Examination of Witnesses (Question Numbers
60-79)
GENERAL SIR
KEVIN O'DONOGHUE,
DR ANDREW
TYLER AND
MR GUY
LESTER
1 DECEMBER 2009
Q60 Chairman: Will that response
provide an analysis of where you disagree with the figures in
the Bernard Gray report?
General Sir Kevin O'Donoghue:
I do not know, but I will certainly take that question back. Lord
Drayson, of course, is leading on this response.
Q61 Chairman: Yes, we will ask him
these questions, or some of these questions.
Dr Tyler: I think what we have
been trying to do is we have been trying to concentrate on the
positives on which there are a lot in the Bernard Gray report.
The Secretary of State set out in the House the eight point plan
which we are now rigorously and vigorously pursuing. What we have
been doing is—rather than descending into an argument over
numbers and statistical treatment of numbers and so on, which
I have to say would be very easy to do in this particular case—we
have been concentrating on the positives and taking those forward.
I think that is a much more constructive territory for the Department
to be in than having a war of numbers.
Q62 Mr Jenkin: Chairman, I sense
that there is frustration at the way the Bernard Gray report has
been presented and greeted; and I suggest if that is your view
that you do need to debunk some of the things that Bernard Gray
has picked up. In this question of team leader turnover he is
comparing the tenure in post of 30 leaders of large projects,
and in 2003 4% were in post for less than a year, and in 2009
37% were in post for less than a year. Just putting my old venture
capital hat on, I would say that that is cause for concern or
it requires explanation. I think we require an explanation?
General Sir Kevin O'Donoghue:
You are talking about 30 projects here; we are currently running
at 900 plus projects.
Q63 Mr Jenkin: Okay. Is this completely
unrepresentative? What would be the representative sample? I think
it needs an explanation—it needs fleshing out—if you
are simply to dismiss it as something of no concern. I am afraid
I think we need an explanation.
General Sir Kevin O'Donoghue:
I will certainly take that back.
Dr Tyler: We have got something
a little under 2,000 projects that we are running at any point
in time. If we took the total population and expressed numbers
on that basis you would find that the vast majority of the 2,000
projects have the same project team leader from start to finish
because a lot of them are quite small.
Q64 Mr Jenkin: What you are implying
is that Bernard Gray is completely out of order producing numbers
of this nature.
Dr Tyler: What he has done is
picked a very small sample of projects, as he has done several
times throughout his report, and then generalised from the specific
to the small number of projects.
Mr Jenkin: I think if that is what you
feel we do need to know that, but we need your figures to compare
with his figures; and I think the public needs that in order to
be able to make a proper judgment.
Q65 Chairman: He has picked a small
number of large projects?
Dr Tyler: Yes, that is correct.
Q66 Chairman: If you have a small
project the chances are it will be quicker?
Dr Tyler: Yes, correct.
Q67 Chairman: The chances are somebody
will stay in post for the four months or whatever it might take
to get it through?
Dr Tyler: Yes.
Q68 Mr Jenkin: But 4% and 37% is
quite a dramatic change, and when things change I like explanations?
Dr Tyler: We can take this one
away and we can go and look into the specifics of it.
General Sir Kevin O'Donoghue:
I do not know the answer but I will take it away and have a look
at it.
Q69 Mr Jenkin: I am afraid it is
more about Bernard Gray! Bernard Gray actually said that the equipment
programme is "unaffordable on any likely projection of future
budgets", do you agree?
General Sir Kevin O'Donoghue:
Yes, I do.
Q70 Mr Jenkin: How unaffordable?
General Sir Kevin O'Donoghue:
I do not know. I would need to turn to Guy on my right who is
in the programme staff. Before I do, this is the whole point of
planning rounds. Our aspirations are always much greater than
the budget. Given an unlimited budget I have no doubt we could
spend it. The whole point of planning rounds is to make sure that
that list of aspirations is put into the proper priority order
for the time and for the contingent or current operations and
money is spent accordingly. That is what a planning round does.
The aspirations traditionally have been higher than the budget.
Q71 Mr Jenkin: It must be measurable
even if only vaguely, but the reluctance of anybody in the Government
to put a figure on it suggests a shyness about the implications
of this number, particularly if its trending upwards rather than
downwards. Is it trending upwards?
General Sir Kevin O'Donoghue:
I do not know. I do not know; I need help.
Mr Lester: To be fair to CDM,
this is more my patch than his. It makes me more reluctant to
give figures in some ways! At the moment we are in the middle
of the 2010 planning round which means we cannot say as of today
how unaffordable we are.
Q72 Mr Jenkin: What was it last year?
Mr Lester: When we went into the
equipment examination and then the 2009 planning round—
Could I just have a slight aside. One of the areas where we have
had a long debate with Bernard Gray is because a lot of his assessments
of numbers are to do with assumptions and he has made certain
assumptions and sometimes we disagree with his assumptions. Even
though his data often came from the Ministry of Defence in the
first place and we validated that, he has then made assumptions
based on that; and one of the issues is how unaffordable the defence
programme is, because it depends on what you assume about how
big the future defence budget is. As you know, we have got a Spending
Review which takes us up to next year, and beyond then it is just
speculation how large the defence budget will be. You can inflate
it: depending on what percentage you assume a level defence budget
will be growing at, that drives how unaffordable the defence programme
is. On the basis of our forecasting, at the start of the 2009
planning round and the equipment examination we assessed that
we were about £21 billion over-programmed over 10 years.
Q73 Mr Jenkin: £21 billion?
Mr Lester: £21 billion over
10 years. By the end of that planning round, the beginning of
this planning round, we were about £6 billion over-programmed
over 10 years.
Q74 Mr Jenkin: So it is a very sensitive
figure?
Mr Lester: There have been a lot
of figures bandied about.
Q75 Mr Jenkin: How can £21 billion
suddenly become £6 billion? These parameters have a very
big effect on the outcome.
Mr Lester: £21 billion became
£6 billion because of the action we took in the 2009 planning
round and the equipment examination. It was not changing the parameters,
it was just doing what our planning rounds always do, which is
balancing the books and prioritising. Every year we look at our
programmes and we decide what is the highest priority and what
is a lower priority.
Q76 Mr Jenkin: Actually you have
answered my next question which is: how much more closely balanced
are we now? You say it has come from £21 billion—
Mr Lester: We are more closely
balanced; we will get it more closely balanced still in this planning
round. The focus in this planning round is on balancing the next
couple of years. In the Defence Review the task there is to look
at the more strategic issues which will produce a balanced and
affordable programme over the longer term. In that sense we totally
accept the analysis in Bernard Gray's report, which is that all
sorts of things—whether it is good procurement decisions;
whether it is making Through Life Capability Management work properly—are
dependent on having a more balanced programme than we have at
the moment.
Q77 Mr Jenkin: I think this is very
positive. I think we are getting numbers we have never had before,
Chairman. I can cut my questioning short. Before we leave that
subject, can we have the methodology that you use to come up with
£21 billion and then £6 billion? Would it not be helpful
if all this was in the public domain? What are the assumptions
that you have used, and are they the same assumptions in both
cases?
Mr Lester: Yes. The only assumption
which is relevant is that we budget for our programmes based on
50% estimates of the cost of the programme generally, give or
take a few exceptions.[4]
Q78 Mr Jenkin: I am sorry, I do not
know what that means. What do you mean by that?
Mr Lester: This is where I am
getting outside my comfort zone! There are different ways of costing
the equipment programme, depending on how much risk you assume
in the costing. The idea of a 50% costing is a programme has a
50% probability of exceeding that costing or coming in at less
than that costing. If you take the portfolio of programmes as
a whole, if you cost everything at that 50% level then statistically,
if you add them all up, that should be how the programmes come
out. In practice that does not seem to work brilliantly, which
is one of the reasons we have cost pressures in the programme.
The theoretical approach, which is sound, does not work so well
in practice because some of the major programmes historically
tend to come out above that 50% level, and therefore when you
add them all up it unbalances the programme. That is how we cost
the programme. We then make assumptions about what a level defence
budget in real terms would look like, and there we just use a
deflator—for which we use 2.7% a year—and then the
figures I quoted are just one line minus the other line.
Q79 Mr Jenkin: That is very useful.
Thank you very much. Of course, one of the problems you are always
grappling with, which Bernard Gray also scrutinises, is the attempt
to quantify the costs of the MoD delaying programmes. He puts
that at between £0.9 and £2.1 billion a year. Do you
recognise those figures?
Mr Lester: Because it is rather
close to my job I have had discussions with Bernard Gray and his
team quite a lot. As Andrew Tyler said, as a Department we decided
it is not productive to get into an argument with him about exactly
how he has done his numbers, especially since there is not really
an argument about some of the data he has used. The issue is his
assumptions, but could I just make two points about that. I know
how he has done his sums. I disagree with the answer that he has
come up with. The two things I would like to say are, first of
all: intuitively, it is an implausibly large figure, because in
the sample he has used, in the analysis in his report, the
biggest single example of what he would describe as "bad
behaviour" by the MoD is our decision to slip the aircraft
carrier by a couple of years. I am not apologising for that because
we did it for rational reasons, but that introduced something
like £650 million worth of cost growth into the aircraft
carrier programme, and that is a public figure, which over 10
years is about £65 million a year. That is the largest
single example; there is nothing anything like as large as that.
If that is the largest example from which he is extrapolating
a lot of his analysis then it is quite difficult to see how £65
million, by far the biggest example, can turn into anything like
£1-2 billion.
Dr Tyler: This has been the issue
that we have had from the start. When you look at that number
and you consider that that is £1-2 billion on £6 billion
of spend, instantly one's commonsense antennae start to twitch
and say, "Can that possibly be a credible number to be `wasted'",
or frictional costs or whatever the euphemism is for it? When
you start to unpack it—and the means by which he has arrived
at this number is very complex, and we could spend all morning
discussing it which I know would not be what you would wish to
do—but for example—
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