Examination of Witness (Questions 200-215)
SIR PETER
SPENCER KCB
10 OCTOBER 2006
Q200 Willie Rennie: I was interested
to hear what you were saying about the maintenance of skills and
I was glad to hear what you were saying about the appropriate
work going to the appropriate places. Rosyth has got to a stage
now at Babcocks where they have got quite a skilled, kind of hard-core
workforce which is efficient and widely recognised as so, but
with the triple S strategy, the decision about the Liverpool five
was to cut the school which has resulted in a possible 90 job
losses out of 1,200 at Rosyth, and excuse me for talking about
Rosyth. The reason why I mention this is because it is quite significant
for the maintenance of Babcocks in advance of the Carriers coming
to maintain those skills. Could you maybe explain why that decision
was made and how that fits in with the maintenance of skills in
the longer term?
Sir Peter Spencer: It is not a
decision which I was personally involved in, so if you wanted
a detailed answer, we would need to write, but the general context
in which these decisions were taken in-year was to ensure that
we could manage within our means and there needed to be some veering
and hauling on some parts of the budget.[6]
It was not, I can assure you, a decision which was lightly taken
because of the very point that you make which is that there is
not much point in publishing a Defence Industrial Strategy about
nurturing the industrial base and then failing to implement the
strategy which ultimately is placing contracts and providing the
work for people So there is a tough edge to all of this where
it is quite clear we are not going to be able to sustain the totality
of the industrial base that there is in place today and we need
to find, working with industry, working with the trade unions
and working with the Armed Forces, what the right balance is going
to be to deliver the fundamental objectives of the Defence Industrial
Strategy and to make sure that where financial reality in the
end kicks in, we do not actually kill something off which we actually
needed.
Q201 Willie Rennie: I can understand
what you are saying. There were two factors that people find difficult
to understand, that the redundancy payments would be covered by
the MoD and be significant, but also that the future Carrier work
was coming this close down the track that actually to fill that
gap in the short term might benefit the MoD in the longer term.
That is what people find difficult to understand.
Sir Peter Spencer: I can understand
why it looks completely perverse. All I can say is that if we
could have managed to do it any other way, we would have done,
but we do have to live within our means.
Q202 Robert Key: I just wanted to
cheer Sir Peter up by reminding him that exactly 100 years ago
a British shipyard delivered to the Royal Navy the largest military
naval ship in the world ever built and it took three months to
build.
Sir Peter Spencer: Was it on budget?
Q203 Robert Key: I do not think they
minded about budgets in those days, Sir Peter!
Sir Peter Spencer: There is the
difference!
Chairman: We will write to you about
the issue of what the prognosis of the French involvement in the
programme is, if we may, and we move on to the Joint Strike Fighter.
Q204 Mr Borrow: Earlier this year
we went to the United States as a committee and discussed with
people on the Hill and also the US Administration the technology
transfer for the JSF. We came back rather more optimistic than
we went and I think on 11 July the Secretary of State gave evidence
and was optimistic at that stage that agreement would be reached
before the end of the year on the sort of technology transfer
that would be necessary to sign the contracts later on this year.
I must say that in the three months since then a lot of the mood
music has changed and it has become much more pessimistic. Is
that mood music, which I think most members of the Committee picked
up, wrong? If it is not wrong and things are not looking very
good in terms of reaching a satisfactory solution, is the UK Government
prepared to say to the US Administration, "We aren't prepared
to go ahead with Joint Strike Fighter"? If that is the case,
presumably we have got a plan B and what is plan B?
Sir Peter Spencer: There are a
lot of questions there. Can I start by saying how much the Ministry
of Defence valued the engagement of the Committee with their counterparts
in the United States. I think the fact that they operating together
as UK plc is hugely helpful here because it sends an unmistakable
message.
Q205 Chairman: Well, we would like
to be able to do that again on the basis of as much information
as the Ministry of Defence can possibly give us on all sorts of
issues.
Sir Peter Spencer: I am not sure
where your mood music is coming from or whether or not it is just
filling in because not much has been heard, but if it would be
helpful, I can tell you what has been happening. We made it clear
to the Americans that we were going to go through the operational
sovereignty principle in considerable detail and test it with
a number of examples to demonstrate the extent to which operational
sovereignty was understood in the United States and was going
to be available. That is important because the point at which
the Memo of Understanding for Production and Sustainment of Future
Development is due to be signed, which is by the end of this calendar
year, is well in advance of when those undertakings by the United
States will be delivered. So there has to be not only huge attention
paid to the detail so that we do understand precisely what was
meant, but we also need to understand how the delivery of those
undertakings is going to be managed and honoured. As you know,
part of the challenge is that the United States is not an homogenous
country in the sense that when we deal with it in Defence, a great
deal of work gets done not only with the DoD, but also with the
State Department. The way the American Constitution works means
of course that the State Department has to observe a whole lot
of different requirements, including procurement law, which does
not necessarily melt away simply because it is inconvenient when
we come through and say, "By the way, here's what we understand
you are now prepared to do on the basis of the undertakings agreed
at Head of State level between the President and the Prime Minister".
Therefore, in order to ensure that we have the best chance of
getting this right, I had a series of meetings following the detailed
work by the teams with Ken Krieg, who is my nearest equivalent
in the United States system, to agree a statement of principles
which described some of the detail and set out the degree of proof
that we will be looking for at the end of this year and the fact
that it was a non-trivial discussion meant that we had correctly
anticipated that this was not just going to be an easy thing to
achieve. This is very clear to Lord Drayson who, in addition to
the close attention to detail that I am paying, is himself making
an independent check in considerable detail of some of these technical
issues and there is a large matrix based on the original exchange
of letters which defines in considerable detail which bits of
technology we are talking about and what it is that we would need
to have in order to deliver the UK requirements. A huge amount
of progress has been made, but until we have got to the end of
it, we simply will not know and we are about to enter a series
of quite intense meetings with the Americans. I see Krieg next
week and the week after and may well fly out to Washington in
order to conclude the discussions at my level and I have no doubt
that at some stage the Minister will wish to take a view and decide
to what extent he will wish to intervene again, so that is where
it is. I do not think anything could be described as a foregone
conclusion here. There is at the level of the DoD that I deal
with a very clear recognition and willingness to help with this
problem and a great deal of work done to facilitate agreement
across the rest of the American Administration, including and
especially with the State Department, but when it comes down to
it, some of these are actually quite tough issues. We also have
to draw a clear distinction between a government-to-government
agreement and industry-to-industry agreements. One thing which
was a great help during the Farnborough week was the fact that
Lockheed Martin and BAE Systems signed up for the next stage of
partnering in this programme because the partnership up until
that point had just been for the so-called `SDD phase', the design
phase. They have now got in place a clear arrangement which identifies
that BAES will be the lead in delivering sustainability and support
to the Royal Air Force and the Royal Navy in operating these fast
jets and identifies the role that Lockheed Martin will play in
supporting them to get access to the information that BAES will
need to do that.
Q206 Mr Borrow: There were some comments
in Aviation Weekly a few weeks ago that the American Congress
were considering delaying the production phase for their aircraft
and that that would possibly lead to an increase in cost of 25-35%.
Would you like to comment on that?
Sir Peter Spencer: Well, subsequently
we have had confirmation that there will be a change in the front
end of the programme. If I have got this wrong from memory, I
will correct it after the event, if I may, but the number of aircraft
in the initial low rate of initial production has been reduced
and there has been an approach which defers some of that production
activity because of concerns about the risk of concurrency i.e.
the overlap between design and production. The impact of reducing
the numbers in a low rate of initial production quantity inevitably
is going to be felt in terms of the cost of the aircraft. For
the total programme that the UK is going to buy into, the majority
of our aircraft will come when they are in full production anyway,
so the actual price of those aircraft we can only sort of continue
to estimate at this stage and it will ultimately depend upon how
many the Americans decide to buy and the rate at which they decide
to buy them. But we are vulnerable for the early orders if the
low rate of initial production quantities change to the extent
as to make significant changes. We simply do not have the information
to call on that, but it is an area of concern which we are watching
very closely.
Q207 Mr Borrow: And plan B?
Sir Peter Spencer: There is a
plan B. Ministers, if the time comes, will explain what plan B
is.
Q208 Chairman: Has the time not come
now because is it not quite important for a plan B to be public,
at least in the minds of the Americans?
Sir Peter Spencer: I would much
rather continue the discussion in camera if you really want to
go down this road, or give you a written answer.[7]
Chairman: That is fair enough, I think.
I think I would not wish to press that at this stage unless the
Committee disagrees with me. Would you agree?
Mr Crausby: I agree.
Q209 Chairman: I will not press that
at this stage. Sir Peter, you said there has been agreement "at
my level", or at least at your level. Is not the problem
that while there is agreement between prime ministers and between
ministers and at your level, it is very difficult indeed driving
that agreement down to the lower levels of the American administration
and industry?
Sir Peter Spencer: Yes, it is.
That is the nub of the problem. Partly because as you go further
down the organisations, you are dealing with much more detail
and, therefore, the tests have to be described much more precisely
and properly understood. It is clearly easier to agree in principle
that on the basis on which we operate together with the Americans
on military operations that they would want to regard us no differently
than they regard any one of their own armed forces, but there
are legal requirements on the State Department which State Department
officials simply cannot ignore so we have to take each of these
items through one by one and that takes a lot of careful and detailed
work and explanation. It also puts the onus on us to be precise
about explaining the need to know. It does not help if we try
and short circuit it and give a more general question and say,
"tell us what you know about this subject" It is not
going to be possible for us to get a response on that basis. We
have had to do a lot of detailed thinking ourselves and both parties
have to work constructively together on this, and they are.
Q210 Chairman: Is one of those constraints
that United States personnel are not allowed by United States
law to reveal to a foreign company the way that secret information
works?
Sir Peter Spencer: Part of it
is the United States law in terms of technology transfer and there
are processes through Technology Access Agreements, so-called
TAAs, that form part of how that technology is made available.
For example, BAES is a subcontractor of Lockheed Martin, Lockheed
Martin then approaches as the prime contractor the DoD and the
State Department and says in order for BAES to do this particular
bit of design they will need access to this bit of information
and then goes through the State Department process and a decision
is taken. I have to say, up until now everything that has been
asked for has been made available. The difficulty is it is such
a demanding process that everything gets slowed down and we are
trying to get into a different relationship ideally where the
United Kingdom is dealt with no differently, and United Kingdom
companies, so long as the right arrangements are in place, from
American companies. What we are getting is a combination of the
two at the moment. It is recognition of the standing the United
Kingdom has as a nation because of what it does together with
the United States in military terms reflected back into an easing
of the technology access arrangements and the big principle is
agreed. As you know, it is now getting that through the system
which is why we put together the statement of principles because
it was a means of the United States DoD communicating with the
rest of its own organisation and the State Department saying what
these principles were and what was now expected as we started
to take forward each of the individual components of the technology
which is needed.
Q211 Chairman: But a government-to-government
arrangement such as the one you are talking about does not take
into account that it will not be ministers who are fixing new
British, say, weapons on to the Joint Strike Fighter in the future.
You need to have British industry involvement for that process,
do you not?
Sir Peter Spencer: Yes, we do,
and the intention is to ensure that British industry is involved.
The question will be over time how the technical knowledge is
made available so that British industry is involved to best effect.
To put this into context, British industry is already hugely involved
in the total programme and a large number of companies have won
valuable business in competition here. What we are focused on
from a government perspective is not just the volume of that business
but to ensure at the highest level that we retain operational
sovereignty on our ability to operate, maintain and upgrade these
aircrafts through life.
Chairman: Okay. Any more questions on
the Joint Strike Fighter? We will move on to spectrum charging.
Q212 Robert Key: Thank you, Chairman.
Can I just say that I think you are having a tremendously good
effect, Sir Peter, on that point about joint working and certainly
it has been a major concern in the QinetiQ workforce in Boscombe
Down that whatever may be agreed at ministerial level, when it
comes to technicians trying to get into the gates of American
yards and factories they have been challenged and stopped, but
it is getting better. The National Audit Office produces its Major
Project Review once a year, quite rightly focusing on big projects
over £200 million, but there are some of the many smaller
projects which concern me, and one of them is radio spectrum charging.
As I understand it, until 1998 the Ministry of Defence did not
pay for spectrum at all. They are the biggest users of spectrum
at about 30% of the total and since 1998 under the Wireless Telegraphy
Act they have had to pay a charge. Professor Cave's study in 2002
suggested that what is currently, I think, this year a charge
the Ministry of Defence pays to the DTI of around £56 million
will almost double over the next five years. There are two consequences
that I am concerned about. The first is that as the communications
budget has to bear this charge communications will be squeezed
to the point where redundancies in whole systems will be made,
perhaps even, it has been suggested, weapons systems will have
to be scrapped early as economy measures in order to hold the
line of the Ministry of Defence budget. I would hope Sir Peter
could reassure the Committee that spectrum charging is not going
to have an adverse impact on the communications budget in particular
but also a knock-on effect on to other procurement budgets of
a smaller nature. My second problem is that we know Australia
and the United Kingdom of the Western Allies are the only governments
where the defence ministries are charged for spectrum and among
the United States and other members of the Combined Communications
Electronics Board, that is Australia, Canada, New Zealand, the
UK and the United States, there is grave concern that there could
be an operational impact here, spectrum charging could lead to
less combined training between forces which would naturally expect
to operate together in time of tension or, indeed, war. I would
like to be reassured that there will not be an impact on international
relations or training caused by a squeezing of the defence budget
by this innovation of spectrum charging which is still quite a
lot of money each year.
Sir Peter Spencer: I had never
heard of spectrum charging until quite recently because, as you
say, it tends to be something which is of relatively low value
and people manage that and as long as it is being managed we are
okay. I can assure you that it has my full attention at the moment
because in the Defence Management Board Review of our budgetary
position over the next few years increases in spectrum charging
were identified and flagged up. I think in the way in which they
were flagged up, I hope it will reassure you, there is no intention
that I am aware of to force the communications budget to swallow
its own smoke. It is being looked at as a defence-wide issue which
will need to be managed. The pros and cons of spectrum charging
are really an inter-governmental department issue and something
for ministers ultimately to deal with. At the moment what we are
doing is to ensure that we get our house in order. There is a
Spectrum Acquisition Authority which was set up a few years ago
in order to get more coherence in the way in which individual
projects went about stating their uses for the spectrum. In some
cases we have got profligate use of the spectrum because if you
have got proper co-ordinated, planned use of the spectrum you
can (a) avoid going for the same bit or (b) make sure that the
way in which you go for different bits does not make what is left
in the middle too little to be used for anybody else, so you make
better use of what you have actually got. We do not pay for spectrum
on overseas operations, of course, so this is something which
happens only internally. I asked the question just now but I am
not sure only because my new MA happens to have a background in
this area so we are playing to one of his strengths, but even
this expert cannot give me an answer with sufficient confidence
to give the Committee that this will not mean charging overseas
operations. I very much doubt it, but for the sake of thoroughness
I will go away and confirm one way or the other.[8]
I think the 50 million extra per year for spectrum charging, or
whatever it turns out to be, is one of many pressures on the budget
so it would be irresponsible just to shrug it off and say, "we
will mop that up", it is another burden that we will have
to cope with one way or another. Much of this, of course, will
go into the discussion which the Ministry of Defence has with
the Treasury on the Comprehensive Spending Review.
Q213 Robert Key: Could I just ask where
the Spectrum Acquisition Authority sits in the Ministry of Defence
structure?
Sir Peter Spencer: It sits in
London. It is chaired by Air Vice-Marshal Stu Butler, who is one
of the members of the Joint Capability Board working for General
Figgures. He began this work as an Air Commodore and because he
is now the Capability Manager for Information Systems, and because
we realise it needs to be run at that level, he has retained the
continuity, which I think is quite a help.
Q214 Robert Key: The Government responded
to the Cave report in March of this year and they produced a response
and action plan which I happened to read on the internet yesterday
having done a Google search on it. I noticed that in paragraph
5.3 it says that the Ministry of Defence will provide the spectrum
requirement to the Treasury by the end of 2006 in order to inform
the Comprehensive Spending Review, as you have just said. This
is going to put a new pressure on the Ministry of Defence, just
one, no doubt, of many, but I hope that you, Sir Peter, and your
colleagues will be robust with the Treasury pointing out the practical
and possible operational consequences of squeezing the budget
in terms of spectrum charging.
Sir Peter Spencer: We will make
sure that the arguments are properly laid out and well understood.
Q215 Mr Holloway: Chatting to some
of the tanker crews at Brize Norton we came on to the subject
of PFIs and some absolutely eye-watering mathematics on the cost
of that equipment across the whole of the contract as opposed
to a one-off purchase. What do you think, if any, are the dangers
of PFIs in terms of the flexibility of your successors in decades
to come to get the equipment they need at a particular point?
Sir Peter Spencer: I think if
the concern is that we lock up too much of the budget too far
into the future then we structure the contract with the appropriate
exit points. We also have to structure the contract in such a
way as to cope with anything which is very fundamental, like a
complete change in the way in which the United Kingdom is going
to do defence hypothetically in 10 years' time. The technical
challenge in that is to ensure that those very necessary contractual
arrangements are not done in such a way as you take back on to
the Ministry of Defence as the customer the demand risk of the
project, because if you do then in terms of balance sheet treatment
you effectively carry it on the balance sheet and you are then
faced with a major practical issue as to the ability of the balance
sheet to absorb so much of the capital hit all at once. I am pretty
optimistic about how far we have come on negotiating this very
difficult, very complex contract. I think the reason why the numbers
are eye-watering is for the simple reason that we do not make
it clear enough to all of our people what the real cost of equipment
is. Some of these equipments will cost four and five times as
much to run through life as they do to buy. It is the same calculation
we fail to do when we have children. They are wonderful and lovely
in their first two years but you have no idea what is going to
hit you when they go to school, go to college, get married and
have children. All of defence needs to be better educated, not
only so we are realistic in terms of what the alternatives might
be but also to ensure that we all of us think through life ab
initio. It is terribly easy to say. It is quite hard to do.
Chairman: Sir Peter, I think that is
it. Thank you very much indeed for a marathon session in which
you have been extremely helpful, candid and passionate. Thank
you.
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