Select Committee on Defence Minutes of Evidence


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 Capability—and 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 it—industry'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 be—the 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 contractor—and we have said who the preferred prime contractor is—would 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.


1   Note from Witness: Payment will be facilitated through a Foreign Military Scales case with the US Department of Defense Back

2   Ev 125 Back


 
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