UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 572-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

Defence Committee

 

 

Defence Procurement

 

 

Wednesday 5 May 2004

SIR RICHARD EVANS, MR NICK PREST, MR JOHN HOWE and MR SIMON FROST

Evidence heard in Public Questions 1 - 75

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Defence Committee

on Wednesday 5 May 2004

Members present

Mr Bruce George, in the Chair

Mr James Cran

Mr David Crausby

Mike Gapes

Mr Mike Hancock

Mr Dai Havard

Mr Kevan Jones

Mr Frank Roy

Rachel Squire

Mr Peter Viggers

________________

Examination of Witnesses

Witnesses: Sir Richard Evans, Chairman, BAE Systems, and Chairman, Defence Industries Council, Mr Nick Prest, Chairman and Chief Executive, Alvis, and Vice Chairman, Defence Industries Council, Mr John Howe, Vice-Chairman, Thales-UK, and Mr Simon Frost, Chief Executive Officer, Claverham, examined.

Q1 Chairman: Welcome, gentlemen. There is nothing like a procurement session to draw a large audience! Thank you very much for coming. Sir Richard, as the doyen of the defence manufacturers and as this is probably your final appearance before us, we afford you the privilege of introducing your colleagues and maybe making a few introductory remarks.

Sir Richard Evans: Simon Frost has I think been here before; he represents our SME group and who of course are of huge importance on the supply chain; on my left is John Howe of Thales and Nick Prest from Alvis. I think it is fair to say that we have all been engaged in the DIC for a period of time. I will make one or two opening remarks. First of all, we are genuinely quite grateful for the opportunity to put an industry perspective on the development of defence industrial policy and of course its implication for the defence procurement system which is so important to all of us. We know that you have many questions that you want to ask on a number of aspects in this complex area but, if I may, I would like to draw attention to one fundamental aspect of the policy before we get too absorbed with the detail. As the DIC's written evidence described, industry made a comprehensive input to the original policy that was announced in October 2002 and it was an input to a debate within Government started by MoD ministers and it was about a policy of the Government which affects a range of the departments, not just the MoD. Thus, the policy was launched jointly by the Secretary of State for Defence and Trade and Industry and subsequently of course made by a group of departments chaired by the Cabinet Office. Sometimes it seems in discussions today as though industry asked for a defence industrial policy when in fact we were engaged in the debate by government. What I really want to point out at the start of this hearing is that the Defence Industrial Policy is not a policy for industry's sake but it is actually, we believe, very much in the national interest. It is about the sovereignty of the UK and it is about our economic future. Our impression is that it arose because ministers themselves felt that the procurement processes brought wider strategic and industrial issues into the equation far too late in the procurement cycle and not in a terribly joined-up way. Industry has always agreed with this viewpoint but it is something that Government have decided to try and change and we very much want to help and be part of that change process. We are very happy to take any questions that you want to put to us and, if we are not able to give you specific answers, we will certainly follow questions up and give you answers in due course.

Q2 Chairman: I am sure that we have a lot of quite contentious questions to ask of you. Gentlemen, the Defence Industrial Policy was launched some 18 months ago. In which areas do you think the policy has made some progress? In which areas do you think the ideas in the policy have not made much progress?

Sir Richard Evans: In fairness, I should re-emphasise that this policy was published only 18 months ago. I think it is a perfectly reasonable question in hindsight for many of us to ask as to why we did not address these issues some years earlier but hindsight is a pretty exact science. I think by definition there is a great deal of expectation that came about when this paper was published that we quite seriously could and would not change things in the period of time over which this had been running. The things that the Defence Industrial Policy paper have done today is that it has given an opportunity for the Government and particularly through the MoD to actually enumerate what are essentially a set of strategic objectives that need to be brought into account in the process of decision taking and, indeed prior to decision taking, in the process of making recommendations for decisions, but I think, in fairness, both we and the MoD would say that the actual examples today of great success in this area are pretty patchy. As of today, I would not want to give you any real examples of where I think we could say that things have been decided differently because of this policy. Now, of course, we are all travelling in hope. We very much actually want this policy to succeed, but it is a big culture change programme and it is not just a policy, this is about getting people to behave and think very differently from the way in which they behaved and thought previously. If this policy is going to be effective, we really should not be having situations where secretaries of state are issuing ministerial directives to their departments in order to turn over recommendations that have been made. Frankly, if we get to that point - and I am obviously here referring to the selection of Hawk, the RAF advanced trainer programme or re-equipment programme - then this policy will have failed. My personal view of this - and I think it is shared by some of my colleagues here - is that it is a good start but it is absolutely not going to make progress until people implement it through the procurement process and, right now, there is insufficient evidence to say whether or not that is being done effectively across the board.

Mr Prest: I would like to echo Dick Evans' point that this is a work in progress. We do not see the Defence Industry Policy as a single blueprint which is then stuck on the wall and followed. I think it comprises a clear recognition by Government that the defence industry is important and a clear understanding in Government of the linkages between its decisions and what happens in the defence industry, that is a clear understanding in Government of the data, the shape of the industry and the direct impact of particular decisions. Then I think it comprises a series of policies or of behaviours that have been followed in a number of different areas, which might be in the area of acquisition, which might be in the area of research and technology or which might be in the area of how future capability requirements are articulated but, in all those areas, pursuing the set of policies which have defence industry effects in mind in order that, consistent with meeting the military's requirements on a value- for-money basis, then the money is spent in ways which produce the results for the Defence Industry Policy or where there is any conflict between value-for-money or meeting the objectives and the consequent effects on industry, that that trade-off is clearly and explicitly recognised and Government can make informed decisions about it. As Dick said, it is a process, it is a series of behaviours and it will take a while to unfold.

Mr Howe: I think there is one positive thing which is that I am sure there is actually more dialogue between industry and Government on these sorts of issues than there was a few years ago, but I guess there is still some way to go in one particular area which is clarity about what kinds of industrial capabilities and indeed what kinds of technologies are judged to be of crucial strategic importance in the long term. What kind of industry does the UK think it is important to have in the future? What kind of capabilities is it important to retain for strategic reasons? That is an area where I think we need to go on working to achieve more clarity in order that we understand clearly what the rules are in that respect when competitions are judged.

Mr Frost: The view I would have from slightly lower down the supply chain is really very similar. It is a long-term industry. We need to plan strategy for our businesses. No little pressure around in our industrial environment, as you might imagine, and sector. We see customers, the Armed Services of the UK and other countries, with a very rapidly changing threat which they have to assess and working together in a joint industrial policy would be extremely helpful to our own strategic planning. We do not need support for products that people do not want to buy. We want to be able to develop the right products. That can only come out of a joint policy, a joint strategy and common understanding of the requirements both for our Government and the international defence industry.

The Committee suspended from 4.00 p.m. to 4.23 p.m. for a division in the House

Q3 Chairman: Sir Richard, in an article you wrote in December, you said, "There is much work still to be done to ensure it" ie the Defence Industrial Policy "becomes a cohesive, effective and systematic strategy for the sustainment and development of key industrial capabilities in the UK." Perhaps you and others could comment on whether there is sufficient momentum in Government and industry that this work is undertaken.

Sir Richard Evans: Perhaps I could go back to the previous point about what are the benefits coming of the policy paper as written. In the paper we have circulated, you will find in the annexure to the paper basically a list of actions that are running that are designed to address some of these issues and these issues that are fundamental are about having a joint view on what the priorities are in the context of investment and spending, how these establish some form of matrix to assess the value of what those are and indeed what they should be, and of course how we deal with the consequences of that because I think 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 and already it is becoming increasingly apparent to us that the gap in technology levels between the UK and the Americans is growing very, very rapidly. That clearly says to us that we have to address the issue and prioritise the requirement and we cannot do that until there is a completely integrated dialogue starting with the user, which is the military themselves, but working through the whole of the scientific community and with the industrial community. I think that all of us on the industrial side recognise that the results of that are going to be pretty damn painful. It is, by definition, going to require us to actually downsize substantially UK capabilities to meet affordability and, if you look at the work streams that are beginning to emerge out of the Defence Industrial Policy paper, these work streams are very much designed to address some of these particular issues. It is then clearly a matter for industry to decide where it is going to invest its future money, but we need to have some clear indications as to what the long-term requirements are particularly in terms of where we are going to invest R&T for the future and we need that a lot more quickly identifying than appears to be the case at the moment.

Q4 Mr Hancock: We were told last year that the defence industry would be going through a process of ongoing restructure and then re-organisation. Presumably that is still the case and, if so, where do you envisage this going over the foreseeable future?

Sir Richard Evans: I think we can only say to you that, although there has been a huge amount of consolidation that has taken place already, it is not going to stop where it is. Even in America, I suspect that there is another round of consolidation to take place. I think that here in the UK, from a UK Limited point of view, our interest is to ensure that, where consolidation takes place and particularly where consolidation entails downsizing, giving up skill sets and people having to move out of the industry, particularly in those areas, we clearly do it in a planned way understanding that actually what we are doing in terms of maintaining a skilled capability is directed to what it is the military of this country actually want for the future. With the best will in the world, we cannot ourselves look into a crystal ball and do that uniquely on our own. We can only do that in conjunction with the end customer. That is why, not just in the context of the Defence Industrial Policy but also in some of the principles of Smart Acquisition, it is so important that the military and industry come together much, much earlier than they have ever done historically to actually try and identify what those key requirements are. If we do not do that, what will actually happen is that, by default, industry will simply downsize, it will consolidate, and we are going to wake up one morning and we will literally find key skills missing. A great example of this is the sad history of the Astute Submarines where, at the time no doubt for very understandable reasons, the Ministry of Defence, having elected to close down the Royal Naval Architects Office - it was done in a very orderly fashion - then we let a contract for a new requirement by way of a nuclear submarine and, low and behold, the only people who had ever designed and actually passed into production a nuclear submarine were not there any more. I am really saying that, in the context of the work that we need to do, we really have to prevent that happening again and, recognising that budgets are not infinite and we have to concentrate those budgets on things that are really important, there is no point in either side doing that independently, we have to do it together, we have to share the objectives and we then have to jointly find how we resource those objectives.

Q5 Mr Hancock: Does that then lead you to believe that the real predator in this would be the United States defence industries who will look to develop British businesses as opportunities for them to take over and to take you out of the market and so depriving us of the very asset you were talking about?

Sir Richard Evans: It is and I do not think we should have any illusions. The great threat to the technological base here in foreign terms is coming from the Americans because they are investing such huge amounts of money into R&T and it is why a lot of our companies are actually investing shareholders' funds today, not here in the UK but actually in America buying American assets. If this process continues without the actions that we have described or outlined or provided for in this industrial policy paper, if we actually do not do that, the UK is simply going to become the American metal basher. There will be no intellectual capability here in the UK in terms of the very high value-added content of programmes that this country has built up over so many years and that is why the big JSF was such a massive disappointment for us. That decision - and we should have no illusions - took us out in the UK from the common aircraft business and we will live to regret it, I can assure you.

Q6 Mr Hancock: So, BAE systems will resist selling part of their operation to the Americans and the marine division will stay in British hands?

Sir Richard Evans: No, we certainly will not. If in fact we are not able to deploy shareholders' funds in this country in support of the current investments that we have here and they are not producing a satisfactory return, the existing management of BAE Systems will have to take that money to somewhere else where it can get that return and, if the management does not do it, the shareholders will put a new bunch of managers in who will do it.

Q7 Mr Hancock: So, BAE Systems are not too interested in the national interest then.

Sir Richard Evans: Of course we are interested in the national interest. We are interested in the national interest for two reasons. One is that we have a huge number of highly skilled people whom we want to protect and we believe that they are an important national asset and actually it requires two to make it work. I do not want to start running some of these assets down if we are going to find ourselves having a requirement for them in due course. We have to have a sensibly planned load in our businesses. Businesses cannot work on feast and famine. We have to have a steady forward-projected workload that makes sense.

Q8 Mr Hancock: Effectively, what you are saying is that the future of BAE Systems marine division is dependent on the MoD buying from them rather than them trying to get other work from elsewhere.

Sir Richard Evans: No, absolutely not at all. It is primarily dependent upon the MoD in the context of the R&T investments that are required in order to sustain future developments in that part of the business. This is a business that, for 70 years, has been completely neglected in the context of investment. When we were buying GEC Marconi, some of you may recall that there was a huge problem with a company called Kvaerner who owned one of the yards in the Clyde and I was called in to Number 10 to give a view on how we may manage the consequences of this because there was a serious danger of this yard being closed and I made the position perfectly clear then. There was at that time and there still is too much naval shipbuilding capacity in this country. We have not invested a single damn penny in any of these facilities for 70 years and the reason for that was perfectly simple. It was for political reasons. The way in which shipbuilding was handed out was that a ship went to this yard or it went to that yard or to another yard in order to deal with political expediencies. There was no long-term planning and therefore no investment committee of any board in the country was likely to be willing to invest in the facilities, which is exactly what happened. I made my position perfectly clear at the time and it was that , if the Government wish us to be, might I use the word, the champion of the naval shipbuilding business in this country, to do that we need to have a partnership with HMG and that partnership requires HMG to prepare to commit long term to us for its requirements and, on that basis, I then have a case to take to my board for investment in that business. We are piling investment into that business. Frankly, if you had gone to any of these yards when we acquired them, you would have been appalled and I personally felt completely disgraced by setting foot in these facilities. How on earth people could have been expected to work and produce high quality workmanship out of them was just unimaginable. If you go round some of these facilities today - and we have not finished it by any means - you will see a very different picture. I want there to be a long-term position in naval shipbuilding for us in the UK and, if we get this business right - and I am talking naval shipbuilding and not commercial shipbuilding - there is no reason at all why we cannot go back out and rebuild an export business that this country once had and then lost. There is no reason why we cannot do that but to do it requires stability, it needs long-term commitment of investment and it requires a partnership to do it and, without that, actually, the business will not survive. At the same time, we have to face up to taking more capacity out of the market here in the UK.

Q9 Mr Hancock: Are you fairly pessimistic about the future of the UK defence industries?

Sir Richard Evans: Yes, I am because, at the present time, the R&T tap has virtually dried up. Decisions were taken 15/20 years ago in the expediency of meeting budget requirements under which the traditional sources of R&T funding in defence became very, very much depleted. It was at a time when the Americans were very much increasing their levels of R&T. I am not suggesting that the UK should be attempting to compete with the Americans in terms of expenditure and defence, but what I am saying is that we should together, as UK Limited, identify those areas that are strategically important for us in the long term and together concentrate our joint resources into making sure that we stay in the premier league in those areas. It is like a pregnancy test; there is no half-pregnancy; we are either there and successful or we are dying.

Q10 Mr Hancock: I think that you need to give your colleagues a chance to defend their position rather than just BAE Systems.

Sir Richard Evans: You asked me about the shipyards.

Q11 Mr Hancock: I will come back to your point of view in a minute as I would like to hear from the others.

Mr Howe: I think an important point about the defence industry is that it is now increasingly international and if companies like the one I work for are going to invest in the UK, as my company has very substantially in the last ten years, then we need to be sure that there are conditions for doing good business here and a joined-up view of what the national priorities are for industrial capability and what the national priorities are for research and technology investment are conditions that are important and should be met as a result of this Defence Industrial Policy.

Q12 Mr Hancock: Are you getting a clear message?

Mr Howe: We are working on it. It is a very important part of the dialogue that we have under the Defence Industrial Policy that we shall get that clarity.

Mr Frost: Can I come back to the general consolidation subject. There are two effects lower down the supply chain. The first one is your traditional customers cease to be in the same company because, as companies get more globally orientated and larger, you often end up supplying to a subdivision of those companies or indeed to a third party who is doing the integration on a national scale. That is a huge change for very, very many UK defence companies. So, they have to learn how to handle and how to liaise with new customers and learn what drives them and those new customers are not always UK businesses, they can often be foreign-based businesses. That is one factor. The other factor is that, at the supply chain level, we all need to be bigger and healthier to satisfy that need. So, there is a lot of consolidation needed lower down the industry. In the case of one of the companies that I am involved with, we sold to United Technologies, the Americans, and that turned out to be a interesting process where a lot of new culture had to be learned and in fact it did turn out to be a two-way street: they bought us because we had flight control technology which in fact they did not, particularly relating to helicopters, and at the same time it gave us some access - and this is a company with 400 people in the south west of England - to programmes that we did not realistically have a chance of bidding on before that. However, that technology came out of the base that had been developed over the years working primarily on UK programmes. So, there is not a difference of opinion here, it just has slightly different consequences running down the supply chain.

Mr Prest: Picking up on the point of consolidation, I think you need to look at it from a couple of different points of view. Consolidation from one dimension means changes of ownership that are going on within the international defence industry and I echo John Howe's point that this is now an international industry. As Alvis, we import businesses in Sweden and in South Africa as extensions of our base business here in the UK. We have been welcomed as investors in those countries and we have been able to operate the businesses in those markets in ways which have satisfied local customers. There is now a further development in that General Dynamics has made an offer for Alvis and, if that goes through, it would result in Alvis becoming a subsidiary of General Dynamics. The reason that these developments are taking place is because companies believe that a bigger international spread in their business will give them access to the wider range of market and will enable them to draw on a wider range of sources of research and technology both in terms of the expertise of their employees and sources of government funding coming internationally into the defence business and, as a general process, I think we have to regard that as (a) inevitable and (b) healthy and, in the longer run, this is better for both customers and employees of companies to be organised on an efficient basis. The other aspect of consolidation that has been referred to has been reductions in capacity and that has been another driver of consolidation in the industry. In my particular sector, which is the production of armoured vehicles, ten years ago there were four armoured vehicle factories in the UK and there is now one and a bit, and that has been a direct result of major reductions in the market, both nationally and internationally. I make that point simply to say that, in the end, the sustainment of these businesses depends on there being a viable market and, in the context of UK businesses, the domestic market is extremely important, not just for its own volumes but also as a source of R&D and as an anchor customer and a reference point around which exports can be built and that remains the fundamental point and is as true in my industry as it is in the marine industry.

Q13 Mr Hancock: Having heard all that you say, I think one question to you, Sir Richard, is, do you think that your organisation has become too dependent on the MoD and the MoD has become too dependent on you and, because of that, the rest of the defence industry in the UK which had survived that consolidation are having a pretty tough time?

Sir Richard Evans: Certainly the facts do not fit the argument. It is not very long ago since we were virtually 90 per cent dependent upon the UK Government and MoD business. Today, the MoD business accounts for something of the order of 20 per cent of our sales. So, the actual dependency in the UK has changed quite dramatically and that has changed for many of the reasons that have been outlined here, that we have to obviously go where the markets are and where we can grow our sort of business. My concern about this issue is that I think that if we just leave this completely to market forces without actually giving any thought to future potential requirements which are national interest issues, what we will see is continuing decline in mine and other companies' interests in the UK markets and I think that would be a sad day for the UK.

Q14 Mr Hancock: Do you think that the MoD are actually equipping themselves for their change that is going to be needed to take account of consolidations you have talked about in the way that your reliance on the MoD is diminishing but their reliance on you, sadly, is still as great? So, what do you think they need to do to reflect the changes in the restructuring that takes place?

Mr Prest: MoD has many, many talented people in it. I think it has, in the recent years in the area of procurement and defence research, been driven to a considerable extent by events, by budgetary constraints and, in some cases, by shorter-term considerations. I think it has found it harder to take a strategic and holistic view and perhaps a longer-term view, in some cases, of how its interests might best be served and I think we should be clear about that. I do not think anyone here around this table is sitting here saying that defence is an industry which should be subsidised. That is absolutely not the question. The question is that the nation as a whole needs to have a clear understanding of actually what it wants the defence industry for and then to follow policies to that effect. Nobody here is advancing a policy of inventing defence equipment programmes in order to maintain jobs that would otherwise disappear. Certainly speaking for myself, I am not. So, it is a question of coming to the issues that we have discussed. The MoD has to have a clear understanding of international trends that are taking place and a very clear understanding of what it can afford. That may seem a statement of the obvious but I do not think it is as obvious as all that. Some of the problems in the equipment programme come from there being insufficient realisation of risks and costs involved in some of these programmes, a realistic view of what is affordable, a long-term capability plan that is transparent and reasonably consistent that industry, as well as the MoD, can then plan around and a clear view, particularly where a research and development investment is being made or where procurement decisions are being made, as to whether it is a matter of importance that the industrial capability with relevance in respect to those areas needs to be maintained in the UK. There has not been much of that mindset; I would not say it has been absent but I do not think there has been sufficient of that mindset in the MoD in recent years.

Mr Howe: I would make a very similar list of points. I think three points stand out and I have made two of them already. Firstly, as Nick Prest has just said, clarity about what MoD want really at two levels, both by way of strategic industrial capability in the UK but also in terms of what they want by way of particular programmes. Secondly, clarity about research and technology priorities, as I said earlier, so that both the MoD and companies put their money in the right areas and complement each other. Thirdly, very much to emphasise the point about realism. I think if one looks at the way Smart Procurement has been working and what it has to contribute - I suspect that we might get on to the subject more later in the afternoon - a considerable inventory of improvements to the procurement process there, but if there is one error, if you like, which has led consistently to setbacks, disappointment and difficulties in procurement, it is because of a whole community - industry, the MoD and, if I may so, at the political level the press - has conspired to be optimistic about the cost of military capability and has conspired to neglect the degree of risk that is involved in major defence projects where one is actually buying equipment that does not yet exist and it is what Mckinsey's I think called a conspiracy of optimism in their work on Smart Procurement. I think we still suffer from it. The figures still show that there is insufficient investment by the customer in risk reduction in the early stages of projects before they reach their main stage of approval and that fact, I think, has led us into a lot of the difficulties that individual projects have run into. So, those are three points: clarity about what the MoD want industrially, clarity about our routine priorities and realism about risks and costs combined with a willingness to invest sufficiently upfront in the technology.

Mr Frost: I would like to add just a couple of points to that. The first one really relates to a fear culture that I think perhaps media attention and other top level issues that we see engenders at the working level, quite understandably - these are intelligent people - in projects where often a solution to a problem is on the table but is perhaps slightly unconventional, needs a change of plan and the inevitable result is that nobody wishes to perhaps stick their neck out quite far enough to say, "Here is a way out of this particular mess that we are in." One thing is to perhaps at the working level in MoD encourage slightly more proactive thinking with industry. The other point that I would like to make comes back almost to consolidation and that is, in a rapidly changing industry, to ensure that the players in the MoD understand the current capabilities, access to technology and resources of the whole of the industry, not just concentrating on two or three major companies but 100-or-so key companies with great capabilities both to actually offer technological solutions but also to solve the current problems on existing programmes. So, a broader understanding of the structure of the UK industry to date.

Q15 Mike Gapes: The Government's Defence Industrial Policy says that open and fair competition remains the bedrock of our procurement policy. However, BAE Systems commissioned a report that was published in January which highlighted concerns that foreign competitors often enjoy a competitive advantage over BAE Systems since they are not required to face international competition for their market and indeed can often be heavily subsidised by their domestic taxpayers. I would be interested in your comments on that and is this concern that BAE Systems have had shared more widely across the UK defence industry?

Sir Richard Evans: The comment that I would give you is that I think that is largely true. It is an issue that is contained in the Defence Industrial Policy paper and clearly one of the objectives that has been identified in this paper is to concentrate a lot of effort into trying to open markets up. Everybody accepts that, in defence terms, the UK is the only genuine open market in the world today but, regrettably, in virtually all other markets, there is nothing like the same sort of reciprocal arrangement. For UK contractors to compete in America or to compete in multi-European countries is exceedingly difficult and I think the object of the exercise - as I say, it is spelt out pretty clearly in this paper - is that it is in everybody's interest that all the markets are as open as possible and that is how we generate real competition and get the benefits from it.

Q16 Mike Gapes: Are you fighting with one hand tied behind your back?

Sir Richard Evans: There are obvious difficulties in this area. Clearly, in the context of competitions that are being run here in the UK on an open basis - and it is right that they should be - clearly, if the whole of the non-recurring and investment cost has already been borne by another party, maybe the American Government, the French Government, the Italian Government or whoever else, and indeed the UK contractor is required to provide for that element in the cost, the UK contractor is at a serious disadvantage. I do not think that is a problem for any of us. That is really, for me, an issue of the UK deciding what it wants. There are always going to be areas where - and I suspect increasingly so - the right thing for the UK to do is to buy off the shelf. I just want to make sure that in other areas we would - and certainly in my company I would think that is the wrong thing to do - have a proper debate about it and, if we ultimately do decide to do it, we do it for the right reasons and then, if we do do that, we actually get the maximum amount of gain out of the decision for the UK. I am sorry to keep coming back to it, but I think JSF is a classic example. It is no good when you have signed up and paid your cheque over then trying to go back to negotiate the release of technology. It is absolutely not the way to do it and I absolutely subscribe to the fact that there are cases where it is absolutely proper to buy off the shelf, but I would also like other governments to share that view.

Q17 Mike Gapes: Can I go back to my question. Do you think that the MoD recognise the concerns that you have expressed and as the report that you commissioned expressed sufficiently when it evaluates the tenders from different manufacturers?

Sir Richard Evans: It is patchy. There are some areas in the procurement process that are better than others. In the main, these questions are not specifically MoD questions, they are the procurement organisations' questions. We are all in one hell of a big learning period. This is a big culture change for all of us, both the guys at the MoD and the DPA and the guys in the industry as well, but I would just like to be sure. We have to go through this process of shifting our ground and changing the way in which people behave and attitudes, but the problem with it is that it takes a lot of time to do it and, in the meantime, the world does not actually stop. Decisions have to be taken, selections have to be made and contracts have to be placed and I just want to make sure that, when we do that, the UK gets the best deal out of it.

Q18 Mike Gapes: Mr Prest, in an earlier answer, said that defence is not an industry which should be subsidised. Yet, on the other hand, we are in a situation where you are saying in your own report that other countries often have heavily subsidised industries and they are your competitors. If we are in this situation, I presume that there are two ways forward. One is that other countries cease to be subsidised in any way and the other is that we move away from the approach we have taken up to now and it seems to me and I put it to you that we do not have either of those. We are in, as you yourself said, a transition. How long do you think that transition will be and are we doing enough and is this country collectively doing enough to get open markets in other countries and, if we are not, what should we be doing to make that possible?

Sir Richard Evans: The transition period, I regret to say, is a lot longer than most people think. Making change on this scale is a huge challenge. Inherently, all of us actually hate change and would like to continue doing things in the way we have done in the past. So, it requires a lot of time, a lot of leadership and therefore a lot of example to be given in order to bring about a change throughout the whole of the organisation on both sides of the table. In the meantime, we certainly should be doing a lot of the things that we are doing at the moment and in some areas may be doing more often. We definitely should not be looking to close our markets up. We should be trying to get a level playing field as widely as we possibly can in order that we are broadly pretty much in the same situation. The fact of the matter is that the guys who have really deep pockets, that is the Americans, are always going to have a substantial advantage on the technology front. It is the case that there are even today areas where we can still beat the Americans, where we are better than the Americans at certain things that we do. Those are things that we need to build on.

Q19 Mike Gapes: I accept that the Americans might be a problem because of technological reasons but we are talking here about open markets. We have European partners and in fact some of the companies here have European associations which are very deep. I would be interested to know what we should be doing to open up the markets in those other countries.

Sir Richard Evans: I think John needs to come in on this since we are referring specifically to John's ownership. There are a catalogue of issues that are being undertaken at the moment, not least some of the things that are going on in Brussels in the context of the European procurement process.

Mr Howe: Just the Thales view on this. First of all, as far as the French market is concerned, I would not argue that it is as open as the British market is, though it has been opening and the French part of Thales would argue that now they do have to win their business in competition which is much stiffer than it would have been a few years ago. Secondly, I do not think that, in the case of Thales, we enjoy any advantage in the United Kingdom derived from market conditions in France. The work that is done on major UK projects by my company and the bids we put forward for new projects are almost wholly based on work done in the UK as UK facilities or costs reflecting their conditions. So, we think of ourselves as a UK company competing in the UK market in that sense. Certainly as far as the French market is concerned, I am sure that the top men in the company would have no hesitation in saying that anything that can be done to encourage all European markets, French or other, to open up would be wholly in the interests of our company.

Q20 Mike Gapes: Does anybody else want to say anything?

Mr Frost: The view I have is perhaps a little more cynical in that I feel that playing cricket when everyone else has great big baseball bats is perhaps a British way of doing things but is not terribly effective. They will do what they want to do and we just need to recognise where we are. I think that is perhaps the first thing and that is being pragmatic about all this. The other point I would like to make is that, if big investments are being made in those countries' industries, they are hard-headed people and they will get their money back and the way they get their money back usually is in the cost of support. All I would ask is that perhaps, in these procurement decisions, the UK should look very carefully at what the life cycle cost in reality is going to be, not least through access to rights over technology that will now allow MoD to actually maintain and support that equipment in years to come. So, it is not a question of handouts, it is a question of what we are actually buying, a very clear-headed question about the support costs and life cycle costs of such equipment. I do not think any government is subsidising an industry to no purpose. It is subsidising an industry because it thinks it is economically beneficial to its own country.

Q21 Mr Roy: First of all, I was very interested in your comments about lack of investment in shipyards especially in Clydeside. Years ago, I only wish that managers with powers such as yourself would have listened to trade unionists when we were making those very same arguments. However, I am still caught between what you were telling us and what you were saying and what was said in the Daily Telegraph when one of your spokesman was talking. In that quote, it was said that there had been expressed an interest in looking at any approaches and offers to increase shareholder value. That is slightly different from shipbuilding in the future and the shareholder value.

Sir Richard Evans: I think the shareholder value issue is inherently related to the well being of the business itself. It is not simply a matter of selling the silver in order to pass it across to the shareholders. The shareholders have an interest and a stake in this sort of business, all the employees have a stake in the business and the managers have a stake in the business but, at the end of the day, we have to do what is the right thing to develop the business and, as I say, the fact of the matter is that here in the UK and across Europe there is too much capacity in this business at the present time. I think that a lot of the investment we are putting into the naval shipbuilding business today is not simply directed at improving the facilities and the fabric of the buildings etc that people work in, it is actually building up and reconstituting the intellectual capacity that was closed down when the Naval Architects Office was closed and therefore redeveloping a design capability not just for the ships but the integration of the systems that actually go into those ships and it is very interesting today that, if you go up to Barrow and look at the engineering block there, there are significant numbers of people who are moving from the south of England and are actually transferring those skills up into Barrow. The same sort of thing is going on in the yards in Glasgow as well. To do that, we have to fundamentally have a capacity that is matched to the market. If somebody can do that better than we can do it today, it is in everybody's interests that we should listen to what ---

Q22 Mr Roy: I am just talking about a difference in emphasis. I thought you were giving an approach where you were actually putting public interest a wee bit more focused as opposed to shareholders' value and I think it would be wrong, if anyone is watching this, to say that Sir Richard is really putting a great emphasis on the need for public interest when, a couple of days ago, your company was saying that it was really all about shareholder value and it would be wrong for anybody to take that message away from what you said earlier on.

Sir Richard Evans: If you think there is a wide difference or disparity in those views, then, I am sorry. I genuinely do believe that it is very easy to absolutely crystallise one particular piece of interest as being in the interest of the shareholders, one in terms of employees etc. At the end of the day, what we want to do is to see this business being hugely successful. If somebody can make a better job of that for the reasons that I have described, it will be completely wrong for us to prevent it happening. Conversely, if we are able to do that in partnership and with our partners here in the UK, that will be absolutely fine as well.

Q23 Mr Roy: If I can just take that one area, for example, where I suppose the public interest and shareholder value that you hold so dearly would certainly join up in relation to value for money. Both you and your Chief Executive over the last couple of months have questioned the MoD's definition of value for money. How would your company like to see value for money defined?

Sir Richard Evans: I think in the context of a specific definition we would like there to be a much wider definition of value for money than is the very narrow definition that the Procurement Agency actually takes. I very much hope that as defence industrial policy gets better and better people will begin to think differently and people will begin to take a different view of it. I would just like to give you one example where I think this is highlighted. It is an actual example, and I go back again to the Hawk decision. The recommendation from the Procurement Executive to ministers was to acquire the Aermacchi name. We had various doubts and reservations about the way the analysis had been carried out, particularly the cost of ownership, but nevertheless we were not party to it, this was a competition position between two separate entities. The UK Government in the early 1970s awarded to the predecessor company, now part of BAE Systems, Hawker Siddeley, again as a result of competition, the design and development of an advanced jet trainer for the Royal Air Force. At the time the value of the contract was about £350 million and in today's money that is about the equivalent of a billion. The contract was implemented. Subsequent to that, and as a result of that, the UK has sold 800 Hawk aircraft around the world generating sales value today to the equivalent money of about £15 billion. In our view, supported by the professionals in the sales organisation, in the MoD, there is a view that there is a continuing market for the Hawk, albeit with further development that you would expect to take place over a period of time, that would result potentially in a further market of about 400 to 500 aircraft. In the decision taking or the recommendation that was made to the ministers, there was absolutely no account taken of that additional value to the UK. You might argue why should the MoD take it into account? Are they paid to take that into account or not? I think that is one of the wider value issues that should be taken into account. I can tell you that since that decision was taken, the Indian Government have placed an order for 66 Hawks which, had that decision gone against us, would not have been placed. The Indian requirement will almost certainly exceed 200 aircraft. There is a huge replacement programme for earlier Hawk aircraft that have already been delivered. I can genuinely see us actually being able to sell a further 400 to 500 aircraft. On the basis of an investment made 20-odd years ago, £350 million, to throw that away and actually give another five billions' worth of business to the Italians or somebody else, and at the same time shut a factory and make a lot of people unemployed, whatever the bloody rules of economics are, that is certainly not economics as I understand it. Somehow in the process of evaluation that was the recommendation that was made. How on earth it could have been made, I cannot believe. Ultimately it required the Secretary of State for Defence to issue a ministerial directive to overturn it. This is the lunatics having taken over the asylum.

Chairman: You have made your point. Frank, carry on.

Q24 Mr Roy: You spoke at great length and, I have to say, a lot of it was going over my head there. Can we focus in a wee bit more. The question was how do you define value for money in such a way that the Government does not?

Sir Richard Evans: I thought I had given a reasonable example. Had the recommendation been adopted by ministers that was made by the procurement organisation, I think that we, the UK, would have lost business to the tune of about 500 more aircraft in the export market. That has a value to the UK. It is a huge amount of money that goes to the Exchequer. Nowhere in the recommendation is that brought into account. My point is that when you look at these sorts of recommendations there is a much wider issue and this should not be looked at absolutely narrowly, and even looking at it in a narrow sense we think it was an injustice anyway.

Q25 Mr Roy: How has the Government responded to you?

Sir Richard Evans: The Government responded by issuing a ministerial directive forcing the Ministry of Defence civil servants to change the recommendation to sign up for the Hawk - it has not been signed up at the moment but it has been announced - and the result of that is patently clear for all to see, that already we now have an additional 66 aircraft in the order book that we would not have had otherwise.

Chairman: We have got another 15 questions to ask still, but I take your point.

Q26 Mr Jones: You say obviously the MoD is the main customer and you made reference to exports in terms of their importance. The defence industry is obviously very important to many of our constituents in terms of jobs and in terms of UK plc. What damage has been done to that, not just to your company but to the industry in general, by the allegations this week in The Guardian newspaper? Is it important that when we are winning contracts abroad, we are not just seen to be winning because we have the best product but we do it in an ethical way? Clearly there are issues which affect your particular company but obviously it paints a broad brush picture across the defence industry in general. What can you do to actually put forward the best face of UK plc defence when you have got allegations that clearly are being made and are being used by those people who are against the UK defence industry?

Sir Richard Evans: These allegations stem from one source, which is The Guardian newspaper. This is a campaign that has been running for a long period of time. In the context of the recent allegations, which incidentally I would remind everybody are always published either at the time of our Annual General Meeting or the time of our results in order to inflict the maximum amount of damage on us, there is actually nothing new in them. When we completed the Marconi transaction we gave absolutely definitive and binding commitments to the Government of the United States in the context of adopting completely the US Foreign Corrupt Practices Act. That was implemented and we actually had a team of lawyers from the US responsible for giving advice in the context of the way in which American companies have implemented this process and it was taken on board with all the safeguards, including hotlines, whistleblowing, etcetera. Subsequent to that, of course, the OECD recommendations were implemented and here in the UK they were put into legislation through the Anti-Terrorism Bill, became law in Parliament and those constraints go much, much further than the US Foreign Corrupt Practices Act. I am satisfied, insofar as I reasonably can be, that all of the appropriate safeguards exist in our organisation, but I have to say that when these allegations are made they are obviously damaging. Nobody thus far has produced evidence to us, despite the fact that we have made a number of invitations to people to do so, other than that which was ultimately submitted to the SFO. Obviously if there is new evidence available and it is brought forward then clearly it would have to be investigated. Certainly in the context of the practices that we and all other companies work to, because all of us have to operate within the framework of the law, we have a duty to our shareholders to ensure that we are completely compliant with the law, not just here in the UK but wherever we are operating.

Q27 Mr Hancock: Are you saying that article was not true?

Sir Richard Evans: I am saying that the allegations contained in this article are of wrongdoing, and I think you have got to be quite careful about how you define wrongdoing in these contexts, certainly the allegations and assertions of the laws being broken, etcetera, are allegations that I at this time, and regularly, completely refute. Until there is some evidence that we have broken the law that I do not have at the moment, obviously I have to continue to refute it.

Q28 Mike Gapes: You may not have broken the law in the context of the UK but nevertheless you might have made payments to members of the Saudi royal family which would be regarded as unethical or immoral. If we have changed our practices as a result of recent US legislation or anti-terrorism legislation that is all to the good, but clearly there are issues that date back a number of years. As far as I have seen, the allegations are something that goes over several years and talks about events three, four, five years ago, at least. Would you agree with me that in the past there has been lax practice and that things have been done that would not be tolerated today?

Sir Richard Evans: I think that business practices have been changing over a period of time. I can certainly assure you that we, and I believe most companies, are not in the business of making payments to members of any government. I would just like to reiterate that not only are we bound here by the laws in the UK but we are bound by the laws wherever we operate. This is not a question of people passing, as you suggest, large sums of money to employees of governments, it is just not the way that business is done. There is a huge amount of speculation that goes on on this subject and it makes good copy possibly but it is pretty far from the mark.

Mike Gapes: We will await the outcome of the investigation, I think.

Q29 Mr Cran: Can I move us on to the question of risk sharing. The danger of this whole issue was recognised in the original document of 2002, defence industrial policy, which must be bedtime reading for the lot of you. It says: "If this risk becomes unmanageable, it could have serious implications for the companies involved and the equipment programme as a whole". That is fairly clear. I think the Committee was interested, and I certainly was, when your Chief Executive was put in front of the Committee of Public Accounts on 23 February this year, and he said this: "Industry took far too much risk in the past and we, BAE Systems, are not doing it in the future." I mean no impropriety about that whatsoever. "There is a far more attractive market in the United States if the MoD terms of trade do not change." That is a powerful statement. You must certainly agree with it, Sir Richard, but does everybody else agree with that?

Mr Howe: Risk was one of the points I alluded to earlier, I think it is one of the defects of the present system that not enough is invested in exploring and limiting risks at the beginning of major projects and decisions are taken to embark on major projects without sufficient investment on that front. I would agree with you on that front. I have to say primarily I think the solution is in the hands of the customer to make sure that he does not take these very large decisions to proceed with major projects until sufficient preliminary work has been done because obviously, as you implied, risk cannot simply be passed on to industry. If a project does not work or is not delivered then the customer suffers at the end of the day. It is a joint problem.

Q30 Mr Cran: I take it that there are no dissenting voices to that?

Sir Richard Evans: No.

Mr Prest: No.

Q31 Mr Cran: Where is the balance? Clearly you have been making representations to the Government, I would be very surprised if you had not, particularly on the 2003 completion of the review of this particular document. The question is (a) whether you have made representations and (b) what has been the Government's reaction to that, or the MoD's or whoever?

Sir Richard Evans: I think also at the PAC meeting to which you referred, both the Chief of Defence Procurement and the Permanent Secretary made exactly the same point that we have been making, and that is that we have to find a way of getting a much better balance on the whole issue of risk. Reference was made to the National Audit Office report on major projects where, from memory, I think the figure reported in the context of pre-main gate expenditure was 4.4 per cent against a recommendation contained in the smart procurement arrangements of 15 per cent. That gives you a measure of the gap. Both sides have learned an awful lot out of this. There is a sort of dichotomy in this in that to get to what is called main gate and, therefore, to get approval, you have to have a price for the programme and you have got to have specific delivery dates identified with that price. The fact of the matter is I think we are all agreed that through circumstances we have been forced to go to main gate far too early, ie before we have expended 15 per cent of whatever it is to de-risk the programme. I have to say that it is a consistent criticism, it is in the existing NAO report but it has been in many earlier NAO reports, that the original price and dates for delivery that are quoted to get through main gate virtually all change, without exception, over the life of the programmes. As I say, the Chief of Defence Procurement was saying exactly the same as we are because this is an issue of mutuality. It is just as important to them that they understand what it is they are paying for and when they are going to get it as it is for us to understand that we can actually design and build and deliver it. This is not an issue where we are on opposite sides of the fence. There is a lot of work going on at the moment to get a much better understanding of how we achieve these objectives.

Q32 Mr Cran: This is a rather important issue for you certainly, for all of you. Could give the Committee a sense of when you think that you are going to get a resolution of this? A lot of work is being done, you say.

Sir Richard Evans: I do not think that there is a big bang solution to this, that we are going to wake up one morning and say that suddenly we have got a complete answer to this. In part, at any rate, the answer to this depends upon the specific programmes. There are things that are happening that you can look at today that will give you, and should give you, encouragement on this. The carrier programme is a really good example where the original intention was to go through main gate in something like March time and that was largely because the existing pre-contract funding effectively ran out at the end of the financial year. We and Thales, who are in the partnership in the context of being required to bid, who had bid and created and the partnership in the context of continuing with this programme, were advising the MoD that there had been insufficient de-risking. From memory, at that time I think the amount of expenditure in what we call the de-risking phase was about two per cent compared with the 15 per cent, not even where the NAO average of 4.4 per cent was, not anywhere near it. The result of that is that the programme has not been presented for main gate approval. Additional funding has been found to keep pre-main gate funding running forward and that will enable a lot more work to be done. Both of us are very clear that we do not want to go to main gate until both of us are confident on what it is we are pricing and offering on delivery and for the supplier and for the buyer to have a reasonable degree of confidence that that is what he is going to get.

Mr Howe: I have nothing to add to that at all. Good progress has been made by the team in continuing with the design, so I would not like you to think that the work has been going badly. 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 that big decision.

Q33 Mr Cran: In asking my next question I do not want to imply that you are not going to succeed in the dialogue that you are having with the Government over this issue and that you are not going to reach a rapprochement. Your Chief Executive did actually say: "There is a far more attractive market in the United States if the MoD terms of trade do not change". What is it about the US market that makes it so attractive, apart from, I guess, the money, the technology and all the rest of it? Is that transplantable into the United Kingdom?

Sir Richard Evans: Certainly it is transplantable. It is interesting that pretty much the same contracting processes were operating in the United States something of the order of 12/14 years ago as are operating here today with regard to programme launch, lack of investment and de-risking etcetera that virtually brought the entire US defence industry close to bankruptcy. It caused a complete reassessment of the whole of the contracting processes and procedures to be introduced and those procedures that are operating today in the US are very much in line with the recommendations that we would make today, and have made today, to the MoD. They are largely about breaking these programmes down into bite-sized opportunities, not having to definitively say on day one "this is what it is going to cost and this is when it is going to be delivered", desirable though that would be to do if we could do it, ensuring that sufficient de-risking has been undertaken before we get to the point where we are definitively pricing and at the same time recognising that if you do not start with a delivery date and do not start off with a price, there have got to be some review points in those programmes where both sides can step back from it. For instance, if we see the risks, and even on the US basis after the programme had been launched there are review points, and if the risks are working out not to be in line with the initial assessments that were made then the buyer has the opportunity to say "We either want to stop the programme and review the programme or there are certain circumstances in which we can abandon the programme because there is no point travelling in hope here if the costs are going to continue to escalate because we cannot get the risk under control". Secondly, against that, there is obviously a very different corresponding position and view of profit. The actual profit allowances in the United States are vastly different from the profit allowances here in the UK. In competitively contracted business - I stand to be corrected on this - I think the current profit rates are running at about 12 per cent on sales. Indeed, the Pentagon themselves recently have been seeking to increase the rates of profit in order to improve the financial health of the contractors in order to be able to get more investment from the contractors back into the R&T budget. Corresponding numbers here in similar circumstances under the current arrangements are probably more like five per cent. There are two issues, one is a much more sensible view towards the management of risk, the assessment of risk and breaking programmes down into manageable pieces without at the front end committing ourselves for the next 25 years and at the same time looking at how you get the risk-reward ratios into the right balance in the context of what the contractors can actually earn. Under those circumstances, the Pentagon, ie the procurement agency of the United States, has every right to come and expect the companies to be investing into R&T to support defence programmes.

Q34 Mr Cran: To state the obvious, I guess you have been making exactly the same points to the Government and I guess the Government are considering it.

Sir Richard Evans: Absolutely. I do genuinely believe, notwithstanding where the NAO have been coming from, that the procurement people in the MoD are looking at some of these arguments, there is certainly the issue of risk assessment and the agreement now is that there is going to be much more money spent on that risk assessment phase than has historically been the case. That is desirable and that is certainly going to happen at the US end. As always, the problem with the MoD people is simply budgetary constraint. The process of government accounting has always been a bit of a mystery to those outside it but it seems to me at the moment that the great problem the MoD has is that its actual liabilities in terms of current programmes, notwithstanding what it may have to do tomorrow, in respect of the programmes that it is currently committed to, exceed what we would describe as the asset but in their case is the budget. In the external world, the next stop is to go and talk to the administrators. There is a certain amount of sympathy we all have for the MoD and to do these things differently does in the short term sometimes require additional investment but in the long term, over the life of these programmes, will without a doubt pay back very handsomely.

Q35 Mr Cran: My last question is simply this: just so that we know how far you are prepared to go to back your views, and all of you hold them very strongly on this particular subject, have any of you actually withdrawn from a contract, assuming the terms of the contract allowed it, where it became apparent to any or all of you that the risk that you were being asked to take was too great, or becoming too great?

Sir Richard Evans: I can give you one recent experience where we were in the consortia we were operating with for the tanker programme and we simply walked away because the amount of risk that we were being asked to take could not be justified and there was a potential issue in terms of whether the consortia bidding for that, which we were in, ultimately could afford to expose sufficient of its balance sheet to the potential liabilities. There are other examples as well.

Q36 Mr Cran: Any others, so we may know if this is common practice?

Mr Frost: Yes, but on a much smaller scale where on one or two UK programmes the volumes were so small and as an equipment supplier the numbers of aircraft were so small that it simply would not justify the amount of investment we would have had to put into both the proposal costs, which were significant, and of course the unfunded elements, such as development. I would like to add a comment. It seems obvious to me, just looking at it from that level and from a distance, as to why any risk equation in selling defence equipment to the US would look totally different. It is simply a matter of scale and volume. If my company is going to sell one thousand ship sets of something, we are much more likely to increase the ante in the risk we take on the non-recurring development end compared with a programme, perhaps, where the UK is buying 50. It is simple economics.

Q37 Mr Hancock: What about when you are buying two, like two carriers? Are you close to the breaking point on the risk assessment you have made on the cost of the carriers and your ability to carry that risk?

Sir Richard Evans: 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.

Q38 Mr Hancock: This really relates to working in alliances, does it not, and whether or not it can materialise as a financial gain for the company as well as offering the defence industry stability. Why do you think there is so much speculation about BAE Systems remaining the client contractor for the carriers?

Sir Richard Evans: First of all, I should say that the original decision that was announced was that there would be an alliance and the alliance was between BAE Systems and Thales. That was announced after the result of the bids was made public. We and Thales then basically brought our teams together under an alliance and have been working under that alliance very satisfactorily ever since. I think our concerns now are that what is actually developing is some sort of procurement committee and this programme, which is certainly the biggest single military programme that would have been launched in recent years, is in some way going to be managed by a committee. The committee will be chaired by a procurement officer from the Ministry of Defence who will have a balancing vote on the committee. We are somewhat concerned when it comes to the issue of who is responsible for what risk whether a committee can adequately deal with the management of a programme of this scale. We have no problem at all if that is what the customer wants to do because, let me be clear, it is the customer's prerogative to decide how he wishes to have his programmes managed. If we were not to be within that committee grouping in the ideas that are just being bounced around at the moment then quite clearly we would want to become a subcontractor to the management team and make our shipyards available and all of our engineering skills available in order to make the programme a success, not to be sitting as part of a committee at the top that may generate risks that ultimately would become uncontrollable. Absolutely we recognise if that is what the customer wants to do then he is entitled to do it.

Q39 Mr Hancock: Providing he pays.

Sir Richard Evans: Well, at the end of the day, providing this committee can manage the programme within the budgets which have been agreed when it does go through main gate, we know that everybody will be deliriously happy and rightly so as well because it is a hell of a challenge, but if that were not to be the case, if people start sort of shuffling the deckchairs around looking to see who is actually responsible for whatever the failings are, it is a bit like good old-fashioned consortia where everybody has got a bit of it, but no one individual is actually responsible. However, under the current proposals or as they were proposed, there is no doubt about it that Thales and we together, shoulder to shoulder, are absolutely locked in in this right at the front end of it.

Chairman: Thank you. We will come on a little later to this.

Q40 Mr Crausby: Still on risk, last year we looked at the problems experienced on the Astute and Nimrod projects, so can you tell us something about the revised arrangements and, perhaps more importantly, are those arrangements working as expected?

Sir Richard Evans: Well, I can tell you that yes, they are working out as expected. 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. In the case of Nimrod, we have had a lot of stability in terms of the design configuration now in the last three months, which gives us confidence that we will fly the first aircraft in the mid-year point. In the meantime of course, on Nimrod, the whole of the system's architecture that is on the ground rig has been developed in time and has now for some months been interactive with airborne sort of systems and with ground-based systems and I would say to you today that on the basis of the recent review we did on both of these programmes that both of these programmes are looking good.

Q41 Mr Crausby: So they will be delivered within the arrangements?

Sir Richard Evans: Yes.

Q42 Mr Crausby: Earlier on you made what I thought to be the quite valid point about the loss of submarine designer skills on Astute and I think you said that it must not be allowed to happen again, so how do you prevent the loss of submarine design skills?

Sir Richard Evans: Again it takes you back into this Defence Industrial Policy paper. We need to have a progressive discussion together with the customer to ascertain what the long-term requirements are in the context of nuclear submarine capability, design and build. Assuming that there is a continuing requirement, we then need jointly to have a plan whereby we sustain the appropriate level of capabilities to ensure that if there is a break in the current programme and a year later a requirement is placed upon us, we have the design and engineering skill-set in place actually to manage that requirement. As I said earlier, the difficulty that GEC were faced with when the initial Astute submarine programme was launched was, firstly, GEC had never designed and built a submarine previously, and, secondly, those guys who had all the know-how were retired and very content in the west country and certainly they were not queuing up to become re-employed and live in Barrow. Now, we simply want to ensure that that does not happen again, but we can only do it in consultation and agreement about sharing those objectives with the customer.

Q43 Mr Crausby: You made a point about the break in the submarine programme and I do understand why last year you wanted to concentrate on submarines, but how can you retain those design skills if you are not prepared to shift to Barrow?

Sir Richard Evans: Well, there are really two ways we can do it and again this is a matter for discussion and agreement. First of all, we have to have some clear indication of whether there will be ship sets beyond the third boat. That being the case, there will undoubtedly be updates progressively going through the design as we go through the boats beyond two and three, so that is one area. The second area is looking at the various requirements in terms of mid-life updates for these ships over their entire life-span. These ships or boats are likely to be in service for anything between 30 and 40 years and the likelihood is that over that period of time there will be at least two complete refits or maybe more than two refits, and those refits need to be supported in engineering terms by our designers, so we really need a sort of long-term master plan for the nuclear submarines and requirements in this county. 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, but there are those two opportunities which are perfectly clear which will be required to be fulfilled and it is, incidentally, why it is so important that we retain the intellectual capacity in engineering. Again if I can keep harping back to JSF, the fact of the matter is that it will be on JSF and there will probably be two or three major updates throughout the large programme and we know that one of those updates will be undertaken by Lockheed back in America and not here in the UK. In the case of the submarines, if we do what I have suggested, that work will be done in the UK.

Q44 Mr Crausby: Moving on to the Future Carrier programme, can you tell us what lessons you have learnt from the Astute and Nimrod experience with regard to that programme and the question of risk?

Sir Richard Evans: Well, I think, firstly, you are looking with the Carrier programme at the combined resources of Thales and BAE Systems which is clearly a much greater depth of resource, know-how and knowledge than would have been the case if either one of us alone had been engaged in this programme. I think the obvious issue here is that, again going back on to this whole issue of risk assessment, we actually get sufficient monies expended in terms of design engineering before we enter into definitive contracts for price and delivery so that we know what those risks are, but I certainly believe that between the two of us, we have got the capability, assuming there is absolutely no extraordinary risk identified, which is not the case today, but on the basis of the way we are going, I would guess that both of our design teams would agree that we would expect to manage the risk.

Mr Howe: I think so, yes. I think, as I said earlier, the programme so far, contrary perhaps to perceptions outside, is actually going very well in terms of the design work which has been going on, planning work and the assessment work. The formation of a joint team between BAE and Thales was quite a challenge after we had just been in intense competition for a long time, but actually it fell into place very well and it is working well, so if the MoD judge that they want to, as it were, change the arrangements for the alliance and change the arrangements for the management of the programme, I would not want people to think that that is because things have been going badly on the project; they have not.

Q45 Chairman: What percentage of work has been divided amongst the allies? Have you worked that out yet?

Mr Howe: Well, the MoD gave a broad indication when they announced the decision 15 months ago that it would be about a two to one division between BAE and ourselves. Actually I think at the moment Thales has quite a high share of the activity because the activity has to do largely with the design work and so on in which elements of what we proposed were chosen, so the way the work is being shared at the moment is not necessarily a complete reflection of the overall balance of the programme between us in the long term.

Q46 Chairman: What progress has been made to permit BAE Systems to bid into the new French Carrier programme?

Mr Howe: Well, I cannot give you a direct answer to that, except that, as you know, both governments have made it clear that they want there to be a measure of industrial co-operation, co-operation at the industrial level between the French and the British, given that the French have indicated that they want a carrier which is broadly of a British type. The discussions on how that is going to work are not yet fully advanced and we, on this side, are talking to the MoD about it, and I am sure there is a dialogue with the French MoD on the other side, but of course I think the question of actually what shape of industrial structure is there going to be in the UK in the long term will enter into that.

Q47 Chairman: Sir Richard, do you have any high expectation of being able to participate in the French carrier programme?

Sir Richard Evans: Not to any significant extent.

Mr Frost: I would just like to comment from the supply chain, which is that I would just hope that the UK Government would be as robust and as thoughtful in its entry into negotiations as the French Government.

Mr Howe: Can I just make the point that, as I say, it is early days and we will see how this works out, but I would not have thought that it will 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 in terms of the work-share shifting, but it is just that I would have thought there would be a broad two to one balance because the French are buying one carrier and we are buying two, but it is only surely commonsense that if the French are buying a carrier which is pretty similar to the one whose design in the UK is now pretty far advanced, there must be an advantage in the two programmes talking together at an industrial level, if only to get a handle on risks, to give more confidence in timescales and to get a handle on costs, the sorts of things we were talking about earlier.

Q48 Chairman: Who has the intellectual property rights on the design? Is it Thales or the Ministry of Defence?

Sir Richard Evans: The intellectual property rights certainly will not be owned by the Ministry of Defence and indeed this is contracted convention, but the Ministry of Defence will effectively have free right of use of whatever intellectual property rights are generated.

Q49 Chairman: But if, as John said, the French proceed with designs that are largely British, does that mean to say that they are proceeding because Thales designed the carrier and, therefore, they borrow Thales' design or do they have to go to the Ministry of Defence and say, "May we use the designs that you, the Ministry of Defence, paid for?"?

Mr Howe: I think there are some important rules of engagement in that sort of area which, as far as I know, have not yet been decided or laid down.

Q50 Mike Gapes: Sir Richard, I would like to raise some questions which may not be very comfortable for you, but in the last few weeks or so the press have not been particularly friendly to BAE Systems.

Sir Richard Evans: Is this a new situation!

Q51 Mike Gapes: Well, I think the number of headlines seems to have been a bit more than normal. Could I put it to you that it appears that the relationship between your company and the MoD have reached an all-time low, and if I could just refer to a few issues, the overruns on Eurofighter, Typhoon, the problems on the Future Carrier programme and the announcement that you made about considering selling your naval division, in the light of all of those and other difficulties, how do you see your current relations with the Ministry of
Defence?

Sir Richard Evans: Pretty robust. I think that when you look at the issues that are under discussion at the present time and the importance of them to both of us, it is perfectly understandable that they will get, and, I suspect, could get, quite a bit tougher than they have been to date.

Q52 Mike Gapes: Really?

Sir Richard Evans: I would like to take you on on Eurofighter, and there are various press articles on Eurofighter which have appeared not just this week, but on previous occasions. BAE Systems has no contractual relationship with the UK Ministry of Defence at all on Eurofighter, just so that we stake out the arrangements here. We are a sub-contractor to a company which is contracted to design, develop, build and supply Eurofighter aircraft, and we are discharging our part of that programme. The UK Government, and we support them in this completely, wish to make changes to the international contract to which we are not a party. The principal change is to introduce a new variant of the aircraft and to introduce that variant at tranche two. There is 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, but I have absolutely no doubt that in due course a resolution to this will be found and the Eurofighter programme will continue and be a highly successful programme. In terms of the small number of aircraft delivered to date, the RAF, in what is called 'Case White', are getting absolutely exceptional levels of flying out of the aircraft. The early part of the programme which we are in at the moment, which is always a very difficult period as the aircraft is going into production and early aircraft are being produced, which is right at the top end of the learner curve, is a very difficult point of the programme to take a judgment on in the context of what the final cost outturns will be. However, when you want to make a change to a programme as big as this, then it requires in this case a variety of disciplines to support those changes and there is a lot at stake for me in the capacity of my company and there is a huge amount at stake for the Ministry of Defence because of the size of this programme, so it is pretty robust.

Q53 Mike Gapes: But is it not true that your company is trying to get cost overruns on the first tranche put into research and development costs on the second tranche?

Sir Richard Evans: No, absolutely not at all. The pricing arrangements for all 600-plus aeroplanes were agreed at the outset of this programme. Tranche one is off that programme. It is priced against an agreed learner curve, it is priced against delivery dates and if there are any changes to the programme in terms of deliveries or to the technical specification, the contract has got to be re-negotiated. If you want to change the programme, change the deliveries and change the specification, you are actually buying something different from the one you ordered and that is actually what is happening and we support the MoD completely on this. We think we need a surface-to-ground aircraft capability, so we are entirely supportive. 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, standing at the bar, to share. It is inevitable that it is going to be very robust.

Q54 Mike Gapes: You are talking about £700 million, according to the press reports.

Sir Richard Evans: Well, I do not think any of us know at the moment what it is because I come back again to the question of risk reduction. There is absolutely no significant work being done on an air-to-surface variant of the aeroplane and, therefore, in the context of the investment of the non-recurring costs, none of us can put our hand on our heart with any certainty and give an indication of what they might be, but for sure we know what disruption to the main-line programme will be and it is considerable.

Q55 Mike Gapes: Can I take you then on to your proposals to sell your naval division and you touched on this earlier, but can you just confirm what the position is on that because there is a report that you had lost your battle with the Government and also in one report that the Government had scuppered your plans to sell the naval yards to the French.

Sir Richard Evans: That is complete rubbish. There has been no discussion of any consequence about selling the naval shipyards to the French. The French have not made any offers to buy the shipyards, and I go back to what I said previously, that if there is a case and somebody has a proposal to put to us and we can see a way of more efficiently securing a long-term interest of this business, we will follow it, but we are nowhere near the point of people putting offers on the table for the business at all.

Q56 Mike Gapes: So you would say that there is no substance in any of these reports?

Sir Richard Evans: Well, there clearly is no substance on the basis of what I have said and the fact is that there has been no debate or dialogue with the French about the French buying these yards at all. What there is some substance to is that if we are going to have a long-term partnership to support this business, there have to be two of us agreeing to that long-term plan and it includes things of the sort which have already been raised in terms of how you maintain the engineering and the intellectual capacity which is required to support the long-term design and engineering for this business. Now, I thought, and I still continue today to believe, that that was a view which was shared by the Prime Minister and by other senior members of the Cabinet at the time when we acquired this business from GEC Marconi. Now, since that time budgets have become incredibly difficult, incredibly tight and maybe the number of Type-45s is not going to be as big as we thought it was, maybe the number of nuclear submarines is not going to be as big as we thought it was and if that is the case, that changes the dynamics of the business and we have to have answers to these questions because quite clearly we are pouring investment into these sort of businesses and it is on a set of assumptions at the moment, but if those assumptions do not materialise, then we will never get our money back.

Q57 Mike Gapes: So clearly, from what you have just said, I would not take it that the relations with the MoD could be described as very harmonious at the moment.

Sir Richard Evans: Well, I think you need to be careful about how you define the MoD. The MoD is a sort of house of many branches. It is absolutely true that the guys are under intense pressure in procurement and that is because we consume such an enormous part of their budget. I suspect in the context of what they are committed to, they do not have the budgets to meet those commitments, so that is a pretty fractious relationship. Then there are other parts of the Department with whom we have extremely good relationships. You have only got to go and look at the preliminary reports from the Iraq conflict in the context of the quality of equipment that we have supplied to the military, the performance, the maintainability and the reliability of that equipment during and in the theatre of war and to look at the praise which they have given us to understand that there are areas of the Department which are hugely supportive of us, but that does not make very good copy in the press, I would agree with you.

Q58 Mike Gapes: So you would not think that we need to go on a charm offensive to try and restore relations or to take some concrete steps to try and get back on an even keel?

Sir Richard Evans: No, I agree with that statement. Where people feel in some way offended by the robustness or the attitude to them and it causes offence, clearly we have to put that right. I do not know whether Geoff Hoon feels that that is the case, but if Geoff does feel that that is the case, then I would be the first guy to go to him and eat humble pie and be very explicit in the fact that if we have caused some sort of offence, we should put it right.

Q59 Mr Jones: Does that include the Chief Executive?

Sir Richard Evans: Absolutely. When I speak for the company, I speak for everybody in it.

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: Yes, and 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 on the future family of light-armoured vehicles which did not get off the ground for various reason, then in the early 1990s there was almost 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 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. It is a project that has a number of different levels 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. I think that falls into a number of areas. I think 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 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 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 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 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 and buy 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 probably 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 programming 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.