Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 280 - 299)



Mr Davidson

  280. I wonder if I can follow on from the point you were making. I had imagined that Smart Acquisition and procurement would resolve many of these difficulties. I understand the problems you are raising, we heard there have been problems over a long period, but I had thought that Smart Acquisition is designed to resolve them.
  (Sir Robert Walmsley) In this Report it is made clear that every single major project report covered here was conceived before Smart Procurement was thought of. The report also makes the point that it will be some time before the application of Smart Procurement principles begin to bite. That is the truth, we cannot rewrite history.

  281. When do you anticipate that excuse will no longer be valid?
  (Sir Robert Walmsley) I do not think it is valid as an excuse now. I try not to make excuses, I try to explain . Looking into the future, because I do that, it seems to me there is not going to be a very significant change next year unless we suffer some bad news. There is not going to be a great deal of good news because the predominant thing in terms of preventing a slip is the change in the project population. MPR 2002, as projects like C-130J, with 30-odd months delay, and a number of other projects begin to pass out of the major project reports we will expect to see a big improvement in the average delay on each project.

  282. I wonder if can I pick up the point you made about dealing with contractors in terms of incentivising, and all of the rest of it. You seem to be saying to me that if contractors actually abide by the terms of the contract they have signed then they should get more money for it. I would have thought that the point of contractors was to get them to do what they said they were going to do and there was penalties if they did not do what they were meant to be doing. Can you just clarify that for me? I do not take the view that a contract is the start of a process of negotiation, I thought it was the end of a process of negotiation and then you moved on to implementation.
  (Sir Robert Walmsley) I did try to say, I accept it was a long explanation, that we had not manufactured any more money for the contract. What we are allowed to do, as a bonus, is bring forward some of the payments that we withhold as a retention against satisfactory performance, so we would get the money sooner, no increase in price whatsoever.

  283. There was meant to be a value in having the money sooner. There is bound to be a cost, an additional cost to the terms of the contract.
  (Sir Robert Walmsley) In that sense, yes, but the overall price has not changed. There is a value in bringing the money forward, that is the incentive that we are trying to provide. We think that we will keep the sticks, but we have to find a way of making sure that these things are delivered on time. Contracts where we share gains, the target cost incentive fee, where we share the gain with the contractor, are all designed to make sure that they are incentivised to perform to time.

  284. Sharing the gain. If you sign a contract in the first place and somebody does what they are meant to do it does not seem to me that there is any gain beyond what you were expecting. If they deliver ahead of time that is valuable, I can see there being a saving if money moves forward. If they do what they are requested to do under the terms of the contract why should they be further awarded?
  (Sir Robert Walmsley) I do not think you can ever look at a contract as a series of little elements on their own, you have to look at it in the round. In the round I am entirely satisfied the Eurofighter contract, which said that some of these retentions, it is not something that we loaded in afterwards, we did not come along afterwards and do it, we did say, "We want to find a way of incentivising it", just as we did our reliability demonstrations on ASRAAM, just as we are doing on Apache. In the case of ASRAAM the contractor has forgone an £8million incentive to perform well by not completing the development programme to time.

  285. Perhaps we will come back to that. There are three contracts I want to look at very briefly, firstly Hercules C-130J with the 23 months' delay. I seem to recall at the time they awarded this contract we had clear categorical assurances from Lockheed-Martin and also the RAF there would be no delays in this. Why have these technical delays suddenly emerged and were we being conned when we were told there would be none?
  (Sir Robert Walmsley) They certainly have not suddenly emerged. It is true that they have emerged over the period of the contract execution. It is a new aircraft and Lockheed-Martin at Marietta completely underestimated the development content of this aircraft, new engines, new propellers, new avionics. They have certainly changed their chief executive twice during the execution of this contract, and it may or may not be connected with this, but it is their biggest piece of work, so it would not surprise me if it was something to do with their underestimate, because I suspect Lockheed have not made a great deal of money on it. Why did they make an underestimate? I simply cannot answer that. They built its predecessor, the C-130K. They knew more about this aircraft than anybody else in the world. You would think that they would have understood what would happen when you fit new propellers and a new engine. You would think they would understand the difficulty of the software for avionics, they did not.

  286. We were led to believe at the time by the RAF that they accepted what Lockheed was saying, that there was unlikely to be a delay. Can you understand why some of us are a bit suspicious when we get bounced into these sort of decisions, that here is the RAF clearly wanting this plane and were quite prepared to back up what the contractor was saying that there would be no delay, irrespective of whether or not they knew there was likely to be a delay.
  (Sir Robert Walmsley) I am sure the remarks were made in good faith, that is the first thing I would say. The second thing is, we have recovered very substantial liquidated damages from Lockheed-Martin as they fell due, which has, at least, compensated for us the running costs of the C-130K. Secondly, if I can revert to the remarks I made before, we do not always take these bids at face value. We did not take the two Beyond Visual Range Air-to-Air Missiles at face value, we said neither of them were good enough, they both need more money spent on production. We do not go into everything with our eyes shut.

  287. Do you have a defence contractors league table of delays and where do Lockheed fit in in that league table?
  (Sir Robert Walmsley) If I did have such a league table, which I do in my mind, I would find it rather difficult to categorise, because some contractors have such a huge range of projects, but if you picked their worst they could well be at the bottom or the top of the league table, ie the worst performer. It is just a fact that defence contractors, the reputable ones—

  288. I am surprised that to be able to deal with those vast resources you do not have some league table of some sort. I certainly know that this happens in a number of local authorities, for example, which are admittedly simpler contracts, but they do have an idea of which contractors are likely to be able to deliver and which cannot.
  (Sir Robert Walmsley) We certainly do. We also have a list called, "contractors in need of special attention", which we treat with great caution. We have lately started to take into account contractors previous performance in a more formal way as we move towards looking at their bids for new contracts. It is an extremely difficult thing to do, but we are starting to ask them to write their reports on previous work they have discharged for us.

  289. It would, perhaps, be helpful in future when large contracts are coming up if we had a list of the previous convictions from the relevant contractors, an indication of whether or not they are able to deliver. Can I turn to the second issue, which is the Landing Platform Dock, and the explanation for delays in paragraph three on page 88. "Industrial loading difficulties at the VSEL Barrow shipyard". Is this all your fault because you gave them too many contracts, or did they take too many contracts not knowing the capacity of their own yard? I remember that this contract was then quickly followed, if I remember, by the Astute Class Submarines and then by the Oilers(?), which then ended up having to be transferred elsewhere. This was entirely predictable, and, indeed, was predicted at the time. I am a bit confused as to why you did not spot it when others outside did.
  (Sir Robert Walmsley) We certainly spotted it as a possibility. We certainly asked to be shown their arrangements and we accepted they were satisfactory. The Barrow shipyard has since been awarded that contract. There have been four new managing directors. They have been trying very hard and have now successfully produced a new computer aided design and manufacturing scheme. The scheduling of large pieces of ship through the yard was something they had not understood the complexity of. The third point was transforming the yard from a nuclear submarine contractor to a surface ship builder and trying to avoid the costs and the meticulous care of every single piece of welding that tends to be in the submarine discipline. It took them longer to eliminate, with surface ships, than we had expected. I do acknowledge I made a wrong judgment there. It is a wrong judgment which effectively was based on assurances I received from a shipyard. When we negotiated the contract we specifically gave them seven extra months to build the ship beyond that which we originally thought was necessary. That was the adjustment we made. In the event that was not enough, it should have been 19 extra months. It took us nine months to negotiate the contract longer than we expected because we had lost the competition.

  290. They have a fair amount of previous for the next contract. Did they pay compensation?
  (Sir Robert Walmsley) They will do.

  291. Can I ask for clarification on page 91, paragraph 3e, where you mention, "HMS Intrepid will remain at a low state of readiness and downgraded capability because of her material condition". Presumably that means it is junk and that you are not going to use it. Why, in those circumstances, if it is due to be scrapped in June 2001 is it not scrapped earlier?
  (Vice Admiral Sir Jeremy Blackham) Because what determines the readiness of something is the time scale, we think about the operation for which it might be used, what the warning time that might be. Then the question we ask ourselves is, that given that warning time in this case for, as you can see, a pretty large scale operation would we within that time be able to recover the unit. We know if the answer to those is yes then the thing is worth keeping, if the answer is no it is not.

  292. This is costing money at the moment? To have it kept, all that will be chargeable up to the figures?
  (Sir Robert Walmsley) It will not.

  293. It is the additional cost of keeping the ships they were to replace in service not going to be met by Vickers, even though that is costing you money?
  (Sir Robert Walmsley) It will not. BA Systems Marine Barrow will pay compensation as a result of Albion and Bulwark being late. That will not be specifically geared to extra costs that we will incur on Intrepid, which, incidentally, is the best source of spare parts for Fearless and for keeping Fearless going that there is.

  294. The third point I want to raise is the future transport aircraft. Again, it is the issue of the RAF having a specification. I remember they were keen to have the C-17. I think we now move to make an award to the A-400M, the decision has now been made. We have some C-17s in the door and I share the points, the concern that my colleague was raising about the way in which that contract was awarded. I was surprised to hear you say that all of the costs of the C-17 are being met within the 500 million. That, as I understand it, was the upper limit. If you are not certain about that I wonder if we can have a note about that. That is certainly not the information I have. I appreciate that it is not directly part of this. It was certainly my impression that there was additional costs under the maintenance side of things and also under pilot training and additional support. Are you saying to me that all of that is appearing within the £500 million?
  (Sir Robert Walmsley) No, I never underwrote the £500 million, I was careful not to. What I did say was in the right region. What I also said was when decisions were made about the short-term strategic airlift they were absolutely made in the full knowledge of the costs, all costs. We did not, so to speak, hide some of them away so that the position looked more favourable than it might otherwise have done. The 500 million is in the right region, but I do not have it at my fingertips. Whatever figure it was, it took account of all of the costs[8].

  295. If I remember correctly, the competition was abandoned at an earlier stage and then they had to come back. It was not previously within the limits and it then appeared to be within limits, that is my understanding of it?
  (Sir Robert Walmsley) What is certainly true is we worked hard to deliver this support option with the United States Air Force. We did not have to set up all of the up-front support equipment and incur those costs, and that did bring down the costs. We have had a very constructive tripartite, integrated project team with all of the people working together.

  296. I was surprised to hear you make the point about the restrictions on usage of the C-17, because my impression was that what it had, over and above, was various capabilities. You seem to be saying now that use cannot be made of those capabilities because of the memorandum of understanding that was part of the leasing agreement. Is that correct or have I misunderstood that?
  (Sir Robert Walmsley) I did not mention a memorandum of understanding. What I did say was that C-17 could perform some of the roles that were listed to me as outside its capability, I remember casualty evacuation. I also said that we would not seek to use it for low level parachute or dropping operations, therefore we were not seeking clearance to do so. That is very much in Vice Admiral Blackham's province. It is to do with us not requiring it, therefore we do not have to go through all of the expense for clearing it for those operations using US procedural arrangements, which we have.

  297. All of the functions you are using it for is not to full capacity and could have been met by the Antonov?
  (Sir Robert Walmsley) I said it twice before, and I will say it again, the key problem with the Antonov is it did not provide secure, assured airlift. We could not guarantee we would get our hands on it when we needed it. That was the purpose of it.
  (Vice Admiral Sir Jeremy Blackham) From the customer point of view that was the most important single factor.

  298. That is not my understanding of the position. My understanding is the bid would involve buying some of these, which would guarantee accessibility.
  (Sir Robert Walmsley) They did not guarantee it. They worked enormously hard to improve the degree of assurance, it fell short of a guarantee[9].


  299. I only need to detain you for a couple of moments in closed session, so I can put a bland question to you. You said that you did not allow punitive contracts, what did you mean by that?
  (Sir Robert Walmsley) I meant contracts which punish the contractor more than the cost consequences for the person to whom he is supplying, which you can do in France. The limitations, put frankly, on penalty clauses. We do not call them penalty clauses we call them liquidated damages. It is designed to put you back in the position you would have been in if the article was delivered as required.

8   Note: See Evidence, Appendix 2, page 39 (PAC 00-01/62). Back

9   Note: See Evidence, Appendix 2, page 39 (PAC 00-01/62). Back

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