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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 822 House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE DEFENCE COMMITTEE
MoD ANNUAL REPORT AND ACCOUNTS
Tuesday 24 January 2006 MR BILL JEFFREY CB and MR TREVOR WOOLLEY Evidence heard in Public Questions 1 - 102
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Defence Committee on Tuesday 24 January 2006 Members present Mr James Arbuthnot, in the Chair Mr David S Borrow Linda Gilroy Mr Brian Jenkins Mr Kevan Jones Robert Key Mr Mark Lancaster John Smith Mr Desmond Swayne ________________ Memorandum submitted by the Ministry of Defence
Examination of Witnesses
Witnesses: Mr Bill Jeffrey CB, Permanent Under Secretary of State, and Mr Trevor Woolley, Director of Finance, Ministry of Defence, gave evidence. Q1 Chairman: Good morning, Mr Jeffrey, Mr Woolley and everybody else. Welcome to this evidence session on the Report and Accounts of the Ministry of Defence. Mr Jeffrey, can I begin by saying thank you very much for coming to your first evidence session with the Defence Select Committee. You have been in post fully for two months now and here you are, expected to come and answer questions about absolutely everything which I think is a bit tough frankly. I am being soft obviously! How are you getting to grips with the MoD and what do you think the comparison with other departments you have knowledge of shows you about how you ought to be getting to grips with it? Mr Jeffrey: Thank you, Chairman, and I am rather conscious of the fact that I am facing this Committee early in my time in the MoD. I think, if you will forgive me, as we get into the detailed questioning, I may well rely on Mr Woolley more than I hope to be doing before very long. As to how I am tackling it, I am tackling it by getting around the place and I was thinking this morning before coming to this session that it is actually more like six weeks because it takes account of the Christmas period. I have already been to the Joint Command Headquarters at Northwood, the DPA, the DLO, the personnel area, the finance area, the policy area, communications, and to the export services yesterday, so I think the answer to your question as to how I am tackling it is that I am getting in amongst it because I am conscious that I did not grow up in this Department and I have to understand its business if I am going to be effective as one of the leaders of the organisation. My first impressions are, I have to say, very positive. I think I find, as I hope the Committee has found as it has done its business, that it is a body of people who are very committed to what they are doing. As you may know, I was responsible for several years for the Immigration Department in the Home Office and I felt that was true there as well in sometimes quite difficult circumstances, but the thing that I am impressed by in the MoD is, first of all, the joint working between military and civilians does seem to be genuine and quite deep-rooted and, secondly, that people are genuinely focused on delivering military capabilities and, as I go around the place, that phrase is used remarkably often. I think the priorities I would see, and I was struck by how coincident they are with the things that the Committee is taking an interest in, are, first of all, business effectiveness, making sure and building on what we have done in the past and what my predecessor, Kevin Tebbit, did in creating a department that has, and deserves, the confidence of ministers, the public and Parliament, and I think a part of my function is to provide leadership for the approaching 100,000 or so civilians, and my military colleagues do that effortlessly and I think that is something I definitely have to do as Permanent Secretary. I think I need to apply quite a bit of attention to a topic that I know your Committee is becoming interested in, and indeed you are going down to Abbey Wood later this week, which is the whole question of how we procure and acquire equipment for defence. The Defence Industrial Strategy is a very important development, but it is quite clear from my early conversations that everyone accepts that, if it is going to work, we, as a Department, have got to play a big part and, although improvements have been made, there is still a great deal to do. I think I need to attend to the Efficiency Programme which you will no doubt want to ask us about later this morning and that is on course, but it is something that I need to pay a very close personal interest in, and there is also a set of issues which I know your predecessor Committee and you have taken a close interest in to do with our duty of care to all of our staff. That is a selection and I think there are other issues. Obviously the Armed Forces are very busy at the moment and there are major commitments in Iraq and Afghanistan and, if I am going to support my Secretary of State as well as I need to, I need to understand these as well and play my part in that. Q2 Chairman: That is very helpful, but, if those are the priorities that you have set out for yourself, how will we be able to judge whether you have achieved what you have set out to achieve? Mr Jeffrey: Well, nothing is 'unimprovable', but my initial sense is that in the papers you have before you is the balance score card, the way in which we set out our targets and how we are progressing towards them, which is a reasonably user-friendly way of tackling the management of this enormous business. I certainly have now chaired one meeting of the Defence Management Board in which we used a balance score card and I think it is well established now. As I say, nothing is beyond improvement, but it gives us a means by which we can track achievement against our main targets. I think in the end one must not have alternative systems in these sorts of things. If we succeed and if I succeed in what I have just described, then it ought to show in the main measures that are described in these papers and, if not, then they are not the right measures, so I would say look to the main systems, look to the running systems and we can assess as we go whether we are achieving the outcomes that we want. Chairman: One of the key issues that we are going to have to take an interest in over the coming years is the issue of recruitment, of overstretch, about all the various harmony guidelines and stuff like that which relate to the personnel of our Armed Forces, and I will ask Desmond Swayne to ask about those. Q3 Mr Swayne: PSA Target 4, if we look at the performance of the Royal Navy and the Royal Marines, has essentially gone in the wrong direction. It was 95.1 per cent on 1 April 2005 as against 96.8 per cent in 2004, so it is going in the wrong direction and it is nearly 5 per cent below what is required. What difference does that actually make, given that we are told that there have been only very isolated breaches of harmony guidelines and, if that is the case, have you set the target too high in the first place? Mr Jeffrey: I think that the Navy is certainly, of the three Services, the one which is still facing a significant challenge in getting up to the strength that it is intended to be at. It is not yet at what is described as 'manning balance' within the 98 to 100 per cent of the preset figure. The latest figures I have are that the forecast deficit for April 2006, a few months hence, was 3.6 per cent compared with 4.9 per cent in April 2005, so that suggests that it is now moving in the right direction, but I should emphasise that what one is measuring it against is also a moving target because there are planned reductions in manpower over that period as well. That may be a partial answer to your second question. It is certainly the case that, although the harmony guidelines are not proving possible to meet for the Army and the Air Force, they are, broadly speaking, being met by the Navy and the Navy is managing within that. That may reflect the fact that the Navy, although it is much involved in current operations, is rather less involved than the other two Services. Q4 Mr Swayne: If we take the Army then, the Army is now in balance, is it not, at 98.3 per cent which, after all, sounds a very creditable figure? I suppose we are all conditioned by pure maths O Level where, if anyone got over 45 per cent, they were a real boffin, so 98.3 per cent sounds pretty good. What are these statistics actually hiding? What are they not telling us because the anecdotal evidence is actually that there are real problem with the Army? Only yesterday in the press we are being told about the Paras being under strength, to be augmented by Infantry units, of Paras having to go direct from Iraq to Afghanistan and of there being tour intervals of less than one year. Are these statistics actually robust? Are they really telling us things that we need to know or are they just simply covering them up? Mr Jeffrey: I think there are several points in response to that. The first is that the figures are accurate in the sense that they tell us what the strength of the Army is at any one time and what that represents as a percentage of what it was planned to be. What they conceal, although it is not really concealed in the sense that it is in there in the rest of the Report, is that for some particular trades there are what are described in the papers as 'pinchpoints' where historically it has been hard to recruit people with specialisms, people like ammunitions technicians, explosives and ordnance disposal officers, signals information systems engineers, these sorts of categories where it is hard to recruit and the recruitment climate is not as benign as we would want it to be and there are some special efforts to tackle these so-called pinchpoints. Otherwise, I think the only other point I would make is that there is no doubt that, although the percentage of the total Army manpower that is currently deployed in operations has been falling and is a little less than it was even when these papers were published, this is a very busy time for the Army and the commitment in Iraq and Afghanistan in particular is such that on the ground there may well appear to be the difficulties of the kind that you describe, but certainly the advice I am hearing from senior military colleagues is that, although this is a very busy time, it is manageable and will continue to be so. Q5 Mr Swayne: The 25 pinchpoints in 2004/05, how are they actually defined, what impact do they have on operations and will the deployment to Afghanistan make them worse? Mr Jeffrey: They are a collection - and I am not sure if they appear in the published Report or not, but we can certainly provide the Committee with a full list of what these categories are. Q6 Chairman: I think it would be helpful if you could, yes. Mr Jeffrey: I think I probably also ought to do the same in relation to Afghanistan. I think it is undoubtedly the case, again as the Committee will know, that we are not completely clear what the nature of any future deployment in Afghanistan will be, but I think I ought to take notice of the question about whether any Afghan deployment, when it comes, will make that situation worse than it already is, and we can provide the Committee with a note on that certainly. Q7 Mr Swayne: The Report tells us at paragraph 113 that Army recruitment has been affected by perceptions of the war in Iraq and issues surrounding Deepcut, particularly parental perceptions, so what actually is being done about that and is it proving effective? Mr Jeffrey: Well, I think the factors that affect Army recruitment are various. The Secretary of State was asked about this during Questions yesterday or on an earlier occasion and he said that he did not think that Iraq was a particularly significant factor, although it obviously is possibly in the minds of parents and others. I think principally, apart from keeping up a very strong recruitment effort, the steps that are being taken are steps around improving recruitment, training, responding to the Deepcut events, looking at the way in which we support recruits under training through welfare and in other ways and, by these means, giving potential applicants the confidence that they need to put themselves forward, but it has to be recognised that we are operating in quite a difficult recruitment climate with still historically pretty high levels of employment, so the task of the Army recruiters is not straightforward. Q8 Chairman: Mr Jeffrey, when we went to meet the ARRC, we asked whether it was possible, at the press of a button of a computer, to work out the individual harmony guidelines relating to any individual Service person and we were told that it was not yet possible. Surely that ought to be possible. Do you have any views or comments about that? Mr Jeffrey: I do not. I have to say immediately that it is probably better to start with this Committee by being entirely straight with it. I am not briefed on that and I think I ought to become so and again, if you would be happy to take a note on that, we will provide one. Chairman: Yes, I should be grateful if you could provide us with one please. Q9 Mr Jones: Mr Jeffrey, welcome to the Committee and, if you give us straight answers, you will be the first person from the MoD who ever has, apart from, I think, the last Procurement Minister who did when he came before us, so I look forward to these straight and honest answers. Can I just pick this up in terms of the issues surrounding Deepcut. How much damage do you think not just Deepcut, but the related publicity which has taken place over the last few years has done not just to the Army, but generally to the reputation of the Services? Mr Jeffrey: Well, I find it hard to assess that. There is no doubt that the Deepcut events, which are now some years in the past obviously, attracted a great deal of publicity at the time and in some respects continue to do so. All I can say is that, as a recent arrival in the Department, it is clear to me that everybody from the Secretary of State down, and I have in particular discussed this with the Armed Forces Minister once or twice, is utterly committed to addressing this set of issues around the way in which we care for our military and civilian staff and the nature of the training experience and the culture of training establishments. It is a difficult set of issues and it is hard to say what the impact has been publicly, but I am sure there has been some. Q10 Mr Jones: So why has your Department ignored one of the main recommendations in our Duty of Care Report, ie, the independent oversight of complaints, which surely would be a method of instilling confidence back certainly in mums and dads who are going to be sending their kids into the Armed Forces? Mr Jeffrey: I do not think it is fair to say that the Department has ignored that recommendation. It is certainly the case that we have not proceeded with the full-scale, entirely independent system that your predecessor Committee recommended, but there are plans in progress both to have an independent element in redress panels where the Secretary of State appoints an independent person ---- Q11 Mr Jones: They are pretty pathetic though, are they not, these panels? Mr Jeffrey: Well, they are a step in that direction. There is also a proposal to have a form of independent audit of the health of the system where an independent person will be able to look at a selection of cases after the event and advise us on the way in which the system operates. Now, that is not, I am sure, as much as the Committee was looking for and as independent a system as the Committee was recommending, but it definitely does represent an element of independence in the process. Chairman: Please will you bear in mind, Mr Jeffrey, that the Committee will be worried that the Ministry of Defence is seen from time to time as being judge and jury in its own court. Q12 Robert Key: Could I turn to civilian personnel management, Mr Jeffrey, and the People Programme. I am very conscious that behind all the uniformed Services, there is a valiant band of people, civilians, on whom the Armed Services depend for the delivery of almost everything, particularly when they are out in theatre. I see it in my own constituency every time there is a little operational flutter when the planes are flying more regularly at Boscombe Down and so on, but I wonder if you could tell me what manpower savings there will be resulting from Project Hyperion? That is very specific and I am asking it for a purpose, because it is a good example of a change which the Army is making to their organisation in Land Command and the Adjutant General's Department which is going to have an effect on recruitment and retention, but it also has an impact on civilian manpower. I wonder if you could tell me what those manpower savings are off the top of your head and, if not, because that is a pretty precise question, could you let us have the figure? Mr Jeffrey: I am searching for the figure as you speak, Mr Key. I think it might be better for me to undertake to give you a figure for that. Q13 Robert Key: That is fine. Mr Jeffrey: I may say I entirely share the sentiment of the first part of your question which is the importance of the civilian element in everything that we do and it is true that, taken across the board, our efficiency savings involve quite significant reductions in the numbers of civilian staff. I cannot speak for the particular programme that you have just mentioned, but we will give you the details. Q14 Robert Key: I would be very grateful because it illustrates the difficulty for the civilian staff of relocating, for example, from Land Command Wilton to wherever it is going to be, and the word on the street is that it is Andover, but it might be Solstice Park, who knows, but wherever it is, in terms of the travel-to-work area and so on, you have to manage civilians as well as the military and this is where it gets very difficult because out there are tens of thousands of civilians who are very worried by what they see as a continuing programme of efficiency mixed with privatisations and PFIs and so on and they feel that the old family of the Ministry of Defence is being diluted and they worry about it very much and so do I. I wondered if you could just give me some reassurance that you do not just see civilian manpower as a management exercise and you really do realise how important they are. Mr Jeffrey: I do and, if it is any reassurance, all my own history of managing businesses inside the Civil Service has been with a measure of responsibility for significant numbers of civil servants. I take that very seriously and I think, as I said at the beginning, that one of my tasks, working alongside my military colleagues, is to really make the civilians feel that they are as significant a part of this enterprise as anyone else. I will do that in consultation with the unions and with a full appreciation of the fact that the decisions we take, which often do need to be taken for good logistic and efficiency reasons, are ones that also take account of the human dimension because it is very important. Q15 Robert Key: Indeed and I know that that is how you will seek to manage civilian manpower. In the memorandum we received from the Ministry of Defence on the response to our questions on the Annual Report, right at the end where it is talking about civilian manpower on page 26, it is a bit clinical and it says at paragraph 67, "Cashable savings from civilian manpower reductions are made centrally". Now you can see where I am coming from. I asked you about Hyperion because it is all measured centrally, but I am not quite sure that the answer is there and I just wonder if anyone behind you has got any of these figures and can help us, and I know you are going to send them along. I just want really to make the point here that you say in paragraph 68, "There are no quality measures against the reduction in civilian manpower because this is not an efficiency measure in itself, but rather a consequence of other efficiency measures". Again I simply ask: are you quite sure that you are putting people first and not the management machine? Mr Jeffrey: Our first responsibility, and it comes back to the targets and the high-level objectives in these reports, is to provide the defence capability in an effective fashion. That will inevitably sometimes, and there are some recent examples of this, cause us to look critically at the numbers of staff we have and what we have them engaged on, but I certainly would not want to approach any of this without a good appreciation of the impact that the decisions we make have on the people who work for us. Q16 Linda Gilroy: I am sure that some of our constituents who will be coming to Westminster tomorrow to lobby us from the defence trade unions will welcome the sort of approach you have outlined and I wonder if I could just take that a bit further. Attached to the notes we had was a copy of the MoD Efficiency Programme and in that, paragraph 14 describes how the Department has established an Efficiency Delivery Board to oversee the overall Defence Efficiency Programme. I wonder if I might ask just one or two questions about some of the principles that we might expect to see that Board having in mind in order to follow through some of the approach you have just outlined. The Gershon efficiency savings are set to produce something like 10,000 job cuts or transfers to the private sector, I think, by 2010 and the unions will be telling us, I think, tomorrow that that ranges across agencies like DARA, ABRO, the Defence Information Initiative, Defence Logistics, the Defence Training Review and the Future Defence Supply Chain Initiative. The sort of questions that the unions will be bringing to us and their members, our constituents, will be seeking reassurances about having a level playing field, about consultation, about the possibility of having inhouse options and I just wonder if you might be able to give us a flavour of how the Efficiency Delivery Board takes into account the kind of concerns they express in those respects. Mr Jeffrey: Well, I do not have a great deal to add to what I said in response to Mr Key. It is a balance and we have a responsibility to our ministers and to the public, as taxpayers, to deliver this extraordinarily expensive business as efficiently as we can. That does mean that we have to keep looking at ways in which we can do so, and the Gershon changes which you have referred to have some impact in the MoD and there is no question about it. In furthering my response to Mr Key, I think that, in working through changes of the kind you have referred to, we have to be sensitive to the human dimension and I am sure that the Board you have referred to will be so, but in the end we also have to achieve the outcomes that our ministers seek and as efficient an organisation as we can provide, so it is the usual difficult balance. Q17 Linda Gilroy: I think on the Defence Committee we understand the need to look for efficiencies to make sure that we are getting good value for the defence budget. It was really looking for, whether in delivering that, there are principles which guide the Efficiency Delivery Board in how they relate to the workforce and to the trade unions. It might be something that we could come back to in the future, but, if I could just ask a similar question, I think one of the concerns which the trade unions would have, and certainly we had when we were looking at the front-line capability inquiry, was that we could end up with some parts of industry having almost a monopoly situation as far as the provision of services was concerned. One area that I know the unions have concern about relates to the Defence Training Review where there are three consortia bidding for two contracts. Now, if one of those consortia ended up with both of those contracts, over a short period of time the MoD could find itself in the hands of a monopoly supplier and again I wonder if there are principles which the Efficiency Delivery Board have in looking at how they seek best value which takes into account the longer-term position that they might be placing themselves in with regard to private contractors? Mr Woolley: I actually sit on the Efficiency Delivery Board and I think the first thing I would say is that our goal is very much efficiency as measured in financial terms, and the goal is expressed as £2.8 billion, so we do not have an agenda, as such, to contract out, except to the extent that contracting out services contributes to meeting that goal of £2.8 billion. It is the view of the Department that, as part of the overall Efficiency Programme, the consequence will be, as you say, a reduction of 10,000 civilian staff, but on each case it is a value-for-money judgment and when it comes to the various agencies and the various trading funds, we have taken different positions according to whether or not we think the value-for-money option is an inhouse solution or a sales solution and that has characterised our slightly different approaches to DARA on the one hand and ABRO on the other hand. In the case of the defence training rationalisation contract, this is a long-term PFI contract and it would be probably for a period of 25 years, so we are not looking for a regular competition, but we are looking precisely for a long-term partnership agreement and what the requirements of the Armed Forces will be and what the industrial structure of the United Kingdom will be at the end of that contract is very difficult to predict, but it is in the nature of having a long-term contract. The advantage of having a long-term contract is that it gives a degree of certainty to the private sector partners as to what the requirement is and that the business will be there and, through that, we expect to be able to drive down the costs and provide efficiency. That is an alternative approach to competition and regularly recompeting contracts which does have the advantage of keeping competitive pressure on the contractors, but the disadvantage is that the contractor, recognising the risk he is taking, has effectively to transfer that risk back to the Department and the Department pays a premium as a consequence. Therefore, what I am saying is, I think, that there are different methods by which we can achieve efficiency, the competitive route, but also the long-term partnering route, and in different cases we have to make judgments as to what we think will be the most optimal way of achieving efficiencies. Q18 Linda Gilroy: I think one understands the benefits of long-term partnership. I think what I and some other Members have a concern about is that can end up, I think, as a break-point in a particular contract of 15 years if by that time there is only one supplier and there is nowhere else you can look. Can they then say to you that they are the only supplier, perhaps they are in significant competition with people for the sort of posts they need to keep filling to provide that service and that, therefore, they are in that monopoly position at that point and there are long-term dangers as well as benefits in that particular approach? Mr Woolley: Well, I think we do recognise the risks. I think one has to make a judgment in some cases whether the market is such that you really can retain competition for a long period and in some cases I think that the market is not such that you can do that. In the case of the DTR, the sorts of services we are looking for, whilst technical, are not so highly specialised that I think one would be eliminating all possibility of competition in the future. Q19 Linda Gilroy: Can I just ask you one more question on the Efficiency Review and a different aspect of it to do with relocation and I wonder if you could give us some idea of the extent to which the savings depend on continuing with that programme. In paragraphs 60 and 61, it deals with the moves which have already been made, the relocation out of the South East and, I think, some savings of 1,200 posts from the Army Technical Foundation College, but then that needs another 2,700 to find by 2010. I do not know if you have any information about what that involves, what likely further moves there will be in relocation from London or, if that is not to hand, perhaps you could let us have a note about it. Mr Jeffrey: I could provide some information about that. The Board position is that we are on course to achieving the overall target of relocating 3,900 posts out of the South East by 2010. The first 1,230 of these were delivered in the last financial year in the way you described when the Army Technical Foundation College closed and was transferred to Harrogate. The other major contributions to achieving the target are: a move of the Defence Medical Evaluation and Training Agency from Aldershot to the Birmingham area, relocating 1,100 posts in 2008/09; the Disposal Services Agency moving from central London to the Bath/Bristol area, relocating 80 posts in 2007/08; the Defence Science and Technical Laboratories relocating 500 staff from Farnborough and Portsdown to Portsmouth Down in 2006/07; and the fact that, when Chelsea Barracks is closed, its units will move to Woolwich, so those currently based there will relocate, 1,000 posts, to a variety of establishments in 2006 to 2008. It is a mixed picture and, by one means or another, we believe we are on course to meeting the objectives set in the Lyons Review. Q20 John Smith: This is a general question to Mr Jeffrey, and I know he has not been in post very long, but I think some of us are genuinely concerned that the Ministry of Defence is in danger of knowing the price of everything, but the value of nothing and not knowing the difference between reducing costs and cost overheads, which I think it has been extremely successful in doing, and introducing real efficiency savings. Our most recent report on support for RAF front-line capability, I think, points in that direction. Yes, the savings are going to be made, but in the future we believe there is a very big danger that we are not going to be able to support the front line efficiently, sustainably and reliably. I just wondered whether you had a view on that and I wondered whether Mr Woolley had an opinion in principle and that is: does he believe in principle that it is possible to incentivise a sole monopoly supplier? Mr Jeffrey: Perhaps I can respond first, and I do so with what I hope is still an open mind, but I am new to this organisation and I am at this stage giving you no more than first impressions. I do not think it is a fair caricature of what I have seen so far to say that this is an organisation that understands the price of everything and the value of nothing. I have been struck by the extent to which considerations about the people we employ and the importance of morale at all levels are the common currency of conversations with my new colleagues, so I do not feel that culturally I have walked into an organisation that is just about slashing and burning and cutting costs all over the place. I do, however, recognise that we are embarked on a pretty demanding Efficiency Programme which will involve some tough decisions and there is no doubt that the reductions that we are committed to make will take some achieving. On the specific point about logistics, all the advice I have had so far is that there are no indications that the pursuit of efficiency has in itself prejudiced the Defence Logistics Organisation's ability to meet the requirements placed on it to support its customers in the front line. That was certainly the message I was getting when I visited the DLO a week or so after I took up my post. One may say, "They would say that, wouldn't they?", but they clearly regard their principal responsibility as being to provide that measure of support for the front line and there was a good degree of confidence that they could carry on doing so in a more efficient context. Trevor may want to respond too. Mr Woolley: It is certainly possible in principle to, and indeed we do in practice, have ways of incentivising monopoly suppliers. We can introduce into the contract various incentive fee arrangements whereby, if the contractor is able to deliver services for less than the forecast price, the benefits are then shared between the customer and the supplier, we can have open-book accounting arrangements, and we have a pricing and forecasting group within the Defence Procurement Agency whose role is to examine pricing that comes from monopoly suppliers to ensure that it is fair and reasonable. Therefore, we have over the years and over the decades developed various means of doing this, but obviously in this, as in many other areas, there is scope to do it better, there is scope for improvement, there is scope to be cleverer and our commercial teams are working to ensure this. Q21 John Smith: But the record in terms of dealing with monopoly suppliers in the past has not been a terrific one and previous reports of our previous Committee have alluded to that. There is a difference between a monopoly supplier and a sole monopoly supplier where the capability does not exist within the UK to turn to when that relationship becomes difficult, for the reasons my honourable friend pointed out, so I do think that consideration has to be given to this. I am sure that Mr Jeffrey has been assured that the efficiencies are being achieved, but who does he think should really have apologised when the RAF could not bring our troops back from Iraq, not because our brave aircrews could not get out there or were not committed or were not prepared to do the work, but because the aircraft were not serviced and serviceable, so we could not get out in time to bring back our troops who were out there, courageously and bravely representing this country? We could not get them out of that country because of problems in the logistical chain, so should the RAF have apologised or should it have been the DLO? Mr Jeffrey: Well, in the particular case you refer to, I am aware of it and the DLO, I know, are working hard to make sure that they can meet these sorts of commitments and it is a question of constant improvement. I am not sure I have an answer to the question as to who should apologise, but clearly it is not an ideal outcome when that happens, far from it. Chairman: As I understand it, an apology was given. John Smith: By the Chief of Air Staff, I think, yes, but the concern, Mr Chairman, is whether this is a harbinger for the future. Is this a sign of things to come if we do not understand the real difference between cutting costs and making genuine efficiencies that we all support? I will leave it there. Linda Gilroy: Perhaps I can just follow on from that to underline the question I asked about what principles the Efficiency Delivery Board use to relate to the trade unions on these issues because tomorrow they are going to be saying to us that Britain's defence is potentially under threat because of some of the Gershon savings. Clearly we will need to listen to what they are saying, but also we will want to listen to what you are saying, but to hear in that that there are some guidelines and principles there that engage in a constructive way in order to listen to the people who are delivering the service. Chairman: Mr Jeffrey, you have heard what has been said. We will move on now to procurement. Q22 Mr Jones: Mr Jeffrey, you referred to procurement in your opening statement and I think we can describe it as a scandal frankly, the way it has been operated in the MoD for the last few years. Can I ask a few general questions and then I have a specific question after that on the Report. In table 19 on page 102, I think it shows that the Defence Procurement Agency has met its targets for 2004/05 for delivering equipment to time and on cost, which I think comes as a great surprise to many who have dealt with the Defence Procurement Agency over the years. How does that fit with the Major Projects Report 2003 and other Major Project Reports which have actually identified slippages and increased costs? Mr Jeffrey: I recognise what you say about the Major Projects Report and in that sense there is still a significant programme of slippage and cost increase which we are trying to address. I am just trying to remind myself of the target as expressed on page 100. If you look at the beginning of the document where on page 14 there are the main objectives, objective 3 is: "Build for the future - develop and deliver to time and cost targets the military capability for the future", et cetera, so it is acknowledged there that several of these targets were not met and the overall assessment is that that objective was only partly met, so I do not think there is any sense in which the Department is asserting that in the procurement area we are meeting all of our targets. Q23 Mr Jones: How does that tally with page 102 then where it does say it in the final bit in table 19? Mr Jeffrey: I think the reason for the disparity is that the main PSA targets are supplemented by a set of key targets which measure success in the procurement of equipment projects. If you look at the key targets, which are the ones listed on page 102, the DPA met five of six of these, which was an improvement on what they had done previously, but certainly, if you step back from that and look at the PSA target as a whole, the position is, I think, more accurately captured at the beginning of the document in the way that I have described. Q24 Mr Jones: But is it not that type of transparency that we actually need if we are going to have confidence that the DPA is actually improving? Personally, I would abolish it, but, if people have faith in it, should we not actually have clearer understandings of what those targets are? Mr Jeffrey: It may be that they could be clarified, but certainly they are measuring different things. The main point I do want to get across to you, Mr Jones, is that this is not an area in which there is any degree of complacency at all. Q25 Mr Jones: Well, I will come to that in a minute. You have already mentioned the National Audit Office Report in terms of major projects and I think it is something like £5 billion, if you take the 2003 Report and the 2004 Report. In 2003, it was £3.1 billion and I think the increase in costs in the 2004 Report was 1.7. What impact has that actually had on procurement in terms of being able to afford to procure other equipment? Has it actually had a knock-on impact? Mr Jeffrey: The last NAO Report, which was published shortly before Christmas, on major projects showed that there was within the year that it covered some further slippage in time of the selection of the biggest projects that the NAO look at, but that over that period there had in fact been a reduction of about £600 million, I think, or £500 million. Mr Woolley: And that reflects the figure in the 2004/05 column. Q26 Mr Jones: I will come on to that in a minute. Is that the £699 million? Mr Woolley: The coverage of the DPA's key targets is rather wider than the Major Projects Reports, so they are not directly comparable, but I think it is the case that, just as the Major Projects Report in 2005 shows a reduction in the cost forecast in year, so the wider DPA targets are reporting it in this table on page 102. Q27 Mr Jones: Yes, but is it not a fact that the reason for the decrease of £699 million is because of the reduction in the amount of equipment that has been ordered? Is that the reason why it is down? Mr Jeffrey: There is a significant element of it which can be described in that way, though it is not by any means the whole story, but it is a much better position ---- Q28 Mr Jones: It is bound to be if you are buying less of something. Mr Jeffrey: ---- than in previous reports. Q29 Mr Jones: I know, Mr Jeffrey, you have not been in post for very long, but certainly the previous Committee and other people look at this, so do you worry about it? I think you have already raised it as an issue yourself, not just in terms of delivering the equipment to our Armed Forces which they need, but also as value for money to the taxpayer. It is a pretty shoddy history. In terms of how it is presented here, is it not important, and I know it is very difficult for the MoD ever to do this, that they admit that they have ever got anything wrong? Is it not about time that you actually in the MoD just said, "Hands up, we got things wrong and this is what we're going to do to put things right"? It never, ever does that in this area, but there are always reasons, and I will come on to specific examples in a minute. Would it not be a new breath of fresh air if you, as the new Permanent Under Secretary of State, said to your civil servants, "Come on, if you do something wrong, open up to it"? Mr Jeffrey: I think there has been a readiness to acknowledge that acquisition of large equipment has not been handled well in the past and part of the reality of it which I inherited is that there are a significant number of projects from quite a number of years ago which have gone wrong from the outset and continue to cause difficulties, and we may even come on to some of those in the course of this hearing. However, my sense of it generally is that there have been some improvements in the way in which acquisition is undertaken. These Smart acquisition principles are a sensible way to conduct it and the question is whether they actually have been followed through into practice sufficiently, and one of the things I will want to pay a lot of attention to is the extent to which the DPA in particular has the staff it needs, the training it needs and the skills it needs to follow these mass acquisition principles through. The thinking behind ---- Q30 Mr Jones: Surely you are not going to expand Abbey Wood, are you? Please do not. Mr Jeffrey: I was not necessarily talking about expansion. Q31 Mr Jones: Good! Mr Jeffrey: The significance of the Defence Industrial Strategy is that it acknowledges that both the industry and the Government need to improve their performance in this area. We have made it very clear, and I think that is certainly something that we will address and the current Defence Procurement Minister attaches a lot of importance to, that we are also up for serious and significant improvement in the way in which procurement is managed by the Department, but, as part of the follow-through to the Defence Industrial Strategy, there is a project which I instituted myself shortly after I arrived in which we will be looking hard at the way in which the procurement function operates, how it is structured, how the processes work, and looking at ways in which we can generally make it work better, and I am utterly committed to that. Equally, I am not in any sense diminishing the progress which has been made because it is clear to me that in the last few years we have got ourselves into a significantly better position than we were. It is not nearly good enough and I am not meeting anyone who is trying to pretend to me that it is. Q32 Mr Jones: If I can refer to a specific example, it is on page 190 to 195 on losses. This is the issue around the Landing Ship Dock (Auxiliary) Programme which I think refers to a potential payment of £63 million to BAE Systems and Swan Hunter. First of all, why are the MoD picking that tab up and, secondly, are they the only extra costs that have been incurred on this programme? Mr Jeffrey: That is quite a good example of what I was talking about. It is a programme where the contract was originally awarded in 2000 to Swan Hunter who were building two of these ships and BAE Systems were then brought in to build the other two. It is undoubtedly a project which has had problems arising from the fact, which I think Swan Hunter themselves would acknowledge, that the design that they intended to apply for these ships was less mature than had been assumed. The increases in cost are partly of course reflected in this Report, but there are broadly three elements. In December 2004 there was a renegotiation of the contract which allowed for up to 84.5 million more for Swan Hunter than had previously been ---- Q33 Mr Jones: What was the figure again? Mr Jeffrey: It is £84.5 million. There was also, and this features also in the Report as something notified in a previous year, £63.8 million to BAES arising from the fact that there was slippage in the Swan Hunter part of the operation. These two elements together, there should be added to them £62 million in addition to enable Swan Hunter to pass design information to BAES, so it is classically one of these projects where the costs have escalated. Q34 Mr Jones: I am just quickly trying to do my figures. What is the actual total figure? Mr Jeffrey: The total value of the contract value now for Swan Hunter is £309 million and for BAE Systems £176 million. That is the history, but I have also to say, as the Committee may know, that there are discussions going on now about what would be required to completely deliver this project. I really would prefer not to say any more about that because one gets into commercially sensitive territory. Q35 Mr Jones: So in terms of Swan Hunter's two vessels, looking at a parliamentary answer, they were contracted for £148 million, so they are now costing to date £309 million, but are you saying there are potentially further costs on top of that? Mr Jeffrey: Potentially. Q36 Mr Jones: Do they relate to the actual ongoing works or is it work that has to be put right once they actually come back in for refit for the future? Mr Jeffrey: If you will forgive me, Mr Jones, I think that is where I start to become anxious about the commercial confidentiality of the discussions that are going on now. This is a project with a chequered and difficult history, but it is also the case that what we are doing now is having discussions with both companies about whether there is a way forward that would enable these four ships, which are potentially of considerable value to the Navy and which are quite close to being completed, to be delivered in a fashion which represents the best value for money to the taxpayer that can be achieved at this stage. Q37 Mr Jones: This is not value for money at all, is it? The fact of the matter is that the two Swan ships have still not been delivered. I think Mounts Bay has already been delivered to the Navy and you are now saying that potentially, and I accept that it is history, the figures you have given, which amount to nearly £1/2 billion, it could actually be more than this for four ships? Mr Jeffrey: It could. Q38 Mr Jones: Can I ask then why it is that the MoD picked up the liabilities for this and did not actually say to Swan Hunter, who are the lead yard, so there is a contractual obligation for them to provide the things to BAE Systems, but why did they not pick up the tab for this because we have seen here an open-ended cheque book, have we not? Mr Jeffrey: Well, I think that goes back, does it not, to the nature of the original contract and the reality of the situation as the Department was presented with it by the company over a year ago? Q39 Mr Jones: But did the original contract more or less give Swan Hunter an open-ended cheque book? I know these ships, I have been on one of them, and I know the ships quite well, and they are not sophisticated vessels, are they, in naval warship terms? Mr Jeffrey: Well, you have got the advantage over me there because I have not been on one of them, so I do not know quite how sophisticated they are. Q40 Mr Jones: But why was it not capped? Was that the original contract, that, if cost overruns came in, we just basically keep bailing them out with taxpayers' money, which is what we seem to have continued to do? Mr Woolley: I think we reached a stage where we had to make a judgment between starting all over again and continuing and paying more and we had to judge what in those circumstances was likely to prove best value for money, and the judgment was to continue. Q41 Mr Jones: I do not want you to give me the figure, but have you actually made any projection in terms of what the actual ultimate cost is going to be? Is there going to be a time when you just say, "I'm sorry" even at this late stage? Mr Woolley: Well, at any stage we have to reach a judgment as to what the options are that are open to us when a company comes to us and says that it is unable to complete within the previously agreed price. Chairman: We will now move on to Defence Logistics and PSA Target 7, David Borrow. Mr Borrow: Chairman, I think most of the points I was going to raise have already been dealt with in questions. Chairman: John Smith, question 9. Q42 John Smith: I will go on to question 9, although I think some of it has been covered and so it may warrant some fairly quick responses. At page 95 of the report it states that over £400m, nearly half a billion pounds, worth of savings have been achieved in operating costs during one year, which needs to be validated, according to the report. The first question is, has that figure been validated in terms of one year's savings of £400m; how were these savings achieved and how is the money saved going to be utilised? Mr Woolley: I believe that they have been validated now. Mr Jeffrey: In relation to how they have been achieved, I can certainly give some examples of the kinds of projects that have led to the savings. The Tornado Future Support Programme has been simplified and that is yielding over £50m a year of savings. There has also been work on the Defence Information Infrastructure, which in 2004/05 delivered savings of about £30m through a mix of more efficient management and improved IT systems. The Harrier Jump Programme - again this is a better way of approaching the support of Harriers - was established in 2004 and is on course to deliver cash savings of some £44m over the next four years. These are all examples but my sense, certainly from my discussions with the DLO, is that there are many others where they are just looking at better ways of doing the work. Q43 John Smith: These figures have been validated, the £44m saving on the Harrier Jump Programme, for example, or are they future savings? Mr Jeffrey: In the Harrier case it is the projected saving over four years, but I think the specific question of how validated are these figures - and in particular the £400m on page 95 of the report - we probably ought to offer a note on that and address the question of validation across the board. Chairman: If you could do that, please. Q44 John Smith: Where is this saving being utilised now? Is it going back into the Treasury? Mr Woolley: All efficiency savings are conceptually recycled within the defence budget. We do not hand anything over to the Treasury; we have a spending review settlement that covers three years, so the more efficient we are in terms of saving money the more resource we have for other purposes. Of course, when we do our planning we plan on the basis that we will indeed achieve these efficiency savings. So it is not as if we are suddenly presented with windfall savings of resources that we can scratch our heads and say, "What are we going to do with this?" They will have been factored into our planning process from the start and therefore they contribute towards all the areas in which we are looking to increase defence capability and other improvements to defence. In some cases the savings will be needed in the DLO itself to cope with additional requirements placed on the DLO. For example, we are currently in a phase whereby we are introducing into service Typhoon, as you know, and when the Apache Attack Helicopter and new, sophisticated equipment of that sort are introduced into service they often generate a spike in logistics for costs that have to be covered. So it is not necessarily the case that the resources that we are giving to the DLO are reducing in anything like the proportion that the efficiencies being achieved in the DLO might suggest because, as I say, there is not cost growth in the DLO but new requirements that the DLO has to meet and some of the savings have to cover those increases. Q45 John Smith: But £400m has been saved in operating costs? Mr Woolley: Indeed. Some of it may represent output efficiencies, that is to say where there is not actually a cash benefit but where the assessment is that what is being produced for that money is greater. Q46 John Smith: A naïve question. £400m in one year is a huge figure. Why was this not done before? Why was there not the scope to make such savings in previous years? Mr Woolley: I think we have always sought to be as efficient as we can. I think that the PSA Target system and indeed following on from the spending review 2002 PSA Target, the Gershon Efficiency Target has perhaps acted as something of a catalyst. I think the creation of the DLO itself, when the DLO was created as a joint service organisation, committed itself to making over a period of five or six years a 20 per cent reduction in output costs. So it has set itself that target, and I think when you set yourself these demanding targets as an organisation you are more likely to deliver them than if you had not had that same target setting frame of mind before. John Smith: Half a billion is an enormous figure delivered as a saving within an organisation, according to the accounts, in one year. It does beg the question, what capacity was there, or is there, within the organisation to be able to save the Logistics ten per cent of its budget in one year. Q47 Chairman: In the report it says that it is the intention to co-locate the DLO Board with the DPA Executive Board at the earliest opportunity. Is that a precursor to merging the Defence Procurement Agency and the Defence Logistics Organisation? Mr Jeffrey: It is not; it is what seems a sensible management step to bring the two organisations even closer together than they already are. Q48 Chairman: But do you not think that that will come? Mr Jeffrey: That is one of the issues, as I mentioned earlier, we need to address. I am struck, again as an early impression, by the fact that the two organisations do work closely together; the Chief of Defence Procurement and the Chief of Defence Logistics are in constant very close contact, as are their senior teams. There are a number of major projects, where we increasingly think in through-life terms, where the project team in effect accounts to both organisations. So there is a question about how far along the path towards integration one goes, if not actual merger. That issue about what the most appropriate and effective structure for the future, post the defence industrial strategy, would be is the one that we are looking at over the next few months. Q49 Chairman: One is an agency and one is not an agency. Mr Jeffrey: That is true. Q50 Chairman: How has the treatment of agencies in the Ministry of Defence changed since they were first introduced? Mr Jeffrey: Certainly as a general observation, because we are now some years away from Next Steps and the initial creation of a large number of agencies, the distinction between organisations that happen to be Next Step Agencies and freestanding operations like the DLO is probably less pronounced than it was in the past. What we have certainly been doing in the Department, as I am now beginning to understand it, Defence Agencies have always tended to be internal agencies providing services inside the organisation more than traditional service providing organisations looking outwards. There has undoubtedly been a measure of rationalisation over the period in a number of agencies and the kind of tasks that they do. That, I think, is a continuing process and it has undoubtedly been a very complicated picture. I do not know if that answers the thrust of your question, Chairman? Q51 Chairman: Does the MoD keep these agencies at arm's length or are they internal? You suggested that they were most internal, I think. Mr Jeffrey: Most of them - but by no means all of them - are providing services inside the Ministry, and in that sense they differ from an agency like the Prisons Agency, for example, which provides a service for the community as a whole. Q52 Chairman: So if you have an agency who appoints the Chief Executive? Mr Jeffrey: They vary and it depends on the significance of the agency. I am not suggesting that the basics of agency status have somehow been changed; essentially each of these agencies will have a framework agreement and a figure within the Ministry giving the answer and all the business that surrounds Next Step Agencies. Mr Woolley: I think what has happened is that the pendulum has slightly swung back from a very decentralised model for managing the Ministry of Defence, which was introduced with our new management strategy in the early to mid-90s, and which was very successful in changing the culture in many ways in terms of devolving financial responsibility, making people away from the Ministry of Defence Head Office aware of the concept of targets and aware of the concept of financial management and so on. But I think that in recent years we have begun to look at whether the overheads that go with a very decentralised structure of having lots of budgetary layers, for example - which although it has management benefits it also creates a certain amount of overhead - whether those are justified in all cases; and I think that approach has also been extended to our agencies where, for example, some of the very small agencies just no longer seem to be of a sufficient size to justify agency status with some of the requirements that go with agency status, such as the requirement to produce agency accounts, and so on. So there has been some rationalisation of agencies in recent years reflecting that more general reassessment of whether the decentralising tendency in the Department went perhaps a little too far in the 1990s. Q53 Chairman: Do you expect that to happen further? Mr Jeffrey: I certainly would not be surprised if the number of agencies, which has been falling in recent years, continues to fall, but each case needs to be looked at properly on its own merits. Chairman: One of the agencies is the Dstl, which you have already mentioned, Mr Jeffrey. Robert Key. Q54 Robert Key: I think that the statement you have just made, both of you really, about the future of the agencies is very significant indeed, and I would like to turn to Annex E of the Annual Report and Accounts, which is defence agency performance. Dstl is a case in point because if we look at Dstl, if we look at the key targets set and met, in Dstl in both 2003/04 and 2004/05 100 per cent were met, and Dstl is a hugely successful organisation undergoing some fairly major structural changes, co-locating a lot of activities at Porton Down. On the other hand, if you look at the Defence Storage and Distribution Agency, you find that in 2003/04 there were 33 per cent of targets met but within one year they had climbed to 100 per cent. Look at the RAF Training Group, you find there that in 2003/04 it was 71 per cent targets met and in 2004/05 down to 33 per cent. Then Service Children's Education, 2003/04 at 31 per cent and 2004/05 up to 52 per cent, and yet we know that that agency is doing very well when compared in terms of delivery for its children with local authority schools. What I am really saying is that given this mixed picture how can you assess whether the performance of Defence Agencies overall is improving? Mr Jeffrey: I think it is quite hard to assess it. I was struck myself, when I was preparing for this hearing, by the sheer variety and the extent to which there is a variety in performance. There is one overall measurement which may or may not be significant, but if you look at the total number of key targets that the agencies have, it was 72 per cent in 2003/04, it was 78 per cent in 2004/05. Assuming that there has not been some weakening in the standards of the targets that are set or the demanding-ness of these targets, that look like progress in the right direction. But I readily accept that there is a wide variety among the agencies. To some extent I guess - and it is still only a guess - that this just reflects the variety of the tasks they have, the operating conditions they face, how demanding the targets were in the first place. If the Committee would like a fuller note on the explanation of the targets I am sure we could provide one. Q55 Robert Key: I would not wish to burden you any further with this line because I think we probably agree it is a strange sort of area that we are in. I would much rather hear from you that you have some plans to review the way in which key targets for Defence Agencies are set because this huge variety says to me that there is something wrong with the machinery here rather than the delivery. Is there a better way of measuring the performance of these Defence Agencies? Mr Jeffrey: There may be and I am certainly more than prepared to look at that. I think one has to bear in mind, though, that they are doing quite remarkably different things; the biggest of them are massively bigger than the smallest of them and, as Trevor Woolley was saying, we are looking seriously at whether some of the smaller ones warrant all the paraphernalia that goes with agency status. It may be that this is just a natural reflection of the variety of the businesses that we are talking about, but I am more than prepared to have a look at that. Mr Woolley: I think it is also worth making the point that most of these targets are, as it were, binary - you either meet them or you do not meet them, and so you either get the tick or you do not. But you may only just miss them in once case or you may have an agency that just misses three targets whereas another agency misses one target by quite a lot, and that will not be reflected in this presentation. Nonetheless, the principle that there should be targets that we set agencies is one, I think, that we strongly adhere to. Q56 John Smith: Mr Chairman, it is not missing or hitting the targets: it is the erratic nature of the figures for the year. RAF Training Group, in one year 71 per cent of its targets were met 2003/04; in the following year it is down to 33 per cent. If I ran an organisation which saw variation like that within its departments, albeit the MoD is quite some organisation, that would be more of a cause for concern than a slight deterioration in performance because at least you would be more confident about being able to address that if it were consistent. It is the erratic nature of these results, as Mr Key pointed out, that is worrying. Mr Jeffrey: I take the sense of that and I hope what I said earlier implied that. I would quite like to look under the surface of this more than I have. I suspect the reason is the one that Trevor Woolley gives, which is that if a target is expressed in terms that you either meet or you do not meet, and one year a few of them switch the wrong side of that line that can have quite a significant impact on the top line percentages. But I would like to look at it more closely than I have done so far. Linda Gilroy: In looking at it as well, the British Forces Post Office went down from 11 targets to six targets; the Defence Estates went up from 11 to 15 and the Defence Geographic and Imagery Intelligence Agency from eight to 15. What prompts them to have such major changes in the number of targets might be a useful thing to look at. Chairman: That is progress. Robert Key, moving on now to QinetiQ. Q57 Robert Key: On January 12 the Secretary of State announced the flotation. I admit that I was one of those who was opposed to the privatisation of DARA, the break-up into Dstl and QinetiQ, but I know that it has been a great success, the workforce are very happy, they are re-motivated, as far as I can see, and there are a lot of benefits that have come from it. Could you tell us what is the likely date for the flotation? Mr Woolley: The date will be in February; I cannot give you a specific date but it will be in February. Q58 Robert Key: What will be the size of the Ministry of Defence's stake? Mr Woolley: Again, I am afraid I cannot disclose that until the prospectus has been published, and it will be published tomorrow. Q59 Robert Key: That is fair enough, that is good. Could I turn to something that is simply honest seeker after truth here, trying to understand the difference between the special share held by the Ministry of Defence and the "golden share"? What is the difference between these two because it seems to me that they are both saying the same thing? "The special shareholder," I read, "has the right to require the company to implement and maintain a regime which protects the defence and security interests of the nation." That is the same for both the special share and the preferential golden share. Mr Woolley: On flotation we will simply have a single special share and that will be designed to protect our security by giving us the ability to prevent the purchase of a significant stake in the company by any foreign body that we regarded as incompatible with our security. Q60 Robert Key: Thank you. Finally, could I ask about QinetiQ's role in the new Defence Industrial Strategy because clearly it is going to have a very important role in that, and when the Secretary of State launched the strategy, after his statement, during the questioning of the Secretary of State, I raised the interesting point that there is a difficulty with intellectual property here, on the one hand looking towards America and on the other hand, through the DIS, looking more towards Europe. QinetiQ is expanding into the United States and they have taken over Westar and Foster-Miller, and that is very good, but if they are also going to be expanding into Europe what about the intellectual property implication of this? Is it not going to be impossible for companies like QinetiQ to, on the one hand, be expanding into Europe and on the other hand have so much intellectual property bound up in North America? Mr Woolley: Is your concern in terms of the risk of exporting our intellectual property because in that regard clearly QinetiQ, like any other company, is subject to export and security controls? Q61 Robert Key: I am talking about the government to government relations and our special relations with the United States here and whether they will be at risk if the United States' government feels that we are moving too close to other companies in Europe, with which they are not in such accord as they are with us? Mr Woolley: It is obviously something that the government is very conscious of. I do not think in this respect QinetiQ is different from any other defence department; I think the same principles apply. Clearly there have been and will continue to be very strong arrangements in place to ensure that any information provided in confidence and for a specific purpose from the American government to the UK government or one of its suppliers is protected if that is what is required. Q62 Robert Key: Forgive me, Chairman, QinetiQ is different precisely because of the golden share and the fact that the government can actually stop QinetiQ from doing something it might wish to do, and therefore there is a government veto on QinetiQ's activities, is there not? Mr Woolley: What there is is a compliance regime that is in place and that is designed to ensure that QinetiQ does not get into a situation in which there is a conflict of interests between its role as an adviser to the Ministry of Defence in the procurement process and a potential role as a supplier to the Ministry of Defence. Clearly one of the roles of the former Defence Evaluation and Research Agency, as well as providing research to the Ministry of Defence, was to do analysis, test and evaluation indeed of products of other companies' ideas, and while much of that role is continued in Dstl it is also, to some extent, performed now by QinetiQ. Obviously there is potential for conflict of interest here, and what has been in operation ever since QinetiQ was vested as a private company is a regime which requires QinetiQ to seek Ministry of Defence clearance before it embarks on contracts that might give rise to a conflict of interest, such that the Ministry of Defence can be assured that arrangements are put in place to ensure that no such conflict of interest will arise, and we in the Ministry of Defence regard that as very important and QinetiQ are entirely comfortable that that regime will continue to operate in the future. Mr Jeffrey: I do not think it is our view that although it puts it in a different position from other companies it inhibits them from doing defence business in the way that we all hope they will do. Robert Key: Thank you. I wish QinetiQ well and we watch this space. Q63 John Smith: Mr Chairman, on QinetiQ, just moving on to a related subject. QinetiQ, as I understand it, are currently bidding for some very large defence contracts and there is this change taking place vis-à-vis the ownership and the nature of the government stake in the company. How does the Department guarantee transparency when evaluating bids that companies like QinetiQ are involved in to prevent other bidders for work, given that the preparation costs of submitting for large-scale projects are quite large now? How does the MoD insure itself against claims from unsuccessful bidders that they were treated fairly and on a level playing field, given these links with some of the companies involved in the bids? Do you follow that? Transparency in evaluation of bid proposals without giving away commercial confidentiality, to prevent future legal action. Mr Woolley: Are you asking in the sense that because QinetiQ is partly owned by the Ministry of Defence the Ministry of Defence might be biased? Q64 John Smith: How do you ensure that that claim cannot be made? What processes and procedures exist within the evaluation of bids to ensure that those sorts of claims have no substance? Mr Woolley: First of all, within the Department we have a clear understanding that in relation to QinetiQ there is a separate shareholder interest from a customer interest. I represent the shareholder interest; I am not myself engaged in the process of the awarding of contracts, which is what the customers, such as the Research Acquisition Organisation, the Defence Procurement Agency and other customers within the Department, that is their role, and they are quite clear that they must assess competitive bids purely on the basis of bids that are put forward by the companies and not take into account what the impact of awarding or not awarding the contract might be for the shareholder interest in QinetiQ. So my teams are not involved in any way in discussions about the award of contracts to QinetiQ or not QinetiQ, so to the outcome of competitions in which QinetiQ might be involved. Their duty is to award the contracts on the basis of a best value for money bid and they have customers have their budgets, and naturally as customers they will want the best value for money as it affects their budget, even though there might be a different impact indirectly in terms of the shareholding value that the Ministry of Defence has. Q65 John Smith: But do you recognise that there is an increasing risk as you enter into more and larger longer-term PFIs or partnering agreements that companies may use the courts to challenge awards that have been made, or is that not something you are worried about? Mr Woolley: We are always concerned about any legal challenge to the basis for which a contract was placed and we have very clear rules; we have very clear evaluation processes that are well-documented; we have a very clear approvals process; and, as far as possible, only a very small number of people evaluating bids actually know which bid is from which company or which consortium so we will give, if you like, code names to the various consortia so that those doing the evaluation are judging between the code names without knowing which is which where it is particularly sensitive. So I think we have robust arrangements in place. Q66 Chairman: Mr Woolley, a quick question about QinetiQ. You are the shareholder, will you get the proceeds of sale or will the Treasury snaffle them? Mr Woolley: I personally, sadly, will not get the proceeds! The proceeds will be split between the Ministry of Defence and the Treasury in a proportion that we cannot yet finalise until we know what the size of the proceeds are. Q67 Robert Key: Chairman, how could that possibly work? How can you not decide in advance what the proportions will be? I find that an extraordinary proposition. Mr Woolley: As I say, until the flotation takes place we will not know precisely how much the proceeds will be. Q68 Chairman: You will not know how much the proceeds will be but are you being then promised a set figure by the Treasury as opposed to a proportion of the proceeds? Mr Woolley: We have been given an indication by the Treasury of the sort of figure that we might be allowed to retain, but it has not been finalised. Q69 Robert Key: Chairman, may I pursue that for a moment, please? In the Annual Report and Accounts on page 166 it gives some figures here about the amount of money which has been apportioned from QinetiQ in various ways, and it says: "Loans repaid by QinetiQ and subsidiary undertakings, representing the partial original asset value of the business since its formation amounted to £104m. The cash received on the part disposal of the shares," etc. Where did that money go? How was that apportioned? Mr Woolley: That has all gone to the Ministry of Defence. Since 2002 the Ministry of Defence has received, I believe, £250 million in various ways from the QinetiQ process. Q70 Robert Key: Did any of it go to the Treasury? Mr Woolley: None of that went to the Treasury. Q71 Robert Key: Can we therefore suppose that 100 per cent will come to the Ministry of Defence once again? Mr Woolley: We have not concluded an agreement with the Treasury on this. Q72 Robert Key: How can we help! Mr Jeffrey: I think you are doing so, actually! Q73 Chairman: A question about some of the other shareholdings that the Ministry of Defence has. International Military Services Limited, the value of the investment has been written down to nil. When was that written down to nil, do you remember? Mr Jeffrey: This is a long and complicated story. International Military Services Limited goes back to the early 1960s. It was originally set up as a private limited company by the Crown Agents; it was then transferred to the MoD in 1979. Its purpose was to allow the Department to sell equipment and munitions overseas, but it ceased trading in 1991 following a change of government policy and involvement of overseas military sales. So we would have wound it up years ago but there is an outstanding appeal, legal claim in respect of the equipment due to be supplied to Iran prior to 1979, which is still before the Arbitration Tribunal in the Hague, and we are not yet in a position finally to wind up this company. Q74 Chairman: I have one other question about golden shares. My expectation was that it might be the Ministry of Defence that owned the golden share in Rolls-Royce, but is that actually the DTI because I cannot find Rolls Royce and the other investments on page 167. Mr Jeffrey: I have a feeling that it is the DTI but I think we ought to check and confirm. Chairman: If you could, please. Brian Jenkins. Q75 Mr Jenkins: Thank you, Chairman. Good morning, Mr Jeffrey. It has been a long time sitting here before I get the chance to have a question. The reason I am going to take you to the book is because many of the questions have been asked this late on, but there are one or two items I want to flesh out a little bit. On page 13 in the Service Agreement we say that in the RAF that 3.9 per cent, that is 2000 people in the RAF, go over their time, and further on I find the type of personnel that go over their time; but it does not mention aircrew, it does not mention pilots and it does not mention maintenance staff, especially fast jet maintenance staff. If you do not have the details to date could you give me a full list of the personnel that do go over or breach the Harmony Guidelines because the term "pinch point" occurs on that type of staff? Mr Jeffrey: I do not think I have a detailed answer to the question about the RAF. As we were saying earlier in the session, both the RAF and the Army, for reasons that are much as anything to do with existing commitments --- Q76 Mr Jenkins: Let me know the answer, please. Mr Jeffrey: We will give you that. Q77 Mr Jenkins: On page 14 on the "Not met" on "Objective: Build for the future" we notice that the slippage is getting better now on our new projects. But the first question I ask is, are we actually better at targeting and developing with the producer the time needed to produce the product or are we better now at lengthening the time to take the slippage into consideration? Mr Jeffrey: They key to this and to avoiding slippage is clearly to have a good realistic plan in the first place and the most significant stage, in my view, in these big procurements is the earlier stage where one does what one can to reduce this. Q78 Mr Jenkins: We are perfectly au fait with the gateway system and the reasons for it. If we are now saying that we are better at targeting and we not just lengthening the time taken, I will accept that we are not going to see slippage in the future or the slippage will be reduced. One of the things I am surprised Mr Jones let go was the projects where we are now £5 billion estimated overrun on the actual target. What effect is this going to have for you on your future ability to manage your programme? Mr Jeffrey: It has a very significant effect; it is something that we clearly need to take into account. Q79 Mr Jenkins: Could you do so, please, and could you give me a note on what you see as the effects being on your procurement programme, therefore the slippage and time for each part of it in the next few years. Mr Jeffrey: We can certainly try to produce that. Q80 Mr Jenkins: Just keep us of informed of the way you are thinking now and what we can have expectations for in the future, and if we have it in black and white I would be very grateful. If I move on to the value for money, we are going to reduce the costs for military training for recruits by six per cent and I have seen now that we have scrapped the target entirely. What target is now in place? Mr Jeffrey: It is not that we have scrapped it; it is that there have been some changes which mean that it can no longer be satisfactorily measured, and we guessed that it would not have been achieved. Do we have another target? Mr Woolley: No, no replacement target. Q81 Mr Jenkins: So we had a target and you could not meet that target and so you have not adjusted the target, you have scrapped it. Mr Woolley: As Mr Jeffrey says, the fact is that it is no longer really possible to measure performance against that target in the way that that was originally envisaged, because the target was very much related to measuring training on a single service basis and because of the creation of more joint service establishments it is not really possible to make the measure on a single service basis any more. Q82 Mr Jenkins: So you are telling me that no one now can work out that if I have three streams of individual recruits and I put them into a mixed facility and then I bring them back out at the end of the mixed facility, I cannot cost that process? Are you telling me you cannot do it, or it cannot be done? Mr Woolley: What we are saying is that it is no longer possible to attribute the costs of joint establishments to single service throughput, and as the measure was on a single service basis you cannot effectively measure the cost on a single service basis. Q83 Mr Jenkins: So where do you attribute the cost of this multi-service unit to, then? Mr Woolley: Where do we attribute? Q84 Mr Jenkins: If you have a multi-service unit where do you attribute the costs? To training? Mr Woolley: Indeed. Q85 Mr Jenkins: So part of this also is training and if you divide the amount of the cost of training by the number going through you get a cost per head, do you not? Mr Woolley: You could get a cost per head of all Armed Service personnel. What we cannot do is have a cost per head for a soldier or a sailor or an airman, which is the way the target was originally expressed. Q86 Mr Jenkins: It says here, "Reduce the per capita cost of successfully training a military recruit by an average of six per cent" and that was your target. It does not say an RAF or an Army or a Royal Marine recruit, does it? Mr Woolley: But the measure is on a single service basis; the individual measures underline this target. Q87 Mr Jenkins: But the point is now you have no target at all rather than a military recruit target, do you? Mr Woolley: Correct. Q88 Mr Jenkins: Do you find that alarming or are you quite happy to have no target to work to? Mr Woolley: There are clearly potentially almost an infinite range of targets that we could work towards, and as far as what goes into the PSA we have agreed with the Treasury that this particular target should no longer feature as a PSA target because of the nature and the change of the policy. Q89 Mr Jenkins: I am going to get no further on that one, obviously I will have to talk to a Minister about why they are quite happy to have no targets for public expenditure on this sort of activity. If I move on to the next one, we are going to reduce our expenditure and the cost of the DLO by April 2006 by 14 per cent, but I do not have a breakdown here. Are we reducing the stockholding, reducing the service times or are we reducing or increasing the efficiency saving in the running of the establishment? What is the main ingredient in the reduction in costs in this area? Mr Jeffrey: It is principally the performance and efficiency that we were discussing earlier in this hearing, which enable costs to be reduced. Q90 Mr Jenkins: So we are increasing the efficiency in the running of it? It is just not stock? Mr Jeffrey: I do not believe so. Mr Woolley: In some cases reducing stock might be part of the efficiency saving. Q91 Mr Jenkins: Yes, I know, and last time we asked you, you had a very good trick, when you wrote down the amount of stock I think some stuff went down from about £20 when we bought it in to a value of pennies, and you said, "Look we have reduced our stock." That is why I am always a bit wary about looking at savings in value of stock. Or should we classify stock separately to the actual manning costs and the look at the increased efficiency of the manning costs? Mr Woolley: What we would score, as it were, to the saving is not the value of the stock as such but the cost of capital on the value of the stock, and that is what would contribute towards a saving in budgetary terms. Q92 Mr Jenkins: The next item is MoD main buildings. When we modernised it we got a 12 per cent reduction in Head Office and other management costs. Are all these staff functions that were originally in the Head Office still carried out in the main building? The reason I ask you is because we did a PFI on one office and because it was too small we had to move some of the staff out to peripheral offices and then we said that the cost of running the main office had fallen. Mr Jeffrey: Broadly speaking, my understanding is that we have much the same staff in the main building as we had before. Certainly my experience in other fields is that when you modernise buildings like this there are significant savings to be had simply because you use the space more effectively than you might have done in an older building. Q93 Mr Jenkins: So all the functions are still carried out in there? Yes? Thank you. If we turn to page 95 in the report, a simple question: at the bottom of that page on logistics we see that we have £21.6m cash receipts achieved from the sale of surplus equipment. Did we buy any surplus equipment back this year? Mr Woolley: Did we buy any surplus equipment back this year? Q94 Mr Jenkins: Yes. Mr Woolley: Not that I am aware of. Q95 Mr Jenkins: Can you check please? We certainly did not in the previous years. On page 97, paragraph 210, as we look down to the "Lean" engineering and support facilities for the Tornado we see that in partnership with Rolls-Royce we have produced cost savings of £88m over four years. This is the year 2004/2005 accounts, so the previous four years. When did they start at Marham "Lean" engineering, please, what year? Mr Jeffrey: I think this is the Tornado future support improvement and efficiency that I mentioned earlier. Q96 Mr Jenkins: It says, "Produced cost savings of £88m over four years". So this is an expected result and not an actually achieved result? Mr Jeffrey: This is a programme on which work began some years ago, in May 2000, to simplify the way in which Tornado support arrangements work. It is partly already producing savings on this sort and partly still to do so. Q97 Mr Jenkins: I do not understand. The figure here says it has produced cost savings of £88m and I take that to be a fact. I do not understand it £88m actually saved but a projection of £88m. Which is to be, is it £88m saved or is it £88m projected savings? Mr Jeffrey: These are four years in the past since this was produced. Q98 Mr Jenkins: So I take it has saved £88m. Could you check on that and let us know? Mr Jeffrey: Yes, we will. Q99 Mr Jenkins: I will go to a much more complicated part, unfortunately. Page 139, cost of operations. The figures on your schedule, once again - it always confuses me when figures do not add up - do not add up, and they are qualified in the next page over. Is it my understanding here that we have a baseline of expenditure and we have an operational cost? And whilst we are on operational costs the Treasury pick up all the extra funding that comes in over and above our baseline. On operations, if we crash a vehicle it is replaced, but if we wear it out it is not and that has to come out of the baseline cost. An example would be, if I had a gun the ammunition was paid for out of the contingency fund to fight the war, but if I wore the gun out and I brought it back they would not replace it; the replacement and refurbishment would have to come out of my base budget, is that right? Mr Woolley: To the extent that we are able to capture the net additional costs incurred by going on operations then we can and do claim that back from the Treasury. So in the example you quote, if we could demonstrate that a gun that had been used on operations had needed to be replaced sooner or it worn out faster as a result of that operation than it would otherwise have done, then indeed we score that to the cost of the operation. Mr Jenkins: Page 194, please. The third item down there is a loss of £65m being incurred following the impairment of an operational building. Q100 Chairman: That is notified in prior years, so presumably it has appeared in these accounts before? Mr Jeffrey: Yes, it has. Q101 Mr Jenkins: £65m. We lost a building or it has been impaired in some way or fashion. Can you tell us why, or if you cannot tell us now can you give us a note on it? Mr Woolley: This is a building at the Atomic Warfare Establishment that was unable to meet the requirement after it was built for which it was designed. No other use for the building could be identified and therefore it had to be written-off. Q102 Mr Jenkins: Could you give us a note on that as well? The one that Mr Jones has asked - and I am racing through it as fast as I can - the one with regard to Swan Hunter. Could you send us a note on that, please, giving us the background in the future for that Swan Hunter project and the costs? Mr Jeffrey: Yes. Chairman: I think that will bring us to an end of this marathon session. I am most grateful to you, particularly - not meaning any disrespect to you, Mr Woolley - to you, Mr Jeffrey, for facing us so soon after you came into the Ministry of Defence and for handling so well some really quite detailed questions. There will be, almost certainly, other things about which we would like to write to you to ask for answers which, in the interests of it not getting too late this morning, we will not pursue now. We are most grateful to you for coming in front of us today. Thank you very much. |