Examination of Witnesses (Questions 40-59)
MINISTRY OF
DEFENCE
31 JANUARY 2005
Q40 Mr Steinberg: Thank you, Chair.
We as members of the Committee base our questions on the Report
that we receive and consequently we regard the reports that we
receive as a true reflection of the Department; otherwise we would
not be seeing it in the first place. We have 100% faith in the National
Audit Office anyway, so if we see something and it is written
in the Report, we accept that. I just say that to begin with.
When we looked at the Major Projects Report last year we found
that the results, if I remember rightly, were the worst ever recorded
and, following on from the line of questioning by the Chairman,
you seem to think, Sir Peter, that one year on things have improved.
But the report does not reflect that view, does it?
Sir Peter Spencer: I said it in
the context that this time last year I forecast that it would
be another bad report but the report would not be quite as bad.
So in a comparative sense it moved in the right direction.
Q41 Chairman: Could you speak up
a bit, Sir Peter?
Sir Peter Spencer: Nobody is pretending
that this is anything other than a poor and disappointing Report.
I am merely noting that the numbers are lower, both in terms of
the cost overrun in-year and the time overrun in-year.
Q42 Mr Steinberg: You look at figures
5 and 7, on pages 9 and 11, and taking page 9 first, what you
have just told us does not seem to reflect what we read in the
Report because we can see quite clearly in figure 5 that costs
have increased in-year on 11 projects and have decreased in six
projects. The ones that have increased in the 11 projects have
increased very considerably. Is that a cause for concern and do
you regard that as being progress?
Sir Peter Spencer: Yes, it is
a cause for concern; no, I do not regard that in itself as progress
other than, as I said last year, I asked the project leaders to
make sure that they took a really hard look at their programmes.
So we were expecting further bad news to come out of projects
which had not been adequately prepared, which had not been adequately
de-risked before we placed them on the main contract for demonstration
and manufacture. So these were the figures that I was expecting
to see.
Q43 Mr Steinberg: It would not be
so bad, I suppose, if one could see, like in any business, that
some things go wrong and some things go well and what you lose
on the roundabouts you gain on the swings, but in this case that
does not happen, does it? All the savings that you have made do
not, for example, cover the cost of the Nimrod MRA4, does it?
So you are making very, very small savings on six projects—and
if you read the Report it seems to indicate that that is great,
11 projects have been increased, six projects have decreased,
therefore it is running smoothly. But that is not the true reflection
when you look at it because the savings are miniscule compared
to the actual overspend.
Sir Peter Spencer: It is a statement
of fact and I agree with it.
Q44 Mr Steinberg: Yes, a statement
of fact. Why?
Sir Peter Spencer: Because these
projects were not properly de-risked and retrospectively it is
an extremely difficult thing to do to predict where they are going
to run into problems, and, as I have said previously, this is
a long process with long lead times to turn the projects around
in terms of the problems you will see reflected in this Report.
Q45 Mr Steinberg: Figure 5 is bad
enough in terms of costs but then we turn to figure 7—and
it would not be so bad, would it, if they are costing 17% more
if they were being produced on time? But not only are they costing
a huge amount more but the timescale gets worse. So they are costing
more and it is taking longer for them to be produced. As a layman,
why is that?
Sir Peter Spencer: Part of the
explanation of course is that the notional interest charge on
capital increases the longer these projects remain on my balance
sheet, and so £500 million of that total figure that you
see is a notional charge which is not being paid by the frontline
commands on their balance sheets. So there is a direct relationship
between time and cost. What you are observing is what I expected
to see, when I sat before this Committee last year and told you
that we needed to get a re-baselined programme with greater realism.
This is realism in those programmes.
Q46 Mr Steinberg: I will not be here
next year, but in the Major Projects Report next year would you
expect to see, for example, figure 7 not showing a delay on projects?
Sir Peter Spencer: There will
be further delays on projects next year because not all of these
programmes have been properly de-risked.
Q47 Mr Steinberg: So for how long
does this go on?
Sir Peter Spencer: I would expect
the total amount slippage to be reduced. It will be reduced year
on year.
Q48 Mr Steinberg: So when do we get
to a stage where figures 5 and 7 will not appear in the Report?
Sir Peter Spencer: I believe I
will be in a better position to give you an answer next year.
One swallow does not make a summer; I cannot possibly give you
an accurate prediction, I am sorry.
Q49 Mr Steinberg: Do you have no
target?
Sir Peter Spencer: I do have targets.
Q50 Mr Steinberg: How long is the
target?
Sir Peter Spencer: We have the
target to drive these programmes into line so far as in-year slippage
is concerned within four years.
Q51 Mr Steinberg: Four years.
Sir Peter Spencer: But what I
am telling you is that in terms of the Major Project projects,
which are the top 20, many of which were let on contracts some
years ago, there is not a great deal we can do now to recover
the slippage which has already occurred or the cost overruns that
have already occurred. So in absolute terms these projects are
still going to continue to show a disappointing result until we
clean them out of the system.
Q52 Mr Steinberg: Turning to figures
14 and 15 in Appendix 3, page 31, they make even more disappointing
reading, do they not? Here we have 10 projects finishing between
35% and 5% overspent. Now, 5% might seem a very small amount of
money and 35% seems a lot of money. Just as a matter of interest,
in those 10 projects that I am talking about that are between
35% and 5% overspent, how much of that is in real terms, in cash
real terms?
Sir Peter Spencer: We do have
a figure and I will find it for you. The total amount of cost
growth this year against the 50% approvals, which is what this
based on, therefore, we say, a tougher measure than last year,
I think is £4 billion, but I need to make sure that those
are the correct figures.
Q53 Mr Steinberg: £4 billion
is a lot of money. What you are saying then, if that is the case,
that in four years' time we can expect to have figures that do
not reflect this sort of figure?
Sir Peter Spencer: No, that is
not what I am saying. What I am saying is that the in-year cost
movements and the in-year slippage movements will be driven down
to much lower levels so long as we meet the key targets in the
Agency and so long as in programming terms the Department does
not choose to change its mind over the scheduling on these projects,
which it occasionally does for operational reasons. May I just
correct my figure which I gave you as £4 billion, it should
be £6 billion.
Q54 Mr Steinberg: Million or billion?
Sir Peter Spencer: £6 billion.
Q55 Mr Steinberg: Billion. Before
my time runs out, figure 15 on the next page, we find that projects
are £6 billion overspent but we also find that projects come
out in some respects over six years late. Six years late, £6
billion overspent, what does that do to our military capabilities?
Sir Peter Spencer: The Lieutenant
General can explain that.
Lt Gen Fulton: To take specifics,
in the case of MRA4 it means running on the MR2 for longer so
that we have a capability. In the case of Typhoon it means balancing
out the capability that Typhoon would have given us against Tornado
F3 and the Jaguar. In the case of the Astute Class Submarine the
S & T boats. So, as I explained earlier, in capability terms
what we have to do is to make sure that we do not lose the capability,
but that clearly means then running on those aeroplanes and boats
over the delay. Clearly also within that we need then to look
at the numbers, for example, for Nimrod MRA4 and the capability
and look at how we might grow that over time.
Q56 Mr Steinberg: So really what
you are saying is that our capability is diminished?
Lt Gen Fulton: No. I am saying
that it does not necessarily increase at the planned rate. MRA4
is a significant improvement in capability to the MR2; the MR2
is a good aircraft but it will run out of life in about 2016,
therefore what we do need to do is to make sure that we get this
capability in before the other goes out. So our capability is
not going down but we need to maintain it.
Q57 Mr Steinberg: The final question
is, if any other Department in Whitehall was £6 billion overspent,
presumably they would have to make cuts. Do you make cuts?
Sir Peter Spencer: This is not
money which we have overspent on this. It is a reflection of the
lack of realism in the original estimates against the budget,
and it that is an important point to reflect in this discussion
because the whole approach that the tools are bringing to us is
to get greater realism from the outset. So what you are seeing
is a level of disappointment.
Lt Gen Fulton: If I could also
say that that is also—remember in the case of the JCA—spread
over 10, 12, 15 years. So a projected cost growth in the JCA programme,
I will have to deal with by looking at the rate at which they
are delivered or indeed the rate at which UK specific weapons
are integrated on to them. So there is an example where it is
not a question of making a cut but it is a question of adjusting
what the forward plan looks like, as I say, over a very long period.
Q58 Chairman: I am just trying to
understand that exchange. This is being broadcast to the public.
You have mentioned several times, Sir Peter, in a rather world-weary
way, that these programmes have not been properly de-risked; is
that right?
Sir Peter Spencer: Yes.
Q59 Chairman: That probably does
not mean much to people watching this Committee here. I think
what you are trying to tell us is that before you arrived on the
scene there was a lack of realism; is that right?
Sir Peter Spencer: I would not
associate it with my arrival. There is a general tendency to be
over optimistic and that translates into a lack of realism about
how difficult some of this equipment is to design, how long it
will actually take and how much it will actually cost, and the
fact that we announce and approved the time and costs budgets
in some cases with inadequate thought and intellectual effort
having gone into the nature of the problem, both in terms of the
technology and in some cases about the competence and the financial
viability of the supplier has come back to bite us quite hard.
We have to get this sorted out and one of the major pieces of
work which the Acquisition Policy Board, which we discussed earlier,
has taken upon itself is to send out some re-defined guidance
in terms of what constitutes a mature business case prior to the
Main Gate approval decision, which covers those points and several
others, learning on the lessons of projects which have got themselves
into this sort of state.
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