Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 180 - 199)



  Q180  Mr Borrow: Finally, would you just touch on French involvement in the project which I can see from a cost point of view could be an advantage. Certainly in terms of the in-service costs that would be a very positive thing. Given that we have already heard this morning how immensely complicated and difficult this whole project is and how many players there are involved and what difficulties there are from capacity constraints within British shipbuilding, is it not really a step too far to complicate the project further by risking involving another partner in this project at this stage?

  Lord Drayson: I think you make a very good point. I think that we need to have real clarity about whether or not such joint working actually does affect the risks of the project. Commonsense would tell us that there are going to be opportunities in building three ships which may not be available to us in building two ships. However, history also tells us that international collaborative defence projects can go seriously wrong, not always but quite often and therefore we need to make sure, because of the importance of this project to the United Kingdom's defence posture, to the United Kingdom's maritime shipbuilding industry, that any potential joint working which is done on the French Carrier is done in a way which is consistent with the needs which we have. I think it is important for us to explore properly and to put all of our efforts in to making sure that we have explored them and I hope that we do find a way of doing this which enables us to realise some benefits. I do not think we should close our mind to it but I think we should have a very firm view of where it gets into the zone of actually negatively impacting the performance of our project.

  Q181  Mr Havard: We had a memorandum in May 2003 that talked about industry-to-industry being the driver and said that at Ministerial level this was understood and there may be projects that came forward. We have had the Alliance structure established for the Carrier. Is the Carrier basically the first and the best example of one of the ways of doing this and so there will be other projects in the future? Is that essentially where we are? Is that the context in which it operates?

  Lord Drayson: I think the context in which it operates is that the Alliance structure on the carrier is a first step in the evolution of future maritime shipbuilding, the shipbuilding industry within the UK. I think because of the importance of the carrier project, the size of the project, the effect on so many yards and so forth, it is really worthwhile using that project as the foundation upon which the industry evolution takes place. Carriers are very important projects but so are Astute submarines and Type 45s; there are a number of projects coming forward. It is not that we intend applying this Alliance principle on other projects; we are not saying that. What we are saying is that because the carrier project creates the possibility of this foundation, getting industry together in this Alliance structure is the right way of getting this project moving forward to enable us to move from that to this further evolution of the industry, and I would hope if it is done right that it enables industry in the future to work in a more collaborative fashion on projects.

  Chairman: Can we move on to the Alliance Structure now? David Crausby, Vice Chairman.

  Q182  Mr Crausby: Thank you, Chairman. It may be our own fault but the Committee is still unclear as to what the exact roles of the individual Alliance partners are. Can you set out in reasonably clear terms what the role of each of the partners is because clearly they come from very different standpoints—the main contractors, the MoD and the Physical Integrator?

  Lord Drayson: Yes. When it became clear that the nature of the project was going to require the resources and capabilities of multiple yards to come together to do this, and that this was going to provide the long-term work framework for the longer-term evolution of the industry, the importance of the Alliance structure in both allowing the industrial participants to sign up to contracts, which set out clearly the responsibilities in terms of parts of the work related to the Carriers and the interface between the various parties and the risk that each party is taking on, in the context of all share the success or failure of the project. And within that the role of the Physical Integrator and the role of the MoD, both as Alliance partners, is that the risk of the project overrunning or being over in terms of cost is shared by all, but before signing up to it each of the Alliance partners has clarity on the risks that they are taking within their chunk of the work that they are doing, and that is therefore negotiated, it is put into contract and then when signed it really gives us the best chance of having a greater degree of the clarity of the risks, certainty that they will be properly managed, who has the responsibility for managing them and where the accountability lies for each of these risks. Therefore, the joint working, such that the Alliance structure encourages people not once they are in the project to spend weeks arguing about decisions—because everybody loses if that happens—but once they have signed up to the Alliance everybody is motivated to get on with it and take decisions quickly and efficiently because in that way the success of the project is likely to be ensured. I think this is an important point in terms of the Alliance structure for the long-term delivery of this project.

  Q183  Mr Crausby: Can you tell us more about the role of the Physical Integrator? Has that been bottomed out now? Because in May of last year, we were advised that just a few loose ends needed to be tied up from the point of view of the Alliance, and yet in our meeting last week we got the impression that it was a bit more than a few loose ends needed tidying up and we are some distance away. What we would like to know is when will all of these loose ends completely and absolutely come together?

  Lord Drayson: There are a number of areas where the role of the Physical Integrator has been vital to this. The first is in facilitating the discussions that need to take place between parties who are normally competing with each other, to actually get around the table to reach agreement on the various elements of the project; that is number one. Number two is to actually bring some outside perspective in terms of other experience in other industries. Things such as this alliancing approach have been used successfully in areas outside of shipbuilding and the Physical Integrator brings experience of that. It also brings experience in other types of major construction work, such as oilrigs, as an example. The other thing which is important is that it brings with it a responsibility from the integration of the joint working in terms of the project management approaches. I know from my own experience as an engineer and working in manufacturing, things such as the project management system, the computer aided design system, the tools which the engineers from the different yards use to communicate with each other effectively to build these very large ships are vitally important. Therefore, it is very valuable having a Physical Integrator doing that and—and we have been doing this over the past year—the value of that has already been shown in what we have seen coming out of the work that has been done to date, for example the output of the 100-day review. Do you have anything to add to that, Sir Peter?

  Sir Peter Spencer: Yes, if I may. Mea culpa because I made the statement last year that, in good faith at that time, our understanding was that there was agreement on a large majority of the detail but there were some loose ends to clear up. Those loose ends turned out to be much more fundamental than I had understood them to be at the time. One of them was the agreement on the use of an Integrator, the need to reinforce the Alliance, and that took time to negotiate through with our Alliance partners; but we are through it because there is now general acknowledgement that what has been brought to this project by the introduction of the sort of skills and expertise that Lord Drayson has just described to you has been hugely beneficial, and they have produced a serious degree of challenge, which was needed because the cost targets of this programme are so demanding for the capability that is being sought. But I did go on to say that in order to de-risk the supply side—because it is not just a question of getting the technology risks properly understood and properly managed—we had to have absolute clarity on the detail and clear understanding of the principles and the processes at the CEO level in all parties, and that is what we have been working to do. When you look at what has been happening, because risk is not transferred but is shared, because we all win or lose together, there is much more of a due diligence process going on by all members of the Alliance to make certain that they do really understand this proposition, because there is not the scope that there would have been in a more conventional contract for that risk and cost increase simply to be handed back to the Ministry of Defence. That is the key to all this. We have meanwhile been maturing the design stage and doing more during the assessment phase than we would have originally been doing in a different sort of programme. It is that detail of the design and the understanding of the design which has enabled us to feel progressively, in some cases, less comfortable about aspects of cost which we thought we would have understood and now we are understanding even better, and it is absolutely imperative now that we conclude this due diligence process so that when we commit to the target cost, when we understand the roles and responsibilities which are still being discussed in commercially sensitive meetings between the partners, that everybody is doing this for the overall benefit of the Alliance, not trying to manipulate it in a way which is simply for the benefit of an individual player.

  Q184  Mr Crausby: It will be two years in January since we decided that the Alliance would be set up and KBR were appointed in February of this year. So can you tell us when all of these agreements will be finalised?

  Sir Peter Spencer: The answer is the same as you were given by Lord Drayson earlier. We are closing down on these agreements but I cannot set an artificial timeline. This is a question of consensus. It is in everybody's interests to get on with it as soon as possible and that is what we are doing, but being hung out to dry by picking a date at this stage and then trying to undermine the process does not work here. It is not different from what would go on in an Alliance programme of this sort in the commercial sector.

  Lord Drayson: Chairman, may I say very briefly, that at the point we make the main investment decision these contracts must all be signed. Everyone who is a member of the Alliance has to have got itself satisfied through the due diligence which Sir Peter has described, and has signed up to it on the basis that it feels that it is entering the Alliance in a way which can deliver the terms which it needs to provide to its shareholders, which is consistent with the long-term strategy of the company, and which enables it to feel comfortable and motivated to be a part of this project and to deliver the delivery date, to deliver the delivery cost and the performance which we sign up to at the Main Gate.

  Q185  Mr Breed: Minister, as I understand it, in this Alliance the MoD will be both a member and a client. So the first question is: how does the MoD manage the obvious conflict of interests? Secondly, how can it separate the inevitable risks, which, as I understand it, is the principal thing which needs to be got right before Main Gate? So how is the MoD going to apportion the potential risks between client and membership of the Alliance?

  Lord Drayson: You have highlighted a very clear problem which exists in all defence projects, which is in terms of the role that the MoD has. The reality of the role that the MoD has is that whether it is with an Alliance structure or not the MoD has that conflict of interest. What the Alliance structure does is manage it properly. The companies can only deliver these ships to the project plan if the Ministry of Defence keeps up its end of the contract. It actually puts the Ministry of Defence into the relationship with the other partners such that there really is a joint contract which both sides are bound to, which motivates both sides when the going gets tough, as it always does on these complex projects, and to sit down together and quickly and efficiently make the decision to resolve them. So it is a recognition of that potential conflict which exists and it is a mechanism for managing it.

  Q186  Mr Breed: What is the advantage, therefore, of being a member of the Alliance?

  Lord Drayson: The advantage is that it enables us to work in a way which gives the best chance of efficient decision-making, management of risk to bring the projects in on time and to budget, because of the motivation that that provides for all concerned in the project to do so. This is why negotiating these Alliance contracts is tough because you are dealing with those issues upfront. What we would expect to see, if you are successful in negotiating those contracts upfront, getting them in place, is that it does ease the process of actually moving through the project because the incentive is there to take decisions efficiently, and that is one of the things which we have learned from the past.

  Q187  Chairman: Sir Peter, you wanted to add something?

  Sir Peter Spencer: The benefit to the Ministry of Defence being in an Alliance, as we have learned from examples in other industries such as oil and gas, is that instead of the supply chain being incentivised to want to bring delay and dislocation-type costs and expect us to pick up those additional costs, is that the way in which the project contingency also serves as the earned profit. Everybody is now motivated not to put their hands in that contingency because if there is a member of the Alliance who wants to bring some force majeur claim with exaggerated details of how much it has cost—which is the problem that has been endemic in all sorts of prime contracting with other industrial areas in a conventional context—that sort of behaviour is by peer group pressure unlikely to happen, because all you will be doing then is taking money out of that contingency pot, which will reduce the levels of earned profit that everybody in the Alliance will take, including the MoD as the client because it will be a reduction in our costs. In other words, we incentivise people to solve problems in the most efficient way, which is not what conventional prime contracting against a fixed price will do for you.

  Q188  Mr Hancock: May I first of all apologise to both of you? Unfortunately I have to leave just before 12 as I am chairing in Westminster Hall. Minister, you have used the word "clarity" eight times so far today, and I think it is a very interesting use of words because I think it needs some clarity here. The current published In-Service Dates, Sir Peter, for the first Carrier was 2012, Joint Strike Fighter 2014, the second Carrier 2015. Now, we did not invent those dates, they came from the Secretary of State, both the current one and the previous one. So all of those dates emanated, for clarity, from the MoD. If they are not achieved then we have some problems, do we not? What do we do about the run-on of the current aircraft carriers, Illustrious in particular? Sea Harrier runs out in March 2006. With delays on this, are we really suggesting that the fleet will have no proper air defence for the best part of a decade? And are the real issues about the Alliance related simply to industrial issues or are they related to the size of the carrier, the type and the size of the number of planes that they are going to fly off it, because I think they are the ones on which we need some clarity?

  Lord Drayson: I do not believe we have any issues in terms of the type and size of planes which will fly off the Carriers. I think we have clarity in terms of the interface between the introduction of the Joint Strike Fighter. We must make sure that the design of the Joint Strike Fighter meets the design of the carrier, in terms that the planes have to work off the carrier. When I visited our current carrier I saw for myself the way in which the carrier strike works as a system, and it is very important that the whole thing is designed as a system to make sure that it can meet the requirements that it needs to meet in operations. One of the good things in terms of the way in which this is being planned is that several of the principles we are going to employ on the new carriers and the new aircraft which will fly in them are being tested today with our Carrier Strike Force. So I think we can have a reasonable degree of confidence that there will not be any issue relating to the interface between the aircraft and the ships.

  Q189  Mr Hancock: I would be interested, Sir Peter, about your views about how the MoD are going to finance the issues raised by the delay in this programme.

  Sir Peter Spencer: As with other programmes we would deal with that as and when the circumstances arose, in terms of the roles of the parties on the operating cost budget.

  Q190  Mr Hancock: Is that one of the risks that is being analysed at the present time, that if this programme does not deliver the first carrier in 2012 and the Joint Strike Fighter in 2014 the Ministry of Defence are working out a strategy to cover that risk?

  Sir Peter Spencer: There will be coherence in the overall package of carrier strike.

  Q191  Mr Hancock: Is coherence the same as clarity on that point?

  Sir Peter Spencer: Yes, because it means that we will factor in when the dates are formally set. We will then reassess the programme issues relating to the current assets and make whatever adjustments might prove to be necessary.

  Q192  Mr Hancock: In last week's evidence we had this, I think slightly unfortunate, quote from one of the witnesses who said that the Alliance partners would "sink or swim together" on this project, and that really does back up what the Minister said, does it not? What happens if the Alliance does sink in the early stages? How are we planning to keep this programme going if the Alliance does not deliver in the early stages?

  Sir Peter Spencer: The interesting thing about an Alliance structure is that in the unlikely circumstances that the Alliance collapsed we still have works contracts in place which will actually build the carrier. You would then reconsider your options, should you so need, as to who was actually going to be in the driving seat in that arrangement. But we do not plan to do that and there is no reason for us to do that as long as we do the right amount of due diligence upfront.

  Q193  Mr Hancock: So what is the last outstanding issue that is causing delay in the agreement on the Alliance being signed?

  Sir Peter Spencer: I do not think that I can discuss publicly the detail of commercially sensitive discussions, but clearly, as far as the members of the Alliance are concerned, they are now taking a look at the performance time, cost and risk relationships; they are working out for themselves who is going to be best placed to do certain aspects of this programme, and there will be a negotiation which we complete as to what those roles and responsibilities are going to be and a negotiation in terms of the amount of risk and reward that individual members of the Alliance will wish to take out, and all of that will hinge upon us converging on the target cost, which would put the centre of the Alliance in such a way as there is the right balance of challenge so that we will reward industry and ourselves by gain sharing the benefits of beating that target cost.

  Q194  Mr Hancock: There must be a date in your own mind by which that Agreement for the Alliance to sign up to has to be achieved, because if it goes on for much longer there is a serious problem in industry in this country having no confidence in what is going on. If we are going to use this model for future developments—and as the Minister rightly said, if it works we ought to—I think we now have to start to say that there has to be an end gain here, Sir Peter, and I would be interested, as would the Committee and Parliament, to know when you expect that to be. On the signing of the Agreement for the Alliance?

  Lord Drayson: Chairman, it may be that I can be helpful here. I think that we as a country, along with a number of other countries, are recognising the fundamental challenge of affordability of a number of large defence projects, whether it is fast jets, submarines, aircraft carriers. All countries face the issue that the level of inflation that is taking place in defence projects and just the overall cost of platforms is raising questions of affordability. Therefore, there is a recognition within the industry here in the United Kingdom, and within the Ministry of Defence, that we have to jointly address these issues of affordability through more efficient working. For industry to be able to make the investment in shipbuilding, to become more efficient, it has to have visibility about the longer-term projects; it has to know how often we are going to be ordering certain types of ships and submarines. If we can provide industry with that then it puts the onus on industry to make those investment decisions. The Alliance structure is one way of enabling these discussions to take place to address fundamental issues of affordability and investment in the long-term. I hope that I have not given the Committee the impression that I feeling alliancing is the answer to everything—it absolutely is not; it is one tool in the project management toolbox—but it is, we believe, particularly appropriate to the carrier projects at this time. It does not mean that we are going to use it on everything. There are projects where straight competition is the right way to do it. However, we do need to see that investment takes place within the shipyards in the United Kingdom to improve the affordability in the future of this type of ship, because we need to be able to buy these types of ships in the future, and I am encouraged that that realisation is taking place. It is important for us from the MoD to create an environment where both investors in companies and the companies themselves can see that they can make good long-term profits to sustain their businesses within this framework, and this is what we are aiming to do.

  Chairman: Moving on to the shipbuilding strategy, Kevan Jones.

  Q195  Mr Jones: First of all, can I say, Chairman, that it is very refreshing to have a Minister before us who actually knows what he is talking about. Clearly somebody made a mistake in the appointment! I have to say that I have enjoyed listening to you this morning. Can I say just one thing to you? Make sure that you do not go native within the MoD, because if you carry on as you are doing clearly we might get some answers that we all ask for, and actually get a better policy. Can I turn to shipbuilding strategy? In January 2003 four shipyards were mentioned for potential work from the Carrier programme: Govan, Vosper Thornycroft, Swan Hunter and Babcock. Are those four yards still designated as yards that will get work from the carrier programme?

  Lord Drayson: We have not signed the contracts; we are in negotiations with a number of yards, and therefore we are talking with a number of yards about the various aspects of the shipbuilding, as you have described. But we have not signed contracts with any of them yet, so therefore I cannot say whether a particular yard is or is not in the deal.

  Q196  Mr Jones: Can I probe a bit further in that? You mentioned earlier on, you used the term that putting the partners together is a bit like "fantasy football" and, when I play, you usually try and get the best players in the team; you certainly would not pick a player that has one leg, for example. So in terms of Swan Hunter, with its current problems on the landing support ships, is it realistic that you are going to include Swan Hunter in this build probe?

  Lord Drayson: As I have said, we have not signed any contracts; we have not made any decisions. It is true that we have had problems relating to the build of ships at Swan Hunter in terms that they are late, and that is something on which we are working very hard within the Ministry of Defence, with the shipyard, to address. I think the best message I can say about this—not specific to Swan Hunter or any yard—is that, as you describe in fantasy football, you want to put together the best possible team. The good thing about the carrier project is that the carriers are so large that they actually require the capacity of this country to build them. Nonetheless, for the carrier project to be successful it is important that the performance of everyone in the team is up to the mark, and certainly the message I would send to the yards in this country is that we certainly have world class shipbuilders in this country and we need to see that the standard of work on the projects is improved as we go forward because it needs to address the fundamental affordability, and that is what we are going to be looking for from the Alliance partners coming on board with the carrier project.

  Q197  Mr Hamilton: I am still trying to go over the part where we talk in terms of if we get it right it will put shipbuilding on a sure footing. I am trying to marry that with the fact that you immediately turn around and say that 2012 is not now a date that we tried to work on. When you talk in terms of what you have to do, in last week's evidence session we were told that the carriers would be built in the UK. However, we were also told that two of the 18 shipyards that you talked to had gone bust. I am going to marry two questions together, Chair, because it makes sense. When you talk about delay in the Main Gate, how is that affecting the shipyards involved in the construction of the carrier? I know that you have not given the contracts out yet but there is work being done at the present time. So how is that having a roll-on effect of these continued delays that we are seeing at the present time?

  Lord Drayson: I am very mindful that the yards around the country need to have the earliest possible decision on the carrier project for the reasons I have described earlier. Nonetheless, when we take the decision it has to be a decision based upon clarity and definition of the risks and the responsibilities of which we have spoken. I think it is important for me to state that it is for the management of the yards to manage their business in an effective way; the Ministry of Defence is not responsible for the management of these yards. But the Ministry of Defence is responsible for creating an environment within the United Kingdom within which shipbuilding can prosper and investment can take place, and that is why we are putting the effort into the maritime industrial strategy to actually set out, with greater clarity, a framework for the yards to enable those decisions to be taking place. But I do not think you can get away from the challenge which both sides have, which is that until we can get definition on the relative elements of the Alliance within the carriers we are not in a position to go forward. That actually puts some pressure on the industrial participants, the yards themselves to get on with the discussions which we are having. It also puts pressure on the Ministry of Defence to get on with it because of the real need to deliver these carriers to the Navy. So interests are aligned to come together to get this done. There is no dispute as to the urgency that there is to conclude the Main Gate decision to be able to move on with the build of these carriers.

  Q198  Mr Hamilton: Minister, I worked in an industry with 100s of 1000s of people and that industry is virtually non-existent now. If you lose the skills-base, which the industry that I worked in, the coal industry, has now done, and if you ever wanted to expand the coal industry—and that is another debate—you have effectively lost the skills-base within the UK. The timeframe which you are working within is very, very short, but you have already extended that period of time. How realistic is it that you are asking private contractors for shipyards to be able to retain a workforce, which has to be necessary to carry out the work that needs to be done, and at the same time you do not have a strategic plan and framework to work within, because that is another issue you are still trying to work with? That requires a cross-party discussion, a cross-party agreement, if you want to talk in terms of a five, ten, 20-year programme of defence expenditure. How realistic is that?

  Lord Drayson: It is realistic. I have seen for myself, and for example one particular yard I visited this summer, where the Managing Director of the yard said to me, "You can ask anyone in this yard what the delivery date is for this vessel, and they will tell you, because this yard really understands the fundamental importance of delivering this vessel to the Ministry of Defence on time." And I tested it out. There was one 20-year old apprentice doing an amazing piece of welding, and I asked him, "When is the delivery date for this vessel?" And he knew it. There is an example where that yard had understood from the top to the bottom the need to address issues of training and investment and to deliver affordability in the long-term. The fact that we have committed, as a Ministry, to deliver the industry with a strategic plan by Christmas, we know—because we are talking to the industry, we are talking to the unions, we are talking to the yards—that that will give them the framework to enable them to make the decisions that they need to make. We have committed to doing that and we are on track to deliver it. That is why I have the level of confidence, both in what I have seen from talking to people, but the fact that the Ministry of Defence is on track to deliver the strategic plan.

  Q199  Mr Hamilton: With all due respect, you are not on track to deliver that; you will not know that until the end of this year, the beginning of next year, until you get a strategic plan in operation, because the delay factor has already knocked these issues back. I made a point of being involved with big industry. I negotiated contracts on behalf of 2,000 people. The important thing at my level, that I can work at, is how we retain a workforce at a time when you know that long-term investment has to be put in. The two have to marry very, very quickly, and I would imagine that by December, when the report comes out, that will be the start of another long debate.

  Lord Drayson: Chairman, I think it is important for me to stress that this maritime strategy that is being developed now is being developed in consultation with industry, with the yards, with the unions, with the companies concerned. This is not something which the Ministry of Defence is going to publish and which everyone is then going to sit down and start debating. This is a process which has been going on for some time. The Secretary of State has charged me to get this done by Christmas and I intend to get it done by Christmas, but it is being done by consultation, and therefore the yards are going through a process with us of discussing these key elements within the strategic plan.

  Chairman: We are beginning to run over time a little. Desmond Swayne.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2005
Prepared 21 December 2005