Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 20-39)


24 JANUARY 2006

  Q20  John Smith: This is a general question to Mr Jeffrey, and I know he has not been in post very long, but I think some of us are genuinely concerned that the Ministry of Defence is in danger of knowing the price of everything, but the value of nothing and not knowing the difference between reducing costs and cost overheads, which I think it has been extremely successful in doing, and introducing real efficiency savings. Our most recent report on support for RAF front-line capability, I think, points in that direction[6]. Yes, the savings are going to be made, but in the future we believe there is a very big danger that we are not going to be able to support the front line efficiently, sustainably and reliably. I just wondered whether you had a view on that and I wondered whether Mr Woolley had an opinion in principle and that is: does he believe in principle that it is possible to incentivise a sole monopoly supplier?

  Mr Jeffrey: Perhaps I can respond first, and I do so with what I hope is still an open mind, but I am new to this organisation and I am at this stage giving you no more than first impressions. I do not think it is a fair caricature of what I have seen so far to say that this is an organisation that understands the price of everything and the value of nothing. I have been struck by the extent to which considerations about the people we employ and the importance of morale at all levels are the common currency of conversations with my new colleagues, so I do not feel that culturally I have walked into an organisation that is just about slashing and burning and cutting costs all over the place. I do, however, recognise that we are embarked on a pretty demanding Efficiency Programme which will involve some tough decisions and there is no doubt that the reductions that we are committed to make will take some achieving. On the specific point about logistics, all the advice I have had so far is that there are no indications that the pursuit of efficiency has in itself prejudiced the Defence Logistics Organisation's ability to meet the requirements placed on it to support its customers in the front line. That was certainly the message I was getting when I visited the DLO a week or so after I took up my post. One may say, "They would say that, wouldn't they?", but they clearly regard their principal responsibility as being to provide that measure of support for the front line and there was a good degree of confidence that they could carry on doing so in a more efficient context. Trevor may want to respond too.

  Mr Woolley: It is certainly possible in principle to, and indeed we do in practice, have ways of incentivising monopoly suppliers. We can introduce into the contract various incentive fee arrangements whereby, if the contractor is able to deliver services for less than the forecast price, the benefits are then shared between the customer and the supplier, we can have open-book accounting arrangements, and we have a pricing and forecasting group within the Defence Procurement Agency whose role is to examine pricing that comes from monopoly suppliers to ensure that it is fair and reasonable. Therefore, we have over the years and over the decades developed various means of doing this, but obviously in this, as in many other areas, there is scope to do it better, there is scope for improvement, there is scope to be cleverer and our commercial teams are working to ensure this.

  Q21  John Smith: But the record in terms of dealing with monopoly suppliers in the past has not been a terrific one and previous reports of our previous Committee have alluded to that. There is a difference between a monopoly supplier and a sole monopoly supplier where the capability does not exist within the UK to turn to when that relationship becomes difficult, for the reasons my honourable friend pointed out, so I do think that consideration has to be given to this. I am sure that Mr Jeffrey has been assured that the efficiencies are being achieved, but who does he think should really have apologised when the RAF could not bring our troops back from Iraq, not because our brave aircrews could not get out there or were not committed or were not prepared to do the work, but because the aircraft were not serviced and serviceable, so we could not get out in time to bring back our troops who were out there, courageously and bravely representing this country? We could not get them out of that country because of problems in the logistical chain, so should the RAF have apologised or should it have been the DLO?

  Mr Jeffrey: Well, in the particular case you refer to, I am aware of it and the DLO, I know, are working hard to make sure that they can meet these sorts of commitments and it is a question of constant improvement. I am not sure I have an answer to the question as to who should apologise, but clearly it is not an ideal outcome when that happens, far from it.

  Chairman: As I understand it, an apology was given.

  John Smith: By the Chief of Air Staff, I think, yes, but the concern, Mr Chairman, is whether this is a harbinger for the future. Is this a sign of things to come if we do not understand the real difference between cutting costs and making genuine efficiencies that we all support? I will leave it there.

  Linda Gilroy: Perhaps I can just follow on from that to underline the question I asked about what principles the Efficiency Delivery Board use to relate to the trade unions on these issues because tomorrow they are going to be saying to us that Britain's defence is potentially under threat because of some of the Gershon savings. Clearly we will need to listen to what they are saying, but also we will want to listen to what you are saying, but to hear in that that there are some guidelines and principles there that engage in a constructive way in order to listen to the people who are delivering the service.

  Chairman: Mr Jeffrey, you have heard what has been said. We will move on now to procurement.

  Q22  Mr Jones: Mr Jeffrey, you referred to procurement in your opening statement and I think we can describe it as a scandal frankly, the way it has been operated in the MoD for the last few years. Can I ask a few general questions and then I have a specific question after that on the Report. In table 19 on page 102, I think it shows that the Defence Procurement Agency has met its targets for 2004-05 for delivering equipment to time and on cost, which I think comes as a great surprise to many who have dealt with the Defence Procurement Agency over the years. How does that fit with the Major Projects Report 2003 and other Major Project Reports which have actually identified slippages and increased costs?

  Mr Jeffrey: I recognise what you say about the Major Projects Report and the sense that there is still significant problems of slippage and cost increase which we are trying to address. I am just trying to remind myself of the target as expressed on page 100 and 102. If you look at the beginning of the document where on page 14 there are the main objectives, objective 3 is: "Build for the future—develop and deliver to time and cost targets the military capability for the future", et cetera, and it is acknowledged there that several of these targets were not met and the overall assessment is that that objective was only partly met, so I do not think there is any sense in which the Department is asserting that in the procurement area we are meeting all of our targets.

  Q23  Mr Jones: How does that tally with page 102 then where it does say it in the final bit of my notes, table 19?

  Mr Jeffrey: I think the reason for the disparity is that the main PSA targets are supplemented by a set of key targets which measure success in the procurement of equipment projects. If you look at the key targets, which are the ones listed on page 102, the DPA met five of six of these, which was an improvement on what they had done previously, but certainly, if you step back from that and look at the PSA target as a whole, the position is, I think, more accurately captured at the beginning of the document in the way that I have described.

  Q24  Mr Jones: But is it not that type of transparency that we actually need if we are going to have confidence that the DPA is actually improving? Personally, I would abolish it, but, if people have faith in it, should we not actually have clearer understandings of what those targets are?

  Mr Jeffrey: It may be that they could be clarified, but certainly they are measuring different things. The main point I do want to get across to you, Mr Jones, is that this is not an area in which there is any degree of complacency at all.

  Q25  Mr Jones: Well, I will come to that in a minute. You have already mentioned the National Audit Office Report in terms of major projects and I think it is something like £5 billion, if you take the 2003 Report and the 2004 Report. In 2003, it was £3.1 billion and I think the increase in costs in the 2004 Report was £1.7 billion. What impact has that actually had on procurement in terms of being able to afford to procure other equipment? Has it actually had a knock-on impact?

  Mr Jeffrey: The last NAO Report, which was published shortly before Christmas, on major projects[7] showed that there was within the year that it covered some further slippage in time of the selection of the biggest projects that the NAO look at, but that over that period there had in fact been a reduction of about £600 million, I think, or £500 million.

  Mr Woolley: And that reflects the figure in the 2004-05 column.

  Q26  Mr Jones: I will come on to that in a minute. Is that the £699 million?

  Mr Woolley: The coverage of the DPA's key targets is rather wider than the Major Projects Reports, so they are not directly comparable, but I think it is the case that, just as the Major Projects Report in 2005 shows a reduction in the cost forecast in year, so the wider DPA targets are reporting it in this table on page 102.

  Q27  Mr Jones: Yes, but is it not a fact that the reason for the decrease of £699 million is because of the reduction in the amount of equipment that has been ordered? Is that the reason why it is down?

  Mr Jeffrey: There is a significant element of it which can be described in that way, though it is not by any means the whole story, but it is a much better position—

  Q28  Mr Jones: It is bound to be if you are buying less of something.

  Mr Jeffrey:— than in previous reports.

  Q29  Mr Jones: I know, Mr Jeffrey, you have not been in post for very long, but certainly the previous Committee and other people look at this, so do you worry about it? I think you have already raised it as an issue yourself, not just in terms of delivering the equipment to our Armed Forces which they need, but also as value for money to the taxpayer. It is a pretty shoddy history. In terms of how it is presented here, is it not important, and I know it is very difficult for the MoD ever to do this, that they admit that they have ever got anything wrong? Is it not about time that the MoD just said, "Hands up, we got things wrong and this is what we're going to do to put things right"? It never, ever does that in this area, but there are always reasons, and I will come on to specific examples in a minute. Would it not be a new breath of fresh air if you, as the new Permanent Under Secretary of State, said to your civil servants, "Come on, if you do something wrong, open up to it"?

  Mr Jeffrey: I think there has been a readiness to acknowledge that acquisition of large equipment has not been handled well in the past and part of the reality which I inherited is that there are a significant number of projects from quite a number of years ago which have gone wrong from the outset and continue to cause difficulties, and we may even come on to some of those in the course of this hearing. However, my sense of it generally is that there have been some improvements in the way in which acquisition is undertaken. The Smart Acquisition principles are a sensible way to conduct it. The question is whether they actually have been followed through into practice sufficiently, and one of the things I will want to pay a lot of attention to is the extent to which the DPA in particular has the staff it needs, the training it needs and the skills it needs to follow these smart acquisition principles through. The thinking behind—

  Q30  Mr Jones: Surely you are not going to expand Abbey Wood, are you? Please do not.

  Mr Jeffrey: I was not necessarily talking about expansion.

  Q31  Mr Jones: Good!

  Mr Jeffrey: The significance of the Defence Industrial Strategy is that it acknowledges that both the industry and the Government need to improve their performance in this area. We have made it very clear, and I think that is certainly something that we will address and the current Defence Procurement Minister attaches a lot of importance to, that we are also up for serious and significant improvement in the way in which procurement is managed by the Department, but, as part of the follow-through to the Defence Industrial Strategy, there is a project which I instituted myself shortly after I arrived in which we will be looking hard at the way in which the procurement function operates, how it is structured, how the processes work, and looking at ways in which we can generally make it work better, and I am utterly committed to that. Equally, I am not in any sense diminishing the progress which has been made because it is clear to me that in the last few years we have got ourselves into a significantly better position than we were. It is not nearly good enough and I am not meeting anyone who is trying to pretend to me that it is.

  Q32  Mr Jones: If I can refer to a specific example, it is on page 190 to 195 on losses. This is the issue around the Landing Ship Dock (Auxiliary) Programme which I think refers to a potential payment of £63 million to BAE Systems and Swan Hunter. First of all, why are the MoD picking that tab up and, secondly, are they the only extra costs that have been incurred on this programme?

  Mr Jeffrey: That is quite a good example of what I was talking about. It is a programme where the contract was originally awarded in 2000 to Swan Hunter who were building two of these ships and BAE Systems were then brought in to build the other two. It is undoubtedly a project which has had problems arising from the fact, which I think Swan Hunter themselves would acknowledge, that the design that they intended to apply for these ships was less mature than had been assumed. The increases in cost are partly of course reflected in this Report, but there are broadly three elements. In December 2004 there was a renegotiation of the contract which allowed for up to £84.5 million more for Swan Hunter than had previously been—

  Q33  Mr Jones: What was the figure again?

  Mr Jeffrey: It is £84.5 million. There was also, and this features also in the Report as something notified in a previous year, £63.8 million to BAES arising from the fact that there was slippage in the Swan Hunter part of the operation. To these two elements, there should be added £62 million in addition to enable Swan Hunter to pass design information to BAES, so it is classically one of these projects where the costs have escalated.

  Q34  Mr Jones: I am just quickly trying to do my figures. What is the actual total figure?

  Mr Jeffrey: The total value of the contract now for Swan Hunter is £309 million and for BAE Systems £176 million[8]. That is the history, but I also have to say, as the Committee may know, that there are discussions going on now about what would be required to completely deliver this project. I really would prefer not to say any more about that because one gets into commercially sensitive territory.

  Q35 Mr Jones: So in terms of Swan Hunter's two vessels, looking at a parliamentary answer, they were contracted for £148 million, so they are now costing to date £309 million, but are you saying there are potentially further costs on top of that?

  Mr Jeffrey: Potentially.

  Q36  Mr Jones: Do they relate to the actual ongoing works or is it work that has to be put right once they actually come back in for refit for the future?

  Mr Jeffrey: If you will forgive me, Mr Jones, I think that is where I start to become anxious about the commercial confidentiality of the discussions that are going on now. This is a project with a chequered and difficult history, but it is also the case that what we are doing now is having discussions with both companies about whether there is a way forward that would enable these four ships, which are potentially of considerable value to the Navy and which are quite close to being completed, to be delivered in a fashion which represents the best value for money to the taxpayer that can be achieved at this stage.

  Q37  Mr Jones: This is not value for money at all, is it? The fact of the matter is that the two Swan ships have still not been delivered. I think Mounts Bay has already been delivered to the Navy and you are now saying that potentially, and I accept that it is history, the figures you have given, which amount to nearly £½ billion, it could actually be more than this for four ships?

  Mr Jeffrey: It could.

  Q38  Mr Jones: Can I ask then why it is that the MoD picked up the liabilities for this and did not actually say to Swan Hunter, who are the lead yard, so there is a contractual obligation for them to provide the things to BAE Systems, but why did they not pick up the tab for this because we have seen here an open-ended cheque book, have we not?

  Mr Jeffrey: Well, I think that goes back, does it not, to the nature of the original contract and the reality of the situation as the Department was presented with it by the company over a year ago?

  Q39  Mr Jones: But did the original contract more or less give Swan Hunter an open-ended cheque book? I know these ships, I have been on one of them, and I know the ships quite well, and they are not sophisticated vessels, are they, in naval warship terms?

  Mr Jeffrey: Well, you have got the advantage over me there because I have not been on one of them, so I do not know quite how sophisticated they are.

6   Note: Defence Committee's Third Report of Session 2005-06, Delivering Front Line Capability to the RAF. Back

7   Note: NAO report on Major Projects Report 2005: MoD (HC 595-I and II). Back

8   Note by witness: The original contract value for the build of the two Swan Hunter vessels was £148 million. Following the order of a further two ships from BAe Systems, an additional £62 million was added into Swan Hunter's contract for Lead Yard Services and Equipment, enabling Swan Hunter to pass relevant design information and equipment to BAe Systems. Following Swan Hunter's confirmation of its underestimation of the engineering requirement, MoD increased the original contract by up to £84.5 million in December 2004. This, together with the purchase of spares at £11 million and minor variations to the contract, represents the total value of the contract for Swan Hunter of £309 million. The current contract value for the build of the BAe Systems vessels is £176 million, which includes £48.5 million for known claims as a result of the impact upon their programme of the Swan Hunter delays and an additional sum for variations to contract and quantity growth. The £63.8 million provision in the accounts includes a further £15.3 million for potential future claims. The original contract value was £122 million. Back

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