UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1339-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

DEFENCE COMMITTEE

 

 

DEFENCE PROCUREMENT 2006

 

 

Tuesday 10 October 2006

SIR PETER SPENCER KCB

Evidence heard in Public Questions 112 - 215

 

 

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Oral Evidence

Taken before the Defence Committee

on Tuesday 10 October 2006

Members present

Mr James Arbuthnot, in the Chair

Mr David S Borrow

Mr David Crausby

Mr Mike Hancock

Mr Adam Holloway

Mr Kevan Jones

Robert Key

Mr Mark Lancaster

Willie Rennie

John Smith

________________

Witness: Sir Peter Spencer KCB, Chief of Defence Procurement, Defence Procurement Agency, gave evidence.

Q112 Chairman: Sir Peter, good morning and welcome. Thank you very much for coming to give evidence about procurement to the Committee.

Sir Peter Spencer: Thank you for inviting me.

Q113 Chairman: Not at all. There are four main areas that we want to cover, but I think on two of them we will be asking questions in writing to you, and those are the performance targets and the DPA's performance against your targets, and also the smaller projects that we took evidence on earlier in the year. We think that those could probably best be covered in writing rather than by cross-examination of you. So the ones that we want to concentrate on mostly today are the merger between the DLO and the DPA and various major projects, including the Astute submarine, the carriers and others. So if I may begin, Sir Peter, with a question about the merger of the DLO and the DPA. We were told that the way the organisation was going to be run and the performance and management system would be set up by September. Has that happened?

Sir Peter Spencer: The organisation has been set up and announced, and in broad outline we have described the purpose, the aims and the objectives, and we have named the key players that we can who will be in board level positions. There are a number of other work strands which are at varying degrees of completion which are going to focus in on the detail of how the performance matrix will be set, both for the organisation and for the Ministry of Defence as a whole. Central to this is the principle at the heart of the Defence Industrial Strategy which is that we should measure performance in terms of delivering through-life capability.

Q114 Chairman: Okay. Have you worked out precisely how that is to be achieved within the new organisation?

Sir Peter Spencer: Without wishing to be pedantic, if I could just stand back from this and say that there are four phases to the project. Phase one was to define what the organisation would look like and set out in broad principles how it will operate.

Q115 Chairman: That was to finish by September?

Sir Peter Spencer: The end of September and that was completed on time.

Q116 Chairman: That was completed on time.

Sir Peter Spencer: Phase two has now begun with giving a set of instructions to each of the two staff board members to define in outline what it is we want them to do, to tell them what their job is, define in outline what it is we wish them to deliver, and for them to do the more detailed work as to how in each of their areas they might need to make some degree of change to deliver the targets which they have been set and to live within the resources which have been provisionally earmarked for them, which we will achieve at the end of December.

Q117 Chairman: Sorry, when will you achieve phase two?

Sir Peter Spencer: Phase two is planned to be achieved at the end of December, which then initiates phase three, which is the next level of detailed work of engaging with the workforce in a much more detailed way to explain what it means for them. However, we will have deep chilled the design by that stage so we will know we have got something which is adequate for the purpose as a new organisation which vests on 2 April (because the 1st is a Sunday). That is important because there will be a lot of communication with all of the people involved, and by communication of course I mean not just telling them how it is going to be but listening to the particular points that they have got. There will still then be in the very fine detail the same sort of opportunities as are happening now to consult because although the leaders with the two stars are already consulting with the people that work with them, all of this draws upon what we did when we did the DPA Forward project inside my own agency, which recognises that the people who are really very familiar with the patterns, in the main, will go a very long way towards implementing change, so long as it is change which has been explained to them properly, and you have given them boundaries within which you want them to operate, but you do not try to dictate explicit, cookery book instructions to them because it does not work.

Q118 Chairman: Okay, that is phase three. Phase three will be completed by when?

Sir Peter Spencer: It will be completed by 1 April so from 2 April phase four is the first year of operation of the new organisation and during that year there will then be the first of the post-project evaluations to take a look to see to what extent the organisation is going to be delivering what is needed and then to be prepared to make any further adjustments at the end of that first year. During that first year the intention is to measure the performance publicly by the existing PSA targets for delivery of projects and by the same targets that are in place for the current Defence Logistics Organisation, but to shadow trade in a new set of targets which will be optimised to measure the organisation's ability to deliver year-on-year improvements and through-life capability management and some other performance matrix as well, including agility in terms of responding more rapidly than we do at the moment to the needs of the Armed Forces.

Q119 Mr Jones: Yourself and the Civil Service do not actually believe in this merger, do you?

Sir Peter Spencer: Yes I do, and that is a passionate belief.

Q120 Mr Jones: Oh, that is the first time you have been passionate about anything before this Committee but ---

Sir Peter Spencer: That is not true.

Q121 Mr Jones: Can I put to you something that was put to me over the summer and it is coming from a number of quarters - it is coming from both the MoD and it is certainly coming from within industry - which is the fact that industry and the MoD and others are signed up to both this merger and also the Defence Industrial Strategy and that is being driven through by a Minister, who I have got to say I do rate in terms of pushing change against the bias of which is your organisation, but their fear is that as soon as he has gone, yourself and the civil servants will actually stop that change or somehow try to thwart that change. I am not suggesting for one minute, by the way, that Lord Drayson is going anywhere but that is a real fear that they have got? How can you actually reassure them that you and all your civil servants are truly signed up to this change and also the change not just in this organisation but in the Defence Industrial Strategy as well?

Sir Peter Spencer: I resent the insinuation about civil servants, to be candid.

Q122 Mr Jones: It is out there. What I am saying is not me, it is coming from people I have spoken to over the summer and it is a widespread thing inside industry.

Sir Peter Spencer: Wherever it is coming from I still resent it and I would rebut it. For the record, I came into this job determined to confront the problem and to do something about it; and I have. The extent to which you can demonstrate that on the bottom line targets is to a certain extent constrained by the legacy of some very big projects which we still suffer from in terms of uncapped financial exposure. We are doing damage limitation on that as best we can. We have totally transformed the culture in defence procurement into one which is obsessed with delivering results and where success and failure matter. I have also worked increasingly closely first with Malcolm Pledger and then with Kevin O'Donoghue on the Defence Logistics Organisation convergence with the DPA in an initiative known as Joint Working, because it was very evident to both of us that we were presiding over organisations which were increasingly drifting apart, to the detriment of the people whom we are here to serve which is the front-line forces. So none of what is happening has been anything other than a natural extension of where we were going but it has been greatly invigorated and accelerated by the leadership of Lord Drayson.

Q123 Mr Jones: So if Lord Drayson had not happened all this would have happened anyway? Is that what you are saying?

Sir Peter Spencer: It would not have happened at the same pace because I think what he has done is to break the mould in terms of our relationship with industry, and in earlier hearings we had discussions ---

Q124 Mr Jones: I am sorry, I just think that is complete rubbish, Sir Peter, and I think without the dynamism of that Minister you lot you would not have shifted on this.

Sir Peter Spencer: I am sorry, I will not sit here and be publicly insulted by any member of this Committee when I can demonstrate what I have achieved because it is on record. It is on record in Hansard for a start; it is on record in the NAO audits; and it is on record in comments that have been made by not only by this Committee but also by the Public Accounts Committee, so the fact that you say it would not have happened without Lord Drayson I can disprove.

Q125 Mr Jones: I am sure he will be pleased to hear that.

Sir Peter Spencer: It has been accelerated and invigorated greatly ---

Q126 Mr Jones: He has recognised it himself actually

Sir Peter Spencer: --- by the very bold line he took in dealing with the interaction with industry, which to a degree was spelt out in the Defence Industrial Policy but which we recognise until it was worked into more explicit strategies for each sector of the defence industry tended to be more a statement of good intent rather than something which changed the way in which we procured.

Q127 Mr Jones: In terms of your agency and the numbers of people employed since you have taken over, are there more or fewer people since you took over?

Sir Peter Spencer: I need to look up the numbers but fewer (?) by a reasonable percentage.

Q128 Mr Jones: Can you provide us with that?

Sir Peter Spencer: Of course.

Q129 Chairman: In July David Gould was in front of us and was asked whether he thought the new organisation was going to be an agency or not. He said that the jury was still out on that. Has a decision been taken on that?

Sir Peter Spencer: A decision has been taken and it will not be an agency.

Q130 Chairman: It will not be an agency and what will be the benefits that will flow from that?

Sir Peter Spencer: I think the benefit which comes from it is that an agency, however hard it tries, tends to develop over time a rather inward-looking culture. You will recall that the purpose of agencies when they were initially developed was as a staging post for something which was heading towards trading fund status. The Government has no intention of defence procurement and support becoming a trading fund, and has recognised that in order to achieve the better overall results that we will need, we need a much more joined-up arrangement, not only across the Ministry of Defence but with industry as well, so we get a real concept of unity of purpose. In that respect, a top-level budget arrangement, which is what the new organisation will be, is now capable of being given the same precision in terms of objectives that any agency would get, the same budgetary disciplines, and to a large extent the same delegated powers to deal with its personnel management issues.

Q131 Chairman: Does that not undermine the entire rationale for agencies?

Sir Peter Spencer: I do not think it does. I think what it recognises is that over time you get a certain amount of benefit by agency status and you then have to decide on your evaluation whether or not you are going to take the next step into trading fund status, whether or not you are going to remain as an agency, or whether or not, frankly, agency status is beginning to be counter-productive. In the concept of bringing together the Defence Procurement Agency with the Defence Logistics Organisation, on balance it was believed that the advantage lay with non-agency status. I have no difficulty with that. I do not think it would have made that much difference one way or the other.

Q132 Mr Hancock: What was the downside that made people make that decision?

Sir Peter Spencer: Of the agency? It was the point I made earlier, Mike, which is that people do tend to think in terms of an agency almost being able to exist by itself; and of course it does not, it is part of a very complicated chain between the front-line and the factory, so anything which reinforces a sense of separate identity when you need to be much more flexible in the way in which you are operating has to be of benefit in this area.

Q133 Chairman: Let us move on to the report which you have mentioned - the Enabling Acquisition Change report - which said that despite the best endeavours of everyone involved and significant improvements in recent years, agreeing with what you said Sir Peter we are simply not doing as well as we could do. What did that mean?

Sir Peter Spencer: It meant that we had achieved improvements in the DPA's performance against its key targets, we had achieved improvements in how well the Defence Logistics Organisation reform was to deliver results, and we had gone some way through Joint Working to bridge the gap, in the sense that all teams became automatically dual accountable on formation so they were already responsible from birth to the Chief the Defence Logistics for delivering the affordable through-life capability management arrangements that were needed. There were a number of project teams in the Defence Logistics Organisation that actually delivered for me because they are doing capital investment projects, which are best run inside the family of projects which are already dealing with them because they are so closely connected.

Q134 Chairman: These, Sir Peter, are examples of how you are doing as well as you could have been.

Sir Peter Spencer: What I am saying is that we were able to go so far with a rather ad hoc arrangement between us called Joint Working but effectively it was beginning to put a bandage on the problem as opposed to cure the problem.

Q135 Chairman: And the problem was?

Sir Peter Spencer: The problem is that we do not have a single organisation which has got the focus on through-life capability delivery ab initio. We also do not have a financial planning system which recognises the need to balance adequately the difference between capital expenditure and operating cost, and we do not have the arrangements with industry which are implementing the McKinsey (?) principle of having a more open relationship and having a more flexible relationship which looks at more appropriate contracting strategies depending on the degree of challenge of a project. So the conclusion which was drawn was that so far so good, but we needed to go a whole lot further and that the Defence Industrial Strategy had said it would take a look internally at what was getting in the way of implementing the Defence Industrial Strategy proposals which were internal to the Ministry of Defence, shine a light on that and do something about it, and that is precisely what the Ministry of Defence has done. It has laid itself bare in terms of what it has recognised as things that get in the way. Industry has been involved in that. It reflects their views as well, and it has set out a timetable for doing something about it.

Q136 Mr Jones: Is that not a massive cultural change for yourself, and I am sorry if you feel insulted by my comments on the Civil Service, but cultural change in the sense that if you push a lot of these things out to industry - and I agree with that in terms of saying through life should be looked at in terms of what their role is in that - but does that not necessarily therefore mean that your organisation is going to get smaller and that control over it and some day-to-day decisions are going to be left to industry? How do you get that through psychologically to civil servants whose vested interest is to keep themselves employed in an organisation such as yours?

Sir Peter Spencer: I think you put your finger on one of the key issues and in fact it is one of the ten work streams which accompanies the delivery of the EAC. We are going to address it in a number of ways. I have done quite a lot to bring new blood into the DPA. In open competition we have got two non-executive directors out of the three on the board, one operations director, the finance director and the current interim commercial director. There will be further competitions to fill some new posts in the Defence Equipment and Support Organisation, so there is ample scope for bringing people in, not only to do the work but also to explain and bring people with them to do things in a totally different way than they have been used to. In that context you will remember that Amiyas Morse was appointed as the defence commercial director in a separate post from one which had been a dual function post when it was DG commercial and the commercial director of the DPA, with that very aim in mind. We have made it clear through publication of the Defence Acquisition Values that we will be assessing people quite explicitly on the way in which they represent those values in their day-to-day work and their day-to-day decisions. One of the big cultural changes, which I would say we were leading on in the Defence Procurement Agency, is holding people accountable for their results. This is not yet fully embedded across the whole of the public sector, but we are starting both in the DPA and now in the Defence Equipment and Support Organisation to put real focus on the outcomes because the new organisation is not an end in itself; it is a way of delivering the end result, which is demonstrable, publicly auditable improvements in the way in which we deliver capability to the Armed Forces.

Chairman: Moving on to the training for this change, John Smith.

Q137 John Smith: In fact, in one sense training is absolutely key to the success of this cultural transformation, this organisational transformation, and the Committee has expressed concern in the past with the introduction of long-term partnering, PFIs, and much greater involvement for longer periods with the private sector. Are your civil servants adequately trained to carry out this role in this changed environment? You yourself have expressed concern about the training levels and the need for training in project management and commercial activity. Has that training programme started? When will it start and have you committed the investment to pay for that training?

Sir Peter Spencer: At present we have not done enough training. We are beginning to open up and recover the deficit. It is a fundamental strand of the work which we are doing which is to up-skill and re-skill people as and when appropriate. Each of the major professional groupings has got a senior person who is charged with identifying what the needs of that particular professional specialisation are, what its current levels of capability are, and therefore identifying what the deficit is and to put in place training programmes in order to increase the ability of the workforce - and this applies not only to civil servants, it applies just as much to the military members of staff who work in both organisations. The major strands are finance and commercial project management, engineering and logistics. The intention is to ensure that we use the Defence Academy to be the lead in delivering this training. It will not do all of it itself. It will in many cases act as the portal to divert people into the best training they can find that is value for money within the UK, and we are also seeking to ensure that the way in which people are then identified at the various levels is related to accreditation with organisations that have international reputations, so that we are giving people real skills which they will value and we are investing in them. So, for example, the Association of Project Managers has three levels of expertise and we are now looking towards ensuring that all those who are involved in project management, and certainly those in project leadership will over time, amongst other things, have to demonstrate the right level of professional accreditation in order to be entrusted with the work which they do.

Q138 John Smith: Thank you. Has the commitment to do that been identified and how much over what period of time?

Sir Peter Spencer: I do not have a complete answer to that at the moment because I do not have a complete answer to the gap analysis. If your sense is that there is a risk that we will not earmark enough, I would agree with you and therefore that is the risk which we are going to need to manage. Have we got anything to demonstrate we are taking seriously? Yes, we have. Both I initially and then the CDL of the day earmarked initial funds to sustain the direct entry graduate recruitment of engineers. We have got a direct entry graduate scheme now for accountants.

Q139 Chairman: Do you think you could write to us with an answer.

Sir Peter Spencer: What we have done so far and what we plan to do?

Q140 Chairman: Yes.

Sir Peter Spencer: Of course.

Mr Hancock: I am glad Kevan has come back into the room because I would just like to reassure members of the Committee who had not seen Sir Peter before that I have witnessed him on at least two occasions when he has been extremely passionate about what he believes in, both in his capacity as Second Sea Lord and also in his new role. That is not to flatter him but I think the record does need to be put right to a certain extent about that. Kevan is obviously disappointed by that remark but nevertheless ---

Mr Jones: I am trying to think what you are after, Mike!

Q141 Mr Hancock: To protect Portsmouth's interests! The commercial is over and I am sure Sir Peter will take both comments in the spirit in which they were intended. In Preview in July it was suggested that there were a lot of changes in your organisation, the DPA and the DLO and they have been through quite a lot since the creation of it in the 1990s. The staff have had to deal with major initiatives, Stocktake, Smart Acquisition, the DPA Forward programme, etc, and now in the July edition of Preview the suggestion is that you are going to lose something like 450 jobs, nearly ten per cent of your staff, over the next two years or so. That is a big cut in an organisation which has not really found its feet properly but is on the way to getting there. How are the staff going to cope with what they are expected to do, with the training you want them to have and the loss of ten per cent of the workforce at a critical time both for your organisation and for the men and women on the front-line?

Sir Peter Spencer: Part of the reduction was brought about by the forward look at the number of new projects which we will be managing, and I think that has been made clear in the Defence Industrial Strategy. However, we have just been through a period of buying quite a lot of new big and complicated platforms and we have still got a few more to buy, and we will come on to that later, but in the main the focus now is going to be much more on technology insertion on existing platforms and much of that work is done inside the DLO anyway by project teams, albeit that they are accountable to me currently for the outcomes. Secondly, we had to accept our part of the Gershon efficiency savings, and I think it is no bad thing to ensure that projects are properly sized. I think the onus, as you would expect, lies on the leadership to ensure that we are using those individuals to best effect, and all I would say is that there are inconsistencies between the way in which projects of similar sizes have been populated in the past which are more to do with the way it has always been as opposed to having a really thorough look at how a project needs to be set up. One of the problems which we have grappled with is when you have got a limited number of people with real expertise, the way in which we have empowered project leaders previously has effectively allowed them to own people who we might use to better effect by being a bit more flexible.

Q142 Mr Hancock: How selective are you going to be and are we going to find ourselves in a position where we let people go and then we re-hire them in a different guise as consultants?

Sir Peter Spencer: I hope not. I cannot stop people leaving. What I would say is that my strong preference is for the work to be done inside the project by properly experienced people, and so it will take time as we get the up-skilling arrangements in place. Meanwhile the most important thing as we form up the new project groupings with the DLA, who in generality tend to have projects with larger numbers of people in them, I think there is going to be much more scope for the individual two star board members who are going to be entrusted with managing groups of projects to take a much more thorough look and decide how they might redistribute within the cluster of projects they have got.

Q143 Mr Hancock: Do you have the facility to be able to slow down the process of loss of staff, to be able to cope, or have you got this target which has to be met?

Sir Peter Spencer: The Gershon targets have been set for the agency. In terms of loss, the loss from the agency over and above planned retirements is extraordinarily low.

Mr Hancock: That is fine.

Q144 Mr Jones: You mentioned the issue around IPT leaders which is very important in terms of making sure that projects go forward. What are you doing to ensure that you actually get the right people doing that job rather than what has been seen in the past possibly as a nice pre-retirement job for somebody before they leave the Armed Forces, for example? Have you any mechanisms in this organisation to ensure that you are going to get the very best people to do this?

Sir Peter Spencer: We have had that mechanism in place for several years now. I have removed a number of team leaders from their posts who have not been capable of doing the work, and so the sort of message I get from people when they leave now is, "It used to be quite fun being a team leader until you rolled up, now there is a rather sharper edge to it." That is where we need to be.

Q145 Mr Jones: What is your role, Sir Peter, in terms of ensuring that you get the right people in the first place?

Sir Peter Spencer: The way the process works is that most team leader posts are competed and that competition is sometimes an open competition, sometimes it is within the Ministry of Defence and the Armed Forces. I take a look at the proposed shortlist so that anybody who is then subsequently interviewed I have confirmed before their interview that I would be content for them to be appointed. In other words, I take a long, hard look at their ability and their expertise to ensure that it is a reasonable thing to ask them to be doing. This has bought me into some discussion, as you might imagine, with other parts of the Ministry.

Q146 Mr Jones: Can you be overruled by, for example, the MoD who want to palm somebody off on you before they go off on retirement?

Sir Peter Spencer: It has happened the other way round. Where the conflict has been, and it is a friendly conflict, has been my insistence that if I am going to be held accountable for results (and I wish to be) the most important decisions I make are the people who are going to deliver it, which is why I went open competition for an operations director and for a commercial director and for two non-executive directors because there is no room for sentiment here, this is business, and we need to get people who are of the right ability and background in order to do it. The challenge we tend to find when we go to open competition is that there is a national shortage in quite a lot of the skills areas we are looking for and some of the very best have got good jobs somewhere else, thank you very much, and then we have to compete either on salary, or on the quality of the work and the interest, or a combination of both.

Chairman: There is a series of questions about key targets that we propose to write to you about because they are rather technical and detailed and are not really the subject of good oral evidence, so we would like to move on to Urgent Operational Requirements and Kevan Jones.

Q147 Mr Jones: Sir Peter, the NAO Report said the DPA performed well in terms of Urgent Operational Requirements and the Committee have seen some of those first-hand both in Afghanistan and Iraq. Are there any lessons that can be learned from those UORs in terms of major procurement issues?

Sir Peter Spencer: There are some very powerful lessons. I think the three most powerful principles are go for something which is off-the-shelf or as close to off-the-shelf as you can get; secondly, make sure right from the outset that the front-line end user is involved in defining the requirement.

Q148 Mr Jones: Can I just stop you on that. When you say the front-line user, do you mean the squaddie who is actually using the equipment at the front end or the commanding officer, because I have found there is a big difference between what a commanding officer is saying and what the man or women we are asking to use the equipment on the front line is saying?

Sir Peter Spencer: That is a good point. I think probably not often enough do we get the actual user. When it is Special Forces we do. A key lesson from that is when somebody rolls up as front-line user, it is a good idea to make sure that it is a real front-line user. Without boring the Committee now, I have a very similar experience from years ago of getting involved with officers trying to say that something was needed which the sailors who were using it really did not need and there being quite a confusion. The third point is to ensure that we go incremental. I think a lot of procurement problems ultimately, when you are measuring performance, go back to people get carried away with their own enthusiasm and they extend the financial liability beyond the envelope of their understanding of the uncertainties, so build a bit, test a bit, build a bit, test a bit, as long as you do it rapidly and you have not got long periods of time where you are waiting for decisions to be made and you have a rolling concurrent programme is a way of doing that. Then once you have got the project on contract you need to keep the end users properly engaged. I think that we are probably better at getting the right end user engaged at that time because, in the main, if you are looking at something which is fit for purpose and reliable, you need troops to test it, and we have done that, for example, with the function integrated soldier technology system, where we had a number of soldiers who came and wore the equipment and used it in exercises and we could then measure not only the performance but find out where the weaknesses were, and often it is just not being made rugged enough and reliable enough for the sort of terrain in which it is to be used.

Q149 Mr Jones: This is becoming a highly political situation at the moment because people are homing in, for example, on the vehicles in Iraq and Afghanistan, so there is a spotlight being put on to it. How confident are you that you can as an agency react quickly to some of these issues because - and again it is not me saying this - there is a school of thought saying you civil servants are down there in Bristol labouring over all these long projects while our men and women are being exposed in Iraq and Afghanistan. This is going to be an increasing problem for us as we do more operations and is going to lead to the situation we have got in both Iraq and Afghanistan. How can you give assurance to those people that you are reacting rapidly to those issues?

Sir Peter Spencer: I think the performance of UOR speaks for itself and certainly when we have questioned people over the last three or four years, they thought the UOR that was delivered gave them what they needed. It was a 98 per cent success rate. So in terms of when we go UOR, we know we can do it and I think you will always be judged on your performance as opposed to your propaganda. So far as trying to speed up the more conventional processes, speeding up the Vector vehicle is one example of that and the speed with which we have moved with Mastiff is another example. Where we are going to have to be very careful is the speed at which you have to make those decisions means you run a higher risk of not understanding what the full requirement is, and therefore you just need to be very careful as you start to deliver that somebody does not say, "By the way, it also needs to do A, B and C." That is manageable so long as you keep in mind the point I made about incrementality. So long as you say okay, we are going to get you precisely what you ask for and it is going to have some stretch potential, and that is phase one, then when as operations evolve you realise there is something else you want, you then say that is phase two and you approve it as a separate project, then so far as public accountability is concerned you have got two successful projects. If you are not careful, the idle way of doing it is to say, "By the way, the requirement is now this and I would like to resubmit." You then make two successes look like one single failure. It sounds trivial but we have been completely bedeviled by this sort of slackness in managing.

Q150 Mr Jones: I do sympathise with you. Sometimes the MoD is not clear in what they actually want but if you are a man or woman in Afghanistan or Iraq, the important thing ---

Sir Peter Spencer: --- is to act quickly.

Mr Jones: --- is to act quickly but also in terms of vehicles it should protect those individuals. Trying to explain that to their families as well is the key point.

Chairman: Can I bring in Mark Lancaster.

Q151 Mr Lancaster: I am intrigued by you saying the important thing is to act quickly because it is, but I fear that sometimes the need to feel that you have to act quickly is not necessarily working in our soldiers' interests. Can I give you one example, and I do not expect you to comment on this example, but there is a UOR just gone in for Afghanistan for a route clearance package, which is a combination of vehicles, American vehicles, Buffalo and Huskies, and they go and clear IEDs off the road. It has come in because the threat is changing in Afghanistan, but when you actually go and talk to the American soldiers using this equipment you discover that one piece of equipment (because this package was designed for Iraq for the nice Tarmac-ed roads there) is completely unsuitable for Afghanistan and one of the pieces - and I am not going to go into too much detail for obvious reasons - is simply not being used in Afghanistan and so this notion of we have to react quickly is potentially resulting in us buying the wrong piece of equipment. I have some concerns that we can go too far. How do you address that? Clearly nobody had spoken to the first sergeant who is using this equipment in Kandahar.

Sir Peter Spencer: I think the clue that was given by Kevan in ensuring that you have got the right end user is pretty fundamental. I do share the concerns but there is a balance to be struck between proper propriety to say let us make sure we have understood this requirement, we are asking for the right thing, we understand the costs and this is not the thin end of a wedge which is going to cause us to spend huge amounts more money putting right the wrong appliance, but by the same token what we cannot do is then apply very slowly the full assurance and scrutiny process which bedevils the rate at which we have laboured in the past. To be positive about it, that was why it was so important that in setting the matrix of performance for the new organisation, agility and speed of response in delivering the right thing to the front-line is going to be encapsulated and more importantly - and I should have said it earlier - at my insistence, those targets are going to be written by the military. The work strand is led by the Vice Chief, Tim Granville-Chapman, who is in consultation with the three Services because one of the problems that you have if you set up a target set without properly involving the end users is that you could end up meeting your targets and they do not feel good about it at all, and what you have done is to satisfy an internal agency requirement which has not been aligned with the real needs. That is the trick of all this is; to put the intellectual effort in and involve the right people so that when you meet the targets there is a wow factor out there.

Q152 Mr Jones: You have just said involving the right people. I think the example that Mark has just outlined - and it is perhaps not your fault but you are perhaps talking to senior people in the MoD, even military people, and are not talking to the squaddie or the person who needs to use the kit. I think that is one of the fundamental changes that needs to happen.

Sir Peter Spencer: I will look at the detail because occasionally there is nothing available in the market place that will do something and it may be that was the only thing they could get, which may not be as good in one theatre as in another clearly.

Q153 Mr Hancock: Chairman, why would you buy a piece of kit with that on it if you are getting good advice that it is a pointless bit of kit to buy on a vehicle? I can understand the need but I think there are some judgments to be made. I am annoyed when I hear Prime Ministers say time and time again that commanders only have to ask and we will deliver and yet you hear then of soldiers dying because their vehicles are not properly armoured. Yet there are adequately armoured vehicles that are available, as you said, off-the-shelf, from other countries which could deliver the basic commodity which they need, which is a safe journey from their base to where they are expected to be in operations.

Sir Peter Spencer: With respect, I think we have to break that down a bit into its component parts. I did not say that there were vehicles that would guarantee the safety of British Armed Forces.

Q154 Mr Hancock: Give them better protection than they currently have in some of the vehicles they are driving around.

Sir Peter Spencer: And that is the whole purpose of the current procurement activity.

Q155 Mr Hancock: How long does that process take if you are buying it off-the-shelf and it is only a vehicle that is delivering personnel from one location to another and is not expected to do anything other than that role?

Sir Peter Spencer: It rather depends as to how many there happen to be with the supplier because although they might be able to provide one very rapidly, in order to get a realistic number, generally speaking these days, people on lease and supply chain manufacture do not have large numbers of complex and expensive bits of equipment stacked up in a warehouse. In the case of Mastiff we managed to place that contract within a very short space of time.

Q156 Mr Hancock: From start to finish give us an example then. You let the contract: how long did it take you to get to the stage of letting the contract and how long will it be for the vehicles to be fully operational?

Sir Peter Spencer: We let the contract in under a month from being asked to do it and that was in July and the first vehicles are planned for delivery on 17 November. So you can do it within a few months, depending upon the article and depending upon the availability from the manufacturer. Occasionally of course you can intervene and see if another nation is willing to allow something to be diverted.

Q157 John Smith: I just wondered, Chairman, following on from the earlier point about training, were there any plans to introduce new training programmes to try and improve this agility of response? Because we are not going to the NCOs on the front-line, I wonder whether there is a training requirement there? You said we were using the Defence Academy for training not just civil servants but the military for improving our delivery of defence procurement. How far are we going to take it? Are there going to be any plans for NCO training in the proposed new Academy because I know there is going to be a whole department on logistics and logistical support.

Sir Peter Spencer: They have already achieved training within the DLO training organisation, all of which will be owned by the Defence Academy from 1 April which will, I think, give much more coherent, cost-effective training across defence. We do need to train people to be more agile in their procurement processes, and that is people involved across the spectrum, from those who state the requirements through to those who are negotiating contracts.

Chairman: We will have more questions to ask about vehicles in later inquiries. Robert Key?

Q158 Robert Key: I want to say, Sir Peter, all power to your elbow for recognising that you can do things quickly, although I would point out that there was an Urgent Operational Requirement for a Mastiff-type vehicle in 2001 which somehow got lost in the system, but that is history. Could I turn to the question of Chinook Mk IIIs. We were all delighted to hear the Prime Minister say what he did about the Forces having the requirements that they needed to do the job. I thought particularly then of the eight Chinook Mk III helicopters in my constituency that have been sitting in hangars since 2001. I do not want to go back over why that happened. The Public Accounts Committee and the NAO have already told us roughly what happened. What I would like to hear from you, please, is what is now happening to those eight Chinook Mk IIIs which are urgently required in Afghanistan and Iraq? Estimates were made that Boeing and the MoD are working to fix this problem, but the cost appears to have doubled from £4 million per helicopter to £8 million. The date for in-service operations seems to have slipped from 2007 to 2010 or 2011. Could you please explain what is happening with those eight helicopters, which cannot be flown except in the most benign conditions because they cannot be certified?

Sir Peter Spencer: The position today is that a Boeing team has arrived in Bristol to go through what I hope will be convergence on the final negotiations for a contract which is both affordable and satisfactory in terms of where the financial risk lies. This has been a much more difficult problem to unravel than had been anticipated. I have pressed the team very hard because I could not understand the timelines. When I looked into it, I discovered the extent to which we just had not completed the original design for the cockpit, so we have got to finish off the cockpit and we have also got to sort out the safety issues and we have also got to sort out the certification and airworthiness issues. We then have to sort out the priority for delivering the work because clearly there are options as to how fast you can push that through, and that will need to be judged against priorities elsewhere in the programme by the military capability committee.

Q159 Robert Key: Have you got any date in mind as to when they might be operational?

Sir Peter Spencer: It is so delicate at the moment that I can only risk your irritation by saying early in the next decade remains the current publicly stated forecast. Ministers are taking a very close interest in this. When the answer does emerge I am sure the Minister would want to tell the House first. It would not really be for me to pre-empt that. I can assure you that I am on the case and he is on case. I talk about it regularly with the CEO in Boeing, Jim Albaugh. I saw him in London two weeks ago and I have another telephone call arranged with him for either Thursday or Friday of this week, so we are doing everything possible to drive it through and get on with it.

Q160 Robert Key: That is very good news. The Public Accounts Committee suggested that one option might be to break up the helicopters for spares, to cannibalise them. Is there any question of that or will all eight of them remain untouched?

Sir Peter Spencer: At one stage we thought that might be an option. That was before we had defined what the fix was going to be. We now have good technical definition. We now know what the solution is. The discussion is how much we are going to pay for it and we would expect Boeing to cap our liabilities with a firm fixed price. I am not interested in getting drawn into a project which if it cannot be delivered we end up paying more and more and more money, which is where we were last time. So there is a very important point of balance to be struck here, of course not to delay the needs of the Armed Forces for a day longer than is necessary, but what we cannot do is to sign up to another bad contract. We are not arguing from a position of particular strength with a company which has a very large order book. As I have made it clear to them, as far as I am concerned, it is their reputation which is at stake here.

Q161 Robert Key: Yes but there are other reputations too. I hope very much that you will manage to lay some ghosts to rest here because, of course, my constituents who work at Boscombe Down have been haunted for many years by what happened with the ZD576 Chinook on the Mull of Kintyre. It was of course the engineers at Boscombe Down who refused to certify that helicopter for flight which subsequently crashed. We will not go into that, but if we can now rebuild the reputation that you have mentioned that will be a very important side effect. The most important thing, however, is to get those Chinooks in service for the benefit of our troops.

Sir Peter Spencer: Of course.

Q162 Chairman: The consequence of these Chinooks being out of service is that the troops in Afghanistan and Iraq have a severe shortage of heavy lift. Is there in progress any thought of an interim solution to improve the heavy lift capacity that is available to both of these theatres?

Sir Peter Spencer: To the best of my knowledge, and I am not as well briefed on this as others in the Ministry of Defence, the focus at the moment is looking at medium lift in the immediate term, but that does not discount anything in terms of acquiring additional items of inventory. The main thrust of the work of course is to manage the operations of the aircraft that we have got and to look for priorities for deployment of those aircraft between the two theatres.

Q163 Mr Lancaster: Can we clarify what we mean by heavy lift, medium lift and rotary lift? Heavy lift I am thinking of Antonovs and C17s and things like that as opposed to medium lift, Hercules ---

Sir Peter Spencer: I thought we were talking helicopters.

Mr Lancaster: It is relative.

Q164 Chairman: So what sort of helicopters?

Sir Peter Spencer: Heavy lift in my vocabulary is either a Chinook or a great big Sea Stallion or a big Sikorsky; medium lift is Merlin and Puma, those sort of things.

Q165 Mr Holloway: How are plans progressing or indeed are there any to start using private contractors to do the water runs and mail runs in Afghanistan in order to let the military helicopters do a more military role?

Sir Peter Spencer: We are looking at a range of options. One of the challenges of those sorts of arrangements is the liability issues in theatre. So until the requirement is clearer from the military customer precisely what he wants us to go and do, all I can do is to look at the proposals that come forward. Anything which is on a lease does give you quite severe challenges in terms of insurance and liabilities.

Q166 Mr Holloway: But MI-17s cost a lot less, I guess, than Chinooks. On Chinooks how long would it take to magic up another six Chinooks from Boeing or anybody else? What are the options? If the Government decided we want six more Chinooks tomorrow, how long would tomorrow be?

Sir Peter Spencer: A lot would depend on the extent to which when we engage with Boeing other customers, particularly the United States Army, were prepared to allow an order to be diverted. They are in production at the moment for the Green Fleet of Chinook Foxtrots. You could certainly theoretically go for a very rapid purchase but a lot of it depends on the availability of money, the willingness or the ability of that production line to be diverted and we have not, to my knowledge, approached Boeing with that question. If I am invited to do that then I will do so.

Q167 Chairman: Do you take the Prime Minister's comments over the weekend as being the answer to the availability of funds?

Sir Peter Spencer: I work inevitably to the process that it will be for the military to determine the priorities of what equipment they believe they actually need in theatre, the order in which they want it and the extent to which that money would be made available either outside the normal budget in support of operations from the Treasury through the national reserve or the extent to which we would have to look at the rest of the programme.

Q168 Chairman: But surely if the Prime Minister meant anything he meant that if the need was there the money would be found?

Sir Peter Spencer: That is going to be something which Ministers will have to determine. It is not for me to act on the basis of what I read in the newspaper what the Prime Minister has said. There does need to be, even allowing for the need for agility of response, somebody who is calling the direction, and that will come from the Secretary of State.

Q169 Mr Hancock: Have you been approached to look at any method at all of improving the medium lift capability for our troops and have you been instructed to seek out a solution to that problem?

Sir Peter Spencer: Have I been or will I be?

Q170 Mr Hancock: Have you been?

Sir Peter Spencer: The work is going on at the moment through the future rotorcraft capability team leader who is looking at the whole range of options. It is a pretty rapidly moving field at the moment, so there are a range of things which are being looked at from diverting from other sources to accelerating the programmes that we have already got.

Q171 Mr Hancock: What sort of time-frames have you been instructed to work under for that?

Sir Peter Spencer: I have not personally been given a time-frame to work under but the answers are being fed back to Ministers in real time in terms of what those options are and Ministers are engaged in it.

Q172 Chairman: Sir Peter, I am a bit disappointed by what you are saying here because the Prime Minister said over the weekend that the troops can have anything they need, and the implication of your reply is that you are shoving it back into the negotiations between the Treasury and the Ministry of Defence, which have always been rather fraught. What does the Prime Minister's promise that the troops could have anything they need actually mean in practice?

Sir Peter Spencer: I am not hiding behind the relationship between the Ministry of Defence and the Treasury. I am just respecting the position I am in in terms of being accountable for the expenditure of public funds.

Q173 Chairman: But did your heart leap when your heard what the Prime Minister said?

Sir Peter Spencer: Yes of course, but somebody has to be the team leader and the team leader is the Secretary of State. That is not me opting out. If everybody rushes off in different directions and runs up their own particular wheeze, it does take quite a long time to sort it all out. I am absolutely clear that the Secretary of State is looking at the options which are available and are being costed and presented to him, and I am absolutely clear that he will implement those as fast as he is able to. How he gets that funded is something which he necessarily must agree with the Treasury. There is no basis on which the Ministry of Defence would go out without the Treasury having endorsed the expenditure of money; that is the way the process works.

Q174 Chairman: So we can be confident, can we, that the Secretary of State would put into effect and give reality to the Prime Minister's words over the weekend?

Sir Peter Spencer: I think you would have to ask the Secretary of State that himself.

Q175 Chairman: Can we move on to HMS Astute. Recently the Committee visited BAE Systems in Barrow and Devonport Management Limited because we were looking at the Strategic Nuclear Deterrent and we saw HMS Astute, we saw HMS Ambush, and Astute was very nearly finished. Are you satisfied that the problems with the programme are now dealt with?

Sir Peter Spencer: No, I am not.

Q176 Chairman: What are the problems outstanding?

Sir Peter Spencer: Well, to give credit where it is due, I think the leadership at Barrow has been outstanding under Murray Easton in terms ----

Q177 Chairman: I think we would agree with that.

Sir Peter Spencer: ---- of the focus of his shipyard on the schedule and I think in terms of the progress in making the schedule is extremely encouraging. Our planning date is 2009 and he is determined to beat it and show us he can do it in 2008 and all of that I hugely applaud. The concerns I have got are that we have at the moment unlimited financial liability for boats two and three because we have not managed yet to agree the prices of boats two and three and we know that there have been problems in terms of rework in terms of the fragility of the supply chain, all of which came to put up the financial pressures and I am extremely keen to bring this to a conclusion ideally before the end of this financial year because it is high time we did so. Now, we are making progress on that front because we now have got a much more detailed set of prices which are being offered up for negotiation, we have done a lot of independent assessment of that with the pricing and forecasting group and we are now into the stage of negotiations which is very difficult to predict in terms of duration because there is a lot of money at stake. We then have to think about the rest of the programme and the ability to continue to build these submarines where we know the supply chain has taken a lot of damage because of the disruption to the early part of the build. Therefore, there is a lot of effort being put into drawing together across industry the right grouping of companies to look at boat four and the subsequent boats in that class to make sure that we get right the underlying drumbeat of the industry, that we nurture and make healthy again the supply chain and that we do not lose out on the key skills which are needed to do this very demanding work because it is probably the most complicated thing that anybody ever makes, a nuclear submarine.

Q178 Mr Crausby: So does the lack of agreement on prices for boats two and three affect the second batch of submarines? It seems to me that it would be odd not to agree the prices on boats two and three, but agree a contract for further submarines.

Sir Peter Spencer: Our approach is, as you would expect, that we necessarily must agree prices for two and three before we consider placing a contract for boat four, although in the nature of things we have not been absolutely literal about that because if we had not done anything regarding boat four, we would have already forgone the opportunity to have a boat four, so we have invested carefully in those long-lead items which are necessary to sustain the industry.

Q179 Mr Crausby: So you see the next batch as just simply being boat four? The question is: how many would be in the next batch? Would you do this one at a time for boat four and boat five?

Sir Peter Spencer: The decision has not yet been made and it is being worked through in the context of the Defence Industrial Strategy as to precisely how and when we will contract for them.

Q180 Mr Crausby: So can you give us any indication as to when the contract for further submarines will be made?

Sir Peter Spencer: Predicting the timing of placing of contracts is not an activity which runs very well publicly with ministers, so they will decide at the moment of their choosing.

Q181 Mr Crausby: You see, what we get from people at Barrow is that the skills base is absolutely dependent on further orders, particularly as far as submarine design is concerned. People will just simply walk away from Barrow and not walk back. There are lots of opportunities, particularly for submarine designers who have quite a broad skill, to travel the world really. Their concern is that once we lose that base, then we will just not be able to complete Astute or indeed be capable of dealing with future submarine orders from the nuclear deterrent point of view.

Sir Peter Spencer: I absolutely agree with you and that is why at the beginning of this year, on 1 April 2006, we created the post of DG Nuclear, Rear Admiral Andy Matthews, who was the first dual accountable Director General in both the DPN and DLO and has the oversight of all of our submarine activity, both in-service, technology insertion and new construction, and his job is to oversee the future of the nuclear submarine industry and to ensure we have in place the plans to sustain that industry over time.

Q182 Chairman: But the point which was made to us in Barrow was that the only way you can retain the skills is by ordering submarines.

Sir Peter Spencer: And that point is well understood, but we have to look at the question of price and timing and the rate at which we can afford to outturn money in that area of the programme in order to sustain the submarine build industry against the other pressures on the programme and it is going to need some quite careful management.

Q183 Mr Hancock: I just cannot believe though that people cannot see that the outturn price on boats two and three will actually determine whether any other boat ever gets built because there will come a time when the point crosses the line beyond what is reasonable to pay for a fourth and fifth boat.

Sir Peter Spencer: Precisely.

Q184 Mr Hancock: That will really in the end be decided by the final price of boats two and three and I think everyone has to understand that there is an enormous risk here, that if this price just goes on and on escalating, then there cannot be another order, the nation just cannot afford it and, whether that does terminal damage or not to the infrastructure at Barrow or the workforce, I think that is the reality of the situation surely, is it not?

Sir Peter Spencer: It could be, but I do not think it is because I have sufficient visibility of where I think the prices of boats two and three will come out for them not per se to provide that degree of threat to ----

Q185 Mr Hancock: But we could not build for the price of those, could we? The nation really would be paying through the nose for something, would it not? You could not build four and five for the same price as we will pay for two and three?

Sir Peter Spencer: I think if we go back first of all to the value for money argument, notwithstanding the escalation there has been in price because of the disruption to the programme when the design was not far ahead enough of the production process, the outturn price of these submarines was probably rather less than the prices which the United States Navy pay for their nuclear submarines by a considerable percentage, and that is in the public domain. I think the error we made was to be unrealistic in terms of how economically we could build these submarines, but based on an unrealistic expectation from computer-aided design and computer-aided manufacture which led to a very aggressive degree of concurrency and of course when you are committed to that extent and it comes unstuck, you do pay an extremely heavy price. Even allowing for that, when we do these comparisons with other nations, the prices we are getting, I think, even so represent good value, but that does not mean to say we will be prepared to settle there because clearly there were a lot of inefficiencies due to the rebuild work. The challenge here with subsequent submarines of course is that over time quite a lot of the technology becomes obsolete and you have to take out that obsolescence as you go through time. We also, just as a technicality, pay in outturn prices, so even if in real terms submarine number four costs exactly the same as submarine number one, the number that would appear would be different because it would have a number of years' inflation built into it.

Q186 Chairman: It looks in real terms, and possibly in money terms, as though boat number two would cost less than boat one and boat number three would cost less than boat number two, does it not?

Sir Peter Spencer: I do not think you can make those assumptions about boats. Three should cost less than two and the cost of boat number one, yes, because we will have amortised a lot of the design costs into it, so the general trend is clear, that you can get a learning effect for subsequent submarines. The difficulty comes when you are faced with a new contract to place and the extent to which you continue down the learner curve or you are affected by other influences, and the other influences here are the disruption of the supply chain and the fact that some of the manufacturers of quite important components are no longer around and we are having to find alternative sources and that is a challenge.

Q187 Chairman: Sir Peter, you are being very helpful. The Astutes that we saw in manufacture were being made with a very interesting method of sliding in cassettes almost, large cabins and large bits of infrastructure being made outside the submarines and then being slid in. When we went to Devonport, we found that submarines which were being maintained and repaired had to have holes cut in them and things taken out and we wondered whether the method of making these submarines is antipathetic to the method of maintaining them in Devonport and whether, therefore, sufficient consideration is being given in the manufacturing process to the through-life maintenance of them. Do you have a comment on that?

Sir Peter Spencer: I think it is a very good question because right at the heart of delivering through-life capability with a new organisation is that you spend more time and effort thinking up-front what additional investment should be made to ensure that in whole-life terms you produce something which is affordable, so we move from right equipment, right kit, right price, right time to right equipment, right price, right time, right cost of ownership. Now, the nuclear submarine is probably the most extreme example because you have a pressure hull and you are going to have to cut holes in it in order to get things in and out. Part of the design process is focused on the exit and entry routes. As you know, there are certain key components you have to replace through life. I would need to go back and take some professional advice on the extent to which the Astute class differs from the existing classes so far as replacing components is concerned. I am happy to do that, but I can only give you a rather general, unsatisfactory answer at this stage. It is certainly a principle which is in place at the beginning of any major procurement programme. The fundamental question is the extent to which it is actually applied ab initio because, as we all know, you commit a very large percentage of the through-life cost of ownership at the point at which you make some quite early decisions in any design process.

Chairman: I think it would be helpful if you could go back and look at that please. We move on to the Future Carrier.

Q188 Mr Crausby: First of all, can you update us on the progress of the Future Carrier programme and tell us if a date for the main investment decision has been set?

Sir Peter Spencer: We are progressing pretty well since this Committee last enquired and a lot more work has been done on the detailed design in the shipyards and on value engineering so that we have moved from parametric-type cost estimation to bottom-up estimates from the people who are actually going to do it. We have clarified the standards to which a ship is going to be built and the performance so as to remove some of the ambiguities, and the industrial arrangement with the alliance between the Ministry of Defence and the companies concerned has settled down and is working pretty well. The common baseline design was agreed with the French and they agreed to contribute up to £100 million as an entry fee and to pay one-third of the demonstration phase costs and to date they have paid some £70 million, most of which is the first two payments of their demonstration fee, £55 million, and the other is a contribution towards the demonstration phase costs and there will be more to come on that. The final £45 million will only be paid if they make the decision to go ahead and build the ship based on that common baseline design. We are now at the stage of due diligence and we are now at the stage of making sure that we really do understand the proposition which is on the table and that we actually understand and believe the numbers. You will remember from the Tom McCain paper, Enabling Acquisitional Change, there was a part of it devoted to better due diligence and to emanating best practice in the private sector. With that in mind, we have had three independent reviews just recently, one a standard Office of Government Commerce gateway review which lasts five days to make sure that the whole of the organisation is joined up and it has got a common understanding of what is required and we have got a proper understanding of the projects which interrelate with this and that we have the right governance arrangements in place and the right risk management arrangements in place. There has been a reg-team review of the design led by Sir John Parker and a team of very well-regarded independent experts to look at the design and the procurement planning to take a look and see where there are areas which would cause us some concern, and that report has not yet been delivered. Finally, there has been an independent financial review conducted by the team led by Deloitte with Rand and Jacobs. They will give us an independent financial estimate as to what they think the cost of this project should be because the great risk when you have to live within a budget is that people call the number they think you want to hear, you are so pleased that you sign the contract and then three years down the line hard reality kicks in. We have been there before and we are not going to do it again. It was the reason why I refused to go to contract in April 2004. Had we gone to contract in April 2004, in my view and this is a personal estimate, we would be looking at a cost escalation of around £1 billion on the basis of our lack of knowledge at the time, so all of this has simply been a relearned lesson in the merits of getting the assessment phase done properly, to be incremental in your thinking and not to commit yourself to very large capital investment until you have got the necessary degree of understanding and confidence. It always sounds so much like a blinding glimpse of the obvious when it is spoken like that, but of course you have to set it in the context of all the other pressures that are on the procurement process to get on with something.

Q189 Mr Crausby: I hear that what is really holding things up is that there is a very large gap between the industry's estimate and the MoD's budget. Is that the case? Can you tell us, how does the latest industry estimate compare with what you consider to be the MoD's budget and the right price?

Sir Peter Spencer: There is no budget per se inasmuch as we will set the budget when we make the capital investment decision. We clearly have a number in mind for planning purposes because we need to give that to those who are on the case to sort it out, but we always have the ability, if something is going to cost something, to match our budget to suit.

Q190 Mr Crausby: So how close are you? Are things running smoothly? Do you think you are quite close to reaching agreement on what the price would be?

Sir Peter Spencer: I am the great sceptic in all this, professional sceptic, because I have got reason to be sceptical. Those who are dealing with it are very encouraging; they believe that what we are seeing here, which is after all the beginning of a negotiation on price, is bound to need some judgment as to what ultimately the price is going to turn out to be. If you think of the contractual arrangements here which are going to be set upon a target cost with the gain-sharing arrangements for beating that cost, then if you stand to benefit by making a lot of earned profit by beating the cost, you are going to be trying to nudge the price high. We have got to find the right point of balance which says that this is a reasonably challenging cost to go for and if you do beat it, then you deserve to get additional profit, so this is where the real work begins. This is why we have gone for the sort of due diligence arrangements I have described because we need as many views as we can as to what the 'should cost' of this project is going to be, and I am not trying to hide anything from you, but I simply have not ---

Q191 Mr Crausby: I hear that the difference is hundreds of millions. Is that true? Is there a difference of hundreds of millions between them?

Sir Peter Spencer: What you are hearing is views from people in industry perhaps who have got a vested interest in talking the price up, so that has to be taken into account when judging what is at the heart of this. When a project comes in, it is not just one number, as you know, but it is a very, very complicated piece of work which has to be very carefully analysed so that we understand what is included, what is excluded, what we think the costs of the exclusions will be, what we think the risks are and put a value on that risk. That very detailed process is actually happening as we speak and all I have to go on at the moment is an assurance from the team leader, which is still all to play for, that he believes that it is very, very feasible to get a contract negotiated for a price that we can afford and that industry can deliver and that we should have the right level of confidence that that target cost will be a real target cost and it will incentivise industry in the right sort of way.

Q192 Mr Crausby: What effect is this having on the Maritime Industrial Strategy? Is it not absolutely crucial to the Maritime Industrial Strategy? It seems to me that we are a very long way from reaching agreement and making progress.

Sir Peter Spencer: No, if I have given that impression, may I correct it because I do not think we are a very long way from reaching an agreement. We have actually come an enormously long way and what we are seeing now is the end of a process where there are real numbers on the table and people are going to start negotiating quite hard and that is a process which can, only to a limited extent, be conducted in public. A lot of it will come down to very detailed discussions as to what the numbers actually mean and it is not lost on Lord Drayson that the CVF project is fundamental to the Maritime Industrial Strategy and you will remember his description of wanting to get together the fantasy football team to deliver it.

Q193 Mr Crausby: We also hear that the management arrangements are not proving to be robust. Are you expecting the management arrangements to change and, if so, soon or is that a factor in this?

Sir Peter Spencer: I cannot answer a hypothetical question. Who has said that about which management arrangements?

Q194 Mr Crausby: Are you satisfied that the managing group of this project from an industrial point of view is working well?

Sir Peter Spencer: I think so. I think we have got two absolute stars in it. We have John Cole(?) who came back out of retirement to do this and it does not benefit him much financially at all, but he does this because he has got a real passion about wanting to deliver this. We have also got Peter ----

Q195 Chairman: Sir Peter, I do not think that the suggestion is that the individuals in charge of it are not appropriate, but the suggestion, I think, is that competing some bits of Carrier, allocating other bits of the Carrier, not necessarily the right bits to be allocated or the right bits to be competed, and then putting them all together in a place, which I am sure Willie Rennie will come in soon to express his view about, but in a place which some people would say should not be the place they should be put together. That is what some people have been questioning rather than the individuals in charge of it.

Sir Peter Spencer: Thank you for the clarification, but just to complete my sentence, Peter MacIntosh who, I just wanted to publicly say, has come to us from industry, works as a civil servant, so this is expertise we have brought in from outside and he is doing a very, very impressive job in giving the Alliance Management Board the leadership which it needs which complements the leadership which John Cole is giving across the Ministry of Defence and elsewhere. In terms of the build arrangements, well, the Defence Industrial Strategy centres upon the need to ensure that there is a unity of purpose and a clarity of purpose so that industry can make its own judgments as to how and when it needs to invest as opposed to long periods when we say nothing to them and then suddenly a contract rolls up and meanwhile we have had a very sort of uneven demand on their resources, so the whole aim of the strategy here is to give that degree of understanding and the ministerial judgment was that we needed, in the case of Govan and Barrow and Vosper Thorneycroft and Rosyth, to give that clarity and to say, "We have got these super-blocks which we will expect to be built in these places". There is always a tension there between whether or not you are going to get the right prices for that work if it is a non-competitive process, and the way in which the alliance works, the transparency we are getting and the side-by-side comparison we are getting gives us the opportunity to ensure that that non-competitive process still gives us prices which are competitive and we will then add to that through the competitive arrangements for the rest of the structure which is pretty simple. The skills that prevail in the oil industry are pretty competent at bringing bits of the structure together and sticking it together. In fact we already do this in the warship-building industry where the bow sections of Type 45s are manufactured in Portsmouth and floated up to Scotland, so this is not a trick which is unreasonable to ask. It is a way of ensuring that, as we get through into this very large peak of demand, we try to make the best use of the industrial capacity we have got, but look through that peak of demand to what happens on the other side to make sure that we size the industry properly and we identify the key skills which we need in order to retain operational sovereignty over the maritime assets in perpetuity.

Q196 Mr Hancock: I have two questions relating to the figures that you evaluated at the time during the due diligence process. Is it for both ships or for the first aircraft carrier?

Sir Peter Spencer: We would be looking at the total programme.

Q197 Mr Hancock: So for both, and the through-life maintenance of the ships is being priced into this equation as well, is it?

Sir Peter Spencer: There are options for looking at the initial period of support which we will look at.

Q198 Mr Hancock: So the time-frame is also critical then, is it not, because you cannot agree a price unless you have agreed a time-frame from start on the first ship to completion on the second ship, so that is fairly critical? Can you advise us on what that time-frame now is from the laying down of the first ship to the operational capacity being delivered of the second ship?

Sir Peter Spencer: Well, the separation between the ships that forms the basis for estimating is the three-year separation between then and (?) which sets the relative positions and that is the basis on which the pricing is being done, but in any contract there will be a tender validity period during which the prices will hold until we take them up and we would aim to get those well outside the timescale within which a decision will be made.

Q199 Mr Hancock: But part of the process is also the way in these two very large ships, the largest ships of all the Navy will have ever had, are going to be serviced, not maintained, but just generally home-ported and serviced. Now, the Ministry of Defence are going through this complex exercise at the moment looking at the three bases and there are some critical issues there and if it was not Portsmouth, the ships are too big for Devonport, so are you being asked to look at that as part of the work you are doing of where these ships could be serviced if the Navy makes a decision, which hopefully it will not, which would go against Portsmouth?

Sir Peter Spencer: All of this work comes together with the Maritime Industrial Strategy on which David Gould is leading for Lord Drayson and draws in the surface ship build programme, the submarine build programme and also the ship support programmes because we need to ensure that we recognise that what the Royal Navy needs is delivery of through-life capability from not only a Ministry organisation which is joined up, but from an industry which works for the common purpose and understands and that we understand the best way of doing that, so there is a lot at work going on at the moment with industry in order to tease out what the options might be. One of the realities, as you will be aware, is if we have over-capacity, we pay an awful lot of the budget on servicing overheads and we then have less opportunity to actually go for what is actually needed, so there are some quite tough decisions which are going to need to be taken.

Q200 Willie Rennie: I was interested to hear what you were saying about the maintenance of skills and I was glad to hear what you were saying about the appropriate work going to the appropriate places. Rosyth has got to a stage now at Babcocks where they have got quite a skilled, kind of hard-core workforce which is efficient and widely recognised as so, but with the triple S strategy, the decision about the Liverpool five was to cut the school which has resulted in a possible 90 job losses out of 1,200 at Rosyth, and excuse me for talking about Rosyth. The reason why I mention this is because it is quite significant for the maintenance of Babcocks in advance of the Carriers coming to maintain those skills. Could you maybe explain why that decision was made and how that fits in with the maintenance of skills in the longer term?

Sir Peter Spencer: It is not a decision which I was personally involved in, so if you wanted a detailed answer, we would need to write, but the general context in which these decisions were taken in-year was to ensure that we could manage within our means and there needed to be some varying audit on some parts of the budget. It was not, I can assure you, a decision which was lightly taken because of the very point that you make which is that there is not much point in publishing a Defence Industrial Strategy about nurturing the industrial base and then failing to implement the strategy which ultimately is placing contracts and providing the work for people, so there is a tough edge to all of this where it is quite clear we are not going to be able to sustain the totality of the industrial base that there is in place today and we need to find, working with industry, working with the trade unions and working with the Armed Forces, what the right balance is going to be to deliver the fundamental objectives of the Defence Industrial Strategy and to make sure that where financial reality in the end kicks in, we do not actually kill something off which we actually needed.

Q201 Willie Rennie: I can understand what you are saying. There were two factors that people find difficult to understand, that the redundancy payments would be covered by the MoD and be significant, but also that the future Carrier work was coming this close down the track that actually to fill that gap in the short term might benefit the MoD in the longer term. That is what people find difficult to understand.

Sir Peter Spencer: I can understand why it looks completely perverse. All I can say is that if we had managed to do it any other way, we would have done, but we do have to live within our means.

Q202 Robert Key: I just wanted to cheer Sir Peter up by reminding him that exactly 100 years ago a British shipyard delivered to the Royal Navy the largest military naval ship in the world ever built and it took three months to build.

Sir Peter Spencer: Was it on budget?

Q203 Robert Key: I do not think they minded about budgets in those days, Sir Peter!

Sir Peter Spencer: There is the difference!

Chairman: We will write to you about the issue of what the prognosis of the French involvement in the programme is, if we may, and we move on to the Joint Strike Fighter.

Q204 Mr Borrow: Earlier this year we went to the United States as a committee and discussed with people on the hill and also the US Administration the technology transfer for the JSF. We came back rather more optimistic than we went and I think on 11 July the Secretary of State gave evidence and was optimistic at that stage that agreement would be reached before the end of the year on the sort of technology transfer that would be necessary to sign the contracts later on this year. I must say that in the three months since then a lot of the mood music has changed and it has become much more pessimistic. Is that mood music, which I think most members of the Committee picked up, wrong? If it is not wrong and things are not looking very good in terms of reaching a satisfactory solution, is the UK Government prepared to say to the US Administration, "We aren't prepared to go ahead with Joint Strike Fighter"? If that is the case, presumably we have got a plan B and what is plan B?

Sir Peter Spencer: There are a lot of questions there. Can I start by saying how much the Ministry of Defence valued the engagement of the Committee with their counterparts in the United States. I think the fact that they operating together as UK plc is hugely helpful here because it sends an unmistakable message.

Q205 Chairman: Well, we would like to be able to do that again on the basis of as much information as the Ministry of Defence can possibly give us on all sorts of issues.

Sir Peter Spencer: I am not sure where your mood music is coming from or whether or not it is just filling in because not much has been heard, but if it would be helpful, I can tell you what has been happening. We made it clear to the Americans that we were going to go through the operational sovereignty principle in considerable detail and test it with a number of examples to demonstrate the extent to which operational sovereignty was understood in the United States and was going to be available. That is important because the point at which the memo of understanding for production and sustainment of future development is due to be signed, which is by the end of this calendar year, is well in advance of when those undertakings by the United States will be delivered, so there has to be not only huge attention paid to the detail so that we do understand precisely what was meant, but we also need to understand how the delivery of those undertakings is going to be managed and honoured. As you know, part of the challenge is that the United States is not an homogenous country in the sense that when we deal with it in defence, a great deal of work gets done not only with the DoD, but also with the State Department. The way the American Constitution works means of course that the State Department has to observe a whole lot of different requirements, including procurement law, which does not necessarily melt away simply because it is inconvenient when we come through and say, "By the way, here's what we understand you are now prepared to do on the basis of the undertakings agreed at Head of State level between the President and the Prime Minister". Therefore, in order to ensure that we have the best chance of getting this right, I had a series of meetings following the detailed work by the teams with Ken Crieg, who was my nearest equivalent in the United States system, to agree a statement of principles which described some of the detail and set out the degree of proof that we will be looking for at the end of this year and the fact that it was a non-trivial discussion meant that we had correctly anticipated that this was not just going to be an easy thing to achieve. This is very clear to Lord Drayson who, in addition to the close attention to detail that I am paying, is himself making an independent check in considerable detail of some of these technical issues and there is a large matrix based on the original exchange of letters which defines in considerable detail which bits of technology we are talking about and what it is that we would need to have in order to deliver the UK requirements. A huge amount of progress has been made, but until we have got to the end of it, we simply will not know and we are about to enter a series of quite intense meetings with the Americans. I see Crieg next week and the week after and may well fly out to Washington in order to conclude the discussions at my level and I have no doubt that at some stage the Minister will wish to take a view and decide to what extent he will wish to intervene again, so that is where it is. I do not think anything could be described as a foregone conclusion here. There is at the level of the DoD that I deal with a very clear recognition and willingness to help with this problem and a great deal of work done to facilitate agreement across the rest of the American Administration, including and especially with the State Department, but when it comes down to it, some of these are actually quite tough issues. We also have to draw a clear distinction between a government-to-government agreement and industry-to-industry agreements. One thing which was a great help during the Farnborough week was the fact that Lockheed Martin and BAE Systems signed up for the next stage of partnering in this programme because the partnership up until that point had just been for the so-called 'STD phase', the design phase. They have now got in place a clear arrangement which identifies that BAES will be the lead in delivering sustainability and support to the Royal Air Force and the Royal Navy in operating these fast jets and identifies the role that Lockheed Martin will play in supporting them to get access to the information that BAES will need to do that.

Q206 Mr Borrow: There were some comments in Aviation Weekly a few weeks ago that the American Congress were considering delaying the production phase for their aircraft and that that would possibly lead to an increase in cost of 25/35 per cent. Would you like to comment on that?

Sir Peter Spencer: Well, subsequently we have had confirmation that there will be a change in the front end of the programme. If I have got this wrong from memory, I will correct it after the event, if I may, but the number of aircraft in the initial low rate of initial production has been reduced and there has been an approach which defers some of that production activity because of concerns about the risk of concurrency and the overlap between design and production. The impact of reducing the numbers in a low rate of initial production quantity inevitably is going to be felt in terms of the cost of the aircraft. For the total programme that the UK is going to buy into, the majority of our aircraft will come when they are in full production anyway, so the actual price of those aircraft we can only sort of continue to estimate at this stage and it will ultimately depend upon how many the Americans decide to buy and the rate at which they decide to buy them, but we are vulnerable for the early orders if the low rate of initial production quantities change to the extent as to make significant changes. We simply do not have the information to call on that, but it is an area of concern which we are watching very closely.

Q207 Mr Borrow: And plan B?

Sir Peter Spencer: There is a plan B. Ministers, if the time comes, will explain what plan B is.

Q208 Chairman: Has the time not come now because is it not quite important for a plan B to be public, at least in the minds of the Americans?

Sir Peter Spencer: I would much rather continue the discussion in camera if you really want to go down this road, or give you a written answer.

Chairman: That is fair enough, I think. I think I would not wish to press that at this stage unless the Committee disagrees with me. Would you agree?

Mr Crausby: I agree.

Q209 Chairman: I will not press that at this stage. Sir Peter, you said there has been agreement "at my level", or at least at your level. Is not the problem that while there is agreement between prime ministers and between ministers and at your level, it is very difficult indeed driving that agreement down to the lower levels of the American administration and industry?

Sir Peter Spencer: Yes, it is. That is the nub of the problem. Partly, as you go further down the organisations, you are dealing with much more detail and, therefore, the tests have to be described much more precisely and properly understood. It is clearly easier to agree in principle that on the basis on which we operate together with the Americans on military operations that they would want to regard us no differently than they regard any one of their own armed forces, but there are legal requirements on the State Department which State Department officials simply cannot ignore so we have to take each of these items through one by one and that takes a lot of careful and detailed work and explanation. It also puts the onus on us to be precise about explaining the need to know. It does not help if we try and short circuit it and give a more general question and say, "tell us what you know about this subject", it is not going to be possible for us to get a response on that basis. We have had to do a lot of detailed thinking ourselves and both parties have to work constructively together on this, and they are.

Q210 Chairman: Is one of those constraints that United States personnel are not allowed by United States law to reveal to a foreign company the way that secret information works?

Sir Peter Spencer: Part of it is the United States law in terms of technology transfer and there are processes through Technology Transfer Agreements, so-called TAAs, that form part of how that technology is made available. For example, BAES is a subcontractor of Lockheed Martin, Lockheed Martin then approaches as the prime contractor the DoD and the State Department and says in order for BAES to do this particular bit of design they will need access to this bit of information and then goes through the State Department process and a decision is taken. I have to say, up until now everything that has been asked for has been made available, the difficulty is it is such a demanding process that everything gets slowed down and we are trying to get into a different relationship ideally where the United Kingdom is dealt with no differently, and United Kingdom companies, so long as the right arrangements are in place, from American companies. What we are getting is a combination of the two at the moment. It is recognition of the standing the United Kingdom has as a nation because of what it does together with the United States in military terms reflected back into an easing of the technology access arrangements and the big principle is agreed, as you know, it is now getting that through the system which is why we put together the statement of principles because it was a means of the United States DoD communicating with the rest of its own organisation and the State Department saying what these principles were and what was now expected as we started to take forward each of the individual components of the technology which is needed.

Q211 Chairman: But a government-to-government arrangement such as the one you are talking about does not take into account that it will not be ministers who are fixing new British, say, weapons on to the Joint Strike Fighter in the future. You need to have British industry involvement for that process, do you not?

Sir Peter Spencer: Yes, we do, and the intention is to ensure that British industry is involved. The question will be over time how the technical knowledge is made available so that British industry is involved to best effect. To put this into context, British industry is already hugely involved in the total programme and a large number of companies have won valuable business in competition here. What we are focused on from a government perspective is not just the volume of that business but to ensure at the highest level that we retain operational sovereignty on our ability to operate, maintain and upgrade these aircrafts through life.

Chairman: Okay. Any more questions on the Joint Strike Fighter? We will move on to spectrum charging.

Q212 Robert Key: Thank you, Chairman. Can I just say that I think you are having a tremendously good effect, Sir Peter, on that point about joint working and certainly it has been a major concern in the QinetiQ workforce in Boscombe Down that whatever may be agreed at ministerial level, when it comes to technicians trying to get into the gates of American yards and factories they have been challenged and stopped, but it is getting better. The National Audit Office produces its Major Project Review once a year, quite rightly focusing on big projects over £200 million, but there are some of the many smaller projects which concern me, and one of them is radio spectrum charging. As I understand it, until 1998 the Ministry of Defence did not pay for spectrum at all. They are the biggest users of spectrum at about 30 per cent of the total and since 1998 under the Wireless Telegraphy Act they have had to pay a charge. Professor Cave's study in 2002 suggested that what is currently, I think, this year a charge the Ministry of Defence pays to the DTI of around £56 million will almost double over the next five years. There are two consequences that I am concerned about. The first is that as the communications budget has to bear this charge communications will be squeezed to the point where redundancies in whole systems will be made, perhaps even, it has been suggested, weapons systems will have to be scrapped early as economy measures in order to hold the line of the Ministry of Defence budget. I would hope Sir Peter could reassure the Committee that spectrum charging is not going to have an adverse impact on the communications budget in particular but also a knock-on effect on to other procurement budgets of a smaller nature. My second problem is that we know Australia and the United Kingdom of the Western Allies are the only governments where the defence ministries are charged for spectrum and among the United States and other members of the Combined Communications Electronics Board, that is Australia, Canada, New Zealand, the UK and the United States, there is grave concern that there could be an operational impact here, spectrum charging could lead to less combined training between forces which would naturally expect to operate together in time of tension or, indeed, war. I would like to be reassured that there will not be an impact on international relations or training caused by a squeezing of the defence budget by this innovation of spectrum charging which is still quite a lot of money each year.

Sir Peter Spencer: I had never heard of spectrum charging until quite recently because, as you say, it tends to be something which is of relatively low value and people manage that and as long as it is being managed we are okay. I can assure you that it has my full attention at the moment because in the Defence Management Board Review of our budgetary position over the next few years increases in spectrum charging were identified and flagged up. I think in the way in which they were flagged up, I hope it will reassure you, there is no intention that I am aware of to force the communications budget to swallow its own smoke. It is being looked at as a defence-wide issue which will need to be managed. The pros and cons of spectrum charging are really an inter-governmental department issue and something for ministers ultimately to deal with. At the moment what we are doing is to ensure that we get our house in order. There is a Spectrum Acquisition Authority which was set up a few years ago in order to get more coherence in the way in which individual projects went about stating their uses for the spectrum. In some cases we have got profligate use of the spectrum because if you have got proper co-ordinated, planned use of the spectrum you can (a) avoid going for the same bit or (b) make sure that the way in which you go for different bits does not make what is left in the middle too little to be used for anybody else, so you make better use of what you have actually got. We do not pay for spectrum on overseas operations, of course, so this is something which happens only internally. I asked the question just now but I am not sure only because my new MA happens to have a background in this area so we are playing to one of his strengths, but even this expert cannot give me an answer with sufficient confidence to give the Committee that this will not mean charging overseas operations. I very much doubt it, but for the sake of thoroughness I will go away and confirm one way or the other. I think the 50 million extra per year for spectrum charging, or whatever it turns out to be, is one of many pressures on the budget so it would be irresponsible just to shrug it off and say, "we will mop that up", it is another burden that we will have to cope with one way or another. Much of this, of course, will go into the discussion which the Ministry of Defence has with the Treasury on the Comprehensive Spending Review.

Q213 Robert Key: Could I just ask where the Spectrum Acquisition Authority sits in the Ministry of Defence structure?

Sir Peter Spencer: It sits in London. It is chaired by Air Vice-Marshal Stu Butler, who is one of the members of the Joint Capability Board working for General Figgures. He began this work as an air commodore and because he is now the capability manager for information systems, and because we realise it needs to be run at that level, he has retained the continuity, which I think is quite a help.

Q214 Robert Key: The Government responded to the Cave report in March of this year and they produced a response and action plan which I happened to read on the internet yesterday having done a Google search on it. I noticed that in paragraph 5.3 it says that the Ministry of Defence will provide the spectrum requirement to the Treasury by the end of 2006 in order to inform the Comprehensive Spending Review, as you have just said. This is going to put a new pressure on the Ministry of Defence, just one, no doubt, of many, but I hope that you, Sir Peter, and your colleagues will be robust with the Treasury pointing out the practical and possible operational consequences of squeezing the budget in terms of spectrum charging.

Sir Peter Spencer: We will make sure that the arguments are properly laid out and well understood.

Q215 Mr Holloway: Chatting to some of the tanker crews at Brize Norton we came on to the subject of PFIs and some absolutely eye-watering mathematics on the cost of that equipment across the whole of the contract as opposed to a one-off purchase. What do you think, if any, are the dangers of PFIs in terms of the flexibility of your successors in decades to come to get the equipment they need at a particular point?

Sir Peter Spencer: I think if the concern is that we lock up too much of the budget too far into the future then we structure the contract with the appropriate exit points. We also have to structure the contract in such a way as to cope with anything which is very fundamental, like a complete change in the way in which the United Kingdom is going to do defence hypothetically in ten years' time. The technical challenge in that is to ensure that those very necessary contractual arrangements are not done in such a way as you take back on to the Ministry of Defence as the customer the demand risk of the project, because if you do then in terms of balance sheet treatment you effectively carry it on the balance sheet and you are then faced with a major practical issue as to the ability of the balance sheet to absorb so much of the capital kit all at once. I am pretty optimistic about how far we have come on negotiating this very difficult, very complex contract. I think the reason why the numbers are eye-watering is for the simple reason that we do not make it clear enough to all of our people what the real cost of equipment is. Some of these equipments will cost four and five times as much to run through life as they do to buy. It is the same calculation we fail to do when we have children. They are wonderful and lovely in their first two years but you have no idea what is going to hit you when they go to school, go to college, get married and have children. All of defence needs to be better educated, not only so we are realistic in terms of what the alternatives might be but also to ensure that we all of us think through life ab initio. It is terribly easy to say, it is quite hard to do.

Chairman: Sir Peter, I think that is it. Thank you very much indeed for a marathon session in which you have been extremely helpful, candid and passionate. Thank you.