Examination of Witnesses (Questions 180
- 199)
TUESDAY 25 OCTOBER 2005
LORD DRAYSON
AND SIR
PETER SPENCER
KCB ADC
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.
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