Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 140 - 158)



  140. Before you opted for the C-17s, how far had Air Foyle and Heavylift been able to satisfy your concerns about certifying the Antonov and assured access to that aircraft?
  (Sir Robert Walmsley) Two separate problems. Certification. My staff visited the Ukraine and Russia on this programme several times. I have to say that their initial very considerable doubts about giving this a military aircraft release, which are our words for certification, were assuaged as a result of those technical contacts. It did not eliminate the problem, but we did feel that there was something there which we probably were going to be able to solve. When it came to the assured charter arrangements, that was a very different matter. The design authority for these aircraft are governments and those governments are not beholden automatically to commercial concerns operating in the West or anywhere else. The fact is that although Air Foyle did very well to give us increased assurance related to the availability of the aircraft—and that was all part of our assessment of their bid—the absolute bottom line was that it could not be a guarantee in the same way that the C-17 was.

  141. What about the other companies?
  (Sir Robert Walmsley) They were no better.

  142. Were they worse?
  (Sir Robert Walmsley) I think it would be improper for me to say.

Mr Cohen

  143. Did you have your contract debriefing with Air Foyle and what were their comments? Did they agree with your assessment?
  (Sir Robert Walmsley) We have not yet debriefed them but I think I have said to this Committee before, and I mentioned this afternoon, that the first people I phoned up on the day of the announcement were Raytheon. I also spoke to Christopher Foyle. I made many difficult phone calls that afternoon. I do manage the losers personally; none of them was easy. They were all offered a debrief. I have to say that without exception people take this news with the greatest good common sense. That does not mean there will not be quite tough conversations afterwards as we explain why we came to the conclusions we did. We have not yet done that.

Dr Lewis

  144. What arrangements did you have to come to with the Department of Defense in the United States to be able to lease the four C-17s? Will they be coming straight off the production line or will they be ex-US Air Force aircraft?
  (Sir Robert Walmsley) Last bit first: coming straight off the production line. Second point: I have already indicated that we were totally dependent on the United States Air Force and indeed the Boeing company for negotiating this lease. I am hugely grateful for the cooperation we received from the United States Air Force on this. A very senior official in the United States Air Force, sometimes known as the Father of the C-17, although that cannot be right because it is a Mrs Druyun who is the most senior acquisition official in the United States Air Force, visited me here. She is a very formidable lady and has personally negotiated all the contracts on the C-17 with the Boeing company. She talked to me, I cannot remember whether it was between Christmas and New Year or just after, once in October and once in February. I spoke to her on the telephone last week, that Tuesday afternoon, to tell her what was going on. We have been extremely closely in touch and I pay tribute to what they have seen as a very useful addition to the United Kingdom military capability. Of course, this is not totally devoid of self-interest. Some of you may have indeed noticed that the United States Air Force slipped a few of their own C-17 production aircraft. That was their business. They totally understood when they did that, which was before we announced our decision, that that was their judgement of what was a sensible way to arrange their programme. There was no suggestion of a formal connection between the two.

  145. In that respect, has the deal that we have done with the Department of Defense let them off the hook of the penalties they were facing from cancelling three C-17s which they had already ordered? If so, are we sharing in those savings?
  (Sir Robert Walmsley) There was no question of penalties; no question of penalties whatsoever. Those negotiations of scheduling aircraft and delivery from Boeing were something entered into between the United States Air Force and Boeing. That was a completely separate contract.

  146. Would all four aircraft be on constant lease or on some sort of call-back arrangement like that envisaged for the RORO ships?
  (Sir Robert Walmsley) Constant lease. This is not private finance. We are paying; our money, our aeroplanes. The only point I would make is that sometimes they will have to go back for deep servicing and that will be done in the United States.

Mr Hepburn

  147. I should like to ask some questions on the Roll-On Roll-Offs and PFI. Obviously there is great interest in Tyneside—and my constituency has a shipyard—and Clydeside, Belfast, to name a few others. The contractor was supposed to be selected by April 2000. We have heard nothing yet. How many bids have been received? Have you selected a contractor yet? If you have, who is it? If you have not, when will it be announced.
  (Sir Robert Walmsley) If I fail to answer any of those, please prompt me again.

  148. How many bids have you received?
  (Sir Robert Walmsley) Four.

  149. Have you selected a contractor yet?
  (Sir Robert Walmsley) No.

  150. When will you be able to announce that decision?
  (Sir Robert Walmsley) The Secretary of State said he expects a contract to be placed this year, as indeed did our memorandum. It said, "From these bids it is intended to place a contract this year". I accept that in the tabulation of the progress of the project, which was all for planning purposes, we disclosed an April date, not for announcement but for selection, not for placing the contract. The contract was going to be placed in July. I am afraid, like many other programmes, I have failed to deliver on my planning. This is not a wholly new exception.

  151. An unknown source in the MOD said in the press that they did not think the UK shipyards had the capability to build these particular Roll-On Roll-Offs. Would you agree with that or are you satisfied that there is a facility there? Just quash that unknown source once and for ever.
  (Sir Robert Walmsley) It is always rather annoying, if you are tilting at windmills. Of course there is a capability in the United Kingdom to build RORO ferries; that is absolutely beyond dispute.

  152. Good.
  (Sir Robert Walmsley) Whether they can do it at a value for money price is another question but of course the capability exists.

  153. The Minister did say that in dealing with this particular contract you would be looking for a level playing field, an equal competitive background in Europe. How will this be achieved, because all sorts of stories are coming out about governments in Europe, whether Italy, France, Netherlands, giving incentives or whatever. I do not know what it is. They are helping their shipyards to compete on an unequal basis.
  (Sir Robert Walmsley) I do not think you will be very pleased with my answer. I too had heard these suggestions of subsidies—improper subsidies because all governments grant proper subsidies from time to time as permitted and they are very welcome too—improper subsidies being given to shipyards overseas. I have visited more shipyards in Europe than I could count on the fingers of one hand. I have done my best to understand their financial structures. I have never yet—and this will not surprise you—come across a clear case of subsidy and that is not just a casual statement. I have worked at this for a number of years. If anybody in this room, let alone sitting in front of me, can come up with a corroborated case of subsidy in a shipyard, I should be delighted to take it very seriously and I am ready to move on that. However, I cannot see it. The trick is that there have been many reports on the British shipbuilding industry, with which I have had a lot of my own professional life connected. We should not think that just because we are good at building ships we are good at building them economically. We do have lessons to learn. Part of it is investment, part of it is training, part of it is skills, part of it is designs which are easily built, part of it is facilities in the shipyards. Whatever the reason, we have not done nearly as well in warship exports as other countries and we just have to be very careful, and I am very careful, before we assume that all the fault lies with subsidies. If I could prove it, I should be so pleased, but I cannot.

  154. Would the whole contract be going to one successful bidder or is there an opportunity to split the contract up and put it in various yards or to various bidders?
  (Sir Robert Walmsley) I think I start from the point that we are not here placing a contract to build ships. It is unusual. We are going to place a contract to provide a service. Admiral Blackham's chaps specify the service and it will be provided for the benefit of the army, air force and the navy. It is a first for us. That contract will have a financial component, because somebody has to have the funds if they are building the ships, we are not going to fund them. We require crews to be provided for the ships, we require servicing to be provided for the ships and they will have to be at certain specified periods of notice and, at a guess, four of them will be working pretty hard for us nearly all of the time and the other two will be at various periods of notice. It will be that sort of shaped contract. I emphasise that we are contracting for a service. This is a public/private partnership (PPP). What that means is that the best bid is not solely determined by the best value for money in the shipyard. It is taking all these components together. What are we going to be charged for servicing? How much do the crews cost? How much interest are they going to pay on the money they are using to finance the ships? All these things will have to be bundled together in order to determine which is the best value for money. To get back to your question: of course there is a possibility of splitting the order between yards, but that is very much an issue for the service provider, if I can call the person with whom we shall contract by that term.

  155. When you say split, do you mean split between yards or split inasmuch as the manufacture would be done under a warship agreement and the actual running and servicing would be done by someone else?
  (Sir Robert Walmsley) Split between yards. What we are looking for is a good bid to provide the service and if they say that the best way for us to do that, for whatever reason—it would be their reason—would be to build two ships in one yard and two in another and that was the winning bid, we would take it.

  156. The Minister also made a statement that warships would be built in UK yards, which was a welcome statement. Why did they not label this particular project for the Roll-On Roll-Offs a defence contract?
  (Sir Robert Walmsley) These are judgements. But you can see that for us, in a private finance contract, it is very important indeed for this to work properly that these things are not on our balance sheet. If they are on our balance sheet, it is not proper private finance, it is a finance lease. One of the ways in which we are able to convince the National Audit Office and the Treasury that these items should not rest on our balance sheet is that they are out earning third party revenue. If these ships are out earning third party revenue—remember I said that two, might be three, but two would be on various periods of notice—carrying ordinary cargo, they are not warships. You cannot have a cargo operator sailing a warship around the world, letting it out to third parties. They are cargo ships. You can see that as part of a PPP, for what are essentially ferries, sealift capability, it is very difficult to see how you could sensibly classify them as warships. Even if they had not been warships, they would have been part of the Royal Fleet Auxiliary, manned therefore by merchant seaman, not flying the white ensign but flying the splendid blue ensign.

  157. The Minister made a very important statement when he said he would put the warship contracts to UK yards, because at the same time you require value for money and good quality when you do that. What happens if these particular orders are put abroad? When you look at the average age of the skilled person, certainly on Tyneside and probably wider, it is 49. Then you get shipyards closing. Where is the competition going to be within the UK sector to guarantee value for money and good quality?
  (Sir Robert Walmsley) I think about these things, not quite continuously but that is what it feels like. Of course with the Type 45 destroyer, this is a critical issue for us. What I would say is that the skills involved in building a warship are not just hull construction—I do not mean to dismiss that, that is an important part of it—but they are very, very strongly centred in the outfitting task. Warships tend not to be very big ships. A Type 45 will be 6,000 tons, probably 1,000 tons too big but nevertheless that is the way it is if we are going to deliver that capability. Most of the money goes into the outfitting task, fitting the weapons, the hugely technical issues. I rather hope that submarine skills are relevant, Barrow-in-Furness is relevant, Vosper Thornycroft is relevant, not just merchant shipbuilding skills, these warship building skills are important to us.

  158. Can you say what sort of call-back arrangements you have in place?
  (Sir Robert Walmsley) We do not have the arrangements in place because we have not negotiated the contract. I take my instructions from Admiral Blackham. He will say he wants his ship on certain period of notice and we shall lodge that in the contract. We might be a little careful about where we permitted the ships to go as well, but we shall be contracting with a reputable company.

  Chairman: I accept the impeccable logic of your arguments. I should not like to have to stand up at the Despatch Box nine months from now and say an order has been given to a German or French company. Please alert whomever has to make that announcement as to the uproar which is going to ensue. Thank you very much as always. We shall see you again tomorrow. You will need to be on your finest form, as ever, to defend the indefensible: Bowman, Type-45 and the carrier programme. You will certainly earn your salary tomorrow. Thank you very much.

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