Examination of Witnesses (Questions 240-259)
25 MAY 2004
LORD BACH,
SIR PETER
SPENCER AND
LIEUTENANT GENERAL
ROB FULTON
Q240 Mike Gapes: So you are part of the
systemic problem as well?
Lt General Fulton: No. We were
set up as part of Smart Acquisition. The establishment of an empowered
customer was the principle that is considered to have worked;
the establishment of an empowered customer who not only owns the
requirement but also owns the budget. I therefore not only have
the opportunity of constructing a 10-year programme but I also
have the responsibility of recommending to the Defence Management
Board something that is affordable but will also be fit for purpose
for the armed forces. I do have an interest, as the programmes
go forward in conjunction with CDP's people, in making sure that
those programmes deliver and, as problems arise, dealing with
those problems.
Q241 Mike Gapes: Can I put it to you,
though, that if you are having things moved to the right and delays
in equipment coming through because of cost overruns, and your
job is to get the best equipment to our men and women for our
forces at the time that they need it, it would be much better,
would it not, if you had more control over the system, making
decisions as to when that would come and how it would come, rather
than being dependent upon an organisation of which you are not—although
you are involved—directly in control.
Lt General Fulton: We are in control
of managing that forward budget. As I say, cost overruns are only
part of the rebalancing, because some of the rebalancing we may
want to do in order to conform to Departmental strategic guidance
or in terms of a new operational situation. We may actually be
causing some of the problem because, in order to make space in
the early years, in order to fit something new and urgent in,
that may mean that actually we have made life more difficult for
the DPA because they then have to juggle programmes which were
going along in an orderly fashion. So this is not, as it were,
them wrong and us right; this is part of an interactive process
which we have both got to work on together.
Mike Gapes: Perhaps we will come on to
the questions of budgeting later on, but I will leave it there.
Q242 Mr Jones: When Sir Peter appeared
before us on 12 May he referred to the "stocktake" that
was taking place as part of Smart Acquisition. Could you tell
us where that is at, at the moment and how the things you find
out through that stocktake are going to be implemented? Will that
lead to some fundamental changes in terms of Smart Acquisition
and will it lead to what I think we all require, which is faster,
cheaper and better equipment?
Lord Bach: I am going to pass
on, obviously, with your permission, Chairman, to Sir Peter to
speak on this, because he is the author of the stocktake. I just
want to make a preliminary comment (I think, perhaps, I have done
that already): that the stocktake and the actions that have been
taken have the absolute and full support of ministers.
Q243 Mr Jones: Before you move off that,
Minister, can I ask you what is the process in terms of your role
in terms of at what stage do you actually get the recommendations
of your desk? Is it on a rolling basis or is there a set time
period when they come across your desk?
Lord Bach: During the course of
Sir Peter's first year—we meet, as you will imagine, on
a very regular basis indeed—he has kept me informed of the
results of, really, his due diligence exercise over the course
of the year. As that has developed, as these ideas have been put
into writing, we have discussed them more and more fully and he
has really taken the action that he has—and it is for him
to speak, of course, on this—having, as it were, in a sense,
cleared it with me as to whether I am content that this is the
way he should proceed. I have to say that his ideas have always
appeared to me to be common sense and a sensible way forward.
He does have, which I think is useful, full ministerial backing
for what he is attempting to do.
Sir Peter Spencer: I started with
the bottom line in terms of how we are going to get the best out
of the Agency, and there are three components: people, processes
and the organisation. The most important but most long-term is
to make sure we have got the right skills in the Agency. We are
putting a lot of effort into ensuring that we have embedded technical
and scientific skills in projects of high risk because, too often,
decisions with the benefit of hindsight have been made in absence
of the full understanding of the technical framework in which
those judgments have been made, and we too often read that technological
problems were the cause of a cost overrun or a time extension.
We similarly need to invest more into developing PFI skills so
that we do the business more promptly, cut the deals more quickly,
and actually move on. So far as processes are concerned, there
are lots of quite detailed work streams here. The most important
part of it is what we actually do to de-risk the proposals and
how we make better use of the assessment phase, how we understand
not only the technological risks but, also, what I can call in
shorthand the supply side risks—how we understand the industrial
base issues. We are putting a great deal more effort into a compliance
regime with standardised best practice, particularly in terms
of assurance, and challenging reviews of projects on a regular
basis by my board directors.
Q244 Mr Jones: Has this been done on
a project-by-project basis or are there some generic things that
go across all projects?
Sir Peter Spencer: For the big
projects it is project-by-project basis. There are 700 or more
separate projects at Abbey Wood, of which the majority are relatively
low value, below £20 million, so we tend to handle those
as so-called clusters when we do the reviews, but we clearly start
with the big, complicated ones first. Then, very importantly,
there is the work to do better with industry, both with the key
supplier management initiatives and also together with the industry
looking at much more appropriate ways of contracting for the more
difficult and complex projects—in other words, to move on
from trying to transfer all of the financial risk on the way but
have a better understanding of what those risks were, where the
balance of risk lies and to have a contracting strategy which
is more appropriate. That is fully supported by industry. There
is a lot of work going on. The final bit was the reorganisation.
You made the point a year ago that some people had said to you
it all looked a bit messed up and it was difficult to see much
structure in it. There was a structure and that actually served
a useful purpose, but we have moved on beyond that point now.
To get more coherent management, both of our outputs but, also,
in the way in which we deal with industry, there are certain ways
in which we have reclustered, and having together projects which
share the same technology and, therefore, usually the same industrial
base does actually give us a much better feel that they are in
natural groupings now. Importantly, we needed to look towards
General Fulton's team, his top-level team, in a way which was
easier for them to handle so that, in the main now, one of this
senior people, the so-called capability managers, will look towards
one of my operations directors and there will be a very heavy
overlap of 80 per cent of commonality, although it will not be
exactly the same. That makes the coherence between the two organisations
better as well. So in that respect we have done a lot of stuff
both within the Agency and between the Agency with industry. The
point where the ministerial support has been so important and
so valuable is making sure that the real consequences of spending
more time on de-risking propositions and taking more care are
understood across the rest of the Ministry of Defence, and that
the right sort of adjustments are made in the planning and programming
assumptions so that we can actually deliver them. On that basis
we have had a delivery plan with key milestones which I report
against to the Minister or the Steering Group which Lord Bach
chairs, and in future against net benefits which we will identify
in terms of how we drive these things through. I am trying to
make this thing open and transparent. It will not yet be the perfect
solution because the problem is so big and complex. It is considerably
more, I believe, likely to improve the performance than had we
done nothing, and we are learning from it as we go along.
Q245 Mr Jones: Openness and transparency
will be a first for the MoD, for me. If we have you back in a
year's time or two year's time what will you be able to point
to that has actually succeeded, in that you have met certain milestones?
Is it going to be, if we are going to be open and transparent,
that you will be able to come to us in two years' time and say
"These are achievable"—not just individual projects
but overall benefits? What is it that you are likely to say?
Sir Peter Spencer: It will be
the revised key targets which are tougher than the previous set,
set by Lord Bach, because he needs to have earlier visibility
and a more sensitive read-out of performance, to get earlier signs
that we are beginning to drift off. These key targets will be
laid before the House either at the end of this month or early
next month as part of the normal run.
Q246 Mr Jones: What are they?
Sir Peter Spencer: It is meeting
the key requirements, increases or decreases of cost in-year,
slippage in-year, customer satisfaction by independent survey,
the value of the assets delivered to the front-line against the
planned value in-year—in other words, do we meet our delivery
targets—and then three efficiency targets which have been
taken from the private sector to be genuine measures of efficiency,
such as ratios of the value of the assets we deliver in-year as
a multiple of the operating costs of the Agency, and we would
expect that number to move up over time to prove that we are becoming
more efficient. There are two other similar targets as well.
Q247 Mr Harvard: One of the guiding principles
of Smart Acquisition was that there should be "a greater
willingness to identify, evaluate and implement effective trade-offs
between system performance, costs and time." If I could ask
something about that, why has there been—and maybe there
has not but it is perceived, anyway—unwillingness or reluctance
by various people to go along with that and see the benefits of
that? Are there difficulties within the MoD, within the customers
or the DPA itself? Where are these barriers to actually promulgate
that properly?
Lord Bach: If I could just start
on that. Obviously, the experts are sitting on either side of
me, but let me just say, from where I sit, that this has clearly
been one of those areas, or one of the principles of Smart Acquisition
which, as Mr Cran put to me so forcefully, has not been successful
up to this stage. There are various difficulties with it. In any
organisation people sometimes have a vested interest in what it
is they have set up and what it is they want, and are reluctant
to compromise that for what they may see as not particularly good
reason. I think what we have learnt, and I think it is very much
part of what Sir Peter is changing here, is that without these
trade-offs we find ourselves in a position where costs rise and
delays take place. So we really have to be, I think, more strict
and strong about insisting that trade-offs take place in order
to achieve the results we want.
Q248 Mr Harvard: When you came to see
us last time, Sir Peter, you said this was patchy. What I am trying
to drive into is why it is patchy and what are the barriers and
where are the barriers? They probably exist in all these organisations
and others to some degree or another. What can you do to help
us on that?
Lt General Fulton: I am probably
one of those to whom you are referring. I make no apology for
being a demanding customer on behalf of the front-line commands
for stating the requirement in capability terms and pitching it
high, because I think that is what our armed forces deserve. I
do not mean gold-plating, I mean demanding in terms of performance—speed
of aircraft, turning rate of aircraft, the number of targets a
weapons system can engage in a certain time, kill probabilities
and so on and so forth. So I make no apology for, as it were,
pitching my initial bid high. By the same token, however, I have
also got to be an intelligent customer and my people have got
to be intelligent customers in terms of understanding what is
realistically achievable, and the IPTs are a key part of that,
but also the research programme is part of either telling us what
is available or helping us to understand when these things might
be available. So we have to balance out being a demanding customer
with being an intelligent customer. Crucial to that, of understanding
where you have got to come down from that high level of performance,
is actually the visibility of what it means—visibility for
my people on "If you trade this performance then it can come
in at this cost and this time". I think what we have not
always had up until now is that full cost/time/performance visibility
to enable us to do it, so I would be the first to say that there
have been occasions where my people have stuck out for that high
level of performance, and I do not make any apology for that,
but we can do better. I think the other area in which we are becoming
very much better is understanding how we can grow capability incrementally.
I think in the past, perhaps, if you came off the top level of
performance it was either "You have that performance or you
do not have it at all". I think we—and I think technology
is helping here—are seeing plenty of places where you can
bring in a capability and then by software additions you can grow
back to the capability you wanted over time. Therefore, people,
by the same token, are increasingly ready to adopt that sort of
approach. I would hold up my hand to say that the customer is
one of those who have been making life patchy for the DPA in the
past, but I would also say that that is widely recognised and
we are doing better.
Q249 Mr Harvard: Is that one of the ways
in which, with the very quick technological and environmental
changes, you balance speed of acquisition against getting the
damned thing right at the end of the day to do the things that
you want to do?
Lt General Fulton: Very much so,
but it is at that very high point of technology where our capability
edge comes. Clearly, with that capability edge comes risk. So
the point is not only pertinent to this need to trade between
cost, time and performance but, also, the point that has also
made and which Sir Peter made the other day, of spending money
in the assessment phase to do that de-risking so that we understand
before we go into manufacture what the actual implications of
asking for that full capability are. So these two are very closely
linked, which is why, in response to Mr Gapes' question earlier,
I said we are part of this, rather than sitting on the outside
and, as it were, looking in.
Q250 Mr Harvard: On the de-risking element,
certainly the assessment that is ascertained is an important tool
in achieving these ends. It seems, historically, there is good
empirical evidence that shows that if you do not do that then
you end up with problems. There is also a lot of evidence that
shows that maybe that is not happening as much as it should do.
As I understand it there is a target or a suggestion of 15 per
cent of the spend should be for this. Is that sort of sum written
in stone? Obviously not because it would be stupid to have it
that way, but how do you monitor and measure that, and to what
extent is that a really important indicator and a pressure that
you apply in terms of contract formations?
Sir Peter Spencer: It is certainly
a very useful crude indicator for one of the more complex programmes
with a good deal of development in it. It is not a very good indicator
if it was a repeat buy of a relatively low-technology product.
So you clearly have to judge each case on its merits. In addition
to that, we are increasingly developing verifiable metrics in
terms of the extent to which we de-risk the technology. There
is quite a useful table of things called technology readiness
levels and, also, at the next level up, system readiness levels,
which you can look at. As a generality we would say you want to
be about TRL 7 or 8 to make the capital investment decision, ideally.
There is a certain amount of subjective judgment on this, depending
upon the technology, but if part of the proposition, as it is
now, is that every proposal will have somebody outside of the
project as an non-advocate bringing their judgment to bear as
to what extent you de-risk that technology and you de-risk the
system readiness levels, you have got a much better understanding
of where you are at. I mentioned the Sonar 2087 project the other
day. That was a very good worked example of that; they worked
on maturing the technology, they worked on maturing the system
integration, and they created their own luck, in a sense, because
that is what they have done. What we have got to be careful about
is we do not simply slap on a 15 per cent overhead to every single
investment proposition because it would not necessarily be well
spent. A lot of this is also the intellectual investment that
you make. So we have got to the point now where, as the Minister
alluded to earlier, we do not look at a date in the sand and say
"We have got to go through main gate on that basis; that
is an anchor milestone and on it hangs the future of a project";
we can give an indication when we expect to achieve that date
but, more importantly, we are looking at the independent assessment
of the maturity of the proposal, both in the technological domain
and in the supplier domain.
Q251 Mr Harvard: You are laying out generally
there these sophisticated changes, the process and measurement
and approach to contract formation, and so on. Is the big problem
that industry does not understand it? Are you going to tell me
that you are making all these changes, you are getting smarter
in the acquisition process, you are putting all these processes
in place, you—the customers within the MoD community (if
I can put it that way)—understand the processes, but the
rest of us do not and industry does not do it and they are not
smart enough about making the change?
Sir Peter Spencer: No, I am not
saying that at all. In fact, all this is being done with a lot
of—
Q252 Mr Harvard: I might say that about
some of them, by the way, but that is for me to say, not you.
Sir Peter Spencer: I do not conduct
my negotiations in public places. Clearly a lot of people who
have "learnt the hard way" by signing up to highly incentivised
contracts and taking a big financial hit have lost their appetite
for doing this sort of thing anyway. We have learned together
here, and hindsight is much easier than foresight. My point has
been both within the DPA and across defence that we cannot keep
treading on the same alligators in this swamp. We know where they
are now, we know what to do about it and I cannot guarantee there
are not any other alligators there, but one thing that decades
of procurement has taught me is humility; it is very dangerous
to actually make grand statements about what is out there, it
is unknown. We manage risks, but there are certain key principles
which, if you apply them consistently, seem to get you into less
trouble than if you do not and, on an encouraging number of occasions,
give you what everybody will admit is a successful outcome, and
that is where we want to be. My aim is to be boringly, repetitively,
uninteresting because we keep on doing these things on time and
on cost.
Q253 Mr Harvard: By the way, we can give
you a list of people you can write to and give that advice to.
You talk about openness, which I think is very welcome and necessary
because otherwise understanding will not come from all the various
communities that need to acquire it. That is quite clear. Maybe
that has been part of the problem in the past. There is an approach
being developed, and it will come out later, on new system houses,
more project management activities and emphasis on this assessment
phase. Are these all part of the drivers, the tools and the techniques,
then, that we will see and people should understand in the process,
in order to achieve this?
Sir Peter Spencer: Yes, and I
accept that there is an obligation on my part to keep people aware
and informed of what it is they are doing, how we are doing and
how we are getting on. There is a strong emphasis on the dialogue
with industry and there are a lot of levels at which this is done.
There is a strong emphasis on the dialogue within the Ministry
of Defence and between the Ministry of Defence and other government
departments. I have to say, in the context of that, and demonstrating
what we are doing, the Committee has not been to Abbey Wood for
a bit and you might find that to come down and have a look at
this project, to see the work strands, to meet the people who
are doing it and see the measurable process, would give you a
little bit more time to be able to get to feel comfortable with
some of the detail. We can only really go through it in headlines
here, Chairman, and there is always the danger that it sounds
a little bit glib. There is a lot of collateral; a lot of people
doing a lot of quite detailed work in order to sort out the issues.
The diagnosis is the easy bit, delivering the cure is going to
be a lot tougher.
Chairman: A few contentious questions
now. This has been the easy bit, up to now.
Q254 Mike Gapes: Can I get back to the
question of budgets and funding money? We were told by the Chairman
of BAE Systems on 5 May that "It is very clear to all of
us on the industrial side at the moment that the budget allocations
that are made today are not sufficient to sustain the existing
levels of capability that we have." He also said it is "going
to require us to actually downsize substantially UK capabilities
to meet affordability." Can I ask the Minister and, also,
General Fulton, do you agree with that? I am worried about it.
Lord Bach: I do not agree with
it entirely. The Spending Review of 2002 settlement did represent
the largest sustained increase in defence spending for 20 years,
adding about 3.5 billion to defence spending over three years.
You know, because you discussed it with Sir Kevin Tebbitt on 12
May, the PUS at the Ministry of Defence, that there are significant
pressures on the defence budget. We fully intend the MoD will
continue to meet its commitments and within the resources allocated
to it by Parliament. I want to make it clear that the costs of
the equipment programme, as a whole, are under control and our
planning rounds will continue to ensure that the equipment programme
is balanced and affordable. We are also now concluding a detailed
examination of capabilities and costs across defence, which includes
defence equipment. It is likely that we will need to make adjustments
to our spending plans to ensure we continue to live within our
means. As well as looking to reduce costs a really key aim of
this work will be to allow us choice and planning flexibility
to ensure that we have the right capabilities to meet the security
challenges for the future. In that context, some of the Members,
Chairman, will recall what I said at this meeting in June last
year, talking about putting into practice some of the equipment
capabilities that we needed as a result of the SDR New Chapter.
Decisions made on the outcome of all this work have yet to be
taken, so I have to be cautious in what I tell the Committee,
I am afraid, but we do expect to make an announcement to Parliament
before the summer recess. Part of this is, obviously, trying to
get the right balance of investment between platforms and systems,
between what are sometimes described as quality and quantity.
The world has moved on appreciably. Can I just give one example
before I shut up? I am told, (and if you ask me where I got this
from I could not give chapter and verse) that in the first Gulf
War it took four aircraft missions to take out one ground target;
in the Iraq War last year, it took one aircraft mission to take
out four ground targets. That little story tells you the changes
that there have been in that decade between the first Gulf War
and the second Gulf War and shows why it is that the new chapter
talked about, perhaps, reducing platform systems and moving towards
effect-based capability. I have gone on long enough.
Lt General Fulton: Do I worry
about it? Yes, I do. I worry that what I am responsible for is
delivering to the armed forces the best equipment capability that
I can, and no, I would never be satisfied that I had done everything
to bring that about. I said earlier that I am, as it were, paid
to be a demanding customer and, therefore, I will continue to
demand the best possible outcome that I can for the money that
we have got. I explained earlier that we rebalance the equipment
programme each year. That is re-costed and then rebalanced both
taking account of this continual upward cost pressure from industry,
on the one hand, but, also, the desired strategic shift to have
the sort of effect that the Minister has just described. That
recommendation goes from me up to the defence management board.
So that plan is only as good as the realism on which it is based,
and the realism that the DPA can give me is based on the realistic
costs from industry. So everybody is part of this. This comes
back to the phrase earlier about needing to get away from those
estimates being overly optimistic because I cannot plan on over-optimistic
estimates because then they come back to haunt me in subsequent
years. What I need is a realistic assessment of what it will cost
us to deliver the capability, then I can adjust my recommendations
to take account of where we need, as I said earlier, to adjust.
Q255 Mike Gapes: Can I put it to you
that the real problem here—and Sir Kevin Tebbit was quite
explicit about it, he said the Treasury asked us during the course
of the year to reduce our planned level of cash spend—the
reality is that it is the Treasury that is the big problem here
and unless you are going to get more money, I understand that
there have been increases, but if the Treasury are bearing down
on the Ministry of Defence and, on the other hand, you have the
increasing sophistication and cost of individual platforms, then
something has to give. What gives is either the pay and conditions
of our men and women or, alternatively, the number of platforms,
as you have hinted at yourself, Minister. Do you think that this
has got very serious consequences for industry because industry,
if we are having fewer platforms, are clearly going to be finding
that there are fewer resources going in to procure from our own
defence industries?
Lt General Fulton: We have flagged
up very clearly that capability is not a question of counting
platforms and we have flagged up—and Sir Peter mentioned
it earlier—that an inevitable result of a better capability
within a defined resource is about putting the investment into
what those aircraft or ships or tanks or vehicles are capable
of doing as opposed to simply counting the numbers of them. Yes,
this is a very clear change that we are seeing but we are not
alone in this, this is also being seen in the United States and
elsewhere. If you compare, for example, the capability of the
Type 45 destroyer with Sampson radar and PAAMS and compare that
to a Type 42 with Sea Dart, you have a massively increased capability.
If you then network the sensors and invest in the networking of
the sensors you increase exponentially the sea area that they
can cover and the job they can do. So, self-evidently, if your
capability is not to rise far beyond any resource you can have,
the numbers of platforms and the numbers of ships you are going
to build is going to come down over time.
Q256 Mike Gapes: Minister, do you want
to add anything?
Lord Bach: I think to the first
part of your question, really, all I can say is that Sir Kevin's
words are with you.
Mr Hancock: Constantly.
Q257 Mike Gapes: Do you agree with him?
Lord Bach: I always agree with
the Permanent Secretary, I have found out that it is a great mistake
not to, particularly in public. I would say this, the Secretary
of State for Defence, of course, as other secretaries of state
are doing at the moment, is in negotiations with the Treasury
over the settlement for this year. Those negotiations are continuing.
I do not think, Mr Gapes, you would expect me to say anything
more on that. You did ask about industry—
Q258 Mike Gapes: I will come back to
Sir Kevin in a minute if you want to talk about industry, please.
Lord Bach: Of course. As far as
industry is concerned, it is not the difference, I think, between
platforms being ordered or other types of defence equipment being
ordered that is the issue. As General Fulton said, although he
is too polite to say it, frankly, size is not everything here.
That is what we mean when we say that platforms are important
still but are not the be all and end all of providing the best
capability necessarily. If we have to make adjustments to defence
equipment programmes then of course it follows like night follows
day that there will be an effect on industry. I have said that
to both sides of industry when I have been talking to them in
the last few months.
Q259 Mike Gapes: At the session that
Sir Kevin gave evidence to two weeks ago he said that "the
Treasury asked us during the course of the year to reduce our
planned level of cash spend and they did it by asking us to reallocate
resources from the lines of our resource budget which generate
cash into ones which do not and we did that". Could you specify
what that means?
Lord Bach: If Sir Kevin did not
make himself clear, I certainly cannot. I have not read the transcript
fully—
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