Examination of Witnesses (Question Numbers
440-459)
MR QUENTIN
DAVIES MP, GENERAL
SIR KEVIN
O'DONOGHUE AND
VICE ADMIRAL
PAUL LAMBERT
15 DECEMBER 2009
Q440 Chairman: Can I break in?
Mr Davies: If I can just make
a final point, we are also adopting a completely different attitude
towards termination and cancellation of projects. We have already
cancelled one quite significant project and, where projects do
not meet their milestones, whereas always before we got into some
kind of endless renegotiation we are now saying that the default
option, the automatic response, is cancellation. Only if a positive
case is made to somehow renew that contract should we do so. Those
are a few examples of how we are improving the process and the
procedures. Are these going to produce results? I do not know
but I believe they will.
Q441 Chairman: Can I break in? The
National Audit Office says that the defence equipment programme
is unaffordable. Bernard Gray's review said that the defence equipment
programme was unaffordable. Last week the Director of Capability
Resources and Scrutiny told us that DE&S had estimated that
there was a 10-year funding gap of £6 billion at the start
of this planning round and £21 billion at the start of the
previous planning round, which makes £15 billion that somehow
has been reduced. Do you know how that reduction was achieved?
Mr Davies: Yes, indeed, I was
part of it, Chairman, as you would expect me to have been. What
we found at the beginning of the year was that, looking forward
over the 10-year planning horizon we look at, there seemed to
be in excess of around £21 billion. One must not be too precise
about these figures because you realise there are great uncertainties
when you go forward, and certainly when you go forward 10 years
you would be very foolish to accept too precise figures. However,
let us talk about in broad terms £21 billion. We have made
some changes which we have to do. They are called "Managing
the Programme", "Managing the Budget", and we got
down to £6 billion. You are going to say to me that £6
billion is still more than we expect to be able to have to spend,
and that is going to go on, I am afraid; that is going to go on
to the end of time, that is just life. It may not be pleasant
or comfortable but it is just life. Every year we are going to
have to look and see what we can afford, where we have to cancel
something, whether we have to push something forward, whether
we have to de-specify something to accept that we have a slightly
lesser specification than we otherwise would get, whether we have
got a better method of acquiring something.
Q442 Chairman: So what was cancelled
to achieve this £15 billion?
Mr Davies: "Cancellation"
is the wrong word because we are not talking here about contractual
liabilities. We always meet our contractual liabilities; we never
cancel those, but we made a number of changes in the programme.
Q443 Chairman: £15 billion in
a year is a lot.
Mr Davies: It is.
Q444 Chairman: So what changes were
there?
Mr Davies: General Sir Kevin has
just reminded me that we do not normally go into the details of
what we have in the 10-year forward programme, so I am going to
withdraw on that, Chairman, if you do not mind because otherwise
I shall create a precedent which will probably be very bad for
a lot of us. As you know, one of the things we did was to re-adjust
the carrier programme; you have already referred to it.
Q445 Chairman: And, as we know, that
has added £674 million to the cost of the carriers.
Mr Davies: Yes, quite so.
Q446 Chairman: So is that a saving
of money?
Mr Davies: No, it is not a saving
over the long term but it was a saving this year, yes.
Chairman: You have rendered the Committee
speechless.
Q447 Linda Gilroy: If you are looking
at a 10-year horizon what is the net impact of that over the 10-year
period?
Mr Davies: The net impact over
the 10-year period is an increase in the cost of carriers. I have
made that plain already. I accept entirely the figure of £674
million but over the period of construction of the carriers we
will be limiting the expenditure. What we are doing the whole
time is that we look at the long term programme, and we do take
things out of the long term programme from time to time. We then
look every year, which is what we have to do, at the short term
programme, the one-year programme, and there we have to make some
changes such as I have already described.
Q448 Linda Gilroy: The £15 billion
figure that we are talking about, that should be looked at over
a 10-year horizon?
Mr Davies: That is to be looked
at over a 10-year period.
Q449 Linda Gilroy: That is an average
of £1.5 billion.
Mr Davies: Yes.
Q450 Linda Gilroy: You must have
some idea of which programmes are going to produce that average
across the 10-year period.
Mr Davies: We made a lot of adjustments,
Mrs Gilroy, but, as I have already explained to you, I do not
want to go through that programme with you because we manage this
programme on an active basis and we change things quite frequently
in the long term programme, and it damages our commercial position
with the industry if they know too precisely what exactly it is
at any one time we are planning to buy and when we are planning
to buy it. It may even cause false expectations on the part of
industry sometimes, so we cannot do that.
Q451 Chairman: The one example you
have produced for how you have made up the £15 billion saving
is a £674 million increase.
Mr Davies: No; I have explained
to you, Chairman. Maybe there is a confusion about whether you
were talking about the short term or the long term. Let me go
over this again very carefully so there is no ambiguity about
it at all. I acknowledge that our pushing forward the carrier
procurement has resulted in an increase in the cost of £674
million, not the £1.5 billion you have quoted but £674
million. That is correct. That does, however, relieve the programme
during the construction period. That does provide more resources
for us in this year and next year which we can spend and necessarily
must spend on other things. That is exactly why we have decided
to do that, so I have acknowledged that entirely. In terms of
the long term programme, the 10-year programme, there are a lot
of things there which we are always playing around with, we are
always looking at again, we are always deciding, "Do we need
this? Do we need that? Can we do it a different way?", and
so on, so it is, if you like, a moving amount of money the whole
time and we have reduced it considerably, which is why we are
saying that the value of it is about £6 billion, the excess,
rather than £21 billion. We have recently conquered that
number. We are proposing—the Secretary of State said this
in his statement—in the future to agree with the Treasury
on a more transparent exposition of the 10-year forward equipment
programme, which is a good thing, but I do not want to anticipate
on that this morning by going into individual items if you do
not mind.
Q452 Linda Gilroy: The consequence
of what you are describing to us is that the job we try to do
of scrutinising this is becoming more opaque rather than less
so, so let me just ask you if you can help us a bit with that.
How many programme boards are there?
Mr Davies: About 30.
Q453 Linda Gilroy: And across the
piste of those programme boards some of them will have to produce
these savings of £15 billion over the 10-year period. In
the Statement on the helicopters today as an example you say,
"We anticipate the reduction in fleet types will produce
substantial through life cost savings over the next decade and
beyond", and you are also exploring the possibility of further
benefits that might arise, for example, estate rationalisation
and the more efficient delivery of training solutions. The NAO
report also talks about for the first time producing data on the
defence lines of development. Surely you are able to give us some
broad brush picture of where these £15 billion savings are
going to come from, which programme boards are going to be expected
to help you deliver them?
Mr Davies: First of all, you have
touched on support costs. That is an area where we have saved
a considerable amount of money and where we expect to save considerable
amounts of money. The £6 billion is a net figure. Let me
be plain. Where we can anticipate a saving that is included in
it. Where we anticipate a cost that is included in it. We are
always trying to deliver the capability that we need more effectively,
more efficiently, and, as you rightly say, the chairmen of the
programme boards will be focused on that. Sometimes we will, from
a top-down point of view, want to question the whole capability
area. That will not be for the chairmen of the programme boards;
it will, if you like, be imposed on the chairmen of the programme
boards. We may decide not to go ahead with one or two projects.
Maybe I could ask my colleagues if they would like to comment
on any of those aspects but we want to be quite transparent with
you about the processes. I cannot be entirely transparent with
you, at least not today, on the individual projects. There are
many pages of printout there which change from time to time, so
it would be quite artificial for me to start giving you some individual
instances of projects that we have put in or taken out of the
10-year prospective budget.
Mr Borrow: Can I just come in? I can
understand that you cannot say which projects have disappeared
and which projects have been cut.
Mr Jenkin: I cannot understand that.
Chairman: Carry on, David Borrow.
Q454 Mr Borrow: I am not going to
pursue that. I certainly accept that in certain projects you will
find savings where you can do it more efficiently, you will make
a reassessment of the capability needs for the future and therefore
things will get cut, but what you have not said, which could be
a significant part of the £15 billion, is to what extent
some of that £21 billion has been pushed forward beyond the
10-year mark. If you could say to us that £15 billion has
been found over the next 10 years through efficiency and reassessment
of what is needed, that to me is much more impressive than saying,
"We have put £10 billion beyond the 10-year mark".
I would have thought you could give us a figure for what you have
pushed beyond the 10-year mark, even if you cannot specify which
programmes you have pushed beyond the 10-year mark.
Mr Davies: I can see exactly,
Mr Borrow, what you have in mind. We have undoubtedly pushed some
things beyond the 10-year mark and we have taken some things out
altogether. What you are asking is the breakdown of those two
things and I cannot give you off the top of my head exactly the
breakdown between those two categories, I am afraid.[1]
Vice Admiral Lambert: You do raise
a very good point and we are very aware of it. In the past with
a 10-year programme there has been a temptation to push things
just beyond the 10-year point so that you do not have to worry
about them until the following year when they will creep into
the programme, so we have started to look at a 20-year plan. It
is something that was suggested by Mr Gray and we are in the early
stages of doing that to make sure that we try not to be tempted
to push things just beyond the bit that everybody is concentrating
upon.
Q455 Mr Jenkin: There comes a point,
does there not, where your equipment programme becomes so disconnected
from your defence policy that really you do not have a defence
policy any more?
Mr Davies: That certainly is not
the case at the present time; that is not a fair characterisation
at all. I would say that it is more connected because we have
got down that, if you like, potential deficit from £21 billion
to £6 billion.
Q456 Mr Jenkin: By either cancellation
or deferral.
Mr Davies: Yes, that is a much
more manageable amount.
Q457 Mr Jenkin: Defence policy was
premised on having certain capabilities for certain contingencies
at certain times. I refer you again to the NAO report which says,
"If the defence budget remains flat in cash terms after this
time then the extent of the over-commitment widens to £36
billion".
Mr Davies: Mr Jenkin, you can
come up with any figure you want to—
Q458 Chairman: No, this is the NAO.
Mr Davies:— if you make
a particular assumption. You can do this as an academic exercise;
you can say, "What happens if the defence budget was flat
in cash terms?", which would mean that it would be falling
in real terms by the rate of inflation every year.
Q459 Mr Jenkin: No. The departmental
assumption of 2.7% growth per annum beyond 2012-13 is flat in
real terms. Could you therefore describe to us what the effect
of the Pre-Budget Report is on that assumption?
Mr Davies: Just a second, Mr Jenkin.
I have just been given the quote here. "The Department estimate,
however, that the defence budget remains over-committed by £6
billion over the next 10 years". That is the figure we have
been talking about. "This assumes an annual increase of 2.7%
in their budget after the end of the current Comprehensive Spending
Review settlement in 2010-11".
1 Ev 124 Back
| 
