Examination of Witnesses (Questions 320-339)
MR QUENTIN
DAVIES MP, GENERAL
SIR KEVIN
O'DONOGHUE KCB CBE, LIEUTENANT
GENERAL ANDREW
FIGGURES CBE AND
MR AMYAS
MORSE
16 DECEMBER 2008
Q320 Mr Crausby: And what about the
loss of specialist skills, are we assured—
Mr Davies: There will not be any
loss of specialist skills because, as I have explained, all we
will be doing is flattening that peak, which would be met partially
by overtime and much more by contract labour or by short term-labour.
That is not the sort of labour which carries the specialist skills.
I can repeat to you what we are trying to do is to produce a solution
which makes sense in financial terms. It has no defence costs
to the nation. We are not losing any defence capability. That
is very important, and I have already made that point, and it
also does not have industrial and employment costs.
Q321 Mr Jenkins: Minister, when you
talk about peaks and costs, etc., you and we are quite aware that
it is not the peak, it is the area under the curve that gives
us the total cost. We are saying at the present time that the
area under the curve is growing and the cost is going to grow;
so that is the reason we are asking you these questions. Not the
exact number of pounds but the fact it is going to grow means
that somewhere along the line something else is going to be displaced.
That is why we ask the questions.
Mr Davies: I do not know whether
that was a question or a comment, Chairman.
Q322 Mr Jenkins: It was a comment,
just to let you know that we are aware exactly what the curves
represent.
Mr Davies: All I can say, Mr Jenkins,
is that it is quite sensible, it seems to me, to make sure that
we schedule our expenditures in such a way that we are able to
meet our in-year financial restrictions, and if we can do that,
as I say, without damaging our defence capability, then that is
something which responsibly we should do.
Q323 Mr Holloway: Some of this feels
a bit like an MBA master class! In that vein, have exchange rates
made any sort of difference to the maths of your major projects?
Mr Davies: Exchange rates are
a problem in certain areas of defence certainly, not just in defence
equipment and support. In the case of the carrier—
Q324 Mr Holloway: I do not mean the
carrier, I am broadening it.
Mr Davies: I am going to ask General
Sir Kevin to come in on this because he of course is managing
the Defence Equipment and Support organisation and sees the impact
of these changes in exchange rates the whole time. There are some
projects where clearly we have a contract which is denominated
or partially denominated or is exposed to dollars or euros, so
inevitably we find ourselves in a situation in which we are not
immune to exchange rate fluctuations. Indeed, that is one of the
aspects of the defence budget, taking the whole budget, the operational
as well as the equipment and support budget, which often makes
it quite difficult to predict even a few months ahead exactly
what our financial position is going to be. Kevin, would you like
to say a few words about that?
General Sir Kevin O'Donoghue:
That is absolutely right. We try to place contracts where we can
in sterling and then the contractor/industry bears the exchange
rate challenge. Some of them are in euros and some of them are
in dollars. You may have seen the second quarter report from the
Ministry of Defence for this year. There is a potential cost overrun/cost
increase in projects and that is virtually all due to the exchange
rate in this current year.
Q325 Mr Holloway: What sort of figure
is that?
General Sir Kevin O'Donoghue:
I think it is about 60 million.
Q326 John Smith: Minister, can we
now conclude emphatically from your reply on the announcement
on the carriers, five months after the original decision on the
contracts in July, that the principles of smart procurement under
the Strategic Defence Review have been abandoned, because the
whole point of the new approach to procurement was that we would
front-load investment and we would put much more effort into planning
before contracts were announced, precisely for the reason that
there would not be changes in terms of cost and in-service dates.
You said that because you have come on board with your new team
and you are not sure what your predecessor said that you have
had another look at this contract. Have you announced a new approach
to the procurement process?
Mr Davies: No, not at all, and
I think there may be some confusion, Mr Smith, because, as you
rightly said, one of the aspects of smart procurement was to spend
rather more money on taking the technical risk out of particular
projects earlier on during the assessment phase, so one might
spend more on assessment and more on design rather than having
a nasty shock later on when you had accepted specifications and
you had given a contract to a manufacturer or to a lead prime
contractor, and then suddenly you ran into technical problems.
That remains the position; that remains the philosophy. Exactly
how you strike that particular balance is an interesting case
in each individual instance, but we are very alive to that kind
of trade-off, and we remain committed to the principles that you
have just enunciated in the smart acquisition philosophy. There
was no element of that in the carriers decision at all. We have
not run into technical problems. It is not because we did not
spend enough money designing the carriers. We actually produced
a very robust design of the carriers. Thales did a brilliant job,
I think, and came up with something which, as you know, the French
Government also bought because they thought the design was so
good. It is nothing whatever to do with that. We have not found
that there were any inadequacies at all—is that right, General?
General Sir Kevin O'Donoghue:
That is right.
Mr Davies: --- In the design which
we carried out. We spent a lot of money at the front end exactly
in line with smart procurement, so we explicitly followed the
principles that you have just very lucidly set out and reminded
us of. It was a quite different issue, the issue that I have described
already, where I looked at the whole financial profiling to see
whether that was really rational in terms of the optimum expenditure
of our defence budget this year and the coming two financial years,
and that is the basis on which I decided that we should re-profile
those expenditures. It was nothing to do with technical problems
at all.
Q327 Chairman: Minister, a final
question on carriers. You are talking in terms of re-profiling
the money. If you look at it from the point of view of industry,
they need to work out how to keep teams together. As I understand
it, there were two phases: the design phase and the production
phase. Is there going to be now, as a result of last week's announcement,
any gap between those two phases and how, if there is, are they
going to keep those teams together? If there is not, are those
teams stretched out going to be viable?
Mr Davies: Let me try and observe
your strictures, Chairman. The answer to your first question is
no and therefore the second and third questions do not arise.
Q328 Chairman: Will those teams be
viable if they are stretched out in the way that you have explained?
Mr Davies: Indeed they will, and
I think I have already explained in my description of the graph
that I have tried to project verbally that the core skills will
continue to be fully employed. This whole issue has been the subject
of detailed discussions between ourselves and the companies concerned.
Q329 Chairman: Okay. I want to move
on to FRES, but I want to do so in the light of your interesting
observation that because you have only come on board in the last
two months, there is no responsibility for what has gone before.
You are answering for the Ministry of Defence here. I wonder whether
you could tell us what the initials FRES stand for?
Mr Davies: Yes, Future Rapid Effect
System. I am sorry that it sounds rather complicated. It might
be easier to say "new generation of armoured vehicles",
but sometimes we have strange names in the defence business.
Q330 Chairman: In view of the decisions
of last week, do you think that is an appropriate name still?
Mr Davies: I have inherited these
terms, Chairman. I have had a number of things to focus on in
the last two and a half months and so I have not regarded it as
one of my personal priorities to go round renaming things; it
might cause more confusion. I do sympathise with you in the difficulty,
which I am sure is not unique to yourself, in understanding why
we sometimes have these slightly complicated names.
Q331 Chairman: Can I read a sentence
from our report on FRES which came out nearly two years ago: "This
is a sorry story of indecision, constantly changing requirements
and delay." That is something clearly with which your fellow
minister, the Minister for Veterans, agrees because he was member
of the Committee that produced that sentence. Do you agree with
it?
Mr Davies: Chairman, I never accept
or reject statements which I cannot read in context. I think I
should need a little notice in order to be able to read the context
in which you say this in order to be able to accept the particular
language which you have quoted.
Q332 Chairman: Well, in those last
two years things have not got better for FRES, have they?
Mr Davies: Let me try, as I am
trying to do throughout this session, Chairman, and be as helpful
to you as I can on that. FRES was conceived back in the 1990s
as—and let me use this perhaps rather more understandable
language—a future family of new armoured vehicles. It is
family because the idea was that there should be maximum elements
of commonalty in the actual vehicles, and that would lead to savings,
to financial or economic synergies but also to training synergies,
so that someone who had been trained on one vehicle could get
into the cockpit of another with minimal additional training and
feel happy in operating the systems.
Q333 Chairman: Okay, you have abandoned
that maxim of elements of commonalty, have you not, because of
the procurement process that has been going on for the last two
years?
Mr Davies: Perhaps I could explain
what has happened. We had a family of vehicles; we still have
a family of vehicles. Initially, we thought that the FRES utility
vehicle was probably the priority, and we proceeded on that basis
to first of all go out to tender for design contracts and then
to negotiate and to award the preferred bidder, or provisional
preferred bidder status as it turned out to be.
Q334 Chairman: Can we come on to
that, please. How has that worked exactly? In November last year
you down-selected from three to three.
Mr Davies: Three to one, yes.
Oh, in May this year—
Q335 Chairman: No, in November last
year you invited three different potential bidders—
Mr Davies: Precisely.
Q336 Chairman: --- to produce their
binding undertakings, I think. You knew that one of them, which
was General Dynamics, was non-compliant in terms of intellectual
property; is that right?
Mr Davies: Not entirely right.
General Dynamics always made clear that they had a different concept
than we did as to the role they wanted to play. We made clear
that their concept was not ours and their concept was not the
basis on which we were going to let the contract. They decided
however to bid, making it quite clear that they had a different
concept. The basic different concept, as you say, related to the
fact that they wished to continue to have the intellectual property
and they wished to be responsible, if they got the design contract,
for the development and manufacturing, or at least to have a share
in that. That is a perfectly understandable business approach
and we had complete respect for it. They nevertheless decided
to go on bidding when we had not accepted that approach.
Q337 Chairman: So you accepted in
November that they were bidding on that basis?
Mr Davies: Yes, that is right.
We thought if they get the preferred bidder status maybe they
will come round to agreeing to work on the principles of the contract.
Q338 Chairman: What on earth was
the basis for thinking that?
Mr Davies: We left it open to
them, it was up to them to choose.
Q339 Chairman: But you chose them
when you knew that they were not prepared to give up the intellectual
property.
Mr Davies: Not at all, we did
not, Chairman. What we did was we gave them provisional preferred
bidder status, and we made it clear to them that we were making
it provisional because confirmation of their status was entirely
contingent on our agreeing on commercial terms that would be acceptable
to us.
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