Examination of Witnesses (Questions 1-19)
MINISTRY OF
DEFENCE
1 FEBRUARY 2006
Q1 Chairman: Good afternoon and welcome
to the Committee of Public Accounts where today we are looking
at the Major Projects Report 2005 from the Ministry of
Defence. We are joined for the first time by Permanent Secretary
Mr Bill Jeffrey, you are very welcome, and Sir Peter Spencer,
who returns to us again, who is the Chief of Defence Procurement
and Chief Executive of the Defence Procurement Agency, and once
again by Lt General Sir Robert Fulton, who is the Deputy Chief
of Defence Staff (Equipment Capability). Sir, Mr Jeffrey, it is
your first time here. What are your ambitions for the equipment
programme?
Mr Jeffrey: One of my ambitions,
Chairman, is to build on the progress that I think the Report
before this Committee does show but we need to achieve a further
significant improvement in the way we do this. I think it is clear
to everybody in the Department and everybody I have spoken to
in the first couple of months, including the two gentlemen on
either side of me, that we do not think we are getting this right
yet. We think there has been some progress but there is still
a good deal to do. One of my highest priorities as I take over
is to really drive through the changes that are necessary and
are being made and deliver them through the performance in this
field.
Q2 Chairman: Could you speak up a
bit. What will success look like to you?
Mr Jeffrey: I think success, among
other things, will include better figures and reports like the
one that the Committee has now. There is an extent to which these
annual reports are much dominated by projects that went wrong
many years ago and that still shows in the figures and the analysis.
I feel that the real test will be whether in a year's time or
two years' time, particularly in relation to the newer projects
that have got going since Smart Acquisition was introduced, or
more recently, we are delivering high quality military capability
on time to cost. As the NAO have said in their Report, that depends
greatly on the quality of the Assessment Phase, on taking the
risk out of these projects as much as we can, on us providing
our staff with the skills they need and possibly on some further
changes in the way we do this business.
Q3 Chairman: Thank you. By the way,
please let Sir Peter or the General answer questions if you wish
them to, I am very relaxed. I will direct my questions to you
and if you want to pass questions to your colleagues, please do.
Mr Jeffrey: That is very kind,
Chairman. If you will forgive me, I have been in post for just
under two months so there are some questions that I will need
to pass over.
Q4 Chairman: This is not a fierce
inquisition, it is very friendly.
Mr Jeffrey: I know from previous
experience of this Committee just how friendly it can get!
Q5 Chairman: Can you start by looking
at page nine of the Comptroller and Auditor General's Report,
paragraph 1.5, where it tells us that: "The decreases in
forecast costs this year were primarily due to reductions in the
numbers or capability of the equipment driven by changed budgetary
priorities". How much capability are you going to have to
trade or delay to keep your programme within budget?
Mr Jeffrey: As expressed, that
is a very difficult question to answer. I certainly think it is
the case that the Department and, indeed, this Committee and its
predecessors have always correctly analysed one of the problems
as being that we tend to regard capability as inviolate, we tend
to regard key requirements as inviolate, and whenever there is
a problem we tend to allow things to slip and costs to increase.
To the extent that we are succeeding in looking hard at the capability
outcomes dimension of this and asking ourselves seriously do we
need all of this, can we scope it down, I think that is a good
development. Clearly we must not do that in ways that could damage
the intended outcome. I think one of the tests of success is where
we do trade off capability, are we doing sensible things on the
basis of a very careful analysis of what would be the least damaging
option.
Q6 Chairman: Of course, in your two
months I am sure you have had time to read our Report of last
year and the Treasury Minute in reply. There is a PAC conclusion
which states that we recommend you develop measures of maturity
for commercial issues, such as procurement strategy, supplier
relationships and financial risk. There was a Treasury Minute
in which the Department acknowledged the point we were making
and seemed to accept it. Can you tell us how much progress has
been made on this recommendation accepted by the Treasury?
Mr Jeffrey: One significant piece
of progress is that my predecessor last February, almost a year
ago, issued some guidance to the Department on the whole question
of project maturity which laid down what comprises project maturity,
technical maturity, financial maturity and procurement strategy.
I think that helped to meet the sense of the Committee's recommendation
anyway. Reading the reports and trying to understand some of these
huge projects that the Department is engaged on, I think there
is a greater readiness to appreciate at the point when the Main
Gate decision is taken that the project really does have to be
mature and these considerations already need to have been addressed.
I think that may be something that the Chief of Defence Procurement
might want to say something on himself.
Sir Peter Spencer: We followed
up the minute to which the PUS has just referred with more detailed
guidance for the project leaders and the directors of equipment
capability who are the sponsors of the business cases. We have
identified under each of those headings in some detail the sorts
of tests that will be applied. Most importantly, as was indicated
earlier, we have moved on from simply applying tests of technological
maturity, which we have been using for some time, and recognised
there are wider issues as well, in particular a proper assessment
of the supplier and whether or not we are confident in their track
record of success and in the maturity of the commercial arrangements
that have been achieved at the Main Gate. If you would wish to
see more detail of that we could provide you with a short note.
Q7 Chairman: So, Sir Peter, we now
have a quantified measure for commercial maturity, do we?
Sir Peter Spencer: We have a number
of quantified measures which provide guidance and, as is indicated
in the NAO's Report, the challenge here is there is such a wide
range of different types of project that the challenge is to identify
a set of metrics and a set of numbers which you could apply to
every single project. I am saying what we are doing is to recognise
this progress that has been made and to give more explicit guidance
to projects concerning the amount of money we would expect to
be spent and time in the Assessment Phase for a particular level
of risk, the technology readiness level number, which we would
expect to be achieved at the Main Gate, the system integration
readiness level, the risk maturity levels and a whole range of
things like that. That sort of cookery book set of instructions
will never replace judgment. On top of that there will need to
be a proper understanding of how the total package fits together.
The evidence that we are spending longer and taking more care
over Main Gate business decisions is drawn out by the NAO report,
particularly in the context of those 10 pre-Main Gate projects
which have been reported on.
Q8 Chairman: While you have got the
floor, Sir Peter, could I ask about in-service dates. This is
referred to in paragraph 1.15, but you do not need to refer to
it because you know it all by heart anyway. Can we talk about
Typhoon, for instance, Sir Peter, which has been apparently in-service
since 2003 but will not have operational capability for a number
of years. For us laymen, can we not have in-service dates that
actually mean in-service?
Sir Peter Spencer: Yes, you can.
The reason why Typhoon looks rather eccentric is because that
was the definition which was used a long time ago when setting
the project parameters for time and cost. If you look at virtually
every other in-service date in this Report you can see it is written
in capability terms. In other words, it represents something which
the lay person could recognise as the degree to which the Armed
Forces are going to be able to use equipment in an operation.
It is not just the delivery of the equipment, it is the fact that
the operators have been trained, the logistic support is in place
and a level of use is defined.
Q9 Chairman: So in future when you
tell us something is going to be in-service, it is going to be
in-service?
Sir Peter Spencer: That is already
happening.
Q10 Chairman: Right. Shall we talk
about carriers for a moment while we are talking about in-service
dates, Sir Peter. Is it still realistic to talk about an in-service
date of 2012 and 2015?
Sir Peter Spencer: I think the
Ministry of Defence's public position on this is well-known and
well-rehearsed. That in-service date will be announced when we
complete the Main Gate decision by announcing the decision to
go forward into manufacturing.
Q11 Chairman: It is already two years
late, is it not? With the benefit of hindsight was it unwise,
perhaps, for Lord Bach to make the announcement when he did, to
set these in-service dates?
Sir Peter Spencer: I do not think
it is a reasonable question to ask me to comment on one of the
Defence Minister's public statements.
Q12 Chairman: It is not something
that you would recommend in the future, is it?
Sir Peter Spencer: I think what
we are doing at the moment is more indicative—
Q13 Chairman: I will not use the
word "unwise", perhaps it was too early for Lord Bach
to have made the announcement when he did.
Sir Peter Spencer: I think it
is a question of how you interpret the announcement. In the past
it was customary when announcements were made to give an indication
of what our planning assumptions were and that was all it was
at that stage, a planning assumption. The point at which we are
audited by the National Audit Office coincides with the figures
we set out when the formal approval is made and those planning
assumptions which were previously indicated by the previous ministerial
team were not based on any formal approval basis. This is a fairly
spurious point in terms of procurement. I can see that it is quite
an interesting point in terms of politics but I deal with procurement,
not politics.
Q14 Chairman: Will the agreement
with the French which was announced recently delay the project
any further, do you think?
Sir Peter Spencer: No. We have
put those arrangements in place very carefully to ensure that
there is a minimum possibility. There are no absolutes in this
world. We have minimised the possibility. For example, as I was
publicly reported as saying, there is no joint control here, the
Demonstration Phase of the common baseline design is a UK controlled
project. The French will contribute towards it, they will have
visibility, but they will not control it.
Mr Jeffrey: Just to supplement
that, part of the understanding is that the involvement of the
French value have value from all sorts of points of view, including
cost reduction, but it should not delay the project overall.
Q15 Chairman: Mr Jeffrey, have you
learned the lessons from the Brimstone project, or perhaps Sir
Peter may want to deal with this. I am particularly looking in
terms of the Beyond Visual Range Air-to-Air Missile. Can you tell
us what is going to happen with that project, please?
Sir Peter Spencer: The Beyond
Visual Range Air-to-Air Missile project, as you know, is an extremely
ambitious European collaboration and as audited in this Report
you can see that part of the difficulty was that the point at
which the Main Gate decision was taken preceded confirmation that
all the European partners were signed up and preceded the contractual
arrangements. Since that time the development of the Meteor missile
has gone reasonably well. The first of the key technical milestones,
which is the firing, is due to take place in April, slightly delayed
by the Swedish winter. That is slightly later than the contractors
planned but well inside the risk adjusted plan against which we
signed up to. The comparison between Brimstone and BVRAAM is quite
stark. Brimstone was a much less ambitious project technically
and was a single national project, so we have much greater areas
of risk involved with BVRAAM and Meteor. In particular, we have
the challenge of integrating the missile into Eurofighter, which
is another multinational programme. The risk inherent in BVRAAM
is orders of magnitude greater than in Brimstone.
Q16 Chairman: Lastly, particularly
for the benefit of the new Members, there is talk in this Report
of the Defence Industrial Strategy. Do you want to tell us a bit
about that, Sir Peter, and the tension there is between cheap
and effective procurement and the understandable desire to support
British industry?
Mr Jeffrey: If I can say a word
about it. I arrived on the scene just as the Defence Industrial
Strategy was being finalised. My own view of it is that it is
an extremely important development because first of all it gives
much greater visibility to industry to Parliament and, indeed,
the public of our forward plans. It is clearer about our working
assumptions based on our budget. It indicates more clearly than
we have ever done before what we think needs to be done onshore
and what does not. It feels to me, having observed the final stage
of the process, that the very act of putting this Strategy together
has helped us to build a closer relationship with the industry.
However, what it does do is to place significant responsibilities
both on the defence industry and on the Department because it
describes a picture in which the balance of our investment will
change significantly over time from the acquisition of new equipment
to through life support of that equipment. Those who I have been
speaking to in the industry in my early days, senior figures,
understand that there are going to need to be significant changes
on their part. We certainly understand that there will need to
be a good deal of adjustment within the Department and I am very
keen to use the publication of the Strategy as a platform for
looking hard again, and it says this in part C of the published
Strategy, at the way we organise procurement within the MoD and
the processes we use, our structures, et cetera.
Q17 Chairman: It does help when we
ask a question if you would try and answer the question. I did
ask you how the Defence Industrial Strategy was going to resolve
the inherent tensions between cost-effective procurement, particularly
from America, and the need to support United Kingdom industry.
Mr Jeffrey: I do not think it
can resolve them completely because these tensions are inherent
in the business. What it does do is to provide a clearer set of
working assumptions about what we want to do onshore, whether
by British industry, or British based industry from elsewhere,
and what we are happy to obtain from elsewhere. That at least
achieves a greater degree of clarity for resolving the tension
that you have described and that we have had before.
Q18 Mr Curry: I have learned some
wonderful vocabulary while I have been reading this. I just came
across this phrase, "improving situational awareness",
I must try and remember that, but quite what it means is absolutely
mind-bogglingly mysterious to me, no doubt I will get there. I
would like to ask you about two developments which are not covered
in this. I would like to go back to the deal with the French on
aircraft carriers. In the past, we tended to have faced the dilemma
that if we wanted to develop something ourselves, it cost an arm
and a leg and we could not afford it so we have got to share them,
but when it is a joint project it becomes complicated, difficult
and, in many ways, inefficient because of the division of labour.
We have abandoned destroyer projects and quite recently joint
projects with the French and other nations. This is different
in that it appears to be a French buy-in who bought a ticket into
this project, there was a cost attached. How do you arrive at
the price of a buy-in on that sort of thing?
Mr Jeffrey: I think the point
you make, Mr Curry, about the risks inherent to this is a very
important one. My observation in the last few weeks is as we got
closer to reaching this understanding with the French, there was
a very strong awareness that international projects of that kind
come with risks by virtue of their very international nature.
We were satisfied on the basis that was agreed with the French
that this could be managed, namely that they would be buying into
the work that we have already done and the negotiations around
the entity, as you put it, which led to the understanding between
our secretary of state and his French opposite number a week or
so ago, were intended to ensure that the French did make a contribution
which reflected the investment that we had already made. The plan,
as I think you will know, is that they will meet a third of the
demonstration costs and they will make staged payments of £30
million now, a further £25 million in July, and £45
million at the end of the Demonstration Phase, if they decide
to go ahead, as a contribution to the sunk costs that we have
already incurred.
Q19 Mr Curry: There was an actuarial
process which arrived at this sort of level of cost, the value
of the ticket.
Mr Jeffrey: I think the intention
is that at the end of all of this we should have two carriers
and they should have one.
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