Uncorrected Evidence 572

UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE

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

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

DEFENCE COMMITTEE

DEFENCE PROCUREMENT

Tuesday 25 May 2004

LORD BACH, SIR PETER SPENCER, KCB and

LIEUTENANT GENERAL ROB FULTON

Evidence heard in Public Questions 186 - 321

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Oral Evidence

Taken before the Defence Committee

on Tuesday 25 May 2004

Members present

Mr Bruce George, in the Chair

Mr James Cran

Mike Gapes

Mr Mike Hancock

Mr Dai Havard

Mr Kevan Jones

Rachel Squire

________________

Witnesses: Lord Bach, a Member of the House of Lords, Minister for Defence Procurement, Sir Peter Spencer, KCB, Chief of Defence Procurement, Ministry of Defence, and Lieutenant General Rob Fulton, Deputy Chief of Defence Staff (Equipment Capability), examined.

Q186 Chairman: Minister, Sir Peter, welcome back; General Fulton. We have a pretty long set of questions we would like to ask you, although we would like to finish at 12.30. Is there anything you would like to say to kick off?

Lord Bach: I would like to if I may, very briefly. Thank you very much, Chairman. I am delighted to have the opportunity once again to discuss with the Committee progress on our equipment programme and the related themes of developments in our Defence Industrial Policy and Smart Acquisition. As you have already said, I am fortunate to have with me today Sir Peter Spencer, Chief of Defence Procurement, and Lieutenant General Rob Fulton, Deputy Chief of Defence Staff (Equipment Capability), namely the equipment capability customer. I recall that last year both Sir Peter and General Fulton had only fairly recently arrived in-post when we sat before you, but I know they are now pretty familiar faces to the Committee and need no further introduction - particularly as you have seen them both I think during the course of the last few months, and in Sir Peter's case only 13 days again. I want to emphasise first that much has been achieved in the last year on some of our most significant projects. I want to mention just two at completely different ends of the spectrum. We achieved, as you know, Chairman, the in-service date for Bowman ahead of schedule in March of this year - although there is obviously still a long way to go. At the other end of the spectrum, the sort of project that no-one ever hears about, I want to just mention as an example the dismounted close combat trainer, which will actually give our troops the best small arms training simulator of its type in the world. That achieved its 50 per cent in-service date of October 2003 and came in under cost, under the Ł13 million. There are other examples. I believe Smart Acquisition is undoubtedly delivering many benefits. Although we are moving in the right direction, I do not want to suggest we are performing as well as we would hope on the delivery of equipment projects. It was the right time over the last year for Sir Peter's stocktake, to conduct an in-depth assessment of what we have achieved under Smart Acquisition, and what we need to do to improve performance still further. You questioned Sir Peter in detail on 12 May about how we are implementing the recommendations from the stocktake. I will be supporting Sir Peter, General Fulton and the Chief of Defence Logistics as they drive this change programme forward, for example, through the ministerial group, which we have established, to give high level impetus to the reforms where necessary. A brief word on defence industrial policy: at last week's meeting the NDIC supported fully our approach to important development of an existing part of the policy, namely, one I know that the Committee has been concerned with, our emerging work on industrial strategy. We are aiming to identify more explicitly the technical capabilities that we need to meet defence needs now and well into the future. We will assess the importance of sustaining these capabilities in the UK for national security, for technology, or for wider economic reasons. This is a complex undertaking that will take some time to do properly. I want to reiterate that competition and value for money remains at the heart of our acquisition system. The results of all this will be shared with industry and will inform our priorities for investment. We are doing this work in parallel with our other defence policy industrial work strands, which remain a high priority. Amongst other things, I think that this work will address some of the concerns expressed by industry, particularly by John Howe of Thales at your earlier hearing with industry. Chairman, if there is one message I want to get across today to this Committee it is our commitment, my commitment, to ensuring that we keep the assessment phase of projects going and do not move too quickly to main gate before de-risking design and design maturity have actually occurred. You will know that the National Audit Office suggested that we should do more of that; and, of course, you will know it is a principle of Smart Acquisition itself but I want to tell the Committee it is not always as easy to do. There are pressures the other way: namely, pressures to get on with the more exciting part of a project, which is production; pressures from contractors to sign up and pay up; and, of course, pressures affecting dates which are in everybody's, not least the media's, mind. The truth is that only by proper de-risking, taking longer sometimes, paying more upfront sometimes will we actually save those delays and cost increases down the line. We need to be responsible about this, and we very much welcome the Committee's support for that line. A lot of people are claiming the phrase "conspiracy of optimism" as the way in which defence procurement has been viewed in the last few years. I do not know who invented that phrase, but I certainly do not want it to be replaced by the phrase "a conspiracy of pessimism". Perhaps what we should all be striving for - and I think this is very much what Sir Peter's stocktake has achieved - is a conspiracy of realism.

Q187 Chairman: Thank you very much. Minister, the broad message we have received from industry is that the Defence Industrial Policy has made a good start but needs to be further developed. You have alluded to this but perhaps you could give us a little more detail of the thinking of the Ministry of Defence and of yourself? In what areas are you planning to develop the policy further?

Lord Bach: The main one, and the chief one, is this move towards establishing an industrial strategy to go alongside an industrial policy. We need to further develop and state what technologies and industrial capabilities are of the greatest importance to us in maintaining existing capabilities, and which ones we expect to require in the long term. This will not be an easy task, because I have just said it will take quite a long time to do properly, but it may also be not exactly a happy story for everyone; because if we decide that we need certain capabilities, either now or in the future, it may equally mean (it is almost bound to, is it not?) that there are capabilities we thought we needed or we had taken for granted that we needed that we no longer do. I believe that this move towards an industrial strategy, asked for by the industrialists when they appeared before you a little while ago, is the main advance that we hope to make in the next few months (it may take longer than that to do it properly) in the DIP. I would say, and I would stress, as I think the industrialists did too, the Defence Industrial Policy is still quite new - it is less than two years old. Some have asked why there was not one before, and I think that is quite a good question. I think we should be given some credit, which is cross-government, for having agreed a Defence Industrial Policy and working our way through it. It clearly has had an effect, I believe, on certain procurement decisions taken already. The one I would say it has certainly had an effect on was the Hawk decision.

Q188 Chairman: When we had the industrialists in with us the Chairman of BAE Systems took the lead role and he told us, "there are some pretty big tensions in the relationship" with the MoD. He appeared to be in a conciliatory mood and his term expires shortly. How do you see the relationship between the Government and defence manufacturers, and between Government and what is our largest British defence manufactures: a) are there tensions with industrialists in general; and, b) your take on the olive branch that Sir Richard was proffering which, I must say, was viewed with some scepticism by myself? I would welcome your comments.

Lord Bach: I have read the transcript very carefully including, if I may say so, Chairman, your remarks to Sir Richard.

Q189 Chairman: Indirectly through him to you!

Lord Bach: I think every remark you make is indirectly to us! That one certainly I agree. Let me just say a word about that. The first point is, I really do not think the fact there is tension between industry, on the one side, and the Ministry of Defence, on the other, is necessarily a bad thing. We are separate animals. Industry have their tasks and their jobs and the people they have to look to, to perform their tasks, and we have ours. Ours are the Armed Forces to make sure they are properly equipped and, of course, the taxpayer too. If the relationship was too cosy, then I think even more questions would be asked than are asked at the present time. Having said that, it is important and I think industry agrees we have gone some way down the line of having a better and closer relationship with industry, because some of the projects we undertake are so complex, so difficult, so vast and expensive that we need to work with the grain of industry rather than against it. As far as BAE Systems are concerned, they are clearly very important contractors for us; have been for some time and remain so; and will be, I am confident, in the future. The relationship is often satisfactory, and sometimes good or better. At the corporate level though it is sometimes difficult because of differences in approach at the highest level and perceptions of how the relationship should work. In particular, the seeming wish of the company at the very top to be in some way in an exclusively privileged position with the MoD (the word "champions" is sometimes used here) is something which I am afraid I cannot accept as being realistic. Competition is the basis of our procurement policy and must, I think, remain so. Let me tell you, there are a whole range of levels upon which the relationship between the company and the MoD has to be a good relationship, and it is on a whole range of projects. If I take as an example the support projects - there are some very major support projects for existing equipment. There is no doubt that the relationship is excellent. From personal experience I am responsible as you know, Chairman, for defence exports; when I go abroad I invariably meet up with employees of BAE Systems who are in the business of trying to sell equipment for their company and for the country. Their working relationship with DESO is incredibly close; and their working relationship with the Department is close too. Of course I accept there are difficulties in this relationship, and I actually accept what you said to Sir Richard - which was that it was important that all sides do their best to make sure that the relationship was a workable one, and one that got better rather than worse. I think that is happening. The personal relationships are very good. I know the CDP sees the Chief Executive of BAE Systems at least once every two months. I have regular contact with senior members of BAE Systems. I have to always remember though that our interests as the Ministry of Defence are to make sure that our forces are equipped properly, and that the taxpayer's position is looked after. BAE Systems and all other defence companies have an obligation to their shareholders which is of crucial importance to them.

Q190 Chairman: But there is more than tension if BAE Systems told us publicly and privately that there is a lot of pressure on them (because they cannot make any money in this country) to pack up their bags and operate out of the United States or elsewhere. That does not seem to me to be an example of tension. That seems to be an example of something infinitely worse than tension. You may well argue, Minister, that this is just BAE positioning themselves for something or other. The nature of the relationship must be pretty high when these threats are aired publicly and privately. What can you do to reassure this Committee that the largest defence manufacturer - for all of its faults and faults are on both sides - will remain in this country?

Lord Bach: I cannot guarantee that, can I.? From where I sit this is part of the division that there is between the Ministry of Defence and private industry. It is my belief, of course, that BAE Systems will continue to play an important and leading role in the manufacture and support of British defence equipment. We are living in a different world now as far as defence equipment is concerned. To say it is a global industry really is just a statement of the obvious. BAE Systems, and other British companies, have bought and purchased companies all over the world, particularly in the United States, and are absolutely entitled to do that. We also, in this country, are willing and happy to see companies that originated in other countries buy into the United Kingdom too. That is the way the markets are going to continue. I would very much regret it if BAE Systems took the course that, as you have said, has been publicised to some extent of moving out of the United Kingdom. I do not believe that. This is a company that employs, to use your figures, 40,000 people in the United Kingdom. They are an essential part of our defence infrastructure.

Q191 Chairman: Tell us something about the future and the manufacturing of helicopters, Minister. I know I do not rush to believe anything that appears in the newspapers, but is this going to be another story (on your watch) that another British company heads not west but south? Is the story true that Finmeccanica are in essence going to acquire GKN Westland? Is this another wonderful example of our Government's strategy to help internationalise defence manufacturers (and I just wonder what there might be left of British defence manufacturing to sell to competition abroad in the future) which I would very much regret?

Lord Bach: I think it is a very fair question but of course, as you know, I am like you and can only look at newspapers and read what I read. These are private companies which are entitled, on the face of it, to engage in what transactions they wish to, subject to regulations and subject, of course, to our being satisfied over a number of very important issues, including security of supply. Can I just remind you, if I may, what the Defence Industrial Policy says about what qualifies as being British and what does not. It really is time that we left behind the concept that what actually matters in the end is where the ownership of companies actually resides from one day to another, from one month to another. What matters is where the work is done; where the work is produced; where the jobs are; where the technology is; and where the value is in the broadest sense. There are companies under the Defence Industrial Policy, which has been widely accepted as a fair document, that originate from abroad that have invested in the United Kingdom and, as a consequence of that investment, have added value by adding jobs, by providing technology and helping us produce the equipment that General Fulton wants us and requires us to produce. In the same way, British companies have also invested abroad as well, and are an important part of the process both in Europe and particularly in the United States. As far as this particular transaction is concerned, I am really not in a position to say any more.

Q192 Chairman: Laisser faire has overtaken this Government. It is not particularly interested and has no influence whatsoever in a manufacturing company, a very good one, that has received enormous orders from the British Government, and was ostensibly in partnership with an excellent Italian company. Frankly, as far as you are concerned, if that company changes ownership then this is just a matter of reality and bye, bye to ownership? Obviously you do not, but I feel that ownership is partly related to manufacturing; because if a company is controlled abroad then (as other governments seem to look after their defence manufacturers quite well) if there are any job cuts they are more likely to be in a foreign country than in their own country. You are doing nothing about it. You are not contacting GKN. You are just reading The Times and seeing if Westland disappears and comes under the ownership of an Italian company, albeit a very good Italian company?

Lord Bach: Can we take one thing at a time. I think the stage of that transaction is, there had been an announcement at a board meeting of GKN last week; but that is as far as it has gone, Chairman. Of course we take a great interest in what might happen in the future. Of course, the British Government will want to talk these matters through if this particular proposal goes any further. We will want to talk these matters through with, as you say, Finmeccanica a successful international Italian company. We will want to talk over matters which relate to much more than just security, but also relate to jobs, work that is promised for the future and what their intentions are. It is not just a laisser faire system we support; but we have to accept that this is a global defence market. We believe, probably more than any other country in the world and practise our belief, that there should be openness in the world as far as this is concerned. We will want to also protect the interests of British workers, as well as the interests of British security.

Chairman: You know, Minister, the market is not open. We are open - and more foolish the British are. To us it is very difficult, in many cases, to operate in the opposite direction. You know my views. If I talk to you privately they will be expressed rather more loudly and less elegantly than at the present time!

Q193 Mr Jones: Can I just pick up on the relationship with BAE Systems. Certainly the people I have talked to, for example, at the CBS, at an operational level seem to be doing quite well. The relationship seems to be working quite well in terms of work with Thales and the relationship with the MoD. I do understand the point you have made that possibly in the past the relationship was too close. Is there not a fundamental difference here, in the sense that you have got a company - although the Chairman who came before us last week was holding the olive branch out - you have a Chief Executive and company which clearly still wants an approach which is diametrically opposed to the Government's position? I hear what you say about competition. Is it not important - not only in terms of a major supplier to the Government with regard to projects, but also in terms of what the Chairman is saying regarding jobs, because it is a major employer in this country - not just in terms of direct jobs but also indirect jobs? Unlike you, some of us next year will have to get re-elected and a lot of these jobs are in communities which we will be asking people to support. What I am saying to you is this: getting the relationship right is vitally important, not just in terms of personalities - personalities perhaps have taken over more than the actual policy itself. The fact of the matter is, what reassurance can you give, for example, to BAE Systems workers throughout the country that this relationship or bad karma will stop; and it is not going to mean at the end of the day they will lose their jobs?

Lord Bach: I may not have to get re-elected, Mr Jones, but I have a passing interest in making sure that some people do.

Q194 Mr Jones: I am reassured about that!

Lord Bach: Your question is a very good one indeed, if I may say so. I think I will go this far: I hope I have already said it, and that is that the relationship with all our defence contractors - and it goes without saying, they are a major defence contractor, BAE Systems - is of huge importance; but that does not mean lying down and playing dead every time either, for the company or for us. There will be moments in time when there are difficulties that are sometimes blown out of all proportion because it makes a good story. I think our fundamental relationship with the company is a good one. As you have said, on many, many projects - large, small and medium - the Ministry of Defence and the company, through those who are running those projects, work extraordinarily well together. At the top there is a great amount of contact on a regular basis; and where we disagree we know we disagree. A message to BAE Systems workers would be that the Government is really committed to that company continuing to play its leading role in defence manufacture; but it is a private company. It is the one that decides in its own shareholders' interests what it does. It is a company with an enormous amount of specialist skill that we require in this country. My own view, and here I am really following what Sir Richard Evans said before you earlier, is that the relationship between the Government and BAE Systems is not nearly as bad as it has been made out to be. It may be Sir Peter would like to add something to that.

Sir Peter Spencer: I think the other point I would add on is that if you look at the Defence Industrial Policy and apply it as written down competition does not necessarily export jobs; because industrial participation of high quality work both in design and manufacturing is frequently made a discriminator in bids. The fact of the matter is, whilst other nations might be prepared to appear to be putting more money into sustaining the home base industry, they are demonstrably getting less operational capability for their money as a result. We are trying to get a better balance to balance the needs of the taxpayer and the frontline military forces to get the right amount of capability and, at the same time, to sensibly nurture the industrial base. As I mentioned last time, in the context of the Alvis-Vickers proposals (which is a bit further advanced in terms of public knowledge) there can be occasions where this can be beneficial; where it is possible that the relatively irregular nature of our own demands for military capability can be smoothed out by being part of a bigger concern. These companies do want to do business with us, and we can set the terms under which that business is going to be done.

Q195 Rachel Squire: Minister, I think you have already touched on a quote that we had from the Vice-Chairman of Thales-UK, who told us that there is now more dialogue between industry and Government but there is still some way to go in one particular area, which is clarity about what kinds of industrial capabilities and technologies are judged to be of crucial strategic importance in the long-term. In your earlier point you were talking about the technologies in industries which are of the greatest importance to the country and that time is needed to do it properly, and you have said a few months and I think you went on to say maybe longer. I think you will appreciate the general concern that what may be already being considered to be areas of crucial strategic importance could be lost or certainly eroded by the time a statement is made of what those crucial strategic industrial areas are. Could I ask you to comment further on whether there are any interim views on what kinds of industrial capabilities it is important to retain in the UK for strategic reasons?

Lord Bach: I agree with you, when you say that there is something of an urgency here in order for the position to be clearer than it is, as to what it is we consider to be vital capabilities that we need to keep in this country. I have asked that work should continue rapidly on that, and that is happening. I think we probably have to do it in two phases: one is to deal with some of those possible areas where the matter comes to a head early on; and then the second phase will be having a more comprehensive look at where those capabilities are unnecessary. I am slightly wary of entering into a debate about where those areas are. It may be that Sir Peter and the General may be able to assist rather more than I can at this present time. I think we can all think of the areas where these may be so. It may involve shipbuilding, for example; it may involve aeroplanes, various types of military aircraft as well. I am sounding extraordinarily vague, and I know what you want is some precision.

Lt General Rob Fulton: I do not know if I have got anything to add at this stage by way of specifics. Clearly we are interested in setting out how we see the development of capability going forward. We are looking at the 2008/10/12 timescale. We are clearly also interested in ensuring security of supply in the event of urgent operational requirements. That is clearly a consideration. The third area I am interested in is making sure that we can sustain in operation some of those equipments which we are going to keep in operation for a long time. Challenger is an example which springs to mind. Currently we plan to keep Challenger in service until 2020-2023 perhaps. Clearly we will want to upgrade it over time and, therefore, we will need to make sure that not only can we maintain it but also that we can upgrade it. I think I would be wary of being drawn on specific technologies, but I think there are certain parameters. I can see the parameters within which my part of the business would want to, as it were, ask the question and ensure that it is there for us.

Sir Peter Spencer: I could be a little more explicit. As the policy identifies there are already some key areas, for national security reasons, which we guard very closely, and may include nuclear technology; nuclear, biological and chemical defence; counter-terrorism; and to that I would add cryptographic technology. We are also looking in the context of the main sectors of the industrial base, as the Minister alluded to, sector by sector. Clearly the one which is closest in front of us on the radar screen is submarine and nuclear technology. The fragility of the nuclear steam raising plant industrial base is well known to this Committee, and that is something which we are nurturing on a daily basis, and putting together the strategic thinking to ministers, which will then need to be discussed across Whitehall. We will check the other technologies on a case-by-case basis as we move though. Surface shipbuilding is another area clearly where we need a decision on that because we have to make a decision in this very large programme which is in front of us, which is more than just the two new aircraft carriers, as to how we are going to do that with our own industrial base. You mentioned, rotary wing - clearly we have got work to do in that area and in the other major areas.

Q196 Mike Gapes: Could I take you back, Minister. You touched in passing on the Hawk. I had a very interesting exchange with Sir Peter two weeks ago about the question of the decision taken by ministers to overrule the DPA in 2003 with regard to the Hawk and the consequences of that. You will be aware that there has recently been the gaining of an important export contract to India. When I asked Sir Peter about this he said he there was a longstanding convention that advice to ministers was not discussed. Therefore, can I ask you as the Minister to clarify the position with regard to the circumstances in which it was decided to go for the Hawk, which has turned out to be an absolutely correct decision and, therefore you were absolutely right. Does that not raise question marks about the advice that you got which is based upon a policy which, in this case, was not a correct policy?

Lord Bach: If I may say so through the Chairman, it is a very good try but I do not think the convention changes merely because you are asking Sir Peter or asking me. I am not going to go into any detail of any kind as to what advice ministers may or may not have received on this issue - save to repeat what Sir Peter said, and I read very carefully your dialogue with him, which is that this was not as it seems a suggestion of some other jet trainer as opposed to Hawk; it was more complicated than that, and it had much more to do with competition than it did with any other type of jet trainer. That is as far as I am going to go. I may have even lifted the veil a bit too far in saying what I have. No, I think the decision (if you pushed me) was the right decision to make. I am delighted we made it. It was a government-wide decision; and I think it is a good example of the Defence Industrial Policy being put into practice. In other words, all the issues that there were surrounding Hawk - both value for money, the importance for the defence industry in this country, high technology - all these were taken into account. There can be different views as to where that led. Ministers views were that it led to Hawk and I think that decision was the correct one.

Q197 Mike Gapes: Did you agree with the view expressed in an article recently that the Defence Industrial Policy currently tends to be considered at a late stage?

Lord Bach: I think there has been a tendency for it to be considered at a late stage. I think on occasions it is the sort of thing that has been left, as it were, to ministers to consider when the advice comes up to them from officials. I think that is changing. I think that has altered. I think one of the principles behind the Defence Industrial Policy, certainly an important part of Sir Peter's changes under the stocktake, is that all those issues are considered at a much earlier stage and shared with industry too at a much earlier stage of the procurement process. I think that is the right way to go. I do not think it should just be left to ministers at the end to consider these wider issues. I think they should be part and parcel of procurement processes from the start.

Q198 Mike Gapes: Is there a need for you to do more within the MoD to get your own MoD staff, and particularly those within the Defence Procurement Agency to think about these things at an earlier stage and to behave differently from how they do now, and in particular in the context of possible export orders?

Lord Bach: I believe we are on the right path here. I think the DIP set us on the right path. Sir Peter has continued that process. We are already doing that to a much greater extent than we did before. Let me make it quite clear that possible exports, whether in the Hawk context or in other procurements, are always a factor that are taken into consideration at an early point in the procurement. That will continue to be so. I think DPA staff are very well aware of these wider issues when they come to give advice to ministers.

Q199 Mike Gapes: But ultimately you will not rule out the possibility that you might overrule that advice, as you have clearly done in the past?

Lord Bach: This is something that happens very occasionally. It happened on previous occasions under different administrations; and it will continue to happen. In the end it is ministers' judgments for which they are accountable - whether elected or not. I am certainly accountable as, of course, the Secretary of State. I have to say that the number of times on which it occurs is very rare indeed, because the advice we get from our officials in the Ministry of Defence in this field is extremely good advice.

Mike Gapes: I am pleased to hear it.

Q200 Mr Jones: You said it was a good example of the Defence Industrial Policy working but why was it then, for example, in the case of BAE Systems that I understand a senior manager was in his car on the way over to the factory to hand out redundancy notices and had to be called back when the announcement came through? The workforce have told me that this eleventh hour approach is not good for relationships, but also the workforce clearly had the threat of redundancy hanging over their heads before you agreed to this in the morning.

Sir Peter Spencer: If I could just put this into context. The proposition which came forward had been originally to be a private finance arrangement. There was no real disagreement between ourselves and the company as to whether or not private finance was a good idea for this particular capability. It was very evident that we did not have the possibility of a deal which we could present to ministers and to the Treasury as value for money. British Aerospace were not wholly committed themselves to PFI per se. At that point we were up against some quite considerable pressures on time to then look at the possibility of a conventional procurement and understand enough about what the prices would be, and what the value for money arrangements would be. Under those circumstances I would say that the factory was running out of work; the company clearly was concerned. We worked extremely hard in a very compressed timescale to bring this thing to a resolution. Nobody likes to put people through that sort of anxiety. There is a proper understanding and a proper sympathy of the individuals who find themselves in those circumstances. There was every intention, and certainly very strong ministerial direction on this, to get this thing sorted out in a timescale where we did not pre-empt the thing by the company in Brough literally falling apart before we made the decision. It came good, albeit at the eleventh hour. You can only look at it in the context. Nobody intended to do it like that; it is because we changed the fundamental procurement strategy pretty fundamentally at very short notice.

Q201 Mr Jones: Was that pressure on you from the Treasury or from the MoD?

Sir Peter Spencer: It was not a value for money deal from the point of view of the MoD. We discussed it, as we do with the DTI and other government departments as we go through. There is continuous contact at official level so that people are aware how any particular procurement proposal is maturing. There was no dissention from the view that the PFI proposal did not represent value for money. I only mention that not as an excuse but to put it into context, and say that we then had to turn this thing round very rapidly and to resolve the key issue of the value for money decision which ministers were going to take.

Q202 Mr Jones: We talk a lot now in government about joined-up government, but clearly with a hundred people made redundant in Brough and the subsequent cost to the taxpayer that would not be a good use of taxpayers' money overall in terms of what that would cost the UK government, would it?

Sir Peter Spencer: That is still part of the wider factors that ministers take into account.

Q203 Mr Jones: What I find remarkable is that you actually came within the eleventh hour or a lot closer than that. If you had a senior manager driving across with redundancy notices ready who had to be called back, is that not brinkmanship to a point which is not acceptable?

Sir Peter Spencer: You could argue it was brinkmanship by the supplier too, because if he were confident this thing was going to come through he could have chosen not to threaten to deliver those redundancy notices. I think this was part and parcel of the negotiation.

Q204 Mr Jones: It comes back to the sour relationship between BAE Systems and -----

Sir Peter Spencer: I do not see these as sour relationships. There are large sums of money here at stake. My job is to protect the taxpayer; their job is to protect their shareholder; and different companies choose to negotiate in different ways. On a personal basis there is no sour relationship.

Q205 Mr Jones: I think the taxpayer is not just the MoD, is it? It is also, for example, the other 200 people made redundant at Brough. The knock-on effect of the cost to the taxpayer would be quite substantial, would it not?

Sir Peter Spencer: I am not arguing with you, because your remarks are entirely consistent with the outcome. I was addressing in particular the reason why it seemed to come up against a very tight timescale. I hope that the explanation I have given you has made that clear.

Q206 Mr Havard: You have arrived at the situation you describe where you decided it was not value for money, but set aside how you get to that position at the moment. The new Industrial Policy, the Smart Acquisition processes - you yourself, Sir Peter, came and told us of various changes made in your own agency. How did all of these new tools and techniques help in that situation? How would they help to avoid that process in the future?

Sir Peter Spencer: They had already helped because, if you think about it, the reason why we had asked for a single tender from BAE - at an earlier stage before I took over this appointment ministers had already determined that they did not want to compete in this area; they wished to see if they could get a value for money solution via a single tender. That is precisely the way the Defence Industrial Policy says these things would work. We would not run a competition and then decide we did not like the result. We would look and ensure that if we were going to have a competition then ministers would be content to pick any of the winners so long as they obeyed the criteria of selection, which might include (as I said earlier) industrial participation. It is difficult for me to speak with great authority on this. This came to me on day two in the job and we went to the Investment Approvals Board on day ten of the job when I had been abroad for seven days on international business. I am not trying to make excuses but in terms of what we would do now - what we would clearly do now, and it chimes precisely with the themes of what we are doing as the Minister has described in shorthand as a "stocktake", is to be much more organised inside the Defence Procurement Agency at dealing with industrial sectors by sector, rather than project by project with problems stove-piping has occasionally caused in the past; and we would have a much more healthy dialogue with all of our companies, and particularly with the biggest, including British Aerospace, through the new key supplier/management arrangements, where we have a much healthier, more focussed dialogue and that is happening. It was helpful to me to hear members represent the DIC acknowledge that was moving in the right direction. We can measure that now because part of the key supplier/management arrangements offer each of our suppliers to give a report back to us as to how they find our behaviour on a project by project basis. Our job is to make sure they feel comfortable in being canvassed and we learn from it, and do not just think they are going to tell us good things. We want to hear the things where they believe we could do better. We are getting a lot of that from many of the companies, which is helpful.

Chairman: If there is any correlation, Sir Peter, between you being away and a British company winning a contract I will give you all my air miles! Please write to me and I will write to the Chairman of British Airways!

Q207 Mr Cran: Minister, if I understood you correctly in your introductory remarks you said Sir Peter's performance, if that is what I could call it, before the Committee on 12 May was a very realistic one. I happen to share that view. I think he has taken a very realistic view of the problems in front of us. The DPA has got into a hell of a sorry state, has it not? If I just quote his words to you so you know what I want you to concentrate on, he said that "poor performance" was "endemic" in the DPA, and "there are seven principles of Smart Acquisition ... One has been implemented in full ... Of the other six, none of them had been implemented fully ..", and on it goes in that particular vein. You are the Minister with departmental responsibility for these things, when did you first begin to know about the sorry state the DPA was in?

Lord Bach: I do not think the DPA was in a sorry state, and I do not think that is what Sir Peter was saying. If you look a little bit further on in the transcript you will see he will say in terms, and I am not quoting exactly, there had been improvements in the way in which Smart Acquisition has been brought out, but we had not gone far enough. That was precisely the point I made after the NAO report was published in November 2002. The Chairman expressed the view to Sir Peter last time that defence procurement had been in difficulties for 25 years. I think it was a characteristic understatement by him. I think it was probably -----

Q208 Chairman: 225 years!

Lord Bach: That I think is probably nearer the mark. In other words, we are constantly trying to improve the position as far as procurement is concerned. Governments of all parties have done their best to do this. We, in our turn, are doing our best. I think we are doing pretty well. I think the emergence of Smart Acquisition and the bringing into effect of Smart Acquisition is a very important move. I think it has already shown some signs of success. It would be a miracle if we got this right straightaway, and if we did not make mistakes from time to time, and if we did not get things right from time to time. I think what Sir Peter has done - if I may say so with him present without wishing to embarrass him - is to have a really good look, after about four or five years of Smart Acquisition being put into practice, and saying absolutely bluntly (and for that I am extremely grateful), "Look, we're not getting everything right. There are some things which have been endemically wrong for a long time that we still haven't sorted out, that we need to sort out", and to set about sorting it out. I have absolutely no embarrassment whatsoever, I have to say, in a Chief of Defence Procurement coming in and saying that and setting out some new ways of doing things. I am absolutely delighted that that is what he has done. Please do not think I or any other minister was naïve enough to think that everything was absolutely fine and rosy in the garden up until that particular point. That is not how the world works.

Q209 Mr Cran: Minister, I am quite well aware of that. Ministers have a tendency to come before a select committee and quite often answer questions that have not been asked of them. If I may say so, that is precisely an example that you have given us now. I asked a very much simpler question than the one you have answered. Before I ask it again, I make it very clear to you that we are perfectly well aware of what Sir Peter is doing in the DPA. The question is: what happened before he came along? It just interests me that there were about two years, if I have got my mathematics correct, between your appointment as Minister and his appointment as Chief of Defence Procurement. I would just like to know what was happening in that two-year period. For the purposes of answering, I would like you to ignore what the Chairman said about procurement being in chaos for 225 years. What happened in that two-year period?

Lord Bach: As you know, the DPA was set up, Smart Acquisition principles were put into effect by Sir Peter's outstanding predecessor, Sir Robert Walmsley and I, working with Sir Robert, was looking all the time at how this was actually progressing. During that period of time I do not think anyone would have said it was working perfectly well. Nor would we have said that it was a disaster. We were learning all the time. What I learned during those first two years, or nearly two years as it was before Sir Peter was appointed, was that Smart Acquisition principles were appropriate principles; putting them in effect was a good deal more difficult than the principles themselves. I do not think there is anything unusual in that at all. There was not a morning when I woke up and suddenly felt what I thought was going brilliantly in fact was not going so well. Ministers I think, I hope, at least have the ability to know that some things are going well, some things are not going so well, and there comes a moment when a new face comes in to head the DPA and decides that something decisive has to be done, and I am delighted that Sir Peter has done that.

Q210 Mr Cran: Again, we are delighted Sir Peter is doing it too, and I have no great difficulty with that at all, but the taxpayer might take rather less of a view than the view you have just taken; the view that, in fact, I guess, it has cost the taxpayer rather a lot of money and that we did not have the DPA applying the principles that Sir Peter says should have been applied, and so on and so forth. The taxpayer might take a different view of this.

Lord Bach: I do not think the taxpayer has lost out.

Q211 Mr Cran: You might have expected, on the first day of your appointment, if you had known that defence procurement was in such a state for God knows how many years before, from day one to act. I just get the impression, looking in on it, it did not happen very quickly.

Lord Bach: I think I did act. All ministers when they come to their post look and see what the position is, take advice and try and move the process forward. Here Smart Acquisition had commenced as a consequence of the Strategic Defence Review; it was being set up, it was in its infancy, the DPA down in Abbey Wood was pretty new as well, and things were progressing - we were advancing. I do not think the taxpayer has lost out at all. I think what we have done, after a period of time, is to have a new face in, to say "Look, this is what is going well; this is what is not going so well. We need to change in a whole variety of ways." Sir Peter, I think, is the first to say that he has had full ministerial support for that. I do not think we have anything to apologise for during our term in office, frankly, in the field of defence procurement reform because we have started the reform, it is a reform that started after the Strategic Defence Review, has continued through various ministers, through me and, no doubt, will be continued by my successor. So, no, I am absolutely content with the way in which things have gone.

Q212 Mr Cran: I guess the taxpayer is entitled to ask when this is going to get resolved. Is it going to be next year? The year after? That year after that? To quote Sir Peter, he said: "My judgment is that there will be a problem next year" (which I presume is 2003/04). "It is unlikely to be on quite the same scale as 2002/03". Then he said, and I would like you to address your remarks to this particular quote of his: "There is a systemic problem". That would get the alarm bells ringing in my head very quickly. "There is a systemic problem". What do you construe a "systemic problem" to be?

Lord Bach: I think the expression is "has been a systemic problem". Sir Peter will be the one who will ----

Q213 Mr Cran: It does not say "has been" - "There is a systemic problem." I can quite easily ask Sir Peter, but, as the Minister responsible, I would like you to tell me what that means. I would like you to tell me what you are going to do about it.

Lord Bach: I think there has been a systemic problem in defence procurement for many, many years. What all administrations have sought to do is to make the position better. We are no exception to that. The systemic problem, as I see it, is that we are involved in spending a large amount of taxpayers' money in an extraordinarily complex field. The judgments that are made have a profound effect on whether we get the equipment that our armed forces need. We have not always done it as well as we should. Smart Acquisition, with its principles being brought into effect, we think, can do a lot to resolve the systemic problem of defence procurement down the years, but we do not believe - and I do not think the Committee should believe - that that can happen overnight or within one year or five years; it has to be done gradually. I think our achievement since 1997 in this field is actually quite a good one. I do not think the taxpayer has lost out as a result. You, I think, were quoting Sir Peter in relation to the National Audit Office report of 2003 when there were - and you may have heard me on the media the day after it was reported - some very disappointing figures in terms of cost increases and time delays, particularly as far as legacy projects were concerned. Some of those projects, of course, started as long ago as 20 years or were thought about as long as 30 years ago. What I am saying to you is that I think we are improving. I think we needed someone like Sir Peter to move us forward faster.

Q214 Mr Cran: Minister, you can see the difficulty that I have and, I guess, anybody else looking in on this discussion would have. You started off saying that we are really getting to grips with it, and I have no doubt that that has happened, and Sir Peter has convinced me that that is the case. You put alongside that the quotation he gave us that "There is" (not there has been) "a systemic problem" and, I am afraid, you have failed to convince me thus far that you know what the systemic problem is within the DPA.

Lord Bach: I am sorry if I failed to convince you. I hope I may have had ----

Q215 Mr Cran: What is the systemic problem? What is it?

Lord Bach: This is a question you should ask Sir Peter, obviously.

Q216 Mr Cran: No, I am asking the Minister who is responsible. I will get on to Sir Peter in a minute, but we did have a bellyful of him a few weeks ago.

Lord Bach: That is not the way I would put it.

Q217 Mr Cran: I am sorry?

Lord Bach: Having read the account, it is not quite the way I would put it.

Q218 Mr Cran: I am not getting very far with this, Chairman. Just one other question. I was surprised that you said that the taxpayer had not suffered in terms of cost and so on, as a result of the chaos - I suppose it was - within the DPA.

Lord Bach: Are you quoting Sir Peter when you say "chaos"?

Q219 Mr Cran: No, I am using my word. You did not say that?

Lord Bach: No, you said it, and I wondered whether you were quoting Sir Peter.

Q220 Mr Cran: Would you tell me though if the MoD has quantified the cost to the taxpayer of the non-application of these 7 Smart Acquisition principles - for any time period that you would like to choose?

Lord Bach: It would be impossible to quantify that cost, and I think, Mr Cran, you know that it would be impossible to quantify that cost. Smart Acquisition is a recent invention. It began with the Strategic Defence Review of 1998 and has been put in practice since that time and, in my view, put into practice fairly well. Perhaps some of those 7 principles should have been put into effect more clearly before Sir Peter arrived. I accept that. Whether that has cost the taxpayer any quantifiable amount of money I would somehow doubt.

Q221 Mr Cran: As I taxpayer, I should like to know. As a taxpayer speaking to the Minister, I would have expected you to have done that, to have found out from the beginning of Smart Acquisition, to where we are now, or in any other time period that you would like to choose, what the cost to us has been. Obviously, you have not done it and we will just have to accept that. Can I ask one other question, and that is all I do want to ask? What is your timescale for getting the Defence Procurement Agency into - now, I had better choose my words carefully - an efficient organisation? Have you got a timescale for that? If not, why not?

Lord Bach: I am sorry to disagree with you but my view is, and I think it will be Sir Peter's, that the DPA has always been an efficient organisation; that it could do better ----

Q222 Mr Cran: Minister, we really are dancing around with words. I read the quote again: "There are 7 principles of Smart Application. Only one has been implemented in full." That is not efficient.

Lord Bach: I think the DPA is an efficient organisation and has been since it was set up. That it has not done as well as we would have liked it to have done is undoubtedly true, but to suggest, as I think you were suggesting, that somehow chaos had reigned, is just completely untrue.

Q223 Mr Cran: Chairman, I just have to have one other question here. We just have to understand how we put together the fact that of the 7 principles of Smart Application only one was implemented fully. If that is not inefficiency, what is it?

Lord Bach: The DPA is much more than, frankly, just that. It is an organisation that is responsible for providing the British Armed Forces with the equipment that it needs. In terms of doing that, I think it has, on the whole, been an efficient organisation and better than what preceded it. That is what I mean by "efficient".

Mr Cran: Minister, I have no other questions, but I find your answers singularly unconvincing against the NAO's report and against what Sir Peter said to us two or three weeks ago.

Q224 Chairman: I hope you are not in court, Mr Cran, when Lord Bach is acting for the prosecution when his tenure ends. May I say, frankly, I think you are doing a very good job. You are grossly underpaid, and you should see your trade union rep to get a rise. I do not wish to add to what Mr Cran said, but basically I think I share his view that there is a systemic failure in the British Government, in that you wait for a crisis before anything is done. We are only wishing to ask what internal feedback mechanisms are there so you can pick up problems before having to wait for a new Sir Peter to come in and then try to clean up the stables? Surely there has to be a process by which you have people sitting alongside Sir Peter, or nearby, so that if the alarm bells are ringing - albeit not too loudly - the feedback process is such that you can take corrective action rather than waiting for a major study and then Mr Cran jumping in and questioning about how the whole process operates. I hope Sir Peter lasts a long time in his office but when he leaves and is replaced I hope there will not be somebody else coming along having to make a fundamental review because the MoD ought to be able to pick up these things more successfully.

Sir Peter Spencer: Chairman, could I make a statement, just to clarify? We have accepted that this is a very big, complicated and difficult problem to tackle. I would have to say that the work which I have put into place did not just begin with my arrival; there was a lot of work which I picked up which had been put in place by Rob Walmsley and by David Gould, who remains my very excellent deputy. So it would just be dishonest of me to try and claim any particular personal credit. Inevitably, on arrival I did something called "due diligence". I examined the bottom line and discovered that the sort of worrying signs that had already been picked up - and which the Minister picked up, as I said earlier, as long ago as 2002 - had indeed developed rather worse than we had hoped. The reason for that is that to start with in a comparison of project performance of those which we, in shorthand, badge Smart projects as opposed to legacy projects, they were clearly doing very much better, but as was forewarned by some of my own people and confirmed by the National Audit Office, if you look down into the detail there were worrying signs of consumption of what we call risk differential, which indicated in a project which was at a relatively early stage that you needed to be very careful. The Minister cannot respond in the absence of hard evidence of something. It was not really until we got the MPRO3 report, which was published just before I arrived, that we began to realise the extent to which this was happening. So all of the sort of instincts that people had, that we had to be wary, suddenly were confirmed quite dramatically and we then, as I said to you before, had to confirm whether or not this was a one-off blip, and a lot of the damage there was the legacy project. We had to clear away the legacy thing and take a look at the Smart projects. That has confirmed the diagnosis. So it is not as stark as it might have appeared to have come out in the discussion. I do not want to try and claim credit which is not mine. I do not believe it is reasonable to expect me to sit dumbly alongside the Minister when, in fact, he could have only responded to the evidence which I then began to be able to present to him, but he was already aware of it and had already put in place himself much of the continuation of work. What my arrival did, if you like, was to give us an opportunity to really convert it into something which had to be addressed with some urgency - and urgency is the key word in all of that. There is huge buy-in within the Ministry of Defence, within the DPA and with industry; we are all in this together, trying to make it work. The need now is to look to the future and to press forward.

Q225 Chairman: Thank you, Sir Peter, for your frankness before us. It is not something we get as a matter of routine, and even though we are asking tough questions we greatly appreciate the fact that you are prepared quite honestly to come before us and say what the situation is, because it is in all our interests that Smart Acquisition really, really works. Yes, there have been problems but it would be unbecoming of us if we did not say we would like, as you say, to see far more from its role. Maybe, if Sir Peter had expressed his words not in terms of cricketing analogies but of footballing, it is a bit like Leicester City played 20 and 5 points and Walsall, if I dare, as opposed to a batting average of 5 having played 20. Maybe it would have brought it home more graphically by particularising and expressing it in footballing terms.

Lord Bach: I stand corrected. I am glad you mentioned Walsall, Chairman.

Chairman: I am sorry we are not going to be in the same league as you, Lord Bach.

Q226 Mr Hancock: The Chairman and I have both been on this Committee long enough to remember when your predecessor came into this room full of the joys of Smart Procurement and told us how much it was going to cost to set up this new operation and all the benefits that were going to be there. Some considerable time has elapsed since then, and I remember asking the question "Tell us what Smart Procurement is" and Sir Robert Walmsley spent some considerable time explaining to us that it was a concept he was on top of and the whole of this agency was behind him and we were on our way. I asked the question did he believe that we were smart enough to implement Smart Procurement. He said "Of course we are", in a rather aggressive way - very similar to your response, I must say, having been taken aback by Mr Cran's probing questions. Well, it has cost us Ł500+ million to set your agency up and you go consistently down by several billion every year on overspends and overruns on contracts. That, to me, is something that we should seriously question. You are looking surprised at the figures. The figures are arrived at in answer to questions that have been probed in Parliament, and Smart Procurement has cost anything between - because we cannot get a smart answer on it - Ł500 to Ł900 million to set all of this up. None of those real benefits have come back to us. It must be possible, Minister, for you to give us some real assessment of what the real costs are and what so far we have achieved since Smart Procurement? What have we saved? You can only blame legacy issues for so long, can you not? 1997 seems a long way off now.

Lord Bach: I apologise, of course, to Mr Cran if you thought I was being aggressive in my answers. I thought it was a Parliamentary Committee and ----

Mr Cran: Who said that I thought that?

Q227 Mr Hancock: I thought he was being unnecessarily aggressive to you, James.

Lord Bach: I thought it was an excellent exchange and I thought Mr Cran, if I may say so, made his point extremely well.

Q228 Mr Hancock: You did not answer them though. He made them very well, I agree entirely with you, Minister, but you did not answer them.

Lord Bach: Let me try and answer you, Mr Hancock, then. I think you seem to believe that history began in defence procurement in about 1997/1998. We have had decades of HCDCs and their predecessors, I have no doubt, complaining that costs have risen too fast, that there have been too great delays, that projects have been undertaken which should never have been undertaken. All of that has been kind of washed away in your question. What we tried to do from 1997/1998 on was set up a new system under new principles, and we are working out way through it. We have made mistakes, and we will continue to make mistakes, but I think, on the whole, there has been progress. You talk about the cost of this. On a kind of detail point, the relocation costs to Abbey Wood were met in full and repaid themselves well before Smart Acquisition began. I do believe that you are also leaving out the fact that there has been progress in this field, which Sir Peter just now has re-emphasised. There has been progress, we are moving forward. It would be a much more depressing scene if we were not. So we are doing that. It is no good you just dismissing legacy projects, with the greatest of respect, by saying "We have heard too much about legacy projects"; the vast majority of the cost increases and time delays pointed out so well by the NAO in their report of January this year relate to legacy projects.

Q229 Mr Hancock: Minister, you make the point about legacy projects. Your predecessor, sitting in that seat, said "One of the advantages of Smart Procurement is, of course, we will be able to deal with the issues of legacy projects and we will be able to say it is not very smart to continue with them." It is not very smart to go on dealing with some of these issues in the way we have. Yet the NAO reports consistently say there has been no change in that.

Lord Bach: I think it is fair to say that there have been greater problems with the legacy projects than perhaps we anticipated those years ago that you quote. Some of those projects, as I said to Mr Cran, are really quite old now and it is they that we have found difficulties in dealing with. That is what the NAO report made clear. If you want me to go that far I certainly will in saying that perhaps we underestimated then the effect Smart Procurement would have on dealing with those legacy issues. You are not saying, are you, that we should have abandoned some of those legacy ----

Q230 Mr Hancock: We are.

Lord Bach: What, we should have abandoned Typhoon?

Mr Hancock: We will come to that a bit later on. When you give us some answers to that maybe we will know how to make a better judgment on that.

Q231 Mr Harvard: We want to deal with various aspects of Smart acquisition, but on the generality of it we have had a report sent to us from the Defence Engineering Group, written by Dr David L Kirkpatrick. It is interesting in the sense that it bores into some of the various elements of the Smart Acquisition process, but it is the conclusion that I find interesting. Is this where we really are? It says "Smart Acquisition was originally presented as a wondrous revelation whereby all the perceived problems of the MoD's organisation and processes would be eliminated, or at least drastically reduced. But it is now increasingly perceived as the start of a long struggle by the MoD and its suppliers to obtain greater efficiencies and avoid costly overruns. It is evident that the transformation which Smart Acquisition hoped to deliver is still incomplete." Is that the realistic assessment of where we are with Smart Acquisition?

Lord Bach: I do not think I could have put that better if I had written the article myself. Anyone who saw a kind of religious basis of Smart Acquisition, that somehow these were the tablets from the mountain and therefore all our problems were over - anyone who even had suggested that - was entirely wrong. We are living in the real world, and I think the author of that paragraph has got it about right.

Q232 Chairman: The author is one of the advisers to our Committee.

Lord Bach: If I had known that I would have flattered him even more!

Q233 Mike Gapes: I would like to bring General Fulton in on this interesting discussion, because clearly as the head of, in a sense, the customer organisation do you agree with the Chief of Defence Procurement that poor performance was endemic in the DPA?

Lt General Fulton: I do not know because I was not there at the time. I clearly am concerned on behalf of the end-user if the resulting equipment does not do what the front-line command want it to do; I am clearly concerned on behalf of the end-user if it takes longer to arrive and I am clearly concerned for my own sake in terms of running an affordable equipment plan if it ends up costing more, because the effect of that is to have an impact on other programmes in order to balance the books. So, yes, I am concerned by the outcome, but I do not think that you can separate the strands because we are part of that as well, in terms of the role that we play. We are clearly identified as part of this rather than sitting outside it and receiving the result.

Q234 Mike Gapes: Is there not a real problem? If you have got, as the National Audit Office have pointed out, a Ł3.1 billion cost increase in the year 2002/03 and on-going increases in costs of legacy projects or other projects, that puts you under very difficult pressure. How do you manage to live within your budget and how do you deal with it?

General Fulton: In terms, firstly, of the Ł3.1 billion, of course - and I think this has been pointed out before - a substantial part of that is interest on capital, and while that is paid within the DPA that means that it is not being paid by strike command, on to whose books it would go. So while the point of principle is right, that cost has increased, the sums are not as large as that.

Q235 Mike Gapes: How large are they?

Lt General Fulton: I would have to ----

Sir Peter Spencer: About 40 per cent is the interest on capital.

Q236 Mike Gapes: Forty per cent of 3.1 billion, so we are still talking about 1.4 billion, or something like that.

Sir Peter Spencer: I was merely answering your question on numbers.

Q237 Mike Gapes: It is still a very large amount of money, is it not?

Lt General Fulton: It is. In answer to the point of principle, about how do we live within the budget, what I have to do is to produce an affordable equipment plan every year and the upward cost of equipment is but one part of the issue with which I have to deal. I also have to deal with, as it were, living within that part of the overall defence budget which is allocated for equipment and clearly there are pressures in the people area, there are pressures in the infrastructure area and there are pressures in the training area. So the whole issue about what proportion of that whole budget is going to come to equipment is also part of the pressure on me. There is further pressure on the equipment plan in the sense of a desired shift in investment from quantity of equipment to quality of equipment and, therefore, we need to find headroom in order to make that possible. Of course, one of the principles that has come through very clearly from the stocktake but was also there with Smart Acquisition is to increase the amount that we invest in the early years. All of this produces a very complex set of issues but the bottom line is that I have to produce this affordable plan. How do we do it? We do it by looking right across all the programmes and looking at where we can either delay programmes, where we can de-scope programmes in terms of the numbers of equipment or de-scope programmes in terms of what they will produce. So individual cost increases is only part of a very complex problem.

Q238 Mike Gapes: Can I put it to you: given that you have to deal with the realities of the consequences of the problems which have arisen because of this difficult endemic, systemic problem, is there not a strong case for letting your organisation take over the responsibility of procuring the equipment that you need, given the past failings of the Defence Procurement Agency?

Lt General Fulton: I am part of that process already, in that I produce and manage the 10-year equipment programme and the money goes to the DPA in-year for them to spend. So they manage the in-year.

Q239 Mike Gapes: But you do not control it; you are dealing with a situation that is not under your control.

Lt General Fulton: But I am dealing with a situation that looks at the 10-year forward plan, and in balancing out that plan what I have to do, or what my people have to do, is work with CDP's people in order to work out how we can bring the requirement down to match the resources available. So, in the sense in which you put it, we are part of dealing with the totality of the problem, so I do not think you can separate any one part of this problem from any other.

Q240 Mike Gapes: So you are part of the systemic problem as well?

Lt General Fulton: No. We were set up as part of Smart Acquisition. The establishment of an empowered customer was the principle that is considered to have worked; the establishment of an empowered customer who not only owns the requirement but also owns the requirement. I therefore not only have the opportunity of constructing a 10-year programme but I also have the responsibility of recommending to the Defence Management Board something that is affordable but will also be fit for purpose for the armed forces. I do not have an interest, as the programmes go forward in conjunction with CDP people, in making sure that those programmes deliver. That may be by, as problems arise, dealing with those problems.

Q241 Mike Gapes: Can I put it to you, though, that if you are having things moved to the right and delays in equipment coming through because of cost overruns, and your job is to get the best equipment to our men and women for our forces at the time that they need it, it would be much better, would it not, if you had more control over the system, making decisions as to when that would come and how it would come, rather than being dependent upon an organisation of which you are not - although you are involved - directly in control.

Lt General Fulton: We are in control of managing that forward budget. As I say, cost overruns are only part of the rebalancing, because some of the rebalancing we may want to do in order to conform to department strategic guidance or in terms of a new operational situation. We may actually be causing some of the problem because, in order to make space in the early years, in order to fit something new and urgent in, that may mean that actually we have made life more difficult for the DPA because they then have to juggle programmes which were going along in an orderly fashion. So this is not, as it were, them wrong and us right; this is part of an interactive process which we have both got to work on together.

Mike Gapes: Perhaps we will come on to the questions of budgeting later on, but I will leave it there.

Q242 Mr Jones: When Sir Peter appeared before us on 12 May he referred to the "stocktake" that was taking place as part of Smart Acquisition. Could you tell us where that is at, at the moment and how the things you find out through that stocktake are going to be implemented? Will that lead to some fundamental changes in terms of Smart Acquisition and will it lead to what I think we all require, which is faster, cheaper and better equipment?

Lord Bach: I am going to pass on, obviously, with your permission, Chairman, to Sir Peter to speak on this, because he is the author of the stocktake. I just want to make a preliminary comment (I think, perhaps, I have done that already): that the stocktake and the actions that have been taken have the absolute and full support of ministers.

Q243 Mr Jones: Before you move off that, Minister, can I ask you what is the process in terms of your role in terms of at what stage do you actually get the recommendations of your desk? Is it on a rolling basis or is there a set time period when they come across your desk?

Lord Bach: During the course of Sir Peter's first year - we meet, as you will imagine, on a very regular basis indeed - he has kept me informed of the results of, really, his due diligence exercise over the course of the year. As that has developed, as these ideas have been put into writing, we have discussed them more and more fully and he has really taken the action that he has - and it is for him to speak, of course, on this - having, as it were, in a sense, cleared it with me as to whether I am content that this is the way he should proceed. I have to say that his ideas have always appeared to me to be common sense and a sensible way forward. He does have, which I think is useful, full ministerial backing for what he is attempting to do.

Sir Peter Spencer: I started with the bottom line in terms of how we are going to get the best out of the Agency, and there are three components: people, processes and the organisation. The most important but most long-term is to make sure we have got the right skills in the Agency. We are putting a lot of effort into ensuring that we have embedded technical and scientific skills in projects of high risk because, too often, decisions with the benefit of hindsight have been made in absence of the full understanding of the technical framework in which those judgments have been made, and we too often read that technological problems were the cause of a cost overrun or a time extension. We similarly need to invest more into developing PFI skills so that we do the business more promptly, cut the deals more quickly, and actually move on. So far as processes are concerned, there are lots of quite detailed work streams here. The most important part of it is what we actually do to de-risk the proposals and how we make better use of the assessment phase, how we understand not only the technological risks but, also, what I can call in shorthand the supply side risks - how we understand the industrial based pressure. We are putting a great deal more effort into a compliance regime with standardised best practice, particularly in terms of assurance, and challenging reviews of projects on a regular basis by my board directors.

Q244 Mr Jones: Has this been done on a project-by-project basis or are there some generic things that go across all projects?

Sir Peter Spencer: For the big projects it is project-by-project basis. There are 700 or more separate projects at Abbey Wood, of which the majority are relatively low value, below Ł20 million, so we tend to handle those as so-called clusters when we do the reviews, but we clearly start with the big, complicated ones first. Then, very importantly, there is the work to do better with industry, both with the key supply management initiatives and also together with the industry looking at much more appropriate ways of contracting for the more difficult and complex projects - in other words, to move on from trying to transfer all of the financial risk on the way but have a better understanding of what those risks were, where the balance of risk lies and to have a contracting strategy which is more appropriate. That is fully supported by industry. There is a lot of work going on. The final bit was the reorganisation. You made the point a year ago that some people had said to you it all looked a bit messed up and it was difficult to see much structure in it. There was a structure and that actually served a useful purpose, but we have moved on beyond that point now. To get more coherent management, both of our outputs but, also, in the way in which we deal with industry, there are certain ways in which we have reclustered, and having together projects which share the same technology and, therefore, usually the same industrial base does actually give us a much better feel that they are in natural groupings now. Importantly, we needed to look towards General Fulton's team, his top-level team, in a way which was easier for them to handle so that, in the main now, one of this senior people, the so-called capability managers, will look towards one of my operations directors and there will be a very heavy overlap of 80 per cent of commonality, although it will not be exactly the same. That makes the coherence between the two organisations better as well. So in that respect we have done a lot of stuff both within the Agency and between the Agency with industry. The point where the ministerial support has been so important and so valuable is making sure that the real consequences of spending more time on de-risking propositions and taking more care are understood across the rest of the Ministry of Defence, and that the right sort of adjustments are made in the planning and programming assumptions so that we can actually deliver them. On that basis we have had a delivery plan with key milestones which I report against to the Minister or the Steering Group which Lord Bach chairs, and in future against net benefits which we will identify in terms of how we drive these things through. I am trying to make this thing open and transparent. It will not yet be the perfect solution because the problem is so big and complex. It is considerably more, I believe, likely to improve the performance than had we done nothing, and we are learning from it as we go along.

Q245 Mr Jones: Openness and transparency will be a first for the MoD, for me. If we have you back in a year's time or two year's time what will you be able to point to that has actually succeeded, in that you have met certain milestones? Is it going to be, if we are going to be open and transparent, that you will be able to come to us in two years' time and say "These are achievable" - not just individual projects but overall benefits? What is it that you are likely to say?

Sir Peter Spencer: It will be the revised key targets which are tougher than the previous set, set by Lord Bach, because he needs to have earlier visibility and a more sensitive read-out of performance, to get earlier signs that we are beginning to drift off. These key targets will be laid before the House either at the end of this month or early next month as part of the normal run.

Q246 Mr Jones: What are they?

Sir Peter Spencer: It is meeting the key requirements, increases or decreases of cost in-year, slippage in-year, customer satisfaction independent survey, the value of the assets delivered to the front-line against the planned value in-year - in other words, do we meet our delivery targets - and then three efficiency targets which have been taken from the private sector to be genuine measures of efficiency, such as ratios of the value of the assets we deliver in-year as a multiple of the operating costs of the Agency, and we would expect that number to move up over time to prove that we are becoming more efficient. There are two other similar targets as well.

Q247 Mr Harvard: One of the guiding principles of Smart Acquisition was that there should be "a greater willingness to identify, evaluate and implement effective trade-offs between system performance, costs and time." If I could ask something about that, why has there been - and maybe there has not but it is perceived, anyway - unwillingness or reluctance by various people to go along with that and see the benefits of that? Are there difficulties within the MoD, within the customers or the DPA itself? Where are these barriers to actually promulgate that properly?

Lord Bach: If I could just start on that. Obviously, the experts are sitting on either side of me, but let me just say, from where I sit, that this has clearly been one of those areas, or one of the principles of Smart Acquisition which, as Mr Cran put to me so forcefully, has not been successful up to this stage. There are various difficulties with it. In any organisation people sometimes have a vested interest in what it is they have set up and what it is they want, and are reluctant to compromise that for what they may see as not particularly good reason. I think what we have learnt, and I think it is very much part of what Sir Peter is changing here, is that without these trade-offs we find ourselves in a position where costs rise and delays take place. So we really have to be, I think, more strict and strong about insisting that trade-offs take place in order to achieve the results we want.

Q248 Mr Harvard: When you came to see us last time, Sir Peter, you said this was patchy. What I am trying to drive into is why it is patchy and what are the barriers and where are the barriers? They probably exist in all these organisations and others to some degree or another. What can you do to help us on that?

Lt General Fulton: I am probably one of those to whom you are referring. I make no apology for being a demanding customer on behalf of the front-line commands for stating the requirement in capability terms and pitching it high, because I think that is what our armed forces deserve. I do not mean gold-plating, I mean demanding in terms of performance - speed of aircraft, turning rate of aircraft, the number of targets a weapons system can engage in a certain time, kill probabilities and so on and so forth. So I make no apology for, as it were, pitching my initial bid high. By the same token, however, I have also got to be an intelligent customer and my people have got to be intelligent customers in terms of understanding what is realistically achievable, and the IPTs are a key part of that, but also the research programme is part of either telling us what is available or helping us to understand when these things might be available. So we have to balance out being a demanding customer with being an intelligent customer. Crucial to that, of understanding where you have got to come down from that high level of performance, is actually the visibility of what it means - visibility for my people on "If you trade this performance then it can come in at this cost and this time". I think what we have not always had up until now is that full cost/time performance visibility to enable us to do it, so I would be the first to say that there have been occasions where my people have stuck out for that high level of performance, and I do not make any apology for that, but we can do better. I think the other area in which we are becoming very much better is understanding how we can grow capability incrementally. I think in the past, perhaps, if you came off the top level of performance it was either "You have that performance or you do not have it at all". I think we - and I think technology is helping here - are seeing plenty of places where you can bring in a capability and then by software additions you can grow back to the capability you wanted over time. Therefore, people, by the same token, are increasingly ready to adopt that sort of approach. I would hold up my hand to say that the customer is one of those who have been making life patchy for the DPA in the past, but I would also say that that is widely recognised and we are doing better.

Q249 Mr Harvard: Is that one of the ways in which, with the very quick technological and environmental changes, you balance speed of acquisition against getting the damned thing right at the end of the day to do the things that you want to do?

Lt General Fulton: Very much so, but it is at that very high point of technology where our capability edge comes. Clearly, with that capability edge comes risk. So the point is not only pertinent to this need to trade between cost, time and performance but, also, the point that has also made and which Sir Peter made the other day, of spending money in the assessment phase to do that de-risking so that we understand before we go into manufacture what the actual implications of asking for that full capability are. So these two are very closely linked, which is why, in response to Mr Gapes' question earlier, I said we are part of this, rather than sitting on the outside and, as it were, looking in.

Q250 Mr Harvard: On the de-risking element, certainly the assessment that is ascertained is an important tool in achieving these ends. It seems, historically, there is good empirical evidence that shows that if you do not do that then you end up with problems. There is also a lot of evidence that shows that maybe that is not happening as much as it should do. As I understand it there is a target or a suggestion of 15 per cent of the spend should be for this. Is that sort of sum written in stone? Obviously not because it would be stupid to have it that way, but how do you monitor and measure that, and to what extent is that a really important indicator and a pressure that you apply in terms of contract formations?

Sir Peter Spencer: It is certainly a very useful crude indicator for one of the more complex programmes with a good deal of development in it. It is not a very good indicator if it was a repeat buy of a relatively low-technology product. So you clearly have to judge each case on its merits. In addition to that, we are increasingly developing verifiable metrics in terms of the extent to which we de-risk the technology. There is quite a useful table of things called technology readiness levels and, also, at the next level up, system readiness levels, which you can look at. As a generality we would say you want to be about TRL7 or 8 to make the capital investment decision, ideally. There is a certain amount of subjective judgment on this, depending upon the technology, but if part of the proposition, as it is now, is that every proposal will have somebody outside of the project as an non-advocate bringing their judgment to bear as to what extent you de-risk that technology and you de-risk the system readiness levels, you have got a much better understanding of where you are at. I mentioned the Sonar project 2087 the other day. That was a very good worked example of that; they worked on maturing the technology, they worked on maturing the system integration, and they created their own luck, in a sense, because that is what they have done. What we have got to be careful about is we do not simply slap on a15 per cent overhead to every single investment proposition because it would not necessarily be well spent. A lot of this is also the intellectual investment that you make. So we have got to the point now where, as the Minister alluded to earlier, we do not look at a date in the sand and say "We have got to go through main gate on that basis; that is an anchor mast and on it hangs the future of a project"; we can give an indication when we expect to achieve that date but, more importantly, we are looking at the independent assessment of the maturity of the proposal, both in the technological domain and in the supplier domain.

Q251 Mr Harvard: You are laying out generally there these sophisticated changes, the process and measurement and approach to contract formation, and so on. Is the big problem that industry does not understand it? Are you going to tell me that you are making all these changes, you are getting smarter in the acquisition process, you are putting all these processes in place, you - the customers within the MoD community (if I can put it that way) - understand the processes, but the rest of us do not and industry does not do it and they are not smart enough about making the change?

Sir Peter Spencer: No, I am not saying that at all. In fact, all this is being done with a lot of ----

Q252 Mr Harvard: I might say that about some of them, by the way, but that is for me to say, not you.

Sir Peter Spencer: I do not conduct my negotiations in public places. Clearly a lot of people who have "learnt the hard way" by signing up to highly incentivised contracts and taking a big financial hit have lost their appetite for doing this sort of thing anyway. We have learned together here, and hindsight is much easier than foresight. My point has been both within the DPA and across defence that we cannot keep treading on the same alligators in this swamp. We know where they are now, we know what to do about it and I cannot guarantee there are not any other alligators there, but one thing that decades of procurement has taught me is humility; it is very dangerous to actually make grand statements about what is out there, it is unknown. We manage risks, but there are certain key principles which, if you apply them consistently, seem to get you into less trouble than if you do not and, on an encouraging number of occasions, give you what everybody will admit is a successful outcome, and that is where we want to be. My aim is to be boringly, repetitively, uninteresting because we keep on doing these things on time and on cost.

Q253 Mr Harvard: By the way, we can give you a list of people you can write to and give that advice to. You talk about openness, which I think is very welcome and necessary because otherwise understanding will not come from all the various communities that need to acquire it. That is quite clear. Maybe that has been part of the problem in the past. There is an approach being developed, and it will come out later, on new system houses, more project management activities and emphasis on this assessment phase. Are these all part of the drivers, the tools and the techniques, then, that we will see and people should understand in the process, in order to achieve this?

Sir Peter Spencer: Yes, and I accept that there is an obligation on my part to keep people aware and informed of what it is they are doing, how we are doing and how we are getting on. There is a strong emphasis on the dialogue with industry and there are a lot of levels at which this is done. There is a strong emphasis on the dialogue within the Ministry of Defence and between the Ministry of Defence and other government departments. I have to say, in the context of that, and demonstrating what we are doing, the Committee has not been to Abbey Wood for a bit and you might find that to come down and have a look at this project, to see the work strands, to meet the people who are doing it and see the measurable process, would give you a little bit more time to be able to get to feel comfortable with some of the detail. We can only really go through it in headline, Chairman, and there is always the danger that it sounds a little bit glib. There is a lot of collateral; a lot of people doing a lot of quite detailed work in order to sort of insure. The diagnosis is the easy bit, delivering the cure is going to be a lot tougher.

Chairman: A few contentious questions now. This has been the easy bit, up to now.

Q254 Mike Gapes: Can I get back to the question of budgets and funding money? We were told by the Chairman of BAE Systems on 5 May that "It is very clear to all of us on the industrial side at the moment that the budget allocations that are made today are not sufficient to sustain the existing levels of capability that we have." He also said it is "going to require us to actually downsize substantially UK capabilities to meet affordability." Can I ask the Minister and, also, General Fulton, do you agree with that? I am worried about it.

Lord Bach: I do not agree with it entirely. The Spending Review of 2002 settlement did represent the largest sustained increase in defence spending for 20 years, adding about 3.5 billion to defence spending over three years. You know, because you discussed it with Sir Kevin Tebbitt on 12 May, the PUS at the Ministry of Defence, that there are significant pressures on the defence budget. We fully intend the MoD will continue to meet its commitments and within the resources allocated to it by Parliament. I want to make it clear that the costs of the equipment programme, as a whole, are under control and our planning rounds will continue to ensure that the equipment programme is balanced and affordable. We are also now concluding a detailed examination of capabilities and costs across defence, which includes defence equipment. It is likely that we will need to make adjustments to our spending plans to ensure we continue to live within our means. As well as looking to reduce costs a really key aim of this work will be to allow us choice and planning flexibility to ensure that we have the right capabilities to meet the security challenges for the future. In that context, some of the Members, Chairman, will recall what I said at this meeting in June last year, talking about putting into practice some of the equipment capabilities that we needed as a result of the SDR New Chapter. Decisions made on the outcome of all this work have yet to be taken, so I have to be cautious in what I tell the Committee, I am afraid, but we do expect to make an announcement to Parliament before the summer recess. Part of this is, obviously, trying to get the right balance of investment between platforms and systems, between what are sometimes described as quality and quantity. The world has moved on appreciably. Can I just give one example before I shut up? I am told, (and if you ask me where I got this from I could not give chapter and verse) that in the first Gulf War it took four aircraft missions to take out one ground target; in the Iraq War last year, it took one aircraft mission to take out four ground targets. That little story tells you the changes that there have been in that decade between the first Gulf War and the second Gulf War and shows why it is that the new chapter talked about, perhaps, reducing platform systems and moving towards effect-based capability. I have gone on long enough.

Lt General Fulton: Do I worry about it? Yes, I do. I worry that what I am responsible for is delivering to the armed forces the best equipment capability that I can, and no, I would never be satisfied that I had done everything to bring that about. I said earlier that I am, as it were, paid to be a demanding customer and, therefore, I will continue to demand the best possible outcome that I can for the money that we have got. I explained earlier that we rebalance the equipment programme each year. That is re-costed and then rebalanced both taking account of this continual upward cost pressure from industry, on the one hand, but, also, the desired strategic shift to have the sort of effect that the Minister has just described. That recommendation goes from me up to the defence management board. So that plan is only as good as the realism on which it is based, and the realism that the DPA can give me is based on the realistic costs from industry. So everybody is part of this. This comes back to the phrase earlier about needing to get away from those estimates being overly optimistic because I cannot plan on over-optimistic estimates because then they come back to haunt me in subsequent years. What I need is a realistic assessment of what it will cost us to deliver the capability, then I can adjust my recommendations to take account of where we need, as I said earlier, to adjust.

Q255 Mike Gapes: Can I put it to you that the real problem here - and Sir Kevin Tebbit was quite explicit about it, he said the Treasury asked us during the course of the year to reduce our band level of cash spend - the reality is that it is the Treasury that is the big problem here and unless you are going to get more money, I understand that there have been increases, but if the Treasury are bearing down on the Ministry of Defence and, on the other hand, you have the increasing sophistication and cost of individual platforms, then something has to give. What gives is either the pay and conditions of our men and women or, alternatively, the number of platforms, as you have hinted at yourself, Minister. Do you think that this has got very serious consequences for industry because industry, if we are having fewer platforms, are clearly going to be finding that there are fewer resources going in to procure from our own defence industries?

Lt General Fulton: We have flagged up very clearly that capability is not a question of counting platforms and we have flagged up - and Sir Peter mentioned it earlier - that an inevitable result of a better capability within a defined resource is about putting the investment into what those aircraft or ships or tanks or vehicles are capable of doing as opposed to simply counting the numbers of them. Yes, this is a very clear change that we are seeing but we are not alone in this, this is also being seen in the United States and elsewhere. If you compare, for example, the capability of the Type 45 destroyer with Sampson radar and PAAMS and compare that to a Type 42 with Sea Dart, you have a massively increasing capability. If you then network the sensors and invest in the networking of the sensors you increase exponentially the sea area that they can cover and the job they can do. So, self-evidently, if your capability is not to rise far beyond any resource you can have, the numbers of platforms and the numbers of ships you are going to build is going to come down over time.

Q256 Mike Gapes: Minister, do you want to add anything?

Lord Bach: I think to the first part of your question, really, all I can say is that Sir Kevin's words are with you.

Mr Hancock: Constantly.

Q257 Mike Gapes: Do you agree with him?

Lord Bach: I always agree with the Permanent Secretary, I have found out that it is a great mistake not to, particularly in public. I would say this, the Secretary of State for Defence, of course, as other secretaries of state are doing at the moment, is in negotiations with the Treasury over the settlement for this year. Those negotiations are continuing. I do not think, Mr Gapes, you would expect me to say anything more on that. You did ask about industry ---

Q258 Mike Gapes: I will come back to Sir Kevin in a minute if you want to talk about industry, please.

Lord Bach: Of course. As far as industry is concerned, it is not the difference, I think, between platforms being ordered or other types of defence equipment being ordered that is the issue. As General Fulton said, although he is too polite to say it, frankly, size is not everything here. That is what we mean when we say that platforms are important still but are not the be all and end all of providing the best capability necessarily. If we have to make adjustments to defence equipment programmes then of course it follows like night follows day that there will be an effect on industry. I have said that to both sides of industry when I have been talking to them in the last few months.

Q259 Mike Gapes: At the session that Sir Kevin gave evidence to two weeks ago he said that the Treasury asked us during the course of the year to reduce our planned level of cash spend and they did it by asking us to reallocate resources from the lines of our resource budget which generate cash into ones which do not and we did that. Could you specify what that means?

Lord Bach: If Sir Kevin did not make himself clear, I certainly cannot. I have not read the transcript fully ---

Q260 Mike Gapes: I thought you had read all the transcripts.

Lord Bach: Not that one, I have to say, but if Sir Kevin did not make it clear then certainly I cannot improve on what he said.

Q261 Mike Gapes: Can I put it politely, is it right that we have defence priorities, within an overall budget allocation which is not changed, determined by the Treasury rather than by the Ministry of Defence?

Lord Bach: Mr Gapes, you know as well as I do how the system works across government, across government quite rightly the Treasury are a very powerful department of state because they have to keep a watch on all of us to make sure that in their view we are spending the money appropriately. Negotiations take place between spending departments - the Ministry of Defence is a large spending department - and the Treasury and a negotiation is completed. I do not think there is anything I can say here that will make the chances of a more successful negotiation any the stronger.

Q262 Mike Gapes: I do not want to damage your hand when you are negotiating with the Treasury - perhaps you will not want to comment - but it is clear I suspect then that certain equipment has been delayed in order to meet this requirement with regard to cash and the areas which the Treasury are concerned about.

Lord Bach: Sir Peter?

Sir Peter Spencer: The literal answer is yes. In the course of last year the misunderstanding between the Ministry of Defence and the Treasury about how we were going to spend certain lines of the budget was resolved at short notice in order to rebalance the books and meet our legal obligation to live within our means. It is true to say that round the margins I was invited to propose ways of managing some equipment projects in consultation with General Fulton and his people so that we live within our means.

Q263 Mike Gapes: Can you quantify how much that was?

Sir Peter Spencer: I think I would rather give the Committee a written answer.

Q264 Mike Gapes: A written answer?

Sir Peter Spencer: Because of the commercial sensitivity.

Mike Gapes: I am sure we would be happy to receive a written answer.

Q265 Mr Jones: Can I just follow up on that. You said that was last year, how many programmes have been put to the Investment Approvals Board this year which have been approved first time?

Lord Bach: Do you understand the question?

Lt General Fulton: I do, I do not know the answer, I would have to check.

Q266 Mr Jones: If I said it was one?

Sir Peter Spencer: I am a member of the Board so I can speak with some personal knowledge. If you begin the year from 1 April, all of the proposals that have been to the Board have been decided upon.

Q267 Mr Jones: That is not the answer to the question. That is a very good Yes Minister answer; ten out of ten.

Sir Peter Spencer: You are asking me off of the top of my head to remember the number. I can say it is quite a large number so I can only go away and give you an accurate number by looking at the records.

Q268 Mr Jones: Your answer was trying to avoid the answer to the question. You said they have been decided upon, that does not mean they have been approved.

Sir Peter Spencer: Because approval is not a point/event in time it is a process, to be boringly pedantic about it, it comes to the IAB who endorse the approval which then goes to ministers who then in most of the big projects, because of our delegations in the Treasury, need to get approval in addition from the Chief Secretary. That does tend to take a period of time so at any particular moment there will be some which are at various stages of that.

Q269 Mr Jones: Could you supply us with that figure?

Sir Peter Spencer: Yes, of course.

Q270 Chairman: You mentioned the earlier Gulf War, when you are in negotiation with the Treasury, Minister, perhaps you could just remind them and if you do not now, the MoD will, one of the consequences of pushing equipment to the right was seen quite brilliantly in 1982 with the Treasury's insistence that Sea Wolf was delayed - I assume on the grounds that the Soviet Union did not have surface skimming missiles, however the French did - and ships sank. Whoever is responsible for making a decision, on whether the right grounds or wrong grounds financially, should bear in mind ultimately should that equipment not be available at the right time, because of the financial expediency on the part of the Treasury, then those who make that decision in my view should be answerable for the consequences. You are not talking about delaying the production of washing machines - not you personally of course - it is a question of delaying the issuing of weapons to the armed forces which may be necessary at any time. It is a very serious decision that has to be made and I hope the Treasury realises that our armed forces are engaged on a fairly frequent basis, that they need the equipment and they do not want the Treasury saying "You can have it five years later" five years later can be five years too late for the armed forces, their lives may well be at risk. Please research that more and perhaps point it out to them.

Lord Bach: Yes. Can I say I am sure the Treasury are very well aware of the point you make strongly, Chairman. I have to say that my dealings with the Chief Secretary, which are constant dealings, and across Government too, are ones in which the Treasury are helpful in terms of making sure that our equipment is procured as economically and as properly and as quickly as possible.

Q271 Mr Hancock: If we could move on to the aircraft carriers now and the future of that.

Lord Bach: Yes.

Q272 Mr Hancock: It is quite interesting, you mention the fact we have not been down to your humble home for some time. When we were there last, we were given quite an in-depth presentation about the Smart procurement processes of the aircraft carriers. We have been particularly interested in how they are progressing. What I would be interested to know, when do we expect an announcement on the new arrangements to be worked out between the three partners in the carriers considering you are one of the partners?

Lord Bach: Can I say that at the present time work, as you know, is going on on the project. There are negotiations ongoing, as you say, between the Ministry and possible partners in an alliance and hopefully announcements can be made relatively soon. At the moment our proposals in relation to the phases of this procurement are with the rest of Government and it is hoped that we can make an announcement on that very soon indeed. As far as when an alliance strategy is set up, that might take a little bit longer. Sir Peter, is that right?

Sir Peter Spencer: We are having a three way conversation with British Aerospace and Thales. There is agreement on the large majority of the detail, there are one or two loose ends which we are tidying up. I cannot speak absolutely authoritatively on behalf of two parties in a negotiation but we all recognise the need to get on with this. For the time being, as the Minister has said, the momentum of the programme is sustained. There is design work going on out there and we are maturing the design to the right level which will be needed later on. I am concerned that we do get on and get this right but I am concerned, also, that we have absolute clarity between ourselves and our main suppliers as to the principles which we are going to adopt and the way in which we are going to do it because all of the evidence suggests with these sort of arrangements, alliance type arrangements, that one of the key things which has to be right from the outset is complete agreement at the chief executive level between the consenting parties as to the principles. I think it is very important that we do not try and fudge that and then come back with some hard luck story in two years' time that we should have got it right. This is one of the things I am referring to when I talk about de-risking the supply side.

Q273 Mr Hancock: Rather foolishly and probably surprisingly, most of us thought you had already got that in hand.

Sir Peter Spencer: It is in hand.

Q274 Mr Hancock: No.

Sir Peter Spencer: It is just not yet complete.

Q275 Mr Hancock: I thought the bonhomie was there and this was clearly understood at the time when BAE Systems were appointed the prime contractors and Thales was their junior partner in this and these arrangements had been put in place. I remember well the presentation the project manager made to us saying that all of this was there. I am surprised we are still fussing around the edges and there is speculation about some major change in those arrangements.

Sir Peter Spencer: I hope you will be pleasantly surprised. I hope you will be pleasantly surprised that we are taking a look at what has always been an extremely well run programme and say that in the light of the additional information we now have from other programmes and in this area there are ways where we can improve upon this. That is precisely what we are doing, and we are improving on it to get it done better.

Q276 Mr Hancock: Do you envisage a significant change in the arrangements we were talking about previously?

Sir Peter Spencer: In terms of contracting?

Q277 Mr Hancock: Yes?

Sir Peter Spencer: Yes, I do because the proposal that we are discussing is not a traditional prime contractorship, it is an alliance arrangement based upon best practice in the petrochemical industry which has served them extremely well.

Q278 Mr Hancock: Would you suggest now that there is going to be a much more flexible approach as to who does what and where than previously envisaged?

Sir Peter Spencer: We never had any hard arrangements in place as to who was going to do what and where.

Q279 Mr Hancock: The Secretary of State gave a very strong commitment to this House that the majority, if not all the work, would be done in the United Kingdom for a start.

Sir Peter Spencer: That remains the presumption. It was never definitive as to precisely where each of the bits of work would be done. There were indications in the context of ship construction, four of the locations were named as looking very promising, and they still are looking very promising but they are not the only locations and the work is not only ship construction, there is an awful lot of system engineering work to do as well.

Mr Hancock: There are at least two Members in the room who have a vested interest in ensuring that the previous arrangements will be stuck to.

Rachel Squire: Hear! Hear!

Q280 Mr Hancock: I hope that is borne out by your optimism for getting this sorted fairly quickly, Sir Peter. If I can then go on to what we are going to put on the aircraft carriers and the recent suggestions that the UK and US Marine Corps STOVL variant of the Joint Striker Fighter is going to be difficult for us to manage on the carriers and what we are intending to do with it. The suggestion is that the Marine Corp are expecting now to see their in-service date for these aircraft is going to drop by some two years or more so it will be further and further back. Where are we?

Sir Peter Spencer: I think it would be appropriate for General Fulton to lead on the requirement on this both in terms of the performance and the in-service date.

Lt General Fulton: In terms of the performance, we remain where we have been all along, we have selected the STOVL variant as that which best suits our requirement, and that remains the case. Clearly, if you are referring to the newspaper articles about weight, we are keenly interested in that. I was over with the company hearing what they had to say about it last week. They are optimistic, as one would expect them to be, about their ability at this stage of the programme to make sure that the aircraft will perform to its specification. Clearly if it does not then we have a series of decisions that we will have to take but those are decisions to be taken when we get to the point at which this aircraft will not do it but at the moment with the effort that is being expended, and the company are in no doubt as to the importance of getting the weight right, for their own sake, as much as for ours or the United States Marine Corp, then we will continue down the path we are on.

Q281 Mr Hancock: Were you surprised by the situation that arose?

Lt General Fulton: On weight?

Q282 Mr Hancock: Yes?

Lt General Fulton: I am not an engineer, I am told by those people closest to the problem, the IPT leader, that he has been closely monitoring this all the way through and for this type of aircraft weight is a perennial problem. It is a balance between the weight of the aircraft, the thrust of the engine and the aerodynamic drag of the aircraft so this is not a simple engineering problem. The IPT leader is very closely involved, as you would expect, from our level one participation in the programme as the only level one participants.

Q283 Mr Hancock: If that was the case and we were on top of it all along, one would assume the US Marine Corps were on top of it all the way along but they are now envisaging the problem they are experiencing over the weight is going to delay the in-service date of their aircraft by at least three years. That does not lead me to believe that they were on top of the problem from day one because otherwise they would not have started with a date two years prior to where they now envisage it to be. Are you saying, General, that we were so on top of the in-service date for our variant of this plane it will still be on time, we will not slip?

Lt General Fulton: I am not saying that, I am saying at the moment we do not know until the programme formally tells us whether they are able to solve the problem and by when - and this is part of the de-risking that goes on at this stage of the programme as we have just discussed - and we will sign the manufacturing contract at the time at which we know what the proposition is, ie what the cost, what the time and what the performance is. The United States Marine Corps have been very closely involved in the programme, just as close if not more closely involved in the programme as we have because clearly it is their national programme.

Q284 Mr Hancock: It would be right to assume that if they are now realistically accepting that the delays will account for probably two years, we would have to make the same assumption?

Sir Peter Spencer: Not necessarily.

Q285 Mr Hancock: Not necessarily. Okay.

Sir Peter Spencer: Because we will always slip strain them by two to three years. As the General said, we have to make a judgment because if the programme base line for STOVL is reset then we may choose to bring our aircraft with the same variant into service at around the same timescale. Previously it was considered to be good risk mitigation not to be amongst the early users, let somebody else sort out the problems. There is then a judgment to be made, when we have got the facts, as to what the trade-offs are going to be. Another thing, which we will clearly want to look at, is that depending upon which production batch you take your aircraft from, how early on in the production lifecycle it is and how many of them are in the badge, it will impact on the price. We will then go back to the person who has the budget and say "Do you want them early at this price, on time at this price or slightly later at this price?" We are at the stage where we can only speculate at the moment. Meanwhile, as General Rob has said, there is an enormous concentration of technological expertise tackling this problem. 6.30 tomorrow morning I set off for Heathrow to fly to the States for the routine meeting of chief executive officers where all of this problem will be laid out in front of me and my American and other international counterparts, and including the chief executive officers from the major companies such as British Aerospace as well as Lockheed who are involved. We will then have some better understanding of what progress has been made.

Q286 Mr Hancock: If the weight problem cannot be resolved, what does that then do for the design and construction of the carriers?

Lord Bach: I think we hope and expect that it will be solved.

Q287 Mr Hancock: This is not a very good example, is it, Minister, of Smart procurement?

Sir Peter Spencer: On the contrary, it is a fairly good example of Smart procurement.

Q288 Mr Hancock: To buy a plane where you are not sure about the weight.

Sir Peter Spencer: We have not yet bought the plane. We have bought into a programme which has high risks and uncertainties, has benefited from a huge amount of de-risking in the earlier phases including the manufacture and competitive comparison of prototypes. Although it is easy for us to get concerned about the remaining risk, we should not just ignore the huge amount which has been de-risked in advance, part of which we helped to fund when we first joined the programme when it was in its technology demonstration phase. What we are doing, it is Smart procurement not to commit yourself to a production buy before you know what the prices are going to be.

Q289 Mr Hancock: Sir Peter, I have read up a lot about the aircraft and its potential, we were given a lot of information when we were in the United States the time before last. The weight issue was not an issue, it was never raised by us and certainly it has not been raised in any of the things I have read until fairly recently about this aircraft. We accepted that this was the variant we wanted, it does the job, but if you are going to reduce it by the sort of weight that is now being suggested, the 3,300 pounds of weight, that has to be got rid of somewhere, what does that do to degrade the product that we wanted? Is the product then the same one? Does it have the same capabilities? Does it have the same air frame capability to take the weight of weaponry we would expect it to have?

Lord Bach: Could I say, as the General just said, it is not a question of peeling off the weight. There will be a need to tackle the weight problem in some key areas and there are some good solutions to that but we have to make sure we understand the problem. Secondly there are options, also, to up the power of the engine and there are options also to improve the aerodynamics. As General Rob said, it is not just a question of you take all that weight away but you are right to have a concern as to what impact it has had on the performance and we are watching that very closely. The way in which that performance will reflect back into us will not really be properly understood until we have a better understanding of to what extent these three prongs of attack on the problem are going to deliver a solution.

Q290 Mr Hancock: That solution will have an impact surely on design and construction of the carriers.

Lord Bach: Not necessarily.

Q291 Mr Hancock: We were led to believe that there was a link between the way in which the carrier would be designed and its capability for the sort of aircraft that were going to operate on it.

Lord Bach: Yes.

Q292 Mr Hancock: If you are saying you get the aircraft down to what we originally specified it would have to be then the carrier design is as it is. I am suggesting if the variant changes does that change the design and, if so, does that alter the date and the time of the carriers to be in-service or indeed for the contracts to be let?

Lord Bach: If I can just step back one. Originally the concept was this would be a STOVL carrier only. There was then a more fundamental appraisal taken of the proposition that said the life of the ship is likely to be considerably longer than the life of the aircraft and it would be imprudent right from the outset not to future pre-fit. The fundamental design concept of the carrier makes it capable of being adapted midlife if circumstances occur which make that a sensible proposal, relatively economically. As it happens it means that we can do that at any stage if there is a completely dramatic problem which does not get resolved but we are a very, very long way away from that. At the moment we are looking in the context of the expectation being STOVL but to manage the risks as best we can. We will do that better when we have some understanding of the actual numbers which will come out later this month.

Q293 Chairman: What would be really helpful, Minister, would be if every now and again you confided in us and said "There may be problem popping up here" rather than us having to read a newspaper and get very exercised by the information we see. If you are trying to repair relations with British Aerospace maybe you could include us in that process.

Lord Bach: Can I just say on that, if we have been remiss, of course we apologise. What I think might be helpful is if we send you a note on the CBF/JCA issue going into slightly more detail than we have been able to here today. We will do that as a matter of some urgency.

Q294 Chairman: We accept your invitation and Sir Peter, tell us what is going on here.

Lord Bach: Can I make just one point. It went back to Mr Hancock's original question about the CBF and what I said earlier on, others have said too, about the crucial part the assessment phase can play in a project and how it can save time and cost later on. It may be that CBF is a good example of that. If we were to allow the assessment phase to run on for some time further in order to de-risk the project more and to form a sensible alliance, if we were to do that I can, I am afraid, see the headlines now which suggest that would mean that we were going back on our word as far as the in-service date is concerned. That is not the position. We were doing that in order to try to protect the in-service date, and that is really the point I am trying to get across.

Q295 Mr Hancock: I regard that as genuine commonsense. I do not that see you would get anything other than support from any of us on that.

Lord Bach: Getting support from you is very important but I am afraid the outside world and politicians, for example, who do not have the advantage of sitting on this Committee might take some advantage of that.

Chairman: There are occasions when we get told things in confidence and if that confidence is broken then that privilege should not be extended further. We could focus on procurement issues particularly at this time of the year and maybe we should have a half session around Christmas perhaps to be alerted to any problems that might come so that we are not as shocked when bad information, or not good information, comes forward.

Q296 Mr Hancock: If I could speedily move on to - probably "speedily" is the wrong word to use in relation to Typhoon - if I could move quickly on to Typhoon.

Sir Peter Spencer: It is very fast.

Q297 Mr Hancock: The question I think you should answer first of all is on the latest report that there is a suggestion that the Eurofighter is not a very safe aircraft. It would be helpful for the record if that was dealt with first-off.

Lord Bach: Let me just start with that and then I will pass on. I notice that is not a story that was run on the BBC this morning at all. I listen to the Today programme always to find out what is going on in the world and I noticed that it was not even mentioned.

Q298 Chairman: In the MoD too probably.

Lord Bach: No, the MoD have been discussing it, but not the Today programme. I cannot think what the reason is for that.

Q299 Mr Hancock: Minister, were you discussing it before or after the report appeared in the paper?

Lord Bach: I really do not think it is an issue that deserves the kind of seriousness with which the article that appeared in the Evening Standard last night pretended. The fact is that ACAS, the Assistant Chief of the Air Staff, on behalf of the Secretary of State, decides the terms of release to service, standard introduction of a new aircraft type, and he looks at the safety case. One of the elements that feeds into a safety case is the independent study that is made, in this case by QinetiQ. All new military aircraft undergo a rigorous incremental series of testing and evaluations to gradually expand the flight parameters and increase the aircraft's operational capability. This is absolutely standard procedure. Operational effectiveness is important but, to us, safety is paramount. No country in the world, and I think I can say this absolutely clearly, is more concerned about safety and safety procedures than the United Kingdom. As a result of the report that was quoted in the Evening Standard last night, the Typhoon was modified, the procedures were reviewed and limitations applied to ensure that the aircraft was ready to enter RAF service and, indeed, it now has as a consequence of ACAS's decision on 13 March. Sir Peter?

Mr Hancock: I am satisfied with that answer.

Q300 Mr Jones: In this morning's Times there is a story about not being able to fly through clouds. Is that nonsense? This is your opportunity to knock these stories on the head.

Lord Bach: Absolutely, I agree with you.

Sir Peter Spencer: It is an incremental process. Because we put greater emphasis on safety in the long performance, we are cautious. What the report that appears to have been leaked consisted of was an independent report on a safety case which pointed out not that there was evidence of something which was unsafe so much as insufficient evidence to be absolutely to the levels of confidence that we aim to be to be able to independently underwrite the performance. It is a call in some cases for more data to be made available, apart from those areas where there is a specific problem as a work around solution while we wait for the design modification to come through. It is absolutely right for people to be concerned about safety. The fact of the matter is it is the Assistant Chief of the Air Staff, who has no line management responsibility for delivering this project, who independently forms that judgment on behalf of his service. That is a very good example of the right sort of responsible corporate governance which is necessary to look after safety issues.

Q301 Mr Jones: The Times this morning was wrong?

Sir Peter Spencer: It is an exaggeration of something which has moved on.

Q302 Mr Hancock: If we could move on to the enhancement of the Eurofighter and the shift of roles making it from a single role aircraft to a multi-role aircraft. We were told that these were largely software enhancements and so on. You must have done some assessment of the cost of this. Is the cost based on all of the aircraft being changed to this role or a significant number or just a few? What is the answer to the costs? Will this mean that there will be a very big cost to the RAF in training pilots into a multi-role capacity? At the moment we have got pilots doing specific roles but this aircraft with a multi-purpose behind it means that you will have a much more sophisticated training for the crews, does it not?

Lord Bach: I am just going to say a very brief word and then pass on to the experts. I want the Committee to know that introduction to service is, I am told, going very well. The Royal Air Force is absolutely delighted with the aircraft's performance and particularly its availability at the present time. There has been progress here and I want to make sure that the Committee know of that.

Q303 Mr Hancock: How many do they currently have?

Lord Bach: Six.

Q304 Mr Hancock: Half a squadron?

Lord Bach: I have got to be very careful. Six.

Lt General Fulton: You are right in saying that we want it to be a multi-role aircraft, both in terms of our ability to maintain the single type of aircraft and, therefore, the whole life cost of operating it, but also in terms of operational flexibility. Multi-role aircraft give an operational commander much greater flexibility either to switch between roles from one mission to another or, indeed, to switch roles within a single mission. My objective is to make sure that the aircraft that come into service henceforth do have that multi-role capability. Clearly it was originally designed as an air defence fighter and will always be a very, very high performance air defence fighter, but the multi-role will give it the additional capability. You asked about pilot workload.

Q305 Mr Hancock: And cost.

Lt General Fulton: Clearly it is a more efficient use of resources to have fewer aircraft types that are able to fulfil more tasks than multiple aircraft types with all the support and whole life cost implications that that has to do the multiplicity of tasks. You would need to look at it in terms of whole life costs and in terms of operational flexibility and the overall number of aircraft that you need to own. In terms of pilot workload, JSF will also be a multi-role aircraft. The JSF and Typhoon will form the backbone of our air power from the time they come into service for 20 years thereafter. Clearly the ergonomics of the aircraft have been designed to make the pilot's workload achievable. That is very much the future of the Royal Air Force, but also the Royal Navy who will be flying JSF as well.

Q306 Mr Hancock: What about the cost?

Lt General Fulton: The overall cost?

Q307 Mr Hancock: The cost of switching the aircraft's functions.

Lt General Fulton: It was always intended that they would become multi-role aircraft, the question is the point at which that becomes a priority. It will be introduced first as an air defence aircraft and then the upgrade, which was always intended, will come into play. As far as I am concerned I would like to bring that forward so that the Royal Air Force has that multi-role available to them earlier. In terms of total cost to the programme it will not have added anything to the totality but clearly it has an impact on the profile of it.

Q308 Mr Hancock: Would you then suggest that we stick with the same number, 232, there is no point in reducing that number when you have a multi-purpose aircraft rather than a single purpose aircraft?

Lord Bach: Perhaps I should just say that we are absolutely committed to the first phase, tranche one, of course, and we are committed to the tranche two purchase of 89 aircraft. As far as tranche three is concerned, there is no need for any decision to be made on tranche three until at least 2007. We are committed to the programme.

Q309 Mr Hancock: Could it be during that period of time you would assess the possibility of reducing the number of Eurofighters and buying an off-the-shelf multi-purpose aircraft?

Lt General Fulton: I think there are two parts to that question. I do not think those two statements have to go together. I think there is an issue, as the Minister has said, on what the totality of our Eurofighter ownership should be. We will then have the JSF coming into service very shortly afterwards. Personally, I would not envisage, and it does not form part of my recommendation, that we need to own more types of aircraft than we absolutely have to. It seems to me that a combination of JSF, Typhoon and the Tornado, which will continue in service until about 2020, will form the backbone of our air power for the next 20 years.

Chairman: This is not a question, there is no time. On the decision making regarding the Carrier programme - I think Kevan mentioned the original policy that was put forward about prime contractorship - it has been fairly obviously to me that the DPA want to have more control over the programme. If they have more control over it, if they are going to manage it, they are going to be sitting on top of the two companies, will they be expecting more risk? I would like to know that, not now but please write to us. Are they prepared to accept more risk? Are they satisfied that both companies are prepared to accept these new arrangements? Above all, is DPA up to managing something as complex as this because historically, and we have spent some time on history, I am not convinced that the Ministry of Defence is at all any good at managing, in essence, a programme. Please do not reply now, we would like to know the arrangements as soon as possible because we have taken an interest in this project from the very outset in 1998 when it was announced in the SDR. I prefer to wait for a response. We are almost coming to an end. Kevan, please.

Q310 Mr Jones: Just before I move on to the first question, you said about tranche three being until 2007. Does that not create some problems in terms of Eurofighter in terms of the workforce, in terms of BAE Systems at Wharton keeping their expertise together?

Lord Bach: I do not believe it does. I think the essential decision that is important for the workforce is the decision that we are going to build the 89 tranche two planes.

Q311 Mr Jones: That is not what they were telling me a few months ago when I was there. Can I move on to FRES briefly. I have asked questions on this on numerous occasions and I would like to hear what your answers are. Obviously you have now got to the stage where you have got a systems house evaluation. What effect is that going to have on the timetable, the in-service date of FRES? When we had the Chief Executive of Alvis before us a couple of months ago he said that it was unrealistic to think that the in-service date of 2009 is achievable, and certainly on Parliamentary Questions I have asked on this issue people seem to be doggedly sticking to the 2009 in-service date. How realistic is this?

Lord Bach: We think it is achievable otherwise we would not say it is. I think you are going to want a slightly greater definition as to what the in-service date will mean in terms of FRES.

Lt General Fulton: I would also say that this is an example of the point I was making to Mr Havard earlier. I and my people set a demanding requirement but clearly the assessment phase will inform the extent to which that is realistic. That is why we do the assessment phase. Crucially, as far as FRES is concerned, as we go into this part of the assessment phase I think there are three things that we do not know. One is that I have a set of performance parameters that I would like it to meet and I do not know the extent to which they can all be matched against each other. You have raised the issue of time and also there is the issue of cost. It seems to me that this is a very good example of what we were talking about earlier where we will have to look at trades. It may well be that CDP comes back to me and says, "You can have something that is very high performing but you cannot have it until 2015" or he may say to me, "You can have a limited capability in 2009", which we can then grow through the life of the programme and you come to the same point of trade-offs on cost. I do not think these statements are necessarily incompatible. What you heard from Mr Prest was his engineering judgment looking at it from the industrial point of view. Clearly what I seek to get out of the assessment phase is the answer crucially to those trade-off questions.

Q312 Mr Jones: The assessment itself is going to be what, two years?

Lord Bach: Yes.

Q313 Mr Jones: Two and a half years. You are very close then to 2009. From the customer's point of view in terms of the Army you have pressure coming from Saxon and other vehicles which are 20/30 years old now and are coming to the end of their useful life. I have asked this question before because FRES is not a single vehicle but a family of different vehicles. Is what you are saying that you might have an early introduction of something that might not necessarily be the final one?

Lt General Fulton: One of the key parameters that I would like to get out of FRES is a single family of vehicles which would start with the simpler variants but would grow to some of the more complex variants. This is very much the way that the United States are approaching their future combat system. In terms of our ability to support this family through life, the more commonality that there is with the vehicles, the cheaper it is going to be for the Defence Logistics Organisation to maintain it and, therefore, reduce our whole life cost.

Q314 Mr Jones: How do you do the trade-off between trying to get that right and pressures coming from your customer, in terms of the Army, saying "We have not got capability because we have kit that is frankly running to the end of its life"?

Lt General Fulton: Therefore, there is a very clear choice to be made between what I might call not FRES and FRES. Not FRES we could go out into the market today and buy a light armoured vehicle, and there are a number on the market.

Q315 Mr Jones: That was my next question.

Lt General Fulton: But they would be the last of the last generation and, therefore, we would firstly not be able to grow a common family of vehicles, they would not be able to stay in service through to the sorts of timescales we need them, through to 2020/2025, or indeed longer, therefore we would lose what to me would be some of the key performance parameters. The assessment phase needs to answer for me the question can we have FRES in a timescale that is acceptable to my end customer or have we got to spend money on not FRES in the intervening period, money that I would much rather invest in FRES. If I can get FRES into service at a time that is acceptable to the Army we can invest all of the money into something that will have reduced operating costs and be a much more capable vehicle, capable in terms of its operational capability, because there are a number of technologies which are now maturing, and have been matured in places like America, France and Sweden, which we would want to incorporate into this next generation of vehicles. We want to be on the front of the next wave, not on the back end of the last one.

Q316 Mr Jones: I think you stressed earlier on, or Sir Peter did, the importance of the assessment test, getting it right, and we would agree with that. Potentially if there is going to be a gap between getting what you want at the in-service date, is one of the options that we buy something off-the-shelf for a short period to fill that capability gap while FRES comes in?

Lt General Fulton: It is an option but from my perspective it would be a very unattractive option because it would divert much needed funds either from FRES or from some other programme. In other words, it would be a dead end capability. It would be a stopgap but it would be a dead end.

Q317 Mr Jones: Could FRES be a vehicle that is there now which could be adapted or is it going to be a brand new concept altogether? Is there something there at the moment that is off-the-shelf that could be part of the first phase?

Lt General Fulton: Not that takes advantage of the new technologies. Not that would put us at the forefront of the future development. The vehicles that exist now are at the back end of the present generation. There are technologies which are at a very advanced stage of maturity both in this country, Sweden and France. I would use hybrid electric drive as one, which is a key defining characteristic, you cannot retrofit it. It is a key defining characteristic, so it comes into that category of a technology which we need to de-risk, to understand what the risks of putting it in are, because if it can go in it makes it possible to have a very capable vehicle in a very small space, because one of my other parameters is for it to fit in the back of a C130 so that it is transportable. I have a number of these demanding, conflicting parameters and the assessment phase for me will answer how many of these conflicting parameters can I have, in what timescale and at what cost. If that is an equation that just will not work then clearly we will have to look at what is the alternative and one of those would be to buy a stopgap and that would put FRES back to 2015/2020, maybe even 2025, and that is a pretty unattractive prospect to me.

Q318 Mr Jones: The pressure you will have on you will be from the Army in terms of the capability it has got now which is basically coming to the end of its life.

Lt General Fulton: Yes. The Army are very keen to replace Saxon, CBRT and the 430 series, I do not deny that. The question is how quickly can I solve the problem for them.

Q319 Mr Havard: This mixture question is absolutely crucial, is it not? It will have to be less than 28 tonnes otherwise the new rapidly deployable bridge is not going to take it. You have got everything from the assessment right the way through to the sophisticated question about the electric engine as opposed to all these different concepts that will go in it. I was at the Joint Combined Staff College the other day and I know that everybody who goes there now apparently has to study what FRES should look like if they come from the Army and there is a whole rack of studies that they are interested in. The mixture of it is important. Are there going to be engineering variants? You will have to get that mixture right, will you not, and, therefore, the bases upon which you get the elements of the family are crucial to the decision making. As far as the industry is concerned, they are going to want to know what they have got to make first. Is the truth of it not that we have a political date of 2009 but that we have a practical industrial date of 2010/2011?

Lt General Fulton: That is what we want the assessment phase to answer. There is enough work that has gone on in this country, in the United States, in Sweden and in France, to show that it is possible to achieve a vehicle family with in excess of 75 per cent commonality across all the types, which helps with my whole life cost issue, which can then be adapted to a range of tasks, of which some variants, perhaps not some of the more complex variants, can fit in the back of a C130 because that gives me the size and weight constraint and rapid deployability. As I said, in terms of where do we start, our aim would be to start with the simpler variants for two reasons: one, because it is the simpler end of the market; two, because it is those ATCs which the Army needs most urgently and then we can look at engineering variants, reconnaissance variants, canon, non-line of sight canon, and so on downstream.

Q320 Chairman: I do not want to pursue this any further. Another point. Alvis point picks up what is left of Vickers; General Dynamics is about to acquire Alvis, another British company goes abroad. Add that then to the ones we mentioned earlier and the helicopter policy and you can add in all sorts of other things. Is this part of the strategy, Minister? If it is not, you must be anxious because now virtually every British company is under threat of either going to the US or going to Italy or being taken over by a French company. That does not seem to me to be very smart defence industrial policy. It might look smart in Washington, it might look smart in Rome, and it certainly looks smart in Paris, but from where I am sitting it does not look smart at all.

Lord Bach: Of course it is a concern. I would not be telling the truth if I said the general point you make was not a concern. I have to repeat, Chairman, these companies that are owned abroad and invest heavily in the United Kingdom and create and sustain jobs here, sustain and create technology here, as far as we are concerned, and this must be commonsense in the global defence market, are to be treated as British companies.

Mr Jones: A good example is Saab Bofors on the NLAW contract.

Q321 Mr Havard: Where does General Dynamics sit as far as the Bowman radio is concerned? That was a rhetorical question.

Lord Bach: Thank you for your support, thank you for your help on that. A few years ago Thales, for example, would have been considered nothing more than just a French company putting it's toe in the British market. It now happens to have the second largest number of UK workers in any defence company in this country and there are exports from the UK that are UK exports. I understand absolutely, if I may say so, Chairman, where you are coming from on this. I would not be telling you the truth if I said there was not an anxiety about it. This is a consolidation of the defence industry worldwide that is not finished yet. I would say on the other side that there are British companies by the old definition who are investing themselves, and have to a large extent, in the United States and in Europe too. This is the global defence industry. Whatever our worries may be about it, I am afraid we have to live with it to some extent.

Chairman: It seems to be all of our companies are going abroad. Anyway, I will draw stumps before I get really mad. Thank you very much.