Examination of Witnesses (Questions 260-279)
Sir Peter Spencer KCB,
and Lieutenant General Rob Fulton, examined.
Q260 Jon Cruddas: 42% was about the
changes in terms of the accounting procedures.
Sir Peter Spencer: It was either
42 or 45. I am told 42.
Q261 Jon Cruddas: One of the conclusions
in this Report at paragraph 1.3 is that £3.3 billion in 2003
suggests a reversal of the improvements in cost control indicated
over the last couple of years. Is the inference from this that
the move from cash accounting to accruals based accounting accounts
for these changes?
Sir Peter Spencer: No, I think
what it means is that the numbers you produce exaggerate with
respect to cash accounting the damage which you incur. In other
words, if we had been looking at this in a former life—
Q262 Jon Cruddas: That is the question
I should have asked.
Sir Peter Spencer: — we
would have had a figure of something like £2 billion as opposed
to £3.1 billion.
Q263 Jon Cruddas: What are the benefits
for accruals based accounting for your department because the
whole logic of it, and I quote from the NAO Report in terms of
wanting resources to deliver better public services. It says that
accruals accounting shows departments' expenditure and income
as it occurs rather than when amounts are paid or received. This
provides an appreciation of the real costs involved in providing
a service rather than what is simply paid out in cash. Financial
statements as in the private sector now show departments' assets
and liabilities as well as the effects on depreciation and the
capital charges. The point is, is not the £3.3 billion a
better rounded understanding of the situation that the department
faces rather than simply saying that on the previous system this
would have been much less?
Sir Peter Spencer: I think what
Sir Kevin was trying to draw a distinction between was that we
did not pay £3 billion in cash additional to industry; we
paid £2 billion. He also pointed out the benefit of this
system, which is that it instils a discipline in getting on with
things. Frankly, it also puts us in the same culture as industry
is in because time is money. The trouble when you just pay cash
is that you do not observe that, whereas time really is money
here and my passion in life is to get people to attack the time
line and to do the performance and cost trade-offs along a time
line because that will automatically bring costs down, not only
the interest on capital but the other costs as well.
Q264 Jon Cruddas: So you are a passionate
supporter of the move to accruals based accounting because of
the discipline it brings?
Sir Peter Spencer: I said I was
passionate about attacking the time line.
Q265 Jon Cruddas: It is a tool by
which you can deliver?
Sir Peter Spencer: Yes.
Q266 Jon Cruddas: And this is a transitional
problem, the £2.2 billion to the £3.3 billion, if you
like, and now it helps you in terms of delivering discipline within
these projects?
Sir Peter Spencer: Yes, it does,
within the DPA, but there is a compensating reduction on the balance
sheet of Strike Command or the other commands because they will
not be picking up the costs of ownership which are charged to
their budgets once they take delivery of these equipments. Therefore
the net increase across defence is the £2 billion.
Q267 Jon Cruddas: I think I have
got that.
Sir Peter Spencer: We are playing
shops, you see. While I own something I pay interest for it. When
I hand it over to the General, if he were one of the front line
commanders, he would then pay interest on it. The fact that I
pay interest on it for longer and it appears as a hit on my book
is compensated by the fact that there is a reduction in his costs.
However, there are consequential problems which are highlighted
in this Report with other things which you have to continue to
have for longer than you planned.
Q268 Jon Cruddas: And there are presentational
problems as you move from one system to the other?
Sir Peter Spencer: Yes.
Q269 Chairman: Just to clarify this
figure 18, page 25, if you look at it, I think I am right in saying
that there are five projects that have either hit or breached
their not-to-exceed thresholds. Why do you not formally reconsider
whether they should be continued in their present form?
Sir Peter Spencer: In every case
where a project has gone through its upper limit it will have
been re-approved, in other words, submitted for whether or not
it should continue or should be re-approved against revised performance
time and cost parameters.
Q270 Chairman: Does this mean very
much then, this threshold, because these five projects have already
hit it, in some cases fairly early on in their life, and you just
decided to carry them on?
Sir Peter Spencer: The judgment
goes along the lines of, do we still need the capability, is there
a better way from where we are now of delivering that capability
and what will be the consequences if we do without it, and that
judgment is taken.
Q271 Chairman: So this really is
a paper exercise? You cannot not have a Type 45 destroyer, can
you?
Sir Peter Spencer: You could identify
how you are going to live within your original budget.
Q272 Chairman: What, knock things
off the capability of the destroyer?
Sir Peter Spencer: The Type 45
is inside its budget. What you have seen is a movement in year.
What it has come to is the limit of what was set as the approval
of the latest acceptable in-service date, so if it moves any further
it will need to be re-approved.
Q273 Chairman: But there are examples
which are already over. You are caught between a rock and a hard
place, are you not?
Sir Peter Spencer: Only if I allow
proposals to go forward with a capital investment decision which
have not been properly de-risked and have not been set up properly
in the first place.
Q274 Mr Davidson: General Fulton
has had a remarkably easy day today. Can I ask you what you have
done about sleeping bags since we last spoke in the gents' toilet
along the corridor?
Lieutenant General Rob Fulton:
Mr Davidson, as I think you may know, the Minister of State for
the Armed Forces was in Norway at the time and has also received
a report on the subject of sleeping bags and it will come through
him. It is not my responsibility to equip people with sleeping
bags. The people whose responsibility it is are answering the
question.
Q275 Mr Davidson: Can I return to
the question of time and could I particularly look at chart 18
on page 25? I am looking there at the fact that the A400M, the
missile and the Type 45 destroyer, and all of this was identified
earlier, are early in their life cycle and up to the limits on
time. I understand what will happen now but what I seek to clarify
is whether or not you think that there has been a mistake in the
assessment process in terms of setting those dates: you were over-optimistic
and is there not a lesson to be learned here, or has something
else untoward happened?
Sir Peter Spencer: Yes to all
of those questions. Yes, there was a mistake; yes, I believe to
set the time differential for a complex shipbuilding project like
the Type 45 with all the unknowns and uncertainties which we were
aware of at the time at only six months looks very short to me.
Unless I was convinced that we had done much more work on a project
before we went to the Main Gate decision I would not allow that
to go through. In terms of the other two, as I explained earlier,
it was because we were effectively gambling on how long it would
take us to place a contract and so it takes time. You cannot set
an agreement in a contract against a time line.
Q276 Mr Davidson: I understand that.
Presumably though those assessments must be, particularly in terms
of placing a contract, made available at the time. What I do not
quite understand is why, knowing what you knew then, you still
made a mistake and I am wondering whether or not appropriate lessons
have now been learned other than simply making the time limits
more generous to give yourselves more space, which anybody can
do just by changing the target.
Sir Peter Spencer: No, that is
not what I am saying. On the first two, which related to a delay
before placing a contract, it does not make sense to have a Main
Gate decision taken 12 months before you plan to place a contract
unless you are very clear that you understand what that contracting
process is going to be. The first lesson that anybody learns doing
this, of course, is that if the person that you are negotiating
the contract with knows your back is up against the wall on time,
he has got the high ground because he can just sit and stall until
your time runs out, so we do not negotiate the contracts like
that. On the second one, which is do you just help yourself to
great lumps of time, no, you do not. What you do is you do not
come to the start line until you have de-risked it, which is precisely
the point I was making about the aircraft carrier. We had not
de-risked it and therefore the only way we were going to do it
was by helping ourselves to a great big wadge of risk differential
which would have been entirely unsatisfactory. We have got to
do the assessment phase properly.
Q277 Mr Davidson: Can I just clarify
in paragraph 1.25 "incremental acquisition"? Could you
expand slightly on how that is applicable to major new projects?
Sir Peter Spencer: If you try
and get a very complex system and describe to the last bit of
detail everything that is it is going to be able to do for you
and say, "Until it has done that I will not accept it",
is a recipe for huge problems. It is the old joke, "How do
you eat an elephant?" "One bite at a time". What
we need to do is make sure that we identify a level of operational
capability which is militarily useful at the initial in-service
stage but know that we are going to upgrade it economically through
life to adapt to changing circumstances. That has the benefit
of being more flexible and versatile because, as the Secretary
of State, Mr Hoon, pointed out recently, one of the concerns we
have got is the ability of defence as a whole to respond rapidly
to a very fast-changing set of political and operational circumstances.
To rigidly adhere to delivering the perfect solution to something
you thought you needed 10 years before is the best way to get
it wrong. You need to be able to adapt as you go along.
Q278 Mr Davidson: That is what I
thought you would probably say. Surely that depends upon having
a very close and trusting relationship with the suppliers?
Sir Peter Spencer: Yes.
Q279 Mr Davidson: Because the emphasis
for them could be to bid low and then make their money later on,
on upgrades and amendments and the process with yourselves, once
they have got you over a barrel with nowhere else to turn.
Sir Peter Spencer: It rather depends
on the project because you do not necessarily go to the original
prime contractor to supply the incremental upgrades. In other
words, you can add something to a warship which you went to a
totally different contractor to produce for you, and you would
still employ competition to do that, so long as you defined or
designed the right sort of margins into the ship or aircraft or
fighting vehicle from the outset.
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