Examination of Witnesses (Questions 40-59)
MR BILL
JEFFREY CB AND
MR TREVOR
WOOLLEY
24 JANUARY 2006
Q40 Mr Jones: But why was it not
capped? Was that the original contract, that, if cost overruns
came in, we just basically keep bailing them out with taxpayers'
money, which is what we seem to have continued to do?
Mr Woolley: I think we reached
a stage where we had to make a judgment between starting all over
again and continuing and paying more and we had to judge what
in those circumstances was likely to prove best value for money,
and the judgment was to continue.
Q41 Mr Jones: I do not want you to
give me the figure, but have you actually made any projection
in terms of what the actual ultimate cost is going to be? Is there
going to be a time when you just say, "I'm sorry" even
at this late stage?
Mr Woolley: Well, at any stage
we have to reach a judgment as to what the options are that are
open to us when a company comes to us and says that it is unable
to complete within the previously agreed price.
Chairman: We will now move on to Defence
Logistics and PSA Target 7, David Borrow.
Mr Borrow: Chairman, I think most of
the points I was going to raise have already been dealt with in
questions.
Chairman: John Smith, question 9.
Q42 John Smith: I will go on to question
9, although I think some of it has been covered and so it may
warrant some fairly quick responses. At page 95 of the report
it states that over £400 million, nearly half a billion pounds,
worth of savings have been achieved in operating costs during
one year, which needs to be validated, according to the report.
The first question is, has that figure been validated in terms
of one year's savings of £400 million; how were these savings
achieved and how is the money saved going to be utilised?
Mr Woolley: I believe that they
have been validated now.
Mr Jeffrey: In relation to how
they have been achieved, I can certainly give some examples of
the kinds of projects that have led to the savings. The Tornado
Future Support Programme has been simplified and that is yielding
over £50 million a year of savings. There has also been work
on the Defence Information Infrastructure, which in 2004-05 delivered
savings of about £30 million through a mix of more efficient
management and improved IT systems. The Harrier Jump Programme—again
this is a better way of approaching the support of Harriers—was
established in 2004 and is on course to deliver cash savings of
some £44 million over the next four years. These are all
examples but my sense, certainly from my discussions with the
DLO, is that there are many others where they are just looking
at better ways of doing the work.
Q43 John Smith: These figures have
been validated, the £44m saving on the Harrier Jump Programme,
for example, or are they future savings?
Mr Jeffrey: In the Harrier case
it is the projected saving over four years, but I think the specific
question of how validated are these figures—and in particular
the £400 million on page 95 of the report—we probably
ought to offer a note on that and address the question of validation
across the board.
Chairman: If you could do that, please[9].
Q44 John Smith: Where is this saving
being utilised now? Is it going back into the Treasury?
Mr Woolley: All efficiency savings
are conceptually recycled within the defence budget. We do not
hand anything over to the Treasury; we have a spending review
settlement that covers three years, so the more efficient we are
in terms of saving money the more resource we have for other purposes.
Of course, when we do our planning we plan on the basis that we
will indeed achieve these efficiency savings. So it is not as
if we are suddenly presented with windfall savings of resources
that we can scratch our heads and say, "What are we going
to do with this?" They will have been factored into our planning
process from the start and therefore they contribute towards all
the areas in which we are looking to increase defence capability
and other improvements to defence. In some cases the savings will
be needed in the DLO itself to cope with additional requirements
placed on the DLO. For example, we are currently in a phase whereby
we are introducing into service Typhoon, as you know, and when
the Apache Attack Helicopter and new, sophisticated equipment
of that sort are introduced into service they often generate a
spike in logistics for costs that have to be covered. So it is
not necessarily the case that the resources that we are giving
to the DLO are reducing in anything like the proportion that the
efficiencies being achieved in the DLO might suggest because,
as I say, there is not cost growth in the DLO but new requirements
that the DLO has to meet and some of the savings have to cover
those increases.
Q45 John Smith: But £400 million
has been saved in operating costs?
Mr Woolley: Indeed. Some of it
may represent output efficiencies, that is to say where there
is not actually a cash benefit but where the assessment is that
what is being produced for that money is greater.
Q46 John Smith: A naive question.
£400 million in one year is a huge figure. Why was this not
done before? Why was there not the scope to make such savings
in previous years?
Mr Woolley: I think we have always
sought to be as efficient as we can. I think that the PSA Target
system and indeed following on from the spending review 2002 PSA
Target, the Gershon Efficiency Target has perhaps acted as something
of a catalyst. I think the creation of the DLO itself, when the
DLO was created as a joint service organisation, committed itself
to making over a period of five or six years a 20% reduction in
output costs. So it has set itself that target, and I think when
you set yourself these demanding targets as an organisation you
are more likely to deliver them than if you had not had that same
target setting frame of mind before.
John Smith: Half a billion is an enormous
figure delivered as a saving within an organisation, according
to the accounts, in one year. It does beg the question, what capacity
was there, or is there, within the organisation to be able to
save the Logistics 10% of its budget in one year.
Q47 Chairman: In the report it says
that it is the intention to co-locate the DLO Board with the DPA
Executive Board at the earliest opportunity. Is that a precursor
to merging the Defence Procurement Agency and the Defence Logistics
Organisation?
Mr Jeffrey: It is not; it is what
seems a sensible management step to bring the two organisations
even closer together than they already are.
Q48 Chairman: But do you not think
that that will come?
Mr Jeffrey: That is one of the
issues, as I mentioned earlier, we need to address. I am struck,
again as an early impression, by the fact that the two organisations
do work closely together; the Chief of Defence Procurement and
the Chief of Defence Logistics are in constant very close contact,
as are their senior teams. There are a number of major projects,
where we increasingly think in through-life terms, where the project
team in effect accounts to both organisations. So there is a question
about how far along the path towards integration one goes, if
not actual merger. That issue about what the most appropriate
and effective structure for the future, post the defence industrial
strategy, would be is the one that we are looking at over the
next few months.
Q49 Chairman: One is an agency and
one is not an agency.
Mr Jeffrey: That is true.
Q50 Chairman: How has the treatment
of agencies in the Ministry of Defence changed since they were
first introduced?
Mr Jeffrey: Certainly as a general
observation, because we are now some years away from Next Steps
and the initial creation of a large number of agencies, the distinction
between organisations that happen to be Next Step Agencies and
freestanding operations like the DLO is probably less pronounced
than it was in the past. What we have certainly been doing in
the Department, as I am now beginning to understand it, Defence
Agencies have always tended to be internal agencies providing
services inside the organisation more than traditional service
providing organisations looking outwards. There has undoubtedly
been a measure of rationalisation over the period in a number
of agencies and the kind of tasks that they do. That, I think,
is a continuing process and it has undoubtedly been a very complicated
picture. I do not know if that answers the thrust of your question,
Chairman?
Q51 Chairman: Does the MoD keep these
agencies at arm's length or are they internal? You suggested that
they were most internal, I think.
Mr Jeffrey: Most of them—but
by no means all of them—are providing services inside the
Ministry, and in that sense they differ from an agency like the
Prisons Agency, for example, which provides a service for the
community as a whole.
Q52 Chairman: So if you have an agency
who appoints the Chief Executive?
Mr Jeffrey: They vary and it depends
on the significance of the agency. I am not suggesting that the
basics of agency status have somehow been changed; essentially
each of these agencies will have a framework agreement and a figure
within the Ministry to whom they answer and all the business that
surrounds Next Step Agencies.
Mr Woolley: I think what has happened
is that the pendulum has slightly swung back from a very decentralised
model for managing the Ministry of Defence, which was introduced
with our new management strategy in the early to mid-90s, and
which was very successful in changing the culture in many ways
in terms of devolving financial responsibility, making people
away from the Ministry of Defence Head Office aware of the concept
of targets and aware of the concept of financial management and
so on. But I think that in recent years we have begun to look
at whether the overheads that go with a very decentralised structure
of having lots of budgetary layers, for example—which although
it has management benefits it also creates a certain amount of
overhead—whether those are justified in all cases; and I
think that approach has also been extended to our agencies where,
for example, some of the very small agencies just no longer seem
to be of a sufficient size to justify agency status with some
of the requirements that go with agency status, such as the requirement
to produce agency accounts, and so on. So there has been some
rationalisation of agencies in recent years reflecting that more
general reassessment of whether the decentralising tendency in
the Department went perhaps a little too far in the 1990s.
Q53 Chairman: Do you expect that
to happen further?
Mr Jeffrey: I certainly would
not be surprised if the number of agencies, which has been falling
in recent years, continues to fall, but each case needs to be
looked at properly on its own merits.
Chairman: One of the agencies is the
Dstl, which you have already mentioned, Mr Jeffrey. Robert Key.
Q54 Robert Key: I think that the
statement you have just made, both of you really, about the future
of the agencies is very significant indeed, and I would like to
turn to Annex E of the Annual Report and Accounts, which is defence
agency performance. Dstl is a case in point because if we look
at Dstl, if we look at the key targets set and met, in Dstl in
both 2003-04 and 2004-05 100% were met, and Dstl is a hugely successful
organisation undergoing some fairly major structural changes,
co-locating a lot of activities at Porton Down. On the other hand,
if you look at the Defence Storage and Distribution Agency, you
find that in 2003-04 there were 33% of targets met but within
one year they had climbed to 100%. Look at the RAF Training Group,
you find there that in 2003-04 it was 71% targets met and in 2004-05
down to 33%. Then Service Children's Education, 2003-04 at 31%
and 2004-05 up to 52%, and yet we know that that agency is doing
very well when compared in terms of delivery for its children
with local authority schools. What I am really saying is that
given this mixed picture how can you assess whether the performance
of Defence Agencies overall is improving?
Mr Jeffrey: I think it is quite
hard to assess it. I was struck myself, when I was preparing for
this hearing, by the sheer variety of purposes and the extent
to which there is a variety in performance. There is one overall
measurement which may or may not be significant, but if you look
at the total number of key targets that the agencies have, it
was 72% in 2003-04, and it was 78% in 2004-05. Assuming that there
has not been some weakening in the standards of the targets that
are set or the demanding-ness of these targets, that look like
progress in the right direction. But I readily accept that there
is a wide variety among the agencies. To some extent I guess—and
it is still only a guess—that this just reflects the variety
of the tasks they have, the operating conditions they face, how
demanding the targets were in the first place. If the Committee
would like a fuller note on the explanation of the targets I am
sure we could provide one[10].
Q55 Robert Key: I would not wish
to burden you any further with this line because I think we probably
agree it is a strange sort of area that we are in. I would much
rather hear from you that you have some plans to review the way
in which key targets for Defence Agencies are set because this
huge variety says to me that there is something wrong with the
machinery here rather than the delivery. Is there a better way
of measuring the performance of these Defence Agencies?
Mr Jeffrey: There may be and I
am certainly more than prepared to look at that. I think one has
to bear in mind, though, that they are doing quite remarkably
different things; the biggest of them are massively bigger than
the smallest of them and, as Trevor Woolley was saying, we are
looking seriously at whether some of the smaller ones warrant
all the paraphernalia that goes with agency status. It may be
that this is just a natural reflection of the variety of the businesses
that we are talking about, but I am more than prepared to have
a look at that.
Mr Woolley: I think it is also
worth making the point that most of these targets are, as it were,
binary—you either meet them or you do not meet them, and
so you either get the tick or you do not. But you may only just
miss them in one case or you may have an agency that just misses
three targets whereas another agency misses one target by quite
a lot, and that will not be reflected in this presentation. Nonetheless,
the principle that there should be targets that we set agencies
is one, I think, that we strongly adhere to.
Q56 John Smith: Mr Chairman, it is
not missing or hitting the targets it is the erratic nature of
the figures for the year. RAF Training Group, in one year 71%
of its targets were met 2003-04; in the following year it is down
to 33%. If I ran an organisation which saw variation like that
within its departments, albeit the MoD is quite some organisation,
that would be more of a cause for concern than a slight deterioration
in performance because at least you would be more confident about
being able to address that if it were consistent. It is the erratic
nature of these results, as Mr Key pointed out, that is worrying.
Mr Jeffrey: I take the sense of
that and I hope what I said earlier implied that. I would quite
like to look under the surface of this more than I have. I suspect
the reason is the one that Trevor Woolley gives, which is that
if a target is expressed in terms that you either meet or you
do not meet, and one year a few of them switch the wrong side
of that line that can have quite a significant impact on the top
line percentages. But I would like to look at it more closely
than I have done so far.
Linda Gilroy: In looking at it as well,
the British Forces Post Office went down from 11 targets to six
targets; the Defence Estates went up from 11 to 15 and the Defence
Geographic and Imagery Intelligence Agency from eight to 15. What
prompts them to have such major changes in the number of targets
might be a useful thing to look at.
Chairman: That is progress. Robert Key,
moving on now to QinetiQ.
Q57 Robert Key: On 12 January the
Secretary of State announced the flotation. I admit that I was
one of those who was opposed to the privatisation of DARA, the
break-up into Dstl and QinetiQ, but I know that it has been a
great success, the workforce are very happy, they are re-motivated,
as far as I can see, and there are a lot of benefits that have
come from it. Could you tell us what is the likely date for the
flotation?
Mr Woolley: The date will be in
February; I cannot give you a specific date but it will be in
February.
Q58 Robert Key: What will be the
size of the Ministry of Defence's stake?
Mr Woolley: Again, I am afraid
I cannot disclose that until the prospectus has been published,
and it will be published tomorrow.
Q59 Robert Key: That is fair enough,
that is good. Could I turn to something that is simply honest
seeker after truth here, trying to understand the difference between
the special share held by the Ministry of Defence and the "golden
share"? What is the difference between these two because
it seems to me that they are both saying the same thing? "The
special shareholder," I read, "has the right to require
the company to implement and maintain a regime which protects
the defence and security interests of the nation." That is
the same for both the special share and the preferential golden
share.
Mr Woolley: On flotation we will
simply have a single special share and that will be designed to
protect our security by giving us the ability to prevent the purchase
of a significant stake in the company by any foreign body that
we regarded as incompatible with our security.
9 Note: See Ev 24 Back
10
Note: See Ev 24 Back
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