Examination of Witnesses (Questions 240-259)
LORD DRAYSON,
MR DAVID
GOULD CB, MR
NICK BENNETT
AND REAR
ADMIRAL ANDREW
MATHEWS
21 NOVEMBER 2006
Q240 Mr Jones: May I ask something
in terms of the Maritime Industrial Strategy? You are quite clear
about what the role of industry should be, but how do you actually
see the role of you as the customer? This morning we took evidence
from trade unions, particularly the ones from Barrow, who were
making the point that what was needed there was continuation of
work to keep the skills set in place and clearly some of the decisions
here are possibly going to lead to gaps in that procurement process
for submarine work. How do you see your role in ensuring that
industry has the orders there to keep those skills together? Would
you consider, for example in Barrow, putting in surface ships
to stop any gap in work orders that could actually result just
from the process as your drumbeat goes through on the nuclear
side?
Lord Drayson: We do recognise
within the Ministry of Defence, not just in submarines and in
shipbuilding but generally, that where we have determined that
there is a strategic defence need for us to maintain in this country
a sovereign capability that puts on the Ministry of Defence a
responsibility to understand what level of work will maintain
that capability. So if we decided that a capability was necessary
for our defence needs, and there are various reasons why we may
have done, as we set out clearly in the defence industrial strategy,
then we have to go to the next step, which is to analyse and understand
the industry well enough and to get industry to understand our
military needs well enough, such that there is a joint understanding
with industry of what is a minimum level of business which will
maintain that capability. That is not an easy thing to do. That
is something which we have been working hard to do, particularly
over the last years; we have implemented the Defence Industrial
Strategy. So in the particular case of Barrow and submarines,
what we have learned is that yes, in the past, for example when
there was that gap which we now, with hindsight, can see was too
long a gap between the Vanguard class and the Astute class, that
gap was in part filled with surface ship work. Now that certainly
helped but we need to recognise that the type of work involved
in surface ships, both from a design and manufacture point of
view, is qualitatively different from the work involved in submarines
and members of the Committee have visited the various yards and
you have seen for yourself that they are really quite different.
So although in some part you can use work for surface ships, such
as, for example, we anticipate that work from the forward surface
ship programme will be in part done by Barrow, it does not totally
solve the problem for you. You need to recognise that. Notwithstanding
that, the issue relating to submarine design and build is only
maintained by maintaining those skills at work applied to submarines.
Q241 Mr Jones: So how do you do
that?
Lord Drayson: Then it is about
balancing the workload and making trade-offs between the two,
given a decision about the defence need. Everything comes from
first determining what it is within the equipment programme we
decide that we need and how then we can encourage by carrot and
stick the industry to right-size itself for that forward equipment
programme.
Q242 Mr Jones: We were told this
morning that it takes nine years to train someone in submarine
design and some of the other technologies involved. Clearly, in
terms of the investment industry needs to make in that, they need
some confidence for their shareholders that you are not going,
half way through that nine-year programme, to say you are sorry
but you do not really need that. How are you going to give that
confidence to the industry that, for example, with submarines—and
I accept all you are saying about the difference between that
and surface ship work—they know that if they are going to
take on apprentices and graduates to get that expertise the work
is going to be there over the longer term?
Lord Drayson: This interdependence,
which has been described by other people as the chicken and egg
situation, is that on the one hand it is about the Ministry of
Defence providing clarity of the forward programme and then sticking
to it, but on the other hand industry then seeing that the quid
pro quo for that clarity is that industry invests to improve,
through continuous improvement, the affordability of that forward
programme and not sit on its laurels and take the forward programme
without making significant improvements. So we need to see both
things reinforce each other and go forward together.
Q243 Mr Jones: I understand that
but the big elephant in the room which perhaps you do need to
talk about is the Treasury. Have you actually got the Treasury
signed up to that type of thinking which is committing MoD spending
quite a long way into the future, if you are going to go to business
and say you can give them this commitment? Is Treasury signed
up to that?
Lord Drayson: You have put your
finger absolutely on the importance of the Treasury being on board
with this.
Q244 Mr Jones: That was not the
question I asked.
Lord Drayson: The answer is yes.
The Treasury is rightly concerned at making sure that we are generating
best value for money for the taxpayer. This is an iterative process
with industry. The Treasury signed up to the defence industrial
strategy as a signatory to the defence industrial strategy and
the Ministry of Defence is keeping the Treasury fully informed
of the process of the programmes as we take them forward.
Mr Jones: I should be very wary if I
were you, Minister.
Q245 Mr Hancock: In your letter
that I received today, you talked about the first anniversary
of the maritime industrial strategy and your disappointment that
the consolidation that you were seeking within the industry had
not been forthcoming with quite the speed you had anticipated.
That is a fair point and I have heard you talk about it before.
You also said that part of the problem there was that the order
book from the MoD had never been rosier for the industry than
it is at the present time, but that is a very short-term view.
Does it not then make it difficult for you to be able to push
the price down of say the Astute submarines to an acceptable level
which would allow you to have the continuity of the programme
that you need when they see very much that they have you over
a barrel, very much like Devonport would claim they have you over
a barrel over their refitting and refuelling of the submarines?
Lord Drayson: I think we have
each other over a barrel. We are the only customer that this industry
can go to and they are the only supplier that we can go to as
the customer, so there is a useful interdependence; someone called
it a Mexican stand-off.
Q246 Mr Hancock: But do they need
you more than you need them?
Lord Drayson: We both need each
other. It is taking more time in the maritime sector than we have
seen in other sectors where there is not that rosy position in
the short term relating to orders. Nonetheless, I have seen, as
I indicated, some good signs: what we have seen on the aircraft
carrier, what we are seeing taking place on Astute. We learned
a lot, the Ministry of Defence and industry together, the hard
way on the Astute programme, going back to 2003 and we are now
in a position to look at the prices for boats two and three based
on a real understanding as boat one comes to completion. It is
about making sure we get the right limited liability in terms
of the risks of the programme in respect of the costs. So we depend
upon each other and it is my job as Minister for Defence Procurement
to make sure that the Ministry gets the best value for money it
can, consistent with ensuring that we sustain the capability where
we have determined that those capabilities are in the defence
interest.
Q247 Mr Hancock: How could Parliament
and the country know that, when we get the White Paper and the
preferred option possibly is to replace the Trident boats, we
can actually afford it, that the price quoted at the beginning
of 2007 is actually going to be a price the nation can afford?
The repercussions of not being able to meet that cost would be
pretty horrendous for the Navy and probably for the MoD generally.
What steps are you able to take, what lessons have been learned?
It is obvious from your own words that the industry itself does
not accept that they have too much of a responsibility to force
the price down?
Lord Drayson: I do not accept
that. I really have seen a recognition take root in industry,
particularly over the last six months, that the Ministry of Defence
means it; I really have seen that. We have seen improvements in
performance, measurable improvements in performance.
Mr Gould: Taking Astute, we have
done what we said we would do in 2003, which is use Astute one
to re-establish the industry, re-establish the capability to build
submarines at Barrow. That has now been done, that has been externally
reviewed and the conclusion is that we have actually achieved
that, which puts us in a position of knowing that we and the industry
understand what a good challenge but a reasonable cost for industry
of building an Astute submarine is. I am optimistic that we are
close to agreeing prices on two and three. The important thing
is to keep that going. So we keep that going through future orders,
we have had significant overhead reductions driven by the management
at Barrow to demonstrate that they can actually improve the running
of the business, we have a much better approach now from Rolls-Royce
and associates on how we are going to maintain and manage the
nuclear-steam-raising plant throughout its life. They are investing
in people, investing in capability, interested in future design
changes to make it easier to build and easier to maintain. Indeed
we have, with DML, the management company in Devonport, some good
cooperation starting in how we can build on what we are doing
with Rolls-Royce in terms of reactor maintenance into submarine
availability contracting. The important thing is not to lose that
momentum. We have the momentum moving in the right direction and
the only way we can assure that the price that we now understand
is the right sort of price for these submarines remains at that
level is to maintain that activity and that engagement by ourselves
and by the key companies in the supply chain.
Q248 Mr Hancock: Is there a price
that is too high or is the decision to have a nuclear deterrent
irrespective of that?
Mr Gould: There is a price that
is too high and there is a price that is too low. A question was
asked previously about whether we are trying to drive the cost
down below where it is reasonable to have it in terms of comparison
with the US and France. There is a level of cost below which you
simply cannot do this kind of work.
Q249 Mr Hancock: I can understand
that. But there is also a cost that the country cannot afford,
is there not?
Mr Gould: Yes, there is.
Q250 Mr Hancock: The question
really is: can we afford not to have a deterrent and can we afford
not to pay for these submarines?
Mr Gould: This is about industrial
skills and capability.
Q251 Mr Hancock: That is how you
get to the price though, is it not?
Mr Gould: Yes. What is the right
level of price for this industrial capability for these products?
It is not for me to decide whether or not we can afford that.
That, with respect, is more for you.
Q252 Mr Hancock: I would remind
you that I did raise the issue about the 30-year lifecycle and
you changed your mind then because I was actually quoting from
the Strategic Defence Review of 1998, paragraph 62, where you
said it was 30 years. The Rear Admiral said he was sure it was
25. You changed your mind. So the price for the existing boats
that we have has decreased because we are going to have to pay
now, if we extend the service, to keep them in the water for the
period that they were originally designed for.
Rear Admiral Mathews: We promised
a note on that and my understanding is that the original design
life set at the staff requirement was 25 years, so I am unaware
of where that figure has come from. We will get you a note on
that. What we are facing here is that this is a long-term business,
long-term time constants and therefore we need long-term decision
making. Where we are with industry is that they have recognised
that, the route that we went down with Astute was not the right
way because we set off with competition and that has led to a
set of behaviours which positions MoD and industry in not the
best collaborative way. In looking at the future programme, we
have to recognise that we need to work together here. We have
downsized the industry, we have downsized MoD, we have a limited
set of skills between us and the only way we are going to do this
is by working together. So industry have already started to grasp
that and they have done a number of things. Mr Gould has already
talked about taking out the cost of the overhead at Barrow, but
they are also looking at how to reduce costs in building Astute
and we have made some significant cost reductions in the future
programme. At DML we have taken out quite a lot in terms of the
nuclear overhead charge; we have had a programme there called
the Submarine Upkeep Improvement Programme which has taken out
significant amounts of money from the annual expenditure there
and with Rolls-Royce we have changed the relationship into a performance-based
contract. So we are moving ahead here with industry. What we have
not achieved yet is joining those three up to work collaboratively
together with us and that is where we need to go next.
Q253 Mr Hancock: To get to that
point on the Astute submarines did you downgrade the specification
of the next two boats as opposed to the first boat? You say you
are getting the costs down. I want to know whether in getting
the costs down all the give has come from one side or have you,
at the Ministry of Defence, degraded our spec in any way?
Rear Admiral Mathews: We have
looked at what we can do in terms of flexibility of specification,
yes, and requirement. What we really need, because we have to
make these boats affordable. So yes, there have been some changes
in requirement, but the Key User Requirements are still there
and we intend to meet those.
Mr Hancock: It would be interesting if
we could know what they were and what the costs were.
Q254 Chairman: Can you let us
have a note about what the reduction is please?
Rear Admiral Mathews: Yes, we
can.
Q255 Linda Gilroy: We have talked
quite a lot about the significant behavioural and structural improvements
that you have been looking for, but in the event that the UK opts
for renewal of a submarine-based deterrent, how are you preparing
to manage a project of the likely scale of the Vanguard's successor?
Lord Drayson: If that is the decision
which is taken, we start from the good position that we have the
infrastructure and the know-how in place for the existing system
and we have the recent experience, as we have discussed this afternoon,
of the Astute. What we have to do though is also recognise that
we are going to need to recruit into the project team additional
people with expertise. We judge that in that we shall be competing
with the civil nuclear industry in some areas, but we judge that
it will be possible for us to do this. We also take into account
that, notwithstanding that we have been operating a system which
is submarine based for some time, we take into account the challenge
that the size of the industry we have today is considerably smaller
than the industry that we had at the start of the Vanguard programme
because of the number of submarines that were being built at that
time compared with the number of submarines that we are building
now. Notwithstanding that, we are confident. Where does that confidence
come from? It comes from initiatives which we have been putting
in place within the Ministry of Defence to strengthen the Ministry
of Defence's general competence across defence procurement in
terms of project management, the range of skills that we need
in terms of commercial project management skills, in terms of
defence procurement generally. All of these are as applicable
to a project such as a major submarine project as they are to
other projects in addition to the skills which are needed which
are peculiar to a nuclear submarine.
Q256 Linda Gilroy: When there
were Polaris and Trident, dedicated organisations were maintained
to manage the project and those no longer exist; there have been
big changes in procurement of course since then. Can you just
say a bit more? Will it be an IPT, will it be a special model
of managing procurement, if it goes ahead? You have said that
you are confident that you will find suitably qualified and experienced
staff, but where will you find them to manage a project on that
scale?
Mr Gould: It is clearly a massive
enterprise doing something like this, which is why when we did
Polaris and then Trident we had special organisations to do that.
In many ways, those were precursors of IPTs because they were
big organisations which brought all the necessary internal skills
together to manage over a long period of time an extremely complex
and challenging programme. That is actually what IPTs do; it is
a question of scale more than anything else. The difference is
that quite a lot of the things that we did in-house, especially
during Polaris but also during the Trident programme, we do not
now do in-house. What we shall have to do is actually recognise
this is a national enterprise and what we have to create in terms
of an IPT is something that is much more like the carrier. I am
not talking about commercial arrangements but the behaviours where
we bring ourselves and people from outside industry together into
a joint team to execute a programme of this size. What is absolutely
clear is that, if you are going to execute a programme of this
size, you must make sure you resource it properly, not just in
terms of money but in terms of the internal skill. By "internal"
I mean people we recruit or bring in on secondment from outside
industry as well to resource the programme properly.
Q257 Linda Gilroy: So accepting
that no decision has yet been taken, but given the likely in-service
date of the potential Vanguard successor, should there not be
at least some sort of shadow project management team set up and
running already? To what extent does the need to have a decision
relate to having that in place?
Mr Gould: It clearly helps to
have a decision if you are going to set up a project team. Because
of what has been happening on investigating options and so forth
and because of what is being done on the nuclear programme generally,
quite a few of the elements of that sort of team are already in
existence, but clearly we will have to grow very considerably
to execute a programme of that size.
Q258 John Smith: Just responding
to the exchanges this afternoon, is it not the simple truth that
if you look at the skills bases and retaining the skills capability,
the moment we put in a defence industrial strategy that we are
going to retain sovereign skills in submarine building, then we
effectively commit ourselves to a replacement of Trident which
is submarine based?
Lord Drayson: No, I do not accept
that.
Q259 John Smith: Or alternatively
we are going to find a use for nuclear-powered attack submarines,
whether we need them or not.
Lord Drayson: No, I do not accept
that. Right at the start of the Defence Industrial Strategy, it
says that whereas in the past we have had an industrial policy
for defence, that policy set out principles by which we would
take procurement decisions but it did not put them in an order
of priority. The Defence Industrial Strategy, for the first time,
put the decision framework in an order of priority and it said
that the first priority will be the defence need. So what comes
first is what the country judges its defence need to be in terms
of strategic nuclear deterrent. After that decision has been made,
what is the country's defence need in terms of submarines? From
that, given that decision, you are then down to what it is that
needs to be done to make sure that the country has the capability
to implement that.
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