Examination of Witnesses (Questions 220
- 239)
WEDNESDAY 25 JUNE 2003
LORD BACH,
SIR PETER
SPENCER KCB AND
LIEUTENANT GENERAL
ROB FULTON
Q220 Chairman: I appreciate the contract
was signed before this Government came into office and before
Smart Acquisition but the contract has been renegotiated three
times. You have had ample warning signals over the last four or
five years. Did you recognise those warning signals? Why did things
have to reach what amounted to a crisis point with the last renegotiation
signed in February 2003?
Sir Peter Spencer: Because we
recognised too late the need to get more closely involved with
the detailed management of the programmes so that we could see
what was going on. I have to say that it came as a very nasty
surprise to the BAE Systems Board as well. In both cases, the
scale of what had happened, which came out towards the end of
last year, had not been properly recognised. This is something
on which we have accepted a proportion of the liability, as we
have reported in our paper.
Q221 Chairman: Minister, you mentioned
the phrase about key skills being lost, in relation to the Astute
programme. In the Nimrod programme, in March 2003, BAE announced
over a thousand job losses at the four sites involved in Nimrod
production, eventually reducing the Nimrod workforce by a half.
Do you think that those reductions will lose key skills, the phrase
that you used? Do you think that that might happen in fact over
the Nimrod programme or will there be greater efficiency resulting
from the loss of half the workforce?
Lord Bach: Of course there are
dangers that that might happen. I know that the company are doing
everything they can in order to mitigate the position as far as
redundancy is concerned, but that is dangerous, yes. I know that
Sir Peter wants to say something on this.
Sir Peter Spencer: This is something,
as you might imagine, we are watching very closely. Although it
is clearly for the company to make sure that it is going to retain
the skills that it needs to continue this programme, we cannot
just sit back and say, "Over to you". What the MoD is
doing very carefully with the management in BAE is to nurse this
programme through pending the formality of a revised contractual
arrangement. We are identifying achievements which are valuable
along the path associated with payments, so that we can keep money
going to retain key skills, not only at Woodford but also in some
of the more vulnerable suppliers, small and medium sized companies.
That is happening on a daily basis at the moment, so that together
we try to make sure that we do not repeat the mistakes that have
happened in the past elsewhere.
Q222 Chairman: You said you were
able to negotiate fixed price contracts with Nimrod and Astute,
which meant that BAE had a lot of the risk and had to accept that
risk of poor delivery. If that is the case, and I am not criticising
what happened subsequently, you have to inject a lot of money
into BAE Systems in relation to these projects. Who is paying
for the computer-aided design help with Astute? Can you give us
more detail on that?
Sir Peter Spencer: We are not
going to split it up in the sense that somebody is paying for
this and somebody is paying for that. The payment mechanism, I
believe, is through the prime contract group, but I will check
that detail.[1]
Q223 Chairman: Would you do so? The
last question from me on this subject is this. The Astute submarines
will utilise the final phase elements of the Swiftsure and Trafalgar
Update, which is also having some difficulties. May I ask at what
point will further delays with the update start to have an adverse
knock-on effect on the Astute programme. Linked to that, can you
assure us that you will not be digging into your pockets again
to restructure the Swiftsure and Trafalgar programme, that this
will be the last time?[2]
Lord Bach: I will start the preliminary
answer to that by just saying that the first submarine, HMS
Torbay, on which I enjoyed an excellent day last autumn, is
fitted Swiftsure and Trafalgar Update final phase and now is,
as I am sure you know, operational. It is due to receive the first
increment of the sonar 2076 stage four update during a repair
and maintenance period starting in November this year to meet
the in service date of August next year. Importantly, the common
product approach between the Swiftsure and Trafalgar Update and
Astute class for Sonar is an important part, we think, of reducing
the risk on Astute. Sir Peter may have more detail in response
to your point.
Sir Peter Spencer: I do not see
this as a major risk or one of the biggest risks to the Astute
programme at the moment. As the Minister has said, we are now
coming towards testing a relatively mature product at sea in an
operational environment, and it is the same product essentially
which is going to go into Astute as part of the de-risking programme.
That is a bit of risk management which the team got right. It
is a brave man in any development programme who predicts that
there could be no further problems. S&T, because it is so
advanced with this process, presents less of a risk than Astute
itself where to complete the work which we are doing at the moment,
to have a basis for amending the contract to completion. As you
might have expected, having newly arrived, I am looking at this
with some degree of caution and questioning that project quite
closely.
Q224 Mr Jones: Can I ask something
about the Astute? I think a lot has been said about the main delays
being around issues of the CAD system of design, although personally
I find that difficult to understand because CAD has been used
quite extensively in terms of surface ships for quite a while.
To what extent is some of the delay also to do with the fact that
BAE Systems were using Barrow for work on the Type-45? Sir Peter
said this could be perceived but I know when I read the RAND study
last year that one of the risks that they did raise was the idea
of block allocations and the fact that you could get, I think
the word used was, a logjam at Barrow. I have also noted that
BAE Systems have now agreed in a memorandum we saw that they are
going to transfer all Type-45 work to the Clyde. To what extent
do you think having both Astute and Type-45 work going on at Barrow
has actually led to some of these problems?
Lord Bach: Let me just start with
the broader themes that you mentioned, Mr Jones. As I tried to
say earlier, as far as computer-aided design is concerned, yes,
a lot of experience had been on surface ships, you are right.
I think what we found, what the company found, and they were right,
was that work on submarines was much more demanding than it was
on surface ships. It may be that CDP can go into that. Component
density placement accuracy in a submarine is a more complicated
process than it was on surface ships and one that had not been
tried out before, except with the SeaWolf class submarines I mentioned,
the US Navy's submarines, where they had the same sort of experience.
I will leave that to Sir Peter. I want to talk a little, if I
may, in answer to your question about Barrow. Let me be frank
with you: one of the most difficult decisions I have had to make
in my two years was the decision in relation to whether we should
agree to the BAE Systems request that the Type-45 work that was
due for Barrow should go to the Clyde. I did agree, and I think
I was right to do so, in the end. (I am glad Mr Roy agrees!) The
reason was that, with the delay in Astute, there was becoming
an almost impossible timescale as far as keeping Type-45s, which
of course is a critical programme too, on time, and there would
have been all sorts of difficulties. Given the Astute delays,
and linking that with the production of Type-45s at Barrow, we
took that decision. I absolutely want to emphasise that Barrow
is our submarine centre; it is a centre of excellence for submarine
building in this country. I hope later this year to be able to
announce an increase on the first three submarines. Of course
those are the ones that are contracted for at the present time.
Sir Peter Spencer: If I could
just look at the expectations that came from the computer-aided
design facilities first. The expectation was that this system
would produce a quality of design in the form of a three-dimensional
model, which would be so accurate in the drawing office that we
would not have to produce much by way of production drawings for
the shop floor in the traditional way. This of course offers a
huge improvement in efficiency to the design process. It has been
used elsewhere successfully for other products, such as cars,
which are complex but not nearly as big and complex as a warship.
The first ship for which this was used in Barrow was HMS Ocean.
It had considerable difficulties and Ocean ran a bit late,
but they managed to overcome it by reverting to some of the traditional
ways of doing things and losing some of the efficiency. They then
used CAD for Albion and Bulwark, the two Landing Platforms, Dock
Replacement ships, and the two tankers. And at the same time they
doing the design work for Astute. Having made progress on the
surface ships and got a bit better, it was still much less efficient
than they had hoped it would be. As the Minister pointed out,
they then discovered that so far as the submarine is concerned,
the demands are much greater than in a surface ship because you
simply have systems which are much more tightly packed. You have
to think through things like maintenance envelopes, so that sailors
can get into equipment and repair it through life economically.
All of that simply meant that the time being spent on the design
was so much greater than had been thought in an overlapped development
and production, which had looked very sensible from the outset.
The people doing the construction caught up with the people doing
the design and they really did have a problem. You also mentioned
the possibility of a logjam in the Devonshire Dock Hall assembly,
and that was a worry at the time. All of the project team leaders
who were separately managing programmes through that facility
used to have good interactions to ensure that each knew what the
other was doing. But what were forecast to be problems five years
before changed through time as different programmes slipped. I
do not think that the Astute problem was in any way caused at
that stage by jamming up the Devonshire Dock Hall, but it did
put the Astute construction programme into the slots that the
company had earmarked in advance of the Type-45, hence the decision
which they needed to make. It was really a question of adapting
through time both their design strategy and their production strategy
to take account of the relative progress which was being achieved
on a number of different programmes simultaneously.
Q225 Mr Howarth: Could I just put
this to you: given that the computer-aided design issue is a fundamental
problem on the Astute submarine, and given what the announcement
did to British Aerospace's share price, a deal they had arrived
at with the Government, do you not think it would have been fairer
to have required the Ministry of Defence to take a larger hit
on that, allowing British Aerospace, quite rightly, to take the
hit on the Nimrod, which in my view is exclusively their problem?
Lord Bach: If I may attempt to
answer, I think the MoD took a pretty big hit on Astute, I have
to say.
Q226 Mr Howarth: And so did the company?
Lord Bach: Of course the company
has taken a big hit on both. The Department has also taken a hit
on both, a bigger one on Astute in proportion than on Nimrod.
Q227 Mr Howarth: Can you remind us
of the figures?
Sir Peter Spencer: It is £430
million for Astute.
Lord Bach: The Company is taking
around or perhaps a little more than £250 million. I reckon
that is not ungenerous to the company, sitting where I do.
Q228 Chairman: Are there lawyers
fees?
Lord Bach: Not criminal lawyers
fees, in my experience, Mr Chairman! When you see those proportions,
I have to say I think the MoD have taken quite a big hit on Astute
in particular. Let us put it in context. We think it is the right
thing to do, and this was an agreement reached with the company
on both Astute and Nimrod. Of course they were treated
separately but they did come up at the same time. I would defend
it as far as saying it was a sensible use of taxpayers' money.
Unfortunately, we found ourselves in that situation but it would
have been quite wrong for the company also not to have taken the
hit on both Astute and on Nimrod.
Q229 Mr Howarth: I was differentiating
between the two programmes deliberately having regard to the company's
policy.
Lord Bach: If I may intervene,
we did that too. That is why the proportions were different for
Nimrod than they were for Astute, but the company took a bigger
hit on Nimrod. We actually took the bigger hit on Astute.
Q230 Mr Howarth: Can we turn to the
Carrier programme? Bearing in mind the conversation we have just
had, to what extent does your "Alliance" approach to
the Future Carrier programme reflect a shift away from the sort
of prime contracting which put risk management almost exclusively
in industry's hands and at arms-length from the Ministry of Defence?
Lord Bach: One of the great advantages
of Smart Acquisition is always alleged to be its flexibility;
in other words, that it can deal with a proposed procurement in
a new way, if that of course is considered to be appropriate.
That is what we think we have done, if I may use the expression,
in spades with the CVF programme. The continuous assessment process
that we use to determine the way forward, and we are still using
during this stage of the assessment phase, has worked extremely
well. It has given an unprecedented level of evidence of the contractors'
performance and underpinned the "Alliance" decision,
and we will use the continuous assessment method in other projects
in the future. It will not necessarily take the place of ordinary,
competitive procurement, but it is very important to know that
we have put in place a well-established and rigorous risk management
process, which has operated throughout this assessment phase.
The process has ensured, we believe, that the majority of those
key risks have been identified, and identified at an early stage.
This will continue in the demonstration and manufacturing phase
later on. It is too early to say how often we will use this precedent
that we used for CVF but we believe we made the right decision
in deciding as we did and in deciding years ago to have a continuous
assessment method of choosing between competitors, between bidders.
Q231 Mr Howarth: Are you saying that
where you and the contractors do not identify any serious technology
risk, you go back to the previous arrangement but that when you
do identify a serious technology risk, you will adopt what we
have perhaps been calling the "carrier" approach?
Lord Bach: I think that in most
procurements we do. Particularly as we move into NEC- Network
Enabled Capabilityand New Chapter stuff, which I suppose
will play a greater part in our procurements in the years to come,
there will always be technology risks that we have to overcome.
The question is: when do you overcome them? There has been a tendency
perhaps in the past, certainly before Smart Acquisition, to overcome
those risks too late. The later you overcome those risks, or tackle
them, the more it costs you and the later the equipment comes
on stream. Crucially, we want to try always now to get hold of
these risks and identify and deal with them at an early stage.
One of the methods of doing that we think is this continuous assessment
process that we have used with CVF, and we think it has worked
so far in this case. I do not know if Sir Peter wants to add to
that.
Sir Peter Spencer: We have done
risk assessments for some years now, but if you go back ten years,
in many projects that was a of list of things that might go wrong:
what is the probability of it happening; what is the effect on
performance and time costs; whose risk is itindustry's
or the Ministry's? It was a very blunt instrument and often one
which failed to do anything at all really about recognising properly
risk and ownership, and that risks can't transfer wholly in one
direction. You tend to mislead yourself either in industry or
in the Ministry if you believe that one major risk is wholly in
one camp or the other. Secondly, we are now focusing as attention,
as you have heard from the team leader, on active risk management
based on transparency of information, shared information, about
what in the technology area the maturity of that technology is
for a given solution, and then recognising the fact that you would
not have achieved that with a preset Technology Readiness Level
at the moment you go to contract. When you bring together the
totality of those individual risks and you have got a shared view
as to what the likelihood of it happening is and what the consequences
are, you have then got the basis for entering into a pricing regime.
If you have something which is really just putting together well-established
technology in a slightly different form and you recognise there
is very little real technology risk in the programme, you are
probably going to be veering towards a more highly incentivised
contractual regime. If, on the other hand, you recognise that
there are some things which again have to continue to be actively
managed because, for reasons beyond your control, you have not
managed to get the technology risk down to the levels you want,
in terms of remaining risk, but it is no use to the end customer
unless you solve that problem, then you actually have much more
of a team working together with shared information to bring that
in and you get a different pricing regime under those circumstances.
Q232 Mr Howarth: It all sounds very
encouraging, I have to say. We do wish it success and hope that
it is going to work. From what you have said so far, with the
Carrier programme you are encouraged that it is working. Are there
any particular aspects of this "Alliance" arrangement
that you see as particularly helpful in avoiding what we have
seen on Nimrod and Astute? Is there anything you have identified
so far?
Lord Bach: In a more general sense,
one great gain for us is the fact that the two companies, which
with us form the Alliance have been, quite rightly, strong competitors
for this particular programme, now that the result has been announced,
have worked together, if I may say so publicly, extremely well,
in my opinion, in order to make the "Alliance" a success.
The primary gain is this: we took the view, after the continuous
assessment, that one company was likely to be the best project
manager, best prime contractor, and the other had the better design.
It seems to me it would have been absurd just to choose one and
lose out on the qualities of the other, or vice versa. I know
it has been described, not by anyone, I am sure, on your Committee,
Mr Chairman, as fudge, but I would actually take the opposite
view; I think we were quite brave to make the decision that we
did. Mr Howarth is right to say that we are pleased so far. I
think the unsaid message is that there is a long, long way to
go, particularly with such a huge procurement at this. If I may
use the old cliche«, we are not complacent about it.
Q233 Mr Howarth: I own up to perhaps
using the word "fudge" at one time. I certainly think
that some of the aspects of the Carrier are extremely welcome,
particularly the flexibility you are building in with the possibility
of having a steam catapult built retrospectively. We welcome that.
Let us look forward now. I was in Paris last week at the Air Show,
and I know you were there. There is a discussion there about a
new French Carrier. How important is it from a political perspective
that a combined UK/French industry team develop the Carrier, in
that the involvement of Thales in your non-fudge keeps open the
possible collaboration with the French on their new proposed Carrier?
Lord Bach: I am not terribly sure
politics comes into it. The French are our allies; we are both
members of NATO and the EU together. To that extent, I suppose
of course we would want always to work closely with our allies,
whether they are to our west or to our east. Beyond that, I do
not think you can read too much into the fact that we are having
discussions with the French on Carrier issues, and have done for
some time. They needed another Carrier. It would be ridiculous
for us not to talk about it, in the same way that we talk to the
United States about our Carrier programme too. It is true that
with the French the discussions have expanded recently to include
operational and policy aspects and the French themselves are to
make some decisions shortly about what kind of Carrier they intend
to build, I think very shortly, within the next month or so. But
I want to emphasise one thing absolutely clearly. I am not prepared
for our Carrier programme, which is on a very tight schedule,
leading up we hope to signing of contracts quite early next year,
to be put back by my officials having to spend too much time on
discussions with whoever it may bethe French, the Americans,
whoever else. My priority at the moment is to try and make sure
that our Carriers, which we need, are built to time and to cost.
I think that is exactly what we are trying to do. I would ask
Mr Howarth not to get carried away with the thought that there
is some kind of political machination going on here. This is just
commonsense.
Chairman: It is reciprocation rather
than machination. I think that is the phrase we are both looking
for.
Q234 Mr Howarth: Minister, I think
you misunderstand my motive in asking the question. I am very
keen that all the technology that we have jointly developed between
two substantial British companies and the Ministry of Defence
should be exportable, and that the French should be encouraged
not to reinvent the wheel.
Lord Bach: That is a fair point.
Q235 Mr Jones: I think it has been
described as an alliance and also as a fudge. It has been described
by some as a shotgun marriage between two companies. We have had
the IPT leader before us. We were all very impressed with him
and the way he is managing this process. I am reassured, I think,
by what you said about the two companies working together. To
what extent has that got through to senior management in BAE Systems?
I think some of us politically are still feeling that at senior
level they are not quite happy with not getting the prime contract
for this. What reassurance can you give us that the Chairman and
Chief Executive of BAE Systems are actually sold on this marriage,
alliance, or whatever you call it, and that they are not acting
like disgruntled relatives and somehow trying to unhitch it before
it actually has a chance to succeed?
Lord Bach: My belief is that they
are not. Sir Peter deals every day with this issue and so I will
ask him.
Sir Peter Spencer: I have talked
to the senior people in both companies, Mike Turner, Alex Dorrian
and Denis Ranque . There was in the early days a bit of a misunderstanding
about the way in which the Alliance might work. The question was
asked very recently: how can you have the MoD as part of the Alliance
if you are a customer? The answer to that is: what we are trying
to do here is to continue the very important work which we achieved
during stage two of the assessment phase, i.e. the continuous
assessment, so that we have a common understanding of the programme
and the risks and the cost packages which are emerging during
phase three, and so that we actually have a common understanding
of the risks both to industry and to the MoD and a common understanding
of the appropriate pricing mechanism and a common understanding
of the amount of capability we should sensibly aim to achieve
by the in-service state of the first ship. That is bearing in
mind that 2004 is quite an important date. So there is a trade-off
to be struck between initial capability and actually having a
manageable programme. In that sense, the customer at this stage
is actually General Fulton, because it is the Defence Procurement
Agency, together with industry, which is now putting together
a package which says, "This is what we are mutually prepared
to contract for between the DPA and industry, and this is our
product to you now in terms of the initial capability and our
judgement on time and cost". At the point at which we then
go to contract, clearly the prime contractorand we have
said who the preferred prime contractor iswould take over
the chairmanship of that Alliance. Having talked that through
in some detail with both parties, there is now a much better understanding.
Can I just give an example of how well the Alliance is working
at ground level amongst the teams of the three components at the
moment? I asked quite a searching question at the beginning of
the week to do with some aspects of detail which, if the thing
had not been working well, would have been extremely difficult
to answer. We have actually had a very rapid turnaround with the
answers which we need, which all three parties are prepared to
underwrite. That is just an interesting piece of collateral that
the thing is working. We need to get that working relationship
in place. We mentioned before that part of the problem with Astute
and Nimrod was the MoD standing too far back and saying, "Now
over to you. You are the prime contractor. You said you can do
it. Here is our price. Here is the time. Come back and tell us
when you have delivered it". That was it, more or less. What
we are bedding in now is a much more integrated working relationship
between the senior players in industry and the MoD as well.
Q236 Jim Knight: I just wanted to
follow up on the potential French collaboration on this. Whilst
Mr Howarth was enjoying the hospitality at the Paris Air Show,
I was seeing members of a Committee from the French National Assembly
here. They were interested and concerned, as part of their inquiries
into the French Carrier programme, to see how far the collaboration
could go. I would be interested in the Minister's thoughts on
that. In particular, they gave the impression that they thought
that decisions had already been made on the compulsion system,
that the size of the hull was too big, for French ports anyway,
and that it was really going to be down to weapons systems collaboration.
Is that an area in particular that you can see developing to any
significance?
Lord Bach: I would not call it
collaboration; I would call it co-operation. That may be just
playing with words but I think there is probably quite an important
difference. I very much welcome the visit that was made and the
fact that members of this Committee saw them. I think these are
French members of the National Assembly who have taken a particular
interest in this, and that is excellent. We believe that the co-operation
that may actually result in something will happen, in the end,
on an industry-to-industry basis much more than on a government-to-government
basis, although the governments are clearly interested in what
the result is. It may well be that it is going to be on things
like weapons systems rather than the ship itself that will eventually
end up being built. It is probably too early to say, and I suspect
your French colleagues were really making inquiries, feeling you
out, as much as saying anything that was certain. I do not know
whether Sir Peter can add to that, as to where we are eventually
going to end up. I would have thought it is too early to say.
Sir Peter Spencer: All of those
points are as described by the Minister. I would say that we are
now at the most important part of this programme in determining
what it is we are going to offer to General Fulton for the initial
operational capability. Although there was a requirement, which
was used as a basis for competition, we have now got to demonstrate
that that is a requirement on which we are going to go forward.
Strictly speaking, I can tell you that we have not yet determined
the size of the hull, not yet absolutely determined the propulsion
package, because we have got to make sure that that comes together
as a full package and, as the Minister said, we cannot allow ourselves
to be drawn into a conventional collaborative programme. We would
have to go round all this all over again with all the time that
it takes when you have got two people trying to make decisions.
We will listen sympathetically to the needs we have got from the
French. If there are options open to us, about which we are entirely
neutral, which appeal to the French in some sort of way, then
it is possible that it would go in a direction which they would
find attractive. The fundamental point is that this is really
going to be industry-to-industry. They are very well practised
at doing that and very often the most efficient collaborative
programmes are the ones which come out of industry.
Q237 Jim Knight: If the co-operation
on an industry-to-industry basis results in the French piggy-backing
some of our systems on the Carrier because we are a partner in
the Alliance, does the UK Government see some of the commercial
profit out of that co-operation?
Sir Peter Spencer: This is an
issue which is currently being discussed in terms of what is in
it for us in terms of the financial arrangement, and if there
is something in it for us, the UK, how does that income stream
affect the Carrier programme. Does it come back into the MoD or
come back into wider government? It is at such an early stage
that I cannot really give you a definitive answer. Certainly it
is something which is being discussed.
Q238 Chairman: I do not think anybody
on this Committee would wish to elongate the process any further,
certainly not to follow the time it took the French to build the
Charles de Gaulle. I was a young man with lots of hair and very
slim when they started that process, probably 25 years ago. What
we are looking for, Minister, is some degree of reciprocation.
We have opened our market for the Carrier programme to a French
company. Most of us would be looking for something serious being
offered by the French Government opening up their Carrier programme
to British companies, so there is reciprocation, which we are
looking for, and not in any way obfuscation or delay.
Q239 Mr Cran: Minister, we have brought
you to this particular document, the Defence Industrial Policy,
which I am bound to say every time it is brought to my attention
gives me a headache because it depends quite often on the weighting
you give to the words, and indeed what the words mean. The particular
words we are interested in here are simply these: "The document
promises a systematic and deliberate examination of the long-term
consequences of its decision for a particular market". What
does that mean? Then it goes on to say: "and where necessary,
to bring competition and competitive principles to a halt".
The question is: what does that mean? We would really appreciate
that answer. Therefore, in a sense, whatever it means, does that
imply that you, as Minister, and all those around you think that
there is a concern for some sectors with which you deal, or otherwise
you would not be thinking about having a systematic and deliberate
examination and so on. Tell us what all that means.
Lord Bach: I think the bringing
out of the Defence Industrial Policy is actually quite
a significant event.
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