Select Committee on Defence Minutes of Evidence


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.





6   See Ev 56 Back

7   See Ev 56 Back

8   See Ev 56 Back


 
previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 8 December 2006