Examination of Witnesses (Questions 120-139)
GENERAL SIR
KEVIN O'DONOGHUE
KCB CBE, DAVID GOULD
CB AND LIEUTENANT
GENERAL DICK
APPLEGATE OBE
29 JANUARY 2008
Q120 Mr Hancock: That is the first
time we have heard it and so that is good news. On the Astute
programme, is there now an agreed price for boats 3 and 4? Have
we accepted the price of boat 2?
Mr Gould: We have an agreed price
of boats 1, 2 and 3. We do not have a fully agreed price for boat
4 because, as I mentioned earlier, we are doing a design for cost
reduction programme. We are trying to bring down that cost, but
we have an agreed price envelope.
Q121 Mr Hancock: Do we now have an
agreed price for boat 3 which is considerably less than the price
for boat 2? We were led to believe that the price for boat 1 would
always be colossal but we have learnt the lessons and boat 2 would
be a bit expensive but after that they would all be cheaper?
Mr Gould: I shall have to come
back to the Committee on whether boat 3 is cheaper than boat 2.
They are fairly comparable in price.[3]
Q122 Robert Key: We know, because
the French have said so publicly, that boat 3 will be more expensive
than the English costings.
Mr Gould: You are talking about
the carriers; I am referring to Astute.
Q123 Mr Hancock: What lessons have
you learnt from the appalling cost overruns on Astute, boats 1
and 2, and, for that matter, the Type 45s? How will you put those
lessons into the carrier contract?
Mr Gould: What it boils down to
is that the problem on Astute was not having ordered a submarine
for 10 years and trying to move from the old way of designing
submarines based on doing a physical scale model of the whole
boat to using computer-aided design. Therefore, it is a matter
of doing no physical scale model but just a computer simulation
of the design and turning that into the manufacturing drawings.
Most of the cost that emerged on Astute 1 was the cost of rebuilding
an industry which in some ways had forgotten many of the skills
involved in submarine construction and was moving into the area
of computer-aided design on submarines which had never been done
before in this country. Lesson one is that 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. One of the reasons for price escalation on
submarines is that something like 70% of the cost of a submarine
comes in through the dockyard gate, not the dockyard itself. We
have not changed the design of the reactor and propulsion system
on submarines fundamentally since we first got into the nuclear-powered
submarine business. What it means is that the component cost over
time goes up because things that made sense for people to build
in the 1970s do not make economic sense today. Part of the answer
is to make those design changes that give you a better through
life cost for the boat. Second, 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.
Q124 Mr Hancock: Can we afford the
fourth boat?
Mr Gould: Yes.
Q125 Mr Hancock: It is 25 years since
we built a carrier. Will we have similar problems?
Mr Gould: And we have never built
a warship of that size. If we come back to the question about
the Type 45, fundamentally what happened was that the price was
fixed while the design was still very immature. What we used to
do with complex warships was to build a first of class almost
on a cost-plus basis. You knew what you were doing before you
tried to fix the price of the subsequent ships. In effect that
is what we have done with the Type 45.
Q126 Mr Hancock: If that is the case
why is not the last boat now being built the same price as the
second boat?
Mr Gould: Submarines?
Q127 Mr Hancock: Type 45. Why is
there a difference in price between the second and fifth boats?
Mr Gould: There will be a difference
in price simply because time, labour and materials change over
time.
Q128 Mr Hancock: Is that the only
difference? The specification does not change dramatically?
Mr Gould: We have not changed
the specification.
Q129 Mr Hancock: That was the other
reason we were given for cost overruns. How many Types 45s can
we afford to build now?
Mr Gould: At the moment we have
six ordered; anything beyond that is subject to the review process
now going on.
Q130 Mr Hancock: That is half of
what we intended to have, is it not?
Mr Gould: Yes.
Q131 Mr Hancock: On Lord Drayson's
last visit he said that to build these carriers the one thing
one had to have was the manufacturing side in agreement on the
way to build surface ships; they should all sign up to it. It
is really the reconstruction of the ship-building sector. Are
you happy that that is being managed?
Mr Gould: I am very happy that
that is being managed, and that is the whole point about the joint
venture. We have used the carrier programme and the lessons from
the Type 45 programme to bring about in effect a complete restructuring
and subsequently a recapitalisation of the warship-building industry
which in the past was blighted by the fact that individual yards
would try to undercut and fight each other rather than work together.
Q132 Mr Hancock: What is the thinking
inside the MoD? You are happy that the restructuring has taken
place; you have an agreed price. You have agreed to build the
two ships and the French have agreed to build the third. What
on earth is the motive for BAE Systems and Vospers not to get
their joint venture organised, because the longer it goes on the
less they will make out of it if there is a fixed price for these
boats? What is their motivation in delaying this?
Mr Gould: We have an incentive
price, not a fixed price.
Q133 Mr Hancock: But the incentive
price must be in our hands. If they take another six months to
agree a joint venture surely the incentive for us is to reduce
what they will get.
Mr Gould: We have agreement on
these things but as I speak we do not have a legally binding contract.
Q134 Mr Hancock: What are they playing
for? Do they hope to get more out of it?
Mr Gould: I do not believe so.
Q135 Mr Hancock: Are they squeezing
you on the price?
Mr Gould: I think we are very
close to being ready to go.
Q136 Mr Hancock: But it is mind-boggling,
is it not? Here you have industry demanding a decision on these
ships and you tell us that as far as the MoD is concerned the
only impediment now is industry not making this agreement?
General Sir Kevin O'Donoghue:
I do not think that was quite what I said. 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.
Q137 Mr Hancock: What are the others?
General Sir Kevin O'Donoghue:
I do not know; I could not answer it.
Mr Hancock: I think that this Committee
and Parliament are entitled to know because in terms of jobs lots
of people, including those I represent, are crying out for this
order so their futures are assured for the 10 or 15 years they
were promised; and the Royal Navy is also entitled to know.
Q138 Chairman: I am a little surprised
that you do not know what they are. This is a key programme for
the capability of the defence of the country. Would it surprise
you to learn that industry tends to say that its joint venture
is ready to go and all it is waiting for is the order? In essence
you are saying that your order is ready to go and all you are
waiting for is the joint venture. Somebody has to move at some
stage?
General Sir Kevin O'Donoghue:
I think you are right.
Chairman: Is that going to be you?
Q139 Mr Hancock: Does it suit you
not to have the contract let now?
General Sir Kevin O'Donoghue:
No, it is not me.
3 See Ev 40. Back
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