Examination of witnesses (Questions 60
WEDNESDAY 14 FEBRUARY 2001
60. In your assessment what does DARA provide
for such an arrangement as opposed to private sector industry?
(Mr Hill) DARA provides a competitive alternative.
In some areas DARA has the only capability. On some transmission
systems there is no alternative in the industry available. If
you look, for instance, at the Chinook transmission system we
have the best transmission test facility in the world now at Almondbank,
£12.5 million of capital investment. The only other one that
compares with that is Boeing's own in Philadelphia which is over
25 years old. We do have unique capabilities we can offer to the
MoD and to wider customers in the European market-place.
61. You mentioned earlier your relationship
with British Aerospace. When we came to visit you last week you
gave us this very interesting briefing about Project Whirlwind.
Could you say a little bit about that and what your plans are
there and how Project Whirlwind would fit in with the partnerships
you have already got and how that would relate to those existing
(Mr Hill) Any organisation in business looks for competitive
advantage and we have been traditionally a repair and overhaul
agency only. Management of the supply chain is going to be crucial
to business success for the DARA in the future and so what we
are looking to do is to deliver a complete supply chain service
from end to end, everything from collecting the component from
front-line, repairing/overhauling it, accessing piece-part spares,
testing, and then delivering it back. We are already doing that
in part with our electronic components. Project Whirlwind will,
jointly with industry, bring both entities together, the design
authority together with the supply chain management organisation
to manage the overall supply chain. The problem that we have in
terms of the current state is that we have a whole range of disparate
repair locations. We have repeated strip down and reassembly of
components at times. We have high repair costs and inventory levels
by holding inventory both within the DARA and other agencies and
in industry with a measure of duplication there. We have a great
deal of unnecessary waiting time, particularly waiting for technical
support and also for spares. And spares provision has traditionally
been the Achilles' heel of our organisation. What we aim with
Whirlwind is to put together a lean, agile support chain to incentivise
repair and overhaul organisations through repair contracts, and
we are moving more and more towards spares inclusive operation
where there are fewer agencies involved in that process. We have
been looking at the entire supply chain and the average time for
components to pass through that supply chain is 274 days at a
time. If you look at the value added within that it is significantly
less and the aim of Whirlwind is to significantly speed up the
flow of components from unserviceable to serviceable through managing
the supply chain more effectively.
Mr Gapes: Thank you. I hope we will be
able to get from the MoD the documentation we have requested which
will make it easier for us to deal with this in our report.
62. It is very interesting what you have had
to say so far, Mr Hill, about where you feel the future is going.
If I may, I would like to concentrate on four or five questions
relating to future expectations, in particular surrounding the
Eurofighter and your participation in that. We have been led to
believe that approximately 6% of the repair work on Eurofighter
will be allocated directly to you. How does this compare with
arrangements you currently have in place for other aircraft types
introduced in the relatively recent past?
(Mr Hill) What I would like to do is ask Mr John Oughton
to give the DLO perspective and then I will go into the detail
following on from that.
63. Would it be more helpful then if you heard
the rest of the questions.
(Mr Hill) Yes, indeed.
64. The next point I would like to raise with
you is the way in which the pre-allocation work has been allocated
and what criteria has been applied, what sort of items are involved
in it, and what was your role, if any, in selecting that work.
The third question really relates to how does the MoD Eurofighter
customer expect to save from the competed element of the maintenance
of Eurofighter, ie the other 94%? Have you been in any way involved
in realising what the potential savings would be putting that
work out? How much of the competed work do you expect to win as
an organisation? How much will you bid for? And the final question
really relates to maintaining Eurofighter; is there scope for
a collaborative arrangement with repair organisations similar
to your own located in the other partner countries who are participants
in Eurofighter, both in development and more importantly for the
long term, those countries who will be operating Eurofighter?
(Mr Oughton) Mr Hancock, perhaps, if I said a word
or two about the general framework in which we have taken these
decisions. Unlike the conventional approach to support, which
would have been based either on significant reliance on our in-house
capability at the DARA or direct support from the manufacturer,
we did look at whether there was a third option available to us
here, what we call a hybrid option, which would allow us to draw
on the best of the support we can secure from the suppliers in
industry and the best support we could secure from the DARA. We
did look at those items where it was appropriate to make an allocation
to the DARA, that is the 6% you are aware of. In forming that
view the Chief of Defence Logistics, General Cowan, who is a member
of the Equipment Approvals Committee, will have drawn heavily
on two sources of advice in helping him to form that view, one
would have been the integrated project team itself responsible
for the Eurofighter within which, of course, are contained logistics
specialists, whose primary function it is to support the project
team in forming views on the support strategy. Secondly, on the
DARA itself, and the Chief Executive in expressing an opinion
on the role the DARA could play and the capabilities that DARA
could offer in putting that support strategy together. There would
have been full involvement and full discussion of the options
before a decision was taken. The judgment that the customer has
made hereagain, it is a judgment that is made by the integrated
project teamis that by allocating 94% of the support work
to a competitive process we would expect to gain significant benefit.
On a total support programme cost of something like £10 billion
over that period we would be looking to secure benefits and make
savings in line with the DLO's strategic goal, and well into double
figures of percentage savings. Those will not be common and standard
across the board, but overall that is the sort of benchmark we
would expect to secure those improvements. We would expect, as
part of that strategy, the DARA to play a significant role, doing
so by winning work in competition rather than having it allocated.
That has two benefits for us, the first benefit is that by assessing
competitive pricesand DARA's prices are now constructed
on a trading fund basiswe will have a much better understanding
of the costs and we will be in a very much better position to
make judgments on where the savings can be secured. Secondly,
by having the choices open to us we can also assess who is best
placed in terms of engineering capability to do the work. I will
leave Mr Hill to make comments on what he expects to win through
(Mr Hill) If you go back some years, Mr Hancock, we
were traditionally allocated work on a work share arrangement.
It was basically 50/50 between industry and the third line organisations.
That has rapidly disappeared, and probably quite rightly, as people
have sought better value for money. As DCDL has said, 6% of mission
critical and contemporary technology work is what has been formally
allocated to the DARA on off-aircraft components. There is no
policy, yet, in terms of on-aircraft work, we are waiting for
that decision to be made. As far as the balance of 94% is concerned
it is our aim to shape the agency up as a trading fund to be truly
competitive. We fully expect to get a minimum of 25% of Eurofighter
off-aircraft work in that competitive process. We have a wing
commander in the agency who is a full-time representative of the
DARA in the Eurofighter integrated project team in Abbeywood.
He very much looks after our interests day-by-day. We meet regularly
with him in order to shape up our support strategy together with
the IPT. Although this is a very different arena we are now moving
into for Eurofighter we welcome the opportunity to be able to
compete for business on a level playing field for the long-term.
65. I just want to follow this up. I appreciate
that the DARA and management are eager to be competitive and win
a lot of these contracts, it is set at a low level, just 6%. Is
one of the implications if they do not succeed against the competition
that the Defence Logistics Organisation and the MoD would be prepared
to let them go out of business?
(Mr Oughton) Clearly in the business casewhich
led us to a decision that we should move to a trading fund statuswe
have constructed some assumptions on the degree to which the DARA
can become more efficient. We have also made some assumptions
on the degree to which the Defence Logistics Organisation can
become more efficient. We have talked this morning exclusively,
internally about the DARA and its expectations. It is very important
for the Committee to look at the DARA as an integral part of the
support capability we provide to our Armed Forces. The benefits
we will secure in terms of reducing the costs will come partly
from within the DARA and partly through the connection that Mr
Hill was talking about, the end-to-end seamless approach to providing
support. In a sense, we are all in this together to produce an
end result. In answer to your question, Mr Cohen, we could not
see the DARA fail independently. It still has to be seen as an
integral part of the capability available to us. We will be in
a much better position to understand the true cost being charged
to us for the work being done in the DARA as a result of the trading
fund status. That will allow us to take our decisions in a more
66. A key concern is that in an emergency, if
we have a wartime situation, then, clearly, we need an organisation
that can be relied on, that can do the work of aircraft repair
quickly and efficiently.
(Mr Oughton) That is why we took the decision that
we should move to trading fund status. We did not take a decision
to privatise the DARA. We believe that at this stage of our development
it is absolutely right that we should have that surge capability
available to us within the Ministry of Defence. The DARA will
be still be a part of Ministry of Defence after this.
67. The design and the construction of Eurofighter
was an international co-operation project. Is the repair and maintenance
of Eurofighter lobbied on purely a national basis or is there
international co-operation, with countries pooling their resources?
(Mr Hill) There is certainly a measure of international
co-operation, yes. There are very complex work share arrangements.
That is why I am a little bit reticent to try to roll them out
because I am not an expert in this area. It is very much the DPA
who is leading on that one. I am aware that over the years very
complex work share arrangements have been worked through on the
Eurofighter project. There will be a major centre of excellence
within the four partner nations. The detail I really would defer
to the DPA.
(Mr Oughton) I think it is fair to say, Mr Viggers,
that the support strategy that we have constructed, the hybrid
strategy that I described earlier, is very much a departure from
the conventional way in which we would have supported the aircraft.
We are clearly in discussion, through the integrated project team,
with our partners to explain to them and show them our thinking
on what we believe to be the best development in support strategy
in the current environment. We wish to seek agreement as far as
we could on common support. It is very much a question for the
integrated project team to pursue with its partners.
Mr Viggers: The point of my question
was that you are in a position to bid for repairing other nations'
Eurofighters. I understand that is the case.
68. I would like to ask some questions on pay
and grading. I know there have been a number of anomalies, you
explained some of those when we visited last week. I know you
have been making some reforms to pay and grading in the run up
to going to a trading fund. Were you not able to make those anyway
under Treasury rules or do you have special dispensation to do
(Mr Hill) No. We have to have formal pay and grading
delegations from the MoD centre to be able to negotiate pay and
conditions for our people in the agency that are appropriate to
our business. What I would like to do is hand over to somebody
who is very expert in this area, that is Bernard Galton, and he
will be able to take you through any of the detail.
(Mr Galton) Some years ago Treasury delegated to the
MoD collective bargaining for civilians, so they are the custodian
of that. Apart from the DARA, Met Office, and Hydrographic Office
that went to trading fund there are very few areas of the Ministry
of Defence that are undertaking bargaining in specific bargaining
units. We have had to seek delegation for that, which we did,
and we got that for our industrial staff on 1st April last year.
We are very keen to have non-industrial delegations as well. We
wanted to bring all of the civilian staff together so that we
could develop a holistic approach to our pay, grading and working
practices strategy. We were not able to do that. The MoD said
that it should come at the same time as the trading fund. We are
now going through the business process for delegation for our
non-industrial staff on 1st April this year. What we did with
our civilian staffwe launched it at our trade union conference
in July 1999is we set up 30 working groups, these are mixtures
of managers and our own trade union representatives, both industrial
and non-industrial, even though we did not have the delegation,
to actually look at whole areas of pay, grading, working practices
in terms of what we wanted to do for the longer term benefit of
the agency. We looked at what was good in the MoD system. There
are some very good things in there. We looked at what we really
wanted to change and what things we wanted to design specifically
for us. It was a very, very successful project. The national officers
were not involved at this stage, it was all our own people. It
culminated last summer when we reached agreement with the national
office of trade unions and other members of the negotiating committee
for a settlement for the industrial staff. We reached that in
record time, we only had a couple of meetings. The sort of things
we did was that we consolidated a number of old bonus schemes,
bearing in mind we brought in people from what was the RAF MGDA
Agency and the Naval Support Command NARO, that had been set up
over many years. We consolidated those at the highest rate. We
took out a load of old allowances that some people had been claiming
for many, many years. People physically had to claim these allowances
and it could not be seen, therefore, as part of their stable income.
That was important to us, to put our industrialists on a stable
income, it would help them get mortgages a lot easier, it would
help them plan their lives, it would also help us to plan our
pay bill a lot easier as well. We did that. The staff will be
moving on to monthly pay as from next month, it will be exactly
the same as our non-industrial staff. We obviously have to go
very carefully within our remit from the Treasury. We could not
throw money at this problem. There is a certain flexibility we
could use in terms of the wider use of recruitment and retention
allowance, where it has only been used on particular pockets before.
So that was on the pay side and we made some quite significant
changes. In terms of grading, we have stripped out the old supervisory
grades. To some people that was very painful because that was
their status, they had worked up to that, and to actually see
that being taken away to move towards a new structure is obviously
painful for people and we had to deal with that very carefully.
What we want to end up with and what we are moving towards are
self directed teams so that all of the people within those teams
are paid in the same way. Although they bring different skills
and experiences to that team we will use all their variety of
skills to improve their performance and ultimately the output
to the customer. That is a major change in terms of the grading.
When we have been round doing our mass briefings, we have had
people saying, "I am on the shop floor and there are five
layers between me and junior managers." To take that out
speeds up communication, it improves clarity, and we are going
through the process in terms of that major change and it is settling
down very well. On working practices it is a case of needing more
flexibility. In terms of giving our staff better pay, better conditions,
obviously we want something in return, so it is the flexibility,
the removal of old demarcations, the introduction of self-supervision
and the self-directed teams where they really are going to take
far more control of their own destiny and have an involvement
in shaping the future of the Agency.
69. I appreciate that answer. Clearly it indicates
that a lot of reform was needed in this area. What more do you
propose to do when you have got the trading fund status in pay
and grading? And another point on this, clearly you are not going
down the road of privatisation because of what was said earlierthe
need to keep the research role and other reasons as wellbut
would privatisation have given you even more flexibility in terms
of pay and are those some of things we should be taking into account
in considering trading funds generally?
(Mr Hill) If I could take this at the top level and
then hand over to Bernard again. What we are aiming to do is to
look at best practice in the commercial sector and particularly
in the aerospace business and to benchmark our systems against
those and we will, as we evolve as a trading fund, be looking
at performance related rewards as a key issue. But it is absolutely
crucial that we move to a single bargaining unit within the Agency
and take out the artificiality that we have lived with for many
years of industrials and non-industrials having a completely separate
system. That is no longer appropriate, and particularly inappropriate
as we move into becoming a trading fund. It is our aim from 1st
April to progressively migrate towards a single status workforce
so that everybody has an opportunity to be able to target any
career opportunity from the shop floor to the chief executive
(Mr Galton) What we can do from April with non-industrial
delegations is it will give us the ability to tackle specific
issues that we have got within the Agency. An MoD-wide pay deal
tends to be fairly broad brush, there is a standard increase across
the board, and clearly that cannot tackle problems that exist
within the DARA. For example, we have got a group of staff called
TTOs. We are the major employer of TTOs within the MoD. It is
only Henlow that employs a few as well.
70. What is a TTO?
(Mr Galton) It is a telecommunications technical officer.
We have got quite a few at Sealand. Their conditions are different
from the professional technical officers who are another group.
We need to tackle that in terms of the differentials that exist,
many of them very, very specialised. We need them desperately,
there is a lot of competition in the market-place for them so
we need to be able to target our own pay system to deal with those
sort of issues. That is just one example. We have got a problem
in terms of the interface between the industrials and non-industrials
over many, many years of them having quite separate pay agreements
within the MoD. Again we have got to tackle that in order to achieve
single status workforce and achieve the harmonisation. We want
to end up with DARA employees. We do not want first and second
class citizens within the Agency. So we must tackle that and certainly
at the interface we have a bulge that we need to correct. You
questioned whether or not we would have the same sort of freedoms
as a commercial company. We have got the constraint clearly of
working within public sector pay but then commercial companies
have the constraint of working within their own profitability
and in terms of their shareholders. So I think that we have similar
constraints but for very different reasons. What we want to try
and do is to pay people a market rate for the job. We will not
ever be able to be the best payers in the business but if we can
move up towards that that will improve our recruitment and retention
which means our costs will be reduced. It means that there will
be a long-term return on money invested in training. I think overall
that will be beneficial but it is working with our trade unions,
with our staff to develop jointly something which is going to
be good for them and good for us.
71. We were very impressed with the training
we have seen. We were delighted with your apprenticeships especially
your apprenticeships for people who were in other careers before.
I was particularly pleased to see a former mine engineer who was
taking an apprenticeship but there was an incredible anomaly there
when these apprentices were getting to their final year that they
were getting paid literally the same as those who were doing the
training. It is the trainers where the key quality is in this.
There was this anomaly where they were not getting proper wages.
Is this the sort of example you are saying you will be able to
(Mr Galton) It is an excellent example of the sort
of thing we want to address. Apprentices are industrials and therefore
we were able to address their pay and conditions in the year 2000
so that when they come out of their training after six months
they go on to the craft rate. We were not able to address the
pay of the trainers and what we want to do is pay a rate for qualified
and experienced trainers and, clearly, if they are earning less
than their trainees then we have a problem and we do need to address
that. We are well aware of that problem and will be looking at
this straightaway for this year. We are not going to be able to
achieve everything in year one. It is going to take two, three,
four years, maybe longer in some areas, to get our long-term strategy
in place. There is quite a lot of things we can do this year and
for the staff to see the benefits of delegations you have got
to come up with quick wins in terms of them seeing the benefits
in their pocket straightaway.
72. Can I follow up with my question because
it is also about youth employment and training and apprenticeships.
We did see some excellent very impressive work there, and we would
very much like to see it expanded. Is it likely to be expanded
when you take trading fund status? Is there scope for that?
(Mr Hill) Indeed we are absolutely committed and yesterday
we had a corporate governance group with the top 50 people in
the Agency to develop the vision for the future and there was
an absolute commitment within that group to us becoming a learning
organisation and investing in people's careers for life. That
is something we have not been particularly clever at in the past.
We have tended to give the industrial element of the workforce
just time on type to learn about aircraft or particular equipments;
we have not developed their career opportunities as well as we
might. We are committed to doing that as a successful trading
fund. We are investing more in training and development now than
we have ever done before in the separate agencies and that will
be very much the flavour for the future. There is not a single
person in the Agency that will not go through some form of comprehensive
training this year. So lifelong learning is absolutely key. We
are even going further back than that. We formed a Saturday Club
where we have young people from the local area coming on Saturdays
to learn about aerospace so that they are able to make a decision
as to whether they want to come into a full career with us or
generally in aerospace. On from there to apprentices, management
training, right to top level training for the board which we have
done in the past year.
(Mr Galton) In 1998 the constituent part of what is
now the DARA had 100 apprentices. We have increased those on year-on-year,
in 2001 it will be 155. We are limited however, by the capacity
in the training centres. There are only so many you can bring
through in terms of the trainer/trainee ratio. We have had a very
in-depth look at the way we deliver our training, without reducing
the quality, to ensure that we meet the full standards based training
for the MoD modern apprenticeship. What we have been able to do,
by making better use of Barry College in St Athan, by having two
intakes per year we can double that capacity from 60 apprentices
to 120 apprentices. We have an ageing work force. We have a civilianisation
programme. There will be a continuing need for skilled young people.
The ability to bring in 120 apprentices, which is available in
August, is going to be extremely beneficial to the long-term viability
of the area and very beneficial to us in terms of having young
people. The Saturday Club is fantastic, I am very proud of it.
We started it last year and this is the second year. We have had
more applicants from youngsters than we could take. We have six
young women as well, we are trying very hard to improve the number
of women coming into engineering. One of my trainers now is sponsored
full-time by the local education authority. He goes out into schools
talking to year nine and year ten pupils. We have designed part
of the curriculum for their technology, to come in to St Athans
and do something practical in St Athans which they can take back
to school and which will form part of their GCSE programme. It
is combining work and school. We have more work to do on that.
We have been doing this with British Airways, GE and the other
British Aerospace employers in the area. We are very proud of
Mr Hood: We were very impressed. We would
like to see it spread in other parts of the country.
73. I think it is clear from the last exchanges
that there was much that we were very impressed with, particularly
the apprenticeship schemes, and there were many people that we
were very impressed with in the people we met. We are very grateful
for that opportunity. What we are here to do is to really get
to the bottom of what both the DARA, the MoD, Members of Parliament,
whoever are the bosses, are going to get out of converting to
a trading fund. We have to know and be sure that this is going
to be something worthwhile. Much of what you talked about is pre
trading fund. You might argue, "We are getting ourselves
ready", but we have to say to you, "If all this could
be done without that, what are we doing? Where are we going?"
We need to explore with you in much greater detail things like
commercial freedom. You mentioned it several times, you talked
about it in terms of investment. What does that mean? What does
commercial freedom mean to the DARA and what does it mean to the
MoD? What are they going to get out of it?
(Mr Hill) In terms of other trading funds in the Ministry
of Defence and elsewhere in government that we have visited there
is absolutely no question that the entire work force takes a greater
ownership of the business, they have greater control over their
destiny and in terms of the business that they can target, that
they can capture and, therefore, their long-term prosperity within
that organisation far more than on-Vote agency. The other issue
is the ability to invest profits, to be able to make a profit
out of the business and then to invest that into the business
for the future. That has been one of the most vexed issues over
the years that agencies have had to face. As with votes, you end
up having to bid year-on-year, particularly for capital projects.
It is one of the reasonsthere are many others, that can
I allude to, if you want to go into detailas to why St
Athan's has got into the dilapidated state that it has. In terms
of commercial freedoms an on-Vote agency would not be able to
enter into a joint venture opportunity with a company where you
would bring the skills of both parties together to create something
that is greater than the single entities in terms of business,
whereas with trading funds we can. We will also be able to get
into a wider market place, which has the benefit for the MoD and
the taxpayer in that the more work we can bring into the agency
the more our overheads go down, the more competitive we will become.
There are a number of markets that we can get into, I believe,
more freely as a trading fund than we can on the vote. What I
think is important as a trading fund is to get the buy-in from
the work force so that they take greater ownership of the business,
so that collectively we make a success of it.
(Mr Galton) We have worked very hard to get the staff,
to buy into the vision and build the corporate identity. If you
look at the history of both NARO and the MGDA they went through
competing for quality and they were going in different directions.
You have to bring them together and say, "This is the DARA,
this is our future you have a really key role to play in this".
If we are successful then as a trading fund we are able to use
some of those profits in terms of improved pay and remuneration.
We can look at team based pay, linking bonuses in terms of performance
against KPIs, and corporate bonuses. If know that some trading
funds have that, certainly in the last one I worked in. In that
way you can directly link the input that the individuals have
made to the output that they have produced and reward them for
that success. That help enormously.
74. This is all good management-speak about
getting people to buy in. I think it is fair to say that there
were people who work in there that have some concerns that they
had not really caught the ethos of what you are trying to achieve.
I am going to ask some specific questions about what freedom you
will have. Will you be free to set your own prices?
(Mr Hill) In terms of our prices we will have to work
within Treasury guidelines. We will work to Specialist Procurement
Services' scrutiny. We will have to, just like industry, work
within the QMAC system (the Questionnaire Methodology for the
Allocation of Costs). We will be no different from industry in
that respect. I will ask DCDL to come in and give the DLO perspective
because there is an important issue for both parties in this respect.
(Mr Oughton) Mrs Moffatt asked the question both ways
round, both the benefits for the DARA and also the benefits for
the MoD more widely. Perhaps, I should say that the decision to
move the DARA to a trading fund is an essential component of our
overall support strategy in creating the Defence Logistics Organisation.
The reason for doing that is set out in the Defence Review White
Paper in 1998, it was to provide us with the opportunity to secure
greater rationalisation and greater synergy across diverse elements
of our business. Why? Because we needed to find ways of generating
the financial headroom in the Ministry of Defence budget in order
to pay for the modernisation of our Armed Forces. The key priorities
that were set out in the Defence Review in 1998 were investment
in frontline capability, the new aircraft carriers, the new combat
aircraft, and also dealing with some of the deficiencies which
the Defence Review believed it had identified in our medical services
provision, for example, and in some of the support and sustainability
areas, meant that we needed to find a way of generating extra
resources from within the Ministry's own budget in order to tackle
those issues. The key first benefit for us was allowing us to
invest in modernising defence across the board. That is why we
took the decision to address the support issues pan-DLO. Secondly,
in order to do that it was extremely important for us as we created
the Defence Logistics Organisation to understand the true cost
of running our support business. Under conventional cash accounting
systems, which are now being replaced by resource accounting and
budgeting, it was simply impossible to establish the true cost
of ownership of any of our assets. Mr Hill has described the significant
assets in terms of buildings and estate, plant, machinery held
by the DARA. We had no concept of the real cost of any of those
assets any more than we have across logistics activities as a
whole. We needed to find a way of shining a spotlight on those
costs. Thirdly, we needed to find a way of ensuring, as we developed
smart acquisition, we could provide the introduction of equipment
into service better, faster and cheaper. We carried that through
into how we supported that equipment once it was in service. Ensuring
we could provide better availability of our fighting capabilities
to the frontline was, again, absolutely essential to the strategic
defence review decision. As Mr Hill has explained, many of the
techniques we are trying to develop not just in DARA but across
the Logistics Organisation as a whole are concerned with faster
turn round times, bearing down on the asset base, reducing the
spares holding we have in our warehouses, being smarter and leaner
in the sense that most large enterprises in the private sector
would be to ensure that we are spending absolutely no more than
is necessary on the support end of the business. That is where
the DARA fits into the wider picture and that is how we will deal
with support into the front-line.
75. I thank you for that very clear explanation
of what we hope to get out of it but we want to know that DARA
is going to be protected as well as being out there and doing
business and making sure everything is done faster and better;
we need to know there is some protection. What proportion of the
work will you be given?
(Mr Oughton) Perhaps the best point we should make
at the start of that response, Mrs Moffatt, is to say that the
DARA, once it reaches trading fund status, will not stand entirely
independently from the rest of the MoD. It will sit outside the
Logistics Organisation and will be owned directly by the Minister,
but as an indication of the commitment that the DLO is making
to the success of the DARA, we will be making investments, we
will be providing investment in addition to the investment DARA
themselves are generating in order to ensure the success of the
enterprise. We are not saying, "You are on your own in the
DARA, you have to fight to win the business and it is an entirely
free and open market-place." In order to ensure that over
the first five- year period of the business plan
76. So it is time limited?
(Mr Oughton)Over the first five-year period
of the business plan we have made some assumptions about allocation
of work and investment in the business in order to assist the
DARA to become competitive.
77. You expect after that five-year period to
be out there on your own?
(Mr Hill) Yes indeed, we hope we will make the Agency
competitive enough to be able to stand on our own feet in the
market-place. A very important issue of our business case is that
we have built in General Sam's 20% cost reductions in our prices
so we will be offering reductions obviously in the latter years
because early on we have got a lot of investment. The other key
issue that is very important both on input and output is moving
to a hard charging regime, which is an enormous discipline. There
are many communicated costs on the Agency at the moment where
we have absolutely no ownership and no control. By moving to a
hard charging regime we are able to negotiate the services that
we take into the Agency and therefore we will fix the prices more
78. Let me take that a step further. So if you
were allocated work from the MoD and you found it completely unproductive
and a great strain on your organisation, would you be able to
walk away from it?
(Mr Hill) That would have to be a negotiation with
the integrated project teams. There are certain key areas where
DARA has a unique capability where there is no alternative in
industry, but if you put a hard-nosed business case together you
would not justify retaining that capability. Electronic fuel pumps
at Sealand is an example where we have insufficient through-put
and yet it is absolutely crucial to the front-line of the Royal
Air Force that somebody does that work. Industry has moved on
to new production and no longer has the capability. In that instance
we would negotiate with the integrated project team and they would
agree to an inward investment so that we shared the cost of establishing
79. What controls are there on the returns to
the MoD? You said "we will be able to reinvest" but,
surely, the MoD is going to take some of the cash off you?
(Mr Hill) We have to pay a dividend on any loans and
on the equity that we have from the MoD just like any commercial
organisation, but where we make profits over and above that, that
can be reinvested in the business. If we were to make massive
profits I am sure we would get some Treasury scrutiny. That will
be monitored by SPS and internal audit organisations like the
(Mr Oughton) Again it is important to explain that
in common with the normal practice for trading funds we would
expect to offer a dividend holiday to the trading fund agency
for the first five years of its operations, so again that is part
of the commitment we are offering to ensure a successful set-up
of the trading fund in order to make sure it will operate successfully.