Examination of Witnesses (Questions 160
- 179)
WEDNESDAY 21 MAY 2003
21 MAY 2003 SIR
PETER SPENCER
KCB
Q160 Mr Cran: We should love to hear
it.
Sir Peter Spencer: The fact of
the matter is that when you are looking at what constitutes a
level playing field, you have to ask yourself a whole lot of questions
about what is actually being taken into the price which is being
offered. It is not unusual in some competitions for something
to be offered in competition from overseas where the non-recurring
costs have been paid for by government whereas the home product
has the non-recurring costs as part of the price. In that context,
you have to ask whether you are comparing like with like. These
are difficult judgments to make. In that context you are then
very often also looking at the point which is referred to in this
policy document, which is whether it is in the long-term interest
to enable your own home product to be wiped off the face of the
earth on one competition when you are going to need to be able
to use that workforce, that expertise, that technology, later
on. This, in the context in which it was handled, 21 days into
post, with the primary aim in my mind of ensuring that the aircraft
project itself was on contract, was not something which surfaced
above the parapet in the sense that you have described it, because
my aim is to make sure we get value for money from the totality
of that programme.
Chairman: An interesting question. Most
of us are pretty happy Rolls-Royce are going to be producing it.
Secondly, if Americans think that the French Government, which
is a monopoly shareholder in the whole project, is going to buy
Pratt & Whitney, then that company is being eulogistic. Thirdly,
some of us think the project may never get off the ground anyway,
so in some ways it is quite academic whose engines they say are
going to be put into the aircraft. Having said that, can we move
on to the next question.[2]
Q161 Jim Knight: May I move away
from A400M back into the area of competition policy and more specifically
looking at one or two case studies? Before we do that, your predecessor
commissioned the RAND study to examine the future of the UK warship
building industry, as part of its Type-45 work. Do you see other
market sectors where their longer term competitive health is similarly
at risk?
Sir Peter Spencer: It is a good
question. The answer must be yes. The next question will be: what
are they? I am still reviewing that. I have to say, having seen
the outcome of that RAND study, that it is a most interesting
piece of work. I actually would say that it reflects the principles
which are in there, which say, okay, you could do something short
term but have you thought through what it means long term and
how are you going to be doing business downstream and are you
going to get value for money in the long term.
Q162 Jim Knight: This promises systematic
and deliberative study of the long-term consequences. I accept
your frank answer, which I very much welcome. Once you have done
that analysis of whether there are other market sectors, would
you then envisage commissioning similar studies?
Sir Peter Spencer: Yes; it is
a good question.
Q163 Jim Knight: In the Defence
Industrial Policy document it talks about the timing of down
selection to a single prime contractor and possibly shifting that.
Someone put to me that we do that too late and that competitors
are spending a hell of a lot of money on that process and if we
can bring that earlier and negotiate a risk sharing agreement
at an earlier point, that would save us all a lot of money and
effort. Do you agree with that?
Sir Peter Spencer: I agree with
the principle, but the way you make the judgment is going to be
the challenge. The benefit very often that the taxpayer gets from
the competitive process is not limited to the price on the table,
it very often is the value you get at the end of the contract
when it is finished because it actually encompasses the arrangements
of a contract and the terms and conditions and the relative responsibilities.
It is not uncommon for a fixed price contract which was awarded
non-competitively to turn out, against a hypothetical same value
at the outset, to be more expensive than one that is won competitively
because in a non-competitive environment you have not been able
to negotiate the terms and conditions you would like to put into
place, because the risk premium which gets put in in a non-competitive
environment is very much greater than would be the case in a competitive
environment. Having said all that, I earlier acknowledged that
if you drive a competition too hard and you get people into position
that they spend so much money on bidding that they cannot countenance
losing, you actually drive them through competition into a contract
which is unsound. You do not get it any earlier; you actually
do not get it any cheaper, you just have a monumental blood-stained
row later on and it all becomes extremely messy. My answer to
your question is yes, sure, for all the reasons we have discussed,
but you have to be careful you do not close it down too soon unless
you have said you are just having a beauty contest.
Q164 Jim Knight: Is that a judgment
you will make.
Sir Peter Spencer: Yes; that is
what I am hired for.
Q165 Chairman: It is not just the
companies who have been stupid by bidding low, it seems to me
that your predecessors have been equally stupid in forcing the
companies to bid low. So there are some lessons to be learned
by the DPA and by BAE Systems, who clearly in the past have bid
too low and could not produce what they wished, bearing in mind
the risk they were taking and the price your predecessors almost
forced them into in that bidding low environment. I am glad you
recognise this.
Sir Peter Spencer: With respect,
I would only dissociate myself from remarks of stupidity on my
predecessors, because actually they did a huge amount which I
admire and hindsight is a wonderful thing. I do not believe anybody,
including the companies themselves, realised the degree of risk
which was being taken on. Now they do it is a totally different
environment and I find it hard to believe that we will get back
into those circumstances. A contract is a deal between consenting
parties and the industrial side of these arrangements has learned
that lesson and very clearly. That has already come across to
me very clearly.
Chairman: Very encouraging.
Q166 Syd Rapson: Pursuing risk management
and thinking about Nimrod and Astute, but concentrating on Nimrod,
part of the Defence Industrial Policy actually says that
burdening the prime contractors with unmanageable levels of risk
will not lead to efficient project performance. It has worried
us somewhat to think that there is a sea change in attitude, that
we are going to ease off on contractors now unless there is a
very good reason for that. The re-negotiation of the Nimrod contract
showed that there was real proof that we were doing it wrong and
it was a very bad risk. We really want to find out what particular
lessons you have learned from the Nimrod experience. You have
partly gone into that, but could you pad it out a little more?
Sir Peter Spencer: We have learned
that if you drive so hard toward an in-service date that you start
to try to build the product before you have finished designing
it, you end up in a ruinously expensive iterative process of design
changes. You well appreciate from your own experience just how
expensive that can be, particularly if you are applying all of
the normal quality assurance type of processes in design and implementation.
Modification on modification on modification is very expensive.
That has been at the heart of this: to make sure that we mature
the design before we get to production, so that by the point at
which we then start going forward we are confident that it is
going to come forward in the timescale which we have now re-set.
Q167 Syd Rapson: Are there any other
measures which need to be put into place to ensure that we do
not repeat that problem?
Sir Peter Spencer: Doing Smart
Procurement retrospectively is a bit like trying to design reliability
retrospectively into a system. There is a limit to how far you
are going to be able to do it without actually starting all over
again. The team—by the team I mean both industry and the
project group—are now very much closer in terms of working
together on this. There is very much more openness in terms of
how the programme is going forward. There is a very much stronger
attention to measuring the risk levels of each of the key components
of the technology. There is very much more emphasis on putting
in place—and retrospectively is difficult here—for
the remainder of the programme earned value management sort of
arrangements. There is very much more emphasis being put on identifying
some anchor milestones, perhaps two or three each year, which
have visibility at board level in the company and at board level
at DPA, so that we not only look backwards, as earned value management
does, but look forward and at the most senior levels spot the
points at which things are beginning to go awry. These lessons
have been learned. They have been learned the hard way and there
is a huge challenge still for this team to deliver this programme.
Q168 Syd Rapson: Are there likely
to be re-adjustments? You start off with an agreement, you progress
and then you stop and re-consider and if management action is
needed both sides re-adjust and we end up re-adjusting all the
way through the programme. It sounds sensible, but I wonder whether
I am reading that correctly.
Sir Peter Spencer: It depends
what you mean by re-adjust. What we want is to say we have now
identified the key indicators of health in this programme. You
know what it is like: you look at a programme for a complicated
project with millions and millions of bits of detail and it is
flashing up the things which really do show that you have got
somewhere and by getting to that point, honestly and independently
assessed by both sides, you know that you have got to that point,
so you have got that bit of risk down. When you are looking at
that against a timetable, knowing the bracket in time when it
has to occur, you are reassuring people that it is still on track.
With some of these programmes the difficulty came that the sheer
depth of the problem as revealed at the board level seemed to
come out very late in the day. It is the alertness in corporate
governance terms: both the company and the DPA being alerted much
earlier on in the piece so that if necessary things can be sorted
out. It might be a question of insufficient resources. There may
be a competition for designers, for example. They just need to
understand that in this programme they have to spot those things
very quickly and respond accordingly. If you mean adjust like
that, I am not talking about re-negotiating the programme to completion
but adjusting the arrangements for delivering it.
Q169 Syd Rapson: Enormous money is
involved in companies putting forward plans and projects and it
is all at risk and there is more confidence in them now presumably.
They do not have to take on things which are unbelievably impossible
to achieve because there is a must-win scenario. With this new
understanding, they must have more confidence in going forward,
knowing what they are negotiating is manageable and achievable.
Before it seemed they took on more than they could chew, got so
big, so enormous that government could not allow them to go under.
Sir Peter Spencer: There comes
a point in any contract where you would want to avoid the possibility
that it was better for a company not to finish a contract or even
to go on with it. In terms of wider issues, the military needs
the capability. We had to get to the point where we could deliver
that capability and not just leave this thing hanging unfulfilled.
Q170 Syd Rapson: May I ask what the
rationale was behind stopping the Nimrod programme after the first
three aircraft?
Sir Peter Spencer: It was the
point I mentioned earlier, which was that we need to make sure
that we build to the right design, otherwise it is going to be
even more expensive as we keep on having to modify the production
models and keep on re-modifying them in the light of the design
not having been finished off. The design maturity had not been
achieved. We also needed to make sure that we got the information
in terms of flying some of the early aircraft, so we proved the
systems out.
Q171 Syd Rapson: Is three a magic
number? I used to build aeroplanes and prepare them for you, but
one aircraft seemed to be enough for me to test whether it was
any good. Is three necessary for a specific reason? Why not five?
Sir Peter Spencer: Do you mind
if I go away and look at that piece of detail? I think it was
just where they happened to have got.
Q172 Syd Rapson: Some of the simple
questions are the most difficult to answer.
Sir Peter Spencer: It may just
simply be that they had reached the point where they were going
to build three anyway. I do not actually know the answer in detail.[3]
Q173 Syd Rapson: Having reached three,
in what circumstances would production re-start for the others?
After you have finished three do you say, okay, in one year, five,
10, whatever, we are going to start the others?
Sir Peter Spencer: There is an
agreement on the point at which the design will be sufficiently
well developed and confidence is achieved so that we know we are
going to build it right first time and then run through. The expectation
is that you will actually get to the end of the programme quicker
that way than if you keep on building, re-building. I am aware
that there is an issue related to the company and to the workforce,
which is clearly going to need to be managed very carefully. I
know that BAES are taking that into account and looking at it
very closely.
Q174 Syd Rapson: Having worked in
the aircraft industry, the people around are like gold dust: if
they are laid off after three aircraft they tend to disappear
to contractors abroad for good money and you cannot get them back
again. If there are redundancies and close-down, who is going
to face the cost of redundancies because of this interruption?
Retraining, if it starts again, is going to be costly and I do
not know where they are going to get people from but it would
mean a lot of extra costs. That is presumably all down to the
company, BAE Systems.
Sir Peter Spencer: Yes, the company
and management.
Q175 Syd Rapson: That is quite sad.
If BAE Systems do not manage to sort out the Nimrod problems and
we have a hiatus, what fallback contingency do you have? The military
need that capability drastically. What is the fallback if BAE
Systems just collapse?
Sir Peter Spencer: I do not think
the programme will collapse.
Q176 Syd Rapson: You have to have
a contingency. You are an ex naval officer.
Sir Peter Spencer: We have played
that contingency in terms of the actions we have taken, which
was that the original programme was not working, but we would
not have remained in it unless there was good confidence that
it was is capable of being prosecuted to completion. It was not
capable of being prosecuted to completion all the while the company
felt that it was exposed to so much financial risk. The whole
of the negotiation centred on the need to enable the company to
close down that risk, bearing in mind that they have already incurred
big losses which they have declared, in order then to establish
the framework in which we could actually start to concentrate
on bringing it to completion, as opposed to a mindset which was
damage limitation under the terms of the original contract.
Q177 Syd Rapson: There is no contingency
fallback with the company and we will see this through because
we think their plans are achievable. If not, presumably government
will have to bail them out.
Sir Peter Spencer: There are always
fallbacks in a sense. I have no reason to believe this is not
going to deliver. I actually believe quite the opposite. I believe
that what is going to happen is, like a lot of these projects
which have a very painful genesis, when it gets into service we
will see a fantastic performance and one in which we have already
spotted, as the paper hints, growth potential for even wider capabilities.
My expectation is that we shall get to the end of this programme
and we will then be adopting or applying incremental acquisition
to make use of an aircraft which has very attractive features
in terms of range, endurance, speed and payload. If something
awful happened, hypothetically, we would clearly, as we have occasionally
done in the past, cut off the ambition of the requirement in order
to deliver something which still gave valuable operational capability
but might actually be short on some aspects. It is not a question
of there being nothing if it does not succeed against its current
contract. It will just be something less. I repeat that I have
no reason at all to believe that will be the case.
Syd Rapson: I have not either; I was
speaking hypothetically.
Q178 Chairman: I presume you will
be reviewing the whole process of Nimrod, which is not one of
the great success stories so far. We alerted Sir Robert to this
in 2000. It does seem that the warning signs were there and it
may be that when there are warning signals you will have to jump
in much earlier rather than let something drag on longer than
necessary before taking the action which is called for.
Sir Peter Spencer: I am not trying
to score points off Rob Walmsley because this is hindsight wisdom,
but in answer to your question, yes, you can count on me taking
a look at each of these programmes which have just been through
this problem; we do have to learn and make sure that we have learned
those lessons across the whole of the Agency and applied them.
I used the term "due diligence" and this is part of
it.
Q179 Jim Knight: Is Nimrod's original
task as anti submarine, scaled back as part of the new stance
from 21 to 18, a symptom of a belated recognition that in these
post-Cold War times Nimrod's currently envisaged maritime role
is much less pressing?
Sir Peter Spencer: I do not think
so, because its original capability, when it was first proposed,
was not only anti submarine but also anti surface and also surface
surveillance and also search and rescue. So a whole range of tasks
continues in the current operational environment to be very relevant
and very important. I am not the authority in the Ministry of
Defence; it would be Air Marshal Sir Jock Stirrup. I do have more
than a passing familiarity with the arguments. What I referred
to earlier was the fact that we now have a platform whose essential
characteristics are such that it gives considerable stretch potential
to deliver capabilities which look to be needed now with a greater
degree of priority than would have been the case some years ago
when the programme first started. It looks as though it can be
adapted very cost effectively, but that is subject to work which
is going on at the moment.
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