Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 240-259)


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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