Examination of Witnesses (Questions 40-55)
MINISTRY OF
DEFENCE
1 FEBRUARY 2006
Q40 Mr Mitchell: Whose fault is it? Here
is a problem which is something like the IT problems in Government
departments where the department's reach, or the public sector's
reach, exceeds its grasp. You said that some of the projects are
over-ambitious and therefore have to cut back. Whose fault is
it that they are over-ambitious? Do you have—because staff
must change in procurement, people move in and move out and move
onto greater things or whatever the continuity of experience in
procurement to know what suppliers are going to cause what kind
of problems, who is going to be able to deliver, who is not going
to be able to deliver, what is likely to work? How is the voice
of experience held together in the procurement department?
Sir Peter Spencer: We have put
in place a comprehensive system for key supply management and
we collect data on the top 18 key suppliers on their performance
on each one of their projects and we assess them on a regular
basis. They have a senior member of the Ministry of Defence as
the point of contact for these regular meetings and we tell them
if they are in the top quartile, the middle two quartiles or the
bottom quartile. It is no surprise they are now taking these reports
very seriously because we have made it clear that we will risk
adjust their bids on the basis of their track record. There is
at least one company where for the senior directors their own
remuneration arrangements are directly related to the score they
are going to get from that independent assessment. It is about
time too that we started to leverage our position as the customer.
A lot of this is fed into the Defence Industrial Strategy and
we are now beginning to move on to look at the next stage of this
which is to get into the detail of the supply chain because the
key suppliers, in the main, tend to be the prime contractors.
A great deal of the innovation and imagination comes from the
second and third tier, small and medium sized enterprises, we
want to get into a position with our prime contractors where they
should be doing the same sort of supply chain management that
would characterise the behaviour of an automobile manufacturer
where they are having to do that because of the competitive pressures
in the marketplace. We need to find some way where there is not
the opportunity to have the sort of full-blooded competition that
we might have had in the past to simulate the same sort of stimuli
to make our suppliers lean, mean and value for money. There are
ways in which we have proved already in the pilot projects where
if we recycle some of the savings back in a gain sharing arrangement
we do get a very positive response and that is beginning to work
quite well.
Mr Jeffrey: If I could just add
to that, Mr Mitchell. Also, and I am sure Sir Peter would agree
with this, we need to look to ourselves. I do not think any of
us would argue, and certainly it is not my initial estimation,
that we are in the position we ought to be in. I want to create
more of a culture within the Department that values high performance
by our own staff when they perform well on project teams or otherwise
and make sure people do not flourish if they perform less well.
This is not just about industry, it is something we have got to
look to internally as well.
Q41 Mr Mitchell: Let me just give
you a concrete example. The Type 45 Destroyer—I have to
say I am very fond of destroyers having spent a considerable amount
of time on one in the Navy scheme for MPs, experienced sailor
me—is basically a simple project, it is not a big, enormously
complicated thing and yet I see the project has now had £145
million of costs taken out of it. Why is that? Is it because you
wanted something too elaborate in the first place or have you
just discovered that the equipment would not fit or would not
work? It sounds as though you are starting to complicate a basically
simple project too much.
Sir Peter Spencer: This is a very,
very complex project. HMS Daring was launched today, the
first of class. There has been a certain amount of press coverage
on the capabilities which are necessary to protect ships at sea
from low-level supersonic sea skimming missiles. The technology
which has gone into this ship is very advanced.
Q42 Mr Mitchell: Now you have taken
it out can it still do the job you want it to do?
Sir Peter Spencer: We are not
taking it out. What we are doing is we are trading some elements
of performance to live within our means. This is one of the projects
where the way in which the contracts were placed simply would
not happen today. I would characterise it by saying that we had
entered into financial exposure levels which went far beyond our
understanding of the problems at the time. It is a fact that we
still have not yet put on contract all of the money for the final
three ships that have been approved, and that has been a major
source of concern to me as we seek to ensure that we can tie down
the completion of these ships. What you are seeing there in terms
of some of the measures which have been taken is to delay some
of the software upgrades in the combat management system and in
the electronic warfare system to some later stage, so they will
come in later on but they will not form part of the initial procurement
because one of the fundamental principles that we are all signed
up to is to do whatever we can to live within our means.
Q43 Mr Mitchell: Just one final question
which the Chairman might allow because it comes from a Euro-sceptic
point of view. I see from Richard North's writings that we are
now ordering more and more stuff from the Europeans instead of
buying it from America where it is cheaper to do so where there
are marginal costs because they have got a huge market for their
own armaments. It makes us dependent on the kind of combined projects
which have produced such glories as the Eurofighter. Are we going
to be much more subject to cost overruns if we are going to order
more from Europe?
Mr Jeffrey: As I look across the
range of projects that I have inherited they are a good mix. We
are still doing a lot of business with American companies. I do
not detect a significant trend towards continental European countries
other than the British based ones that we know about or, indeed,
the Americans that we are already doing much business with.
Sir Peter Spencer: I think there
is an important point here in terms of judging what the costs
are going to be in whole life terms and supporting American sourced
equipment occasionally can be rather more expensive than we had
understood ab initio. Other countries have found this out
too. On the other hand, it is true to say that where we can do
something like purchase Tomahawk missiles at effectively marginal
cost it does represent very good value for the money which we
spend. The challenge with European projects tends to be the management
arrangements. If you are buying from America or you are in an
American co-operative arrangement, America is the dominant partner
so you have actually got somebody who is in charge. If you look
at Eurofighter, we have got four nations and the amount which
I bring to bear in decision making is 25%, so inevitably it is
more complex and we have to work quite hard at those. In the European
context in the past with Eurofighter the contractual arrangements
were set up under the so-called juste retour where an enormous
amount of effort went into sorting out work share for the participating
nations almost regardless of the efficiency of what resulted.
Under the new arrangements with the European procurement organisation
called OCCAR those sorts of juste retour arrangements are
no longer in place. Although clearly participating nations expect
to have some involvement for their industries the arrangements
are sorted out over a much broader portfolio of projects which
are calculated over time. The track record of those projects is
much better than Eurofighter, as you would expect.
Q44 Chairman: I have a figure of
costs for Type 45 of £153 million, is that right?
Sir Peter Spencer: Per copy?
Q45 Chairman: Per copy, yes.
Sir Peter Spencer: I do not think
so.
Q46 Chairman: I read it somewhere.
I just wanted to get it right.
Sir Peter Spencer: The UPC listed
here is £561.6 million.
Q47 Chairman: I am sorry, I under-estimated
it. Will you forgive me asking, Sir Peter, because we are not
defence specialists, with the possible exception of Ms McCarthy-Fry
who represents a defence constituency, but you mentioned the threat
to the Type 45 of supersonic low-level skimming missiles.
Sir Peter Spencer: Amongst other
things.
Q48 Chairman: How many low-level
skimming missiles has al-Qaeda got? The serious part of this question
is are we building another dinosaur that could be sunk by one
terrorist approaching it in the harbour when it is refuelling
or something?
Sir Peter Spencer: Clearly high
value assets in harbour need to be protected and that is a matter
of tactics and doctrine as much as anything else. In terms of
the realism of the threat, and the expert is on my right, it does
not take a lot of money to fit a missile into a small boat and
to send that out against some high value merchant ship which is
bringing much needed equipment into theatre to support a military
operation in peacekeeping and peace support. Depending upon that
threat we do still have to protect the sea lines of communication
and it would be hugely unwise to imagine that the sea is by definition
a safe place to move about simply because people do not live on
it.
Chairman: Thank you, Sir Peter. I am
sorry to ask you that question.
Q49 Mr Curry: Can I just pursue that
with one question. When you talked about Type 45 you said it costs
a great deal to defend it from attack and I am thinking if the
bulk of the money goes to protect the ship it becomes a bit like—
Sir Peter Spencer: It was defending
another ship, so it defends a large area of the ocean in which
the assets you wish to protect would be based.
Q50 Mr Curry: There is no point in
building a vessel if its main purpose is to defend itself. It
is a bit like "Do not throw stones at this notice".
Sir Peter Spencer: No, its main
purpose is to defend other ships.
Mr Jeffrey: To get the division
of labour right, I do not know whether General Fulton would like
to answer that.
Lt General Sir Robert Fulton:
It is designed either to protect a sea area which might contain
our own carrier, which will certainly need protection, or it might
be another nation's ships or, indeed, it might be a civilian merchant
ship.
Q51 Mr Mitchell: The Report observes
the point that when a project is mature enough for the main investment
decision to be taken will look very different from one project
to another dependent upon the perceived benefits of progressing
the project quickly, albeit with a greater level of recognised
uncertainty and risk. I do not want you to define the process
of maturity for different kinds of weaponry but in that kind of
decision, once it is considered mature and the order goes ahead,
are the politicians brought in then or is that entirely a Ministry
decision?
Mr Jeffrey: Both the Initial and
Main Gate decisions are put to the Minister for Defence Procurement
for agreement, so in that sense politicians are very much involved,
and the Chief Secretary of the Treasury as well.
Mr Curry: Mr Mitchell introduced a question
from the Euro-sceptic point of view so perhaps I ought to declare
that I am notoriously Europhile.
Mr Mitchell: Shame!
Q52 Mr Curry: Just as well since
my French wife and I are coming up to our 35th wedding anniversary.
The French Government has recently listed a series of industries
it regards as strategic, which appears to include yoghurt and
steel. Does the British Government have an idea of the capability
which ought to be kept in national hands? Is it a concept which
means anything internally for the UK Government? How would one
characterise it?
Mr Jeffrey: My colleagues may
want to comment but the Defence Industrial Strategy in part addressed
that issue, not by saying that there are things that can only
be undertaken by British owned companies in the United Kingdom
but by saying that there are certainly some capabilities which
we would want to see onshore in whoever's hands they may be. I
do not know if that is the thrust of your question, Mr Curry,
but there certainly is a working set of assumptions about what
we need to keep on these islands.
Q53 Mr Curry: We would put location
over ownership, as it were?
Sir Peter Spencer: We define as
a UK company a company which creates intellectual capital in the
UK itself. For example, BAES, where the shareholding ownership
is 46.7% overseas, is a UK company, as is Thales UK and certain
American companies who operate inside the UK and do the development
design here. What the Defence Industrial Strategy has done is
to be much more explicit about what the Government regards it
needs to have immediate access to in the UK to support military
operations and define so-called sovereign operational capability
through life. Whereas the previous document on which the Defence
Industrial Strategy was based, namely the Defence Industrial Policy,
named a handful of capabilities such as nuclear weapons, nuclear
steam raising plant, cryptography and certain other areas, this
is much more explicit sector by sector as to what is going to
be important enough to nurture and sustain in the UK and by the
same token it has identified some areas which in the past we have
not opened to competition as not enjoying that particular status.
Industry feels that this enables them to take a longer term view
which, together with better access to our forward planning, enables
them to judge the sort of investments they might wish to make
both in new facilities and in restructuring old facilities. We
would expect to see the benefits of that over time rather than
a series of apparently independent competitions running for different
capabilities which to industry represent instability.
Q54 Chairman: To sum up: the figures
on costs have improved, for which we congratulate you, but they
have improved because you have made cuts and these are cuts which
we, ourselves, recommended you make in the past to get a more
realistic picture. Things are improving slowly but the overall
cost of these projects, despite decreasing in one year, is still
an enormous £2.7 billion more than the original budgeted
cost of £26 billion. Lastly, can we assume, Mr Jeffrey, that
we are now at the start of a new dawn in defence procurement?
Mr Jeffrey: I think it is always
unwise to use that sort of phrase. I am certainly both encouraged
and challenged by what I have inherited here. I think there are
signs of improvement. The test now is how we manage the more recent
stuff but, as the Chief of Defence Procurement has been saying,
we live with the inheritance of the past. We really have got to
work very hard, adjust our systems as necessary, push our people
who are very willing, I sense, and make sure that we do make it
a new dawn. I am reluctant to give any hostages to fortune, particularly
with this Committee.
Q55 Chairman: Sir Peter, this Committee
has great respect for what you have achieved so far, do you want
to have the last word?
Sir Peter Spencer: I would say
it was good to table this result. I remain concerned about the
risks with what I describe as the toxic legacy and we are going
to have to work really hard to sit on top of that. I think there
will be some storms ahead and it is going to be a real test of
character and the working relationship that we enjoy between myself
and General Rob and his people to ensure that we do the right
sort of things to sit on top of the budget but that is going to
be tough.
Chairman: Thank you very much.
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