Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 100 - 119)



  100. The WSMI appears to allow greater competition of surface ship refits, at least in the short term. How have you structured the deals with the dockyard contractors to ensure competition survives in the longer term?
  (Mr Coles) The contracts are actually on an output spec basis, the companies are delivering an output and the contract is incentivised both on how they deliver that through a number of key performance indicators and profit sharing arrangements, so that is how it is incentivised. In other words, it has looked at what the output is, how to deliver the output, if you do not meet the output you stop getting paid, if you really do it badly you actually lose your profit and finally, of course, if they really, really do not perform, we can take the whole thing back in-house or sub-contract it to another management company.

  101. With contractorisation of the dockyards in 1987, and then their outright sale in 1997, the MoD was able to keep some pressure on refit costs through the competitive element of the programme and in extremis your ability to switch refits between dockyards if you were not satisfied with the prices available. With naval base support now to be contractorised, what leverage will you have if prices or performance at one of the bases becomes a problem?
  (Mr Coles) Two things. The refit remains exactly the same but we have included, also, in the competitive programme what we have called docking periods which occur, period refits. They will be open to competition, they are not allocated. Finally, of course, the periods inside, when a ship is in fleet time, as we call it, that is delivered by the output spec by the company and they get paid their premium or their costs on the basis of how they deliver the output not what the input is. So this is a fundamental change, it is not input based, it is output based so it is quite a significant change in the way we do business.

Mr Roy

  102. As part of the WSMI, the MoD is renegotiating its contractual obligations for allocating refits to the dockyards without competition. Why was this necessary, given that your allocated programme obligations would have gradually declined steadily over the years ahead anyway?
  (Mr Coles) I think as Sir Robert has mentioned earlier, the competition is the stimulus for innovation and change, whether it is in techniques or management activities. There is a process which drives costs out and inefficiencies. If we can bring that further forward, that must be an advantage to us and the taxpayer and the Royal Navy of course. It is a part of the process of bringing the benefits of competition earlier in the programme and we can do that through this arrangement.

  103. Under the new arrangement which has been negotiated with the three dockyard contractors when will allocated refit work come to an end at each of the dockyards? What will be the ramifications for job continuity which has been raised in the media in the last week or so? How does that compare with your current obligations?
  (Mr Coles) At Devonport I think it stops almost immediately because they have a very small allocated programme anyway. At FSL it terminates quite quickly, there is a small amount of work. At Rosyth it is brought forward by two years so instead of 2007-08 it is 2004-05.

  104. Any information on job continuity?
  (Mr Coles) The jobs that we announced earlier about the likely reductions, the fall-out of the figures I have already given as part of the partner arrangements.

Mr Jones

  105. Can I ask a question in terms of the amount of refit work that there is. First of all, can you give us an indication of how it has risen and fallen over the last ten years and what your projections are for the future of the level of refit work which will be needed? In doing that, can you say in terms of the fall how much does that relate to the reduction in the size of the fleet? In terms of the capacity in the refit, what is the current position on surface capacity?
  (Mr Coles) In big handfuls, from about 1987 to about now, I guess the total industrial capacity has about halved, in terms of the amount of activity we need for a variety of reasons: people are more efficient, we are better at doing it, ships are newer, better techniques, better available to the ships. In terms of the number of ships that actually pass through in any one year for the maintenance cycle of these refits, it has gone down from about 105 to about 50. So the number of ships has halved but also the amount of capacity that we need has dropped, it is 105 ships to 51, 500,000 man-weeks to 250 or thereabouts. There has been a change in the number of ships but also what we do on them and how we do it with a consequent reduction, of course, in the amount of effort we need in the companies themselves, and sometimes they do indeed sub-contract that out as well so it is not the whole measure.

  106. In terms of the future, how many dockyards do we need to meet the requirement?
  (Mr Coles) The number of dockyards that we will need or refitting yards in the end will be determined by the companies staying in the market or bringing in other work to do that.

  107. Come on.
  (Mr Coles) That has to be the answer because they are private companies.

  108. Come on. No. We had this yesterday with some civil servants trying not to answer the question. What is your estimate? Putting to one side the private work, what is the estimate of the number of dockyards needed for work you project is coming from the MoD?
  (Mr Coles) I do repeat again it is not a question I can answer specifically because we could do it all in one if we wanted to or we could do it in five. At the moment we have three and as long as they are competitive they will remain competitive with the work we have and they might be able to supplement their activity, as they are doing at the moment, by additional work they are bringing in to keep the overhead down or generate income. They do that very successfully so in the end it must be their responsibility to say "Well, I will stay in the business and meet our work under the competitive pressures".

  109. Let me ask the question a different way and see if I can get a reply. In terms of shipyards obviously we want a situation where we want competition between different shipyards.
  (Mr Coles) Yes.

  110. Are you saying that we need three dockyards to remain competitive?
  (Mr Coles) I would say we need at least two.

  111. I think I have got the answer. Thank you. Can I ask another question then in terms of decisions taken in terms of procurement. What decisions are taken in terms of when you are buying or procuring a ship? What is the trade off between the procurement and the upfront costs of that and then the long term case for selecting a contractor for logistic support arrangements? What is the balancing act?
  (Mr Coles) I think as Sir Robert indicated, maybe he should take the lead on this question, we look at procurement and support as a holistic activity, in other words, looking not just for the cheapest upfront costs but the cheapest through life cost as well. Decisions taken in what I would call the upfront part of procurement, and what happens consequently, are taken in the round and, of course, the responsibility passes for warships from Sir Robert's DPA to myself at some point in the cycle. So it is taken in the round right at the very start, we look at what is happening on the 45 or the others right at the heart of this, how we are going to procure these and how we are going to support them.
  (Sir Robert Walmsley) I think that is an absolutely crucial issue for us. Everybody knows that we have been saying that we want to take through life costs into account for as long as I have worked in ship procurement or ship support. I do not think we have done it enough. There are two techniques which I think I would just add to what John Coles has outlined. The first is that you can never know the costs that are going to be generated a long time in the future anywhere near as certainly as you can know the costs that you are going to incur next year, that is just life, because circumstances will change etc., etc..

  112. You can do things at reduced costs later.
  (Sir Robert Walmsley) We can certainly. The basic concept that the estimated costs of the year 2015 are known with less certainty than the estimated costs for the year 2005 just remains to me a common sense proposition. I am quite keen, therefore, on the idea that we make these judgments about the comparisons between alternatives on, this horribly sort of jargon phrase, net present value which means that we discount at six per cent per annum the financial significance in decisions. So something in the year 2015 will have had six per cent knocked off it for up to 13 years. That stops you from doing silly things because people have made ridiculous estimates of what is going on in 2020 not because necessarily they have got them wrong but because you are going to do different things in that year, that is the first point. The second point is that it is all very well except that it is still Mr Coles' organisation—the Warship Support Agency—which is bearing the costs of this support activity rather on the basis of having trusted the estimates made by my team in which, of course, his experts participate before we made the initial acquisition. I think there is an issue here about making the initial provider of the ship in some way link in to bearing the costs of support downstream. We have been very, very careful to do that with the Astute nuclear submarine contract which I think is probably the first serious warship contract we have done that with.

  113. Does that not have implications for dockyards if you do that? Some of those procurers could follow up that work outside?
  (Sir Robert Walmsley) They could if they were really stupid but they are not really stupid because they know where the ship is going to be based so when Astute submarines turn up at Faslane they will use the providers, that Mr Coles has been talking about, of the services in Faslane to do the work. The question is how much work will be required and that work will be commissioned by the submarine prime contractor from the incumbent organisation at the naval base in Scotland. The question is who is paying the ultimate bill, and the answer is the submarine designer is linked in to that, he is going to design a submarine which requires less maintenance rather than thinking "Oh, good, I can make a second wodge of money on this by generating a huge maintenance -heavy ship". We are trying, in other words, to tie in maintenance costs to the initial acquisition costs by thinking about it, including this discounting process I mentioned, as well as contractually because in a way it is contracts that cut the real mustard not promises.

  114. If you are going down that route, has any thought been given—I am not suggesting you procure warships in the same way as ro-ro ferries—or is there any thinking being given to tying up onboard maintenance costs to the warship?
  (Sir Robert Walmsley) No. I think I told this Committee last year—because I looked up what I said—there is no question of a private finance initiative for warships. I have made lots of mistakes in my time as Chief of Defence Procurement. When I was pushing it on survey ships to have private finance, eventually I got punched on the nose by the navy board and told to go away and buy the ships properly, and I did that. I am not going to make the same mistake again.


  115. That is why you are so enduring, Sir Robert, you happily admit mistakes.
  (Sir Robert Walmsley) That was a king-size mistake.

  Chairman: We know you have a lot to admit to but the fact you do it is quite refreshing.

Mr Jones

  116. Are there any ideas, for example, of having a maintenance contract with the actual provider further downstream?
  (Sir Robert Walmsley) I think all these ideas need to be considered. John Coles has just been reminding me that of course the new offshore patrol vessel contract is very much done on this basis of tying in to the provider so that he maintains the ship so if they cost a lot to maintain then he will pay the burden. I think that is the right route. As to who should do the eventual maintenance—and I recognise the sensitivity of this—the navy wants the ships to spend their time in harbour in naval bases. We too, we have talked a lot about people this morning, and I know it is not fashionable necessarily for civil servants to talk about service people but let us be absolutely clear that getting the right people to man the ships is totally critical to the defence capability and a key issue for the Royal Navy. If we think that we are going to encourage people to serve in ships if they are sent off somewhere different from their home port for most of their maintenance then that to me is the road to ruin and we have to be very, very careful before we do it. It should not be excluded as a possibility otherwise the chaps will just hold us to ransom. My guess is it will continue to be done at the home port, most of it.

  117. Even if a supplier can say that they are going to generate significant savings, you would balance that?
  (Sir Robert Walmsley) How would they do that? They would be making it up and we would want to say "How are you going to do that?" If they know how to do it then we would tell the people at the home port to do it that way too. The key thing is to generate ships which do not require lots of maintenance. I think it is very important that the designer and the initial builder are hooked into that proposition.

Mr Roy

  118. Kevan Jones just touched on savings and I would like to stay on it for a while. With rationalisation of naval base and dockyard activities under the new commercial arrangements we are speaking about today, just for the record by how much do you anticipate that spare capacity can be reduced?
  (Mr Coles) I do not think the spare capacity will be reduced over time with the counter proposals because the spare capacity in a sense, particularly with a naval base, is essentially the number of people working in it because, of course, if the assets are not working properly then the naval base commander or the partner will actually remove them. It is mainly about the asset utilisation and or the people who are there.

Mr Jones

  119. I do not understand that.
  (Mr Coles) What I am saying is we are not generating spare capacity, we are trying to make sure it is not there. There are two things. One is the number of people, we have already talked about the final number of people. In terms of the assets that are in the dockyard companies or in the naval bases, they will be looking to ensure the assets if they are duplicated can be shared and if they do not need them they will be disposed of.

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