Examination of Witnesses (Questions 340-359)
MR QUENTIN
DAVIES MP, GENERAL
SIR KEVIN
O'DONOGHUE KCB CBE, LIEUTENANT
GENERAL ANDREW
FIGGURES CBE AND
MR AMYAS
MORSE
16 DECEMBER 2008
Q340 Chairman: So what were the negotiations
that happened between November and May?
Mr Davies: I do not know that
there were negotiations between November and May. What happened
was the bids came in between November and May and bids were being
prepared, and we selected the General Dynamics bid, but we said,
"We cannot give you preferred bidder status because we have
not agreed on the commercial framework within which we are going
to operate with you, so we cannot make you the preferred bidder,
we will make you the provisional preferred bidder, and we will
see now whether we can agree on a commercial basis for going forward
with this business which is acceptable to both of us." We
failed to do that. There were a number of discussions going through
the summer with them. I will ask Mr Morse, who was involved in
these discussions, to say a few words in a few moments about it
to fill in what I am saying, but on the basic principle we were
absolutely straight with them and transparent throughout—and
they would not for a moment, I am sure, deny that—and they
were absolutely straight and transparent with us throughout. I
am glad to have the opportunity to confirm that in case there
is any doubt in anybody's mind. It is perfectly reasonable for
one of two adult parties to say, "We would like to work with
you on this basis," and the other party to say, "Well,
we would like to work on a different basis." You proceed
to go through the technical design and so forth and discuss other
matters, but leaving aside for a moment the commercial framework
within which a contract would ultimately need to be signed. That
is the principle. We then spent several months after May seeing
if we could reconcile our concept, our perception of how we wanted
to go forward with General Dynamics. I can explain to you why
we took the line we did if you want me to go into that.
Q341 Chairman: What I would really
like to know is why, knowing that they had this issue over intellectual
property in November, they were chosen as the provisional preferred
bidder in May without that issue having previously been cleared
up?
Mr Davies: I think it is very
sensible, Chairman. It is perfectly possible, we could have said—
Q342 Chairman: You think the decision
in May was sensible?
Mr Davies: Yes, I do think so.
Q343 Chairman: Even though you have
abandoned it now?
Mr Davies: Absolutely, Chairman.
It is perfectly theoretically possible for us to have said at
the beginning, "Sorry, unless you now sign up irrevocably
and say you accept our commercial framework, we will not entertain
your bid. We will not look at anything you send us. We will not
even consider your design." One could have said that but
I cannot for the life of me see why it would have been in the
interests of British defence procurement to have taken that line.
Q344 Chairman: Because you have taken
it now.
Mr Davies: No, no, no, on the
contrary, we have simply said, "Your perception of the commercial
arrangements are not the same as ours. By all means, if you want
to, go on bidding and then we will resolve the matter later on,
but if you do not want to bid now because you know where we stand
on these matters, that is your choice as well." They chose
freely to go ahead and bid. We respected that decision. We looked
at their bid. It was accepted conditional on subsequent agreement
on commercial terms. Having postponed the commercial discussions,
because that is the way the company wanted to play it (and we
saw no reason why we should not play it that way, and everybody
was being completely honest and transparent with everybody else)
we then tried, in good faith, to see if we could reach agreement
with them commercially in the course of the summer, and we failed
to do that. Both sides, with no ill-will, in total transparency
and with good faith decided then that we did not have a basis
on which we could proceed commercially. That is the position we
found ourselves in last month.
Q345 Chairman: No ill-will? Are you
paying General Dynamics any amount of money to keep their teams
together?
Mr Davies: Going forward we have
not made any commitments at all, Chairman. We are considering
how to proceed with the utility vehicle now. We could not do the
deal with General Dynamics, and I think we were right not to do
the deal with General Dynamics, on General Dynamics' terms. We
have to be quite robust about this in defence procurement. We
have to be quite careful about how we deal with people. We have
to make sure that we get the full benefits of competition or,
if we cannot get competition, we have sufficient cost discipline
in the system to protect our interests or protect the interests
of the taxpayer, and General Dynamics understand that.
Q346 Chairman: Are you considering
paying General Dynamics an amount of money to keep their team
together?
Mr Davies: We are considering
going forward on a number of possible bases. We are committed
to this project. We are committed to providing the British Army
with a utility vehicle. It will not come forward in the timescale
which it was originally intended to do, that is perfectly true,
but we are not abandoning this project. At the moment, in the
light of the failure to reach agreement with General Dynamics,
we are considering a whole range of possible ways forward. We
have reached no conclusions. I am concealing nothing from you
at all. It will take a little bit of time for us ourselves to
decide how to go forward and to prepare our positions for discussions
with eventual contenders for the design and manufacture of the
vehicle.
Q347 Chairman: Do you think money
rather than work would keep a General Dynamics team together?
Mr Davies: Chairman, I have not
had these discussions with General Dynamics. It is premature to
ask me questions like that. I do not know how we are going forward.
I do not know who we will be discussing this matter with going
forward, but we have said to General Dynamics, and I can repeat
it now to you for the benefit of the Committee if you like, that
if we go forward with this project as we are intending to do,
we would welcome bids from General Dynamics on whatever basis
we feel we can invite such bids in the future. We have not taken
any decision as to such a basis and I cannot predict what that
basis would therefore be. Obviously you are very interested in
the details of this—and I quite understand that, it is a
very important project—and, if I might, I would ask Mr Morse
to add anything that he thinks is relevant so as to give you as
complete a picture of this matter as we can.
Q348 Chairman: Mr Morse, is this
the most disastrously managed programme in Ministry of Defence
history?
Mr Morse: I am not in a position
to make that relative judgment, Chairman, and you would not really
expect me to, I am quite sure.
Q349 Chairman: So that is not a no?
Mr Morse: No, it is a statement
that I cannot answer the question.
Q350 Mr Havard: It will be a Christmas
number one!
Mr Morse: If you would like me
to comment on the discussions with General Dynamics, I am willing
to do that, of course. I was involved (not on my own) in having
discussions over the last months with General Dynamics.
Q351 Chairman: When did you begin?
When did you become involved in it?
Mr Morse: I personally became
involved in those discussions in July, I think it is probably
true to say. There had been previous continuous engagement with
them by our teams, but I became involved with another senior official
in October. We met and we had very frank discussions on both sides.
I think both sides tried to explore ways of being flexible and
seeing if it was possible to make this thing work to our mutual
satisfaction. As it turned out, the group had a very clear view
of their business philosophy. Did they have such a clear view
or was it clear to us just what that view was at the beginning?
Perhaps not.
Q352 Chairman: Why was that not clear
because had they not been making it clear for several years?
Mr Morse: I think it was really
a question of how absolute that position was.
Q353 Chairman: In other words, you
thought that you could tell them to do something that they had
been telling you they would not do?
Mr Morse: No, I do not think that
is a fair characterisation of it; I really do not. I think we
had had much more engagement than that, but when it came to the
final decision, they took a particular line.
Q354 Chairman: That was the line
that they told you they would take in November.
Mr Morse: No, that would be very
much overstating it. They indicated a reservation at the beginning.
We had good reason from our earlier discussions to believe that
it might be possible to develop a solution to our mutual satisfaction.
As it turned out, that did not happen, but it was not because
we had not thought about it or had not tried to make sure the
discussions had a good chance of success; actually we thought
they did.
Q355 Chairman: Why?
Mr Morse: And, by the way, I think
they thought they had a good chance of success as well. I am not
talking around the point at all, Chairman. What I am describing
is we had a commercial negotiation with them and we entered into
it in a belief that there was some common ground that we could
establish. That was not an unreasonable expectation, to be quite
frank. I am not going to go into every single commercial detail.
I do not think that is appropriate because we are hoping, as the
Minister has said, to do business with them in future, but it
turned out that, although every effort was made to work out something
between us, that was not possible. Sometimes that happens in negotiations.
Mr Davies: Chairman, perhaps I
can just summarise this by saying that I am quite confident (although
of course I only came on the scene relatively late in the day)
that there is nothing whatever in the story to the remotest discredit
of either party involved. Both parties had different concepts
of what they were prepared to do in terms of establishing a commercial
relationship. Maybe both parties thought that the other party
might change his mind; that is natural, you cannot exclude that.
That actually did not happen and we both recognised that our positions
at the end of the day were not reconcilable. As Amyas Morse has
just said, we both hope that in future we will be able to do business
in different contexts, and if there is some sort of new competition,
some opportunity to get involved in the UV, as I trust there will
be, we certainly hope that General Dynamics UK will want to be
a candidate for that. I have discussed the matter with Mr Wilson,
the Chief Executive of General Dynamics and with Lord Levene,
the Chairman of General Dynamics, and I am quite confident that
they share my perception of that and they would endorse what I
have just said. There is no skin off anybody's nose in this particular
context. That is life, that is business. People have different
perceptions of how they want to resolve a particular business
problem; they cannot resolve it and so they decide to walk away
from that particular deal on that particular day.
Q356 Mr Jenkin: Meanwhile, British
Aerospace have announced that they are reviewing the existence
of their Land Systems unit, so there is the prospect that we will
actually lose the capability of building armoured vehicles in
the UK altogether. Does that matter?
Mr Davies: Mr Jenkin, I think
you have got to make quite clear what is being suggested and what
is not being suggested. What we set some store by is having prime
contractors in this country available to us with the design authority
for their particular products. We are not concerned really with
whether they sub-contract or sub-manufacture particular elements
of their armoured vehicles in South Africa, or Sweden, or somewhere
else; that is perfectly acceptable to us. We do not take a simple-minded,
protectionist approach to that. What we need to have is a relationship
with the prime, a relationship with the design authority. We need
to have someone who can take responsibility not only for producing
the vehicles we want, but for upgrading them, for maintaining
them, for subsequent technology insertion, and that we and they
(they being directly dependent on us in a contractual relationship)
are masters of the relevant technology. That is what we require
and that is what I believe we will continue to have going forward.
Mr Jenkin: I think that was a "no,
it does not matter".
Q357 Mr Havard: FRES was going to
be a family of vehicles. You talk about the utility vehicle, and
that is what you have just been talking about. I need to try and
get a picture of what vehicles are going to be available. We have
Mastiff, Bulldog and Jackal, we have all these other vehicles
being bought, so we are acquiring a family. That is not a family
that is necessarily coherent in the sense of spares and all the
other things, but nevertheless a collection of vehicles, and within
that is Warrior. A lot of these new vehicles are going to replace
these things. You talk about the utility vehicle and you were
also talking about the specialist vehicles. Apparently they are
going terribly well. What is in the specialist vehicles? Is there
an engineering variant? Where has that gone? You are talking about
the scout vehicles certainly. Where is the direct fire vehicle?
Where does Challenger fit in with FRES? Where is the system of
systems? Essentially, a family is a collection of disparate individuals;
it is not a system; and it is not a strategic view, in my opinion,
so where has the strategy for mobile armour gone in terms of how
you are contracting for FRES?
Mr Davies: Mr Havard, there obviously
is some confusion here because I did not suggest, and would not
suggest, that all the armed vehicles you have listed—and
you have listed about half the armoured vehicles in the British
Army—are all part of a particular family in the way in which
I defined it. That of course is not the case. It might be an idealised
version of something which you might dream of but that is never
likely to be the case. After all, Challenger 2 derives from the
1970s; the Warrior derives from the 1980s. It is still a very,
very fine vehicle and we are upgrading it, by the way, that is
one of our current priority programmes that we are bringing forward.
Q358 Mr Havard: I am aware of that.
Mr Davies: Some of the other vehicles
that you have mentioned have been procured with modifications
but procured off-the-shelf, very rapidly, because they are best
adapted to the—
Q359 Mr Havard: I am aware of that
as well, but my point is how does this make a coherent, strategic
approach to all of the other procurement activities that you have
in relation to providing armoured vehicles on the ground, maintained
in a consistent fashion?
Mr Davies: Right, well, the coherence
lies in having the widest possible suite of weapons for commanders
in the field to choose from. You have just yourself given a whole
list of vehicles, some of which may be five tonne, some of which,
if you go up to Challenger 2, for example, go up to 70 or 80 tonnes,
and for Warrior perhaps half of that figure, so you have got a
very, very wide range of vehicles which commanders can draw on,
taking into account the particular circumstances in which they
need their operational capability.
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