House of COMMONS









Tuesday 29 JANUARY 2008




Evidence heard in Public Questions 1 - 229





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Oral Evidence

Taken before the Defence Committee

on Tuesday 29 January 2008

Members present

Mr James Arbuthnot, in the Chair

Mr Mike Hancock

Mr Dai Havard

Mr Adam Holloway

Mr Bernard Jenkin

Mr Brian Jenkins

Robert Key

John Smith

Richard Younger-Ross




Memorandum submitted by the Ministry of Defence


Examination of Witnesses


Witnesses: General Sir Kevin O'Donoghue KCB CBE, Chief of Defence Materiel, David Gould CB, Chief Operating Officer, and Lieutenant General Dick Applegate OBE, Chief of Materiel (Land), Defence Equipment and Support, Ministry of Defence, gave evidence.

Q1 Chairman: General O'Donoghue, I welcome you and your team to our evidence session on the DE&S. We meant to visit you last week. I regret that parliamentary business meant we had to stay here. We recognise that this mucked you about considerably, for which we apologise. We shall do our best not to do it again, but the vagaries of the parliamentary timetable are strange. We shall do our best to come back as soon as we can. We are conducting an inquiry into DE&S. This is something that we have been meaning to do for some time. You are supporting two major operations in Iraq and Afghanistan and have provided equipment in pretty rapid time for those two operations. That is something for which you deserve congratulations. We have a lot of ground to cover. I wonder whether my colleagues on the Committee can be as brief as possible in their questions and perhaps the witnesses can be as concise but full in their replies. We shall then be able to cover the ground. General O'Donoghue, will you please introduce your team?

General Sir Kevin O'Donoghue: Thank you very much. I am delighted to be here and I would also be delighted if you could come back to Abbey Wood when that is suitable. On my left is David Gould, Chief Operating Officer, who will pick up some of the detail on projects both on equipment procurement and through life performance. On my right is General Dick Applegate, Chief of Materiel (Land), who will pick up any detailed questions you have about support of current operations.

Q2 Chairman: Your department has been in existence for 10 months. What has been the progress following the merger?

General Sir Kevin O'Donoghue: Progress has been remarkably good. Going back to the second half of 2006 I and Peter Spencer, who was then CDP, put quite a lot of intellectual effort into what the new organisation should look like. We held workshops with the two stars in the spring of 2007, but it was not really until 2 April of that year that we were able to start to pull the two together. I think we have achieved the high-level strategic requirement and processes which are needed based very much on the analysis that Peter and I did. What functions would the new organisation have to deliver? What were the processes, hence what was its structure? That is the basis of DE&S. As to what we have achieved in the past 10 months, bits of the structure are coming together quicker than others. Some of them are in Abbey Wood and can come together quicker than elements of IPTs that are moving from Andover. The through life capability planning process is coming together and is beginning to be adopted throughout the department as the way to do business in the future. In DE&S through life management planning is well under way. We have certainly taken a big bite into upskilling our people. We have sorted out the skills we need and upskilled those people who need it because of gaps in professionalism in the organisation. We have also taken a huge step to pull together the two working practices, if you like the two cultures. I am not however too fond of the word "culture". We were two different organisations and we are steadily coming together. You mentioned that we were supporting two particular and quite difficult campaigns. Funnily enough, the fact we are supporting those two campaigns has brought us together quicker than it might otherwise have done.

Q3 Chairman: That is the good side of the story. What do you say are the things where progress has not been as good as you would have liked?

General Sir Kevin O'Donoghue: I think we should have been further ahead with through life management planning. We have through life management plans. All the programmes have plans. The big programmes have detailed plans; the smaller ones have summaries. I do not think we are as far down the route as I would have liked by making sure we support equipment through life by using those plans with industry and the front line. That is one area where I do not think we are as far ahead as we should have been. The other area is upskilling. We made huge inroads into upskilling. Had it not for the fact that people are working very hard across big chunks of the organisation perhaps we would have been able to release people for training and upskilling to a greater extent than we have.

Q4 Mr Holloway: Is one of things you are doing less well the fact that you simply do not have the cash to fund all the programmes?

General Sir Kevin O'Donoghue: No. The upskilling is more a question of giving people time off from busy jobs.

Q5 Mr Holloway: I am referring to your overall problem: you do not have enough cash?

General Sir Kevin O'Donoghue: No. I am given a certain amount of cash and am told what my outputs are to be. I have ring-fenced the cash for upskilling.

Q6 Chairman: I think the question was slightly different. To put it a different way, what keeps you awake at night?

General Sir Kevin O'Donoghue: Current operations keep me awake at night.

Q7 Chairman: Why?

General Sir Kevin O'Donoghue: Because that is our primary aim and that is where things will go wrong and, if they are to go wrong, they will have the greatest impact.

Q8 Chairman: You said that the current operations had helped you come together?

General Sir Kevin O'Donoghue: I believe they have. There is an imperative to support current operations, which I believe has brought us closer together with people from the DPA - I do not like to say "the old DPA" - and produce UORs, as people from the DLO have been planning and supporting them to get them to theatre. That was what forced us together.

Q9 Chairman: What has been the feedback from your customer about how well you are doing?

General Sir Kevin O'Donoghue: Commanders in theatre are very supportive. It was Jonathan Shaw in Iraq who said that he had never been in a theatre of operations where he had seen so much new and outstanding kit coming through. We are now beginning to get equipment through within six months of deployment. I believe that our customers on deployed operations are content.

Q10 Mr Jenkin: We all know that priority has been given to the front line and we have been impressed by what is getting through. But we also know that the three-year spending round is a very tight settlement for the Ministry of Defence and that if the priority is the front line considerable savings will have to be made out of future programmes. That is what we want to focus upon at this point. How will you make your programme fit? We all know about the procurement bow wave and the tendency to delay main gate and contract dates in order to keep cash flow within Treasury limits. One official told me off the record that it was no longer about cheese-paring and salami-slicing; it was now a matter of looking at whole programmes. Can you give us any indication of the process in which you are involved at the moment to make future programmes fit within the budgets allocated to you?

General Sir Kevin O'Donoghue: The process we are in, which is the same one we go through every two years, is one that looks at all the programmes. We are not yet at the end of the planning round. Everybody always says that it is the worst planning round ever, but it is progressive every year. There are always difficult decisions to make in planning rounds. As you rightly said, our aspirations are much greater than the budget ever allows us to achieve, so there are always difficult decisions to be made.

Q11 Mr Jenkin: You have 19 major projects and you do not anticipate delaying or cutting any of them?

General Sir Kevin O'Donoghue: I suspect that we will have to, but which they are and quite what they will be I do not know. We are in the middle of a planning round.

Q12 Mr Hancock: When would you expect that decision to be finalised?

General Sir Kevin O'Donoghue: I believe that recommendations will be put to ministers later next month or in March.

Q13 Mr Jenkin: You have told me something quite important. You are looking at all the major projects and you may cut or delay any of them?

General Sir Kevin O'Donoghue: We always look at all major projects.

Q14 Chairman: Do you say that this planning round is different from other planning rounds in which you have been involved in terms of the scale of potential delays or cuts you have to face?

General Sir Kevin O'Donoghue: It is certainly different from any other planning round in which I have been involved because for the first time we are looking at an equipment and equipment support budget. You will remember that in the past the equipment plan was always quite separate from the equipment support plan. I believe that what we have been able to do this year is to have much more realistic costings by bringing the two together.

Q15 Chairman: That is a difference?

General Sir Kevin O'Donoghue: That is a huge difference, and part of the difficulty we are in is that we now have more realistic costings.

Q16 Chairman: To return to the question I asked, is the scale of your difficulty different?

General Sir Kevin O'Donoghue: Yes, it probably is.

Q17 Chairman: Are you able to quantify that?

General Sir Kevin O'Donoghue: I cannot. We are in the middle of a planning round.

Q18 Chairman: Is it different because it is worse or better? I have to ask that for clarity of the record.

General Sir Kevin O'Donoghue: I think it is a greater challenge this year than it was in 2007.

Q19 Chairman: Can you ever remember it being as much of a challenge as it is today?

General Sir Kevin O'Donoghue: Yes. When I was an MA back in the late 1970s we had some pretty challenging times.

Chairman: We shall come back to some of these issues in our detailed questions. We now want to go into the size and shape of your department.

Q20 Mr Hancock: Let me start with your own organisation. You have given a commitment that by 2012, four years from now, you will have reduced manpower levels from 29,000 to about 20,000. How will that be achieved? How can you be absolutely sure that in achieving the target you do not lose the people you most need to retain because the ones who may go off are easily employable elsewhere? How will that work out?

General Sir Kevin O'Donoghue: To answer the second part of the question first, you are absolutely right that it is a big challenge. How do you retain and motivate the people you want while other people are leaving? I do not believe that can be done with money given the way we operate; it must be done by motivating people, so it is a matter of leadership and management. As far as concerns reducing size, we started with 29,000 and we are now just under 27,000. We put the strategic intent and outlined where we needed to be in output terms to all the two stars and asked them how many people they needed. Using all the levers available to them under the new construct and HR delegations, how many people did they need to deliver their outputs and what was their profile over the next four years? That was how we finished up with something of the order of 20,000.

Q21 Mr Hancock: Do you think that in the end it will lead to your having to buy in short-term contract staff to cover some of the holes that might have been made by losing so many?

General Sir Kevin O'Donoghue: I believe that when in some areas we do buy in expertise it is not because of numerical holes but holes in professional expertise. For example, my DG Commercial and DGHR are from the outside and we need to bring in people. While the process of upskilling is going on so we can get our own people up to the required level of professional skill we need to buy in some expertise. In some areas we just do not have the expertise anyway. We would not want it in-house because it is unique and we might just want to buy it in for a week, a year or whatever it is.

Q22 Chairman: Arising out of that, is your DG Commercial Amios Morse?

General Sir Kevin O'Donoghue: No; it is a man Les Mosco who is two star and he is located at the other end of the motorway. He is my DG Commercial, as opposed to the Defence Commercial Director who is Amios Morse.

Q23 Chairman: What sort of support staff does your DG Commercial have?

General Sir Kevin O'Donoghue: Numerically?

Q24 Chairman: Yes.

Mr Gould: There are about 900 commercial staff spread right across various project teams.

Q25 Chairman: What sort of commercial experience does that staff have?

Mr Gould: Most of them are, if I may put it this way, home-grown commercial officers so they will have training from the Institute of Purchasing and so forth. They will have commercial qualifications. Most of them - there are some exceptions - will have spent their lives as civil service commercial officers rather than coming in from outside.

Q26 Mr Hancock: As to the size of the organisation, what are your plans for reducing the number of sites you occupy? Will there be enough room to locate the whole organisation eventually at Abbey Wood?

General Sir Kevin O'Donoghue: No. We will not get 20,000 people into Abbey Wood, and we would not want to anyway given the big numbers of the organisation, the naval bases, airfields and so on. The intention is that by 2012 all those people who are office-bound and who do not need to be somewhere else specifically because that is where their job is will be in Abbey Wood.

Q27 Mr Hancock: Would that release a number of sites that you solely occupy, or are there sites that you share with others at the moment?

General Sir Kevin O'Donoghue: It could do. As an example, Chief Defence Intelligence is moving into Wootton behind us, so the whole estates plot moves round.

Q28 Mr Hancock: What about your relationship with MoD centrally? Their plan is to reduce their staffing by 25 per cent over a period similar to yours. Will that have a consequential effect on your ability to deal with them and have the same ongoing relationship, or will it be weakened by that?

General Sir Kevin O'Donoghue: I think it will be stronger. The whole point of MoD streamlining is not just to take out 25 per cent of staff but to make it more effective, and I believe the permanent under-secretary has accepted that fewer people can be more effective. In that sense I think that we should get through the approval and decision-making process quicker. There is a danger that some of the things currently done in main building will move into DE&S. I do not have a problem with that at all, if that is the right thing to do, provided the resources to do it come with it.

Q29 Chairman: Can you talk us through the concept of fewer people being more effective?

General Sir Kevin O'Donoghue: There are some examples. If I may talk about DE&S where I have a greater understanding, we put together two big organisations. We pulled in two sets of processes. For example, the DPA and DLO had assurance processes and we put them together. It has become very clunky and we need to think out that process and in so doing there is some duplication of numbers. By reducing the process and hence the numbers we can make the process itself much more streamlined and the decision-making much quicker.

Q30 Chairman: How do you ensure that you lose the people you want to lose and not the people you want to keep?

General Sir Kevin O'Donoghue: This is very much a line management business. It is for leadership and management to persuade those whom we really want to keep that life in Abbey Wood is good and this is what everybody wants. Once I can see people wanting to move out of main building down to the other end of the motorway I shall know that we are beginning to have a degree of success.

Q31 John Smith: Of course, all of this is nonsense if we do not have the right skills?

General Sir Kevin O'Donoghue: Absolutely.

Q32 John Smith: In your introduction you referred quite rightly to upskilling the workforce in the newly-formed department. With through life management capability and long-term private sector partnership, which is what we are now embracing, it is successful in the private sector precisely because, as scarce as they are, they have other very important skills, especially commercial lawyers. Have you completed your skills audit, and what gaps if any have you identified within the department?

General Sir Kevin O'Donoghue: We have not completed the skills audit but we are a long way towards it. In financial and commercial we have completed that audit. Both DG Finance and DG Commercial know the number of posts that they need to fill with professional people and at what level those people need to be. We are upskilling those people. We shall achieve the 50 per cent target in both areas by the end of this year.

Q33 John Smith: The original target date was March 2008?

General Sir Kevin O'Donoghue: I meant that we shall achieve it by the end of the financial year. We shall not achieve 50 per cent in project management but then we were not training people specifically in project management before DE&S was formed; or just as it was being formed the DPA and DLO boards agreed that we should put a programme in place. But by the end of March 2008 I think we should have about 320 qualified people - I cannot remember the exact figure but it is in the memorandum - in project management. We have barely started inventory management and the logistics side. Courses have been set up in the Defence Academy in Shrivenham and they look good. The first courses have been run and people are enthusiastic about them, but we shall not have the skills up to the level needed. Engineers are in short supply. It takes quite a long time to train a chartered engineer, so we are progressing with that. Next year we shall continue with the five areas that I have been talking about and embark on another three areas: integrated logistics support; HR and sustainable development. We shall start to upskill the people who work in those particular disciplines. The answer to your question is: no, not by a long way, but I think we have taken a big chunk out of it and we now have it running and pointing in the right direction.

Q34 John Smith: Are you satisfied that your reward structure is flexible enough to recruit and retain the right type of skill and professional?

General Sir Kevin O'Donoghue: No, it is not. That is something in which the personnel director is engaged; it is not something I can do within DE&S. It needs to be either department-wide or perhaps civil service-wide. I do not believe that we have the right rewards. I should like to be able to pay people for their professional qualification when they are in posts that require that professional qualification.

Q35 John Smith: To pick up Mr Hancock's question, exactly how much are you spending on consultants?

General Sir Kevin O'Donoghue: I do not know. I would have to come back to you specifically on that.

Q36 Chairman: Could you come back to us on that point?

General Sir Kevin O'Donoghue: Yes.

Q37 John Smith: I should like to know the amounts and also the proportion of the total wage bill.

General Sir Kevin O'Donoghue: Of course.

Q38 Chairman: As to the courses in Shrivenham to which you referred, are you confident that they will be funded next year?

General Sir Kevin O'Donoghue: I fund them and I have ring-fenced the money.

Q39 Richard Younger-Ross: What progress are you making in the implementation of the Defence Acquisition Change Programme?

General Sir Kevin O'Donoghue: I think it is moving along quite well. The merger between DPA and DLO is a big part of the Defence Acquisition Change Programme, but the other work strands are very important. Without the other work strands all the good things that I think we can do by merging DPA and DLO will not be nearly as effective. The other work strands are the budgetary planning process and the whole business of having a 10‑year budget with equipment and support for that equipment not yet in service held by the equipment capability community and, as for equipment that is in service, for the first four years to be held by the front line command. That has put money where priorities and decisions need to be made. I do not own the support budget any more except that I am given money in year and told by the front line commands what their priorities are. That is one really important strand and if you wish I can go on to talk about the others.

Q40 Richard Younger-Ross: You seem very pleased with its progress. Is there anything that delays it or holds up any part of it?

General Sir Kevin O'Donoghue: One of the strands was to produce an affordable and balanced budget and that will be a challenge, as I think the permanent under-secretary said.

Q41 Richard Younger-Ross: One of the targets for performance management is the creation of a set of metrics. Have those been set?

General Sir Kevin O'Donoghue: We are setting them.

Q42 Richard Younger-Ross: By when do you expect that to be done?

General Sir Kevin O'Donoghue: We need something in place by the start of next year. The challenge was to move from input to output metrics. How do we measure through life capability? How do we persuade this Committee and others that we are delivering through life capability in the way we say we are? It is those sorts of metrics that we are now putting in place. We shall trial them between now and 1 April and see whether we can develop something that is meaningful in the way of a through life capability measure.

Q43 Richard Younger-Ross: Not only are you being asked for through life capability but the change programme is meant to deliver capability more quickly?

General Sir Kevin O'Donoghue: Yes. The challenge placed on me by Lord Drayson - it was placed on the department because there are more players than just DE&S - was to reduce acquisition time, particularly the demonstration and manufacture bit of it, by 50 per cent. The cabinet cycle is that the concept phase is the concept phase. As to the assessment phase, I have always resisted an arbitrary cut in time because I think that for some very complex and highly technical projects you need a longer assessment phase; you need to de‑risk before you move to demonstration and manufacture. But we are looking at ways to reduce the demonstration and manufacturing phase by 50 per cent. Part of it is much quicker decision-making within MoD.

Q44 Richard Younger-Ross: You used the words "looking at". Are there any examples you can give to assure us that this is happening?

General Sir Kevin O'Donoghue: FRES is quite a good example of reduced timescales.

Mr Gould: To give a specific example emerging from FRES, what we have done with the demonstration trials - the so-called trials of truth - is that rather than seek to develop an entirely new vehicle from scratch we are taking existing designs and finding out how much further development needs to be done, so the amount of work that needs to be done at the D&M phase is the minimum necessary to get to the initial upgrading capability, not the complete redevelopment of an entirely new design. That is one way of cutting into the time taken up.

Q45 Robert Key: Before we get any deeper into detail I want to ask you about the philosophy of where you think you are going. What do you believe the Ministry of Defence wants? Does it want fewer people in your organisation or to spend less money on that organisation?

General Sir Kevin O'Donoghue: It is very clear that the government-wide target is a reduction in the cost of overheads and that is the administrative cost regime laid upon all departments.

Q46 Robert Key: If any organisation is told to reduce the cost of people it can do it in two ways: it can lose a large number of people who are not paid very much or a small number of people at the top who are paid more. Which are you doing?

General Sir Kevin O'Donoghue: It will be both. This is not a downward pressure on numbers. How many people do you need to deliver your outputs?

Q47 Robert Key: Are you relying upon being able to buy in consultants for the expensive jobs and losing more of the people who would be there if you did not have to engage those consultants?

General Sir Kevin O'Donoghue: A lot of the jobs will go because as we move to contracting for availability a lot of the transactional work that we currently do in-house will move to industry. As we form these partnering arrangements quite a lot of the work done will move across to industry which is better placed to do it. I think we shall finish up with a higher skilled and paid workforce but a smaller one.

Q48 Mr Hancock: One of the criticisms we have often had from industry is that the customer can choose the changes and expectation of the particular equipment it has sought to obtain. What will you do to overcome the issue of the goal posts being continually moved by the customer who demands changes and costs go up mainly, as manufacturers tell us, because the process is not clear from day one?

General Sir Kevin O'Donoghue: Perhaps I may separate that into two. You are absolutely right that there is requirement creep, as it is called, and customers, in this instance front line commanders, will often change their minds. That is something about which we need to be fairly rigorous, unless it arises because the threat or security aspect has changed. A very good example perhaps is electronic counter-measures where the threat continually changes and the reaction by industry working through the project teams has been outstanding. ECM equipment is continually being altered to meet changing threats. We need to become much more agile.

Q49 Mr Hancock: But in some instances it has prevented much needed equipment coming into service, has it not?

General Sir Kevin O'Donoghue: You may be right, but there is always a balance. Do you want something that is 80 per cent right now - this is my view - with an open architecture that you can build on incrementally as changes occur?

Q50 Mr Hancock: I would settle for that, but we have not done it in the past?

General Sir Kevin O'Donoghue: We have not always done so, but the line we are driving forward now is 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.

Lieutenant General Applegate: In addition to guaranteeing operational focus within the organisation I work in the other direction to make sure that they are part of the team and understand the consequences of some of the decisions and the requirements they set. We want to make sure they are involved in the trading process and understand the cost of some of the things they would like to have. I am there to make sure they are realistic and pragmatic. In a way, it is a matter of weighing up the various competing demands of those in the front line, particularly those on operations, those in the equipment customer community in London who set the requirement and those in DE&S. One of the roles of the Chief of Materiel is to span all of those to try to make sure that we do not have an "us and them" approach. We shall come back to FRES later, but part of the role we have been playing is to make sure there is absolute realism, that hard decisions are faced and that adequate briefing is given so there is a greater understanding of the technological background and proper cost implications, not keeping them at arm's length and saying, "Well, that is our specialist business. You just tell us what you want." Fundamentally, that is one of the roles that we as Chief of Materiel have in dealing with each of the front line services.

Mr Gould: A fundamental of good project management is good change of control. What you need to do is use the assessment phase to do the trading process to which General Applegate referred and ensure there is a common understanding between ourselves, suppliers and customers about the level of capability following the assessment phase investigations which will be pursued in the initial development and production standard. I think you will find that our clients in the Armed Forces, the users, are prepared to do that kind of bargaining provided they can see in a long-term project that there is a growth path to insert capability changes as you go through life in the future. The key to the whole thing is good change control. The kind of thing to which Mr Hancock refers happens when you do not exercise good change control inside the project and that is where both we and industry suffer the uncontrolled change to which reference has been made. It is a fundamental of good project discipline that that is carried out, working with the customer and supplier to make sure it is done properly.

Q51 Chairman: There was a time when smart acquisition was the Holy Grail. Do you say that defence acquisition change has taken its place?

Mr Gould: I do not believe in holy grails for project management; other people may do so. If I were to write a book on the subject it would be called No Golden Bullets or something like that.

Q52 Mr Hancock: Is it a change for you, Mr Gould?

Mr Gould: No, it is not, but I have learnt a lot over the years, believe me. It comes down to the discipline of good project management. The change programme can provide you with the right atmosphere, surroundings and conditions, but fundamentally it is good project and good programme management that gets you the right result. There is no magic formula. There are some really good disciplines. I have here a 10‑point card which I am very happy to share with the Committee.

Q53 Chairman: What is the top point on that 10-point card?

Mr Gould: The top point is that we lay down the foundations of success early. Hindsight is a wonderful thing, but for most projects that get into difficulties you can look back and say that that was all foreseeable if only more attention had been paid to it right at the start and people had not given in to the temptation to compromise, ignore a difficulty and pretend something could be done quickly when it could not be. I think the most difficult thing is to retain that sense of objectivity and realism in the programme but at the same time not lose the ambition.

Q54 Richard Younger-Ross: My background is architecture which is a form of project management. The one bit I learnt as the defining point is that if you did not get the brief right everything else would fall apart. A very good example is defence procurement where the brief keeps changing.

Mr Gould: Fundamentally, one talks about good change control, but that starts with having a really good common understanding on both sides as to the project outcome that is expect, the brief if you like.

Q55 Chairman: May we please have copies of your card?

Mr Gould: You may indeed.

Q56 Chairman: Who else has it?

Mr Gould: It is available on the acquisition operating framework, so anybody who has access to the defence intranet can obtain it.

Q57 Mr Jenkin: Did you give it to the new minister?

Mr Gould: I am not sure that I have yet, but I will make sure that is done.

Q58 Chairman: I am sure she will look forward to it.

Mr Gould: I have certainly discussed it with her, but I shall make sure she has one.

Q59 Mr Jenkins: I had the opportunity to see Lord Drayson a couple of weeks ago. He took time off from racing his biofuel cars round circuits in America and so on. He said that one of the big differences between what he is doing now and the defence side is that if in the afternoon a formula 1 car suffered a broken strut when going round a track it would be photographed, downloaded to the manufacturer, the alterations would be discussed, the part would be made, flown out to the circuit, fitted on the car and the car would be on the track next morning. He does not expect the defence industry to achieve that pace in the near future but there is a marked difference in terms of how long it takes for it to get to that dealer and produce an enhanced strut, or even get round to seeing the one that is broken. As to through life capability management, would you like to explain to the Committee what benefits you expect from this approach?

General Sir Kevin O'Donoghue: Perhaps I may first comment on your initial statement. The way we achieve what Lord Drayson describes is through contracting for availability. When the cost of not repairing something falls on the contractor he repairs it very fast.
A good example may be Rolls-Royce at Filton near Bristol. They have a military engine operations room across the end of which is a big sign for the Rolls-Royce workforce to see - we contract for availability of engines - which says "Remember! Spares are now a cost, not a profit". Harrier is another very good example. Under the old way of doing business if something was wrong with a Harrier photographs were taken, reports were written and it was sent back to BA Systems and perhaps some time later a view would be taken. Now there is a BA Systems engineer on site and he has to be available within two hours. He may still say that it is not airworthy, but at least a decision is made very quickly. That is because we are pushing back onto the manufacture the risk of unreliable equipment. Risks arise in a number of ways. Financial risk seems to migrate back to the biggest player, which is ourselves; operational risk will always stay with us, but I do believe that the risk of unreliable equipment is one we must push back onto the manufacturer.

Q60 Mr Jenkins: Therefore, things are getting better?

General Sir Kevin O'Donoghue: They are certainly better.

Q61 Mr Jenkins: Can you tell us what the benefits are of through life capability management?

General Sir Kevin O'Donoghue: Through life capability management is all about bringing together all the lines of development: doctrine, manpower and training, not just equipment and equipment support. If we go down the through life capability management route properly the equipment capability area - the main building - will pull together those various strands and take account of all of them when making decisions about capability. In the past we have bought things, supported them when they have come into service, thought about the manpower needed, the doctrine, and the infrastructure to house whatever it is in a not very coherent way. There are some good examples from the past, but by and large it has not been done very coherently. Through life capability planning and management will bring all of that together in a plan owned by DCSEC and directors of equipment capability and managed by the IPT.

Q62 Mr Jenkins: So, what is the benefit?

General Sir Kevin O'Donoghue: The benefit is that we are not wasting money by buying something that is too big for the garages or we do not have soldiers trained for it, that is, buying something that comes into service next year and we have not trained the soldiers to be ready to operate it at the same time. It is a matter of coherence.

Mr Gould: An example is the patrol vessel HS-5 which we have not bought from Vosper Thornycroft. We are buying from them five years' worth of ship time. What Paul Lester at VT says is that he believes the cost of building that ship to make it reliable so he can meet the terms of the contract is probably in the region of five per cent higher than it would be to sell ship time. One of the big benefits of through life capability management and through life management plans for projects is the ability to invest upfront in something that will be cheaper and easier to maintain and subsequently to modify and improve throughout its life. When you do not have a through life approach you do not have a mechanism for doing that trade which says you should invest early for long-term benefits. We also plan with our suppliers how to provide support. Therefore, on the A400 aircraft which I am sure we will return to even before the first one has been built we are looking at what arrangement we shall put in place to support and maintain that aircraft through its life rather than doing it as an add‑on later in the programme. In terms of total equipment plan even for that there is an enormous benefit to come. If we also look at training, doctrine, use and so forth we shall also make sure that we get the benefit out of the equipment in military terms more quickly than we can by doing all these things sequentially which was what tended to happen.

Lieutenant General Applegate: I think that from a user's perspective we cannot have confidence that we will be able to grow incrementally if there is no plan in place. Therefore, it would be difficult for me to say to the front line user he should trust us because what he is getting is only the first step and later on there will be improvements. He may ask me to prove it or show him how we have prepared for that. Do we have a technology road map which will identify where it is possible to introduce that? Is the electronic architecture capable of enabling that to be brought in? Do we have the necessary skills? Is the relationship with the industrial sector right or does the industrial sector even exist to do it? What do I have to do in order to confirm the requirement and when I might want it? What difficult choices might I have to make about whether to invest in the upkeep of a particular system or its replacement? I think that through life management planning is fundamental to the development of improved trust between members of the defence team rather than something which in the past was too adversarial.

Q63 Mr Jenkins: Therefore, something like the acquisition of Apache helicopters some of which were placed into a big hangar and somebody was paid 24 million to wipe the dust off them and keep them maintained because we had not trained the pilots could never happen again?

Lieutenant General Applegate: I would hope the chances of it happening again are hugely reduced, but I never say "never". Unfortunately, the world has a tendency to surprise one.

General Sir Kevin O'Donoghue: It should not happen by default. In future we shall know and make decisions on what we want to do.

Q64 Mr Jenkins: This was a great idea which came up in the defence review of 1998. Why has it taken so long to get it imbedded in the MoD?

General Sir Kevin O'Donoghue: I think the defence review in 1998 referred to through life equipment planning and management. That was what the DPA and DLO attempted to do. I do not believe that it concerned the whole capability or all the defence lines of development. DPA and DLO were trying to do through life management planning of the equipment and its support through life, with some success in some areas. A very good example is special projects and those have been through life IPTs for a long time. With the best will in the world, with an acquisition IPT in Abbey Wood and a support IPT in Wootton for aircraft or Andover for vehicles, to create that through life equipment plan was quite a challenge. That has been enabled by putting together the two organisations and sorting out the budgets.

Q65 Mr Jenkins: I am glad you have gone to budgets. Do you have in mind a programme that has not gone down this route and one that has? What are the financial benefits, or any other benefits, of going down this route? Can you give an example of where it has paid off?

Mr Gould: An example of a programme that has not gone down this route is Apache. You have referred to a very good example of what happens when you do not do a proper through life plan and get the brief right at the early stage of procurement. The pressure was to spend the money to get the aircraft and then the rest of the problems could be sorted out later. That might be the right decision but it has a consequence. If you do that you know what the consequence is. A good example of through life planning and technology management, production, logistics support and constant technology refresh in response to threat changes in the area of special projects is electronic counter-measures to which General O'Donoghue referred earlier. All of that derived from work in Northern Ireland. By having a constant stream of technology work and refresh we were then able to make adjustments and do modifications or build new systems to cope with threats that emerge very rapidly in today's operations. If you do not have that long background of technology management and planning how do you manage the equipments, distribute them and get the information into the equipments that make them effective on the day? If we did not pay attention to that all through life we would not be able to do what we are doing today. Therefore, today's through life success depends on long-term equipment and technology planning from the past. I would say exactly the same thing about nuclear, biological and in particular chemical protection equipment which is a good example. What we are able to do today is the result of a very long-term technology programme that also produces projects in future.

Q66 Mr Holloway: To pay up front to support the kit in the future sounds absolutely marvellous, but how on earth are you supposed to do that when most of your budgetary considerations are short term and everything is rather over-heated? By way of example, the carriers cost 3.9 billion. Is that the through life cost?

General Sir Kevin O'Donoghue: No.

Mr Gould: That is the demonstration to manufacturing cost.

Q67 Mr Holloway: Is what you have been talking about for the past five minutes more an aspiration than what you are actually doing?

General Sir Kevin O'Donoghue: It is an aspiration in that the Defence Acquisition Change Programme started 10 months ago, but the offshore patrol vessel (OPV) referred to earlier is a very good example of this. We need to instil this in everything we do as we go forward and to recover some of the programmes already in existence is quite difficult.

Mr Gould: But DE&S has a very detailed through life management plan to go with it.

Q68 Mr Jenkins: I understand that you are discussing methodology here and how systems work. While I appreciate that a big and complex programme needs this device do all programmes require it? Where is the cut-off point? When do you decide that it is not suitable for a particular programme?

General Sir Kevin O'Donoghue: In my view all programmes need a through life management plan. The detail of that plan will vary. If it is a big, complex project, for example the carriers, it will need a detailed plan; if it is a small project it still needs a through life management plan but it could be relatively simple.

Q69 Mr Jenkins: The MoD is now moving on to "improved through life costings using simple models, to support through life decisions". When will the improved models be developed? When will they be implemented and used? If we are to look at through life costings with the use of these models, which programmes will they be and how much do you see going towards the original manufacturer to maintain the through life programme on our behalf under the defence industry strategy approach that you are now developing? How do you see it developing?

General Sir Kevin O'Donoghue: If I may answer the second point first, I do not see industry running our through life management programmes; I see them being done jointly. To go back to the start of a project where you are competing for a particular programme, we will have our project team and each competitor will have his project team. As soon as you go to the preferred bidder you should co‑locate those project teams so that geographically they are in the same place. As soon as you sign up to a contract you should merge those teams into a joint team. The through life management plan will then be held jointly. Industry has a big part to play in it; it is not something that you hold at arm's length from industry.

Q70 Mr Jenkins: Therefore, in future as far as the first part is concerned you do not envisage the transfer of some of these functions and therefore the nuclei of the bodies in the MoD into industry?

General Sir Kevin O'Donoghue: Not those functions, no.

Q71 Mr Jenkins: That is not part of the plan?

General Sir Kevin O'Donoghue: No.

Q72 Mr Jenkins: Does the structure and expertise you get depend on the nature and amount of the programme? If you cut the programme will it have an effect on the size and cost of the team?

General Sir Kevin O'Donoghue: Yes.

Q73 Mr Jenkins: Therefore, if there were eight type 45 destroyers on the books but we had placed orders for only six would it have implications for the viability of the team?

General Sir Kevin O'Donoghue: I am sorry; I did not understand. No. You change the numbers from eight to six. You have a through life management plan and you know when you will insert technology and when various things have to be changed either for reasons of obsolescence or to upgrade because of the threat. If you doing it to eight instead of six the cash numbers will be different but the plan in words will be the same.

Q74 Mr Jenkins: If we have the carriers and the nuclear submarine replacement on the books and you hope to do this for both big projects how do you get the manpower and skills required in place, or what plans do you have to put it in place?

General Sir Kevin O'Donoghue: Some of the skills we need to draw in from outside. As far as the successor programme is concerned there are not many places to draw nuclear engineers from outside. We need to train our own, and we are doing that. We are drawing in people and looking at universities that produce nuclear graduates, but some programmes come out like the carriers and other programmes diminish; they are either in steady state or the equipment is coming out of service and people can move across.

Mr Gould: They are quite different. As you know, in the case of the carriers we have built an alliance of a number of companies to do that programme because it must be thought of as something that we do perhaps once every 50 years. It is not a continuous programme. This country has never built a 65,000-tonne warship, so it is quite unusual. We have a core team comprised of DE&S direct employees, both service and civilian engineers, but added to those most of the design work is being done by alliance partners. The production engineering work will be done by people in the shipyards which will have to augment their people while they do that phase of the project. But as one goes through the manufacturing phase into final assembly and introduction into service those numbers will diminish. We will have a small core team that continues and around that alliance partners will change over time. Submarine building, whether it is for SSNs or SSBs - ballistic firing or attack submarines - is a specialised business both for us and industry. It includes not just nuclear engineers but engineers who have familiarity with and main knowledge of submarine building. It is quite unlike anything else. In that area I have to plan on the basis that we will keep a group of submarine people in the class - the people who build all the submarines - at pretty much a constant level. That will be a group of several hundred people who have long-term expertise, memory and training and new people will come in; and the same is true in industry. They need to keep a core workforce of about 3,500 at Barrow which is our specialised yard. It must be tuned to that; you cannot allow it to vary too much or you will literally forget how to build a submarine and when you start to try to do it again you get into big trouble.

Q75 Chairman: That depends on orders, does it not?

Mr Gould: It does. You take a very big risk if you have erratic submarine orders.

Q76 Chairman: You do not know what the orders will be, do you?

Mr Gould: But I have a very good plan. We now have three contractors on the Astute class; we have a fourth where initial contracts are already being placed. 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 through.

Q77 Robert Key: I want to turn to costs. In our report on the MoD annual report and accounts published yesterday we noted that the Defence Procurement Agency had met all its key targets in 2006/07 for the second consecutive year, which was very good news. Do you expect that the DE&S will meet the former DPA targets for 2007/08?

General Sir Kevin O'Donoghue: We will meet the cost and performance targets but I do not think we will meet the time target, for which there are good reasons that I can go into if you wish.

Q78 Robert Key: The MoD autumn performance report stated that the major programme showing cost growth at present continued to be Nimrod MRA4. What is going on with that programme?

Mr Gould: 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. We cannot solve it in the same way and so we will have to make a stability modification on the production aircraft to deal with that problem. 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. There are three prototype aircraft doing the trials and the plan is to convert those to the production standard. The total we are talking about is 100 million which is just a little less than three per cent of the total programme cost.

Q79 Chairman: You say it is not unusual. If it happened with the earlier version this was predictable?

Mr Gould: It was predictable, but you cannot do any kind of system or flight trial test, or the test of any sophisticated equipment, until you have built the prototype; that is the first time you can test it against reality. I am quite sure that all sorts of simulations, wind tunnel tests or anything else you can think of were gone through in this programme and the problem was not identified at that point. Therefore, although it occurred on the MRA2 it would have been a low probability. Unfortunately, low probability but high impact risks occur during testing.

Q80 Robert Key: I recall that that happened also with the Hercules upgrade?

Mr Gould: That was much more difficult. Lockheed had a number of very significant problems on that programme.

Q81 Chairman: Therefore, no contingency has been built in for this happening?

Mr Gould: A contingency is always built into a project, but if we did that for every single risk that we identified in terms of time and money you would criticise me for coming in under budget on all of the projects and wasting resources which could have been used for something else.

Q82 Chairman: When did we last criticise you for coming in under budget?

Mr Gould: You never have.

Q83 Chairman: Because you have never done it?

Mr Gould: On the original Trident programme, yes, I did. We had a very large contingency in there, but if you fund a very large contingency it takes money away from other projects that you are doing.

Q84 Chairman: Surely, what a large contingency does is create a realistic defence procurement programme?

Mr Gould: I would say you should put into the contingency a sum that budgets and funds in time and money for the risks that you believe are the most likely outcome in the project. That is really the definition of what we call the P50. If you put in every single risk, including those that you think are unlikely to emerge, you will over-egg the contingency.

Q85 Chairman: This one being not usual; it had happened before?

Mr Gould: It happened before on the MRA2 but not during the wind tunnel trials on the MRA4. How much collective memory is there? How long a gap was there between the MRA2 conversion programme and the MRA4? It was something in the region of 20 years. It would not be surprising if some of that experience was lost.

Q86 Mr Jenkin: Do you think that the Airbus consortium is in possession of this wisdom? It is producing what will be a production aircraft ab initio; there will be no trials before it starts to produce it.

Mr Gould: Are you referring to the A400?

Q87 Mr Jenkin: I refer to the A400M.

Mr Gould: There will certainly be flight trials.

Q88 Mr Jenkin: I appreciate that it will do flight trials but it will be with a production aircraft. Do you think we should build in a bit of extra contingency for see-sawing, yawing and pitching?

Mr Gould: I think we should take a very cautious view of the time it will take to complete flight trials on A400. It is an extremely challenging programme. The one most like it in my view is the American C17 programme which is now extremely successful and we are doing very well with it but, my goodness, it went through problems to bring it to where it is today.

Q89 Robert Key: Which other major projects are sharing cost growth in this financial year?

Mr Gould: Cost growth is Nimrod.

Q90 Robert Key: Where are you making the largest contingencies for major projects this year?

Mr Gould: In terms of time?

Q91 Robert Key: In terms of money.

Mr Gould: There is one other major project about which I have some concern in money terms and that is the BVRAAM Meteor air-air-missile. The risks there are not so much technical - because the missile programme itself is going quite well - as production costs. We are signed up for production but the other nations are not. At the moment they do or do not sign up for production that will have a major effect on the production costs of the missile. The uncertainty about that is a concern. Again, as to the integration cost of Typhoon, whether or not the Italians come into that programme will have an effect on that budget.

Q92 Robert Key: It is quite difficult to get a handle on some of these things. For example, the current cost forecasts for Typhoon are restricted. Why is that so?

General Sir Kevin O'Donoghue: I shall be very happy to offer the Committee a closed brief on Typhoon, but for commercial reasons it would be quite difficult to talk about it in open session.

Q93 Chairman: We would be happy to have a closed brief, but are you not able to answer the question put by Robert Key?

General Sir Kevin O'Donoghue: Not about the cost, no.

Q94 Robert Key: In principle, why is the cost restricted?

General Sir Kevin O'Donoghue: Because we are in the middle of commercial negotiations.

Q95 Robert Key: With whom?

General Sir Kevin O'Donoghue: With Eurofighter.

Q96 Robert Key: In that case I may be able to help. There has been a report this week in the German press of a letter from Eurofighter GmbH to the German Defence Ministry saying that the bill for the Eurofighter will increase by about 10 billion more than expected, of which Britain's share of additional spending will be 5.8 billion because of certain systems and other modernisation programmes put into the procurement process. Is that right?

General Sir Kevin O'Donoghue: I am not happy to say any more. I am happy to say it privately.

Robert Key: Is it not extraordinary that we can get this information from Germany but our own Ministry of Defence cannot provide it? That is why I seek clarification.

Chairman: You have offered us a private briefing and we will take you up on it. This is obviously a matter of key concern to this Committee no doubt as well as to you.

Q97 Mr Holloway: I am fairly ignorant about the whole Nimrod programme, but are we not constantly reinforcing failure? Is there an argument even at this stage for thinking about a completely different platform?

Mr Gould: We went through this in very great detail in about 2003 when there was a major crisis in the Nimrod programme. There was an open question at that point as to whether we should continue with it or just stop it and it should not go anywhere. One of the questions we asked was: if we did not go with the Nimrod what aircraft would we go with? We could not find a substitute at that time. It is quite a specialised design because it is not just a flying platform that sucks up information and you take a civil aircraft and put some kit in it like a Boeing AWACS or something like that. It is an aircraft with a bomb bay and it does tactical flying to be able to deliver its torpedoes and ordnance in the right place at the right time. To take a civil aircraft design and turn it into a tactical military aeroplane is a pretty hard call. At that time we looked at it very carefully and could not find an alternative way to go and eventually we made the decision across government to continue with the Nimrod programme. At this stage we do not have the pitch problem but we have to make a modification to ensure it does not recur on the production aircraft. The production, flight trial and mission system programmes are going very well.

Q98 Chairman: But other countries struggle by without Nimrods?

Mr Gould: They certainly have struggled. Most other countries that have this use something called the P3 which is a Lockheed Orion aircraft. That was a contender, but it does not have the endurance of Nimrod. Indeed, the Americans are moving to the multi-role maritime aircraft and have been struggling for about 15 years to try to find a way to move from the P3 design to something more capable.

Q99 Mr Holloway: It just seems bizarre to be doing this to a rotting old 1950s aircraft?

Mr Gould: Most of it is new.

Q100 Mr Holloway: Not the one that I went on recently, although maybe the electronic gizmos are new.

Mr Gould: The wings, engines and undercarriage are new.

Q101 Robert Key: The airframe is not.

Mr Gould: The fuselage is not.

Q102 Mr Jenkins: Is there a case for having a general procurement contingency rather than just an inflated budget because we have underestimated the contingencies on different programmes?

Mr Gould: I agree that there is. Indeed, some of the contingencies for projects in the future are held centrally by DCS Equipment Capability, General Figgures, our customer, rather than as part of the project cost.

Q103 Mr Jenkin: Does that prove sufficient?

General Sir Kevin O'Donoghue: We do not have one yet.

Mr Gould: The answer is no because we do not have a balanced programme.

General Sir Kevin O'Donoghue: But the right way to do it is to hold it centrally in the equipment capability area rather than down at project level.

Q104 Mr Jenkin: But you do not yet have approval for that?

General Sir Kevin O'Donoghue: We do not have the money for it yet, and it will be part of PRO8 as we go forward.

Q105 Mr Jenkin: As to slippage, for which you cannot have a general contingency, MPO7 was worse than MPO6. Will MPO8 be worse than MPO7?

General Sir Kevin O'Donoghue: Yes.

Q106 Mr Jenkin: To what do you attribute the major slippage?

General Sir Kevin O'Donoghue: I shall ask Mr Gould to pick up the specifics, but there are really three reasons for it. One is that there is slippage; the programme is not going as fast as we thought it would, and that might be for technical reasons or whatever. The second big factor is that it is an international project over which we really have no control. A very good example is A400M and Typhoon. We do not have control over the time of delivery. The third matter is those areas where we have chosen for one reason or another not to bring something in when we first thought we would. Meteor and BVRAAM is a very good example of that. For operational reasons we do not need to bring that in when we originally said we did. I will not go into more details, but there was a conscious decision to bring in something late.

Mr Gould: We have already talked about the A400.

Q107 Mr Jenkin: Perhaps I may ask a question about A400M. What is the latest cause of slippage and what is the latest in-service date?

Mr Gould: The latest in-service date that we currently predict is July 2011. The original approval was December 2009. We lost a year because the German Government took a year to sign the MOU and so no work was done. The lesson there is: do not sign up to an in-service date until the German Government has signed the MOU. I have something called the project rehabilitation unit which is a kind of special force that I move around from project to project. It has made a review of A400. To some degree we are fortunate because we are not taking the first aircraft off the line. The initial customers, the French, will be the ones who are most hit by the production delay. They 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.

Q108 Mr Jenkin: Can we say that in retrospect it would have been cheaper and better to stick with C17s and Hercules?

Mr Gould: It depends on how many C17s you buy.

Q109 Mr Jenkin: But in terms of the cost of transporting a cubic foot per mile over the lifetime of the aircraft is that not so?

Mr Gould: Not necessarily. The C17 is an enormously expensive aeroplane both to operate and to buy.

Q110 Mr Jenkin: But presumably the unit cost per cubic foot is lower than that for a Hercules because it is a much bigger aircraft?

Mr Gould: If you fill it up on every journey that is true, but it is unlikely that you will do that every time.

General Sir Kevin O'Donoghue: The C17 is really a strategic aircraft. The A400M will be tactical as well as strategic.

Mr Gould: You would have had to buy more Hercules which would not have the carrying capacity of the A400. Therefore, the A400 will be a very good aircraft for the requirement. The other day I heard somebody from Airbus say that it is technically more challenging than the A380. They will get there.

Q111 Chairman: Do you say that buying the A400M was a large industrial project to keep wing manufacture in this country?

Mr Gould: There was certainly a lot of industrial pressure to do that, but practically in terms of cost per flying hour it will be a very good aircraft. It is very challenging because you are trying to get something that is in between Hercules and the C17 at a price which is closer to Hercules.

Q112 Mr Jenkin: On slippage generally, what is your master plan to reduce and contain it so it becomes predictable? Of course slippage also increases cost.

Mr Gould: It does not always increase cost. It increases cost if you need to keep older items in service; it can increase Treasury interest on capital charges.

Q113 Mr Jenkin: But what is the plan to stop this happening?

Mr Gould: I come back to my first point about laying down the missions for success early. Time has a different characteristic from performance and cost. 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 - it is not always the case, and not for the A400 currently - 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. The question is: how on earth do you deal with that both contractually and in terms of setting an ISD? We used to do that by having something called a confidential policy date, which is exactly what it means. It was something we kept to ourselves and we did not share with the contractors what we really thought they would achieve. We cannot do that nowadays, but it made us pay a lot of critical attention to the manufacturers' schedule. One of the things we are now putting back into project management skills - we need to do more - is the requirement to pay critical attention to the contractor's schedule and consider whether it is really credible. I know of contractors who are told by their own technical advisers that the test schedule ought to be 40 weeks and the management says it should be 25 because that is where the profit forecast comes in. We have to stop that kind of thing happening. We need to be ambitious but to have the ability to look at a schedule with as much skill as the contractor and say it is not credible. The other technique we are introducing on all category A, B and C projects - we need to do it increasingly wherever we work - is called earned value management. When that is well done it 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. We are now doing that on Nimrod and we are doing it on Astute. It happens on all American-based projects because the DOD requires that. Increasingly, we shall apply it to all of ours. I did a random survey the other day. I conducted a lecture more or less on the question just asked me for all our project managers. There were 200 of them in our lecture theatre. I asked how many of them had been on an EVM course. I was pleased to see that on a rough show of hands about 90 per cent had done that work. The critical matter is that

we will not go to a main gate decision on a project unless the contractor and supplier have convinced us they have in place and are sharing with us the management tools - the EVM techniques and others - that we need so they can demonstrate progress. We shall also focus much more on the lines of development 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. That is my list of recipes to deal with that.

Chairman: Let us move to the question of carriers.

Q114 Mr Hancock: Six months ago the secretary of state said we were ready to go and the contract was about to be signed. Why has it not been signed?

General Sir Kevin O'Donoghue: We are not quite ready to sign the contract. There are some commercial issues with the joint venture. The BA Systems and VT joint venture needs to be set up and that is rolling at the moment.

Q115 Mr Hancock: But is that the only reason?

General Sir Kevin O'Donoghue: That is the issue.

Q116 Mr Hancock: Why do they not share that view? Why do BA Systems and VT say that is the problem?

General Sir Kevin O'Donoghue: I do not know what it is they are saying.

Q117 Mr Hancock: They say it is nothing to do with them and it is an internal MoD matter. What else could it be?

General Sir Kevin O'Donoghue: They need to set up the joint venture.

Q118 Mr Hancock: Therefore, the only thing that stops the carrier contract being signed is nothing to do with the brass; it is simply the join venture deal between BA Systems and VT?

General Sir Kevin O'Donoghue: That is my understanding. I suspected you might ask this question and talked to the commercial people this morning.

Q119 Mr Hancock: Do we now have an agreed price?

General Sir Kevin O'Donoghue: Yes, as I understand it; it is 3.9 billion.

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.

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 per cent 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 BA 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.

Q140 Mr Hancock: Does it suit the MoD for this contract not to be let now?

General Sir Kevin O'Donoghue: No.

Q141 Mr Hancock: What is the impasse about?

General Sir Kevin O'Donoghue: We do not know.

Q142 Chairman: General O'Donoghue, I am afraid we do not understand these answers. Can you help us?

General Sir Kevin O'Donoghue: There is a commercial process to go through and it has taken a number of months up until now. The side letter to the joint venture was signed after Christmas, so that is ready to go. Debate is being had between our commercial staff in the main building and the alliance and joint venture.

Q143 Mr Jenkin: Is it possible that it is simply being held up because the cash is not there, or delaying the order will help the cash flow of the Ministry of Defence in the short term?

General Sir Kevin O'Donoghue: I genuinely do not know. The planning round is not in my hands. What we and the IPTs are doing in the planning round is to provide much more detailed costs than we have ever been able to do from the centre. That is where I sit at the moment. I am not closely involved in the planning round. I am closely involved in providing costs and adoptions but not the planning round.

Q144 Robert Key: Mr Gould explained that one of the reasons for increases in cost was the inevitable rise in the cost of labour and materials, but in the memorandum that the Ministry of Defence has provided to the Committee for this inquiry it is pointed out in the table that the original main gate approval cost in 2005 was 3.9 billion and the forecast this year, which I note is not restricted, is 3.9 billion. There is no increase in those years. Is this part of the bone of contention? Is this not fairyland?

Mr Gould: That is because the timescale for building the ships has not changed between those two things, so the labour and materials bills does not change. The fact of the matter is that as we speak the joint venture has not been formed and we do not have that body with whom we can contract.

Q145 Mr Jenkin: Does that require Ministry of Defence approval?

Mr Gould: It does require approval.

Q146 Mr Jenkin: Do you think that may be the problem?

Mr Gould: I do not believe that is the problem. 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 BA 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.

Q147 Mr Jenkin: It sounds like a stand off.

Mr Gould: No, it is not.

Q148 Mr Hancock: It is not unreasonable to ask when you would reasonably expect to be able to tell industry that this is now to be signed. The way this contract has been handled and the to-ing an fro-ing is not a good example of the new regime and I think industry will look rather reluctantly at the way this been handled for good news in the future?

Mr Gould: To come back to your original question about how we shall not have on the carriers what happened on the type 45, I think this is a pretty good example. We have spent quite a long time and in excess of 400 million to make sure that with the carrier alliance we have a common understanding and expectation as to the design, what is involved in manufacturing it and what are the industrial arrangements for it so that when looking at the 3.9 billion and the incentive arrangements - because we hope to do better than that as we go through the project - both sides understand that this is a realistic possibility and it is not wishful thinking. We have already ordered some of the long-lead materials for the ships. For example, the steel has already been ordered from Corus because it is a good thing to do in the current state of the market. We are not standing still; we are making progress.

Q149 Chairman: General O'Donoghue said in answer to Bernard Jenkin, who asked if it was possible this had arisen because you did not have the money, that he did not know.

General Sir Kevin O'Donoghue: You are absolutely correct.

Q150 Chairman: Would you give the same answer?

Mr Gould: Is it possible because we do not have the money? Clearly, I would not give the answer that we do not have the money, but the fact is that we are going through a review of the programme of the nature we talked about earlier. The Chairman specifically asked whether this was as serious as we had ever known it at least in recent years. To that I would say yes, although my memory goes back to the 1970s as well and I can think of times when maybe it was worse. That is not an atmosphere in which it is easy to take big decisions on commitments, but when the Defence Management Board looked at this proposal it said that it was a good one.

Mr Hancock: The simple question is: when do you expect to be in a position to get the contract signed? Mr Gould, what is your best guess based on your 30 years' experience of the good and bad times in the MoD?

Q151 Chairman: Will you get it through before you go?

Mr Gould: I would be very disappointed if I did not.

Q152 Chairman: Do you think you will?

Mr Gould: Yes.

Q153 Mr Holloway: In that case this is not a convenient stand off whereby until you do a contract they cannot legally do a joint venture?

Mr Gould: No. They can legally do a joint venture today if they can. I would expect this to be fairly imminent. When I go is fairly well known, so that gives you the timescale.

Q154 Mr Jenkin: What is the target number of Astutes?

Mr Gould: Seven.

Q155 Mr Jenkin: But like everything else that is presumably in the melting pot? I am not trying to catch you out. It is not a special category?

Mr Gould: It is not.

Q156 Mr Jenkins: I do not understand the phrase "in the melting pot". I understand "re‑profiling". By this plan I anticipate that somebody will sit down and look at all the projects and re-profile them, for example something should have greater priority because we need it or something else can be pushed back because it is not needed at the present time. The outcome will be the same level of expenditure but a re‑ordering of the projects within that expenditure. That kind of re-profiling is the subject of an annual assessment in any good company. Is that what you see?

General Sir Kevin O'Donoghue: That is exactly where we are at the moment and we are coming to the end of it.

Q157 Mr Jenkins: Therefore, it is not a matter of everything sitting on the table and it being decided what is put into the pot and what is pulled out of it; it is more sophisticated than that?

General Sir Kevin O'Donoghue: It is an analysis of the all the programmes to see whether the profile of the programming is right. That is why I cannot tell you why; we are where we are.

Q158 Chairman: What is the target number of joint strike fighters?

General Sir Kevin O'Donoghue: It depends on what they cost.

Q159 Chairman: Are you happy with the programme at the moment?

General Sir Kevin O'Donoghue: I think so. The first STOL version of the joint strike fighter, not the STOVL version, has flown. We do not yet know the unit or support costs, which is why I answered the question you first asked the way I did. It would be foolish of me to suggest a number without knowing the price.

Q160 Mr Jenkin: If the United States ordered fewer than it anticipated at the outset - there appears to be such a possibility - would that affect how many we could afford to buy, because obviously the unit cost would go up?

General Sir Kevin O'Donoghue: It would certainly be a factor that would have to be taken into account.

Q161 Mr Jenkin: How big a risk do you think it is?

General Sir Kevin O'Donoghue: I do not know. We have the advantage that we have not signed up for x aircraft but to be part of the programme. We can buy these aircraft off the production line as we need them. Unlike most aircraft where to keep the production line open you buy a certain number and then stick some into a shed somewhere because they are the attrition reserve and so on, here 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.

Q162 Chairman: Are you confident that they will be available to fly off the aircraft carriers in 2014 and 2016 when they come into service?

Mr Gould: I am not confident that that will be the case. We plan to use the GR9 on the first of the carriers.

Q163 Chairman: When was that announced?

Mr Gould: We will not have a carrier's worth of fully productionised, trained and equipped JSFs in 2014.

Q164 Chairman: For how long do you expect to be using GR9s?

Mr Gould: Currently, we plan to keep them in service until 2018 or something like that.

Q165 Mr Jenkins: As always, you choose your words very carefully. You say you do not plan to have a full commitment of joint strike fighters. Do you intend to mix aircraft?

Mr Gould: I meant I did not expect that the joint strike fighter programme would be physically able to provide us with a wing's worth of joint strike fighters in 2014. We plan to operate only joint strike fighters from carriers when we have enough JSFs to do that.

Q166 Chairman: What are the costs involved in running on GR9s?

Mr Gould: I do not think we are running them beyond where we planned. We always planned to use them in that way.

Q167 Chairman: Is any consideration being given to marinising Typhoon?

Mr Gould: No.

Q168 Chairman: If that was ever plan B, is that now out the window?

General Sir Kevin O'Donoghue: It is very much on the back burner.

Mr Gould: I do not think it would be plan B; it would be further down the alphabet.

Q169 Richard Younger-Ross: As to the joint strike fighter, you said that the number would be determined by cost. Can you give a percentage? Will it be half the number if the cost is so much? What is the ballpark figure? What sort of variation in percentage are you talking about?

General Sir Kevin O'Donoghue: I cannot say. We just do not know what the unit cost is. 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?

Q170 Richard Younger-Ross: What percentage variation are you looking at in terms of cost?

General Sir Kevin O'Donoghue: I am not sure at the moment because I do not know the unit price.

Q171 Richard Younger-Ross: Therefore, it could be double the cost?

General Sir Kevin O'Donoghue: I very much doubt it.

Mr Gould: All we can do at this stage is look at comparable programmes in the past. Looking at where the joint strike fighter is today, what happened on the F18 at an equivalent stage? What was the production cost growth? Typically, at equivalent stages a 20 or 30 per cent increase in cost has been known to happen, but at the moment I have no evidence that that will happen on the joint strike fighter.

Q172 Richard Younger-Ross: We have two aircraft carriers. What is the number of aircraft you expect to have on them, if you can afford them?

General Sir Kevin O'Donoghue: Thirty-five or 36.

Q173 Richard Younger-Ross: But you do not know whether or not we can afford 36?

Mr Gould: We can certainly afford that number, but there would be an additional number for training, attrition and so forth.

Q174 Chairman: The original figure was 150?

General Sir Kevin O'Donoghue: Yes.

Q175 Chairman: That is cloud cuckoo land, is it not?

General Sir Kevin O'Donoghue: I do not think we need to make a decision on that. Because the production line will run on we can buy the number we need, which presumably will be the 36 to man one aircraft carrier plus the training and so on and buy others as and when we need them. I am not sure we need to decide on a number now.

Q176 Mr Jenkins: I had no intention of going down this route but it is fascinating in that we have the prospect of the first carrier having no joint strike fighters to land on its deck. Do we plan to have the second carrier within the four wing? What sort of drumbeat do you anticipate in getting the joint strike fighters? At what rate will we get them and what will be the level of training? When can we get the second one up? I know that this is all speculation given the time ahead and the cost, but somebody must have sat down and drawn up a plan. Is there any chance of our having a look at that outline plan with regard to the rate at which you expect these items to be delivered and when the aircraft carriers will have their full complement? Is there any point in our having an aircraft carrier if we have nothing to land on it?

General Sir Kevin O'Donoghue: We will fly the GR9.

Q177 Mr Jenkin: Would it not be cheaper to run the existing aircraft carriers if we are just to carry on with GR9?

General Sir Kevin O'Donoghue: No.

Mr Gould: We come to the point about the size of ship you build once every 50 years. We have now built up the supply chain that gives us the opportunity to build those ships in that timescale. If you delay building those ships you have to pay a bit extra to run on the Invincible class, but the additional amount you pay just on labour and materials for delay and dislocation in the carrier programme would outweigh that several fold.

Q178 John Smith: You say that the number of joint strike fighters will be determined by how much they eventually are. Surely, the number of joint strike fighters should be determined by what we need for our defence capability and the fact that GR9s will go out of service by 2016 or 2018. You must have a figure which is what we need for this country's defence?

General Sir Kevin O'Donoghue: Yes.

Q179 John Smith: What is it?

General Sir Kevin O'Donoghue: The Chairman asked me how many we would buy and the answer is that it depends on the cost. You would point a finger at me if I signed up to something without knowing how much it would 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.

Q180 John Smith: You must still have some numbers in mind in terms of what capability you predict in the next 10 years?

Mr Gould: The figure of 150 is the one we still have in mind, but when we get to the main gate, which we have not got to on JFA, that will be the time when we start to determine what the production numbers are. The great opportunity with JFA is that we do not have to make up our mind on the total at the start.

Chairman: I think we ought to move on because we must still cover FRES as well as other matters.

Q181 Mr Holloway: The design of the utility vehicle has not yet been chosen, but I think you held trials in the summer. When is it likely to be announced?

General Sir Kevin O'Donoghue: Very soon.

Mr Gould: A recommendation has been made.

Q182 Mr Holloway: The MoD memorandum refers to a system of systems integrator and "one or more UV Integrators". What are the integrators going to do, and could it become more difficult if you have too many?

Lieutenant General Applegate: As to the system of systems integrator, if we go back to some of the past weaknesses we have not been very good at developing people with the necessary skills and to think about the way a variety of individual equipments come together and interact with one another - in other words, a system of systems - in order to exploit those to maximum advantage. Similarly, because we have a number of vehicles with multiple roles we need the necessary expertise to consider how best to integrate common solutions throughout those roles, where that is appropriate, and what might be, for example, common electronic architecture, making sure we have the appropriate inclusion of technology to drive down the whole life cost. There are some skills that we are not particularly good at and so in the short term we need the system of systems integrator to give that overview and provide us with specialist expertise to manage the complex mix of individual requirements and look across the technology so we have the many strands of technology that we require not simply to bring in the individual equipments but to do the upgrades through life that we talked about earlier. There are some quite specialised skills in that area and there are not many around. That is the reason we have asked for the system of systems integrator to support us in this work. It is not a lead systems integrator as the Americans have with the future combat system because we have learned the lessons from that particular programme. With the lead systems integrator there was effectively a hand off to that LSI to conduct the activity on behalf of government. It is the SOSI as part of the internal alliance, the core team, which supports us in our work. The system of systems integrator is also there not to continue to be the experts for ever and keep us in ignorance, but one of the tasks placed upon it is to bring those skills back into the Ministry of Defence so we become better at this over time.

Q183 Mr Holloway: We were told that the Army, the front line as it were, would have an input into this. Can you take us through what input it has had so far and also confirm that the Army's preferred option is the one that you will be announcing?

Lieutenant General Applegate: To start with the second part, the Army has been involved throughout this and supports the design decision.

Q184 Mr Holloway: But is that the Army's preferred option? Did it support it?

Lieutenant General Applegate: Yes. 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 through life, levels of protection and confidence in the nature of the company. How has that been done? Clearly, there are Army people within the project team. On the assessment panels there have been representatives from both the Army in London, if I may put it in those terms, and also the front line user. They have scored on those assessment panels and have been fully involved in all of that technical work. The analysis was then taken to the executive committee of the Army Board which was briefed over a number of hours on the outcomes that we found. It was posed a series of questions and asked whether it agreed with the recommendations and to clarify some of its priorities. That work was then taken forward and formed part of the recommendation of the way forward. There was a lot of engagement. In the case of FRES over the most recent period the user has been very much involved as part of the team, understanding the cost of some of the requirements and being willing to trade where it made sense once the evidence was provided. Evidence of that would be the way in which we step back from the C130 requirement in terms of the ability of the vehicle to sit in a C130 because, to be frank, it was not technically feasible to do that considering the levels of protection we would wish to have. I hope that gives you the answer. It has been heavily engaged throughout.

Q185 Mr Holloway: General O'Donoghue talked about the joint strike fighter pulling stuff off an existing US production line. Is there an argument even at this stage to scrap the FRES project as it is currently configured and buy the best available thing off the open market at the time and not in such huge quantities and at such gigantic cost?

Lieutenant General Applegate: No.

Q186 Mr Holloway: Why not?

Lieutenant General Applegate: Basically, because if we pulled something off the production line today we would be spending a huge amount of money to upgrade it to meet the conditions of today. For example, the Americans have found huge problems with the LAV3 that has been used in the past in upgrading it in order to make it relevant for today's missions. We also spend somewhere in the region of 650,000 per vehicle that we put into the operational theatre in order to equip it with new armour, communications and electronic counter-measures simply to bring it up to the standard of today. That is the reason we have taken the pragmatic course of looking at something that we believe is capable of being developed into the system and can grow through life. If we were to buy off the shelf a combat vehicle rather than a protected vehicle such as the Mastiff, which is another matter you may have in mind, there would be nothing in the market place to meet that particular need for the Army considering the range of missions that it has to complete.

Q187 Mr Holloway: Notwithstanding your comments about adapting it through its life, you are buying something now against a range of threats as yet unknown which tries to do absolutely everything. Surely, given the gigantic cost of this I still do not understand why you would not be better off getting the best available thing at the time in specific numbers?

Lieutenant General Applegate: 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 which 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. If we bought something now literally off the shelf effectively we would have to shoe-horn in, as we do on UORs at the moment, a series of sub-components in a very poor fashion and it would have very limited life, so it would be a bad decision. The Army is quite convinced about that, and there is a decision as to whether you literally buy off the shelf, assuming there is the ability to ramp up production, or have something that gives the Army confidence will grow through life. We must have that confidence if we are to grow. One of the things we have noted with the current range of vehicles is that we tend to have them for a long time and increase their capability over time. We also have tended to increase their weight, their demand for power, the levels of protection and the other elements we put on them. To try to do that with an off-the-shelf system at the moment would be a recipe for disaster. We and the Army are content with that.

Q188 Chairman: General Applegate, rather meanly towards the end of last year I congratulated David Gould on down selecting from three to three. You may already have dealt with this and I have missed it. When will you make a decision?

Lieutenant General Applegate: With regard to the design?

Q189 Chairman: Yes.

Lieutenant General Applegate: It is imminent. We have made the recommendation to invest in that and push forward aggressively.

Q190 Chairman: Is there any truth in the stories over the weekend that when we are buying American-armoured vehicles we are being placed in the back of the queue?

Lieutenant General Applegate: No. I have a very good relationship with my American colleagues and they have provided us access through their joint allocations board in order to meet our needs.

Q191 Chairman: General O'Donoghue, you have painted a pretty bleak picture of life in your area of work at the moment. It is an area of uncertainty. As all these reviews take place how is that uncertainty affecting the people who work for you?

General Sir Kevin O'Donoghue: I had not intended to paint a bleak picture. I think it is rather exciting at the moment and there is a golden opportunity to move forward, which is what we are doing. It is unsettling people. We will come down to some 20,000 people over four years. People need to know who is staying, who is going and who will have early release. There is a degree of uncertainty in some areas and in others which support current operations people are very busy and working hard. They have seized it and are going for it, which is very impressive.

Q192 Chairman: As to uncertainty over the equipment programme, how is industry reacting to that?

General Sir Kevin O'Donoghue: I think industry would say it would like to see an affordable programme and fewer projects properly funded, if that is what it takes, than a lot of projects not properly funded. I have heard industry say that at gatherings. Industry would like us to settle the programme and we know that we go through this every two years. They are just waiting to see what comes out the other end.

Q193 Chairman: So, what they want in that respect they have never had?

General Sir Kevin O'Donoghue: I do not think we have had a properly affordable programme for many years.

Q194 Chairman: What are you doing about that?

General Sir Kevin O'Donoghue: This is PRO8 and the planning round that we are going through at the moment.

Q195 Chairman: Is there a sense that industry is delaying investment because of the uncertainty over the programmes?

General Sir Kevin O'Donoghue: I do not know.

Mr Gould: I think it is bound to do so. This will not be missed when it sees the certainty of something coming through. It is very patchy across different sectors. Where we have been able to put in place good partnering arrangements we see signs of investment particularly in people. Industry has the same problems with skilling, upskilling and retaining skills that we have. Very often the same sorts of skills are in short supply. Therefore, when industry invests in people, which we see when partnering arrangements are in place, that is good, but clearly investment in infrastructure and technology can take place in industry only if it can see an outlet in the market for that. If it sees growth in a certain sector of the market - UAV is a case in point - private investment goes in because it is dependent not just on the MoD. If it is investment that is dependent on just the MoD it will happen only when industry sees decisions coming out from the department.

Q196 Mr Jenkins: I do not see the bleak role that the Chairman sees; I see a challenging and exciting one. One aspect on the industry side - I recall this from a previous existence - was that when it came for an order you would say it would have its research and development costs over the run of the order. I would say, no, it will not; it will be paid upfront because it will not get the run of the order. Is it true that in the past we had to pay the research and developments costs of programmes that we knew were short, cut or were never implemented? It cost us a lot of money for the security and stability that industry required?

Mr Gould: It is probably wrong to try to characterise the whole of industry in one sentence. Different parts of industry behave very differently. One matter I have looked at carefully over recent years is what proportion of the free cash in a company, if you like its profit, is ploughed back into the industry in terms of R&D. In some companies you see figures like 10 per cent or more. I am sorry to say that in some of the very big ones you see figures of two per cent or less. A lot depends on where these companies are in the supply chain. If you are to compete and get yourself into the supply chain of BA Systems, Lockheed or whatever it is you have to spend money on R&D to improve your products. Therefore, mid-size companies tend to have a better record on R&D spending than the very big ones. I find that disappointing. One thing that we are trying to do, particularly through my colleague Paul Steen who is now the science, innovation and technology director in the MoD, is to see whether we can use not just our research budget but the way we commission research to get a better result in terms of both pull-through and the participation of companies that are good at innovating in the defence programme. Defence enterprise gateways as they are called try to set up clusters of good practice involving big as well as small companies centred perhaps on a university or a technology centre to improve the process. That is quite encouraging. Ultimately, what people spend on R&D will depend on how they perceive the market conditions. If the market conditions are not good or they are uncertain it will be very hard for R&D directors to get money out of finance directors, just as it is inside the MoD.

Chairman: Let us turn to urgent operational requirements (UORs).

Q197 Mr Jenkin: General Applegate, I want to ask about lessons learned. Obviously, you have been a great success story and I shall turn to you in a moment. First, I want to ask about the technicality of this. The memorandum says that the total number of UORs until December 2007 was 796 and the cost was 2.6 billion. Is that since the start of Afghanistan and Iraq?

Mr Gould: Yes, of that order.

Q198 Mr Jenkin: Is the 2.4 billion the capital cost of those UORs or does it represent the lifetime cost?

Lieutenant General Applegate: Clearly, the problem with UORs is that their life is quite short. Although there are many benefits in the UOR process, which we should exploit - I know the Committee has looked at this - there are some significant shortfalls especially where one is fighting long campaigns.

Q199 Mr Jenkin: If you buy Mastiffs they will outlast the campaign, will they not?

Lieutenant General Applegate: At the moment the funding we have is enough to keep them for the period of a UOR; in other words, the UORs last for a year and you must make a decision then as to whether to bring them into the core programme, that is, find new money or get rid of them.

Q200 Mr Jenkin: Therefore, none of the 2.4 billion has yet been brought into the core programme?

Lieutenant General Applegate: Elements of it have been and some of the decisions this year are about what else we should bring into the core programme.

Q201 Mr Jenkin: Can you quantify how much of that 2.4 billion has been brought in?

Lieutenant General Applegate: At the moment I could not.

Q202 Mr Jenkin: Would you give us those figures?

Mr Gould: The 2.4 billion is what we have spent on UORs and sustaining them in the theatre of operations. If we bring them back into the core programme it comes out of the EEP and it will be separate from and additional to the 2.4 billion.

Q203 Mr Jenkin: After 2003 and the invasion of Iraq there was a sense that the UOR programmes in 2003 had an impact on 2004 and 2005. Can you quantify that? If we asked you to provide figures on that would you be able to do that?

Lieutenant General Applegate: Can you describe what you mean by "impact"?

Q204 Mr Jenkin: There were items of equipment which were then brought into the core programme. The money had to be found out of the core programme to fund those, and presumably that money had to come out of other programmes.

Lieutenant General Applegate: We will have to get back to you with regard to the detailed figures.

Q205 Mr Jenkin: But in terms of the 2.4 billion there must be quite a lot that will come out of future programmes?

Lieutenant General Applegate: In terms of planning for 2008, one of the decisions that Andrew Figgures as DCDSEC has to make is which of those capabilities he wishes to bring back in because a new standard has now been set. How can that money be found within the programme to do so?

Q206 Mr Jenkin: But would it be true to say that a good deal of the reluctance to approve UORs is because a lot of the big ticket items would have an impact on the forward programme and therefore it is very difficult to justify that expense?

General Sir Kevin O'Donoghue: There has been no reluctance to approve UORs.

Q207 Mr Jenkin: Even the saga of the helicopters was protracted.

General Sir Kevin O'Donoghue: That was a requirement issue. There has been no reluctance to approve UOR funding.

Q208 Mr Jenkin: That is a very important assurance and we take it very seriously, particularly as you are wearing uniforms. Perhaps you would prepare a note on those figures which would be extremely useful. CDP said that there were "some very powerful lessons" to learn from the UOR experience, procuring off the shelf as close as possible, making sure the frontline user was involved in the decision and undertaking procurement in an incremental way. I am not quite sure what that means. Do you think we have learned these lessons, and are there further ones to learn?

Lieutenant General Applegate: Certainly from my perspective, yes. To go back to some of the things we have said today in regard to FRES, the close involvement in routine programmes of the user in a way that we did not adopt in the past is directly the sort of relationship one sees in UORs. We see a process whereby we draw those sorts of behaviours into our main programmes. There is a sense of urgency and purpose because of support of operations throughout the whole organisation, which I think is refreshing and acts as a focus for people and clearly a catalyst for changed behaviours. I certainly see close team activity involving the user and industry coming out of UORs which applies more widely. I think that "incremental growth" goes back to the business of what we have now called the threshold level which is good enough for the initial operating capability with confidence of how it grows over time, putting in new technology as the threat emerges or as it becomes more mature or affordable. We see that taking place, and FRES is another good example of that. As to the comment about buying as close to off the shelf as possible, I go back to the comments I made about FRES. The issue is that it is not a complete off-the-shelf item; it is something that we can develop. What we have not done is the development ab initio of a brand new armoured vehicle; rather, we have taken a pragmatic stance in order to identify a solution that we can develop to meet our needs. All of those things are beginning to lap over, quite rightly, into our main programmes.

Q209 Mr Jenkin: Why do we still hear so many stories - perhaps they are simply got up by the media - from people who say that they want this and that but they have been told they cannot have it?

Lieutenant General Applegate: Do you mean on operations?

Q210 Mr Jenkin: Yes. You must have had that experience yourself.

Lieutenant General Applegate: Yes. I was a particularly impatient commanding officer who did not get anything and who sat on top of a mountain outside Sarajevo where nothing came through. To an extent that scarred me. There is a certain impatience within the organisation to deliver what is needed on the front line. I think that if you asked the question 18 months ago in relation to Afghanistan when initially Three Para went through and there was deployment into the platoon houses, to an extent we were surprised and the nature of the campaign took a direction that we had not predicted. What one then tries to do is play catch-up. The first thing we need to do is develop a pattern for the campaign. What is really needed to get the requirement articulated by those in theatre to say what they need? Clearly, that comes from the individual soldier, but the views of each individual soldier have to be analysed in theatre and turned into a requirement. It goes through the permanent joint headquarters and is then confirmed and UOR money is given. Once we have done that we have to go into the market place and try to find these things. I was interested in Lord Drayson's comment about motor racing in dealing not only with an agile industrial sector but one which clearly had sufficient capacity. The lead time for some of these equipments is significant.

Q211 Mr Jenkin: As an example, there was reluctance to put foam in the wings of Hercules. That was a logistical and not a cost problem.

Lieutenant General Applegate: You know more about that than I do.

Mr Gould: You have to take an aircraft out of service.

Q212 Mr Jenkin: You are still trying to meet that requirement?

Mr Gould: We are still trying to use them, so it is quite a challenge.

Lieutenant General Applegate: The point I am trying to make is that there is a time lag first in defining the requirement and then going to industry even for things like heavy machine guns and general purpose machine guns which one might think would be common. For a heavy machine gun there is a six-month lag; for a general purpose machine gun there is a 12‑month lag in the market place because it is just not there. As to the Mastiff, I remember well that in pushing that through we required a lot of support from our US colleagues in order to provide us with favourable conditions in order to bring it in on an accelerated timescale.

Q213 Mr Jenkin: The problem is that the equipment in theatre is designed to last a certain life and that is very quickly trashed by the sheer use of it. How do we fund that? Can that be UOR-ed? Is that not a cost of operation and is it fully funded as such, or does that have to come out of the core budget?

Lieutenant General Applegate: Some of that funding does come out of contingency funding in order to maintain it. I am less sanguine about the cost of recuperation, as we call it; in other words, at a time when we do not need that equipment on the operation, or the operation is closing down, or we are trying to reconstitute a reserve, is there sufficient money to prepare for a contingency task in five years' time? That is an issue which the department is looking at in this round.

Q214 Mr Jenkin: Should not 16 Brigade have more than six WIMIKs for its training?

Lieutenant General Applegate: It should have a larger training fleet, but part of the problem initially - this is not the case now - was that the Treasury did not approve elements for training and attrition.

Q215 Mr Jenkin: That does not come out of your core budget?

Lieutenant General Applegate: No. Now that we have a more stable campaign in Afghanistan - more like TELIC - the department is working out what should be the equipment table with which to conduct operations. We now have a better idea of the pattern of operations and what is needed for success. Because of some of the shortages for training we may have to bring back some of that equipment to ensure we train people properly before they go to theatre.

Q216 Mr Holloway: The Army has been using a gigantic amount of ammunition in Afghanistan. Every six months it doubles. For example, for the Apaches the requirement has been 81,000 30mm rounds. Is this huge use causing a problem in your supply chain?

General Sir Kevin O'Donoghue: No. We are able to get the ammunition. A lot of it comes from BA Systems Royal Ordnance which this year will produce over 200 million rounds of small arms ammunition for us.

Chairman: We have a couple of questions to ask finally of Mr Gould. Before we do that, we shall write to you about a few questions because we have not really had time to reach them today.

Q217 John Smith: I should like to deal with the defence agencies. We turn to a somewhat more mundane subject. Why are you retaining the DSDA as an agency within the new department, and will it continue as an agency?

General Sir Kevin O'Donoghue: The answer is that I do not know whether it will continue as an agency. The reason it was the only agency to survive into DNS is that that was what was agreed and announced by ministers when we launched FDSCI, the future defence supply chain initiative under the change programme.

Q218 John Smith: It was there before and as part of the rationalisation you will continue to look at it?

General Sir Kevin O'Donoghue: Indeed.

Q219 John Smith: Why was there a change of mind on the Defence Aviation Repair Agency which was to be abolished on 1 April 2007 but will now be merged with ABRO to create a super-agency with trading fund status? That is a complete about-turn in government policy.

General Sir Kevin O'Donoghue: I do not know whether we intended to abolish it.

Mr Gould: As I am sure you know, the DARA is made up of three elements: the fixed wing engine part which is at St Athan, that is, engines in large aircraft; the helicopter bit in Fleetlands and in Almondbank, Perth; and the avionic repair part of that at Sealand. The avionic parts, which have a good deal of commonality with some of the work that is done in the Army Base Repair Organisation, which is already a trading fund, will be put together. They will become a single trading fund agency. The large aircraft part at St Athan will disappear with the large aircraft anyway, maybe even before I disappear with FSTA being done. That will just die a natural death. The rotary wing and component rotary wing repair organisation is being considered for sale. Therefore, it is not an amalgamation of the whole thing. What is being amalgamated is the component avionic repair facility at Sealand with ABRO which does quite a lot of similar work.

Q220 John Smith: Will that continue as a trading fund?

Mr Gould: Yes.

Q221 John Smith: The IPTs or the department will be its main customer for the newly-formed trading fund?

Mr Gould: It will not be its only customer but it will be the main one. That is the main reason for having it. One of the reasons for keeping ABRO as a trading fund is the fact that because it is a government-owned company it is quite easy to deploy people overseas and into operations and so forth. With a private company it is much more difficult to do it.

Q222 John Smith: You referred to consideration of the sale of the rotary wing/helicopter deep repair and maintenance business. Given the pressure we are under on the front line in Afghanistan in terms of maintaining helicopters in theatre, to which this Committee has referred, do you think it is a wise move to consider the sale of the entire deep repair and maintenance of three principal platforms which have been delivered to date to the front line without any major difficulty? We have placed enormous pressure on aircraft service and the component supplier. Do you think that to sell it to a relatively small Canadian company called Vector which does not have a track record in this field at this particular time is an unnecessary risk to the support of these aircraft?

Mr Gould: I do not want to speculate on the final decision to sell or to whom it might be sold. Vector has shown interest in it.

Q223 John Smith: That is the only company to show an interest in it?

Mr Gould: Others have but I do not want to get into it because I am not right on top of the sale process; I am not the person who is conducting it. Is it a sensible thing to do in general? I think the answer is yes. We are already heavily dependent on commercial suppliers, Boeing, Agusta Western and others, for deep support for aircraft. We do not deploy the deep maintenance and repair people forward into theatre. That is done by the REME basically or the RAF. Therefore, for maintaining aircraft in theatre RAF and Army technicians are the key. To make sure we get availability of aircraft so we can deploy them in theatre we are moving to availability contracts based on a partnering arrangement with Agusta Western or with Boeing for Chinook. Our degree of industrial dependency is increasing and we find that availability contracting is a better way to get the right number of aircraft ready to deploy into theatre than the mixed arrangements we currently have. Therefore, in principle I think it is a perfectly sensible thing to do, but I stress that a final decision has not yet been made.

Q224 John Smith: Is it not the case that these are larger principally British or British-based companies which have a track record in servicing our front line aircraft? If Vector, a Canadian-based company, purchases the rotary wing and component business from DARA it will double in size as a company. I just flag it up. I think there are implications in terms of maintaining front line availability.

Mr Gould: Any final decision to sell will have to take all those things into account, and certainly one of them will be: do not move any of these things without our being there.

Q225 Mr Holloway: Why can we not support more Apaches in theatre? There is no shortage of Apaches. Is there a shortage of support?

Lieutenant General Applegate: At the moment the hours for Apaches are pushing up really well at the moment. Remember that the Apache was brought into service several years early and we had a problem over the support package. Currently, the stress is in people in terms of sufficient maintainers and the trading of the parts, not the aircraft or the spare parts.

Q226 Chairman: Mr Gould, this is probably your last appearance here which will be a sadness for the Committee and probably a joy for you. As you sail off into the sunset what would be your greatest triumph in recent years in your job? What would be your greatest regret? What is currently your greatest hope?

Mr Gould: Wow! I shall not point to a particular project as the greatest triumph. If in 2012, say, we have managed to launch an aircraft carrier and it is floating somewhere on the Firth of Forth, albeit not in service, or we have a company's worth of FRES utility vehicles operating in Afghanistan, or we have completed a set of negotiations on the Typhoon tranche III, or we have made a lot of progress on the future capability of Typhoon and it fully exploits its potential in its air-to-ground as well as the air-to-air role, I will say that I have put in place a lot of the matters that made those things happen. Therefore, if they finally succeed I shall be happy. What I can tick off now is that when I started this job a minister had fairly recently said something along the lines, "We do not have an industrial policy for defence and we are proud of it."

Q227 Chairman: It was not me, was it?

Mr Gould: No, and I would not have reminded you if it was. Since then we have an industrial policy, which I wrote. We have an industrial strategy, most of which I wrote. Most of the ideas were mine but with a lot of encouragement from Lord Drayson without whom it would not have happened. That has had an enormous effect on the ownership of the industry. If you look at the amount of inward investment in the UK defence industry in the past 10 years it is phenomenal and that can be only to our benefit because in this country we have created a market that has been attractive for inward investors. I hope that will continue. It has also enabled us to move on. I know well, like and admire Peter Levene, for whom I worked, and he did a great deal of good. We had a winning formula but took it too far. I talked earlier about the type 45 contract and others like it where we said there should be competition that could be used to fix everything. You then find that you have not done a first of class; you have set parameters without knowing what you are doing. You have pushed people into a situation where they almost buy contracts and bet the firm and it ends in tears. I believe that to move to a point where you use competition but only in a way that satisfies and meets market conditions, and it make sense so to do - the industrial strategy does that - is a great step. The biggest regret - I hope I have dealt with it - is that I did not spot earlier, not that the DPA had forgotten how to do project management - a lot of people did know how to do it and were still doing it - but that they had not made it a fundamental and total core skill to train people through life. You can teach people the techniques of project management; you can send them off on courses - the first course I did in the MoD a long time ago was on project management, and I have probably forgotten most of it - but the fully-fledged manager comes only with a lot of domain experience and scars. If you want to apply good project management to a submarine build programme you also need people who have familiarity with and main knowledge of the submarine world and so on. Therefore, probably my biggest regret is that I did not pay more attention to it earlier, did not pick it up inside the DPA - it is being done now - and insist on it more vociferously, and perhaps I would then have had even more arguments with the MoD personnel director than I have had.

Q228 Mr Holloway: What do you plan to do next?

Mr Gould: I am not allowed to accept any offers at the moment because I am still under contract to the MoD. I do not plan to retire to retire. I believe I have some skills and knowledge that are useful to other people and hope to be able to use them.

Q229 Chairman: This has been an absolutely fascinating session. While you are under severe constraints because of the process you are going through you have done your utmost to try to get round them and be as open as possible, and for that we are most grateful.

General Sir Kevin O'Donoghue: I apologise if we ducked the issue on occasions. As you say, we are in the middle of a planning round and the programme will be made affordable. That is the purpose of planning rounds, but where we are at the moment is quite difficult.

Chairman: Thank you.