WEDNESDAY 2 MAY 2001

SIR ROBERT WALMSLEY KCB AND VICE-ADMIRAL SIR JEREMY BLACKHAM KCB

  100. Why did the United States and Germany withdraw from the ASRAAM programme? Was that because of concern about technical feasibility?
  (Sir Robert Walmsley) No. It is history now and I suppose lots of people would have their own perspective on it. From my point of view, there is a great difficulty in persuading the United States forces, for lots of good reasons, to rely for a major weapons system on offshore procurement. I think we went into the deal that Europe would provide the short range weapons and America would provide the medium range weapons, in retrospect, with rather starry eyes about the willingness, both industrially and militarily, of the United States to rely on Europe for a short range, self-defence weapon. I think it fell apart for industrial reasons and perhaps for military reasons of control of capability as well. Subsequently, in late 1996, we offered a very detailed specification of ASRAAM to the United States military for them to consider it as a potential candidate for what I think was then called the AIM9X programme, which was a sort of Sidewinder successor. It did not succeed.

  101. What about the Germans?
  (Sir Robert Walmsley) I do not know.

  102. Why do not the Germans need ASRAAM for their Eurofighters?
  (Sir Robert Walmsley) IRIS-T is their own national missile.

  103. That is the national alternative?
  (Sir Robert Walmsley) That is the German missile.

  104. Does that have problems?
  (Sir Robert Walmsley) It is wholly inappropriate for me to comment.

  105. Any missile named Iris has problems.
  (Sir Robert Walmsley) It is the name of the Canadian solution for Bowman as well.

  106. Supposedly the merits of ASRAAM were quoted as one of the key reasons why we did not need to have a cannon on Eurofighter. We seem to be having these problems with the missile. We are not sure yet when it will eventually come into play. Are you really sure that it is wise to have a fighter without a cannon on it?
  (Vice-Admiral Sir Jeremy Blackham) I do not think I have anything to add to my previous position on this. I anticipate that ASRAAM will be in service when Eurofighter meets its in-service dates—indeed, well before that. I do not see anything which would cause me to change my view on that at all. I am confident, yes.

  Mr Viggers: The Admiral's reply is entirely fair from his point of view and I think we should also record that those of us who believe that it is a mistake not to have a cannon on the Eurofighter have not changed our view either.

  107. When the decision to go for Meteor was made, we said, "We are not part of the process of decision making. At least we would like to be told why the decision was made for one and not the other", which would have been really helpful. As any Defence Committee worth its salt, we at least would have been pleased to have known the decision making process and why one was chosen, not the other. You said, "I cannot brief you, Chairman, because we have not debriefed Raytheon." That was a year ago. Have you debriefed them? If you have, we are not going to get a briefing in this Parliament but are we going to get one in the next Parliament, because although this is a programme in which a decision has been made it could have rumbled on for some time. To save yourself further embarrassment on this, if there are going to be any problems—the Baroness's letter is clearly a shot across the bow if ever I have seen one—can you update us on whether after 12 months we are going to be briefed on the decision or whether you are hoping we will have forgotten that you gave us that assurance?
  (Sir Robert Walmsley) I know you will not have forgotten, Chairman. I have yet to discover evidence of the Committee forgetting to come back to some point it has promised to come back to. Our procedure is to brief companies formally once a contract is signed. Competition is only formally concluded when a contract is signed. At the same time, it would not be of a great deal of interest to Raytheon to be briefed about Meteor once the contract was signed, which will be later this year, because quite frankly the water is so far down under the bridge that you can hardly find the people, let alone the technical staff who are interested in it. I can tell you that on the day we announced the decision I phoned the appropriate senior executive in Raytheon to tell them the bad news from their point of view. I do that always as a matter of routine. I gave him an outline debrief and I gave him and some of his staff an outline debrief in the United Kingdom about ten days after that last summer. I have also added a bit more detail in the time that has gone by. That senior executive has now left Raytheon and joined another extremely reputable US defence contractor, so he has passed out of my scenery really on this. I therefore confirm that I am ready to provide the detail to the Committee when we give our formal debrief to Raytheon. It seems an enormously long time ago.

  108. It is.
  (Sir Robert Walmsley) It is. I absolutely accept that. We have six countries in this programme, the Eurofighter partners, plus Sweden and France. That gives a clue as to why Meteor turned out not to be hugely more expensive, as a lot of people were certain it would be, than taking ERAAM+, when we were only sharing costs with one country. Sharing with six does not half cut down the non-recurring costs. These are the brutal, top level points which I talked to Raytheon about on the day. Please understand that sharing with six they had not taken into their consideration sufficiently. Secondly, an incremental programme is fine if you are signed up to all the increments, but it is quite clear to Admiral Blackham's staff and to the Royal Air Force that they want the full capability as defined in Staff Requirement 1239, that ERAAM+ only offered part of that and that may have kept the United States Air Force very comfortable with their stealthy aircraft. Eurofighter is not an inherently stealthy aircraft and needs a long reach. Meteor provides that and we needed a secure route to providing a missile with a long reach. In essence, that is the top level argument.

  109. Will you sign the contract if you have assurances that things are going to proceed reasonably with the project? Is this the reason why it has not been signed, because you want some assurances beforehand?
  (Sir Robert Walmsley) Of course we do and we have to bolt down all the contract terms and conditions with the companies, including the milestones which have already been mentioned, of which now three are completely settled and one we are quibbling about. The reason is that we have to get six countries on board and there is a famous phrase which has been used in this room on many occasions: that involves work-share decisions, not that we are running this programme on the basis of absolute, specific work-share, but people have to be reasonably content. This is an immense, trans-European, industrial endeavour to get that sorted out. The formation of MBDA, the inclusion of France in the programme and Spain, meaning that we have all four Eurofighter partners, and Sweden providing the Gripen aircraft, which is a very good test platform and means we do not have to devote Eurofighter development aircraft to testing a lot of Meteor aircraft interfaces, has given the programme a robustness which I feel comfortable about but it does mean negotiating all the agreements, including things like providing Gripen as test aircraft. Having negotiated an MOU which is as near as ninepence now finalised, we are really trying to get it signed at Le Bourget, but I do not know whether we are going to succeed or not. That is the MOU. That has been a huge piece of work. The contract is proceeding in parallel and will be signed a few months after the MOU.

  110. When you phoned the guy from Raytheon, did you say, "I am sorry you lost but this is a political decision. Europe could not afford to mess this up. That is why we had to have it"? How did you explain that?
  (Sir Robert Walmsley) I certainly did not tell him that. It is probably what he believed but it is absolutely not what happened. It is the same chap I have phoned up about other losses and other wins in the past. I think they respected the United Kingdom's processes. They do in the end regard us as competent procurement professionals and, in the end, the American companies—I have to pay enormous tribute to them—are very ready to see it as water under the bridge. They are not continually revisiting past defeats or victories.

  Chairman: It is right that you keep on the company's back over Meteor. There are a lot of heads on the chopping block, including most of the Members of this Committee, so we give you what authority we can to ensure that the company delivers on time and to the quality that is demanded. On to a pretty easy one now. All we are talking about is buying and building roll-on/roll-off ships. Mr Hepburn has a constituency interest.

  111. Yes, which I will declare now. Obviously, the first question has to be what has gone wrong?
  (Sir Robert Walmsley) I recognise this is a hugely significant issue and I therefore want to make that absolutely clear. If some of my responses might seem a little administrative, it is not because I do not understand the seriousness of the point. Not much has gone wrong. We had a very good competition to provide a strategic sealift service, which was won fair and square by AWSR, which effectively decodes as Andrew Weir Shipping. We announced the winner last autumn. The prospects offered by a bid which they had put to us, including four ships to be built in Germany and two to be built at Harland & Wolff, were that we would provide an earlier in-service date which effectively was 27 ship months but has now translated into something better than that: two years ahead of the planned in-service date. We had a good bid, offering us the capability earlier than we expected. So far so good, last autumn. A technicality involved in merchant ship building, which is by no means a technicality to those involved but appears like it to those outside, was that something called the Shipbuilding Intervention Fund expired effectively on 31 December 2000. What that effectively meant was we had to order ships by 31 December 2000 and they had to be completed I think by December 2003 in order to secure varying levels of the Shipbuilding Intervention Fund, seven per cent, as it happened, in Germany, nine per cent, as it happened, in the United Kingdom, which meant that the bids for the Ro-Ro benefited from the Shipbuilding Intervention Fund providing the ship building contracts could be placed before 31 December. We succeeded in doing that but we were not contracting for the ships then. Andrew Weir were contracting for the ships. Clearly, they did not want to be stuck with having ordered ships and then finding that we did not sign the private finance contract with Andrew Weir. Otherwise, they would be left holding a very big baby. As well as having to authorise Andrew Weir to sign the ship building contracts, we at the same time signed a preliminary agreement with Andrew Weir which in essence, apart from a whole lot of technicalities about agreements as to where we were going, specified that in the event that the private finance contract was never signed we would take responsibility for the ships that Andrew Weir had ordered. Otherwise, they would find themselves with a very big bill and no customers. We duly signed the preliminary agreement with Andrew Weir I think on 29 December. My team worked extraordinarily hard between Christmas and New Year. Quite a few of us turned out, negotiating these bits of paper over that period and the ship building contract was placed extremely late on the Friday night of that week with Flensburger and with Harland & Wolff as planned.

  112. They got the Shipbuilding Intervention Fund?
  (Sir Robert Walmsley) Exactly. It is a bit magical to me but this is a fact. The only thing about the Shipbuilding Intervention Fund is that the contract cannot be encumbered with what are known as conditions precedent to make it effective. There were no such conditions precedent in the contract between Andrew Weir and the Flensburger yard in Germany, quite straightforward. There were conditions precedent between Andrew Weir and Harland & Wolff which had to be satisfied. We had dates when they were having to be satisfied. Effectively, these were to do with Andrew Weir and Harland & Wolff—I hope I am not straying into commercial areas—and those who would provide the finances to Andrew Weir. There were commercial issues which they wanted to see squared away before they were prepared to lift these conditions precedent on the Harland & Wolff contract. We set out that we wanted these fixed by 31 January. We got to that date. We agreed to extend it and matters were, not to put too fine a point on it, trickling on. Meanwhile, I am being asked questions by Admiral Blackham and others in the Ministry of Defence as to what I am doing about making this contract effective. It was on 9 March therefore that the Secretary of State announced that the Ministry of Defence would itself, given this uncertainty over the ability of Andrew Weir to finalise that contract with Harland & Wolff, take over the contract with Harland & Wolff on the same terms. That is what we are now doing. It is effectively doing the same thing in a different way. As it happens, Andrew Weir will both manage the construction of those ships at Harland & Wolff and will also make the final payment on the ships and take delivery of the ships as they leave the yard on, as it happens for the first ship, the very significant date of 21 October 2002.

  113. The problem was not with the contract itself; the problem was the financiers and Weirs themselves wanted guarantees from Harland & Wolff to deliver on certain dates.
  (Sir Robert Walmsley) I think I have gone about as far as I can.

  114. Was the problem with the contract or with the Harland & Wolff yard?
  (Sir Robert Walmsley) It was not dates. It was nothing to do with the flow of information from Flensburger to Harland & Wolff. The construction of the ships was never an issue. It was a commercial matter between AWSR, Harland & Wolff and AWSR's financial backers.

  115. When you were asked to do the scrutiny, presumably you went into this. It is a fairly unique contract. You went into it line by line and at the end of the day you found yourself in a position to recommend to the Secretary of State yes, this is the line to go along and surely scrutiny should have picked this up?
  (Sir Robert Walmsley) I have asked myself that many times. It is possible, but some of this is quite delicate because it affects the commercial position of all the parties involved. The commercial position of Harland & Wolff was very seriously changed for the worse during November when you may have noticed that they had reversed on appeal an arbitration award for a huge sum of money. What that meant was that Harland & Wolff's commercial position changed enormously between our announcement in October and AWSR and their financial backers trying to close the deal. I am not trying to say that completely excuses me for having failed to look at both that possibility and what that would lead on to in terms of the commercial arrangements between these three. In retrospect, probably I should have pushed that harder. We did not and the fact that everything went through like a box of birds with Flensburger meant we now have a very good delivery programme for Harland & Wolff. I am quite happy with the yard; I have visited it; I have seen the steel being cut for those Ro-Ro ferries. The performance will be fine. What we did not envisage was that change in circumstances about that appeal. We did not envisage how that would lead to a run-on in terms of commercial confidence. That is about as far as I can go here.

  116. You say that the MoD have taken over the contract with Harland & Wolff. What does that mean for Weir and what does it mean for the MoD in relation to Harland & Wolff?
  (Sir Robert Walmsley) What it means is that the MoD will make the payments to Harland & Wolff during the construction of the ship except for the last one. It is a good thing to make Andrew Weir make the last one, which is quite a substantial proportion of the price. On the ship coming into AWSR's hands, we will then secure a price for the service which reflects our costs in constructing those ships and indeed even down to the detail, where I have to have two or three extra people to manage the contract. We will expect to see all that come back to us through reduced costs in the service provided to us. For me, it is doing the same thing in a different way.

  117. On the original contract, you obviously estimated savings on the PFI scheme and the traditional MoD procurement scheme. What were those savings?
  (Sir Robert Walmsley) I cannot tell you the answer to that. We are still negotiating the PFI. I can only say that they were very substantial. We were not, in other words, worried about whether or not we were going to make the PFI gate. We confirmed the robustness of that judgment shortly before we placed the contracts in December and have done so again since, but since we have not negotiated the PFI contract I am not going to say what the savings were.

  118. Now that the change has come about with the traditional procurement contract with Harland & Wolff, have those estimated savings changed?
  (Sir Robert Walmsley) No. That is why I said we would expect to recover it through a reduction in the cost of the sealift service. After all, we will have gone the extra mile in terms of making the construction of the ships possible.

  119. You say there is an in-service date now of 2002 or 2003?
  (Sir Robert Walmsley) The first ship comes out of Flensburger in August 2002. It will be in service the next month. The first ship comes out of Harland & Wolff on Trafalgar Day in 2002. It will be in service within a week or two of that. I have looked at the Harland & Wolff schedules and I do not mind them knowing that I think there is quite a lot of spare in them. I think they could come forward, even beyond that. We will get the whole sealift service in service by the end of 2003 compared with the original planned date of 2005. Some things can happen quickly. This will.