Examination of Witness (Questions 100-119)
12 MAY 2004
SIR PETER
SPENCER
Q100 Mr Roy: What about the other 35
per cent?
Sir Peter Spencer: In terms of
slippage? In terms of cost and time slippage?
Q101 Mr Roy: Yes.
Sir Peter Spencer: It comes to
700 programmes and there are decreasing returns on that.
Q102 Mr Roy: Sack two deputy operations
directors!
Sir Peter Spencer: There is a
good deal of difference between having that data independently
validated by the National Audit Office for 700 programmes than
for 70. That other work does get picked up. We have now promoted
the delivery of the assets by value against the asset delivery
schedule for the Agency as a whole to a key indicator as well.
We have got some more conventional commercial efficiency performance
parameters which are measures of productivity which have been
worked up. I ought to say that whereas in the past we had been
reporting movement against the 90 per cent estimates, we are now
going to report movement against the 50 per cent estimates because
that measures the heart of the problem in terms of getting defence
right. All of that motivates us to deliver the things properly.
Q103 Mr Roy: What is the mechanism that
you have put in place that will identify the best procurement
practice?
Sir Peter Spencer: In terms of
procurement practice, there is a whole range of other strands
at work. I will just go back one. We will spend much more care,
much more intellectual effort and more financial resource in the
assessment phase and be much more rigorous at independently verifying
the degree of maturity of a proposition before we make the capital
investment decision. Historically we have spent as little as two
per cent of the total budget. For what it means, the average figure
considered best practice is about 15 per cent and we are currently
on around 4.4 per cent. Then there is a whole strand of work,
in conjunction with industry and benchmarking from best practice
in the civil sector, improving much better contractual arrangements
which we believe will deliver better outcomes, not only for the
Ministry of Defence but also for our suppliers.
Q104 Mr Roy: Just on that point, what
examples can you give us where you have identified best procurement
practice elsewhere and incorporated that into the DPA's new arrangements?
Sir Peter Spencer: These are not
all new. Some of the ones were there already in terms of de-risking.
Some of the PFI projects which we have done, if they are being
underwritten by third party financiers, spent a lot of time in
due diligence, they virtually never miss their in-service dates
because they make quite certain they protect their money. We have
to emulate that due diligence and protect the taxpayers' money
with the same care that a banker protects his or her money. Secondly,
we have looked at things like the 2087 sonar project where about
14.8 per cent[4]of
the budget was spent in putting a prototype to sea of this brand
new low-frequency active sonar, examining the structure of the
stern of a Type-23 frigate and making certain that all of the
risks were understood in terms of maturing individual technologies
and the system integration risks were understood. It was very
much easier then to come to an agreement as to how much work was
involved and it has worked out well both for the supplier and
for us. The other area we are looking at is partnering arrangements
and certainly partnering arrangements not only in terms of providing
services but also partnering arrangements in terms of having less
taut contracting arrangements than we have been used to applying
in the past. Sometimes we apply them anyway, target cost incentive
arrangements whereby we find the point at which we think there
is a sensible target to aim for and we incentivise our suppliers
to beat that target because then they share in the cost under-run
with us and they get a higher percentage return as profit. They
are not always easy to set up but in the main, if they are well
set up, they lead to much more harmonious working relationships
and much better outcomes.
Q105 Chairman: Does it mean that the
National Audit Office is going to be producing a report which
will be much, much broader than their 20 Major Projects Review?
Do they have resources to get beyond that 20?
Sir Peter Spencer: I cannot speak
on their behalf but we have discussed this with them. I have been
given no reason to believe that they consider this to be an insurmountable
problem. It does not mean to say that they will not concentrate
on the top 20 for the Major Projects Review, it is just that in
terms of validating the performance against key targets they have
shown a willingness to audit a larger number of projects.
Q106 Chairman: Perhaps we should write
to the National Audit Office and ascertain what the scope of their
future studies and publications is going to be. We do not waste
too much sympathy on whether the Public Accounts Committee has
to be working harder, that is their problem.
Sir Peter Spencer: As I understand
it, they will still publish for the MPR the top 20 and then the
top ten pre-Initial Gate. For auditing of the key targets, they
will audit in detail the top 20, they will sample audit from the
other 45 or so.
Q107 Chairman: That seems very sensible
if they have the resources. It is manifestly absurd to me to focus
exclusively on the top 20, even though the value of the top 20
is a high percentage of Government spending, and we are oblivious
of any deficiencies in the procurement process vis a vis
those smaller processes that are off the radar screen.
Sir Peter Spencer: You do not
hear about the successes either.
Q108 Mike Gapes: I would like to ask
some questions about the Defence Industrial Policy. We had the
Chairman of BAE Systems before us last week and he told us that
the Defence Industrial Policy "is a good start but it is
absolutely not going to make progress until people implement it
through the process". What is your assessment of how the
Defence Industrial Policy is being implemented through the procurement
process and what more do you think needs to be done?
Sir Peter Spencer: His answer,
of course, has to be correct. I would simply say that I believe
the process has already started, and I can demonstrate that, and
it will gather momentum over time. Everything I have done in the
stocktake, if you read the Defence Industrial Policy, plays straight
into that. We have a lot of engagement with industry. We are spending
time with them working out better and more constructive contracting
arrangements. We are looking to improve to mutual benefit the
processes for competitive arrangements. We have been working hard
on the question of opening up markets both in the United States
and within Europe, and we know the Head of Defence Export Sales
through the forum that he runs has been doing a lot of really
fine work. In terms of the question of building, nurturing, our
own industrial base, a lot of work has been going on building
upon something I mentioned to you last year, the RAND Study in
the surface shipbuilding sector. We have been doing a number of
studies on other industrial sectors. On 19 May next week when
the National Defence Industries Council meets under the chairmanship
of Lord Bach, the Ministry of Defence will be explaining to industry
how the overall processes are going to work in order to pick up
some of these detailed strands and play them through. So far as
the individual procurement decisions that are being made, the
factors that we have said would be taken into account in that
Defence Industrial Policy are being taken very carefully into
account by ministers.
Q109 Mike Gapes: As you know, the Defence
Industrial Policy is based on policy being driven by the need
to provide armed forces with equipment which they require on time
and at best value for money for the taxpayer. Sir Richard Evans
in an article recently said that we needed an agreement between
Government, industry and the UK on what we all really mean by
value for money. What would you say we mean by value for money?
Sir Peter Spencer: The definition
that you have given serves pretty well. The question is how you
calculate that parameter for a given project. The way in which
we do this inside the Ministry of Defence is to take a look at
the options which are open to us and if it is something very simple,
and as long as it works and has a certain reliability, and it
is easy to define its performance parameters, we might go for
the lowest compliant tender. That very rarely operates in the
world of major projects. There we are looking at a complex equation
of how you balance the various components of operational effectiveness
against the money you will be invited to pay, and we have a fairly
sophisticated procedure or process to develop something called
a combined operational, effectiveness and investment appraisal.
The Committee suspended from 3.53pm to 4.02pm
for a division in the House
Chairman: Sir Peter, as we are humble
infantrymen we do not know whether there will be another vote
very quickly, in which case I apologise in advance because we
will have to disappear again, but fingers crossed there will not
be another division. Mike?
Q110 Mike Gapes: I was in the middle
of asking, and you were in the middle of answering, a question
about value for money and definitions.
Sir Peter Spencer: I talked about
the cost of acquisition and said you obviously have to factor
in not just the initial cost of acquisition, it is very important
we do it on a through-life management basis and we are looking
at the whole life costs. In amongst that, we then factor in considerations
about the industrial base, a point which is very important because
if we were to make wholly short-term decisions without paying
attention to the wider industrial factors we could end up losing
part of the industrial base which we will need later on. So all
these things need to be factored in.
Q111 Mike Gapes: Would you agree you
should also take account of potential defence exports?
Sir Peter Spencer: Yes, I would,
and we do.
Q112 Mike Gapes: You would not accept
that the way we define value for money is currently too narrow?
Sir Peter Spencer: Because we
lay all these factors in, I do not see why it is open to be described
as too narrow. You can always question after the event what weighting
was put on different factors, because if you are going to try
and combine all this into a single number then you must have made
some implicit assumptions about the relative importance of different
factors.
Q113 Mike Gapes: Can I give you a specific
example which did come up last week actually, the question of
the advanced jet trainer where, as I understand it, there was
a recommendation to ministers, advice from the DPA and officials—according
to what we were told by BAE Systems—to opt for the Italian
Aeromacchi bid, and this advice was overruled by ministerial direction
from the Secretary of State. Subsequent to that, there has been
recently announced success in gaining an order from India, which
presumably would not have happened for the Hawk if the original
decision as recommended by the officials and the DPA had been
pursued. Would you like to respond to that?
Sir Peter Spencer: I am not going
to comment on detailed advice to ministers, but I can tell you
that is factually incorrect.
Q114 Mike Gapes: So it is not correct
that the recommendation was for the Aeromacchi as opposed to the
Hawk?
Sir Peter Spencer: A convention
which prevails in this House is that officials are not obliged
to divulge the detail of information given to ministers. If the
Chairman wishes to take this up with Lord Bach it would be much
easier, but the recommendation did not go to buy a specific aircraft
to ministers. That is as far as I am able to go.
Mike Gapes: Can I try another way. Were
you in favour of Hawk?
Chairman: That is a very poor alternative
approach! Even I can see through that one! Sir Peter is not going
to give way. I must say, when I asked his predecessor on how many
occasions advice which had been given by him was rejected by ministers,
he said, "I can't remember", so he took a very similar
approach to Sir Peter, ie "I'm not telling you." I am
afraid that is a line which is not going to be pursued.
Mike Gapes: Can I go on to a more general
question then, if you allow me, Chairman?
Chairman: Let's hear the question first.
Mike Gapes: Do you think it is good that
we have situations where Secretaries of State issue ministerial
directives to overturn recommendations?
Q115 Chairman: That is better.
Sir Peter Spencer: It is a motherhood
question, is it not? He is the elected representative who is responsible
to this House for the expenditure of money, so in terms of where
the actual decision is taken it is absolutely the case that he
makes those decisions. My job—and I invest no emotional
capital in this whatsoever—is to explain in a more general
sense what the numbers will be for various courses of action.
We do and we did factor in judgments on exports, and put that
advice forward to him. I believe that it is a good example of
defence industrial policy working, because if you read the defence
industrial policy it says, "We will address these issues
upfront before we invite competitive tenders." So the process
was thought through. Far better than to have run a competition,
come up with a result which ministers found they did not feel
was appropriate, and then be accused of using companies as stalking
horses in a contest where we only ever intended to award the contract
to a single company. So we talk through these issues before we
invite tenders, which is precisely what the DIP says we are going
to do.
Q116 Mike Gapes: But clearly there are
different perceptions about value for money here. There is a perception
you have of an assessment as to what potential exports might be
and a ministerial decision which is clearly a different decision,
but in hindsight we can say that was probably the correct thing
to do because of the exports to India—I do not know if they
were factored into your equation or not, presumably you will not
be able to tell me—in hindsight the outcome has been a good
one, has it not?
Sir Peter Spencer: I am delighted
that we have got an export order and was delighted before the
event.
Q117 Mike Gapes: But clearly there are
different perceptions here about value for money. That is the
point I am making. There is not an absolute value for money approach
which is based upon your original recommendation. There can be
another view—
Sir Peter Spencer: I am sorry,
I—
Q118 Mike Gapes: I just want to be clear
what you are saying. We were talking about value for money and
you said, "Yes, exports are factored in." I want to
probe, how much are they factored in? Are you taking worst case
scenarios? Are you taking an assumption of a certain level of
exports? Are you taking account of the wider context?
Sir Peter Spencer: I am not prepared
to comment on the Hawk case for the reasons I gave earlier, but
in the more general case we would factor in a judgment on the
benefits of exports. The key question is, is there a single number
which you then roll that into in some complicated mathematical
equation? Not one I have seen. So therefore there are value judgments
to be made, and judgments as to the probability of the amount
of exports which are going to be achieved, for example; probabilities
of the extent to which you may need to have that piece of industrial
capability for some later procurement. There are also judgments
made which are well outside the procurement perspective as to
the need to generate wealth in a particular region of the country.
Q119 Mike Gapes: Would it be fair to
say that the whole concept of value for money is itself a value
judgment?
Sir Peter Spencer: In many cases
it will be, yes, so it is possible to draw different conclusions
from the same set of data depending upon your own position and
what you are trying to achieve.
4 Note by Witness: The actual figure is 12.1 per cent. Back
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