Examination of Witnesses (Question Numbers
80-99)
GENERAL SIR
KEVIN O'DONOGHUE,
DR ANDREW
TYLER AND
MR GUY
LESTER
1 DECEMBER 2009
Q80 Mr Jenkin: I would love it!
Dr Tyler: —half of that
number is what he describes as "unproductive projects costs".
Included within that, for example, is overcoming technical issues.
Overcoming technical issues is what we do. We are buying technically
very complex pieces of equipment, and a lot of DE&S is focussed
on solving technical issues. If that is an unproductive project
cost, I would like to know how that sort of logic has gone through.
He talks about hidden industry costs (the provisions that industry
makes within their accounts for losses that they have made on
projects that they have not managed to manage adequately, or that
they have underbid in the first place), and he calls that an unproductive
project cost which is added to this frictional pile. When you
start to unwrap it and see the assumptions he has made, as Mr
Lester has said, you see that a lot of the assumptions are racy,
to say the least. My personal view is that it is a number which
has been somewhat exaggerated for the sake of effect, and I think
that is unfortunate.
Q81 Chairman: Dr Tyler, can I say
why I think this is helpful. I think this is helpful because you
are at last discussing the detail of the Bernard Gray report saying,
"It is right here and wrong there; that issue is something
that can be discussed in public", and we can finally get
the truth as to what is going wrong, if anything, within the Ministry
of Defence. That is something that we have been trying to do for
decades. That is something, surely, that is not unproductive in
terms of questioning the figures; it is something we have got
to do in order to come to the right answer?
Dr Tyler: I said earlier, I think
as a Department we have agreed that the most constructive way
to respond to Bernard Gray—which, by the way, qualitatively
I think we would agree with the vast majority of Bernard Gray's
conclusions; once or twice I have described them as "glimpses
of the bleeding obvious"; but there can have been few surprises
qualitatively in what he came up with in his report, and I think
we would say the same thing. We have been very much on a constructive
course here, looking at the areas that he has recommended for
improvement; going through those; having lots of detailed discussions
about how we would go about implementing his recommendations.
One or two of his recommendations I think we have decided that
we will not be taking forward, and there have been public statements
to that effect; but a lot of the recommendations that he has put
on the table we are looking to take forward; and the Secretary
of State was quite clear when he made the announcements in the
House about the way in which we would be responding to the report.
Time is precious; we want to get on with this. We could spend
a huge amount of time—indeed if you read my copy of the
Bernard Gray report there are scribbles all over the margins where
I might disagree with the detail, but it does not seem an entirely
constructive thing to be sitting there dismantling details in
the report when qualitatively we agree with most of the thrusts
of the report.
Q82 Chairman: May I do that? May
I read your copy of the Bernard Gray report?
Dr Tyler: You are welcome to it.
Chairman: Thank you. I would like to.
Q83 Mr Jenkin: On this question of
annual costs of delays, I do not want to trespass on a later question
about carriers but how does it work? The decision to delay the
carriers by two years, is that taken by you, CDM, or is it taken
above your pay grade?
General Sir Kevin O'Donoghue:
No, it is on recommendations from the Defence Board to Ministers.
Q84 Mr Jenkin: In a way, these decisions—they
are inevitably very political—it is the politics that has
put the cost up?
General Sir Kevin O'Donoghue:
No. By definition, if you delay something you will finish up with—
Q85 Mr Jenkin: I understand that.
The point is, the decision not to delay earlier and to save some
of this delay cost is a political decision?
General Sir Kevin O'Donoghue:
I think most of what we do is a political decision.
Q86 Mr Jenkin: I am just clarifying
that. I think a lot of what Bernard Gray is criticising is not
necessarily the performance of your Department, it is the political
management.
General Sir Kevin O'Donoghue:
We are in a democracy.
Q87 Mr Jenkin: Yes!
Mr Lester: I would not say it
is political. In this particular case it was a financial and prioritisation
decision, which is what London does. In a sense, it is not the
fault of the project if they are told, "Your programme is
now going to be delayed by a couple years". It was not a
political decision; it was advice from the Department to Ministers
saying, "Given the budget, given the pressures and given
other priorities, this is what we recommend you do".
Mr Jenkin: We have been making reports
about the unaffordability of the equipment programme ever since
I came on the Committee since 2006, and the Government sort of
resisted that conclusion. The Government is now recognising that
conclusion, but that resistance ultimately comes from the top,
does it not? That is an unfair question. Can I move on to research
and development.
Chairman: Before you move on, Brian Jenkins.
Q88 Mr Jenkins: One of the problems
you have got with actually assessing the cost of delay is there
are obviously pluses and minuses with any decision taken. In the
past we have been in a position where we have had to place orders
with companies not because we needed the order but if we did not
place the order the company would go out of business and, therefore,
we would lose that specialism and lose that sovereign ability
to produce that piece of equipment. When we have delayed some
of these orders in the past what we have done is impose a burden
on the company by saying, "We want to keep you in business,
but we don't want to keep you in business too well and want to
push it back a year". We have been pushing projects back
to the right for decades now in the belief that we must maintain
that sovereign ability. Who should pay for it? Should the MoD
budget pay for it in the longer term, or should the nation itself
pay for it with some sort of special funding?
General Sir Kevin O'Donoghue:
If it is a military capability that we need—and, if you
remember, the Defence Industrial Strategy was all about what military
capability will we need in the future; and therefore what industrial
capacity will we need in 10, 15, 20 years' time, and how much
of it can we get from overseas and how much of it has to be onshore?
To pick up what you were saying, where we decided we have a capability
in this country that we must retain in this country for whatever
reason—operational sovereignty reasons perhaps—then
it is the Department that pays. Whether there is a broader governmental
issue or not is a bit above my pay grade; but at the moment, you
are absolutely right, we pay.
Q89 Mr Jenkins: How do you cost that
in the equations of the Gray report?
General Sir Kevin O'Donoghue:
If you delay something there are two ways you can do it: you can
delay it and tell industry that it is just going to have to make
people redundant and slow the production rate down; or you can
say, "No, we don't want you to make people redundant. We
want to maintain those skills and competences that you have got.
We don't want people disappearing", and you pay them to do
it over a longer period of time. Most industry will have contract
workers as well, so the core skills we need to maintain, not necessarily
the number of contract workers.
Dr Tyler: We do implicitly and
explicitly build that into our planning. Quite often the conversations
that Mr Lester and I have are around the costing in of that long-term
cost to ensure that we have got the capability available to us;
and that comes in the form of both costs and benefits which are
then costed into the budget every year as part of our normal course
of business.
Q90 Chairman: When you delay the
aircraft carriers, for example, that is £650 million, or
is it £700 million?
Mr Lester: I think the figure
is £654 million.
Q91 Chairman: That cost presumably
then falls on to the equipment that you would not otherwise be
able to buy with that £654 million?
General Sir Kevin O'Donoghue:
It forms part of the planning process for future years. You are
absolutely right, it means that £65 million a year, if it
is a straight profile, will fall into the equipment programme
in future years.
Q92 Mr Hamilton: When you talk in
terms of making a saving over the next couple of years because
of the delay does that then take into account the added cost when
that contract finally does come into fruition, because there will
be an increase in the cost because you have delayed it?
General Sir Kevin O'Donoghue:
Yes.
Q93 Mr Hamilton: That takes account
of that in each of the years where you are making a saving, so
it is a false figure?
General Sir Kevin O'Donoghue:
It was a saving in the early years, and a cost in later years.
Dr Tyler: The cost in the later
years exceeded the saving in the early years.
Q94 Chairman: In the memorandum that
you have produced for this inquiry, page 12, at the bottom of
that, "The direct impact of the Equipment Examination re-profiling
measure ... was in the order of £700 million". I know
£46 million between friends is not a huge amount of money,
certainly not in the Department's terms; but why did you not say
in this memorandum "£654 million"?
General Sir Kevin O'Donoghue:
I am struggling, Chairman, just to find the page. It is not my
page 21, I am afraid.
Q95 Chairman: It is in the bit about
the Queen Elizabeth Class Carrier key events/decisions over the
last 12 months and the question is: "What is the cost penalty
of rescheduling the aircraft carriers?" Then: "The direct
impact of the Equipment Examination re-profiling measure to reprioritise
cost in the first four years and to delay each ship by one and
two years respectively, was in the order of £700 million".
Were you rounding up there?
General Sir Kevin O'Donoghue:
No, if I remember that was before—
Dr Tyler: I think £700 million
is a round-up on the number, yes.
General Sir Kevin O'Donoghue:
I would have to check that.
Q96 Chairman: The reason I raise
this is, the difference between £700 million and the £654
million that you, Mr Lester, were just talking about is double
the pain that you were prepared to take over the Territorial Army
training. If you had ferreted around a little, might you not have
saved the Government just a little embarrassment?
General Sir Kevin O'Donoghue:
The difference between £650 million and £700 million
is the extra cost which will occur in the later years. It is not
a saving this year that could have been used to buy out—
Q97 Chairman: I am talking about
something different.
General Sir Kevin O'Donoghue:
I am sorry, I misunderstood you.
Mr Lester: The Territorial Army
saving was an in-year savings measure, as I understand it. I may
possibly have misspoken when I said £654 million; I should
have said £674 million. I think it was a rounding issue and
we have just rounded the figure up in the memorandum. The aircraft
carrier slippage saved about £450 million in the early years,
but in the long-term over the cost of the programme there is this
cost growth; so there is no offset between an in-year savings
measure on the Territorial Army and a long-term cost growth over
beyond 10 years.
Q98 Chairman: In essence, you are
just putting off the pain, are you not?
Mr Lester: We rebalanced the programme
to higher priorities.
Q99 Chairman: By putting off the
pain you increase it.
Dr Tyler: The exercise that we
were conducting was to try and maximise the amount of money that
we needed in the first couple of years in order to spend on other
higher priority areas. The exercise that we went through is we
looked at the CVF programme, which was a mature programme at that
point in time, and we said being practical about this and not
completely dismembering the programme, what is the minimum we
can take it down to which sustains the programme on a credible
basis and returns as much money as we possibly can for other higher
priority activities in those early years? That is the exercise
we went through and it was an iterative process, and Mr Lester
and I were both intimately involved in that iterative exercise,
to see how far we could bring that down still retaining a credible
CVF programme and maximising the amount that we freed up for other
priorities.
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