House of Commons - Defence

Select Committee on Defence Tenth Report

4 Progress on key programmes

110. In the current Parliament we have examined the progress on a number of key defence equipment programmes. For some key programmes we have undertaken specific inquiries, such as our inquiries into the Future Carrier and Joint Combat Aircraft programmes[146], and into the Future Rapid Effect System (FRES) programme[147]. We have also examined the progress on key programmes as part of wider inquiries, such as Defence Procurement 2006[148] and Ministry of Defence Annual Report and Accounts 2006-07[149]. In our Defence Equipment 2008 inquiry we examined the progress on seven key programmes: Astute submarine; Type 45 destroyer; Nimrod MRA4 aircraft; A400M transport aircraft; FRES; Future Carrier; and Joint Strike Fighter (JSF).

111. The National Audit Office's Major Projects Report 2007[150], published in November 2007, sets out how the 20 largest equipment programmes have performed against their Approved Cost and Approved In-Service Date (ISD) for the year ended 31 March 2007. The performance of the seven key programmes which we focused on in this inquiry, against their Approved Cost and Approved ISD, as reported in the Major Projects Report (MPR) 2007, is set out in Table 4.

Table 4: Performance of key programmes against their Approved Cost and In-Service Date (ISD)

Project Approved Cost at Main Gate
£ million
Current Forecast Cost
£ million
Variation

£ million
Approved ISD at Main Gate Current Forecast ISD Variation

Months

Astute submarine 2,578 3,798 +1,220 June 2005 November 2008 +41

Type 45 destroyer 5,475 6,464 +989 November 2007 November 2010 +36

Nimrod MRA4 2,813 3,500 +687 April 2003 September 2010 +89

A400M 2,744 2,629 -115 December 2009 March 2011 +15

FRES The project is pre-Main Gate

Future Carrier The project is pre-Main Gate[151]

JSF 2,236 1,858 -378 MPR 2007 states that "The tailored Demonstration Main Gate noted but did not approve ISD"

Source: National Audit Office

Recent Committee coverage of key programmes

112. Prior to this inquiry, we last examined the Astute submarine and Type 45 destroyer programmes in our report Ministry of Defence Annual Report and Accounts 2006-07, published in January 2008[152]. We were concerned to learn that both programmes had experienced substantial forecast cost increases since MPR 2006.

113. The Astute submarine programme had experienced a forecast cost increase of £142 million and the Type 45 destroyer programme had experienced a forecast cost increase of £354 million.[153] Bill Jeffrey told us that the forecast cost increases experienced since MPR 2006 were a result of "some further efforts by the teams concerned with BAE Systems in particular to understand the cost base of Astute and to identify with them ways of resourcing the Type 45 programme more efficiently".[154] He said that the MoD had re-negotiated the contracts on these programmes on a "more fixed price basis" and he believed that the costs on both programmes were "now more under control".[155]

114. The Type 45 destroyer programme had also slipped a further 11 months since MPR 2006 and was forecast to enter service three years later than the in-service date approved at Main Gate.[156] In our Ministry of Defence Annual Report and Accounts 2006-07 inquiry, the MoD told us that it had sought to place the programme on "a more stable footing" and had worked with the contractor on a "significant re-orientation programme focused on risk quantification and incentivising delivery".[157]

Astute submarine

115. The MoD memorandum to our Defence Equipment 2008 inquiry provided an update on the Astute programme. The current forecast cost and ISD were the same as those in MPR 2007. Recent key events on the programme have included:

Construction on the programme has been optimised to a "22 month drumbeat" which is the "optimum approach to sustain the industrial base and enable a smooth progression to the construction of the successor submarine programme". This drumbeat is "based on a 7 boat Astute programme, subject to affordability".

A contract was placed in May 2007 to start initial construction on Boat 4.

ASTUTE was launched from Barrow in June 2007 and is "due to enter service in 2009".

In August 2007, while "undergoing testing on Astute (Boat 1), power was lost to a lubricant oil pump which caused damage to the Turbo Generator bearings". Final repairs are expected by Spring 2008 and the costs of these are to be agreed by BAE SYSTEMS and the MoD once the repairs have been completed. ASTUTE is scheduled to be delivered by the contract date of November 2008.[158]

116. In terms of the number of Astute submarines that would be ordered, Mr Gould said that the MoD had let contracts for three submarines and "we have a fourth where initial contracts are already being placed".[159] He confirmed that the MoD could afford the fourth boat.[160] He added that:

We have a design for cost reduction contract and long lead items on the reactors for the fifth boat. We need to keep going at that rhythm to use the Astute learning to build into the successor programme to make sure we do not lose those skills and collective memory as we go though.[161]

117. The target number of Astute submarines was seven.[162] CDM confirmed that the Astute programme was, as with other equipment programmes, part of the current "analysis…. to see whether the profile of the programming is right".[163] On 27 February 2008 the Minister for the Armed Forces confirmed that it remained the MoD's plan to order seven Astute submarines.[164]

118. We have taken a close interest in the prices of the individual boats ordered. The MoD has agreed price for boats 1, 2 and 3, but did not have an agreed price for boat 4 because it was undertaking "a design for cost reduction programme".[165] We would expect the price of boat 3 to be lower than boat 2 and asked the MoD if this was the case. Mr Gould considered that the prices for boats 2 and 3 were "fairly comparable in price".[166] Following the evidence session the MoD provided us with details on the prices of Astute boats 2 and 3:

Compared on a like for like basis, the target price for Boat 3 (Artful) is some £37M less than the target price for Boat 2 (Ambush).[167]

119. The MoD considered that the problems on the Astute submarine programme were a consequence of not having ordered a submarine for 10 years and moving from designing submarines based "on doing a physical scale model of the whole boat to using computer-aided design".[168] The MoD had learned a number of lessons from the Astute submarine programme. These were:

"if you are to undertake something you have not done for a long time and you are to change the whole technique by which you do it you should not try to fix the price until you know much better what you are doing. The key to containing submarine pricing in future is, first, to design for cost reduction."
"it is such a specialised industry that you need to keep doing it. If you do not keep ordering submarines at a certain drumbeat you will inject cost into future boats because you have to go back up the learning curve."[169]

120. We note that the MoD has identified key lessons from the problems experienced to date on the Astute submarine programme. We consider it vital that these lessons are taken into account when the MoD acquires the successor to the current Vanguard class submarines and look to the MoD, in its response to our report, to set out how it plans to ensure this is done.

Type 45 destroyer

121. The MoD memorandum to our Defence Equipment 2008 inquiry showed no change to the current forecast cost and ISD reported in MPR 2007 for the Type 45 programme. Recent key events on the programme have included:

In August 2007, "Treasury signed off revised costs and revised contract for Type 45 ships 1-6 let with industry".

In August 2007, "Initial Sea Trials were successfully completed" on the First in Class Type 45 destroyer.

In November 2007, the third Type 45 destroyer was launched.[170]

122. The Type 45 destroyer is a planned class of eight ships, but approval, so far, has only been given for six ships.[171] We asked how many Type 45 destroyers the MoD could afford. Mr Gould said that six had been ordered, but "anything beyond that is subject to the review process now going on".[172] He told us the price difference between ships in the Type 45 programme was because labour and materials had changed over time.[173] The MoD had not changed the specification for the Type 45 destroyer.[174]

123. The Type 45 destroyer programme experienced a further forecast cost increase of £354 million and a further 11 month time slippage during 2006-07. We note that the MoD did not change the specification for the Type 45 destroyer, so this was not the reason for the further forecast cost growth and time slippage. In its response to our report, we expect the MoD to set out the key lessons identified from this programme and to provide us with an update on how the programme is currently performing against its Approved Cost and In-Service Date.

Nimrod MRA4

124. The Ministry of Defence Autumn Performance Report 2007-08 states that the "major programme showing cost growth at present continues to be Nimrod [MRA4]".[175] At the evidence session for our inquiry into the Ministry of Defence Annual Report and Accounts 2006-07, Bill Jeffrey told us that the cost growth on the Nimrod MRA4 programme was the "one significant area that we are having to attend to now".[176] In our report Ministry of Defence Annual Report and Accounts 2006-07, we recommended that the MoD undertake a review of the Nimrod MRA4 programme "in order to ensure that best value for money is achieved in maintaining this important capability, both in quality and quantity of platforms".[177]

125. At the evidence session for our Defence Equipment 2008 inquiry we asked why the Nimrod MRA4 programme was experiencing further problems. Mr Gould told us that:

We have something which usually happens on aircraft programmes, that is, an overlap of production with flight trials. As you know, we have let the production contract for MRA4. The flight trials are going well but what happens is that you finally discover some things that need subsequent modification as you go through the production programme. There has been a problem of pitch on the aircraft, which is not unusual; it happened also on the MRA2, but the MRA4 has much bigger wings and more powerful engines.... That accounts for about half of the cost growth referred to in the interim report. The other half is the cost of converting the three trial aircraft..... The total we are talking about is £100 million, which is just a little less than three % of the total programme cost.[178]

126. Since the DE&S Chief Operating Officer, Mr Gould, told us that the problems being experienced on the Nimrod MRA4 programme were not considered unusual, that they had been experienced on the MRA2 programme and that "it was predictable", we are deeply concerned that they nevertheless seem to have come as such a surprise to the MoD. His comment that, until the prototype had been built, "that is the first time you can test it against reality" may be true, but for the MoD to have failed to have provided for the risk turning into reality cannot in the circumstances be excused by the suggestion that "it would have been a low probability". We accept his contention that, because of the long gap between the MRA2 conversion programme and the MRA4 programme, some 20 years, the experience from the earlier programme had been lost, but we are disappointed that this had not been recognised at a much earlier stage of the programme.[179]

127. The MoD had examined the scope for acquiring a different aircraft "in about 2003 when there was a major crisis in the Nimrod programme". The MoD could not find a substitute at that time and "made the decision across government to continue with the Nimrod programme".[180] Mr Gould said that most other countries use the "P3 which is a Lockheed Orion aircraft". The P3 was a contender, but did not have the endurance of Nimrod.[181] Regarding the age of the MRA4 aircraft, Mr Gould told us that most of the aircraft was new, such as the wings, engines and undercarriage. The fuselage was not new.[182]

128. The Nimrod programme has experienced further slippage in 2007-08 of 3 months. The total forecast in-service date slippage on the programme is now 92 months, some 7.5 years.[183]

129. At the end of 2006-07, the Nimrod MRA4 programme had experienced a forecast cost increase of some £687 million, almost 25% greater than the approved cost, and has experienced further cost growth in 2007-08 of some £100 million. Given the huge cost growth seen on this programme, we are concerned that the MoD does not appear very alarmed by the additional cost growth in 2007-08, referring to it as "just a little less than three per cent of the total programme cost". The programme has also experienced further slippage in 2007-08 which now totals 92 months, some 7.5 years.

130. In our report on the Ministry of Defence Annual Report and Accounts 2006-07 we recommended that the MoD undertake a review of the Nimrod MRA4 programme in order to ensure that best value for money is achieved in maintaining this important capability, both in quality and quantity of platforms. This is a programme that has been beset by one problem after another and neither the MoD nor the contractor appears to be able to get a grip on it. We hope that the new Minister for Defence Equipment and Support will look closely at this programme and consider whether it is ever likely to deliver the capability our Armed Forces require in the timescale needed. If it is not the MoD should withdraw from the programme.

A400M

131. We examined the progress on the A400M transport aircraft programme in our Strategic Lift report, published in July 2007.[184] The programme had experienced ISD slippage of 15 months which had required the lives of C-130K Hercules aircraft to be extended.[185] During our inquiry into the MoD Annual Report and Accounts 2006-07, the MoD provided us with an update on the A400M programme. The MoD acknowledged that the announcement by Airbus, the contractor for A400M, that initial deliveries are likely to be delayed by between 6 to 12 months "has placed the UK's In-Service Date of March 2011.... at significant risk". The MoD was working with Airbus to examine the scope for "schedule recovery".[186] In our report on the MoD Annual Report and Accounts 2006-07, we recommended that the MoD undertake "a review of the A400M programme given the problems experienced to date".[187]

132. In our Defence Equipment 2008 inquiry we asked about the latest forecast in-service date for the A400M programme. Mr Gould told us that "the latest in-service date that we currently predict is July 2011".[188] The programme had experienced a further 4 months slippage since the position in MPR 2007 and was now expected to enter service some 19 months later than the original approved ISD. Mr Gould said that the MoD lost a year "because the German Government took a year to sign the MOU and so no work was done".He considered that the UK was fortunate because it is not taking "the first aircraft off the line".[189] He added that Airbus:

have missed the milestone for starting assembly of the first aircraft and have had delays on the engine programme, so both of those things will combine to delay the programme, but it will not be a one-for-one delay of a year; it will be less than that for us because we take subsequent aircraft.[190]

133. Following the evidence session, the MoD provided us with an update on the A400M programme. The programme has experienced a further five months slippage during 2007-08, bringing the total in-year slippage to nine months. The total forecast in-service date slippage for A400M is now two years.[191]

134. We asked whether it would have been better and cheaper to have increased the C-17 and Hercules aircraft fleets rather than acquire A400M aircraft.[192] CDM emphasised that, while the C-17 is a strategic aircraft, the A400M "will be tactical as well as strategic". Mr Gould considered that the A400M will be a "very good aircraft" for the requirement,[193] but acknowledged that:

It is very challenging because you are trying to get something that is in between Hercules and the C-17 at a price which is closer to Hercules.[194]

He told us that he thought we should "take a very cautious view of the time it will take to complete flight trials on A400M" as it was "an extremely challenging programme".[195]

135. It is disappointing that the in-service date on the A400M transport aircraft programme has slipped a further nine months in 2007-08 and it is now expected to enter service some two years later than the original approved in-service date. As we recommended in our report on the Ministry of Defence Annual Report and Accounts 2006-07, we look to the MoD to work closely with the contractor for this programme to reduce the risk of any further delays and, where possible, to identify ways to recover some of the forecast slippage.

136. DE&S has a "project rehabilitation unit" which is moved from project to project and has undertaken a review of A400M.[196] We recommend that in its response to our report, the MoD sets out the key findings of the review of the A400M programme undertaken by the DE&S project rehabilitation unit.

FRES

137. We examined the progress on the Future Rapid Effect System (FRES) programme in our report The Army's requirement for armoured vehicles: the FRES programme, published in February 2007.[197] In our FRES report we examined the issue of the ISD for the FRES Utility variant and noted that "over the years, Ministers and MoD officials have provided us with different target ISDs for FRES that have moved progressively into the future". In May 2004, the then Minister for Defence Procurement (Lord Bach) told our predecessors that he expected that the Utility variant of FRES would be in-service in 2009.[198] In our report we acknowledged:

the increased rigour that Lord Drayson's[199] leadership has brought to the MoD's procurement process and note the reasons he gives for not announcing the ISD for FRES before it has passed its Main Gate review.[200]

138. In its memorandum to our Defence Equipment 2008 inquiry, the MoD states that:

Real progress has been made on FRES. Implementation of the FRES competitive Acquisition Strategy is being driven hard to ensure we deliver, as early as possible, a FRES capability that meets the Army's needs through life.[201]

139. The MoD memorandum provides the following update on the FRES programme:

June 2007—the Minister for Defence Equipment and Support announced the three vehicle designs selected to take part in the Utility Vehicle (UV) Trials (the UV Design Competition). The vehicles were VBCI (Nexter), Piranha Evolution (GD (UK)), and Boxer (ARTEC).
September 2007—Herbert Smith appointed to provide legal advice to the FRES Integrated Project Team "to ensure that the MoD receives strong legal, intellectual property and alliancing advice".
October 2007—the MoD announces that the Thales (UK) and Boeing team have been selected as the preferred bidder for the "System of Systems Integrator (SOSI)".
November 2007—Industry responses to "Pre-qualification questionnaire for the UV Integrator role received by FRES IPT and assessment under way".
November 2007—the Minister for Defence Equipment and Support "announced the outcome of the UV Design trials. UV Trials completed on schedule in September 2007, producing a recommendation based primarily on technical considerations. Review of commercial implications of the three competing designs launched".[202]

140. The MoD memorandum lists the following forthcoming events:

January 2008—Award of contract for the initial phase of SOSI support to the FRES programme.
2008—Announce the one preferred UV Design to be taken forward to the next stage of the FRES UV programme.
2008—Selection of one or more UV Integrators to proceed to the next stage.[203]

141. The MoD expected the decision on the UV design to be announced "very soon".[204] Lieutenant General Applegate told us that "we have made the recommendation to invest in that and push forward aggressively".[205] We sought confirmation that the UV design that has been recommended was the Army's preferred option. Lieutenant General Applegate said it was. He added that:

The reason is that we briefed the Army accordingly, with appropriate caveats as to names and things like that, about what we had found in the various trials and the implications of the analysis we had done in terms of issues such as timeliness, the ability to grow though life, levels of protection and confidence in the nature of the company.

He emphasised that the Army had been "heavily engaged throughout".[206]

142. We note that the Army, as the front line user, has been closely involved in the process of identifying the preferred FRES Utility Vehicle design and that the design which has been recommended is the Army's preferred option.

143. The advantages of acquiring equipment off-the-shelf, or as close to off-the-shelf as it was possible to get, have been recognised by the MoD from the UOR process. We asked whether there was an argument for the MoD acquiring a vehicle to meet the FRES UV requirement off-the-shelf rather than a developmental vehicle which was likely to involve greater cost. Lieutenant General Applegate said there was not, as if the MoD "pulled something off the production line today", it would need to spend a substantial amount of money to meet "the conditions of today".[207] He told us that the MoD currently spends around £650,000 per vehicle to put it into theatre in order to equip it to the standard needed.[208] We sought further explanation as to why the MoD would not be better off getting the best available vehicle now. Lieutenant General Applegate told us that:

What we have done is to identify what we believe is the best available developmental vehicle in the market place that has a future. The alternative is to buy something that is basically a cul-de-sac and goes nowhere; it cannot be upgraded and cannot meet the threats over time. We believe that we have now identified that particular preferred design for the utility vehicle and we are confident that in conducting what is an aggressive programme to deal with some of the technological risks to produce something as early as we know the Army wishes will provide a level of capability that is far in excess of what we have today in order to meet those threats and, importantly, that it would have growth.[209]

He considered that acquiring a vehicle off-the-shelf would be a "bad decision" as such a vehicle would have a very limited life. The Army tended to keep vehicles for a long time and to increase their capability over time, and to try and do this with an off-the-shelf vehicle was considered to be "a recipe for disaster".[210]

144. We note that the FRES Utility Vehicle design which has been recommended is a "developmental vehicle" and that the MoD considers that this is the best option as it can be upgraded and its capability increased over time. We also note that the MoD considers that acquiring an "off-the-shelf" vehicle would not provide scope for increasing capability and would have a very limited life. While we recognise that these are strong arguments for acquiring a developmental vehicle for the FRES Utility Vehicle, such an option is also likely to involve higher costs and increased risks to the in-service date because of unforeseen problems during the further development. If the recommended design is approved, the MoD needs to ensure that it identifies the key risks on the programme and how these are to be managed.

145. We sought clarification on the roles of the SOSI. Lieutenant General Applegate explained that the MoD had not been very good in the past at developing people with the necessary skills "and to think about the way a variety of individual equipments come together and interact with one other". He said that the FRES programme involves a number of vehicles with multiple roles and the MoD needed the expertise to consider how best to integrate common solutions throughout those roles. In the short term the MoD needed:

the System of Systems Integrator to give that overview and provide us with specialist expertise to manage the complex mix of individual requirements.[211]

General Applegate added that one of the tasks which the SOSI would undertake was to "bring those skills back into the Ministry of Defence so we become better at this over time".[212]

146. It has been widely reported that Lord Drayson, the former Minister for Defence Equipment and Support, wanted to achieve an In-Service Date for the UV variant of FRES of 2012. In its memorandum to our FRES inquiry, General Dynamics told us that Lord Drayson "has stated that the aspiration for the FRES Utility Variant IOC [Initial Operating Capability] is 2012." However, in response to a question about the FRES ISD, the Minister for the Armed Forces, on 18 February 2008, said that in-service dates are not normally set until the main investment decision [Main Gate].[213] We find it an issue of concern that the MoD appears to be at an advanced stage with regard to selecting the FRES Utility Vehicle design yet has still to clarify what the planned In-Service Date is. In its response to our report, we expect the MoD to provide clarification on this matter.

147. In our report UK land operations in Iraq 2007, published in December 2007, we examined equipment issues including the procurement of armoured vehicles. The MoD had procured 100 Mastiff armoured vehicles for deployment to Iraq and Afghanistan as well as an additional 38 Vector patrol vehicles. It had also up-armoured 70 FV430 MK3 Bulldog tracked vehicles. On 8 October 2007, the Prime Minister announced the purchase of 140 Mastiffs for use in both Iraq and Afghanistan.[214] In its response to our report we expect the MoD to set out how many Mastiff vehicles are being procured for operations in Iraq and Afghanistan, how the acquisition of armoured vehicles for these two operations impacts on the FRES requirement, and how the MoD plans to use these vehicles when they return from current operations.

Future Carrier and Joint Strike Fighter programmes

148. We examined the progress on the Future Carrier and Joint Strike Fighter programmes in our Future Carrier and Joint Combat Aircraft Programmes report, published in December 2005.[215] The MoD's memorandum to that inquiry noted that "the target in-service dates for the two future aircraft carriers remain unchanged at 2012 and 2015".[216] The Joint Strike Fighter will operate from both the new aircraft carriers and land bases.[217] In the NAO's Major Projects Report 2004, the estimated ISD for JSF was given as "2012 to coincide with the first of the new aircraft carriers (CVF) entering service".[218] In our inquiry into the Future Carrier and Joint Combat Aircraft Programmes, the MoD told us that the ISD for JSF would be set when the main investment decision (Main Gate) had been taken and that its "previously announced planning assumptions based on an ISD of 2014 have not been changed".[219] In our report we concluded that:

We are concerned that the In-Service Date for the JSF has slipped from 2012 to 2014, some two years after the first carrier was originally expected to come into service. It is essential that the In-Service Dates for the CVF and JCA programmes match. If not, the UK could be left with new carriers without new aircraft to operate from them, or new aircraft with no new carriers to operate from.[220]

149. We examined the progress on the Future Carrier and JSF programmes in our The Defence Industrial Strategy[221] report, published in May 2006, and our Defence Procurement 2006[222] report, published in December 2006. We examined the Future Carrier and JSF programmes again in our report The Defence Industrial Strategy: update[223], published in February 2007. In the latter report, we expressed our disappointment that the required restructuring of the surface ship industry had "not taken place and that this has delayed the main investment decision on the Future Carriers".[224] We welcomed the signing of the Memorandum of Understanding covering production, sustainment and follow-on development for the JSF programme, and the assurances obtained by Lord Drayson, the former Minister for Defence Equipment and Support, that the UK will get all the technology transfer it requires to operate the JSF independently.[225]

FUTURE CARRIER

150. On 25 July 2007, the Secretary of State for Defence announced the overall outcome of the Comprehensive Spending Review 2007 settlement for defence. He told the House that the MoD would be placing orders for two 65,000 tonne aircraft carriers which were expected to enter service in 2014 and 2016 and "will sustain and create some 10,000 jobs across the UK".[226] On 27 February 2008, the Minister for the Armed Forces confirmed that the planned in-service dates for the two carriers had not changed.[227]

151. The MoD memorandum for our Defence Equipment 2008 inquiry provides the following update on the Future Carrier programme:

25 July 2007—The final Main Gate approval was announced to move into the Manufacture Phase. The approved cost for the programme at Main Gate was £3.9 billion and the approved in-service dates for the two carriers were 2014 and 2016.
25 July 2007—BAE Systems and VT Group entered into a legally binding Framework Agreement to establish a Joint Venture (JV). "BAE Systems, VT and the MoD also signed a Heads of Terms which set out the intended role of this JV in the CVF programme. At the same time the three parties signed a non binding Heads of Terms on the planned Terms of Business Agreement (ToBA) MoD intends to conclude with the JV in relation to the future surface warship programme".
Future Carrier Long Lead items were contracted for over the latter part of 2007.
As part of the process towards the JV formation, a legally binding Side Letter of Assurance was signed with the two companies on 11 January 2008 in support of the ToBA.
Placement of the Manufacture Contract was expected in the next 6 months, subject to legal formation of the JV.[228]

152. In a Written Answer of 7 January 2008, the Secretary of State for Defence said that:

we have committed to placing an order for two future carriers. Contracts will be placed with the industrial participants in the Aircraft Carrier Alliance delivering the project, when the joint venture between BAE Systems and VT Group has completed the necessary approvals to allow it to receive a contract. This process is nearing completion.[229]

Joint Venture

153. We asked CDM why the Manufacture contract for the Future Carriers had not yet been signed. He told us that the MoD was "not quite ready to sign the contract" as there were some commercial issues with the Joint Venture (JV). He added that the JV needed "to be set up and that is rolling at the moment".[230] Mr Gould said that the JV had not been formed and the MoD did not, therefore, have a body to contract with.[231] We asked whether this was the only reason for not signing the Manufacture contract. CDM said "that is the issue".[232] We pressed further and asked again whether the only thing stopping the Future Carrier contract being signed was the JV deal between BAE Systems and VT. CDM told us:

That is my understanding. I suspected you might ask this question and talked to the commercial people this morning.[233]

154. Later in the evidence session CDM said that:

What I thought I said was that there were some commercial issues in which the Defence Commercial Director was still engaged, and one of those is the Joint Venture.[234]

155. We asked what the commercial issues were. CDM told us that he did not know and "could not answer it".[235] We were surprised to hear that he did not know given that this was such a key programme. We asked if it suited CDM not to let the contract now. He said "no, it is not me".[236] We asked if it suited the MoD not to let the contract now. He said "no".[237] We asked what the impasse was about. CDM told us that "we do not know".[238]

156. Mr Gould summarised the position on the JV, which the MoD has to approve,[239] as follows:

We have been encouraging them to form a Joint Venture, so not to approve it would be pretty perverse. What they have been asking for is a side letter from us which gives them some comfort, because obviously the Joint Venture in effect is a delayed sale. Therefore, if BAE Systems guarantees a price it needs some statement about future work. It has had that letter; it has been signed and sent to them, so there should now be no impediment to pretty quick progress on the formation of the venture and contracting for the ships.[240]

He expected the creation of the JV to be "fairly imminent".[241]

157. On the same day as the oral evidence session for our Defence Equipment 2008 inquiry, the Scottish Affairs Committee held an oral evidence session for its inquiry into employment and skills for the defence industry in Scotland. One of the witnesses for this oral evidence session was Nigel Stewart, Commercial and New Business Director, BAE Systems. He was asked about the JV on the Future Carrier programme and told the Scottish Affairs Committee that:

In terms of where we are at, the talks are at a very advanced stage and we are really just awaiting now confirmation from the Government of the signature and the timing of the CVF contract, assuming it is on the terms as currently agreed.[242]

158. On 2 February 2008 the Minister for the Armed Forces wrote to John Bercow MP about the Future Carrier programme. The letter, which has been placed in the Library of the House, states that:

As recently as 11 January we agreed a Side Letter with the companies, BAES and VT, giving assurances relating to our future intention which is a major step in the process underway to allow the Joint Venture (JV) to stand up as a legal entity which will permit the Carrier to go ahead.

159. When we held our oral evidence session on 29 January 2008, the Manufacture contract for the Future Carriers had yet to be signed. We find it a cause of concern that the MoD did not seem to know what was holding up the signing of the Manufacture contract. It appears that the formation of the Joint Venture between BAE Systems and VT was a factor behind the delay, but the MoD's view on why this had not happened did not appear to match that of industry.

160. CDM did not know if the Manufacture contract had not been let because the required funding was not available. He said that "the planning round is not in my hands".[243] Mr Gould considered that this Planning Round was as serious as he had known in recent years and "that is not an atmosphere in which it is easy to take big decisions on commitments". However, the Defence Management Board had looked at this proposal and "said that it was a good one".[244] If there were delays to the Future Carrier programme, there would be additional costs from running on the current Invincible class aircraft carriers. However, Mr Gould considered that "the additional amount you pay just on labour and materials for delay and dislocation in the carrier programme would outweigh that several fold".[245]

161. Mr Gould is leaving DE&S on 28 March 2008.[246] He told us that he would be disappointed if the Manufacture contract for the Future Carriers had not been signed before he left and was confident that it would be.[247]

162. We note that the MoD expects the Manufacture contract for the Future Carriers to be signed by the end of March 2008. We found unsatisfactory the responses from the MoD on the reasons for delay in signing the contract. We think it likely that much of the cause relates to the current difficulties in the Planning Round, but there must come a point where delays in letting the contract will affect the programme schedule and the expected in-service dates of 2014 and 2016. Further delays are also likely to lead to increased costs on the programme. We plan to monitor this closely.

163. We also call on the MoD to set out what roles the two Future Carriers will perform when they come into service and what capabilities these expensive ships will give us that could not be provided in other ways. Since the 1998 Strategic Defence Review there have been reductions in the number of current and planned surface ships, such as the Type 45 destroyer. We therefore look to the MoD to confirm that the two new carriers will have sufficient protection to undertake the roles expected of them while not removing from other tasks the naval cover that the country will continue to need.

Costs

164. The approved procurement cost for the Future Carrier programme is £3.9 billion.[248] The MoD expects that, as a result of the investment made to date and the incentive arrangements that will be put in place, the programme can be delivered under £3.9 billion. Mr Gould said that "both sides understand that this is a realistic possibility and it is not wishful thinking".[249]

165. A press article in January 2008 reported that BAE Systems and VT Group had proposed a cost-cutting plan to keep the Future Carrier programme on track. The article claimed that this followed an informal request from the MoD to industry to find ways to slowing spending on the carriers and that the MoD was looking for overall savings of some £200 million on the programme over the next two years.[250]

166. We note that the MoD expects the Future Carrier programme to be delivered below the approved cost of £3.9 billion as a result of the incentive arrangements that it plans to put in place. While it is important to acquire the two carriers within the Approved Cost, the MoD must also take account of the through-life costs of the carriers which will be many times greater than the acquisition costs. The MoD needs to make the necessary investment when acquiring the carriers so that substantial savings through-life will be delivered. In its response to our report, we expect the MoD to set out the forecast through-life costs of the two carriers and how its investment to date in the programme is expected to reduce the through-life costs.

Restructuring of the surface ship sector

167. The MoD was "very happy" with how the restructuring of the UK surface ship sector was being managed. Mr Gould told us "that is the whole point about the Joint Venture". The MoD had used the Future Carrier and Type 45 destroyer programmes to bring about a complete restructuring and a "recapitalisation of the warship-building industry".[251] We note that the MoD is content with how the restructuring of the UK surface ship sector is progressing. This is an issue which we plan to monitor closely.

168. On 11 February 2008 the MoD announced the start of an investment programme to modify the dockyard at Rosyth where final assembly of the two carriers is to take place. A £35 million contract was signed by Babcock Engineering Services with "Glasgow-based subcontractors Edmund Nuttall Limited to modify the docks in order to accommodate the building of the carriers and widen its direct entrance". The total investment in Rosyth is expected to be about £50 million.[252] We note that a contract to upgrade Rosyth dockyard, where the final assembly of the two aircraft carriers will take place, has been signed.

JOINT STRIKE FIGHTER

Cost

169. The Major Projects Report 2007 states that, as at 31 March 2007, £965 million had been spent on the JSF programme. A Unit Production Cost (UPC) is not provided in MPR 2007 as UPC "approval will be sought as part of MG [Main Gate] UK production approval".[253]

170. In our Future Carrier and Joint Combat Aircraft Programmes inquiry, the MoD told us that "we anticipate buying up to 150 STOVL [Short Take Off and Vertical Landing] variants of the Joint Strike Fighter".[254] In our Defence Equipment 2008 inquiry we asked what the target number of Joint Strike Fighters was. CDM said "it depends on what they cost".[255] The MoD did not yet know the unit cost or support costs for the JSF and CDM considered that "it would be foolish of me to suggest a number without knowing the price".[256] He confirmed that, if the US ordered fewer JSF aircraft than originally planned, this might affect the number of JSF aircraft the UK could afford because the unit cost would increase.[257] CDM did not know how big a risk this was. He added that:

We have the advantage that we have not signed up for x aircraft but to be part of the programme…. because the United States is buying so many we can pull off aircraft from the production line as we need them, so there is more flexibility in that respect.[258]

171. We probed further on the issue of the price of JSF aircraft and how this would affect how many JSF aircraft the MoD would acquire. We asked CDM for an outline figure. He told us that:

I cannot say…. We need to see the unit cost and then judgments will need to be made. Do we buy the number we first thought of for that price or fewer? Do we take money from a different programme?[259]

Mr Gould said that for comparable programmes to the JSF, such as the F18 programme, production cost growth of 20-30% had been typical. However, he had seen no evidence of that happening at the moment on the JSF programme.[260]

172. The MoD expects to have 36 JSF aircraft on each aircraft carrier.[261] We asked if the MoD could afford 36 JSF aircraft. Mr Gould was confident that the MoD could afford that number, but noted that there "would be an additional number for training, attrition and so forth".[262] We asked if the original figure of 150 JSF aircraft was "cloud cuckoo land". CDM told us that he was "not sure we need to decide on a number now".[263]

173. We asked if the MoD had a figure for how many JSF aircraft were needed for what the UK required for its defence capability. CDM confirmed that the MoD had a figure.[264] We pressed CDM on what the number was. He said that:

The Chairman asked me how many we would buy and the answer is that it depends on the cost…. We are at an early stage in the programme. The Royal Navy knows what it would like, as do all the services. This is all a balance. Requirement, minimum requirement, cost and other programmes are all intermeshed, and that is the work that is going on at the moment.[265]

Mr Gould added that "the figure of 150 is the one we still have in mind" and that the "great opportunity with JCA[266] is that we do not have to make up our mind on the total at the start".[267]

174. We acknowledge that cost has to be a factor in determining the procurement of major equipment, but we would expect the number of JSF aircraft to be primarily determined by what the UK needs for its defence capability. In its response to our report, we look to the MoD to set out the different roles which JSF aircraft will be required to undertake and how many aircraft will be required to fulfil each of these roles.

175. We note that the MoD considers that one of the benefits of the JSF programme is that it does not have to decide on the number of JSF aircraft it will acquire "at the start". While we acknowledge that UK participation in the programme provides this flexibility, we are surprised that the MoD does not consider it an issue that it does not know how many JSF aircraft it requires because it is "at an early stage in the programme". We take issue with the term "early stage", as the MoD has already spent in the order of £1 billion on the JSF programme and the first aircraft carrier, which the JSF aircraft will operate from, is expected to enter service in 2014—just six years away.

In-service date

176. Given our previous concerns about the in-service date for the JSF, we asked if the MoD was confident that JSF aircraft would be available to operate from the new aircraft carriers when they entered service in 2014 and 2016. Mr Gould told us that he was not confident that would be the case and that the MoD:

plan to use the [Harrier] GR9 on the first of the carriers…. we will not have a carrier's worth of fully productionised, trained and equipped JSFs in 2014…. we plan to operate only Joint Strike Fighters from carriers when we have enough JSFs to do that.[268]

177. The MoD plans to keep the Harrier GR9 in service until around 2018.[269] Mr Gould said that he did not think the Harrier GR9 aircraft were being run on beyond what was planned and that the MoD "always planned to use them in that way".[270]

178. The acquisition of two new aircraft carriers and Joint Strike Fighter (JSF) aircraft to operate from them will provide the core elements of the MoD's 'Carrier Strike' capability. We are disappointed and concerned to learn that JSF aircraft will not be available to operate from the first new aircraft carrier which, on current plans, is expected to enter service in 2014. We recommend that, in its response to our report, the MoD sets out the reasons why JSF aircraft will not be available to operate from the first new aircraft carrier when it enters service and the latest estimate of when sufficient JSF aircraft will be available to operate from both carriers.

179. We note that Harrier GR9 aircraft are to be operated from the first new aircraft carrier and that these aircraft will remain in-service until around 2018. We look to the MoD to undertake an assessment of how the 'Carrier Strike' capability would be maintained if JSF aircraft were not available to operate from the two aircraft carriers in 2018 when the Harrier GR9 goes out of service.

Wider lessons

PROGRAMME CONTINGENCY

180. During our examination of the progress on the Nimrod MRA4 programme, we asked whether a contingency had been built into the estimated cost of the programme. Mr Gould explained that a contingency was always built into a project, but, if that was done for every single risk identified, the MoD would be criticised "for coming in under budget on all of the projects and wasting resources which could have been used for something else".[271] In our view, what a large contingency did was create a realistic defence procurement programme. Mr Gould considered that the contingency should only include the risks that you believe "are the most likely outcome in the project" as, if you included a contingency covering every single risk, including those that were unlikely to emerge, "you will over-egg the contingency".[272]

181. We asked if there was a case for having a general procurement contingency. Mr Gould agreed that there was a case and said that some of the contingencies for "projects in the future are held centrally" by the Deputy Chief of Staff (Equipment Capability) "our customer, rather than as part of the project cost".[273] CDM added that the MoD did not yet have a general procurement contingency, but considered that the "right way to do it is to hold it centrally in the equipment capability area rather than down at project level".[274] The MoD did not yet have the money for a general procurement contingency, but it "will be part of PR08 [Planning Round 2008]".[275]

182. We consider that there is a strong case for having a general procurement contingency held centrally by the Equipment Capability customer rather than at the individual equipment project level. We look to the MoD, in its response to our report, to set out what consideration it has given to a general procurement contingency and whether and how it plans to introduce such a system.

CONTROLLING SLIPPAGE

183. The Astute submarine, Type 45 destroyer and Nimrod MRA4 aircraft programmes have experienced substantial in-service date slippage. In the Major Projects Report 2007, the total in-service date slippage for these three programmes was 166 months, some 14 years. The A400M programme has also experienced slippage and JSF aircraft will not be available to operate from the first of the new aircraft carriers, which is expected to enter service in 2014. We asked what the MoD was doing to control the in-service slippage seen on equipment programmes and the lessons that had been learned. Mr Gould considered that "time has a different characteristic from performance and cost" as:

Performance and cost can be bound contractually and legally. You can say that you will not make a milestone payment until a certain level of performance has been demonstrated and so on. You can certainly make the schedule contractually binding, but you cannot make it obey the laws of physics if it does not want to. The laws of physics have their results towards the end of a programme, because you find difficulty in a programme.... when you begin to do your system test and you cannot do that until you have a prototype on which to do it. What it means is that you are carrying not so much risk but a degree of uncertainty into quite a late stage of a complex technological project.[276]

184. Mr Gould said that one of the things the MoD was now putting back into project management skills, and it needed to do more, was the requirement "to pay critical attention to the contractor's schedule and consider whether it is really credible". He considered that MoD staff needed the ability "to look at a schedule with as much skill as the contractor". [277]

185. Substantial in-service date slippage on major equipment programmes has often been a result of over-optimistic estimates by contractors of the likely programme schedule. It is, therefore, worrying to learn that the MoD only now acknowledges that it needs to include in the project management skills of its staff the ability to examine a contractor's programme schedule and consider whether it is credible. In its response to our report, we look to the MoD to set out how it plans to up-skill its staff working in defence acquisition, so that they are able to examine critically the estimates provided by contractors both in relation to a programme's schedule and cost.

186. A technique being introduced by the MoD on equipment projects is Earned Value Management (EVM). Mr Gould explained that this technique:

requires you to prepare a very detailed work breakdown; it is a schedule broken down into work packages. That allows you to measure on a weekly basis exactly what progress is being made on a project so you can predict problems early on. Therefore, you know you have control and shared data.[278]

187. EVM is used in the United States on equipment projects as it is a requirement of the Department of Defense. The MoD is now using the technique on the Astute submarine and Nimrod MRA4 programmes and plans to use it on all equipment projects. Mr Gould told us that the MoD will not make a Main Gate decision unless the contractor has convinced it that it has "in place and are sharing with us the management tools—the EVM techniques and others—that we need so they can demonstrate progress".[279]

188. We note that the MoD is introducing techniques, such as Earned Value Management, to improve its visibility of the progress on equipment programmes and to identify potential problems as early as possible. We look to the MoD to assess whether the expected benefits are delivered by such techniques and, where they have been, to ensure that they are adopted on other programmes. We also expect the MoD to learn from the experience of the US Department of Defense in using Earned Value Management, such as on the Joint Strike Fighter programme.

189. There is often a substantial time-lag between the date an equipment meets its in-service date and the date when the equipment can be operated by the Armed Forces. For example, Typhoon achieved its in-service date, defined as the date of delivery of the first aircraft to the RAF, in June 2003.[280] However, the first operational squadron of Typhoon aircraft was formed on 31 March 2006.[281] Mr Gould said that the MoD would be focusing more:

on the lines of development[282] as well as training rather than the kit and testing it so that we look not just at ISD but initial and full operating capability and work to those schedules. What is now happening on projects is that when we have enough system performance we start to train the crews, soldiers or whoever even though there is still some development to be done so they can effect the final stage of development and become familiar with the system and get it into service quicker.[283]

190. We note that the MoD is paying more attention to the date at which equipment can deliver initial and full operating capability, rather than just the in-service date. Starting the training of the users of equipment, even where there is some further development work to be completed on an equipment programme, should allow the equipment to enter operational service more quickly.

CHANGE CONTROL

191. One of the criticisms that we have often heard from industry is that the MoD changes the requirements and specifications of the equipment it has ordered. These changes lead to increased costs. CDM acknowledged that there was "requirement creep…. and customers, in this instance front line commanders, will often change their minds". He said that the MoD needed to be fairly rigorous about this, although it might arise because the threat had changed.[284]

192. We asked how the MoD was addressing the issue of requirement creep. CDM's view was that there was a good case for having equipment "that is 80% right now", with an open architecture that could be built on incrementally as changes occurred.[285] The approach which the MoD was seeking to drive forward now was to:

have an open architecture with incremental upgrading and innovation to be added as required either by the threat or as research and technology develop something much better.[286]

Mr Gould stressed the need for "good change control" as a fundamental of good project management.[287] He said that good change control started with having a "really good common understanding on both sides as to the project outcome that is expected".[288]

193. Cost increases on equipment programmes have often arisen from 'requirement creep'—additions and changes to the specification of equipment already ordered. We note that the MoD is seeking to address this by acquiring equipment which meets the vast majority—around 80%—of the military customer's requirement, but which also has an 'open architecture' allowing incremental upgrading and innovation to be added later. This appears to be a sensible approach, but DE&S must ensure that staff who work in project management have sufficient training in key skills such as good change control.

146 HC (2005-06) 554 Back

147 Defence Committee, Seventh Report of Session 2006-07, The Army's requirement for armoured vehicles: the FRES programme, HC 511 Back

148 HC (2006-07) 56 Back

149 HC (2007-08) 61 Back

150 National Audit Office, Major Projects Report 2007, HC 98-I Session 2007-2008 and National Audit Office, Major Projects Report 2007 Project Summary Sheets, HC 98-II Session 2007-2008 Back

151 Main Gate approval was announced on 25 July 2007, after the period covered by the Major Projects Report 2007. The Approved Cost at Main Gate was £3.9 billion and the Approved ISD for the two carriers was 2014 and 2016 Back

152 HC (2007-08) 61 Back

153 Ibid, p 23 Back

154 Ibid, Q 96 Back

155 Ibid, para 59 Back

156 Ibid, Q 97 Back

157 Ibid, Ev 34 Back