Examination of Witnesses (Questions 1-19)
SIR BILL
JEFFREY KCB AND
MR TREVOR
WOOLLEY CB
4 NOVEMBER 2008
Q1 Chairman: Good morning and welcome
to this the first of two evidence sessions on the Ministry of
Defence Report and Accounts. Sir Bill, Mr Woolley, may I say first
thank you very much indeed for putting in your memorandum in good
time for our inquiries this year. Can I begin by asking you about
your PSA targets, please? You had six PSA targets and you met
in full only one of them and I wondered why that was and whether
you were satisfied with that?
Sir Bill Jeffrey: I do not think
we could be satisfied with that performance as you have described
it, Chairman. As the Committee will know very well from the attention
it pays to our business, there were different reasons in each
case. I think the most obvious example of an unmet PSA target
is the readiness one where, as the Committee knows, there is a
very clear explanation for that which is to do with the extent
to which the Armed Forces have been deployed on current operations
and therefore it just has not been possible to maintain the levels
of readiness that were set in the original target. Overall what
I would say is on the first of the PSA objectives, which is the
one to do with operational success, again the Committee through
its extensive work and its visits will know this well, indeed
better than I do, we feel that at that end of the business, although
there is a lot still to do in Afghanistan particularly, there
is a lot to be proud of as well.
Q2 Chairman: We will come back to
that specific target later on this morning. You were deployed
on operations in 2005, 2006 and 2007 and in your interim assessments
you knew you were deployed on those operations and yet you were
predicting a much more positive outcome on your PSA targets. Those
predictions proved to be wrong. Why was that do you think?
Sir Bill Jeffrey: Certainly for
some time now, as I look back on the quarterly reports we have
been predicting (because the trend was clear) that we were unlikely
to meet the readiness target. There may have been a bit of institutional
over-optimism at some stage but in relation to that target in
particular I hope the Committee would agree that we have been
clear for a year or so, if not longer, that it was heading in
the wrong direction. Whether we could have spotted that trend
earlier I would not be able to say.
Q3 Chairman: Your forecasting leaves
room for improvement, does it not? How will you improve it?
Sir Bill Jeffrey: You could present
it that way, Chairman. It is very hard to assess in an empirical
way what the impact of deployed operations will be on an indicator
like this. As I said to the Committee in this session last year,
and I think as the Chief of Defence Staff has said to you as well,
it would have been surprising if readiness levels as we measure
them had not declined. Exactly how far and how fast I think is
quite challenging technically to forecast. What we have been doing
as a Department all the way through is our best to maintain such
readiness as we can whilst obviously regarding the support and
manning of deployed operations as, by some way, the highest priority.
Q4 Chairman: Is there a culture in
your Department of what you described as institutional over-optimism?
Sir Bill Jeffrey: I would not
go as far as to say it is a culture, Chairman. It is something
we need to guard against because—and again I hope the Committee
feels this as you meet people and as you get about the Department—people
are enthusiastic about what they do. I certainly feel that in
the area that I am sure the Committee will come on to this morning
of acquisition and procurement we need to guard very much against
a combination of ourselves in our project teams, staffed by people
who are keen to deliver what they can for the Armed Forces, the
ultimate user and indeed our suppliers all feeling optimistic
about the deliverability of a project in time. We have worked
hard to counter that—in some areas successfully and some
areas less so.
Q5 Chairman: You need to inject an
element of reality and realism into your forecasting, do you not?
Sir Bill Jeffrey: On the particular
area that I have identified, I think the main means by which we
can do that is by more systematic use of what are known in the
trade as "should cost" exercises, benchmarking, asking
ourselves the question if you look internationally at what others
are paying for this sort of capability what should we expect to
pay. We have done that in the past but not as systematically as
I think we ought to. [1]
Q6 Mr Jenkins: One thing you might be
able to help me with, or you might not be able to help me with,
is to cast some light on some of these PSA targets we have got.
If you look on 2005-06, 2006-07, 2007-08 we have "on course",
"broadly on course with minor slippage" and then "partly
met". By "partly met" do you mean it was 2% off
target or 50% off target? When does "partly met" become
"not met"? Do you have any way of indicating exactly
the degree of concern because "broadly on course with minor
slippage" and "partly met" could mean the same
thing to me. When did it become "partly met" rather
than "broadly on course with minor slippage"?
Sir Bill Jeffrey: I think occasions
when we have used the phrase "partly met" are usually
in relation to PSA targets where there is more than one element
to them. The obvious example is in relation to the equipment programme
itself and the objective "build for the future, deliver the
equipment programme to cost and time". Our objectives there
are partly met in the sense that we have delivered on key user
requirements through the projects that the Committee knows about,
but in relation to cost and time there has been slippage that
exceeded the initial targets we were set, so in that sense the
PSA target was met in part but not in whole. Elsewhere if you
look at some of the international conflict prevention work, I
think the view—and this is an inter-departmental one—has
been that we have made significant progress but it would be overstating
the case to say that we completely met the PSA target, so it is
a variety. But I quite take the point, if you look in particular
at the readiness target, over the last few years, as I have and
as many members of this Committee have, we were possibly holding
out hopes of reversing the position longer than it was realistic
to do so. I think that is a fair criticism.
Q7 Mr Jenkin: I am trying to get
a handle on what assumptions you were making then that now do
not apply. Is it that additional deployments have been made therefore
cancelling more training or is it additional attrition on equipment?
These terms "slippage" and "some risk" are
euphemisms for what? Is it just optimism or are you being optimistic
about what we will not be required to do and a year down the track
we find we are doing all sorts of extra things that were not in
the original assessment which is why it has slipped?
Sir Bill Jeffrey: Obviously we
did not have perfect vision of what the commitments would be.
We did not at some stages during these three years know exactly
what decisions ministers would take on deployments. I think the
main feature of this is the extent to which one can assess the
impact of deployment over this period of this degree of intensity
on the Force elements whose readiness on all the measures that
are described in these papers we were attempting to assess. I
think to an extent, as I have said, we probably held out for longer
on an assumption that we could steady this or improve it than
might have been realistic. It is worth bearing in mind that the
78% (which was the original target when it was set at the beginning
of the PSA period after the 2004 Spending Review) was seen as
a stretching target because it was 5% more than we were achieving
at the time, and in that sense maybe it is not that surprising
that it has tailed off in the period since then.
Q8 Mr Jenkin: In March this year
the National Security Strategy said that we were going to enter
into a period of recovery from operations and recuperation but
in the six months since then it has just not turned out to be
that. Were you happy with that assessment going into the National
Security Strategy?
Sir Bill Jeffrey: We are now looking
forward rather than looking backwards and I think there is reason
to believe that there will be a significant scaling down as we
achieve the fundamental change of mission in Iraq for example
that the Prime Minister has referred to, so there is the prospect
in reasonably short time, notwithstanding the fact that we will
no doubt still have some presence in Iraq, of getting down for
the purposes of this sort of planning instrument to one medium
scale.
Q9 Mr Jenkin: That assumes we are
not going to send additional staff to Iraq, we are not going to
Somalia, we are not going to Darfur, we are not going to The Congo.
The potential demands on the Armed Forces seem to get larger and
larger. Is it realistic for the Ministry of Defence to be happy
with such an assessment?
Sir Bill Jeffrey: I think the
only sensible posture for the Department to take is that we will
do what we are required to do and are doing now in two theatres.
As I said, there is reason to suppose that the commitment in Iraq
will scale down as we get into next year. To the greatest extent
possible it is our responsibility when that happens to use the
opportunity to reconstitute military capability and to get these
figures of theoretical readiness for a future war, into a better
state than we are now. I think if we did otherwise we would be
being defeatist.
Q10 Mr Jenkin: But what demands are
made upon you are not within your control?
Sir Bill Jeffrey: I think to that
extent this is the construct of a business trying to manage itself
as rationally as it can in an uncertain world. I do not make any
apology for that. I think it is in the nature of the business
we are in that we do not exactly know the future nor do our ministers
nor does anybody.
Mr Havard: This question of recuperation
and recovery, I am told that we are not going to be in a position
to have another large overseas conflict or be ready for it until
2017. Is that correct? How long is it going to take to get back
to this state?
Q11 Chairman: We will come on to
that later I think. Answer that question if you would and we will
explore it further, later on.
Sir Bill Jeffrey: It is difficult
to be precise. It is certainly the case that reconstitution for
what is known in the planning business as large-scale deliberate
intervention will take longer than reconstitution for another
medium-scale operation should one come along. I do not recall
the 2017 date but I will check and give the Committee some information.[2]
Chairman: We will come on to your own
predictions on that in a few minutes' time. David Crausby?
Q12 Mr Crausby: The National Audit
Office tells us that you have not yet published detailed measurement
and delivery plans for your new Departmental Strategic Objective
targets despite the Treasury's deadline of April 2008. When will
you be able to provide us with a copy of these objectives?
Sir Bill Jeffrey: I am not immediately
certain from the way you have described it, Mr Crausby, what the
National Audit Office was referring to. There is an intention
within the Department certainly to pull together a cross-departmental
strategy and that is going on now. It is putting together our
defence strategic thinking, our business strategy and our long-term
resource strategy, but I do not recognise the term that the National
Audit Office are quoted as using.
Q13 Mr Crausby: The NAO simply noted
the deadline set by HM Treasury for departments to create detailed
measurement and delivery plans for their Departmental Strategic
Objectives was April 2008 and those detailed plans have not been
published to date.
Sir Bill Jeffrey: I do apologise,
it is not something that is immediately known to us and I think
the safest course with the Committee, as ever, is to offer to
give you a note.
Mr Woolley: We do have detailed
targets for each of the Departmental Strategic Objectives against
which we are reporting now and against which we reported at the
first quarter recently.
Q14 Chairman: Maybe you would send
us a note on that.
Sir Bill Jeffrey: We will certainly
do so.[3]
It may be what is at issue here is what Trevor Woolley has just
described which is the new style Departmental Strategic Objectives
which replaced the PSA objectives. We have published these and
indeed, as he says, the first quarter's report against them is
the one we sent you a few days ago.
Mr Woolley: There are a couple
of sub-objectives where we did not report at the first quarter
where we said we would be reporting at the second quarter, but
we do have detailed targets that relate to those sub-objectives
and they have been agreed and we can certainly provide those to
the Committee if that would be helpful.
Q15 Mr Crausby: So you will send
us a note. Can I ask some questions about defence inflation and
the impact that that will have on our targets. The Committee recently
held a seminar at Shrivenham and three experts told us there that
price inflation for defence equipment was some 3% higher than
normal inflation. Does that calculation of 3% defence equipment
inflation ring true with you and what impact will that have on
our performance?
Sir Bill Jeffrey: It is certainly
the case, and I can recall in the equivalent session last year
discussing this with the Committee, that some of our input costs
are rising faster than general inflation, although it has fluctuated
hugely in the last few months, and oil and fuel is one of these.
I am aware of the analysis by Professor Kirkpatrick that you were
briefed on at Shrivenham and it is an interesting one. I do not
think we could immediately validate the figure of 3%. Like any
analysis of this kind, it rests pretty heavily on the assumptions
that are made at each stage as Professor Kirkpatrick sets out
the argument and I think we would question in particular the assumption
that we should not discount technological improvements in comparing
the costs of different generations of defence equipment. However,
it is an interesting piece of work and it is certainly an area
that within the Department we are devoting quite a lot of attention
to.
Q16 Mr Crausby: So do you calculate
a figure of your own? First of all, do you accept that defence
inflation is running higher than the GDP deflator? Secondly, do
you calculate a figure of your own?
Sir Bill Jeffrey: If I might make
one comment on the GDP deflator point, the thing to bear in mind
about the GDP deflator is that it measures in the end inflation
in the output of the economy; it does not measure input inflation,
and often elsewhere in the economy the cost of inputs rise more
rapidly than the eventual price that one pays in term of outputs.
As I have said before, we would certainly recognise a picture
in which the mix of goods and services, (and dare I say it also
people because we are always (to the extent that it is affordable)
pleased when Armed Forces pay settlements are at the top end of
the range) that that mix of goods and services and people in some
respects inflates year-on-year by more than general inflation.
I would not care to go further than that and I certainly do not
think that although we have found it a good lead (and I do not
mean that in any critical way) we could as a Department sign up
to the 3% figure.
Mr Woolley: I think that is right.
I think it is important to be aware of this distinction between
input and output inflation. It is very difficult to measure a
unit of defence capability, which is our defence output. If you
cannot measure a unit of defence capability it is very difficult
to say how the cost of that unit of defence capability may have
increased or not from one year to the next. What we are obviously
very interested in is the input cost because it is in the nature
of the economy that you would expect the input cost to increase
faster than the output cost, just as a company's wage bill will
tend to increase at a faster rate of inflation than the prices
of the products that a company is manufacturing. Nonetheless,
it is important for us to understand what the inflation of those
input costs is. In terms of pay, which is a very large part of
our budget, we have a very good understanding of that. In terms
of the equipment it is quite a complex issue. To the extent that
we have equipment programmes with firm price contracts, where
over a period of years what we are paying for a particular contract
has been absolutely fixed, you have to make an assumption as to
what element of inflation is built into that firm price and that
is not self-evident. In the cases of contracts for defence equipment
that have variation of price clauses, which are intended to take
account of inflation, these variation of price clauses are linked
to a whole series of published indices. These may be the retail
price index, they may be industry-specific indices, and each contract
has a different variation of price clause in it relating to these
indices and some different measures in some different proportions,
and therefore in terms of trying to get a feel for the overall
average weighted rate of inflation in defence equipment procurement
with variation of price clauses, this is a far from straightforward
exercise, but we are trying to assemble more information on this.
It is a very detailed exercise we have to undertake and that will
give us a better understanding of our input inflation. We would
expect input inflation to be higher than the inflation in the
rest of the economy because we would expect our efficiency, like
any private company's efficiency, to be able to translate those
rises in input cost to rather lower output prices.
Q17 Mr Crausby: So are you saying
that you think it is there but it is difficult to calculate?
Sir Bill Jeffrey: I think we are
saying it is difficult to analyse (because it is as complex as
it is) what the inflation of input prices and the equipment we
acquire is, although we are working on that. We are certainly
not saying that there is not an effect called defence inflation.
I think every defence department in the world experiences the
generational effect that Professor Kirkpatrick's paper describes
in the sense that the equipment we buy is becoming more capable
but item-for-item more expensive as technology advances. That
is undoubtedly there, it is something we have to cope with as
a Department and, as Trevor Woolley said, in a way, this is what
lies behind the major efforts to improve efficiency that are described
in the report the Committee has in front of them.
Q18 Chairman: So you are working
on it?
Sir Bill Jeffrey: Yes.
Q19 Chairman: Is this not what you
said last year?
Sir Bill Jeffrey: It is.
1 See Ev 40 Back
2
See Ev 40 Back
3
See Ev 40 Back
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