Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



Mr Gapes

  200. Perhaps I should declare an interest; my constituency, Ilford, was the designated manufacturing site for the Archer project and is now no longer, because of the changes that have come about. I have been following this issue for eight years, since I was first elected to Parliament, and there has been enormous uncertainty caused by the chopping and changing. I want to probe some of the reasons for that. In the risk reduction study, Sir Robert, that Archer are currently doing for you, what have they been asked to examine?
  (Sir Robert Walmsley) Bowman consists of radios at various frequencies, most obviously VHF and HF, and it consists of a management information system which tells what frequencies the different radios have to use to broadcast instructions, and it consists of a very complex over-the-air re-keying cryptographic protection system where the cryptographic keys are distributed over-the-air as part of the radio system itself. There are a number of other elements available. But just with those four things; two different frequencies of radios, a management system and a cryptographic system, you begin to see that Bowman is a collection of components, and what Archer have been doing is specifying the individual components. They have been seeking proposals from industry, including their shareholders, to satisfy the individual specifications of Bowman, and most importantly they have been managing the systems engineering integration which makes sure that all of those components can work together. That is a very difficult issue in terms of making sure that data can move from one radio to another, that they do not interfere with each other and that the wires that connect them up inside the vehicle can move the data around the vehicle or headquarters in sufficient volume and at sufficient speed not to result in disruption to traffic. That is what Archer has been doing; maintaining the system design and running the bits in industry.

  201. As I understand it, the latest in service target date is three or four years ahead. What specifically are they focusing on to ensure that that date is met?
  (Sir Robert Walmsley) The date, which is precisely as you have described—three or four years from now—is a date not to be settled unless and until we place a contract with Archer.

  202. So it could move again for another few years?
  (Sir Robert Walmsley) No, it will not move a few years. That is to take my uncertainty over whether it is three or four into, I think, territory which I do not recognise. What I think is right though is to say that in that contract there will be a very clear requirement on Archer to demonstrate performance. It is not just demonstrating that one radio can talk to another, I think it is right to say that that is easy, but what is difficult is to manage this at a very large scale of large troop formations. These are networks where people are continually joining and leaving as they go over the brow of a hill, or as they arrive by helicopter. The network is going to involve an enormous number of units and radios, and demonstrating it at scales will require the co-operation of the army, because it will have to be real. Archer will be incentivised to deliver on time because payment against that achievement will mean that they will be out of pocket if they fail the demonstration.

  203. We have been told in your memorandum that the current risk reduction work is intended to give you confidence in the programme's likely performance, time and cost that you need for the Main Gate approval for Bowman. How big would the projected further delay or additional costs have to be for you not to submit the programme for Main Gate scrutiny?
  (Sir Robert Walmsley) The first thing to say is that we have looked at it very carefully to make sure that it is affordable at Main Gate. We have a budget and I think we are on track to deliver a programme that is affordable, but that requires a negotiation to be concluded with Archer. I make no secret of the fact that we are at least £100 million over budget now, but that is probably somewhere around about 5% and I am confident that we can negotiate that figure into an affordable situation. The second thing we have to be absolutely clear on is that this is a rational proposition. We do not just take a promise from a company, even with a very tough contract which penalises them or causes them to have to pay the money back to us if they do not deliver, we inspect their technical proposition in great detail, and of course DERA—the Defence Evaluation Research Agency—contains a number of people who are capable of assessing these systems, as does my own staff, and we will use independent advisors if we think that is appropriate. So we need a tough contract, a rational, technical proposition and it needs to be affordable. If we pass all of those things, then we will get it on contract and we will deliver it to the army.

  204. Earlier on you described the way in which the Yeoman competition with Crossbow for the Bowman project had changed in 1996 when Yeoman and Crossbow came together to form Archer, and you described it as "a difficult organism". Could you enlarge on that, please? I would be interested to know what you mean in terms of why it is difficult. Is it any more difficult now than when you were dealing with the ITT model through Crossbow when Siemens/Plessey became British Aerospace through Yeoman?
  (Sir Robert Walmsley) It is a bit more difficult than that. In that case we had two consortia. I admit that they were consortia, so there is a problem there, but it was Crossbow versus Yeoman, they were in competition and each would incentivise the other's good behaviour. A completely different situation arises when you get into a single tender action, because there you have to have a more intellectual argument about why that costs too much and we have to go out and prove it, and we say, "We are just not paying that amount of money for an HF radio." We can control that by Archer running sub-contract competitions for things like the VHF radio, and we say that we want these competitions. I have people in there and they scrutinise the bids, exactly as we were talking yesterday about scrutinising the engines for the A400-M, and via competition we are quite happy that we can get a competitive price for these various components. The problem in Archer has been that since the three shareholders in Archer are the source for many of the bids for these competitions, it is quite difficult to get the people in Archer to objectively say, "Well, I agree that is the best one and that goes to you", because actually they are thinking, "I wonder what my bosses think of that back in my shareholding company?" I do not mean to trivialise that point, it is a real table cloth tugging exercise, and quite frankly these project specific joint ventures—much as I have described to this Committee on the principle of the anti-air missile system for the type-45 destroyer—do have this terrible difficulty of, are they really a free-standing entity capable of making their own decisions, or are they just the servant of their shareholders? We, therefore, obtained an agreement from Archer that British Aerospace, without adjusting the shareholding in Archer, would take on the management role, and that change completely electrified the performance of Archer. Last November we were a mile away from being able to select a VHF radio—because remember Archer has to take this responsibility, otherwise it is my fault if these things do not work—and on 14th February, as they promised, with this new organisation, they selected a VHF radio and it went to one of the three shareholders and the others took it on the chin.

  205. As far as you are concerned the British Aerospace lead role has been very positive?
  (Sir Robert Walmsley) Absolutely. Let me also mention in that connection that that has been one of the direct benefits of the BAe/Marconi Electronic Systems merger. That imported into BAe a huge degree of competence in electronic systems acquisition, and the staff that they have been able to direct into the Archer consortium has really in many ways been one of their most important achievements.

  206. Is it fair to say then on the basis of what you have just said that the new system has given you more leverage over the consortium than you had before in terms of pushing for more competition?
  (Sir Robert Walmsley) That and other pressures have given us leverage over the consortium.

  207. What other pressures?
  (Sir Robert Walmsley) The first one is that they will not get a contract unless we get a good bid that is a rational technical proposition, and that, I have to say, took rather longer than we would have wished to dawn on the Archer organism. The second pressure is that we told them that we were not happy with their progress and said that we are not going to sit around on our hands here and just wonder what is going to happen in Bowman and we went out with half a million pounds to two companies and asked them to produce their ideas on how they would solve the Bowman requirement. We were quite open with Archer on that. I have to say that competitive pressure, the idea that they might not get the contract, new staff coming in from Marconi—now BAe Systems—and a proper management arrangement inside Archer have all combined to completely change their performance.

Mr Hood

  208. Why have you asked for alternative bids from Thomson—CSF?
  (Sir Robert Walmsley) They are not formal bids in the sense of competing bids, they are original bids. We pay money for the information on how they would satisfy the requirement and their estimate of the cost. The reason we did that is that I was not happy that Archer was taking us seriously. That is not to say that some individuals might not have taken us seriously, but that is what it seemed like to me.

  209. Are the bids for the entire Bowman package or part of it?
  (Sir Robert Walmsley) Entire.

  210. Why are you turning to other firms for bids at this stage? Was it not an option in 1996 when you lost the opportunity for competition with the merger of Yeoman and Crossbow?
  (Sir Robert Walmsley) It was. I remember the interviews extremely well, Mr Hood. Each consortium came to see me in turn. They told me in a very emotional way that their company's Board could no longer countenance them putting so much money into their side of Bowman when there was a risk that they would not get the main supply contract in the end. From their point of view they are being asked to invest and then there was a toss of a coin. What they then went on to say was that if they were only allowed to combine all of this uncertainty would disappear and their Boards would be quite happy to invest because they knew that they were going to get the contract and, furthermore, the immense worldwide export opportunities meant that this would be a glittering success for Britain. There was all sort of talk about factories in various parts of Britain and manufacturing technology being imported from elsewhere, in other words, a real story. I rejected that and I spent six months trying to keep them apart and saying, "This it is not a good idea." In the end I could not control them and they came together. We have then suffered from the effects of a company under this shareholding structure I have described with very complicated pre-emption rights if one of the shareholders suffers a change of control, which has meant that they have all been on the edge of their seats watching each other more than trying to deliver to their customer. For all those reasons we felt—and I have discussed this with my colleagues—it would be a good idea to ginger it up a bit. We were quite open with Archer, I make that quite clear.

  211. What options role do you have available once they submit their bids? Could you let the Bowman contract go to one of those firms or is the aim to use their prices to push Archer's prices down?
  (Sir Robert Walmsley) No. The aim is, I hope, quite clear. This is what I have explained to Archer: We would like to place a contact with Archer, but we will not do so until we have satisfied the criteria I have mentioned before. If we decide that we cannot continue with Archer, then we cannot then spend a year wondering what to do next, so we needed to develop a specification against which we could run a competition, which will be different to the specification which you share and discuss with the contractor, as we have been doing with Archer. We also wanted to know that if we did run a competition there was a rational proposition that the two competitors could offer us a solution. We are happy that the two companies that we went with, Thomson and General Dynamics, because that is who they are a subsidiary of, were indeed sensible communications companies to spend this money on. They are not bids. This is not a competition and Archer knows it is not, it is preparing the ground for a competition only if we decide not to go with Archer.

  212. What are the key criteria being used to assess CDC; talks about the price, the capability of the systems, the technical risk or their ability to deliver Bowman earlier than Archer?
  (Sir Robert Walmsley) You have just listed the things I would have given if you had not said to me what they were. Those are the criteria, and very sensible ones too. I have to be quite clear in my mind that timeliness is very important, it is more important for all the reasons we have talked about this morning. This is absolutely fundamental and we have looked, therefore, at what these companies are operating now, today.

  213. The CDC is believed to be offering an in-service date two years after contract placement. Is that realistic and can Archer compete with that?
  (Sir Robert Walmsley) Of course it is not realistic, but companies will tell you anything in order to get the work. At the moment CDC and Thomson are nowhere in this, except that Thomson, on the present schedule, will buy one of the Archer shareholders. So the companies will tell you anything at this stage. That is why I said this is not a competition. It is only if we decide not to go with Archer that we would then launch a formal competition, and this work we are doing now is helping us to prepare a competitive specification and to assess whether CDC and Thomson are reasonable propositions for undertaking a competitive solution.


  214. Mr Walmsley, the Canadian company said that the Canadian military are using this system. Are you saying that the system that they have deployed for the Canadian armed forces is not remotely like the one that we hope to get for the British armed forces?
  (Sir Robert Walmsley) I would not say it was not remotely like it. It is certainly not congruent with the Bowman requirement. It would certainly require us to develop a new radio for part of the Bowman requirement, which is very important to us. I am very familiar with the Canadian system. I first saw about it in 1990 and I went back and looked again in 1992. It has been a long time in development. There is a risk that the technology might be a little bit less than absolutely at the cutting edge.

  215. Is there anything that you would like to add, Admiral Blackham, about the different options?
  (Vice Admiral Sir Jeremy Blackham) I think Sir Robert has covered it all. Like him, I hope that we will find ourselves able to place a contract with Archer, but we clearly have to be in a position to guard against that not happening.

  Chairman: We have a few more questions from Mr Cohen on this.

Mr Cohen

  216. You said yourself that Archer were not taking your department seriously, and the MOD presumably, about this contract, how realistic is it? I know you put out information for possible alternative bids to these other two companies, one of which is a shareholder in Archer, is it not, Thomson? (Sir Robert Walmsley) They will be if the acquisition of Racal proceeds.

  217. Again, they could have a bit of an insight. How realistic is it, and do they take it that we could abandon Archer?
  (Sir Robert Walmsley) We would not have spent half a million pounds with two companies if we were not prepared to look at it seriously. The purpose of our spending this money in a way demonstrates our intent. You cannot just jump off a cliff and hope that these two companies that you have, so to speak, looked up in the Yellow Pages, are going to be able to solve Bowman. We want to see the quality of their potential solutions. We know that there is a great deal that these companies have to offer, but we want to see the detail of that. I think it is entirely realistic that Archer expect that we could jump into a competition, and that is part of the reason why they have improved their performance so much over the last few months.

  218. So we have, in effect, spent half a million pounds to ginger up Archer?
  (Sir Robert Walmsley) And also to place ourselves in a position where if Archer do not offer us a satisfactory proposition, we are not spending a year wondering what to do next.

  219. Are you expecting a serious bid from Thomson-CSF given their connection with the Racal subsidiary, who are already a key partner in the Archer consortium? What happens if this connection between Thomson and Racal were—I thought it was well under way.
  (Sir Robert Walmsley) It is well under way, expected to be completed on 15 June. I have personally had meetings with the chief executive officers of both General Dynamics, the owners of CDC, and with Thomson-CSF on this very issue. The arrangements are that we will get the bids in from Thomson-CSF and CDC by the end of this month. We will make a decision at that stage, on the basis of the bid that we will receive from Archer during June, whether we want to continue with Archer or not. Between receiving the bids from CDC and Thomson, and making a decision on whether to continue with Archer or not, we will suspend activities on those two competing bids. Thomson understand that. They understand that our preferred course of action is to stay on the horse we are currently astride, to make Archer work. On that basis, Thomson are wholeheartedly behind Archer. After all, they have purchased Racal, they do not want to then stab it in the back, they want it to work. Thomson understand that we, the Ministry of Defence, are not going to be spending a huge amount of more money on these two competing bids, one from CDC and one from Thomson, while we are riding the Archer horse. But if we pull the plug on Archer, and I am hoping we do not do that—those are exactly the words I have used to both Thomson and CDC, I am hoping we do not do that—we will keep those two competing bids in the, so to speak, freezer and they will be ready for us to work on should Archer not come through with the goods.

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