Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 40-59)

5 MAY 2004


  Q40 Mr Crausby: Still on risk, last year we looked at the problems experienced on the Astute and Nimrod projects, so can you tell us something about the revised arrangements and, perhaps more importantly, are those arrangements working as expected?

  Sir Richard Evans: Well, I can tell you that yes, they are working out as expected. There is a much improved partnership in the context of the management of these programmes and, as a result of that, there is a lot of stability where both of these programmes are currently to budget and to time against the revised contract terms. In the case of Nimrod, we have had a lot of stability in terms of the design configuration now in the last three months, which gives us confidence that we will fly the first aircraft in the mid-year point. In the meantime of course, on Nimrod, the whole of the system's architecture that is on the ground rig has been developed in time and has now for some months been interactive with airborne sort of systems and with ground-based systems and I would say to you today that on the basis of the recent review we did on both of these programmes that both of these programmes are looking good.

  Q41 Mr Crausby: So they will be delivered within the arrangements?

  Sir Richard Evans: Yes.

  Q42 Mr Crausby: Earlier on you made what I thought to be the quite valid point about the loss of submarine designer skills on Astute and I think you said that it must not be allowed to happen again, so how do you prevent the loss of submarine design skills?

  Sir Richard Evans: Again it takes you back into this Defence Industrial Policy paper. We need to have a progressive discussion together with the customer to ascertain what the long-term requirements are in the context of nuclear submarine capability, design and build. Assuming that there is a continuing requirement, we then need jointly to have a plan whereby we sustain the appropriate level of capabilities to ensure that if there is a break in the current programme and a year later a requirement is placed upon us, we have the design and engineering skill-set in place actually to manage that requirement. As I said earlier, the difficulty that GEC were faced with when the initial Astute submarine programme was launched was, firstly, GEC had never designed and built a submarine previously, and, secondly, those guys who had all the know-how were retired and very content in the west country and certainly they were not queuing up to become re-employed and live in Barrow. Now, we simply want to ensure that that does not happen again, but we can only do it in consultation and agreement about sharing those objectives with the customer.

  Q43 Mr Crausby: You made a point about the break in the submarine programme and I do understand why last year you wanted to concentrate on submarines, but how can you retain those design skills if you are not prepared to shift to Barrow?

  Sir Richard Evans: Well, there are really two ways we can do it and again this is a matter for discussion and agreement. First of all, we have to have some clear indication of whether there will be ship sets beyond the third boat. That being the case, there will undoubtedly be updates progressively going through the design as we go through the boats beyond two and three, so that is one area. The second area is looking at the various requirements in terms of mid-life updates for these ships over their entire life-span. These ships or boats are likely to be in service for anything between 30 and 40 years and the likelihood is that over that period of time there will be at least two complete refits or maybe more than two refits, and those refits need to be supported in engineering terms by our designers, so we really need a sort of long-term master plan for the nuclear submarines and requirements in this county. It needs to be agreed between the two of us and then we need to agree how we are going to make sure that those resources are maintained, but there are those two opportunities which are perfectly clear which will be required to be fulfilled and it is, incidentally, why it is so important that we retain the intellectual capacity in engineering. Again if I can keep harping back to JSF, the fact of the matter is that on JSF there will probably be two or three major updates throughout the large programme and we know that those updates will be undertaken by Lockheed back in America and not here in the UK. In the case of the submarines, if we do what I have suggested, that work will be done in the UK.

  Q44 Mr Crausby: Moving on to the Future Carrier programme, can you tell us what lessons you have learnt from the Astute and Nimrod experience with regard to that programme and the question of risk?

  Sir Richard Evans: Well, I think, firstly, you are looking with the Carrier programme at the combined resources of Thales and BAE Systems which is clearly a much greater depth of resource, know-how and knowledge than would have been the case if either one of us alone had been engaged in this programme. I think the obvious issue here is that, again going back on to this whole issue of risk assessment, we actually get sufficient monies expended in terms of design engineering before we enter into definitive contracts for price and delivery so that we know what those risks are, but I certainly believe that between the two of us, we have got the capability, assuming there is absolutely no extraordinary risk identified, which is not the case today, but on the basis of the way we are going, I would guess that both of our design teams would agree that we would expect to manage the risk.

  Mr Howe: I think so, yes. I think, as I said earlier, the programme so far, contrary perhaps to perceptions outside, is actually going very well in terms of the design work which has been going on, planning work and the assessment work. The formation of a joint team between BAE and Thales was quite a challenge after we had just been in intense competition for a long time, but actually it fell into place very well and it is working well, so if the MoD judge that they want to, as it were, change the arrangements for the alliance and change the arrangements for the management of the programme, I would not want people to think that that is because things have been going badly on the project; they have not.

  Q45 Chairman: What percentage of work has been divided amongst the allies? Have you worked that out yet?

  Mr Howe: Well, the MoD gave a broad indication when they announced the decision 15 months ago that it would be about a two to one division between BAE and ourselves. Actually I think at the moment Thales has quite a high share of the activity because the activity has to do largely with the design work which is one of the elements on which our proposals were chosen, so the way the work is being shared at the moment is not necessarily a complete reflection of the overall balance of the programme between us in the long term.

  Q46 Chairman: What progress has been made to permit BAE Systems to bid into the new French Carrier programme?

  Mr Howe: Well, I cannot give you a direct answer to that, except that, as you know, both governments have made it clear that they want there to be a measure of industrial co-operation, co-operation at the industrial level between the French and the British, given that the French have indicated that they want a carrier which is broadly of the British type. The discussions on how that is going to work are not yet fully advanced and we, on this side, are talking to the MoD about it, and I am sure there is a dialogue with the French MoD on the other side, and of course I think the question of actually what shape of industrial structure is there going to be in the UK in the long term will enter into that.

  Q47 Chairman: Sir Richard, do you have any high expectation of being able to participate in the French carrier programme?

  Sir Richard Evans: Not to any significant extent.

  Mr Frost: I would just like to comment from the supply chain, which is that I would just hope that the UK Government would be as robust and as thoughtful in its entry into negotiations as the French Government.

  Mr Howe: Can I just make the point that, as I say, it is early days and we will see how this works out, but I would not have thought that it will be a question of the French doing a lot of work on a British carrier or the British doing a lot of work on the French carrier in terms of the work-share shifting, and I would have thought there would be a broad two to one balance because the French are buying one carrier and we are buying two, but it is only surely commonsense that if the French are buying a carrier which is pretty similar to the one whose design in the UK is now pretty far advanced, there must be an advantage in the two programmes talking together at an industrial level, if only to get a handle on risks, to give more confidence in timescales and to get a handle on costs, the sorts of things we were talking about earlier.

  Q48 Chairman: Who has the intellectual property rights on the design? Is it Thales or the Ministry of Defence?

  Sir Richard Evans: The intellectual property rights certainly will not be owned by the Ministry of Defence and indeed this is contracted convention, but the Ministry of Defence will effectively have free right of use of whatever intellectual property rights are generated.

  Q49 Chairman: But if, as John said, the French proceed with designs that are largely British, does that mean to say that they are proceeding because Thales designed the carrier and, therefore, they borrow Thales' design or do they have to go to the Ministry of Defence and say, "May we use the designs that you, the Ministry of Defence, paid for?"?

  Mr Howe: I think there are some important rules of engagement in that sort of area which, as far as I know, have not yet been decided or laid down.

  Q50 Mike Gapes: Sir Richard, I would like to raise some questions which may not be very comfortable for you, but in the last few weeks or so the press have not been particularly friendly to BAE Systems.

  Sir Richard Evans: Is this a new situation!

  Q51 Mike Gapes: Well, I think the number of headlines seems to have been a bit more than normal. Could I put it to you that it appears that the relationship between your company and the MoD have reached an all-time low, and if I could just refer to a few issues, the overruns on Eurofighter Typhoon, the problems on the Future Carrier programme and the announcement that you made about considering selling your naval division, in the light of all of those and other difficulties, how do you see your current relations with the Ministry of Defence?

  Sir Richard Evans: Pretty robust. I think that when you look at the issues that are under discussion at the present time and the importance of them to both of us, it is perfectly understandable that they will get, and, I suspect, could get, quite a bit tougher than they have been to date.

  Q52 Mike Gapes: Really?

  Sir Richard Evans: I would like to take you on on Eurofighter, and there are various press articles on Eurofighter which have appeared not just this week, but on previous occasions. BAE Systems has no contractual relationship with the UK Ministry of Defence at all on Eurofighter, just so that we stake out the arrangements here. We are a sub-contractor to a company which is contracted to design, develop, build and supply Eurofighter aircraft, and we are discharging our part of that programme. The UK Government, and we support them in this completely, wish to make changes to the international contract to which we are not a party. The principal change is to introduce a new variant of the aircraft and to introduce that variant at tranche two. There is some truth in the speculation in the press regarding our view on the pricing of those changes which are very different from the views of the Ministry of Defence, but I have absolutely no doubt that in due course a resolution to this will be found and the Eurofighter programme will continue and be a highly successful programme. In terms of the small number of aircraft delivered to date, the RAF, in what is called `Case White', are getting absolutely exceptional levels of flying out of the aircraft. The early part of the programme which we are in at the moment, which is always a very difficult period as the aircraft is going into production and early aircraft are being produced, which is right at the top end of the learning curve, is a very difficult point of the programme to take a judgment on in the context of what the final cost outturns will be. However, when you want to make a change to a programme as big as this, then it requires in this case a variety of disciplines to support those changes and there is a lot at stake for me in the capacity of my company and there is a huge amount at stake for the Ministry of Defence because of the size of this programme, so it is pretty robust.

  Q53 Mike Gapes: But is it not true that your company is trying to get cost overruns on the first tranche put into research and development costs on the second tranche?

  Sir Richard Evans: No, absolutely not at all. The pricing arrangements for all 600-plus aeroplanes were agreed at the outset of this programme. Tranche one is off that programme. It is priced against an agreed learning curve, it is priced against delivery dates and if there are any changes to the programme in terms of deliveries or to the technical specification, the contract has got to be re-negotiated. If you want to change the programme, change the deliveries and change the specification, you are actually buying something different from the one you ordered and that is actually what is happening and we support the MoD completely on this. We think we need a air-to-ground aircraft capability, so we are entirely supportive. This is a hell of an expensive venture and it requires a very big amount of investment to be put in and this is not an investment that the other governments are willing, standing at the bar, to share. It is inevitable that it is going to be very robust.

  Q54 Mike Gapes: You are talking about £700 million, according to the press reports.

  Sir Richard Evans: Well, I do not think any of us know at the moment what it is because I come back again to the question of risk reduction. There is absolutely no significant work being done on an air-to-surface variant of the aeroplane and, therefore, in the context of the investment of the non-recurring costs, none of us can put our hand on our heart with any certainty and give an indication of what they might be, but for sure we know what disruption to the main-line programme will be and it is considerable.

  Q55 Mike Gapes: Can I take you then on to your proposals to sell your naval division and you touched on this earlier, but can you just confirm what the position is on that because there is a report that you had lost your battle with the Government and also in one report that the Government had scuppered your plans to sell the naval yards to the French.

  Sir Richard Evans: That is complete rubbish. There has been no discussion of any consequence about selling the naval shipyards to the French. The French have not made any offers to buy the shipyards, and I go back to what I said previously, that if there is a case and somebody has a proposal to put to us and we can see a way of more efficiently securing a long-term interest of this business, we will follow it, but we are nowhere near the point of people putting offers on the table for the business at all.

  Q56 Mike Gapes: So you would say that there is no substance in any of these reports?

  Sir Richard Evans: Well, there clearly is no substance on the basis of what I have said and the fact is that there has been no debate or dialogue with the French about the French buying these yards at all. What there is some substance to is that if we are going to have a long-term partnership to support this business, there have to be two of us agreeing to that long-term plan and it includes things of the sort which have already been raised in terms of how you maintain the engineering and the intellectual capacity which is required to support the long-term design and engineering for this business. Now, I thought, and I still continue today to believe, that that was a view which was shared by the Prime Minister and by other senior members of the Cabinet at the time when we acquired this business from GEC Marconi. Now, since that time budgets have become incredibly difficult, incredibly tight and maybe the number of Type-45s is not going to be as big as we thought it was, maybe the number of nuclear submarines is not going to be as big as we thought it was and if that is the case, that changes the dynamics of the business and we have to have answers to these questions because quite clearly we are pouring investment into these sort of businesses and it is on a set of assumptions at the moment, but if those assumptions do not materialise, then we will never get our money back.

  Q57 Mike Gapes: So clearly, from what you have just said, I would not take it that the relations with the MoD could be described as very harmonious at the moment.

  Sir Richard Evans: Well, I think you need to be careful about how you define the MoD. The MoD is a sort of house of many branches. It is absolutely true that the guys are under intense pressure in procurement and that is because we consume such an enormous part of their budget. I suspect in the context of what they are committed to, they do not have the budgets to meet those commitments, so that is a pretty fractious relationship. Then there are other parts of the Department with whom we have extremely good relationships. You have only got to go and look at the preliminary reports from the Iraq conflict in the context of the quality of equipment that we have supplied to the military, the performance, the maintainability and the reliability of that equipment during and in the theatre of war and to look at the praise which they have given us to understand that there are areas of the Department which are hugely supportive of us, but that does not make very good copy in the press, I would agree with you.

  Q58 Mike Gapes: So you would not think that we need to go on a charm offensive to try and restore relations or to take some concrete steps to try and get back on an even keel?

  Sir Richard Evans: No, I agree with that statement. Where people feel in some way offended by the robustness or the attitude to them and it causes offence, clearly we have to put that right. I do not know whether Geoff Hoon feels that that is the case, but if Geoff does feel that that is the case, then I would be the first guy to go to him and eat humble pie and be very explicit in the fact that if we have caused some sort of offence, we should put it right.

  Q59 Mr Jones: Does that include the Chief Executive?

  Sir Richard Evans: Absolutely. When I speak for the company, I speak for everybody in it.

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