Oral evidence

Taken before the Defence Committee

on Wednesday 21 May 2003

Members present:

Mr Bruce George, in the Chair
Mr James Cran
Mr David Crausby
Mr Mike Hancock
Mr Gerald Howarth
Mr Kevan Jones
Jim Knight
Patrick Mercer
Syd Rapson
Rachel Squire

__________

Memorandum submitted by Ministry of Defence

Examination of Witness

Witness: SIR PETER SPENCER KCB, Chief of Defence Procurement (CDP), Ministry of Defence (MoD), examined.

Q105  Chairman: Welcome to the massed ranks of the lobbyists again. Nothing like a good procurement inquiry to raise interest and of course your first appearance before us in your current position. Welcome to you. You have not entered a simple area; having looked at your CV I am sure you are well equipped, but I do not envy you your very difficult task We wish you very well in this branch of your career.

Sir Peter Spencer: Thank you.

Q106  Chairman: Can you tell us what you think in your career, largely in the Royal Navy and Ministry of Defence, will be most helpful to you as CDP?

Sir Peter Spencer: The sum of it really. The procurement process does not only happen in the Defence Procurement Agency (DPA), it involves a very good understanding of what happens in the front line, it involves a very good understanding of what happens in the customer community - what we used to call operational requirements and now call equipment capability. It needs to understand the challenge of looking after equipment through life and it needs a sensitive understanding of the industrial base. Without me going through all the detail, you will see, in terms of the appointments I have held, that I have been engaged in all of those areas. My particular depth of experience is in having been project manager, project leader, project director, director general and then one of the first executive directors on the Agency board at Abbey Wood. So I do have a track record I can point to, I do have the ability to engage with the key players at Abbey Wood, particularly the integrated project team leaders, with people in the DLA, in the EC community, in the front line and in industry, knowing that I actually have practical knowledge of how life really is as opposed to how it looks on paper. This does not necessarily make it any easier but it does give you the ability then to use leadership in the right way because this is fundamentally a leadership challenge.

Q107  Chairman: What projects did you lead?

Sir Peter Spencer: Sea Wolf surface to air missile programmes; all of the surface Navy's command system projects, most of the combat system projects. When I was in AOR I kicked off the joint strike fighter technology demonstrator, the Astute programme, the carrier programmes. Then, when I was Director General Surface Ships, I was involved with the Type-45 destroyer and all of the surface ship programmes which you see now, including Albion, Bulwark, Ocean.

Q108  Chairman: Not too many of the great disasters in procurement; you managed to avoid most of those or you have been successful in not having them on the catastrophic list.

Sir Peter Spencer: Others would need to pass a judgement on that. I think some projects are harder than others and the hardest ones are the ones you are well aware of and often are much more complex.

Q109  Chairman: You do not come into the job with any starry eyed view of the tasks you are going to have to undertake.

Sir Peter Spencer: No, I do not. The good thing about the procurement processes in this country is the transparency and the fact that other people mark our homework. Although people might argue that there are some wrinkles in the system, it is infinitely better than anything I observe in other countries. At least it keeps us honest in terms of identifying where things have not turned out as we said they would. We have nowhere to hide in terms of cost completion programmes. I discovered on some European collaborative programmes that cost to completion simply is not measured because it is not part of approval. Their obligation financially is a cash flow in-year challenge; it does not matter how long the project goes on for. We do not operate like that and therefore it inherently, so long as we are forced to live up to the right standards, encourages better procurement practice. It is not good enough yet, but all of that points us in the right direction.

Q110  Chairman: Your predecessors have been pretty high profile because of the nature of the job and the consequences of their decision making. Very often their names are remembered for the innovations that they have been responsible for. Have you given much thought to where you feel you will be innovating or changing policy? What priorities did you set yourself before you sat at your new desk?

Sir Peter Spencer: It is very early days to make a public statement when I have not really addressed my own people. This is my twenty-first day in office and the first full week was spent meeting an unbreakable international obligation. You will forgive me if I do not go into too much detail; I would rather they hear it from me than read about it in the transcript of this hearing.

Q111  Chairman: This is a select committee of the House of Commons. We represent the taxpayers. Whilst it is very important that you explain to your new employees, it is really very important that you explain to us as well, so if you would give us an inkling of your plans.

Sir Peter Spencer: I was not refusing to answer, I was just saying that this will be a fairly outline statement which needs to be worked up. If you wanted the list of things I wrote down, they are short, medium and long term. The short term is first of all to win the confidence of the people with whom I am working. Ministers, Defence Management Board colleagues, senior leadership in industry, senior leadership in other countries and my own workforce, although the last bit is the one which is not so much of a new area because I know a lot of people down there already and I know the site well. Secondly, anybody who comes into a job such as this where your own performance is so ruthlessly measured and observed publicly, you would sensibly do some due diligence. I am looking at the actual performance as measured. I am looking at the performance figures which have been laid down for the next four years and looking at the collateral which supports the probability of success of meeting those important performance key targets. I am also doing a sort of policy "evaluation" - in inverted commas because it sounds a rather grandiose way of putting it - of the extent to which the Smart Acquisition changes are actually delivering and looking at each of the strands in turn - I was part of the original vision for this - and asking how far we have come and where we go now. In the medium term the things which need to be put right fall out pretty easily because they are largely ones my predecessor would have done anyway. He is very clear in his own published corporate and business plans of the areas where the DPA needs to improve its own abilities. It needs to get a much better understanding of the industrial base, a much better understanding of the suppliers, much better understanding of estimating in advance the risks which are being taken on in any development programme, the right point at which to go to contract, the right way of assessing or attributing those risks and then working out the contracting risk reward strategies accordingly. We certainly need to have a more efficient relationship between ourselves and the defence logistics organisation. I know Malcolm Pledger well, we worked closely together in the personnel area and we have already had the first discussion on that. Inter-operability is shorthand really; it covers lots of things. It is to win the confidence that we are actually in the Smart procurement projects really getting a handle on getting the through-life cost dimension right. That does not just mean spares, repairs, maintenance, it also means getting the infrastructure thought through and everything else. Then there is the question of the front line and acceptance and getting a much better understanding of what we really mean by in-service date. This is quite a hot topic really. Now that we are actually employing the disciplines of full cost accounting, resource accounting, time really is money. If you actually have a programme which is running late and you have not transferred it, then you are picking up on your balance sheet interest on capital for the assets in course of construction for a period you had not planned for. On the other hand, none of the commanders in chief is very comfortable with the proposition that they should take onto their asset register the full cost of development amortised over a relatively small production quantity for an asset which does not actually have any real beneficial use. We have to understand that process better. Those are in the medium term. In the longer term, I believe that we need to take the Smart Acquisition changes very much further forward. To give credit where it is due, what happens at the moment in Abbey Wood is unrecognisably better than it was 20 years ago and than it was 10 years ago. There is a risk - I am not suggesting it is in place at the moment - that in time we will think that is all right and it is as good as it needs to be. We need to pick the right benchmarks to ensure that we do genuinely continue with what I find is a very strong site-wide commitment at Abbey Wood to improvement in the pursuit of genuine excellence, to harness that so that we really start to look at how we become much quicker and more agile in procurement for the many projects for which that is appropriate. Not everyone. Some of the very big ones are bound to take longer. You cannot build an aircraft carrier in two years, but there are other things we could field much faster. We need to pick the right benchmarks in the civil sector in order to find out when they do their equally complex projects, why it is that they are so much faster than we still are. The second main goal is to move through-life management onto what I call total procurement. The thing I discovered during the naval personnel part of the business is that we do not plan as far ahead in personnel terms as we do in equipment terms, but the lead times are longer. I put into Abbey Wood people who are on my payroll, who are actually influencing the design process, because the capability consists not only of hardware and software, it also consists of the people who go to war with the equipment or in the equipment. In that context, there are trade-offs to be made which we are not actually making early enough in terms of whether we want to de-skill some jobs. We know in the war for talent, for young people, it is going to be much more difficult to get lots of specialist artificers in the future, so why not see to what extent we can do some things in a way through technology rather than through people. There has been a slightly over-simplified approach to this in some areas where we simply reduce the headcount, but often we reduce the headcount of the people who are easiest to recruit and to train. That is a bit of jargon shorthand for my memory for total procurement. We also need to improve the reputation of the procurement community. When I go to talk to my international counterparts, there is huge and genuine admiration for what is achieved and yet if you read about it in the press, because we are the sort of nation we are and we actually expect people to perform well and spend the time sorting out the things which have not gone so well, you can get the impression that it is actually much worse that it is. The only way we will overcome that is by being much better at many more things. That is a reputation which needs to be earned. The reason it is important to earn it is because, to get to the point where we need to be in procurement, we are going to need very high quality people and we are going to have to be seen as a place where people really want to come and have their careers. You have seen Abbey Wood; it is a fantastic working environment. There are some hugely able people there. We need to make sure, as we tackle the demographic trends for young people, that we set out our stall down there in a way that we do attract the right talent and then grow it to provide the leadership which we are going to need.

Chairman: Thank you. That is an exciting agenda and your predecessor is a pretty hard act to follow. You must give him our best wishes. What made him endearing and almost unique was his willingness to put his hand up for his mistakes, of which there were one or two. We do not normally have people confessing errors of judgment in decision making but in processes as complex as the ones you are dealing with I am afraid it is very difficult to go through a career without having the responsibility for pretty substantial errors of judgement. If you could minimise it, the taxpayer would be deeply grateful.

Mr Hancock: May I just say that I did not think your predecessor was awfully endearing and he never put his hand up to confess to anything until the very last moment? We should get that on the record as well. Some of us felt that way. I was rather interested in your comments about your background and the sort of projects you were involved in. Most of those projects came in over cost and over time. You were then a serving naval officer. I should be interested to know where you believe Smart procurement is going to help your group of naval officers and other military officers in other services to get what they require from a system right in the future and where you link to them.

Chairman: Before you go into very great detail, we shall be coming to further questions on Smart Acquisition, so if you could just give a brief answer.

Q112  Mr Hancock: In principle, with your background, knowing that the projects you listed mostly came in over price and way over time.

Sir Peter Spencer: They did not all come in way over price and way over time. If I may just give an example, the ADORS improvement programme, the command system for the Type-42 destroyer and the carriers, was £120 million of software development, priced 12 years ago was a programme which came in on time and on budget but, because it did, we ticked it off and never thought about it. In terms of things like the Type-23 command system, I was the guy who finished them off. One of the difficulties we have had in the past is the fact that we have had these very long-running programmes and therefore everybody has been able to say "Don't blame me, it was my predecessor. With the benefit of hindsight I wouldn't have done that". What I learned from that is that the people who were doing it well a lot of the time made their own luck. In other words, it was not mysterious, it was because they thought through the lessons and they did things properly and applied them conscientiously. Actually, most of the time, it came out all right. It was the people who ignored it who got themselves into serious difficulty, then got removed and somebody else went in to fix it. The lesson I learned was that if you allow yourself to be driven towards meeting very, very demanding bits of requirement, and actually spend far too long meeting the last little bit of requirement, often requirement which is not part of the agreement, but which is an interpretation of lower level documentation, then you will overrun and you will waste a lot of time. The passion I bring to this is because I know that so much money is spent on procurement that if you are late with procurement, not only do you damage operational capability, with all that implies in terms of operational risk, not only do you screw up the calculations and the overall management of the capital budget, but you also screw up on somebody else's operating budget because they are having to keep old equipment going for much longer than they had budgeted for, or, rather, they had not budgeted for and therefore they have to find the money. You get a triple hit and it is absolutely fundamental to me that we stop the slippage and that we may need to be more pragmatic than we have been in the past about precise definitions. So long as something has an initial operational capability which is appropriate in the current operational environment and the scope to be improved economically through an incremental acquisition process, then we should be driving to meet those dates.

Q113  Mr Jones: You said one of your tasks was to understand the industrial base and the supply chain. That concerns me a little bit in the sense that you have been appointed and you have set that as one of your key tasks. Do you think it appropriate that in your position should be someone from a military background? Or would it be better for the taxpayer and our confidence as parliamentarians if we had somebody who came from a manufacturing background, industry background, who actually understood the supply chain and the industrial base? Finally, in terms of the cost overruns and the benchmarks you were talking about, do you think ministers or parliament or the public purse should set benchmarks for you, that if we do have cost overruns there is an option there for the Sword of Damocles to come down on your head as being responsible? One thing which frustrates a lot of people is that we talk about a lot of these cost overruns as though they were just meant to happen, but nobody ever takes responsibility for it.

Sir Peter Spencer: May I deal with the last point first? I agree with accountability. How far you take accountability is a direct function of how much individual freedom somebody has had to manoeuvre. One of the trade-offs here in a complicated organisation such as defence is the extent to which any single person is going to be able to take these sorts of decisions without reference to anybody else. There are things where, if you said, unless you come in to cost you will be fired, they would come in to cost, but we would not necessarily have something which would actually work, or would be supportable. Once you talk about being supportable, you are then engaged with other people who have part of the process. I agree with you about the principle of accountability: applying it needs to be done intelligently, but increasingly the whole point of having individual project team leaders empowered the way they are at Abbey Wood was to strip away two - in some cases three - levels of supervisory management which used to disguise the real accountability. There is no doubt in the minds of each of those team leaders who is accountable: they are. The only person who is accountable above them is me.

Q114  Mr Jones: What is the difference between your organisation and private industry? If private industry had the cost overruns and some of the debacle which has happened in the past in procurement, I am not sure many companies would actually start by giving people promotions or retaining them for much longer, would they? They would be dispensed with quite quickly. Should we not be getting to a culture in this procurement where people are accountable and if they are not doing their job they are moved, including yourself if you fail to deliver?

Sir Peter Spencer: I did start off by saying I was doing some due diligence and there is a good reason for that, which is that I expect to be held accountable. I also expect to be able to control the things for which I am accountable. I am not dissenting from the principle. I have to say that I do not find that everybody in industry who fails to deliver gets sacked or moved on; sometimes they get put on another project. It is not as quite as different as you might have painted. So far as the military background is concerned, my military background, apart from the fact that it has given me experience in two or three areas where procurement has to understand, like the front line, fleet support, the OR process, has nothing to do with what I bring to the job as the chief procurer. It was a question which was quite properly explored at some length during the selection process. I have to say that on three previous jobs in my career I have competed against civilian colleagues for a post, worked for civilian bosses with largely civilian workforces in amongst civilian peers. So in that context the military component is no different from that in any other part of the public sector. It then reduces your question to whether you should have somebody from industry or somebody from within MoD doing this job. I did not make that decision. When I said that it was an area we need to look at, I was picking up something which my predecessor was big enough to acknowledge, which was that there were bits of the industrial dimension which were not properly understood. It is not because we do not understand how the work is done - we have all been in there, spent large chunks of our life in there, lots of us have friends in industry or relatives in industry who are actually doing this - but if you stand back now, with the benefit of hindsight, and look at the impact we have had on the industrial base, driving some of the very tightly incentivised contracts which we have done, you find that what you actually get is perverse behaviour. We thought we were doing the right thing, we were putting it into context and moving away from the old cost-plus regime into an incentivised contracting regime, all of which brought huge benefits, but you rarely get owt for nowt in life and it brought a down side. The down side is an implicit but unthought through assumption that industry's resources are infinite and they can absorb any risk and that we could transfer total or huge amounts of risk, when we know that is not actually the case. The whole of the Defence Industrial Policy paper recognises that and sets out some principles which will be used in future as they are being used now to approach this sort of contracting in the future in a different way.

Chairman: We shall be coming back to some of these points.

Q115  Jim Knight: In your opening remarks you talked about the need for career development within the DPA in order to retain and recruit the best staff and I quite agree. You also talked about your project leaders being directly accountable to you with no middle managers getting in the way. It has been put to me by people who work in or with the DPA that the shallowness of the structure of the organisation now means that once you have achieved a certain level, the opportunities for career development within the Agency are quite limited and that is a limiting factor for developing the in-house capabilities of the Agency. It has also been put to me that for related reasons there is a shortage of some of the commercial skills that the Agency needs in terms, for example, of legal and financial skills. So there is an over-reliance on consultants. I am interested in how you would respond to those criticisms.

Sir Peter Spencer: So far as the structure is concerned, that is something I am going to look at quite carefully. I would not agree that there is no middle management that gets in the way. There is an executive board which has very clear responsibilities of corporate governance, to ensure that we strike the right balance between allowing empowered project leaders to control their own destiny to as great a degree as is possible and sensible, whilst living within certain house rules and making sure, as we assess the cumulative risk of one project after another coming together, that the totality of what we are taking on is going to deliver success against the criteria which have been set for the Agency as a whole. In that respect I have huge admiration for what these executive directors are doing, because, having been there at the beginning of the process, the number of cross-cutting agency functions which they take on is very impressive and they are very important. The question is: do we have the right or the best relationship between the integrated project team leaders and the executive directors in the sense that there is a natural and regular contact between team leaders and executive directors, in the sense of acting as a mentor, sounding board, helper, because they bring their own track record to bear? At the fine level of detail, there are some differences of view which have been registered to me, with great loyalty to Rob Walmsley, because everybody realises the huge success that he achieved in transforming what was there before into the Agency, but he himself needed to move on. We now need to take a good look and now is a good time for it. We are about to get one or two new executive directors anyway, I have just arrived and we are about to go away in eight days' time and spend a day just talking this lot through so that they can feel that they can point out the things they find a bit of a challenge. Career development is a challenge for any organisation: you can have ten layers in the organisation so everybody can get a little prize and be promoted and play boy scouts and get another badge. Then you lose the clarity of command and control. Or, you have the arrangements like this where you cut out a lot of the middle layers because you do not believe that they bring added value to bear and then how do you get people to feel good about what they are achieving? To get to the level of being a senior civil servant at the one-star level, equivalent of an army brigadier and to run a great big project, is in itself a successful career. To get to the level of being the one-star equivalent running one of the key support groups, like the international relations group or the supply relations group or to be one of the commercial directors, is in itself a successful career. Not many soldiers who have reached the rank of brigadier would say theirs was an unsuccessful career. There are career development opportunities in that sense. The question then comes: what about above that level? I do not think we are too different there from other areas both of the public sector and the private sector. The challenge is going to be how to reward people who may not necessarily go to the most senior levels of being executives, but we want them to continue to do their work as very important people just at the lower end of the very senior management. I have to say that the large majority of people on the campus love the job they are doing. So the project leader of the torpedoes, for example, who is an old colleague of mine, is about to move to take over an even bigger, more exciting project, as a one-star again. It is not a promotion, he is not getting more money for it, but he certainly gets a huge amount of job satisfaction. What he does get is peer group recognition on that campus because he knows that he would not have been picked unless he was really known to be somebody who could deliver.

Q116  Patrick Mercer: We have already touched on the Defence Industrial Policy document. Does it present a departure from previously understood procurement policy within the DPA?

Sir Peter Spencer: Yes, it does.

Q117  Patrick Mercer: Would you like to expand?

Sir Peter Spencer: It makes it clear that we have moved on from the days where we give the contract to the lowest compliant tender. It actually makes it clear that there are circumstances where you could take a short-term view and lose out in the long term, both as a customer and in broader senses. The key challenge here is to have clarity as to who is doing what. I am in no doubt that my primary task is to provide the recommendation which says that the bedrock of the procurement strategy is competition and we would have to have very good reasons not to compete and if we compete to compete in a way which also takes account in the longer term of the impact on the supplier base and the impact therefore on the longer term financial interests of the Ministry of Defence of making an individual decision. We also have to anticipate, but not in any way interfere with, wider aspects on the grounds that there may be wider considerations which lie outside procurement, but which ministers may need to consider. Under those circumstances, it is not very helpful if you just say the right answer is this one. What this document says is that team leaders, rather than leaving that to a mad scramble right at the end when everybody gets left waiting in suspense to discover what the decision is going to be, need to anticipate the likely requirements, the likely information, the likely stakeholders, both nationally and across the public sector in other government departments, what sort of interests are likely to come to bear from Treasury, DTI, Foreign and Commonwealth Office and whatever, and make sure we have understood that early and to as great a degree as we are able to, give that transparency to the people whom we have invited to consider taking part in the competition so that they can form their own judgement as to the extent they are likely to be able to win, even taking account of those sorts of factors, because it will shape the way in which they approach a competition or whether they want to approach it at all. The second bit which is very important is the emphasis on research and technology investment. The most common reason why projects mysteriously get into trouble is that they run into technical difficulties. With the benefit of hindsight, we then say we did not understand enough about the technology before we went through. So making better use of the nation's research science and technology budgets by co-ordinating what we do within defence with other government departments, with industry and with academia, has to be a sensible way of going forward, so that we live up to the statements we have made, which are that we will de-risk technology during the assessment phase and we will not make that big main-gate decision until we have understood it. Those are some of the key points. I also think the emphasis on dialogue with industry might look a statement of the blindingly obvious, but those who have been involved in some of the less attractive confrontational sort of arrangements over some contracts will know that very often the problem was that there was not enough dialogue with industry. People felt that if you went too close to them you would get infected by something, so they tried to communicate across the boundaries of a contract. It is a deliberate exaggeration, but now people feel much more comfortable with the fact that they are not only allowed to get closer, but they are positively encouraged to understand what is going on and talk these things through, without commitment either way in some cases.

Q118  Patrick Mercer: The industrial witnesses last week said that laying out the policy in explicit terms was very helpful to them. What benefit does the MoD get from it?

Sir Peter Spencer: If the things we set out work, then we will get benefits because we will get projects which will run more efficiently. We will get competitions which are acknowledged to run better, where we do not get delayed in any argument about the outcome, but we actually have de-risked the technology so there is a greater chance of success. The bit I should have mentioned earlier is a long-term aim but we do recognise the success of our industry in terms of their overseas competitiveness and pressing to open up markets for industry is an important component of this. The more competitive they are overseas, the better it is for us, because we share the overheads and they will be more competitive in the pricing they play back into us for the next competition.

Q119  Patrick Mercer: How will the policy be taken forward? Why is further development necessary?

Sir Peter Spencer: Because nothing lasts for all time. We said we will review it. We have issued the interpretation to the project team leaders. One of the things I have learned over the years in all sorts of contexts is that policy is okay until you bring it to work in practice and then you should check whether or not it was working and see whether you have the policy right. If the people who wrote it are perfect and it is as adaptable and flexible as we believe it is now, then it will be a quick health check and a few tweaks. We might find that there is some part of it which frankly has consequences which we had not anticipated and we might need to review it. That is a rather hypothetical answer but I think it is a good health check. You issue a policy, you measure the benefits, you decide whether or not it actually needs to be robust.

Q120  Mr Howarth: As you know, the policy set out four key factors which would form what is called the bedrock of the decision-making process and they are: operational effectiveness, affordability, long-term value for money and national security. You yourself have referred to those wider interests which are: security of supply, industrial offset, jobs at home and foreign security policy considerations. You have suggested that your teams are going to need to anticipate those wider issues so that competition will not be the only factor which is taken into account. At what stage of the bidding process are you going to flag up to the competitors that the four key bedrock issues of course are there, but you have to tell them that in this particular procurement competition, the following wider factors are going to apply? Is it going to be as bold as that or more subtle.

Sir Peter Spencer: It will be a mixture of the two. If I may give you a practical example. It is government policy that we build warships in British shipyards. So that is something you flag up front, "You're very entitled to enter this competition if you want to, so long as you remember that if it is a warship project it is going to be built in a British shipyard". Then everybody knows where they stand and that is why there were people from overseas who were willing to look at some of the procurement projects we have had. In other areas we may be less willing, right up front, to be quite so explicit because it might look as though we are trying to avoid having to compete and that we are trying in some way to say one thing and do another. The important thing is that the contractors know this is the list from which the project team leader will be working. Quite correctly the top four are starred, because those are the primary drivers, but they get conditioned by other considerations and the only way in which you can determine the extent to which you are going to be conditioned is on a case by case basis. Industry understands that.

Q121  Mr Howarth: You will know that virtually every competition has a vast body of lobbyists fronting for the various organisations saying "If you don't buy this bit of kit from the United Kingdom, it will mean that jobs are lost here, there and everywhere and that there will be no hope of exporting this kit overseas". Is that not going to be completely antithetical to the idea of competition and drive away potential competitors?

Sir Peter Spencer: I do not think so, but we will only prove that by how we are seen to implement this policy now. The very worst of all worlds would be to give people the idea that we did not have a sensibly level playing field and that we were only interested in guys coming from overseas to be a stalking horse, to put the frighteners on the people we decided to give the project to in the first place. That is definitely not the intention.

Q122  Mr Howarth: So under the Spencer regime people in the United Kingdom will have to be prepared for the fact that there will be recommendations emanating from Abbey Wood saying we ought to buy this foreign kit.

Sir Peter Spencer: You could not say it would necessarily be that or the other way; there will be a mixture, as you would expect. The judgment has to be what the best deal you can get is in procurement terms, both in the short term and long term. Is this the best deal in the short term? Is it also the best deal in the long term. Then there will be wider procurement issues which will be anticipated and the recommendation will be to those who make the ultimate decision. Here is the procurement answer, unfettered by wider issues. Here are the consequences if those wider issues play this way, that way or the other. At least the information is there, so you can put a value on it. In these circumstances, with such large sums of public money being spent, all of these decisions are bound in the main to have a strong political implication. You do not hire the chief executive of an agency to play politics, you hire them to give the best information and the most honest answer they can achieve.

Q123  Mr Howarth: Would it be true to say that in the case of some contracts you will flag up at the outset that what are called the wider factors will be taken into account? It may be in other cases that where there is a really close-run competition, where the competitors are offering similar equipment, similar capability, similar value for money, at that point the wider factors might kick in towards the end.

Sir Peter Spencer: That is a possibility. It is a very realistic possibility.

Q124  Mr Howarth: Are these judgments to be made by officials or to be made by ministers?

Sir Peter Spencer: The judgment made by officials will be on the procurement: on what is the result of not taking into account the wider factors and here are the wider factors and here is what the answer comes to if the wider factors are taken into account. You could anticipate many of them. After all we do actually consult ministers when we down select. As we go through the process, and one of the points which is emphasised in the policy guidance is that we should not compete beyond the point where it is sensible, if we get to the point and we unearth wider factors, because we may not recognise them all from the outset, then we have an obligation both to ourselves and to those taking part in the competition to make the explicit decision at that point so that we do not compete beyond the point where it is sensible, where it is going to be of value to anybody. That is the point at which, unless it is a very low value contract, inevitably advice will be offered.

Q125  Mr Howarth: So you would be perfectly content, would you? For example, on the Hawk 128, there being no serious competitor anywhere else in the world, this being a wonderful British product, would it be inconceivable that the British Government would receive a recommendation from DPA that they should buy something from Germany or something Italian with a hint of Ukranian?

Sir Peter Spencer: That goes from the general to the specific and advice has yet to be put to ministers.

Q126  Mr Howarth: There is a general issue here which is that there are cases - ministers seem to have accepted this - where there is no point having a competition. British national interest determines, our industrial base requires, our technological interest requires, that we should not have a competition. We should buy British and have done with it. Do you agree with that?

Sir Peter Spencer: I think what you need to do is say there is a preference in this case. It may be a need, it may be a statement as I mentioned with shipyards: it will be built in a British shipyard full stop. In which case you go away and get the best price you can. There comes a point where my job is to turn round and say ""If you were to wish to place this in a UK company, here is the best price and deal we can get in a non-competitive environment. Here is how it compares with the amount of money we anticipated. Here is how it compares with the value for money through life we believe competition should achieve". Then ministers can put a price on the judgment they make and I have given them the information they need, but without in any way trying to put any of my own influence into what is a political judgment and a political statement.

Q127  Mr Howarth: I could not disagree with that. I think that is very fair. Would being clear about what factors would be given weight avoid the situation on the carrier programme where the two bidders were engaged in trying to out-do each other in their Britishness? Or is that always going to be a bit of a messy one?

Sir Peter Spencer: This is quite interesting. If you have two minutes, I can give you a personal view on this. I have not been involved in many of these projects, but if you are interested, in answering that question, bearing in mind this happened when I had just left my previous appointment and was contemplating life as a civilian and not contemplating really coming back to defence - that was a bit of a surprise to me, as it is no doubt to you - looked at from a distance, starting a competition and then stopping it before it came to an end looked very odd. If you look at what this policy says, it says why run a competition for longer than is beneficial. Had we continued with the original procurement strategy, we would have run that competition on for some considerable time, it would necessarily have involved a great deal more money from the MoD and also from the companies and the judgment which was made - and I have seen nothing to cause me to dissent from it - was that neither company really had the resources which were needed to take on such a difficult and complex project with a guarantee or high confidence of delivering a successful outcome. So once competition had achieved its useful purpose, which is demonstrably that we have got better solutions out of a competitive environment so far, that bringing together some of the parts gives you a stronger outcome, there is actually a case for saying that competition has achieved about as much as it is going to and by the way, my sounding of the companies was that they were getting to the point where because they had invested a lot of their own money in other competitions, they are quite disinclined now to get themselves into a position, where they had been in the past, where they had spent so much money they could not afford not to win therefore they kept on putting more money into it and taking on more and more demanding contractual conditions, because they had got so badly damaged by that on other contracts. My guess is that they probably might not have been putting in much of their own money at all and therefore this thing would have dragged on and dragged on and dragged on. It was a very brave decision. Everything I have seen so far - and I reserve the right to have a different view when I have had slightly more than 21 days - suggests that was actually not only a brave but sensible thing to do. I am happy to say that the companies, having got over the surprise, have got together in that alliance remarkably quickly and they are making very good progress, because they wanted to come good as well.

Q128  Chairman: Have you met your French counterpart yet?

Sir Peter Spencer: Yes, I have; I met him the week 8 to 12 May.

Q129  Chairman: They do not have the same complications in their decision-making procedures. Maybe you should take some advice from the French.

Sir Peter Spencer: I think they have other complications. If you look grossed up at what you get out in terms of hardware and the quality of the hardware for the budget, I would maintain that the UK procurement performance compares pretty favourably.

Q130  Jim Knight: Mr Howarth touched on this when he mentioned the Hawk issue and I accept that you do not want to go into specifics, but in this case it would appear to me, having spoken to some of the workforce whose jobs are at risk on this decision, that a gun is being pointed at the government or DPA's head with bullets of all of those jobs lined up in the barrel and there is a possibility of politicians coming to you and asking what we are going to do about it rather than the other way round. Is that how you see a relationship developing as these wider factors are used more and more by companies trying to play political games?

Sir Peter Spencer: There is nothing very unique here in terms of lobbying and people being rightly concerned about their workforces. We owe these people a lot. They have worked for us, Hawk is a fantastically successful project. It has served this nation well. The people of Brough have actually delivered a huge amount on behalf of the nation. On the purely social and personal context, I would see every reason why lots of people would want to put forward their case as strongly as they possibly could. The other tension is to ask whether in a non-competitive environment you can get a value for money proposal which is affordable. That is the discussion which is taking place at the moment and there is no sense at all of ministers turning round and saying "Here's what you've got to do, but by the way I want it to be you that does it". It just does not work like that.

Q131  Chairman: Do you have the expertise to make a judgment like that, to say you think it could be produced for X million pounds so go on and do it?

Sir Peter Spencer: Yes; yes, we do.

Q132  Chairman: Will this be damaging to our reputation as being one of, if not the, most open system for anybody who wishes to sell their products? I saw some comments in the press over the weekend that maybe the decision which might be emerging on Hawk was an end to the policy of competition. You would say it would not be that.

Sir Peter Spencer: No, because the story I read in the Sunday Times was factually incorrect. No recommendation has been made to ministers by the investment advisory board. We are now at the stage where we are looking very closely at a very complicated problem against quite a sharp time line. We are well aware of the concerns that British Aerospace have about the viability of the Brough plant and the arrangements which have already been put in place about which the workforce at Brough feel extremely apprehensive. People are very clearly aware. We have an obligation to get this decision through quickly and clearly.

Q133  Mr Hancock: Why would it take time? If you followed the consequences of your previous answer about a time coming when continuing with competition is not going to be profitable to anyone, so you have to call a halt to it - and you rightly identified the carrier - if your advice to ministers is that the Hawk is a good product and it would take an extremely good product to beat it, why bother with competition anyway? Surely your role then is to make sure that you as the chief procurer always have the opportunity to maintain a British presence in that field in the UK. So your advice to ministers is that there is no real debating point here and your advice is that it is important to UK Limited to have this facility and we should buy this aircraft. No competition. No wavering. Straightforward answer. You did not really answer that point when Mr Howarth posed that question to you. There must be a role for you in that.

Sir Peter Spencer: We have a different understanding of what my job is. I do not have in my terms of reference that I buy British and only buy from overseas if there is no decent British product.

Q134  Mr Hancock: You are missing the point again. I am talking about a new role as head of UK Limited for the Ministry of Defence. You have a tried and tested product which has served this nation well, to use your words. Is there a plane out there which is affordable, which is better? Is there?

Sir Peter Spencer: Forgive me but this is a question I am not going to answer in public, not at this stage. The answers I would give you would be information which it is quite inappropriate to give at this stage.

Q135  Mr Hancock: But do you believe it is a role for you to give that advice to ministers at a very early stage, to say we could waste a lot of time a lot of money and put at risk a lot of expertise by dragging this out? Yes or no.

Sir Peter Spencer: The answer is, in the general case - this is not addressed to Hawk - yes, of course, and this is what this is about. Under those circumstances a recommendation would come forward, as it has occasionally done in the past, to say this is an area where frankly a competitive process would not work for the following reasons.

Q136  Mr Hancock: And would not be in the national interest.

Sir Peter Spencer: On any occasion, when we put forward a non-competitive proposal - and it is only a minority of projects, 16 per cent by value which are non-competitive - then one of the considerations which would be fed into that would be the national interest. Of course it would. There are some areas where we do not compete because of the technology which is referred to but not listed in detail, where we are simply not prepared even to consider using certain technology or making it available to anyone else.

Q137  Mr Hancock: Are you a bit surprised that you are still having to deal with this issue and that your predecessor did not resolve this matter ages ago?

Sir Peter Spencer: I am content to take the portfolio of work which was there, which was pretty tidy. There are bound to be some things which were left untouched and if you just put it into context, the historical facts are that the company was invited to respond to a tender, not in a competitive environment and was given some guidelines as to what would constitute value for money. If we are going to go to spend taxpayers' money and seek Treasury agreement on a non-competitive tender, we have to demonstrate value for money and affordability.

Q138  Mr Hancock: I am sure that an awful lot of people around the Brough area would be very interested to read the transcripts of those replies. I should like to ask some questions relating to what you would characterise from your very short time in the job and where you came from, as well as the progress over the last three to four years in implementing the initiatives aimed at opening up markets, in particular in respect of the Declaration of Principles we have with the United States and the Framework Agreement we have with the UK and five European countries?

Sir Peter Spencer: Starting with the European countries, the formal position today is that we have signatures from all nations except Italy and we expect a signature from them quite soon. It then breaks the LOI agreements into six implementation arrangements and a couple of those are signed up already and the others are well on the way. Frustratingly slow, if we wanted to have these arrangements in place immediately. I would put a more positive gloss on it, inasmuch as it is all very well having great headline arrangements, if they are not properly staffed or in detail, so the processes are understood by the people in the different countries, both in industry and in the government agencies as to how they are going to operate, we will not make any real progress. One of my priorities will be to continue to drive forward on that and to encourage my fellow national armament directors to push it forward as well.

Q139  Mr Hancock: By your answer you would therefore agree with UK industry's view that the pace has been slow and in some instances no movement at all.

Sir Peter Spencer: No, that is not what I said. What I said was that it takes time.

Q140  Mr Hancock: Well would you agree with that then?

Sir Peter Spencer: I said we would all like it to happen instantly. What I did say was that this is complicated and detailed work and like any other international agreement with six consenting parties, in fact in this case 12 consenting parties because there is industry as well, if you want it to be robust, you have to do the hard work to get it into place. I am not in a position to form a judgment as to whether it has been slower than it should have been. What I am saying is that I am not surprised that it has taken a bit of time. I am actually quite encouraged that we now seem to be getting towards the end of it and I look forward over the next couple of years to being able to start to deliver some real benefits from it and that will be my job.

Q141  Mr Hancock: When you picked up the brief from your predecessor, did he say, "Oh, by the way, there's widespread disappointment within industry with the pace of these arrangements"?

Sir Peter Spencer: I did not discuss that subject with my predecessor.

Q142  Mr Hancock: Have you had no representations since you came into office from British industry? They have certainly made us aware of their disappointment.

Sir Peter Spencer: To put this into context, not many of them have had a chance to come to see me yet, have they?

Q143  Mr Hancock: No, but I think it is a bit like being a new MP. You were a constituent of mine for a while, but I did not hear from you, though we met on occasions. People do try it on with the new boy and British industry has not been reluctant to suggest to your predecessor that he could do more to protect their interest. They expressed fairly widespread concern that after three or four years of promises little has moved for them and you have not heard from them yet.

Sir Peter Spencer: It would be unfair to them to say that it is not so important that they have not immediately raised it with me, because they have not been given much opportunity. I have read the transcript, so I have now hoisted the message in. My own people have assured me that is not for want of trying from the UK end and I shall continue to do my best to deliver five other nations, but there is a limit to what it is reasonable to expect somebody to do when it has to be done by consensus. So we shall continue to drive ahead.

Q144  Chairman: We produced a report 2000-2001 The Six Nation Framework Agreement and government responded to us in a special report. In the concluding paragraph it said that the agreement would come into force 30 days after the second nation deposited its instrument. Why are we waiting for the Italians then?

Sir Peter Spencer: I am afraid I cannot answer that detailed question.

Q145  Chairman: Could you drop us a note on that? You obviously have the documents.

Sir Peter Spencer: Of course.

Q146  Chairman: I wonder whether there is no requirement to wait for the Italians to sign the agreement.

Sir Peter Spencer: In terms of implementing the agreement, the work has already taken place on that. I was not trying to suggest that nothing would happen until the Italians signed. All I said was that in terms of the overall LOI, we are pretty close now to getting six nations signed up. It is not that which will actually affect the progress, it is the implementation arrangements.

Q147  Chairman: You can look at the documents and please drop us a note.

Sir Peter Spencer: Of course.

Q148  Mr Hancock: Do you share the concerns of British industry over the US restrictions on releasing intellectual property, in particular the recent one over the JSF?

Sir Peter Spencer: There is a concern in several different contexts about access to information. There is a co-ordinated effort across all of government, as well as industry, to press for better arrangements. I am aware of it, because I raised it with Pete Aldridge, who was until very recently my American approximate counterpart. I know you are aware of the background of this. There are many people in the United States who are actually very receptive and would like to be more helpful, but there are some considerations they have to think through quite carefully and we, as with the LOI in the European context, might secure the headline agreements but we also have to secure the procedural arrangements through the executive to make sure they actually turn into something which is material and useful.

Q149  Mr Hancock: This is pretty damaging, is it not, to British industry in lots of ways? Do you believe this is something where you have a role in trying to unlock it?

Sir Peter Spencer: Yes.

Q150  Mr Hancock: Would you be making recommendations to ministers fairly quickly for a government to government procedure here which would give British industry some actual signal that the UK Government were now going to get on their side on this argument instead of listening to the reasons why the US are not prepared to assist in this fight to get these intellectual property rights available?

Sir Peter Spencer: Forgive me for being pedantic, but intellectual property rights are a commercial issue, so in that respect I am thinking ---

Q151  Mr Hancock: Some of the commercials would do business; it is governments which are stopping it.

Sir Peter Spencer: Yes and in that context I do not need to press ministers to do it, ministers are already aware and are already working on it. This is quite an interesting time for it to be happening. I completely agree that the Chief of Defence Procurement has a role to play, in fact I am already playing it.

Q152  Mr Cran: A few questions to round off this whole discussion we have been having on opening up the markets. You referred to the Defence Industrial Policy document which it seems to me - and I am bound to say you have not disillusioned me in any way whatsoever - can mean anything to anybody reading it, for instance, concerning the opening up of markets, there are certain wider factors, you have enumerated what they are so one can use those. It says "Competition remains 'the bedrock of procurement policy', but will not be continued beyond the point at which long-term advantage can be gained". Thus, to try to illuminate for the Committee just a little bit more what you mean, I should like to take you to the choice of engine for the A400M military lift aircraft. What the Committee would like to know is what part your department played in all of this and particularly in light of the fact that it would appear that a cheaper US/Canadian bid lost out to a European consortium bid which was somewhat more expensive. I know you said we have moved away from the era when money was the only consideration, but just talk us through what is happening over the choice of that engine.

Sir Peter Spencer: The aircraft prime contractor, Airbus Military, has announced that it has selected the engine. The choice of that engine was an industrial matter for the prime contractor and in the context of the overall health of the programme, as you know, the Bundestag is meeting today to discuss whether or not it is going to sign off the German offtake so that we can place the contract. My reaction to the fact that the programme seemed to be moving ahead, because they have made a difficult decision, and the fact that we very much hope that the German Government is going to sign up today, means that we can finally go ahead and place this much delayed contract. I am not sure you could say that was adopting the Defence Industrial Policy. This is a collaborative programme with several other nations which began before this was written or published.

Mr Howarth: I can assure you that it began before Pontius was a "Pilate"!

Q153  Mr Cran: In order that I can get a clear answer to my question, what you would really say is that you played absolutely no role in this whatsoever. If that were the answer, I am bound to say I would find it extraordinary. At least at one level I would regard you as the guardian of at least part of the public interest and there is a public interest involved in the choice of this engine. What was the answer to my question?

Sir Peter Spencer: In terms of whether I got involved in the selection of the engine, the answer is no, I did not, in the sense that it was Airbus Military who announced that that was what they had gone for. When looking at the reasons for it, one of the things which the project team would look at would be the relative virtues. The judgment, amongst other things, which appears to have been made by Airbus Military is that this is a lower risk option. I have not seen any of the numbers, but what I do know as a general principle, is that when you actually look at the bids which are on the table, the number which appears at the bottom is not necessarily the number you go for because it is smaller, because you are actually factoring in other things like the confidence that this thing is actually going to come through in time, is not going to go up in price, is not going to give an integration problem. Because we have a prime contractor doing that, because we have a project office doing it and we are two steps back from it, we have not been involved in the way we would be with many other programmes.

Q154  Mr Cran: So there is a public interest involved in this; you have accepted that there is. You have a project team looking at it. You said it is a lower risk option and then you illuminated some of the facts which suggest it is lower risk.

Sir Peter Spencer: No, I noted amongst other things that amongst the reasons which have been given by the prime contractor was lower risk. I then moved away from A400M engines and said that I could understand from other projects I have been involved with, why something like that might have caused the decision to turn out the way it did.

Q155  Mr Cran: I just rather feel, from where I sit, that I would expect the Chief of Defence Procurement to have an answer to some of these questions. Dash it all, you are the man who at the end of the day is there protecting my interests, not as a Member of Parliament but as a taxpayer. I think I would have expected you to know that.

Sir Peter Spencer: Are you unhappy with this selection of the engine?

Q156  Mr Cran: I am quite agnostic and quite apart from that I am here to ask the questions and you to answer them. I just merely say again that I would have expected you to have known the answers. May I ask another question? Is it within your bailiwick to know what the differential in the price between the two bids actually was? I do not know. I have seen some press comment about all of this, but I guess you must know.

Sir Peter Spencer: I do not actually.

Q157  Mr Cran: Why not? I think I would expect you to know.

Sir Peter Spencer: If we had got to the stage of this being an issue which was attracting a lot of difficult and contentious public attention and it was the subject of a detailed inquiry, then I would relieve the integrated project leader of his position of taking the lead on it and I would go in and brief myself up on the detail. We have not, as far as I have been aware, got to that point. The issue has been to move ahead with this much needed requirement and to get it onto contract. As has been mentioned by several other members of the Committee, whenever you get these decisions being made, there is a lot of lobbying, so there are lots of people who have an agenda which they are bringing to bear and a great deal of what I read in the newspapers in these areas is pretty ill-informed and speculative. Under those circumstances I do not in the real world second-guess everything which every project leader is doing on every little thing just in case the question comes up. If it is a question on which you would like a more detailed answer, yes, of course I will go away and look at it. By the way, I did not mean to give offence by asking a question. I was simply trying to understand the context in which you wanted the answer.

Q158  Mr Cran: I never take offence at anything, so do not worry about that. Your real world is very different from mine because, as all my colleagues know, cost would come at the top of my list. If it has been rumoured that the EPI bid was €228 million to €240 million higher than Pratt & Whitney, if I were in your job, I think I would want to know why. There may be a lot of reasons to substantiate that decision, but I think you should know and you should be able to tell us. There is another reason why it should come high on your list of priorities: I just think that this might be seen as undermining the efforts to persuade the US to open up their procurement. I think it is a deceptively important large issue.

Sir Peter Spencer: If we can just put this into its proper context, this is a multinational project, so inevitably national armament directors are one step further back that they would be in a nationally owned programme. As we are trying to turn collaborative project management into a more efficient arrangement, the last thing a project is going to be able to cope with is having lots of people questioning every single sub-decision which is being taken. I go back to the fact that in this instance we are looking at the need to get this programme on to contract. If, in the context of the totality of the programme, the prime contractor determines that he can take one particular product and still come into the budget which we have set him because of other considerations elsewhere, that is what we hire him to do.

Q159  Mr Cran: That seems to me to be a very good answer to a question I did not ask. I asked you whether you do not think that the decision which was taken in relation to the choice of engine in the case of the A400M in fact could be construed to undermine the opening up of US procurement. After all, they are going to say, just as perhaps it is said over here in Europe, that the playing field just is not fair over in Europe, so to hell with it. That should worry you, should it not? Do you have a view about all of that?

Sir Peter Spencer: Yes, of course I have a view about it.

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.

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, 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 own 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 own 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 swop 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 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.

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, ten, 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 British Aerospace 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 this 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 has 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 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.

Q180  Jim Knight: Your memorandum envisaged those sorts of adaptations, deep strike, ISTAR, (Intelligence, Surveillance, Target-Acquisition & Reconnaissance) roles. Are these the limits of the other roles? Are there others which Nimrod could satisfy?

Sir Peter Spencer: I could not think of any off the top of my head, but I am not the expert. I am not trying to get out from under. We can provide you with an answer, but that seems to me to be a pretty powerful area for advancements.

Q181  Jim Knight: Would expanding Nimrod's role in such a way have implications for what other ISTAR or deep-strike platforms would be needed?

Sir Peter Spencer: No. One thing which has come into play very recently is the recognition of the need, in the context of the way warfare is moving and the whole approach to network-centric operations, to integrate each component in the battle space, to integrate it into the whole, the original systems as systems context. One of the key areas of work which has been really pushed through from the EC community, with support from the DPA and others, is the need to have an integration facility, which we are looking at now, so that we can not only demonstrate with experiments the enhancements which a particular platform will bring to the overall battle group, or try out various ways of using it, but also help to de-risk some of the material aspects. Integration is a big issue and integrating something like the Nimrod into all the other assets would be important. It is a huge scaled up version of what used to be done at the Admiralty Surface Weapons Establishment at Portsdown, the land-based test site. If you had a new bit of kit to fit into the Type-23 frigate, you had to prove that it could work with the rest of that system and obey the protocols. This, on a much grander, bigger scale, is the way this will work in the future.

Q182  Jim Knight: It sounds as though these additional roles would be quite a priority on the Nimrod. The impression I received from your answers to Syd was that if you did have further problems with Nimrod then you would perhaps have to scale things down.

Sir Peter Spencer: That was a hypothetical discussion. We both agreed that.

Q183  Jim Knight: Hypothetically then, if that were to happen, do you currently have a take on where the priorities lie in terms of which roles you would want to hang on to?

Sir Peter Spencer: There are issue for the defence staff, the equipment capability staff to determine. They are still thinking that process through and we are not paying yet. Clearly we will work with them because partly it will be operationally driven and partly it will be a function of what you can afford and how quickly you can do that.

Chairman: You are not out of the wood yet, Sir Peter. We are now moving on to another system which is not quite a 100 per cent success as yet, putting it mildly.

Q184  Mr Crausby: Your organisation has recently been forced to re-negotiate the contract for the Astute submarine to the point where the MoD have had to plough in an additional £430 million and BAE have written off another £250 million of their own money. Is this not a disaster? What exactly has been the problem with BAE Systems? Why have they had so much difficulty using computers to design this submarine? Surely they have enough expertise in computer-aided design?

Sir Peter Spencer: Is it a disaster? It would be strange if against performance, time and cost I did not recognise that it was a huge disappointment. In terms of putting it into context, even with the amount of money which is being negotiated, we will be purchasing these submarines at a considerably lower price than the Americans say their nuclear submarines cost them. I just put it in that context. The question is: was the ambition we had when the contract was priced misplaced and was the company's ambition in terms of their ability to use computer-aided design, computer-aided manufacture, too great? I think the answer to both questions is yes, with the benefit of hindsight. It is a worked example of a point we have raised several times already. We were in an era of believing that we could negotiate very highly incentivised contracts and transfer risk hugely in one direction and both sides at the time thought it could be done. The particularly disappointing aspect of the Astute programme is the fact that the difficulties had not been recognised at the senior levels in the company. It is a story I am still looking into really, but by way of example, somebody said to me that since the contract has been let there have been seven different managing directors of the company which was created to run Astute. That gives you a feeling of lack of continuity. Certainly the metrics which you look for in terms of design and build of submarines, when you do them the old-fashioned way, are easier to spot than when you are putting together a hugely complicated piece of design in computers where you almost cannot fit it into your head and you only see little bits of it on the screen. As other people have found, the potential benefits are huge.

Q185  Mr Hancock: What are the benefits?

Sir Peter Spencer: The benefits are that you reduce the time line.

Q186  Mr Hancock: You have not done that.

Sir Peter Spencer: I said the potential benefits, if used well. The potential benefits, if used well, are that you reduce the number of man hours hugely on the design process and you actually produce a quality of drawings out of design, which does not then have to go through a separate iteration to produce production drawings in order to be able to build it. So the expectation in the early days was that you were going to virtually transfer from the electronic drawing office to the shopfloor the detail you needed to construct a very complex piece of machinery. I believe people honestly believed that could be done. They under-estimated the skills which were required. They under-estimated the difficulty. In terms of measuring progress, it would appear with hindsight that there was some misunderstanding over the fact that you had done an awful lot of design hours work meant you had actually got that far through the programme. Let us suppose hypothetically you said it was going to be 100,000 man hours to design and you had done 60,000, you might think you were 60 per cent of the way through the design process. With the benefit of hindsight, if it took you 240,000 hours, you were actually only one quarter of the way through the process. It was the ability to understand that which was lacking and the fact that it came out so late. They had already started the construction and they realised that the design work was not keeping pace with the construction, which then really brought this thing home to roost. There had to be a point at which they stopped and took stock to decide how they were going to get through it. The question was then raised: to what extent is this wholly a problem for industry, which needs to be sorted out or to what extent was there some part which the Ministry played in this? This has been declared in the minute which was given to you. It was recognised that to an extent, without any liability being accepted one way or the other, this was an agreement between consenting parties where both parties were working against assumptions which turned out to be incorrect. In that context there was a reasonable argument that the ministry should make a contribution to this. Importantly, we needed to make sure that, as with Nimrod, confidence was restored in the company that they had actually capped that risk, so they could then get on more positively moving forward to finish off the design of the submarine as opposed to damage limitation, worrying about cost overruns and nobody being sure how it was going to end up. This very damaging period of uncertainty needs to come to an end as soon as it can and that is the process we are managing.

Q187  Mr Crausby: It is difficult to understand why it will end up so much cheaper than the Americans' when the Americans still appear to be so much further in front of us from the point of view of computer-aided design. For instance, the Americans claim that they can produce between 80 and 90 per cent of the submarine or modules outside the submarine, whereas BAE seemed to be aiming for around 50 per cent. It is difficult to understand how in the end that will be the case that we will end up producing a cheaper submarine than the Americans, especially when BAE are now turning to the Americans for help. If this is the case, why did the MoD not just use the US as a prime contractor who had real experience in this field in the first place? May I just say that I am not advocating that? It is just a question and not something, as a British engineer, I am advocating.

Sir Peter Spencer: The fact that they have run into this problem does not mean to say that they are uncompetitive and unproductive in everything that they do. Far from it. The productivity gains which have been achieved at Barrow over the years, particularly in terms of production, are admirable. I would not myself be prepared to associate with a view which said that British ship building, or British submarine building, was uncompetitive compared with the United States. What I am giving you is a view which has been given to me from industry having talked to industrial counterparts. They are genuinely curious as to the sort of sums of money we are talking about. We can look at that very positively, to say that in all of the bits, other than this CAD-CAM, the thing was being done well and efficiently and we are getting very good prices out of it. The fact that General Electric are now involved is sensible: there is a company which believes and can demonstrate that it has mastered the art of this very complex and difficult CAD-CAM and it would be very advantageous to us and to British Aerospace to be able to employ that expertise to get this thing moving. What we want to do is get the thing moving and get to the end of the programme.

Q188  Mr Crausby: The Barrow workforce do not feel too pleased with all that in the sense that they have delivered lots of productivity over the years, yet as a result of this they are now being told that they cannot produce surface ships any more, they have to concentrate completely and absolutely on submarines and that means another 750 redundancies or in that region. The Barrow workforce, quite naturally, not producing surface ships, wonder about the future. Are you satisfied that BAE's decision not to produce surface ships at Barrow will help the Astute programme?

Sir Peter Spencer: Yes, I am. I know Murray Easton well. He is a hugely capable, well experienced ship builder with a fine track record of success. It is a great relief to me that he is actually in the programme in the position he is in. He is also somebody who passionately looks after his workforce. I first met him when he was working at Cammell Laird at Birkenhead in 1984 and I saw him address the workforce there when they had a similar issue about the future of the yard. There was no doubt about the leadership he brought to bear in terms of winning the confidence of some pretty hard-bitten welders and electricians, people who had heard a lot, been through a lot; he actually related to them in a way which was tangible. They trusted him to drive this thing through. He is not somebody who does not look after his workforce. He does. He also needs to deliver this programme. In terms of moving it around between one site and another, we do have to leave these key strategic decisions within the company if we want them to achieve the success on the programmes and disentangling the knock-on effects is quite important.

Q189  Mr Crausby: I suppose when you have to put in £250 million you have to do something. I am sure that Murray will do what he can there. It is not a personal attack on anybody but the workforce is going down and down and down and is obviously very concerned about the long-term future of Barrow shipyards, particularly as far as the surface ship facilities are concerned.

Sir Peter Spencer: We will be building more submarines.

Q190  Mr Crausby: Is it absolutely certain that we will produce more submarines?

Sir Peter Spencer: We have given a statement in that report as to what the current plans are.

Q191  Rachel Squire: May I pick up your earlier comments about the alliance in respect of the future carrier programme, something which, the Rosyth dockyard being in my constituency, I have taken a keen interest in? May I ask you whether there are any particular aspects of the alliance which has been formed between the MoD, Thales and BAE Systems over the future carrier that you think would be particularly helpful in avoiding the sort of difficulties you have been describing in respect of Nimrod and Astute?

Sir Peter Spencer: For one thing, we have the combined intellectual energy of two companies. We have more understanding of the risks in this programme than we would have had with any one of them. We also have in the aircraft carrier - and I know that you interviewed Ali Baghaei, the team leader - a very well designed process of identifying the risks of the various components of the carrier and the very clear process of assessing the technology readiness levels in each case to aim to get them to the levels now which we require of level 6, ideally level 7 but perhaps level 6, before we make the main-gate decision and in those areas where that looks to be a difficult call, to have a clear fall-back position. I think he mentioned to you the soft radios. So you go for very modern radio equipment, but if by the time you place the contract you cannot go for it, there is other stuff you can put in instead and you just design it in such a way that you can have those enhancements at some later stage. We already know that at the point at which we place this contract, the design maturity of the carrier will be more advanced that for any other warship we have placed. On top of all of that is the sort of thing I referred to earlier, creating your own luck. Of course things can go wrong and that is why you have development programmes, but there is great conscientiousness in looking at all of those things which could go wrong and at what is in place to do it, so that at the point at which we place a contract we are confident that the level of risk is containable. Part of the discussion will be the value that industry puts on that risk. If they are not persuaded that the level of risk is containable, then the risk contingency will be unaffordable. We will be very careful to ensure that we get the right sort of balance between a manageable amount of risk when we fire the gun at the beginning of the demonstration and manufacture contract and an affordable amount of contingency to cover those risks and much greater transparency and involvement between a real integrated team with the MoD project team being part of it. We can then understand how these risks get dealt with as we go through time and applying the sort of techniques I referred to earlier of how we get a real measure on progress in terms of own value management and we keep on looking forward to cost of completion, time to completion in a way which flags up the moment something starts to wobble. Then, if it is an issue that senior management needs to be involved with because there is not sufficient design expertise, for example, we pick up that signal as soon as we can and we head the problem off, as opposed to trying to react to it after it has happened. None of that will convince the sceptic that it will be all right this time, because it is what we said the time before and the time before that. All I can say is that we can demonstrate much greater maturity of thinking at this stage and much greater proof of the maturing of the technological solutions to the requirement.

Q192  Rachel Squire: On the basis that this alliance model does work well, do you think it could then be looked at as a useful model for other equipment programmes?

Sir Peter Spencer: If it does work well, the answer of course is yes. If I am candid, we are still learning what partnering actually means - because this is a form of partnership - what it actually means in a grouping where you have a public sector component which is a net donor and a private sector component which is a net recipient. It is how we draw up the arrangements to identify that success rewards each of the components equally. It is terribly easy to do these theoretical models: it is turning it into a working arrangement which is robust enough to cope when things start to go wrong. Everybody is great friends when it is going well. It is when the thing starts to wobble, when people start to worry about a time or a cost overrun, that the test of whether or not you have something different in place will take place. If it is a charade, it will fracture into an old style finger-pointing exercise across a contract "It's your fault, you pick up the extra money". If it is done properly, everybody will say they do not want that to happen, they want to solve this and they will be too busy solving the problem so it does not degenerate into that. That may sound rather idealistic, but you have to find some way of working more like that more often. There are examples of projects where that has happened and it has not all ended in tears and they have just gone straight through it. It is just that because they are over so quickly we do not have time to celebrate and we are too busy chewing over the arguments in the ones which are staggering a bit.

Q193  Rachel Squire: Sounds familiar. To what extent do you consider that this alliance approach represents a shift away from the sort of prime contracting which put risk management in industry's hands and seemed to keep the MoD at arm's length? How would you respond to the comments that this is the MoD putting itself more in the position of having to share some of that assessed risk?

Sir Peter Spencer: I would say that is what we are trying to achieve, but we are still negotiating the precise way in which it will be achieved. It is encouraging to see the progress which has been made. We have taken two putative prime contractors who were competing tooth and nail for a big prize and suddenly said, "By the way, we're now all friend, we're on the same team". To have come together so rapidly has been a huge leadership achievement by the chief executives of both companies, by Alex Dorrian and Mike Turner. That is reflected in the working arrangements in the companies. Where we are all feeling our way a little bit is how to involve the ministry team in that alliance in a way that everybody knows where the sensible boundaries of responsibility are and where the liabilities are. It is easy to have a feel in your mind as to how it should play, but it is going to be very important to document in a way that is unambiguous, so it does not end in tears later. I am not trying to over-bureaucratise it, but you can see the point I am making.

Q194  Chairman: What is immensely frustrating for us, and this Committee has been evaluating the progress made by your predecessors now since 1979, is that screw-up follows screw-up. We have been told endlessly that lessons are being learned, we are now moving into Smart Acquisition, but some of the foul-ups have a familiarity to them. Now you have been in your job for three weeks, are you going to undertake some major re-appraisal of each of the major contracts? All you have to do is look at the National Audit Office reports and see where the slippage is. Will you, in the next six, 12 months, however long before any review you might make is published or at least is a working document in the DPA, then when you come before us next year be able to give us some assurance that we are not going to go through what appears to be the inevitable cycle? A contract is let, things start slipping, slipping again, you put it right, it is not right, then the Armed Forces, and especially in your case, because you have been on the receiving end of poor decisions historically, get the stuff in, it does not work, it does not work as well as it should, it is three years, five years, eight years late. Do you think you will be able to have a real impact on the process? It is in desperate need of reform.

Sir Peter Spencer: I agree that it is in desperate need of further reform. Realistically with projects which have contracts which were let a long time ago there is a sensible limit as to the extent to which you can change. You cannot retrospectively engineer reliability into a system very successfully. You can do it up to a point. You cannot retrospectively suddenly wave a magic wand over something which has been going since the late 1980s and turn it into what you think a Smart procurement project would have out-turned. Unfortunately, we are still going to be saddled with the painful consequences of these things as they keep on registering slippage against the original agreed in-service date and escalation over the original agreed cost. What I do want to make sure is that we recognise two things. One is that the people who are dealing with it today were not the people who committed the original act. They are the people who are mitigating the consequences and in many cases we have put some of our very best people in there because it was so important to get control of something which has turned into a monster. From their point of view it is very easy for their efforts not to get the recognition they deserve. They are actually rescuing all of us from something which if it had not been tackled robustly would have turned out far worse. In that respect, I am keen to make sure that there is recognition of what they do and realism about how long it is going to take to turn round the overall results all the while they are being affected by programmes which continue to come in late. All of the measures we have at the moment point to the fact that the programmes which are being set up in a more enlightened way are making measurably better progress. I go back to my earlier point: is that measurably better good enough? That is an important question to determine and to see how far we are going to continue to put the bar up. If you looked at something like Tomahawk, and I know that my predecessor has made this point in front of this Committee before, it actually went through very smoothly, very quickly, it delivered absolutely on time and in budget. It was so successful it only ever scored once in any of the big major project reviews and then it was in service. We know we can do it. It is a question of finding out how we can do it more often in the future.

Q195  Chairman: We managed to produce Trident under cost. If we are capable of producing Trident, then we ought to be able to produce Astute. This Committee decided during the SDR that we would monitor the carrier programme on an annual basis. We have had some excitement up to this point in time, we still have nine years to go for the first and 12 years to go for the second carrier before it enters service. What can you do to ensure that this Committee, ten years down the road, 15 years down the road, is not going to be lamenting the fact that the slippage date of 2012 is growing to 2015 and 2019 and that 2015 will not be slipping to 2021? The Royal Navy, the Armed Forces, want these carriers pretty quickly. I know you are taking a rather novel approach to producing this aircraft carrier. I know it would be futile for me to ask for assurances, but it would be really helpful if you could just tell us the next time you appear before us, that things are moving in the direction of successfully producing these carriers to the quality required and to the timescale and cost demanded. Do you think you will be in a position to give us a good progress report next year that things are moving successfully, no slippage and everything is hunky-dory?

Sir Peter Spencer: That is certainly my intention.

Chairman: We will have you here every year, every single year, because this is too important to see old mistakes being re-made. I know it is a difficult problem for you. I am sorry we are giving you a hard time; we could be giving you a far harder time. We will be watching.

Q196  Mr Jones: May I ask about the Thales/BAE alliance. Some perhaps would describe it as a shot-gun marriage. Certainly in the press over the last few weeks, there have been various unattributable sources from both sides, though one side in particular, arguing that the process is not working. We heard when we had Ali Baghaei before us that he is quite happy with the way things are going on. What do you see as your role? Is it as a marriage guidance counsellor to ensure that it works? Is it as somebody who is going to step in and ensure that the couple do get on? This goes on for many years, so what do you see your role as being? Is it going to have to be, as we are led to believe, that some of the relatives on both sides are not happy with the process still, that you are going to have to take an aggressive stance to force them to live together?

Sir Peter Spencer: If we get to aggressive stances, it is because plan A did not work out.

Q197  Mr Jones: Plan A being ...?

Sir Peter Spencer: Plan A being that the alliance works in such a way that both companies are highly motivated to succeed. In that context, the arrangements which the companies are forming between themselves and have already formed are pretty familiar to me. They are not a million miles away from forming a joint venture company, from doing a contract that they would do for any one of their customers. They know how to do this. The only thing which slightly caused a pause for breath is whether or not they will be able to do it so soon after being so hard in contention in competition. I believe that, all things considered, they have made remarkable progress. The real test is yet to come. The real test is when we actually enact this in the form of an agreed contract.

Q198  Mr Jones: Is it not very hard, when, for example BAE Systems, and certainly people like Mike Turner, have made some very vociferous comments against the French, suddenly then to find out that they have to go into partnership, in this case marry a French partner, to ensure that the partnership works? Is there not a possibility that BAE Systems are still hankering after the fact and that if they make the relationship so difficult somehow you will draw a line and say it has not worked and therefore BAE Systems will become the prime contractor?

Sir Peter Spencer: I cannot speculate as to what may or may not be in BAE's senior managers' minds. I have seen no sign of that and I have talked to Mike Turner. I did not detect any overt, anti-French feelings, in fact his company deals with the French in all sorts of arrangements. They have perfectly successful everyday co-operative arrangements with French industry in a whole range of areas in that company, as they do with other European nations, as they do with the Americans. The key to this is to recognise that the in-service date is very important, as the Chairman has just emphasised. We are not going to have the time to achieve success against that in-service date if this thing does not settle down into an harmonious relationship. Will I be the marriage guidance counsellor? Yes, in a sense I will, because, in the same way that if marriages fall apart there is more cost to the taxpayer in supporting the wreckage that results from it, if this falls apart there would potentially be more cost to the taxpayer. Of course I will be engaged in that, as I would expect Dorrian and Turner to be engaged, but then in fact the three of us already are and that is within 21 days of joining. That in itself is demonstrable proof of where I see this in my order of priorities.

Q199  Mr Jones: At what stage will you come to the conclusion that it has not worked or that there are problems in the relationship?

Sir Peter Spencer: I have no cause to think that would be the case. I could not speculate on that. I am expecting, on the basis of the assurances that have been given by those two companies and on the basis of evidence that they are perfectly capable of forming harmonious and constructive and successful partnering arrangements in other contracts, there to be no reason they should not do this on the carrier; in fact there is every reason why they should want to do it. They recognise that this is such a huge slice of business for both of the companies.

Q200  Mr Howarth: May I just take you back to what you were saying a moment ago about the role of the MoD in this? My understanding is that the companies are indeed getting on with it, but the real issue now is the role of the Ministry of Defence. You are taking a 10 per cent risk share in this apparently, but as one of the participants pointed out to me this morning, you are also the customer. I do think there is some difficulty here. You did allude to it a moment ago. At the moment it does seem to be the case that it is the role of the MoD which is holding the thing up, not what we all expected, which was the fratricide between the two companies. They are getting on with it. How do you see yourself having this role of the 10 per cent risk-bearing shareholder in the project and being the customer?

Sir Peter Spencer: If I take you back to the principle we agreed earlier, which is that you cannot transfer total risk anyway, then the Ministry of Defence does have risk in this programme anyway, however you might choose to try to measure it. In the lead-up to placing the contract, there is a need to have the same visibility of the pricing regime and the project management arrangements and risk management arrangements and all of that as we enjoyed in phase 2. The continuous assessment model which the project team have been using under Mr Baghaei has been innovative and hugely successful and has safeguarded the interests of the taxpayer in terms of knowing much more about the design maturity of this project than we would ever have done under the old arrangements.

Q201  Mr Howarth: Yes, we all buy that.

Sir Peter Spencer: Before we go to contract, we need to continue to have that access and that visibility. I do not know who is briefing you from within the companies, but if they say what they have said through their chief executives, that they are happy with this alliance and that they recognise that the MoD is still bearing a great deal of risk at this stage and therefore needs to protect it and if they are going to be as transparent and as straightforward as I have been assured that they will be, then I simply do not understand why they would have a problem.

Q202  Mr Howarth: Is your risk bearing participation in this, as opposed to your contractual arrangement as the customer, going to be set out in a document?

Sir Peter Spencer: We could spend a lot of time writing all this down. Ten per cent is not, as far as I am concerned, something which is supported by a rigorous piece of detailed arithmetic which we could show you that this was 10 per cent of the risk and if I claimed it did, you would be right to be sceptical. It is a sensible rule of thumb estimate at this stage as to how we feel about it and it is useful as a means of making clear the relative weights which will go on the participation of the three components in this alliance.

Q203  Mr Howarth: I am not going to press it any further, but perhaps we could flag up that we will be monitoring this aspect.

Sir Peter Spencer: My point was that I would much rather work on the programme and work on the contract than work on an interim piece of documentation which would soon outlive its useful purpose.

Q204  Mr Howarth: Understood. Part of the reason why the alliance between the two companies has been successful is because there is a clear understanding that BAE Systems are the prime contractor and there is a clear definition of roles. I am not clear that there is a clear definition of role for the MoD, apart from being the customer.

Sir Peter Spencer: BAE are not the prime contractor, they are the preferred prime contractor. That is an important difference.

Q205  Mr Howarth: The preferred prime contractor. Can we move on to the SDR new chapter and the emphasis in that on new technology and particularly the importance of Watchkeeper, the UAV programme. Our understanding is that its planned in-service date has been brought forward slightly, but it is still three years off and even then only an initial operating capability is envisaged. Why can this programme not be more aggressively accelerated? What do you think are the limiting factors preventing that happening?

Sir Peter Spencer: It is a good question, given the intention to use proven air vehicles. They do have to be integrated into the battle space. We could just fly them around, but we would not get the capability out of them that we need. We need to get the ground stations sorted out, which means command and control, which means software, which means communications, which means integrating with all of the other things which are going to be fielded, including Bowman. In that sense, we could rush at it, bodge it and then spend a lot of money retrospectively trying to fiddle it retrospectively. Or we could actually scope this thing and get a proper understanding of the total capability that the customer wants.

Q206  Mr Howarth: I have to say that we spent years on Phoenix, which has really been a bit of a disaster and I would have thought that some of the doctrine on how you apply this particular bit of kit would have some relatively sophisticated thinking on how to apply that now, would it not?

Sir Peter Spencer: The Phoenix analogue is not wholly helpful inasmuch as the capability from Watchkeeper will go far and beyond that which is delivered by Phoenix. It provides a pointer, but only to a limited extent. If your question is whether I am curious as to why it is going to take three years and whether I am going to test it, the answer is yes, to both questions.

Q207  Mr Howarth: Your memorandum assumes an extensive use of existing available technology and that the Watchkeeper solutions will be non-developmental. Major components will use existing off-the-shelf components. That being so, why are you not buying your UAV off the shelf? There are plenty of them around.

Sir Peter Spencer: Because we are buying a system of which the UAV is a component.

Q208  Mr Howarth: Is there not a risk that without a greater sense of urgency, and notwithstanding the very sensible point you made about making sure we get it right and do not rush at it, given the development of technology and the application by the United States of UAVs, when you do introduce Watchkeeper into service it risks being a generation behind those now in operation.

Sir Peter Spencer: So far as the capability is concerned, with the joint UAV experimental work which we shall be doing, all of that will be aimed to ensure we do prove that we can integrate this thing in a way which does reflect current military doctrine and current military thinking, drawing on the mature technology of the air vehicles, which are the easy bit now because they are already there. In the context of whether it can only be done in 2006, the simple answer is that I do not know today. What I do know is that it is remarkable how often, when there is an actual fighting operation, stuff can be brought forward quite quickly, because we shortcut all the testing. Whereas we are going to test the thing properly to ensure that in through-life cost terms it is what we need and is affordable and meets all of the requirements, it takes a bit of time but if push comes to shove sometimes things do come forward early. Where we will be on that I do not yet know until I see some of the output from the experimental work we shall be doing.

Q209  Mr Howarth: That implies that another war would be extremely helpful in getting this bit of kit advanced just as Storm Shadow has been advanced by Iraq.

Sir Peter Spencer: That was not my point.

Q210  Mr Howarth: No, I did not think it was actually, but it was worth mentioning nevertheless. It was a cheap shot. I have been very helpfully advised that we were told by Sir Jock Stirrup that it was the network which was more readily and easily produced that the UAV itself.

Sir Peter Spencer: That is probably a reflection of my relative lack of familiarity with the detail. I would be surprised, given the statements which have been made about going for existing UAVs. Certainly it does not entirely chime with the work which is taking place with the joint experimental facility.

Q211  Mr Jones: May I ask something around trying to speed up acquisitions in terms of the FRES programme? When will the initial-gate decision be taken? Are we getting into a position here where we have one major armoured vehicle manufacturer in the UK, Alvis-Vickers? Are we going to have a situation where we will have a competition with a foreign tank or vehicle manufacturer or will we abandon that and just go with Alvis-Vickers in this case in order to protect a British company and British capability in this field?

Sir Peter Spencer: I do not yet know the answer to that. I can assure you that we will apply this approach in this area as we have elsewhere. At the moment we have contractual commitments on other programmes which we have to look out for. In the light of the new chapter and operational experience in Iraq, clearly the Army is taking a close look at what it needs to have in terms of the right sort of protective mobility in a rapidly deployable expeditionary force. So this is a particularly sensitive issue in terms of how we handle our way through. All of the people who are involved in this have been told that the military customer is taking stock of what his requirements will be. We will then position ourselves accordingly when we have a better understanding of how they want to go ahead.

Q212  Mr Jones: So the initial-gate decision for FRES has not been taken yet.

Sir Peter Spencer: No. I have answered off the top of my head and this precedes my arrival in post. From memory, and I will correct it in a note if I am wrong, this proposal has not yet got to the IAB, but it is very close to going to the IAB. If I am wrong, I will send you a correction.

Q213  Mr Jones: Part of that decision is going to take some lessons from Iraq and other places. Will that push it back? If you want to send the Committee a note on this, that is fine.

Sir Peter Spencer: It is really a question more for when you look at the NPP in more depth with DCDS(EC). This is very much him saying what his views are on the requirement. I am not aware that that is going to delay the initial gate. What it will do is inform the work we do in the assessment of FRES. It will certainly influence the concept of analysis so that we identify the criteria which are going to distinguish the various options which come forward for meeting the overall capability.

Q214  Mr Jones: And the question about having a competition for this? Is that what will ensue?

Sir Peter Spencer: I cannot speculate on a competitive or non-competitive strategy for a requirement I have not yet seen. I will answer as soon as I have the information.

Q215  Mr Jones: Yes, but there is really only one British company who could produce this.

Sir Peter Spencer: Therefore we will be in the process of taking a look at what the requirements are from industry; the presumption would be competition unless there was a reason not to compete. It is exactly the same process as we have described in other contexts.

Q216  Mr Jones: I know, for example in Telford and also on Tyneside, a lot of people's jobs are related to this work. Keeping that workforce and the ability of that workforce together would be important in terms of this contract.

Sir Peter Spencer: I was asked whether or not the RAND shipbuilding study had lessons for other areas and clearly this is something where one would look in terms of long-term value for money. It is an important point which I am very sensitised to. May I give you that assurance?

Chairman: Thank you so much. We shall look very carefully at what you have said when the transcript is published. Lord Bach is coming on 18 June. In due course there will be a debate on procurement and it is normally our intention to produce a report to help inform that debate. We will tend to meet you at least once per year formally here and we very often like to come down to Bristol and see you in your new working environment. We will be back. Thank you so much. Good-bye.