Examination of Witnesses (Questions 60-75)
5 MAY 2004
SIR RICHARD
EVANS, MR
NICK PREST,
MR JOHN
HOWE AND
MR SIMON
FROST
Q60 Chairman: It seems, Sir Richard,
a fairly good relationship you have had, but then we have all
been deceived because the impression we have had over the last
two years is that relations are pretty bloody awful and if they
are getting better, I am very happy. As somebody who has the interests
of the British defence industrial base very uppermost in his mind,
it seems to me faintly ridiculous that the Ministry of Defence
and the largest defence contractor are engaged in what appears
to me to be a seemingly endless conflictual situation. I do not
know whether you need marriage guidance counselling. The OSCE
has great expertise in bringing together irreconcilable entities
or entities who are finding it very difficult to enjoy a more
harmonious existence, but bearing in mind the importance of BAE
Systems for the MoD, I really hope that what you are saying is
true, Sir Richard, because you are very important, you employ
40,000 people in this country, you are a prime contractor on a
number of key equipment projects and I very much hope that if
you are reading the situation correctly, and I very much hope
you are, that what differences there are will be, if not sunk,
reconciled or managed better. I think whoever is shooting from
the hip on both sides ought to ponder very, very closely the consequences
of doing that because it is very damaging and if you go under,
if you get rid of aspects of your production, then there will
be other predators only too delighted to step in, too delighted
to step in, be they American or French or Japanese or whoever,
so I would appeal to you to use every possible opportunity in
the time you have before you retire to try to mend fences because
it is a pretty unedifying spectacle that we are observing. Both
sides are at fault. You have screwed up on a number of projects
and the Ministry of Defence is pretty insensitive and bureaucratic
with a millstone of a structure for procurement hanging around
its neck which in some ways is the source of the problem and not
the solver of the problem, so it is not just turning the heat
on inefficiencies in your company or any other company, but looking
at the procurement process and seeing whether eventually you can
squeeze some degree of efficiency out of it which meets the desires
of the consumer. I apologise for a piece of rhetoric rivalling
your own, though not at such an elaborate length, but I hope you
get the drift of my message and I shall send a copy of my remarks
to Mr Hoon and to Lord Bach and I hope that we can see a better
relationship in the future than we have witnessed in the past.
Sir Richard Evans: Well, Mr Chairman,
I do not want the Committee to go away believing that all is sort
of sweet and light within the relationship.
Q61 Chairman: We know that!
Sir Richard Evans: There are some
pretty big tensions in the relationship. Your remarks are absolutely
correct. We need to put this behind us and have a fresh start
on this. It is hugely important for all the reasons which have
been discussed and referred to today that this should be the case
and I want it to be quite clear that in the context of my position,
and indeed Dick Olver, who is taking over from me in July, our
objective is to have a proper and good relationship with the most
important single customer that we have.
Chairman: Well, that is encouraging.
Perhaps we should bring you back as an adviser and you can stir
things up from the sidelines!
Q62 Rachel Squire: It perhaps seems a
very good moment to move the focus away from the prime contractors
on to the management of small and medium-sized enterprises. Can
I ask you, Sir Richard, as the Chairman of the Defence Industries
Council, and Mr Frost particularly, to comment on and answer a
couple of questions. I think in spite of the focus we all tend
to give to prime contractors, smaller firms are considered to
provide the essential foundation for the United Kingdom's defence
industry, so can I ask whether the Defence Industrial Policy and
the Ministry of Defence's acquisition policies and processes adequately
acknowledge and reflect the different circumstances of small and
medium-sized enterprises as opposed to the prime contractors?
Mr Frost: This is always a question
that I love. I suppose if I were to put my hand on my heart, I
would have to say no, but we have made a heck of a lot of progress.
The important thing is the recognition of the whole supply chain.
We are in a global industry and there are parts of that chain
which will be small UK companies and there are also quite a lot
of often unrecognised large UK companies who are not prime contractors,
and I could mention a couple of names, like Smiths and Cobham,
for example, who are very major players globally, so the supply
chain issue is quite important and is recognised within DIP. That
does not mean that we do not have a long way to go, particularly
in the consolidation issue which often means that the supply chain
is less visible to the MoD. The MoD has to deal with fewer larger
contractors and often ideas from the supply chain are hard to
get access to, and that is an issue we have all got to work on
together and is recognised and is being worked on. However, I
think there is another factor which is important and, perhaps
to take the focus off BAE Systems for a little while which I am
sure Dick will not mind, we have lots of customers, so BAE Systems
is a major customer, Rolls-Royce is a major customer, GKN is a
major customer, Boeing is a major customer and so is Lockheed,
and one of the important things in all this is that it is difficult
for us to do business with them if they are 3,000 or 5,000 miles
away. We need to encourage them to have a base in the UK where
the smaller companies, who are often quite local to them in regional
clusters and so on, have the opportunity to compete globally at
that local level. Now, that is a factor which is very hard to
address, but one thing is for sure, that these companies move
away to nations where they can get better support and they are
all looking at it all the time. I can assure you that the US companies
I am involved with have a league table of nations in which they
should invest in the defence and aerospace business, and they
are always taking these measures, so if they move away, I can
guarantee that will damage the supply chain, not just the small
companies, but the whole supply chain.
Q63 Rachel Squire: Can I ask you whether
you feel there are adequate mechanisms in place with the MoD to
make sure that your voice gets heard and that you get the access
to influencing the acquisition policies?
Mr Frost: I think there are. We
have made huge progress, but more co-ordination perhaps would
be beneficial between the various initiatives within MoD.
Q64 Rachel Squire: Finally, can I ask
whether you consider that Smart Acquisition is currently being
implemented below the prime contractor level?
Mr Frost: I saw this one coming
and I actually asked my colleagues in the company today and they
gave me an update. It is a bit of a curate's egg. It depends very
much on which project team you are dealing with as a smaller,
direct supplier and I guess that is probably the same experience
with the larger companies, but progress is being made. The attitudes
have improved greatly, though I think the mechanisms could still
do with some honing, but yes, progress in the right direction.
Q65 Mr Viggers: The Chief of Defence
Procurement stated in a recent article that the principles of
Smart Acquisition had not always been consistently applied and
he made two comments, one of which is that the approvals process
needs streamlining, and he also said that the links between government
and industry were not as open as they should be. Neglecting the
second of those, can I ask on the approvals process whether you
think that the concept of the initial gate and main gate is good
one? Does one size fit all and is the approvals procedure one
which you find broadly satisfactory to your businesses?
Mr Howe: Just to start the ball
rolling on that one, as you may know, I joined Thales from the
MoD about three years ago and looking into the MoD from outside,
I think that the slowness of the approvals process and the extent
to which companies exist in a state of uncertainty for some time
while they are waiting for decisions, a process which is often
very expensive because bids have to be sustained, that is one
of, I think, the industry's legitimate criticisms of the approvals
process, slowness of the process, and in a sense the uncertainty
of it, so I would rather endorse the CDP's criticism on that point.
Q66 Mr Viggers: May I put a personal
point of view which is something I have always felt and that is
that the initial gate and main gate in the approvals process is
an attempt to bring sense to hugely multifarious businesses and
that by seeking to impose a pattern, it may well have created
its own problems. It follows from that, if you follow the logic,
that the project managers should be given rather more power and
rather more responsibility.
Sir Richard Evans: I think there
may be something in that, although one has also got to bear in
mind that one of the objectives of the reforms to the approvals
process which was in Smart Acquisition was acceleration and the
other was just reducing the number of approval points. I think
if the MoD can keep its emphasis very much on trying to keep to
a minimum the number of times in the life of a project at which
it has to go up the line for approval, that would be a big advantage
and that is just a slight, if you like, qualification to my agreement
with you on that point which you have just made.
Mr Prest: Perhaps to add something,
again this is something of a work in progress. If you look at
the way it has been practically administered, increasingly review
points of one sort or another are being introduced between initial
gate and main gate, whether it is in the form of a review note,
but something which actually triggers further commitment and has
to be reintroduced into the approvals process at some level or
another, so in practice I think the administration of it is becoming
more flexible to meet the requirements of different projects which,
as you say, are varied.
Q67 Mr Jones: Can I change the subject
yet again to the issue of FRES. We had the Chief of the General
Staff before us and he said that it was most important procurement
programme for the Army and clearly it was very important to regions
like the north-east and areas like Telford in Shropshire as well.
What is your view of the way that this project has been taken
forward and do you agree with some commentators who say that it
has been paralysed by analysis? Finally, do you think that the
in-service date of 2009/10 is actually achievable because I have
asked this on numerous occasions now in written parliamentary
questions and also of Ministers and senior officials who still
keep saying that this is the date they are working towards. Is
that an achievable date?
Mr Prest: This is a subject obviously
I know something about, as Chairman of the company which has perhaps
largest interest in the particular project. I think you have to
go back a bit and it is worth just reflecting on the fact that
in the armoured vehicle area I think it is fair to say that the
MoD has had particular difficulty in formulating its requirements,
launching procurement programmes and then sticking to them, and
there are various reasons for that, I think, but it is not necessary
to dwell on them in this forum. In a sense, the FRES is a successor
of three other attempts to get this programme launched which probably
go back to the late 1980s to a project for a Future Family of
Light-Armoured vehicles which did not get off the ground for various
reason, then in the early 1990s there was a project called `TRACER'
which was for a new reconnaissance vehicle which ended up being
cancelled and in the mid-1990s they launched a programmed called
MRAV (Multi-Role Armoured Vehicle) which also ended up being cancelled,
so it is not a happy story in general. FRES as a programme is
designed on a number of levels. Firstly, it is to replace some
existing vehicles in the Army infantry which are now 30 or 40
years old and becoming obsolete, in some cases because of these
programme problems. It is partly a replacement programme. It is
also to fulfil a new concept which is of a self-contained medium
force, which the Army does not effectively have at the moment,
which would fall between the heavy armoured force and the light
forces. It is also going to be a feature of the new network enabled
warfare that the three Services see going forward. So it is a
project that has a number of different strands and some of the
problems of preparing for FRES have revolved around trying to
disentangle those different elements of the project and saying,
"Where do we put the emphasis? How do we trade off between
them?", and so on. It is a fact that the FRES IPT was formed
in early to mid-2002. It is now the case that no assessment phase
contract can be launched before the end of this year. It takes
two and a half years to launch an assessment phase; I would argue
that is unnecessarily long. However, by coincidence, a statement
was issued today about the launch of the FRES assessment phase
and presumably the various Government approvals are now in place
for it. Obviously we welcome that and we will work energetically
to get on with it. There has been an unnecessary delay in my view
in launching the programme. Your second question was about the
ISD or was that the third question?
Q68 Mr Jones: It was really about paralysis.
I would be interested to know where you think the delay has been.
The answers that we keep getting on this keep changing certainly
in terms of what you were saying earlier, that FRES is a family
of vehicles, but there stills seems to be vagary about what FRES
is going to be or mean. In terms of the skills of jobs both in
the north-east and other parts of the UK defence industry, it
is going to be very important that those delays do not continue.
Mr Prest: I think the MoD has
taken some time to formulate the business case and get it through
the approvals process to get the assessment phase launched. The
reasons for that fall into a number of areas. There have been
some difficulties in assessing what the requirement is that they
are trying to answer, I think that is one of the questions. It
is somewhat of a chicken and egg problem because the assessment
phase is designed partly to clarify that, but a lack of understanding
at this stage of the requirement has been a delaying factor. There
have also been differing opinions as to how it should be handled
from a procurement point of view which has taken a bit of time
to sort. I suspect there have also been some problems in assembling
the funding lines. This is all corporate speculation. There has
been no official output from the MoD on the reasons for the delay,
but those would be the three most prominent causes.
Q69 Mr Jones: Your company were doing
the initial work. What reason was given to you for stopping that
work and then putting it out to a systems house?
Mr Prest: There were a number
of reasons. The most important reason was that the MoD felt that
they did not want to restrict their options in any way for how
they might tackle procurement in development and production. Secondly,
they felt that if they launched the assessment phase with contractors
who had a vital interest in development and production that might
compromise their ability, for example, to run a full international
competition for the project at the development stage, if that
is what they elected to do. I think the second factor was they
felt that they wanted access to the best ideas they could find
that would feed into this project from around the world and that
to use an independent systems house would give them a better chance
to do that than if they went through a company which had competitors
around the world who might not necessarily be willing to offer
up trade secrets, and I do not think they are right about that,
but that was their view. Thirdly, the nature of the work at this
stage is such that it has quite a high level of operations analysis,
a system of balancing work in it somewhat of the nature that MoD
used to do itself internally and they felt that that work could
be very readily accomplished by a systems house, with really the
other elements of platform expertise and specific equipment expertise
being fed into it.
Q70 Mr Jones: In terms of the work that
you as a company already have carried out at considerable cost
to the MoD, what has happened to that work?
Mr Prest: Obviously it has informed
the MoD's planning for the project.
Q71 Mr Jones: At what cost?
Mr Prest: I do not know if I can
put a figure on the official record. I think you will have to
ask the MoD. Your third point was about ISD and that is a very
important point. I think it depends. At one extreme they could
go about this project by buying an off-the-shelf product via a
non-competitive route, that would probably be the shortest way
to get an ISD, but it might not give them an ISD of something
that necessarily fits the bill in the longer term, so they may
well not do that. The other extreme would be to have a full development
programme selected by full competition and that would be the longest
route. Depending on what they do, I think the ISD can vary between
sometime perhaps not very long after 2009 and a date quite a long
way after 2009, that is the current reality.
Q72 Mr Viggers: The National Audit Office,
in its Major Projects Report for 2003, reported substantial in-year
cost increases and time slippage, but it pointed out that the
Smart projects under the new form of procurement showed less cost
variation and time slippages, on average, than the older projects.
Is this better performance on the Smart projects likely to be
because they are more recent projects and the Legacy projects
tend to be longer tail, or do you think there are some advantages
in Smart procurement?
Sir Richard Evans: I think there
are clearly advantages in Smart procurement if we can make it
work and apply it properly and consistently across all of the
programmes, but if it is not doing that then why the hell are
we doing it, we should find some alternative. I would come back
to the point that time will tell. I am not very keen on this definition
of Legacy programmes myself. In due course those programmes that
have been launched when Smart procurement came into being will
themselves be Legacy programmes. At that point in time people
will make a judgment. If you look back over the last two or three
years in terms of both really major programmes that have been
launched, it is pretty early in the cycle to tell. Even if you
go back five or six years, it is still pretty early in the cycle
to tell, but there are clear indications that where you have the
integrated teams working together there are serious benefits that
are beginning to accrue from it and we want to continue to support
it.
Q73 Mr Viggers: There have been delays
and there have been overruns and the budget is relatively finite.
Where does the shoe pinch? Are programmes creeping to the right,
are programmes being cancelled, or is the Government trying to
shape down some of the costs of current programmes?
Sir Richard Evans: I think it
is a combination of all those. Had some of these programmes—and
FRES is a great example of this—been launched at the time
at which they were initially projected for they would be covered
in the budget. The fact that they are sliding to the right actually
takes the pressure off the immediate budget, it does not solve
any of the problems because they have still got to be budgeted
for as requirements. My guess is, out of all the contributors
towards the current problem in terms of savings, the biggest single
saving is programmes being pushed to the right.
Q74 Mr Viggers: Any other contributions
from the other witnesses?
Mr Frost: I think the issue on
Legacy programmes is important. My reference earlier to fear in
the system, fear of change, applies particularly in some of those
areas where there are large support costs which could be addressed
by the supply chain at large. On occasions I think the MoD shy
away from some of the more innovative solutions to saving money
in those areas. That is not a generalisation, there are specific
cases, but there are some big bucks to go at in the Legacy area
and some ideas around which will save some money.
Mr Prest: Who was it that said
it was too soon to tell whether the French Revolution had been
a success or not?
Mr Howe: Mao Tse Tung.
Mr Prest: I would say it is similar
with regard to Smart procurement. It is a long-term business!
Q75 Chairman: Now that we are quoting
history, in my A-level examination I had a question in history
which said there are no revolutions. Maybe the revolution we are
apparently going through is not one at all, but that remains to
be seen. Thank you all very much. In particular, Sir Richard,
thank you. I am not sure whether we will be calling upon you again
before your retirement. You look remarkably young for all the
pressures you are under. I am sure you will not retire, you will
merely metamorphosise into some other aspect of the defence industry.
Thank you very much for your contribution today and over many
years. Thank you all for coming before us this afternoon.
Sir Richard Evans: May I thank
you, Mr Chairman, and all of your colleagues, including those
who have had to leave early, for their forbearance when listening
to our answers.
Chairman: Thank you very much.
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