Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 287 - 299)




  287. Welcome, gentlemen. Sir Jock, twice in a fortnight may be too much for you! This is a most glittering array of talent that we have seen in this Committee for some time and rivals tonight's match with Manchester United. We have high-profiled, high-salaried stars and well-known suspects sitting behind you and to your right. You may not all wish to answer all the questions, but as you represent different elements of the procurement process, it may be apt to hear more than one person speak on a question. Perhaps I shall address questions to you, Lord Bach, and then you can work out who wants to hide under the table and who wishes to be forthcoming. We have people who are pretty forthcoming. I propose to continue until at least a quarter to one. Lord Bach, welcome to your first and hopefully not your last meeting with the Defence Committee. Would you like to say anything by way of introduction?
  (Lord Bach) I am looking forward to the next two and a quarter hours—or will it be six hours! I am slightly apprehensive. It is rather like going to a fair and taking a ride that one has not been on before. One has a sense of anticipation and is interested to see what the ride is actually like.

  288. As at Alton Towers, I suspect that you are well strapped in.
  (Lord Bach) Thank you for that warning. I do not think that I need to introduce any of those with me today. I look forward to doing my best to answer your questions.

  289. We shall start with some questions on private finance initiatives. When we requested information from the MoD we requested information on five programmes that would fall within the framework of PFIs. I want to explore a couple of those. Your heavy equipment transporter programme is the first and, so far, the only PFI that uses sponsored reserves, although you have others in the pipeline that are likely to use them. What have you learnt from this "pathfinder" programme about the use of sponsored reserves? Have your experiences shaped the way in which you are implementing the other PFIs?
  (Lord Bach) As far as PFI is concerned, at the Ministry of Defence we look at it in a pragmatic way on all occasions. Whenever it delivers us better value for money than a conventional procurement, we shall take that option. As you know, Chairman, we have taken it already in 42 projects, bringing some £2 billion of private sector investment into defence. We are looking at it over another 40 projects that would bring in much more in the way of private sector investment—up to £12 billion. Your question is about sponsored reserves. In regard to sponsored reserves, it is early days. As you know sponsored reserves will undertake substantially the same tasks for the MoD in peacetime under service contract arrangements as they do in operations. When the department requires those tasks to be performed on operations, sponsored reserves like other reserve forces, are, of course, subject to military law and discipline and wear the uniform of the service in which they serve. In that respect they are materially different from contractor staff who work in support of operations. We have no single blueprint of training that sponsored reserves must have. It will depend upon the particular role that they play. At the minimum they are likely to receive training on military organisation, conduct, ethos, discipline and perhaps basic small arms training for self-defence. The point of using sponsored reserves is to enable them to continue to do the same job that they do in peacetime and if that is right we do not think that a large amount of additional military training will be necessary. I want to make it clear to the Committee that we are feeling our way on this. On the HET (heavy equipment transport) PFI project, for which a contract was placed in December last year, the service does not commence until July 2003 with full service achieved, we hope, in July 2004. Either I or my successor, or my successor's successor will be in a better position to tell the Committee how sponsored reserves have worked at a future meeting of this Committee.

  290. How are you able to go completely over to contractor staff operating the Ro-Ro ships and heavy equipment transporters, when you still need RAF crews to fly the strategic tanker aircraft?
  (Lord Bach) As far as the tanker aircraft is concerned, it is a project that is quite a long way back, particularly from the last one you asked me about, the HET. To begin with we shall have a mixed manpower of which at least 75 per cent will be RAF crews and 25 per cent may be sponsored reserves. That will be ground crew and pilots as well. We think that that is a sensible strategy to begin with, to see how it works. One of the crucial things that we are trying to do is to remain flexible in the way in which we introduce the concept of sponsored reserves and the way in which we run each of our PFI projects. That will mean doing different things in different cases. We think that it is appropriate, certainly so far as FSTAs are concerned, and our initial thinking is—I repeat that it is important to remember that no final decisions have been taken about FSTA yet—that a combination of service and sponsored reserves is the best way to go.

  291. On the strategic tanker programme, your helpful memorandum notes that an "air transport" element will be included in the programme if it looks to be cheaper than current civil aircraft chartering arrangements. How will third-party income be generated by the contractor if this PFI is confined to a fuel-carrying role?
  (Lord Bach) I shall ask Sir Robert to answer that question.
  (Sir Robert Walmsley) I do not think that there is any question that third-party revenue would be confined to a fuel tanking role. The aircraft are, of course, intrinsically capable of carrying freight because they are tankers. There is a large volume inside, the internal volume of the aircraft, that is not full of fuel. We hope that the competing private contracting consortia would seek to enter into arrangements to carry freight or passengers. It does not take long to put the seats back on one of those aircraft and to use it for passenger transport. That is the essence of the competition of course. If they are willing to take that risk, they will produce a better value-for-money solution for us.

Jim Knight

  292. On the balance of contractor staff and sponsored reserves as opposed to pilots, can you be clearer? I accept that you need flexibility as you bring forward the projects in deciding that balance, but what are the criteria when you do decide? In strategic tanker aircraft the indication is that there will be more RAF than contractor staff, whereas for the others it is more contractor staff than RAF. How is that balancing decision made.
  (Lord Bach) On a case by case basis. Mr Knight, you are right in the sense that there would be more service than contractor staff to begin with, but that is to begin with. We do not know whether that balance would stay the same as FSTA came on line and we had a few years' experience of it. In the case of Ro-Ros and HET, the designation of sponsored reserves does not mean that we see people being put into dangerous situations. The services being provided are not intrinsically military in their nature and can be met by the private sector. As far as FSTA is concerned, we feel that at least to begin with it is important, as a matter of reassurance as well, to the outside world that there is a fairly large quantity of service people.

  293. The principal factor in the judgment that you take is the extent to which they would be involved in combat or close to combat?
  (Lord Bach) That is one of the major factors. As you know, the closer we get to operational necessity, the less inclined we are to use PFI.


  294. What about when you get a bit closer to the frontline?
  (Lord Bach) It is a matter of judgment. We felt with, for example, the combat vehicle project that, for a number of reasons, it was best to procure by conventional methods and that was clearly close to the frontline. Our present thinking on FSTA is that it is the other side of that. As I have tried to make clear in my answers already, we have made no final decision on that. We think we have the situation about right so far.

Mr Hancock

  295. On what do you base those judgments? You say that it is a closely-called decision. What tips you down one side or the other? The closeness to the frontline cannot be the only criteria.
  (Lord Bach) No, it certainly is not, but it is certainly one of the factors. All the time we are seeking to demonstrate value for money. That is the broad concept. I think I have already said that. By way of example, as far as the Combat Support Vehicle is concerned, we thought that there was limited scope for third-party revenue, which is also an important feature for two reasons. Firstly, there is the dispersal of those particular vehicles when they are on operations, which means that it can be hard for a contractor to use them for third-party purposes. They are specialist vehicles. So we take on board a number of considerations on each occasion; for example, if there is a limited scope for innovation, as there often is if one is very close to the operation. There may be limited scope for sponsored reserves if you are very close to the operation. Those are factors that we also take into consideration when deciding. Maybe Sir Jock Stirrup can take the matter further.

  Chairman: We shall come on to that later.

Syd Rapson

  296. I suppose I should declare an interest. I want to ask questions about Skynet 5 and, of course, Astrium in Portsmouth and in Stevenage has enhanced its profile somewhat having been selected for it. On Skynet 5, PFI will supplement and eventually replace the existing ageing Skynet 4 system. It will rely on only two satellites, as opposed to three before, and some spare capacity will be going to the commercial sector for communications. Although you are insured under Skynet 5 with the two satellites, under the previous system there were three, which assumes that two were necessary and one was a back-up. What does the Skynet 5 programme offer you that you would not get from a straightforward commercial contract for satellite capacity as and when you need it?
  (Lord Bach) I shall ask Sir Robert to deal with the numbers. First, we are very pleased indeed with the way in which the Skynet 5 competition has been carried out in what has resulted. We believe that Skynet 5 will provide satellite communications to our Armed Forces in much the most efficient and cost-effective way. I remind the Committee that the total throughput of Skynet 5 is about two-and-a-half times greater than the present Skynet 4 system. One of the great advantages of the private finance initiative here is that we shall deal with the usage made of Skynet 5 by the contractor for our purposes, rather than having to pay for the full programme irrespective of future actual use. On the issue of why we need only two rather than the three satellites that are presently required for Skynet 4, I shall turn to Sir Robert.
  (Sir Robert Walmsley) It is simply a matter of geographical coverage. We have always just needed two. Against the possibility that one was lost on launch—the single most likely cause of total loss—or did not deploy or work properly when placed in orbit, we thought that it was sensible to construct three satellites. Having constructed three, it made sense to launch three rather than just leave it in a cupboard on the ground, wasting away. We looked carefully at the possibility of insuring ourselves against loss on launch as we did in the days when we did it as a conventional procurement for Skynet 4. The difficulty was that it is all very well someone giving you back all the money when the satellite has blown up, but that does not actually replace the communications capacity that you need. With a relatively short-lived satellite system as Skynet 4, with a design life of something like six years, you would have to launch the second of the three Skynet 4 satellites very early in order to ensure time to build the third one with the insurance money and launch it to take over the services if the second one blew up. I know that sounds unbelievably complicated, but that is the way it is. With Skynet 5 the satellite life is closer to 15 years. The arrangement is—a big risk for the private finance provider—that he builds the two and takes out an insurance policy as to whether they both successfully achieve orbital performance. He launches the second satellite soon enough to give himself time to assemble all the bits—he will probably have quite a few of them—so that he can launch that to take over from Skynet 4 stage two satellites in good time to ensure a seamless provision of operational capability. That is how it works. That does, of course, save quite a bit of money. It is important to emphasise that the calculations that we have done show a robust 6 per cent saving on this private finance solution as compared with the conventional procurement because of the third-party capacity use. There are plenty of military customers out there who want to buy it. They can all afford the terminals that will fit in a suitcase or a trunk, but they cannot afford the satellites, although they would like a piece of one. The consortium is ready to sell that to them.

  297. So the commercial risk is being covered by the company that is going to be the back up. The severe cost if they lost a satellite will enable them to be prepared to replace it immediately, rather than suffer massive costs?
  (Sir Robert Walmsley) Exactly. I return to the point that we are not just interested in the money. We have to have a robust mechanism to provide the communications. There is no satisfaction in having the money in the bank, but not having the satellite. We need the communications and we are quite satisfied that this arrangement will provide a seamless transfer from Skynet 4 to Skynet 5.

  298. At times of busy demand for capacity, there needs to be extra drawn from commercial satellite services. When operations are in the headlines, we have seen how capacity is often quickly snapped up by television firms grasping at the headlines. How is Paradigm going to be able to guarantee that your satellite traffic demands will always be met?
  (Sir Robert Walmsley) Their contract provides for retaining clauses—if that is not too simplistic an explanation of something that is undoubtedly extremely complicated - to have access to commercial capacity.

  299. It is in the contract?
  (Sir Robert Walmsley) We have not signed the contract yet, but it will be in when we have signed it. This is a really robust arrangement. The United States is quite happy to rely on commercial satellite support for military operations. We should be too. We should not just confine ourselves to military satellites for all our traffic.

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