set the first in-service date and
perhaps it is true that the strategic environment will more and
more require us to bear that in mind as we set the first in-service
date. We then had bids from contractors and none of them could
achieve it. So as soon as we went out to industry we knew that
that judgment could not be substantiated by any real offer.
19. Perhaps I could switch from nuts and
bolts, because we are not likely to agree how many nuts it takes
to match how many bolts, and go on and raise a point that was
raised with your predecessor, who always impressed us, if I may
say so, as a witness here. What progress are you now making with
the conundrum of developing new systems and at the same time needing
to decide on a cut-off point beyond which you will not allow new
technology to be introduced and alter the design, because this
has been at the heart of so many problems in the past?
(Sir Robert Walmsley) As I mentioned before, I
think taking too big technical steps introduces the sort of technical
risks which have resulted in these delays. I think we should contemplate
an incremental style of acquisition where we take smaller technical
steps for some equipments, we do not try and take it all at one
bite.
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