Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)



  Q1  Chairman: Good morning. Welcome to the first evidence session of the Defence Committee of this Parliament. It is about the Future Carrier and Joint Combat Aircraft Programmes Inquiry. I would like to welcome everybody in the back of the room as well as those who have kindly agreed to come and give evidence to us. Firstly, if I might welcome Mr Coles, Mr Cameron, Mr Geoghegan and Mr Pryor. There are a number of questions which we need to go through. This is a very long running programme which is absolutely essential to the country's strategy in defence terms and we will need to come back to it over the years. I wonder if I can begin by asking if you would please—perhaps this is best addressed to you, Mr Coles—set out for us how the Alliance approach is expected to work? What will the role of the Ministry of Defence be compared with the other Alliance partners. That may seem a large question, but I would nevertheless be grateful if you can cover it in five minutes, or preferably even less, because we have got a lot of questions that we need to get through.

  Mr Coles: I will try my best, Chairman. Essentially, an Alliance for a major project—quite common in other industries—has a number of partners who have specific roles and responsibilities that progress the programme, including the clients. They are combined by an over-arching Alliance agreement to deliver the programme which they all buy into—that is whatever the cost applying to the schedule is—or in the risk reward, including the clients. Most importantly, each of the contractors has a works contract which specifies precisely what their contribution is to the various parts of the programme. That is how it is set out in those terms. It takes a long time to reach those agreements because each company in the Alliance has to assess its role and its responsibilities and those of its partner companies in the Alliance to share in the risk and reward. It takes a long time to reach an agreement in that process. Each company brings its own specialist skills and each other company challenges that company to deliver them in the best way. Therefore, we deliver the best for the project, not necessarily the best for each company. It is a very different way of contracting and a very different way of behaving across the companies, including Government officials in those projects. That is a broad summary of how it is set out to work.

  Q2  Chairman: Would any of your colleagues like to add anything to that or comment on it?

  Mr Cameron: I would just add that being part of the Alliance is being part of a co-operative relationship which brings to bear the best intellectual capacity of the Alliance members in the execution of this very important project. We are very pleased to be part of that relationship in that co-operative approach to delivering CVF.

  Mr Pryor: I would like to echo John's comment about the length of time it takes to form an Alliance. We joined the Alliance in the latter months to bring our expertise in the offshore industry Alliances, to meet the best investing parts of building these aircraft carriers. It is our experience that it takes time to settle down relationships between the companies and between individuals in their companies so that we can present a seamless product to each other and to the completion of the project.

  Q3  Chairman: Would you say that two and a half years was nevertheless quite a long time to take in forming an Alliance and finalising those arrangements?

  Mr Pryor: Chairman, I am not sure we have been going at it for two and a half years in the form of Alliance-building mode; the Alliance members you see in front of you here have been at it since February this year.

  Q4  Chairman: What was it that was identified between 2003 and 2005 for the decision to prompt the Physical Integrator?

  Mr Coles: We all recognise that this project is beyond any one company to deliver. Also, we recognise that business as usual, ie the way we have done things before, would not be successful for this programme. We need to bring in some different views, different talents and different experiences of different industries to bear down on the way we have done business in the past. That was the background to bring in the Physical Integrator, a different perspective on how to run a complex project on multi-sites actively bringing skills sets in. That is how the origin of all this started to bring in a Physical Integrator.

  Q5  Mr Jones: On that point, is the reason why we have an Integrator, the fact that the contract was awarded both to BAE Systems and Thales? What was going to happen if previously one of those solely had been awarded the contract?

  Mr Coles: Of course we would not do it that way and we elected not to do that. We elected to bring in a third party to bring those skills sets together, those very skills sets this project needs to assemble it and to complete it on many sites.

  Q6  Mr Jones: The answer to that question is if we had given it to Thales or BAE Systems it would not have needed a Physical Integrator.

  Mr Coles: If we had the prime contract, of course we would not have done it that way round, you are quite correct.

  Q7  Mr Jones: A political fudge has led to more cost?

  Mr Coles: Indeed not; the exact opposite, I would say. You bring in a different talent into that programme.

  Q8  Mr Jones: No. If you had awarded it to a prime contractor you would not have needed to employ a systems integrator, would you?

  Mr Coles: Of course not.

  Q9  Mr Jones: Therefore there was a cost involved that you did not need?

  Mr Coles: I do not accept that.

  Q10  Chairman: With whom will the Ministry of Defence be contracting if there is not a prime contractor?

  Mr Coles: It will be contracting with each of the companies in the Alliance separately and collectively.

  Q11  Chairman: How is the allocation of work and risk going to be sorted out if the Ministry of Defence is contracting with everybody?

  Mr Coles: The precise roles and responsibilities of each member of the Alliance will be agreed and they will have to accept as part of that agreement a risk reward in the Alliance contract. Each company has a specific task agreed un-contractually and they buy into that by taking a share of the risk and the reward within the project. All which will be put into the contract as the over-arching contract, the individual contracts will say what they have to do and the risk reward is built into that mechanism.

  Q12  Mr Hancock: If that is the case, who carries the risk if one element of the Alliance fails to deliver on time so causing a cost-overrun to another member of the Alliance partnership? Who then meets the cost, the Alliance generally or the MoD?

  Mr Coles: The individual parties will all share in the risk, that is the difference. Each party is carrying the risk in part for its colleagues. Perhaps one of my colleagues will be able to amplify that.

  Mr Pryor: Perhaps I can build on that point. The point of the Alliance is that we all sink or swim together, so if one of my Alliance colleagues or partners fails in his scope of work, I take the risk on that failure, likewise he is taking the failure on my scope of work. We believe that it is a stronger bond to deliver the outcome of the project than being independent and saying, "It is your fault, it is not my fault". That is another reason why it takes so long to build the Alliance because we have to agree the risks that are being handled by my partners and they have to agree the risks that we are handling and the quantification of those risks in monetary terms. That is part of the time it takes to nail that down, as John said, in the collective agreement, which would be the Alliance contract, which is a binding contract, and the individual works' contracts from the Ministry of Defence on the individual partners.

  Q13  Mr Harvard: If it is awarded to one company, then you do not need the Physical Integrator, but we have now got two, so you need the Physical Integrator. Potentially we may even have three, of course, if the French get involved; we will get on to that later on. The point my colleague made about extra costs, surely what we are really seeing here is that the Physical Integrator is an extra cost because of the deficiencies. It seems to me that you have just described a very differentiated process of contract negotiation and contract compliance which also needs to be done now as well which you might not have needed in quite the same way if you had awarded it to one organisation. I think we are seeing, are we not, the fact that project management skills and various other skills were deficient in the DPA and possibly in the MoD and this is some sort of policeman gatekeeper contract compliance organisation that is going to run in order to make a project work in any event, is it? You make the savings because you get it right rather than get it wrong, but there is an extra cost.

  Mr Coles: In any project you would need all the skills sets that a Physical Integrator in this project would bring. You would need them anyway, someone would have to do that. Whether it is done within one company and you will bring a second or a third company to it is not really the issue, it is that skills set they bring, that experience and knowledge base they bring to what has been our way of doing it before.

  Mr Geoghegan: I think it is worth noting that from the outset, even when this competition was run essentially under the heading of "prime contractorship", both of the competing companies, Thales and BAE Systems, put forward teams of companies to respond to that competition. Both sides recognised that it would require a number of companies to come together, both in terms of skills and capacities, to respond to this project. Whether it be through a prime contractor or whether it be through the current proposed Alliance structure, there would have been a series of interfacing contracts that would have to have been put in place. In many cases the prime contractor would have been handling that interface process. This is another form of dealing with a complex set of project interfaces of contracts.

  Q14  Chairman: Sir Dick Evans told this Committee last year that he was worried about the whole thing developing into a sort of procurement committee. Do you think he was wrong to express concerns about that?

  Mr Geoghegan: I think those concerns come with looking at something which is new and seeing a lot of interfaces. A lot of the attention that we have been putting on the programme over the last 12 months has been trying to identify the minimum number of interfaces that are required within this Alliance and putting the required governance around those.

  Q15  Mr Jones: I do like straight answers, but the quick answer to it is you have put an extra layer in here because the prime contractor would have been doing that job. My fear is—and I think Sir Dick Evans said this—that you are going to get a procurement committee here, are you not? The fact is that if you had awarded it to BAE Systems or Thales they would have been the main integrator, you would not have then had to appoint a system integrator to do that because they would have done it. Surely there is an added cost there. I will try again but obviously you are not going to answer it.

  Mr Coles: I will answer it again and if anyone wants to add anything, they can. The same task would need to be performed whether in an Alliance or in a prime contract or a joint venture, the same task would need to be done, so it is not an extra task we are bringing in.

  Q16  Mr Jones: It is an extra cost.

  Mr Coles: It is not an extra cost either. It is a question of who does that task and the experience they bring to execute that task from other industries and other knowledge bases that we may not have brought in the past. That is how Alliances work. We bring together the skills of a number of parties who combine together to produce a superior outcome.

  Q17  Mr Jones: What was wrong with BAE Systems, for example, or Thales being the prime contractor? As your colleague said, clearly you had to negotiate with different companies, but why have you got two possible prime contractors now with another organisation sitting above them as an integrator? That must add a cost. You cannot tell me it has not.

  Mr Coles: I do not agree that it adds a cost, it is a different way of running the project.

  Q18  Mr Jones: It is a bureaucratic way of doing it.

  Mr Cameron: I would not agree with that. If you look at the experience of the offshore industry in particular and the construction industry, the use of Alliances to drive out cost and change behaviour can be instrumental in bringing on some of these projects, which would never have gone ahead without an Alliance, and we want to bring that focus to this particular project.

  Q19  Mr Jones: Are you saying that either Thales or BAE Systems were not capable on their own of being the prime contractor?

  Mr Coles: We needed all the skills sets, both Thales, BAE Systems and others to bring this project on. It is a complex project.

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