Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



  Q200  Mr Swayne: Will the demonstration and manufacture contract be for one or two ships?

  Lord Drayson: The demonstration and manufacture contract for one or two . . . I am sorry, I do not really understand this.

  Q201  Mr Swayne: When the contract is let for the demonstration and manufacture will it be for one ship or for two ships?

  Lord Drayson: You are asking me, basically, are we intending to build one carrier or two carriers?

  Q202  Mr Swayne: Is it the same contract or are there going to be two separate ones?

  Lord Drayson: I am sorry for being a bit slow on the uptake here. The intention is for us to build two carriers; that is what we require. We are moving forward on the basis of two carriers. In terms of the elements of the contract within those two carriers there may be differences in terms of the Alliance contracts for each carrier, but that does not mean to say that there is a lack of commitment to two carriers as opposed to one. But in terms of the fact that we need to manage the capacity, the time delay between the first carrier and the second carrier, in terms of the peaks and troughs, the interface with other projects, it is very important to get it right. So it may be necessary for us to have separate contracts for each ship within an overarching structure for both ships. That is a complicated answer to your question but I want to make sure that I am giving the Committee clarity. The intention is for us to build two ships but to build two ships in the most efficient manner, taking into account the maritime strategy. The details of those contracts are being negotiated at the moment. It may be that it is better to actually structure them as two separate sets; it may be that it can be done as one set but that has not been determined at the moment.

  Q203  Mr Swayne: What will be the contractual arrangements between the Ministry of Defence and the other Alliance partners and the shipyards? For example, how will those contractual arrangements and the transfer of risk be affected by the Ministry of Defence retaining the decision-making power over the allocation of work between shipyards?

  Lord Drayson: I think that the principle of the Alliance structure is that in going into the Alliance negotiations there is a negotiation about responsibility for the various proportions of work, at the blocks of work that come together to create the ships. The Ministry of Defence shares the risk because the Ministry of Defence is an Alliance partner. The Ministry of Defence is also in a sense chairing this from the point of making sure that there is a fantasy football team coming together to do this. So that is the way in which that process of decision is on the allocation of work. It has to be done on the basis that the Ministry of Defence is satisfied with it; it has to be done on the basis that all of the Alliance partners are satisfied with it, for the Alliance contract to be signed.

  Q204  Mr Breed: Minister, in the context of the Ministry of Defence submission that the Whole Life Costs for the carrier strike capability is going to cost something like £31 billion, of which part of that is acquisition costs of approximately £12 billion, what are the estimated costs for the acquisition of the two carriers at this moment in time within that sort of framework?

  Lord Drayson: The decision that we are going to take on the Main Gate, as well as setting the timescale, is going to set the costs for the carriers. So when we sign the contracts for the Alliance, because the Alliance structure is going to be what is going to deliver the project, it is also going to be the contracts under which the participants sign up for the delivery price for the carriers. So that will be determined at the Main Gate decision.

  Q205  Mr Breed: Is that cost going to have to be contained within the current equipment programme or will other programmes have to be cancelled or modified in order to make way for it?

  Lord Drayson: We need to ensure that in the management of the overall equipment programme that the cost that we are signing up for, as part of the Alliance, is one that meets the equipment programme which we have.

  Q206  Mr Breed: If, God forbid, with all this work that is being done in de-risking and everything else, there is the unusual possibility that the costs might increase, at what point might it be considered that the whole project is unaffordable?

  Lord Drayson: You can certainly envisage hypothetically a wide range of scenarios in terms of speed of cost increase and so forth. I think it is important for us to make sure that we go into this project on the basis that we do have clarity over the risks and responsibility, and that we have managed them such that we do not go over in terms of cost. That is a challenge for the whole of the defence procurement area within the department that I have responsibility for; it is not unique to carriers. Because of the pressure that we have in terms of the significant needs across a wide range of a number of projects it is important for us to deliver our projects on time and to cost in all cases. That is a challenge for us to do in the current environment which you have, as I described earlier, and that is something which we need to improve. We have made good progress on that but there is further work that needs to be done.

  Q207  Mr Breed: But the risks are obviously somewhat greater because of the size of this particular project and its other bits around it, in terms of the total budget of the Ministry of Defence's procurement.

  Sir Peter Spencer: That is the whole point of alliancing, is it not? That you set your target cost with much greater confidence and everybody who is involved is trying to beat it as opposed to trying to come back to deal with you with claims of additional costs. That is why we have been so careful through the 100-day review, to take a really good look at this with newly introduced, new challenging, probing questions from KBR, as the Physical Integrator, and to take a look at some of the assumptions that had formed the basis of costing up to that point, and to recognise that the performance, time and cost element of Smart Acquisition has to be done vigorously at all stages in the programme and especially when you come up to that main investment decision. That is a very important part of the work that we have been doing. All of our experience is that projects that put enough intellectual effort at the front end, do enough due diligence at the front end, in the main create a successful outcome. Too many projects claim bad luck where they have just not spent enough time at this very important foundation stage, and this is what this is about.

  Q208  Mr Havard: A very short question. Defence Industrial Strategy, December. Presumably at that point maybe the Alliance is set up, maybe a Main Gate decision—we were told it was going to be roughly about December. Is that we are seeing? So should we be coming back in March and asking you to come back in March and then perhaps we will get an answer to 2012 or whenever?

  Lord Drayson: I am always very happy to come back and talk to this Committee.

  Q209  Chairman: I think we should move on to the Joint Combat Aircraft. This is not going to be a difficult question at all. We used to call this Joint Strike Fighter, we now call it Joint Combat Aircraft; is that correct?

  Lord Drayson: Yes, that is correct.

  Chairman: Starting with what might or might not be happening in the United States, David Crausby.

  Q210  Mr Crausby: There appear to be worries in the US about cutbacks in Joint Strike Fighters. Senator Carl Levin for instance has said that the Joint Strike Fighter is likely to be trimmed back. So how concerned are you about these reports?

  Lord Drayson: It is something which we are watching very carefully indeed. We are having regular communications on this subject, both with the Embassy and with our partners, with whom we are working on on the project. In terms of the requirement which the United Kingdom has for the Short Take Off and Vertical Landing aircraft, we believe that the Short Take Off and Vertical Landing aircraft, given its vital importance to the US Marine Corps, is not under threat, but we are watching this very carefully indeed.

  Q211  Mr Crausby: What would the alternatives be? It clearly must be a possibility that the STOVL could be cut back. I know that that is not at all in your control when we consider the number of aeroplanes that we are going to buy in relation to the whole contract. If the Americans choose not to go ahead with STOVL then where are we? What would the alternatives be to that?

  Lord Drayson: A decision was taken some time ago to join the American programme for this fighter, and the programme which we are now working on is one through a process where we will be buying aircraft from this international programme. It is therefore important to us that this programme continues. In terms of a plan B, if there is a decision taken not to go forward with the aircraft which we require, i.e. the STOVL aircraft, then we will have to look at those plan B alternatives. I do not think it is appropriate for me to go into what plan B is. We do not believe that we need to do that. We are looking at this very closely and for the reasons which I have described we think that the Short Take Off and Vertical Landing aircraft is one which will be continued with; but, as I have said, we are watching the situation very closely.

  Q212  Mr Crausby: Lockheed Martin last week mentioned the Quadrennial Defence Review that is due to report at the end of the month. Today's Defence News reports that British defence officials are worried that the Pentagon's Quadrennial Defence Review could affect their plans. Are you worried? Is there a risk?

  Lord Drayson: This is an American programme which we had decided some time ago to buy into. Therefore, if there is a decision taken to stop the programme or cancel elements of it that would affect us, yes, and we would be concerned about that; and we are monitoring the situation very closely. This is an important programme for us; we are monitoring it closely. Our assessment of it at the present time is that we do not believe that it is likely to negatively impact on the STOVL aircraft.

  Q213  Mr Crausby: Back to plan B, I suppose there could be two plan Bs. One, would we continue with STOVL with a different alternative—F-18, for instance? Or would we want to consider the design of the carrier itself if we abandon STOVL? Is the abandonment of STOVL on the cards in the event of the Americans not producing that version in Joint Strike Fighter?

  Lord Drayson: I really do not think it is appropriate for me to get into talking about hypothetical solutions which we might put in place to circumstances when we are not presented with those circumstances today. We anticipate, we expect that the JCA aircraft in its STOVL version will go forward on the basis that we have signed into the project in terms of the rate of development. We are satisfied actually in the way in which the aircraft is progressing to date, and so we are not in a position today where we are so concerned that we are putting contingency plans in place. We are monitoring it very closely but I do not think it is appropriate for us to be getting into a consideration of what the fallback alternative needs to be. We are not there yet and we do not anticipate being there.

  Q214  Chairman: Would you agree with the proposition that if the United States did abandon or change its intentions in relation to the STOVL version of this aircraft it would cause us quite serious concerns?

  Lord Drayson: Yes.

  Sir Peter Spencer: May I add a comment, Mr Chairman? We can only make the assumption that the STOVL programme is going to go ahead for the time being; it is not our place publicly to try to second-guess the United States' government decisions. But QDRs are a pretty regular thing and any programme which has large spend is being looked at, so all of the big programmes in the United States are being looked at. But it is a fact, as this Committee knows, that in view of the longevity of these ships the fundamental design has been put into place so that we could, under extreme circumstances, implement the design as a more conventional aircraft carrier. So there are options which will enable the carrier strike still to be delivered, but they would not be as good as the current plan, which is why we intend to stick with it.

  Lord Drayson: Perhaps I could also add, in terms of addressing the concerns, that there are scenarios which are being talked about in terms of the shape of the future programme in the context of future defence reviews, which maybe advantageous to us in terms of the mix of aircraft and so forth. So we should not assume that necessarily the QDR is going to lead to a negative outcome for us. It may not affect it, it may lead to a more positive outcome and we are monitoring it very closely. But we are not in the position at the moment of having to implement any kind of plan B.

  Chairman: Of course, this is all speculation. Robert Key.

  Q215  Robert Key: Sir Peter, will the UK variant of the JCA be identical to the US STOVL variant in both design and performance?

  Sir Peter Spencer: I think you had answers on this last week in terms of the differences in the potential of its weapon fit to make it UK-specific. In terms of the baseline design, as you heard Tom Burbage tell you, we are working to the same joint operational requirement document. Therefore, we will get the performance for which we have contracted.

  Q216  Robert Key: Will the stealth features be identical? We were not quite clear about that at the end of last week's session.

  Sir Peter Spencer: I am not in a position to speculate on sensitive aspects of technology in the public place, other than to say on the basis of our contractual arrangements with the United States we know that our requirements are being designed for this programme. We are not aware of any different requirements that the United States might have, and as we are working from the same joint operational requirement document I think the speculation is groundless.

  Q217  Robert Key: Do you think there is any chance that the French would buy into the JCA?

  Sir Peter Spencer: You would have to ask the French government.

  Q218  Robert Key: But what is your take on that?

  Sir Peter Spencer: I have no opinion on that.

  Q219  Mr Borrow: One of the troubling aspects of this particular project has been the transfer of information and technology from the US to UK companies. Minister, I wonder what discussions you have had personally with members of the US administration on this problem and also other players within the United States who will have an interest on this transfer?

  Lord Drayson: I have had conversations with members of the United States' administration and I have had conversations with members of the industrial partners relevant to this project, and I have stressed the importance to the United Kingdom of issues around technology transfer, the way in which that affects long-term operability of the aircraft for us, and the fact that this is an aircraft which will be in service for some considerable time and the effect that issues of technology transfer have on our ability to upgrade the aircraft in the future. My understanding of the position we are in at the moment is that we are not short of any information at the present time which is adversely affecting the project. The concern that we have is that in the relatively near future we are going to need to see the transfer of information and intellectual property for us to see our needs in the long-term to be met. So it is important that those things take place and we are making that point very clear. I would also like to add that it is important for us to recognise that we have entered into this programme, buying this particular aircraft to benefit from the huge quantities of aircraft which are going to be produced. The cost savings for us, both in terms of initial acquisition costs and the long-term support, are very significant because thousands of these aircraft are going to be built and pooling the need to the United States with us and with other countries, and we need to be mindful of being very clear as to what aspects of long-term support and upgrade are peculiar to the United Kingdom's need, strategically, because that is going to have an adverse effect in terms of long-term overall support, in terms of not being able to benefit from the cost savings. So we need to have a balance to this. I think this whole area of technology transfer within this particular programme is one which is also shared with other programmes, but I think it probably becomes most important over the next year or so.

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