Examination of Witnesses (Questions 217
- 219)
WEDNESDAY 25 JUNE 2003
LORD BACH,
SIR PETER
SPENCER KCB AND
LIEUTENANT GENERAL
ROB FULTON
Q217 Chairman: Gentlemen, thank you
very much for coming. I can recall once a team from MoD admitting
that on procurement issues their "A" team was going
to the Public Accounts Committee. They did not quite state it
as boldly as that. However, we cannot complain on this occasion
on procurement issues. Minister, we are very grateful to you and
to Sir Peter Spencer and Lieutenant General Fulton. Thank you
for coming. We have an interesting and demanding agenda. Perhaps,
Lord Bach, you have a few opening remarks?
Lord Bach: I have a few remarks,
if I may. I am delighted to be back before the Committee to discuss
progress on delivering our equipment programme, and of course
the MoD very much welcomes this Committee's continued and valuable
interest in the critical element of our overall defence capability.
May I briefly introduce the other witnesses? I am joined today
by Sir Peter Spencer, the new Chief of Defence Procurement, whom
you have in the very recent past already questioned, and by Lieutenant
General Rob Fulton, who took up his post as Deputy Chief of Defence
Staff (Equipment Capability), in other words the equipment customer,
at the beginning of June. Chairman, when I was here in May last
year, and as part of your Committee's 2002 survey of major procurement
projects, I was very much the junior member among the witnesses
before you. One year on, I find myself in the opposite position
and to this extent, that compared to the witnesses who were also
here, I am the witness longest in post. But this is a strong and
expert team that I have with me. You know, I think, already the
considerable experience in the acquisition area that Sir Peter
brings to his new portfolio; he has a lot of experience in the
procurement field. General Fulton is also known to this Committee
from his previous role with the Equipment Capability Customer
area as Capability Manager (Information Superiority) and for his
work in particular in shaping and articulating the concept of
Network Enabled Capability. This is a particularly interesting
time perhaps to review where we have got to in a range of key
equipment projects and in our acquisition and industrial policies.
Much has happened in the last year. There have been a number of
important developments in the projects covered by your survey,
including: the adoption of an "Alliance" approach to
the future aircraft carriers; contract signature on two collaborative
projects, Meteor and A400M; and the agreements reached with BAE
Systems earlier this year on the way forward for Nimrod MRA4 and
Astute. I have some encouraging news to report to you on Typhoon.
There is also a number of broader factors which today together
provide an unusual context for this year's review. Let me very
briefly highlight two key issues. First, of course, the UK's armed
forces have just taken part in decisive war-fighting operations
in Iraq. Our servicemen and women have of course again demonstrated
those qualities of professionalism, courage and humanity for which
they are renowned. The battle-winning quality of their equipment
also made an important contribution to the rapid success of the
campaign. We are now, as you know, in the process of identifying
and learning the lessons from Operation TELIC. Emerging findings
will be published next month before the summer break. The more
detailed points will take a little longer to digest. I do not
want to pre-empt that work, but I have no doubt that we will want
to discuss the issue with you to some degree today. Obviously,
I must emphasise that operations in Iraq are continuing. The appalling
and tragic events of yesterday bring home the challenges and risks
that our service personnel still face. May I place on record my
admiration for them and my deepest sympathy for the families of
the six Royal Military Policemen killed yesterday and the 37 other
members of the armed forces who gave their lives during offensive
operations. In addition, my thoughts, and I am sure the thoughts
of all those here, are with those from the 1st Battalion of the
Parachute Regiment who were wounded yesterday at Al Amarah and
their families. Going back to procurement issues, we have been
working over the past year to flesh out and give effect to the
findings of the SDR New Chapter in the forward defence programme.
Plans for investment in new equipment capabilities, including
the further development of the network, have formed an important
part of this work. We are currently in the process of producing
a formal response to your own report on the New Chapter. As the
Secretary of State said to you when he gave evidence in March,
we intend to bring together progress on the New Chapter and a
number of other threads of defence policy work in this autumn's
Defence White Paper. Therefore, whilst I cannot give you all the
details of our plans today, I hope we can, nevertheless, provide
some reassurance that we are taking this issue forward with the
urgency that it deserves. All in all, there is lots of material
to consider. Sir Peter, General Fulton and I stand ready to attempt
to answer your questions.
Q218 Chairman: Minister, thank you
very much. Of course we would follow on from your tributes to
those who died yesterday and during the campaign. It was particularly
poignant for us, Minister, because we learnt about that event
when travelling back from Fallingbostel, where we had gone on
a visit to talk exclusively to cavalry regiments that were involved
in the conflict. Coming back and finding that some of our valued
military personnel had been killed and wounded was deeply saddening.
The first question I would like to ask relates, and you may think
it is rather unfair starting off with this, but the Nimrod MRA4
maritime patrol and antisubmarine, antiship aircraft and the Astute
attack submarine programmes have not so far been shining successes
or examples of Smart Acquisition. May I ask first what particular
lessons you believe you have drawn from the Nimrod and Astute
programmes so far?
Lord Bach: I think we have learnt
lessons from both programmes. Both programmes, I want to emphasise,
are of crucial importance to our defence capability requirements
and so it is essential that we obtain those capabilities at the
earliest possible time we can, but you are right, of course, and
it is common knowledge, that both these procurements have not
run successfully insofar as we would like them to have done. One
of the lessons I think we have learnt as far as Nimrod is concerned,
and I start with that first, is that the balance of risk and reward
may not have been perfectly judged. We need to be anti-costs but
not anti-profit and we need to choose contractual pricing mechanisms
that best reflect the degree of risk in our major development
and production programmes. We think therefore that a target cost
incentive fee is right for the restructured Nimrod programme.
Firm and fixed pricing arrangements of course very much have their
place in our procurement strategy, but they need to be targeted
judiciously. The first answer is: balance of risk and reward.
Secondly, risk reduction: what is called engineering concurrency
has its place but the danger is that there is a wasteful overlap
of design and engineering with production. So the production pause,
which I know is painful to many people working on this programme,
will allow, we believe, the design to reach an appropriate level
of maturity before embarking on the main production programme.
What seemed to be happening was that because there was such an
overlap between development and production, the danger would be
that as production continued, the development work would also
be continuing, and costs would be added to make the planes better
and time would be wasted. We thought that the only way of stopping
this was to make sure there was this production gap. The general
issue of project management also of course arose here, and I have
no doubt that the company itself can talk about that in due course.
That is shortly what I would say about Nimrod. On Astute, I would
like to concentrate on the risk issue. The introduction of computer-aided
design was much more difficult, much more troublesome, than we
had expected, either by the contractors or by us at contract award.
Transferability from a surface ship design has been of less benefit
than expected because of the much more demanding component density
and placement accuracy in a submarine. We now know, but we could
not have known before, that the US Navy was having a similar experience
with CAD with the design of their Seawolf submarines ten years
ago in the early Nineties. In response, we have facilitated the
assistance of General Dynamics Electric Boat Company to provide
key design management expertise. Industrial capability is another
point I would like to raise in regard to Astute. It is a long
time since a submarine was completed at Barrow. The last submarine
was Vengeance and the last were four Tridents. So key skills
were lost in the gap before Astute commenced production. I think
that has been one of the difficulties, too. Hopefully, in the
whole shipbuilding field, those key skills being lost will be
something that will no longer prevail. That would be my perhaps
rather too long answer to the question. It may be that my colleagues
have something to add to that.
Sir Peter Spencer: What you have
just heard from the Minister, Chairman, reflects the points that
I made in response to a similar question when I first appeared
in front of you, and so I do not think there is anything to add,
apart from the fact that we are taking all of those factors into
account as we move forward to completion of these two programmes.
Q219 Chairman: Do you think, Minister,
that both the MoD, DPA and the company are going to put their
hands up and claim some responsibility, and hopefully where there
were mistakes—and clearly there were—they have been
properly identified?
Lord Bach: I think you have got
to separate the two different procurements, if I may say so, before
coming to a clear answer on that. I think on Astute we both misjudged,
as I say, the influence of the CAD system and I think that is
demonstrated by the amount that the Ministry is paying in order
to make sure that this does not happen again compared to what
the company is paying. I think on Nimrod it may be a slightly
different story.
Sir Peter Spencer: For completeness,
I ought to record the point that both of these two programmes
predate Smart Acquisition reforms when contracts were originally
placed. Although to some extent you could retrospectively apply
some of the "smart" principles, as I mentioned last
time, you cannot really re-engineer it in reverse very satisfactorily.
The Nimrod MRA4 design challenge was hugely underestimated by
industry. You will remember that we thought we were adapting an
existing aircraft. The sort of figure which is now used is that
some 95% of the aircraft is new. In both cases these two programmes,
having let highly incentivised contracts in good faith and believing
both in industry and in the Ministry that "eyes on hands
off" here was the way of getting them to get on with it,
we discovered, with the benefit of hindsight, that that did not
give us enough visibility shape of progress. The new arrangements
which are being put into place have a much more integrated management
process with both parties working more closely together, which
is easier to do with the target cost incentive arrangements, which
were described by the Minister just now, than if you have a highly-incentivised,
fixed or firm price arrangement.
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