Examination of Witness (Questions 140-159)
12 MAY 2004
SIR PETER
SPENCER
Q140 Rachel Squire: In relation to the
continuing consolidation and restructuring, and the involvement
in that not just of UK based firms, have you in the DPA given
any consideration as to how that might affect the Defence Industrial
Policy and your acquisition policies and processes? Do you envisage
that there will need to be any changes to reflect and deal with
the restructuring and consolidation that you are talking about
in general terms?
Sir Peter Spencer: If the result
of restructuring and change of ownership leaves the definition
of a company to continue to be treated as if it was part of the
home industrial base, as it is currently with Thales-owned companies,
there is no need for change because the principles endure. It
is possible I suppose to conceive of different types of restructuring
which might cause us to have concerns, particularly if it related
to protection of very sensitive technology, and certainly the
work which we will be doing as I described earlier to establish
our strategic priorities, that will in turn influence in the fullness
of time the sort of advice which will be given to ministers concerning
particular restructuring proposals which might come forward.
Q141 Rachel Squire: So you do not particularly
see it as a major issue which you need to address in the Defence
Procurement Agency?
Sir Peter Spencer: It is an issue
which we need to monitor very carefully but it is an issue on
which the scope for intervention is extremely limited, and it
is an issue where we need to be very objective about assessing
both the risks but also the opportunities which a restructuring
might provide.
Q142 Mr Cran: Just a few questions on
access to technology in relation to the Joint Strike Fighter.
Sir Richard Evans, when he came along to see us on 5 May, a meeting
I referred to before—never a man who is backward in coming
forward—was very explicit. He said, "I think JSF is
a classic example. It is no good when you have signed up and paid
your cheque over and trying to go back to negotiate the release
of technology." Not really well put but his point is very,
very clear. Therefore the question I want to put to you is, why
in heaven's name did we sign up before we concluded any deal on
the release of technology? Maybe this was before your time, I
do not know, but I am sure you have looked at it.
Sir Peter Spencer: It was considerably
before my time as the Chief Executive of the DPA. What I would
say here is that this Committee has been extremely supportive
of ministers and of the Ministry of Defence in discussing in the
United States the general concerns about access to technology,
and the results of that were the prospective Buy American legislation
which was passed last year was a good deal less problematic than
it might have been, and I am grateful to all of those who helped
to persuade people the other side of the Atlantic to reconsider.
It is also the case this is an extremely sensitive area for the
United States—you do not need me to tell you that—so
confronting the United States in public over these issues and
in the run-up to an election does not seem to me to be necessarily
the most effective way of dealing with this. We have had the personal
involvement of the Prime Minister with the President about unlocking
the sort of flow of information which is needed in procurement
as well as in other areas of defence. We have set up the bilateral
Defense Acquisition Committee, which is chaired by Sir Kevin Tebbit
with Paul Wolfowitz, and first met in February. We have identified
the specific areas which need to be followed through, including
the Joint Strike Fighter, and a great deal of progress gets made
quietly by dealing with these things fairly discretely and not
having them as headlines, which this year of all years would be
counter-productive. So far as access to technology which is needed
by British Aerospace to discharge its responsibilities as subcontractor
to Lockheed Martin on Joint Strike Fighter, we have been getting
there. We have been arguing it through. We have been doing our
utmost to help industry over this to create the right of sort
of openings with the DoD and the State Department. There are still
some areas which are going to be more difficult than others. I
believe that by working together in close harmony as UK Limited
on this we will continue to get access to the information which
we need, but it is not going to be easy and we are going to have
to be very careful about the way in which we conduct the dialogue.
I am not sure that it would have been possible to have demanded
this as a condition of entry from the outset. If I look at the
Attack helicopter as another example, we have found a way of meeting
our requirements to certify the software of that aircraft for
safety purposes in ways other than having access to the code within
the UK. We can deliver it in a slightly different way. We need
to look at what consequence we need to have and think carefully
and diplomatically with our United States' colleagues as to the
best ways and manageable ways of doing it. I do not blame the
company for feeling apprehensive over this, it is quite right
to signal to me and my people that we have a part to play in ensuring
that we get continued access because the challenge in the United
States, as you well understand, is the sheer scale and complexity
of their organisation and making sure that there is a commonality
of message at various levels within the State Department in particular.
Q143 Mr Cran: Can I just ask the question
in a slightly different way. When and if we have a major purchase
from the United States in the future, how far up the MoD's list
of priorities is the access to technology? Is it high up there?
I do entirely concede that you cannot just bash the table and
say, "No order unless we get access to technology" because
circumstances may not allow for that. Is it high up the list of
priorities?
Sir Peter Spencer: It is high
up the list. We are a level one supplier. We actually contributed
$100 million at the very early stages of the technology demonstration,
so we already have unrivalled access to technology compared with
other nations, the question is how much do we need. It is fundamental
in the considerations of dealing with projects through life. I
work extremely closely with Sir Malcolm Pledger, the Chief of
Defence Logistics and one of his major concerns, quite rightly,
and mine, is to make sure that we do not just look at the procurement
being up to the point of taking delivery and handing it over,
we have to understand how cost effectively and operationally effectively
we are going to make use of that equipment through life. Technology
is a key component of that in terms of upgrades, in terms of dealing,
as we invariably have to, in a live operation when you push the
performance envelope to somewhere you have never been before and
you find something which needs to be done quickly, and that is
a point which is well understood by Mike Wynne, who is my opposite
number. We need to know that we can operate this thing effectively
in operations, not join a queue and get the thing fixed six months
later.
Q144 Mr Cran: Are you concerned about
reports—and I have to admit they are only reports and I
guess you could very easily say "I never comment on reports",
but let me try this—the reports being that the US is developing
anti-tamper technology on the Joint Strike Fighter to protect
Stealth and it is not going to share that technology with anybody.
Does that concern you if it is true?
Sir Peter Spencer: I would not
comment on that specific example.
Q145 Mr Cran: I would just like to know
why.
Sir Peter Spencer: Because we
are a tier one supplier of the United States.
Q146 Mr Cran: Why does that preclude
you from giving me an answer to a fairly simple question?
Sir Peter Spencer: Because it
is not a simple question.
Q147 Mr Cran: I do not care how complicated
it is, we have got all night if you want.
Sir Peter Spencer: If you would
like to clear the room I will tell you.
Q148 Mr Cran: That is a separate issue.
If you are saying you do not want to share it with the public
that is another matter.
Sir Peter Spencer: I am very happy
to send you a note.[6]
Q149 Mr Cran: If it is confidential we
understand.
Sir Peter Spencer: I am sorry;
I should have made it clear.
Q150 Chairman: One of our concerns thus
far with Stealth and Joint Strike Fighter, which is essential
because we do not have resources to make too many systems now,
is if the US does not give us full access. We know about the ITAR
waiver, which is unclassified information, but when it comes to
a crisis, and we require in a war lots of things to be done, if
we do not have access to all the information necessary it is a
question of joining a queue but we need something, we will not
be able to get out the nylon stockings and hammer and bang on
the kit any more and tie something around it, it would require
access to sophisticated arrangements. I should imagine in any
war where we decided to go on our own, if there will be such an
occasion, we will need American support. The more you rely on
others, the more veto power they have over you. We know from our
experience, Sir Peter—Belgium in 1991, Switzerland in 2003—we
know the problem. Do you have any concerns about it? Is it inevitable
the more you procure from abroad the more in hock you are to other
people's goodwill and willingness to supply you with what you
require in an emergency?
Sir Peter Spencer: I think the
general point is well made and on the specific point about the
Joint Strike Fighter, and I touched on that slightly earlier,
I might say Mike Wynne my American counterpart is very clear on
what our concerns are and what we will need to be able to satisfy
ourselves on in terms of security of supply and the ability to
mount operations successfully. Lord Bach is extremely engaged
with these issues in all of the procurement projects which we
have—security of supply—for the reasons that you just
gave. That said, I would have to point out that virtually all
of the equipment which we produce in the home industry at the
whole system level is dependent on overseas supply of key components,
so we are operating in a global village here and there are a number
of ways in which we protect ourselves against the possibilities
of being held to ransom, as it were, by other people, including
in simple cases making sure you stockpile enough of the stuff
if it is that important to you or making sure that you have access
perhaps to certain design information so you could become self-sufficient,
albeit less cost-effectively, in extremis. Security of
supply is a factor which needs to be dealt into the decisions
and there is not a single way of answering it.
Q151 Chairman: I can understand that
but resource accounting and budgeting and financial constraints
forbid the government from holding too many supplies and then
you are reliant upon the "just in time" concept that
may or may not deliver. There is this appalling dilemma that the
more kit you hold in the event of somebody letting you down the
more the financial penalties there are involving suppliers.
Sir Peter Spencer: But we do have
a long-standing agreement with the United States generally in
terms of security of supply which to date they have always met.
Chairman: It is not so much the US. Right,
we are into the last half or so and we hope to finish by 5.30.
Frank please?
Q152 Mr Roy: Sir Peter, last week we
were told that the procurement process is still suffering from
"a conspiracy of optimism" and that all involved (the
MoD and industry) are over-optimistic about the cost of military
capability and the degree of risk that is involved in major defence
projects. Do you agree with that view?
Sir Peter Spencer: I would find
it hard not to because it was my words being quoted!
Q153 Mr Roy: You recently stated at a
Committee of Public Accounts meeting that the MoD now recognises
that there is a limit to which you can transfer financial risk.
How is this recognition being reflected in your current acquisition
policies and procedures?
Sir Peter Spencer: It is reflected
in the work to think through. One of the key principles of smart
acquisition, which as I said has not been fully taken up, is in
contracting more intelligently with industry and having a closer
relationship and together derisking the solutions to procurement
and instead of thinking in terms particularly of however hard
you have tried to derisk in advance there is some residual uncertainty
at the upper end of the capability, that was generally the case,
that you recognise the fact that you cannot just transfer the
risk and sort of say I will come back in five years when people
have done this, but you recognise that you are talking about risk
sharing and risk assignment and you structure the contractual
arrangements to reflect that. That leads you into arrangements
which are different from highly incentivised fixed and firm prices
with cumulative retentions and 20 per cent in liquidated damages
which at the upper end of the scale of complexity have hardly
ever worked and often had quite a corrosive influence on outcomes
because of the behaviour that it brings about so under those circumstances
we are paying much more attention to equality of information on
both sides with a real understanding not only of the technological
risks but also some of the other things that come to bite you
if you have not really thought through how you are going to work
together on the supply side. We look at the ability of different
parts of the supply chain to deliver further down and their ability
to accept the risks and all of that, so we get a much more holistic
understanding of what the proposition is and draw up the contract
accordingly. One of the work streams which is working very hard
at the moment, led by one of my most experienced directors of
contracts Mr Waddingham, is new arrangements for contracting with
industry and this is very much at the heart of the work which
he is doing, in consultation with industry. There are lots of
examples where we have already taken this approach notably in
support and it has worked well. We need to codify that and spread
it across the Ministry of Defence, particularly across the DPA
so we get greater consistency in applying them so that industry
feels more comfortable that it has got into arrangements which
are more appropriate for what it is doing.
Q154 Mr Roy: Obviously industry must
be comfortable because that last quote I gave you was from the
Vice-Chairman of Thales last week but I am glad the two of you
think extremely similarly. On that "conspiracy of optimism"
quote from you both did your stocktake of smart acquisition seek
to address the problems that are perceived from the conspiracy?
Sir Peter Spencer: Yes it does
because what it says is if you try and spend too little time and
intellectual effort and too little money in the assessment phase
you will not have understood the capital investment decisions
that you are about to make and you will simply have closed your
eyes to the real risks which are there which will then come and
take you by surprise. And so often when you look at the reasons
given for cost overruns it is because we did not understand the
technological risks. So that means that we have had to engage
in discussions with General Fulton and his people to say that
there are occasions now where we are going to need to have a much
clearer plan for derisking the technology of the potential solutions
and mature the proposition for longer and we will actually get
to the end point sooner as a result of that because simply starting
early if you are running in the wrong direction does not get you
to the end point on time. I mentioned the 2087 sonar project earlier
and it created its own success because it spent an amount of time
understanding the technology, the risks and the environment before
we set the performance, time and cost parameters.
Q155 Mr Roy: One other area where I am
sure you and the Vice Chairman of Thales will agree is the changes
that have been planned to make the assessment phase of projects
to help reduce the risks of cost increases and time slippages
during the demonstration and manufacturing phases. What changes
are you planning?
Sir Peter Spencer: To the assessment
phase?
Q156 Mr Roy: Yes?
Sir Peter Spencer: I think in
the main the assessment phase will have more resources devoted
to it and compared to the way it has been done previously it will
take longer and we will not through thick and thin hold on to
a pre-declared date for making a main gate decision come what
may and regard it as a sign of failure if we do not make it.
Q157 Mr Roy: Why is it a sign of failure
if you do not make it?
Sir Peter Spencer: Good question.
It is a question I asked.
Q158 Mr Roy: That is why I am asking
it
Sir Peter Spencer: Because people
have defined it as an anchor milestone saying if we do not make
the decision on this date we will not make the in-service date.
It is a fallacy and a bad decision made on the grounds—
Q159 Mr Roy: Who is disagreeing with
that?
Sir Peter Spencer: It is the way
the programme has been run in the past.
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