Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 40-59)


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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