House of Commons - Defence

Select Committee on Defence Sixth Report

3 Progress on key projects

64. In last year's report on defence procurement[92] we examined the problems on the Astute attack submarine and Nimrod MRA4 maritime patrol and anti-submarine/anti-ship attack aircraft programmes. The contracts for both these major projects had to be renegotiated because of difficulties stemming from poorly managed risk. MoD provided memoranda[93] for both projects which update the positions. Since we last reported, amended contracts reflecting the Agreements between MoD and BAE SYSTEMS have been signed.

65. On Astute, the current forecast cost is £3,498 million compared to £2,578 million approved at Main Gate and £3,600 million reported in last year's memorandum. The current in-service date is January 2009 compared to the date of June 2005 approved at Main Gate. On Nimrod, the current forecast cost is £3.5 billion compared to £2.8 billion approved at Main Gate and £3.4 billion reported in last year's memorandum. The current in-service date is 2009 compared to the date of 2003 approved at Main Gate.[94]

66. We asked Sir Richard Evans, Chairman of BAE SYSTEMS, whether the revised arrangements on the Astute and Nimrod programmes were working as expected. Sir Richard told us:

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.[95]

Both programmes had been recently reviewed and Sir Richard told us that on the basis of these reviews 'both of these programmes are looking good'.[96] He was confident that both programmes would be delivered within the new arrangements.[97]

67. On Astute, Sir Richard highlighted concerns about retaining submarine design skills and sought from MoD an early indication as to whether there will be orders beyond the third boat. He emphasised that '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'.[98] On Nimrod, Sir Richard said that there was a lot of stability in terms of the design configuration and he was confident that the first aircraft would be flown in the middle of the year.[99]

68. In July 2004, we visited BAE SYSTEMS at Barrow, where the Astute submarines are being built, to learn about the progress on the programme. We were told that, while some risks had still to be addressed, the company was confident that the in-service date for the first submarine would be met. However, given the problems experienced on the programme, we were surprised to discover that there was only a relatively small MoD team based at Barrow.

69. On the Nimrod programme, MoD acknowledges that risks and challenges remain. However, 'the development and manufacture of the first three Nimrod MRA4 aircraft to be used in the flight trials programme is well under way and we are making good joint progress towards first flight this summer'.[100] Under the restructured contract, design and production have been separated as far as possible to ensure that technology is adequately de-risked. MoD has, however, approved low risk production activities where these helped maintain essential skills and product knowledge as well as preserving the schedule.[101] At a briefing from representatives of the BAE SYSTEMS' workforce at Woodford, where work on Nimrod is being undertaken, we were told that in order to protect the in service date of 2009 and to retain the required skills, a decision regarding production and location was needed this year.

70. We are pleased to learn that good progress is being made on both the Astute and Nimrod programmes, and that the contractor is confident of delivering the programmes in accordance with the revised arrangements. On Astute, MoD and the contractor need to identify a way forward which ensures that vital submarine design skills are retained, particularly given that the Astute submarines are likely to require major refits in the future. We recommend that MoD sets out in its reply to this report its assessment of what it needs, particularly in terms of Defence Procurement Agency staff of sufficient seniority, at Barrow, where the submarines are being built, to ensure that it is kept fully abreast of developments on this previously troubled programme. On Nimrod, MoD needs to ensure that a decision on the programme is announced in a timescale which will ensure that the in-service date is met and that the skills of the current workforce are not lost.

Future Carrier

71. Last year, we concluded that 'There is significant merit in the novel 'Alliance' arrangement for the Future Carrier programme. There may be some very difficult issues to iron-out, which may yet defeat the MoD. But we welcome the way the Alliance model is trying to avoid some of the pitfalls of the Nimrod and Astute programmes. We welcomed Lord Bach's assurance that the discussions with France on a possible co-operation with its carrier programme would not be allowed to jeopardise the UK Carriers' in-service dates'.[102] The Government's response to our report, published in October 2003, noted that 'the current intention remains to place a Demonstration and Manufacture contract in Spring 2004'.[103]

72. In its memorandum on the Future Carrier,[104] MoD stated that the UK will procure two large aircraft carriers from around 2012 which would operate the Short Take Off and Vertical Landing (STOVL) variant of the Joint Strike Fighter, the Maritime Airborne Surveillance and Control (MASC) capability and other aircraft in a variety of roles. Stage 3 of the Assessment Phase formally started on 5 September 2003 and ran until 31 March 2004. However, work is continuing to develop the carrier design to a high degree of maturity, and MoD is discussing the alliancing strategy for the Demonstration and Manufacture Phases with the two companies—BAE SYSTEMS and Thales UK. The programme remains on target to meet the in-service dates of 2012 and 2015. The current estimate of cost for the carriers is around £3 billion. The memorandum notes that there is agreement between the UK and France, at ministerial level, that industry to industry co-operation represents the best way forward for any UK/France co-operation on aircraft carrier issues.

73. John Howe, Vice Chairman, Thales UK, told us that good progress has been made by the team in continuing with the design and that 'The work that is going on at the moment to complete the design and to assess the risk associated with that is essential before the Ministry takes the big decision'.[105] As already noted (paragraph 27), the Chairman of BAE SYSTEMS told us that the partnership had advised the MoD that there had been insufficient de-risking, and additional funding had been found to keep pre-main gate funding running to enable further work to be done.

74. On the issue of risk assessment, Sir Richard Evans added that:

As yet, there simply has not been sufficient work done to get us to the point where anybody, and by that I mean anybody on the industrial side or anybody on the procurement side, could realistically today make a full assessment of risk. If it were the case that you could make that assessment of risk then this programme would have gone through main gate and, as I have said previously, it has not done. I suspect there is probably realistically at least another year's worth of work to be done before we begin to see whether the scale of risks here can be managed and how they can be managed.'[106]

75. However, Sir Richard considered that the two companies between them had the capability to deliver the project assuming that no extraordinary risk was identified.[107] Sir Peter Spencer confirmed that the project was still at the de-risking phase and told us that 'all parties agree that it will be mutually beneficial for us to recognise that having spent about five per cent of the budget to date on the assessment phase that there are strong arguments to continue to mature our understanding of the design of the system integration aspects and of the supply chain aspects'.[108] This de-risking was likely to continue until at least the end of this year, but Sir Peter did not think that this would lead to delays—it would provide a better understanding in order to set the time and cost targets.[109] Sir Peter told us that at the moment the plan was to come in on these already declared in-service dates, but he said that these would normally be set at the Main Gate decision and when the proposal had been de-risked.[110]

76. A number of reports in the press suggested that the expected costs of the two carriers could be nearer to £4 billion, compared with MoD's estimate of £3 billion. Sir Peter told us that MoD had 'very good metrics, independently verified, of what we know this carrier can be built for',[111] and added that a key issue was how MoD was going to go to contract, as a contract which rewarded people for delivering below the target price changed the whole dynamic of the relationship between the client and the supplier.[112]

77. We were pleased to learn that the alliance which had brought the BAE SYSTEMS and Thales teams together had been working 'very satisfactorily'.[113] However, Sir Richard Evans was concerned that what was actually developing was 'some sort of procurement committee…. chaired by a procurement officer from the Ministry of Defence who will have a balancing vote on the committee'. He was particularly concerned about who would be responsible for the different risks and questioned whether a committee could adequately deal with the management of a programme of this scale.[114] Sir Peter did not wish to comment on the revised arrangements for the alliance, because negotiations with the potential suppliers were taking place. However, he said that MoD had benchmarked against best practice in the petro-chemical industry, and he had looked at the way a similar alliance operated at Heathrow's Terminal Five. He said that the alliance on the Future Carrier was not developing into a 'committee'.[115]

78. In terms of the discussions taking place between MoD, BAE SYSTEMS and Thales UK on the revised alliance arrangements, Sir Peter told us that there was agreement on the great majority of the detail.[116] Lord Bach added that 'proposals in relation to the phases of this procurement are with the rest of Government and it is hoped that we can make an announcement on that very soon indeed. As far as when an alliance strategy is set up, that might take a little bit longer'.[117]

79. With regard to the French carrier programme, Sir Richard Evans did not expect BAE SYSTEMS to participate to any significant extent.[118] John Howe did not think it would 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. However, he considered that 'there must be an advantage in the two programmes talking together at the industrial level'.[119]

80. We consider it vitally important that defence equipment programmes, particularly of the scale of the Future Carrier programme, are properly de-risked and we support the sensible decision to continue with the Assessment Phase on this programme. Publicly announcing the expected costs and in-service dates for the Future Carrier programme before the risks had been properly assessed was a mistake from which MoD must learn. We are pleased to learn that the 'alliance' discussions are progressing well and expect MoD to reach agreement on the revised arrangement as soon as possible.

Joint Strike Fighter

81. MoD's memorandum stated:[120]

The Future Joint Combat Aircraft (FJCA) will replace the capability currently provided by the RN's Sea Harrier and the RAF's Harrier GR 7/9 in the second decade of this century. The aircraft will be operated in a joint force, from both the new aircraft carriers and land bases…. The Short Take Off and Vertical Landing (STOVL) variant of the US-led Joint Strike Fighter (JSF) has been selected to meet the requirement and the UK is currently engaged in the System Development and Demonstration (SDD) phase of that programme, as the Level 1 collaborative partner.

The spend on the project to 31 March 2004 was £342 million. Overall aircraft numbers, which have yet to be determined, will drive the cost of the programme. The overall cost of the programme is expected to be in the region of £7-£10 billion.[121]

82. We were concerned to learn that, as development has progressed, the work to mature the design to meet weight targets necessary to achieve desired performance levels has proved much more demanding than expected and that the problem appeared to be greater on the STOVL variant of the Joint Strike Fighter. The US Marine Corps, who are also acquiring the STOVL variant of the Joint Strike Fighter, were expected to slip their forecast in-service date from 2010 to 2012.[122]

83. General Fulton told us that MoD were 'keenly interested'[123] in the issue of the weight problem on the STOVL variant of the Joint Strike Fighter. He had visited Lockheed Martin and said that they were optimistic that the aircraft would perform to its specification.[124] In terms of the impact on the UK in-service date for the aircraft, General Fulton told us that 'at the moment we do not know until the programme formally tells us whether they are able to solve the problem and by when'.[125] Sir Peter Spencer said that it should not necessarily be assumed that that there would be a delay of two years for the UK,[126] because 'we will ideally slipstream them by two to three years'.[127] Lord Bach expected the weight problem to be solved and did not believe that it would have an impact on the design and construction of the Future Carriers.[128]

84. It is vital that when the Future Carriers enter service they have their offensive airpower capability, which is to be provided by the STOVL variant of the Joint Strike Fighter. However, it is unclear whether the weight problems currently affecting this variant of the Joint Strike Fighter can be solved to achieve the required performance and, even if they can, how this might affect the planned in-service date. We note that the Minister for Defence Procurement expects the problems to be resolved—this is an issue which we plan to monitor closely.

Eurofighter/Typhoon

85. MoD's memorandum stated:[129]

Typhoon (formerly Eurofighter) is an agile fighter aircraft that will serve as the cornerstone of the RAF's future fighting capability. It will bring a significant increase in our air superiority capability as it replaces the Tornado F3 while its multi-role capability will allow Typhoon also to fulfil the ground attack roles now performed by the Jaguar.

The in-service date for Typhoon (defined as the date of delivery of the first aircraft to the RAF ) was achieved in 2003—some 54 months late. The current forecast cost of Typhoon is £19,018 million, compared to £16,670 million approved at Main Gate. Typhoon is being produced in three tranches. Contracts for the production of the first tranche of 148 aircraft, of which 55 are for the RAF, were signed in 1998. Future production orders would commit the UK to 89 and 88 aircraft for tranches two and three respectively.

86. The NAO's Major Projects Report 2003 noted that the second tranche of Eurofighter/Typhoon aircraft was expected to be ordered 'around the end of 2003'.[130] However, at the time of our inquiry, the order for the second tranche had still to be placed. Sir Peter Spencer said the delay was because MoD had only recently received a proposition from industry addressing the issue of the price.[131] MoD also needed a proper understanding of what it was going to get for the money, and a proper understanding of the de-risking of the technology as the development contract was completed.[132]

87. Sir Richard Evans told us that the UK wished to make changes to the international contract for Typhoon and that the principal change was to introduce a new variant of the aircraft and to introduce that variant at tranche two. He added that there was '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'.[133] In terms of the new variant of the aircraft, Sir Peter Spencer told us that the 'need for the aircraft to be adapted for multi-role capability comes as a direct result of us incrementally moving towards the performance which is now needed in defence…. what we need more of now is air-to-ground'.[134] However, he told us that the pricing of tranche two production was entirely separate from the enhancement programme to make it multi-role as there was little need for any physical change to the aircraft because that adaptability had been built into the basic design. The enhancements required were largely the software enhancements to the mission system of the aircraft which would be loaded into the aircraft's computer systems.[135] However, some commentators have suggested that there will be a need to add new systems and modifications for air to ground operations, including target acquisition, weapon delivery and communications.

88. General Fulton did not provide a figure for the cost of undertaking the required enhancements to make the aircraft multi-role, but said that in terms of the total cost to the programme 'it will not have added anything to the totality but clearly it has an impact on the profile of it'.[136] He told us that it was a more efficient use of resources to have fewer aircraft types that are able to fulfil more tasks,[137] and added that 'you would need to look at it in terms of whole life costs and in terms of operational flexibility and the overall number of aircraft that you need to own'.[138] However, Sir Peter Spencer and General Fulton's view of the cost of changing the aircraft to multi-role contrasted with Sir Richard Evans who told us that '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…. to share'.[139]

89. The Secretary of State has acknowledged that the second tranche aircraft is to be of a different kind from the first tranche and would provide an air-to-ground capability not originally envisaged when the aircraft was designed. He recognised that it was vital for the strike capabilities of the RAF that 'we secure tranche 2 aircraft…. that must be at an affordable price.'[140] MoD is committed to the tranche two purchase of 89 aircraft, but has stated that no decision needed to be made on tranche three until at least 2007.[141] Lord Bach did not consider that the date for a decision on tranche 3 created any problems for BAE SYSTEMS at Warton, or in terms of keeping the expertise together.[142]

90. We support the decision to adapt the second tranche of Eurofighter Typhoon aircraft to multi-role, as this will ensure that the UK gets the capability it needs in a changed environment. However, we are concerned that there appears to be a wide disagreement between MoD and industry on how much the necessary enhancements will cost. We find it surprising that MoD considers that there will be little impact on the total cost of the programme, unless there are also plans to reduce the size of the third tranche. We expect MoD to conclude negotiations and place an order for the second tranche as soon as is possible.

Future Rapid Effect System

91. The Future Rapid Effect System (FRES) is intended to provide a capability to deploy an effective, combined arms land based force between the two existing extremes of heavy armour and light forces. It is anticipated that the capability will be provided by a family of medium-weight armoured vehicles that will replace the CVR(T) series, Saxon, and elements of the existing FV430 series.[143] MoD's memorandum notes that the Initial Gate investment decision had taken longer than expected, but was approved in April 2004.[144]

92. Nick Prest, Chairman and Chief Executive of Alvis told us that 'in the armoured vehicle area…. MoD has had particular difficulty in formulating its requirements, launching procurement programmes and then sticking to them',[145] and he referred to the various armoured vehicle programmes which had been cancelled such as TRACER and the Multi-Role Armoured Vehicle (MRAV). He noted that FRES was a project which had a number of different strands and that some of the problems of preparing for FRES had 'revolved around trying to disentangle those different elements of the project'.[146]

93. Following the April decision, the Minister of State, Adam Ingram, announced[147] on 5 May 2004 details of the two year assessment phase for FRES:

The assessment phase will be led by a systems house, independent of product or manufacturing capability, selected for their programme management, risk management and systems engineering capabilities. The successful candidate will be selected via competition and a contract should be placed in late 2004. The systems house will provide an objective view of ideas and technologies, which may be applicable to FRES, and of the risks inherent in complex "system of systems" integration. It will exploit and build on previous work wherever possible. In addition, as part of an incremental acquisition approach, the assessment phase will include a range of risk reduction and technology demonstration work to examine the risks of relevant technologies and to determine if they are suitable for FRES, allowing the insertion of new technologies as they mature.

94. Nick Prest welcomed the announcement on the assessment phase, but noted that it had taken over two and a half years to launch this phase, which he considered 'unnecessarily long'.[148] He attributed the delays to: the time taken to formulate the business case and get it through the approvals process; differing opinions on the procurement strategy; and problems in getting the required funding.[149] Northern Defence Industries Ltd referred to FRES as suffering 'paralysis by analysis'.[150]

95. We asked Nick Prest whether the in-service date for FRES of 2009-10 was achievable. He told us that buying off-the-shelf via a non-competitive route would probably provide the quickest in-service date, and a full development programme by full competition would be the longest route and that, depending upon which route MoD pursued, the in-service date could vary between 'sometime perhaps not very long after 2009 and a date quite a long way after 2009'.[151]

96. Lord Bach considered a 2009 in-service date for FRES as realistic—'we think it achievable otherwise we would not say it is'.[152] However, General Fulton noted that the assessment phase will inform the extent to which it is realistic. What he was seeking from the assessment phase was answers to 'trade-off' questions.[153] He explained that what he wanted from FRES was 'a single family of vehicles which would start with the simpler variants but would grow to some of the more complex variants. That is very much the way the United States are approaching their future combat system'.[154] General Fulton told us that he was faced with a number of demanding and conflicting parameters and the assessment phase would be expected to provide answers as to:[155]

how many of these conflicting parameters can I have, in what timescale and at what cost. If that is an equation that just will not work then clearly we will have to look at what is the alternative and one of those would be to buy a stopgap and that would put FRES back to 2015/2020, maybe even 2025, and that is a pretty unattractive prospect to me.

97. We welcome the announcement that an assessment phase contract for FRES will be placed in late 2004, but remain concerned that the in-service date of 2009 will not be met—a concern shared by industry. This is another example, like the Future Carrier, where MoD appears to have announced an in-service date for an equipment before the assessment phase work required to substantiate that date has been undertaken.

Watchkeeper

98. MoD's memorandum stated:[156]

The Watchkeeper system will consist of unmanned air vehicles, sensors, and ground control stations. It will provide UK commanders in the land environment with a 24-hour, all weather, Intelligence, Surveillance, Target Acquisition and Reconnaissance (ISTAR) capability, providing accurate, timely and high quality imagery to answer commanders' critical information requirements.

The programme is currently completing the Assessment Phase and proposals for the delivery of Watchkeeper have been received from Thales and Northrup Grumman. The current forecast cost of the Assessment Phase is £51.7 million. The main investment decision (Main Gate) is currently planned for later in 2004.[157] MoD's memorandum stated that the definition and timing of the in-service date for an initial operating capability for Watchkeeper would not be confirmed until Main Gate. Proposals have been solicited on the basis of delivering UAV capability to support a Medium Scale warfighting deployment by the 'end of 2006'.[158] Last year we were told that the initial operating capability was planned for 'early 2006',[159] it therefore appears that some delays are already being experienced.

99. We examined Watchkeeper in our report on the New Chapter to the Strategic Defence Review and concluded that:

The MoD's declared determination to "make sure we really do keep our forces equipped with the most up-to-date technology" does not sit with the lack of urgency in acquiring an effective networked UAV capability.[160]

100. We are concerned that there are signs that Watchkeeper's initial operating capability is likely to be later than was being forecast last year. This appears to support the conclusion we drew last year—that MoD is still finding some difficulty in balancing increased procurement agility against decreased risk. If this is to be done successfully, it is important, in the assessing of bids, that the technical and Defence Industrial Policy issues are considered concurrently. Failure to do so may not only lead to unnecessary levels of risk but also to delays in the decision making process. We expect MoD to identify ways to restrict any further slippage in delivering the Watchkeeper capability.

92 HC (2002-03) 694 Back

93 Ev 91-94 Back

94 Ibid Back

95 Q 40 Back

96 Ibid Back

97 Q 41 Back

98 Q 43 Back

99 Q 40 Back

100 HC Deb, 21 June 2004, cols 1177-1178W [Commons written answer] Back

101 Ibid Back

102 HC (2002-03) 694, p 50 Back

103 Defence Committee, Fourth Special Report of Session 2002-03, Defence Procurement: Government's Response to the Committee's Eighth Report of Session 2002-03, HC 1194, para 27 Back