Examination of Witnesses (Questions 40-59)
MINISTRY OF
DEFENCE
17 MARCH 2008
Q40 Mr Touhig: I am not clear where
you consider you get your definition "masking" from.
The author of the Defence Industrial Strategy has gone;
has the strategy gone with him?
Sir Bill Jeffrey: No, it certainly
has not. We are still entirely driven by the thinking in the Defence
Industrial Strategy. There is a plan which Ministers intend
to deliver on a little later in the year to publish a revised
version of that strategy. The thinking behind it, the combination
of a clearer, more open relationship with the industry, greater
transparency about requirements, a greater clarity about what
needs to be onshore and what does not, more emphasis on through-life
capability, more emphasis, where it makes sense, on—
Q41 Mr Touhig: I appreciate that
indeed and welcome it—
Sir Bill Jeffrey: That is very
much where we are.
Q42 Mr Touhig: One of the objectives
was transforming industries by signalling the MoD's future requirements
and driving improved efficiency and overhead reductions. We were
promised Defence Industrial Strategy version 2 within two
years and we are now over that. When do you expect the published
version 2 of the Defence Industrial Strategy?
Sir Bill Jeffrey: I would expect
it to be a little later this year. We were talking earlier about
the planning round that was still going on in relation to our
expenditure position—
Q43 Mr Touhig: You cannot put a date
on it, Sir Bill?
Sir Bill Jeffrey: We had a discussion
with industry towards the end of last year. It was clear from
these discussions that the industry itself would welcome deferring
any re-issue of the Defence Industrial Strategy until the
key decisions on resourcing had been taken. The very strong signal
we got was that they would not want a premature publication on
the second anniversary that might be affected by decisions on
the overall programme which had at that stage not yet been taken.
Q44 Mr Touhig: It makes absolute
sense but you are actually tied totally, are you not, because
you are still waiting to know how much money you can spend, which
is why you cannot progress the strategy?
Sir Bill Jeffrey: We know how
much money we have to spend; we are still in the process of taking
decisions about where to spend it.
Q45 Mr Mitchell: Don Touhig called
it conjuring, what has happened, this transfer to other accounts,
and actually it is worthy of Enron at its best because you are
shifting it around in a way so as to disguise the total expenditure.
If it is transferred to other projects, as the £1 billion
is, what happens to the other activities financed by those budgets?
What are you foregoing from the budgets to which it is transferred?
Sir Bill Jeffrey: As I said earlier,
Mr Mitchell, we have a budget that emerges from last year's comprehensive
spending review. We have a number of financial pressures that
we need to tighter manage within these budgets. Sometimes there
are reductions but more generally there are increases in pressure.
Among the increases in financial pressure are those arising from
these budgets that are described in this Report. Ministers have
to take decisions about where to set priorities within that. If
you will forgive me, I would strongly resist the Enron comparison,
because this is an entirely transparent allocation of money from
one budget to another; it is not intended to mislead.
Q46 Mr Mitchell: It is entirely honourable
too but it is very confusing for people who are looking at these.
There is not a total saving and you have not really answered the
question of what is cut back, because you must be cutting back
other projects to maintain projects that may be outdated.
Sir Bill Jeffrey: Let us remember
that in the Major Projects Review exercise we are addressing on
the cost side of the equation as opposed to the timeliness side,
the lifetime estimated costs of the project, so we are talking
about expenditure pressures that, as a result of these increases,
will build up over a period of time, and we just have to manage
these within our normal financial budgeting process.
Q47 Mr Mitchell: Because you got
the initial budget expenditure estimates wrong!
Sir Bill Jeffrey: Well, sometimes—sometimes
these decisions simply reflect a rational allocation of expenditure.
Q48 Mr Mitchell: In paragraph 3,
page 5, the department's rationale for continuing to reallocate
budgets and expenditure is to better measure the performance of
individual teams in controlling their project costs. I do not
get that. The same teams are continuing to manage it when it is
transferred to other budgets, are they not?
Sir Bill Jeffrey: It is a point
we touched on earlier. I perfectly agree that it is the same team,
but a lot of accounting is making sure that costs are highlighted;
indeed, in earlier sessions with this Committee you have often
been quite critical of the fact that the department has not been
very good at bringing together in the right place cost information
that will enable it to judge accurately the cost of activities.
What is entailed here, in many cases, is, for example, bringing
together the costs associated with the Maritime Industrial Strategy.
To take that example, the NAO itself, in paragraph 1.2 of the
Report, remarked that those costs which contribute to this year's
largest reallocation are more appropriately overseen at the corporate
level. I do not want to labour the point, but we are making a
judgment here which very much has the support of the NAO.
Q49 Mr Mitchell: You are still measuring
the performance of that team in the total expenditure, not just
the part that is left on the old budget!
General Sir Kevin O'Donoghue:
Can I offer a thought? If you take Barrow as an example, if we
left all the overheads associated with Barrow within the MPR for
the Astute Programme the overheads would be huge when we need
to maintain some of the infrastructure that we are maintaining
there is for the successor programme. That is the reason for putting
it in a different budget line. At the moment there is no successor
programme, not in my area; so the only team to manage it properly
is the Astute team, but it is a separate issue.
Sir Bill Jeffrey: It would be
quite misleading to attribute these costs essentially associated
with having a submarine build facility tied in to the Astute—
Q50 Mr Mitchell: At what point do
you say, "This has gone on for so long; this technology is
now outdated" and you have to call a halt to it?
Sir Bill Jeffrey: Which technology—sorry?
Q51 Mr Mitchell: I do not know which
particular project it applies to but there must be projects that
are delayed and whose costs have been shifted to other projects
where the technology is becoming outdated. At what point do you
review the effectiveness and usefulness of that technology and
that project?
General Sir Kevin O'Donoghue:
With all due respect, that is a different issue. That is done
in conjunction—between the equipment capability area and
my area. We need to remember there are twenty projects here.
Q52 Mr Mitchell: We are not continuing
to finance something that is outdated?
General Sir Kevin O'Donoghue:
No.
Q53 Mr Mitchell: The next reason
for moving budgets around in this kind of fashion is to distinguish
the costs of maintaining defence-critical industrial capability.
General Sir Kevin O'Donoghue:
Yes.
Q54 Mr Mitchell: You are feeding
your staff to the defence capability industry to keep it going
and keep it happy, which is a fairly unique concept, is it not?
If the Government put government business and government money
transfers through the Post Office to keep the Post Office alive,
that would be the same sort of thing, would it not? This must
be the only section of Government that is doing this, keeping
a sector alive by feeding it projects.
Sir Bill Jeffrey: To some extent,
Mr Mitchell, it is a consequence of the—
Q55 Mr Mitchell: My colleague says
"agriculture". We disagree on that. It does mean that
there is a commitment there to—they are your masters, in
a sense because they can come to you and say, "We need to
keep this going".
Sir Bill Jeffrey: I do not think
I agree with that last point. It is certainly the case that one
of the consequences of the Defence Industrial Strategy,
which in my view was correctly lauded, is that we are much clearer
than we may have been in the past about the fact that if a nuclear
submarine building capability in this country is regarded as essential,
then in the end we are going to end up sustaining it. It would
be better to have the kind of active discussions with industry
that we have been having.
Q56 Mr Mitchell: Probably, if you
were an old-fashioned person like me you would nationalise the
lot—and then you are sustaining Government money in Government
projects, which is a payment back to the government, but we will
leave that aside as a kind of emotional spasm! How does it work?
Do they come to you and say, "I am a defence industrial complex;
I have got this brilliant idea for a ray which will remove the
uniforms, armour and clothes of any soldiers on the other side"
and you say, "Yes, we must have it to keep you going".
How does it work? Do the ideas come from you or from the complex?
Sir Bill Jeffrey: This is not
a question of sustaining industry for the sake of doing so. In
the case of the maritime sector what the Defence Industrial
Strategy was premised on was, first of all, that we were in
the course of awarding quite significant contracts for shipbuilding
in the military sector to the British shipbuilding industry. Secondly,
in one very significant respect, namely the nuclear submarine
sector, we were likely to be dependent on the indigenous submarine
building capability for some time. Thirdly, when the bulge of
business that we are providing for the maritime sector had run
out in whatever, five, 10 or 15 years' time, the chances were
that because modern platforms were intended to last for longer
that the industry would need to adjust itself to deal with all
levels of business, and that is why—
Q57 Mr Mitchell: We are not in the
situation of the Americans, with a powerful defence industry which
exports things all the way round the world. We do not have that,
but it does still put you at their mercy in the sense that you
cannot be too keen to cut the costs because you endanger the existence
of the Defence Industrial Strategy.
Sir Bill Jeffrey: What it does
is place on us the responsibility to negotiate hard as good deals
as we can with that industry and to have a very open relationship
with them in which it is well understood that our purpose is to
drive down costs over time, because otherwise we will not be able
to afford the business.
Q58 Mr Mitchell: Why do we have this
rigmarole of transferring costs to other budgets? Would it not
be simpler to cut back the technology as costs are increased so
that you are getting a less technologically advanced product,
but at the same time cost you bargained for in the first place?
Is that not a sensible way of approaching it? Are we not ending
up with over elaborate technology?
Lieutenant General Andrew Figgures:
You appreciate, Mr Mitchell, that the balance of requirement and
supply is a very delicate balance. There is no point in being
supplied with something that does not meet the requirement; that
is just a waste of money. However, there is a risk attached with
meeting the requirement because very often the business we are
in requires high levels of technology, and whether it is in software
development or in defensive aid suites—whatever it is, we
tend to have to operate at the upper end of the envelope.
Q59 Mr Mitchell: You might have a
certain number of destroyers and yet you are happy to cut back
on that number because the technology is getting more expensive
and they are over elaborate and delayed
Lieutenant General Andrew Figgures:
We strike a balance between requirement, which is driven by the
threat, and, as time moves on the threat increases—
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