Select Committee on Defence Minutes of Evidence


Examination of Witness (Questions 1 - 19)

WEDNESDAY 10 NOVEMBER 1999

SIR ROBERT WALMSLEY KCB

Chairman

  1. Thank you, Sir Robert, for coming in to talk to us. If I can make a brief introductory statement before asking you if you wish to make any initial remarks, the purpose of our meeting this morning is to examine in detail the proposals for the establishment of the Organisation for Joint Armament Co-operation, known by the acronym OCCAR. OCCAR is intended as a collaboration between a small number of European countries for the management of defence procurement projects. The other member countries at present are France, Germany and Italy. A Convention formally establishing OCCAR as a body with a separate legal identity was signed by the four countries in September 1998, and this Treaty is now awaiting ratification by Her Majesty's Government. It is the view of the Defence Committee that before the Treaty is ratified the Committee should examine the issues. Certainly this is an issue of Parliamentary influence and scrutiny. So I am pleased that we are able to have this session on OCCAR and the Treaty before any debate, if it takes place, on ratification. The aim of this evidence session and our subsequent report is to ensure that the House is better informed before the Convention committing this country to OCCAR membership is ratified. There have been many attempts at procurement collaboration in the past which have often become bogged down in bureaucracy and have failed to make progress because of the difficulty of satisfying the competing interests of the participating countries. We are producing a report today, Sir Robert, on a procurement project which was not the epitome of competence, namely the Frigate programme. We will be seeking reassurance on the accountability of OCCAR to Parliament and the mechanisms for auditing its operation. Equally important, it is not clear from the Convention who will take responsibility if OCCAR-managed projects run over time and over budget, and we will be seeking clarification on this from you, Sir Robert. You will be, I understand, the United Kingdom representative on OCCAR's management body, the Board of Supervisors. Before we begin questioning, is there any introductory remark you would like to make?
  (Sir Robert Walmsley) Thank you very much indeed, Chairman. I have, really, just two sentences. One is stolen, which is that it is a truth universally acknowledged that collaborative projects are in want of better management. The other is a simple fact, that I believe that participation in the OCCAR organisation offers the United Kingdom the best chance of doing just that.

  2. That is the briefest introductory statement I have heard. We have one-and-a-half hours to allow you to expand, Sir Robert. Firstly, on the purpose of OCCAR, what do you think is OCCAR's unique selling point that makes it different from all the other armaments collaboration groups currently operating? What does the MoD hope to gain from the United Kingdom's membership of OCCAR?
  (Sir Robert Walmsley) The first point, I think, Chairman, I would make is that OCCAR has been set up with some very clear objectives and they are focused on better performance. There are lots of other aims but they are absolutely focused on better performance. So, in the Convention, it is quite clearly stated that there should be no dual manning of posts (that is efficiency); that the project teams shall have the powers needed to undertake day-to-day management (that is empowerment) and the top priority should be given to performance and risk management to value engineering and to cost containment. That is very, very close to what we expect of Smart procurement. For OCCAR to have that absolutely up front as part of its objectives gives me a great sense that it has been founded with the right ideas in place. What is, I think, unique to OCCAR is that in Europe it explicitly rejects the concept of juste retour and couples that with a commitment to competition at the prime and subcontract level. I hope I am not straying into suggesting that I am teaching people to suck eggs, but sometimes the concept of juste retour is not quite as precisely defined or well understood. It is fundamental that it is well appreciated that what that means is an automaticity in the granting of work in direct proportion to the money expended. In other words, if Britain is a 33.3 recurring per cent partner in a programme, then 33.3 recurring per cent value of work is undertaken in the United Kingdom. Clearly, once you set up a project on that basis you are pre-determining not the outcome of every competition but you slowly find yourself boxed into a corner where, at the end, you have to award the work to some country in order to balance it. That is what is called juste retour. The only people to whom it is unjust is the taxpayer and the armed forces of the countries concerned. So OCCAR rejects that, and, on the other hand, it makes this very formal commitment to subcontract and prime contract competition. This is, in some ways, a revolution in European defence procurement. Starting out with the right objectives is one thing, Chairman, (and I am sure you will be going on to quiz me on what on earth I think is going to be actually done to make these objectives realised) but the right objective is unique.

  3. Do you think it is deliverable?
  (Sir Robert Walmsley) With difficulty, but I do not think anything worthwhile is often done with great ease. I think it is tough. It is worth just dwelling on this issue of juste retour in work-share. It would be an easy thing to, say, abandon it, but clearly you cannot abandon it completely; you cannot, so to speak, not be interested in how much work comes to each of the partner nations because I do not think it is possible to contemplate going on securing the support of this body, let alone the wider politics of the British people and the taxpayer, if no work from any defence programme every came to the United Kingdom, and other countries feel the same. So we do need to keep a score.

  4. That is what I was going to ask you. How quickly does the score card get read?
  (Sir Robert Walmsley) The score card will be read every year. We are still making the detailed arrangements for that but it is quite complicated. Of course, with four nations in OCCAR, another attribute is that it is much easier to reach agreement among four than the whole of NATO or the whole of the Western European Union. It is still quite complicated. I do not know how many combinations—I have not worked it out—there are of two, three or four nations collaborating amongst four, but it is quite a lot, so the score is a complicated thing. What it does, though, provide us with the opportunity of asking industry to contemplate redressing the balance on programme number two as a result of imbalances that appeared in programme number one, without abandoning the commitment to competition. Industry is quite ingenious at ways of placing work competitively and placing it in particular countries. I very much hope that we could unleash that mechanism as opposed to doing what we have done (and you have examined me on it before) on Eurofighter, where virtually every box—biscuit tin size or above—is partitioned to the first decimal place in accordance with the off-take of the four participating nations, which is a hugely inefficient way of going about it.

  5. With the drafting of the Convention and the concepts behind it, was the Government and yourself much involved in the shaping of this document?
  (Sir Robert Walmsley) Yes, we have been. It is, of course, give and take. I think I have said to this Committee before, Chairman, that we have not got a monopoly on good ideas in this country. We know the armed forces of our partner nations; they are equipped with some very good equipment made in their own countries, and I think they have had a closer relationship with industry—there are lots of reasons, some of them because they are owned by the government—than we have. We can, perhaps, learn that from them. However, taken in the round, we have tried to take the best parts of their practice, the best parts of our practice and graft them on to the principles of what we thought were the fundamental points, and I have mentioned most of them already. They are revolutionary in Europe.

Mr Colvin

  6. I think it would help the Committee, Sir Robert, if you were to explain a bit about the mechanics of the financial administration referred to in the Convention. There is no shortage of collaboration on military projects in Europe—an awful lot goes on—but there have been examples in the past where the financial management has gone all wrong. I think a good example was Tornado, for instance, which was an excellent European project but where the Panavia consortium worked alongside the NAMMA organisation, which was the financial management bit. I am not quite clear what OCCAR is going to do on the financial side. Will it, for instance, pay all the bills, will it do all the procurement, will it provide joint accounts, or what? I can see it can have an overall responsibility for the financial administration but will it actually take from the companies the responsibility for financially managing the whole project?
  (Sir Robert Walmsley) It is quite a big answer to that, and it is going to take some time to work my way through it. The first thing to say is that today OCCAR is not legally able to place contracts. So, today, on a collaborative programme we set up an international programme office in a country, the contracts are then placed as a result of agreements between governments—usually under the law of the host country—and the bills are paid, sometimes without any money crossing boundaries. So that a contract might be placed in country A but country B just pays the money to its own industry. There is quite a complicated structure necessary to do that, but there is no question that the money that arrives in the international project office arrives from participating nations, and the arrangements for paying it are covered in the MOU. That is the way OCCAR works today. In other words, nothing has been ceded to OCCAR so far. One of the purposes of giving OCCAR a legal personality, which is what this Convention and its ratification is all about, is to allow OCCAR itself to place contracts, and under whatever law it chooses for the particular project at hand. OCCAR will get the authority to place contracts from the participating nations in a programme, and they will make available to OCCAR, for payment by OCCAR, against a contract placed by OCCAR, money as the contract proceeds. A key fact in the Convention, which is actually absolutely fundamental, is that the assets that are generated by this contract or these contracts continue to belong to the nations who provided the money to OCCAR in the first place. There is no question of OCCAR acquiring military force or military capability, or in some way, so to speak, taking the money from the nations and saying "I am sorry, that contract has somehow not worked and we have got all the stuff"; the assets continue to belong to the nations. The rules under which OCCAR makes those payments will be subject to approval by the Board of Supervisors for OCCAR, on which, as the Chairman mentioned, I am the United Kingdom representative—although I make it quite clear that the Convention is explicit on the fact that it is the Defence Ministers of the countries, the Secretaries of State for Defence in all the countries who are the national representatives, that is delegated to the National Armament Director, which is a role I fulfil for the United Kingdom. So the rules under which OCCAR disperses money are all approved by the Board of Supervisors, of which I am the United Kingdom representative. However, on a particular programme, that will be done in accordance with generalised arrangements which have been approved by the Board of Supervisors along the lines I have mentioned.

  7. Will that be possible without the harmonisation of commercial law in Europe? We are some way from that at the present. What happens if parties do not deliver?
  (Sir Robert Walmsley) I think we would very much like to see harmonisation of commercial law in Europe and we would very much like a European company statute. That would certainly help. It is possible, of course, because OCCAR can choose whatever law it wants; it can decide to place a contract in Italy under Italian law, which might be quite sensible if it is an Italian/German collaboration, for example. Or it could choose to put it under English law. What it will not do is have a muddle on that point. It would be quite clear which contracts are placed under which law.

  8. To get back to the end product, you do feel that on the quality and price of our equipment the quality would go up and the price would come down? That is the objective.
  (Sir Robert Walmsley) Absolutely.

  9. What about Britain's defence industry? How much consultation was there with industry? Are they, generally, in favour of what is proposed?
  (Sir Robert Walmsley) It is always a bit difficult to know what industry is in general favour of. I have no doubt in my mind on two points. First of all, that industry recognises that there is a requirement to improve the management of collaborative defence projects and they believe that OCCAR probably offers the most likely route to achieving that. Secondly—and I hope it does not sound as though I am complaining too much that I have been overtaken by history—it was in November 1996 that the four nations signed, first of all, the administrative agreement that established OCCAR. There is no doubt that our thinking—my thinking—has come on quite a bit since then. I think if we were embarking on the OCCAR business as of today we would have made more formal attempts to consult with industry as we went along with the Convention. I make that quite clear. We did not undertake these formal consultations, and I regret, really, that I have not kept industry as well informed about the details of OCCAR as we should have done. That does not mean we have not consulted them at all, it just means that we have not done it as formally as we would indisputably now do it if we were setting out on this exercise. That should not obscure the very good work that is already deeply under way in OCCAR with what we have called the OCCAR Defence Industries Group, now established under the umbrella of the Western European Union European Defence Industries Group. We are already into the substance of this. OCCAR, I think, if it is characterised by anything, is characterised by getting on with the work as opposed to talking about what it will do. So we have established an OCCAR Industry Contracts Panel, which has had several meetings with OCCAR to discuss just the sort of point that you have been raising, about how contracts should be laid out. We have got stuck right into that, which is the cutting edge, really, of defence procurement. How will the contract look? We have already started that work with industry—European industry.

  10. Can we get on to the subject of membership of OCCAR, and can you clarify one thing for me? We have got four founder members now, Britain, Germany, Italy and France, with the Netherlands and Belgium about to join. However, we are told that OCCAR is going to be a programme-led organisation. In other words, a country can be a member but might not choose to put any programmes into OCCAR but remain outside. As far as membership is concerned, can you confirm that that it is, essentially, programme-led? Say, for instance, Britain and France have a joint project. It need not necessarily be managed within OCCAR, it can be managed outside.
  (Sir Robert Walmsley) First of all, I can confirm there is no compulsion on nations to put co-operative programmes into OCCAR. I think it would be quite unusual for Britain and France to have a collaborative programme and then decide not to put it in OCCAR, although there is one pre-eminent example—Eurofighter—of which three of the partner nations are OCCAR nations. Spain has expressed some interest in OCCAR but has made no formal application to join. However, we would look at Eurofighter and say this is a huge programme, it is already managed (I think, perhaps, drawing on the experience you mentioned of Panavia and NAMMA) now in a very effective way by the NATO Eurofighter management organisation, and we would not seek, so to speak, to move that into OCCAR. It is done by one agency, there would be no point in destabilising that. So no compulsion. I think a strong predisposition would be to OCCAR, but I would just make clear one point: the ability of a nation to join OCCAR is at the agreement of the members of OCCAR, and the conditions which we operate for this are, first of all, an adherence to what have become known as the Baden Baden principles, which were drawn up by France and Germany bilaterally in 1995 and which the United Kingdom and Italy accepted—with all the business about juste retour and competition that I have mentioned. Once we had accepted those we were then, so to speak, eligible, along with Italy, to join what was then emerging as a potentially bilateral co-operative organisation sponsored by France and Germany. However, there was one condition we had to fulfil, and that was that we had a programme. There are not going to be spectators in OCCAR with no interest in whether OCCAR actually delivers programmes. So, first of all, sign the Baden Baden principles, and then—in that hackneyed phrase—bring money. In other words, put a programme to be managed into OCCAR so you have a real stake in what is happening in OCCAR. If I can call it an entry ticket, our entry ticket then was the Multi Role Armoured Vehicle. It was a programme which was then envisaged, as I say, as a three-nation co-operation between Germany, France and the United Kingdom. It has taken us a long time to get there but we did, in fact, sign a bilateral MOU and, indeed, a contract (in many ways much more important) last Friday in Berlin. While all that was going on, the COBRA (the Counter Battery Radar programme) which is about £200 million worth of expenditure to the United Kingdom came through the MOU and contract placement phase and we have put it into OCCAR. So I make clear that a country needs an entry ticket, which is a real programme. In our case, we chose the MRAV, which is in the future, and it has taken us three years, from the moment we said "MRAV will be our entry ticket", to deliver it as a project. In that time we have contracted for and placed a Counter Battery Radar programme in. So we now have a programme, COBRA, being managed by OCCAR, but every country that seeks to join OCCAR cannot just say "We would like to join you and start to adjust your procedures", they have to bring money to a programme. So programme-led is a good description.

  11. Who will actually make the decision as to whether a programme goes under the OCCAR umbrella or not? Governments or can the prime contractors?
  (Sir Robert Walmsley) Absolutely governments. Absolutely governments. OCCAR is a government organisation. Governments place contracts, as usual,through the Ministries of Defence (and it will not be any different in any other country) and the proposed management arrangements for a project are very much part of the approval process for committing to that project. I would think very big questions would be asked indeed if it was a collaboration with OCCAR nations and they proposed, for some reason, not to put it into OCCAR.

  12. You mentioned Spain, and there may be other countries that want to join. As more and more countries come in, will it not begin to suffer from the same inefficiencies and bureaucracy and layers of management that its predecessors have suffered from?
  (Sir Robert Walmsley) I think that is a worry, and that is not in any way to suggest that the people joining are any less capable than the people who are there. It is just that when there are more of you it is more difficult to actually take decisions.

  13. You started this session with a very concise introduction, so perhaps I could throw at you a concise conclusion from what you have said so far. It is simply this: that OCCAR exists in order to get rid of juste retour, full stop. The fact is, however, that a lot of the smaller companies at present involved in European collaborative programmes insist on juste retour, and the reason why OCCAR has not got a bigger membership is because they will not give up juste retour. So, as more and more members come in, is there not going to be pressure to reintroduce some form of juste retour, and you will have a sort of two-tier level of operations within OCCAR?
  (Sir Robert Walmsley) It probably sounds a bit disputatious but I think it is the exact opposite way round. We are not going to change the rules of OCCAR. That would require a change to the Convention. So what it means is that if somebody wants to join they have got to give up the principle of juste retour. If I characterised OCCAR—because this is quite a detailed session—as simply giving up juste retour and introducing competition, I am afraid that is my fault. I should have made it quite clear that also in the Convention, all set out, is the absolute commitment to adopting international best practice. What that means is that each programme does not have to reinvent how to do it. That is what happens now. You set up a new programme, you find yourself in partnership with, say, France and Italy, and then sit down and think "How do we manage this?" There is no body of experience. There is no portfolio of procurement techniques sitting on the shelf. There is no prior commitment to competition and subcontract competition. All those things come with OCCAR.

  14. So competitiveness is the name of the game.
  (Sir Robert Walmsley) I think it is.

  15. One last question, which does not come up anywhere else in our session, and that is on the subject of the security of supply. I notice that in the Convention there is mention of guaranteeing our armed forces the equipment they require. I wondered why, within the Convention, there is not something that refers the European Code of Conduct on Armed Sales to ensure, with a multinational project under OCCAR, that one of the member states cannot start vetoing the sale of equipment to others.
  (Sir Robert Walmsley) I am sure the Committee is aware that that strand of work is being taken forward in a broader forum than OCCAR—the Letter of Intent, as it is called. This Treaty was being drafted well before we got under way with the Letter of Intent. There are two extra partners to the Letter of Intent, Sweden and Spain, and one of the six elements in that is security of supply, and another one is export licensing.

  16. Can we look forward to having another Convention in due course, leading to a Treaty, on security of supply, rather than just a Letter of Intent, which has no force in law?
  (Sir Robert Walmsley) You are probably very aware of this, but just to remind ourselves, the Letter of Intent sets out six areas where we seek to improve procedures in order to facilitate the operating of cross-border defence companies. We have been discussing (with our five partners on that) how we should give effect to these undertakings. I think it is entirely possible that it will need a separate Convention in order to give legal force to some elements of it. For elements such as research and technology co-operation or harmonisation of requirements I do not think we need legal compulsion to do that—in fact, I think there would be some complications—whereas on security of supply I can see some utility in having the force of law underpinning whatever arrangements we reach.

  Mr Colvin: Thank you.

Laura Moffatt

  17. You have spoken, Sir Robert, a bit about what is happening now and sorting out the issues. Can I turn a little bit to the medium and long-term future? I would, firstly, like to ask, have you done an assessment of how many MoD projects may be being dealt with in this way, say, over the next ten years?
  (Sir Robert Walmsley) I cannot say that I have looked ten years ahead. I can say that we do look into the future and think which particular programmes might go into OCCAR. I have mentioned COBRA and I have mentioned the Multi Role Armoured Vehicle, on which we signed the contract on Friday, which will go in just as soon as we can get the people moved from their offices in Koblen to Bonn. I am very pleased that the other half of the Common New Generation Frigate project, PAAMS—the Principal Anti-Air Missile System—will go into OCCAR. May I make a small detour on that point? You will remember the close relationship between the PAAMS missile system and a Franco-Italian missile project called FSAF, which is producing the same missile for use by their armies as well as the same missile in the Franco-Italian Navy. That is already going into OCCAR. So if we had had FSAF—the Franco-Italian partner—in OCCAR and PAAMS outside it we would have absolutely failed to ensure working arrangements for those two projects working closely together, which is something we absolutely need to introduce. At the moment they are separate, so PAAMS is the next candidate.

Mr Cohen

  18. Will there still be two missiles at the end of that process?
  (Sir Robert Walmsley) There will be 1,000 for us, Mr Cohen, and they will all be the same as the ones they have, because they have agreed to incorporate in their missiles a third radio receiver to accommodate the radio uplink required by Sampson, the radar in the British ships. So they will all be the same. There is more in the picture, and I could list them all but I think each one would not be very useful. What I would like to say is that I am particularly keen to try to introduce some technology demonstration projects because if you are going to make a co-operation successful it is amazing how much the "not invented here" syndrome is alive and well amongst technical experts. "My baby is beautiful" rules. So if we can just get some of this early technology demonstration work into OCCAR I think we are laying the foundation for some really good co-operations. There is an airborne radar programme called AMSAR, currently well into its technology type phases, between France, the United Kingdom and Germany, which I think we have now persuaded our co-operative partners we should put into OCCAR as laying, really, an excellent foundation stone for future co-operations on combat aircraft.

Laura Moffatt

  19. You have made it very clear that it really is looking at it project by project, candidate by candidate, and, therefore, it is quite difficult to make an assessment of where we may be in the future. How much does OCCAR cost us at the moment?
  (Sir Robert Walmsley) At the moment we pay one-sixth of whatever OCCAR costs. I will come to the answer in a minute. These facts sound very boring but it is important to get them straight. France and Germany have more programmes in it than anybody else. That is partly because of the motivation in setting up their original bilateral concept, because they have got the TIGER Helicopter, they have got ROLAND, they have got FSAF, as I mentioned, and they have got a missile called "Hot Milan". When there were four of us we set about, with a cost-sharing key, where it was one-third France, one-third Germany and the other third split equally between us and Italy. So current cost of OCCAR is about £1.8 million, which is about £300,000 to us this year. When OCCAR has a legal status and if the Netherlands joins—so we are still at four, which is still at the efficient stage (which Mr Colvin hinted at)—the new cost-sharing key is equal parts with France, Germany, Italy and the United Kingdom and half as much for Holland. What that all works out at is that instead of paying one-sixth, which is about 16 per cent, we pay, believe it or not, ten-forty-fifths, which is about 22 per cent. So our share will go up, but we are introducing more projects. When we have put in PAAMS, when we have put in MRAV—which are absolutely going to happen—and if the medium range TRIGAT programme comes to contract, which I very much hope it will, that will go in as well, and COBRA is in there now, we are getting more out of OCCAR so we expect to pay more in. I think 22 per cent strikes me as quite reasonable. The way it is worked out is that we get ten votes, as do the three other founder nations, and the newcomers, the Netherlands, will have five. Our ten votes also carry a veto over any decision of OCCAR, including the admission of other nations.


 
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