Examination of Witnesses (Question Numbers
500-519)
MR QUENTIN
DAVIES MP, GENERAL
SIR KEVIN
O'DONOGHUE AND
VICE ADMIRAL
PAUL LAMBERT
15 DECEMBER 2009
Q500 Robert Key: Minister, you and
I have been in the House of Commons for quite a long time now
and both of us started with other careers. You have, therefore,
an important insight into how the country works. Since you and
I were elected to this House a long time ago and since I became
a member of the Defence Committee for the first time in 1995,
there have been shed loads of reports into defence procurement
and its reform, but there has been no fundamental reform. The
rest of the country, in every sector, has reformed enormously
over the last 15 years. What is it that is so resistant to change
in defence procurement that means that, almost uniquely, successive
Ministers have banged their heads against brick walls of defence
procurement? What is it that makes it so difficult?
Mr Davies: Mr Key, I have the
premises to your question, but I do not really agree that there
has not been a real change, a real reform recently. I think there
have been some qualitative steps forward in the last 10 or 12
years: the introduction of SMART Acquisition was enormously important,
the putting together of the IPTs, the new relationship with industry,
Through-Life Capability Management, the bringing together of logistics
and support and equipment procurement, which were previously two
quite separate functions, and the Defence Logistics Organisation,
or Agency as it was then, simply bought the equipment and then
threw it over the fence to the DLO to get on with it and look
after it. That is a hopeless formula, because it meant, of course,
that there was no sense at all in which the procurement organisation,
or those doing the procurement, had any sense of long-term responsibility
for the actual performance of the equipment and the capability
which they were spending the taxpayers' money on acquiring. That
has all changed, and it has been reflected in these long-term
support contracts, for example, which are very novel. They are
very novel in this country, and I find that very, very interesting,
because we now have a national asset there. We are much better
at doing these long-term support contracts and we have moved much
further towards capability and availability contracting than either
the Americans or the Continentals, and that actually gives our
industry a benefit. You will recall it was not so long ago when
defence manufacturers really focused on selling a bit of hardware
and they did not really care very much what the price was of the
hardware because they were guaranteed enormous profits on the
spares which they could supply over the next 20 years. That was
where the real profit lay, and governments, not just in this country
but elsewhere around the world, would buy the hardware and then
somebody else would be responsible subsequently for buying the
spares. That is hopeless; that has gone. Now defence contractors
who deal with us on major platforms or systems know that they
have to look at it on a through-life basis. They are delivering
capability and, in many cases, an increasing number of cases,
we are actually not even specifying so much the numbers of equipment
that we are purchasing, we are specifying the capability that
we need and then they can decide how many platforms are required—a
good example of that is the Future Strategic Tanker Aircraft,
for example—and we will be doing more of those availability
and capability contracts in the near future, I hope. It is a completely
different approach. I was going to say that British industry has
benefited there because, having gone through the possibly slightly
agonising process of changing the method in which they supply
our requirements and doing that increasingly well, they have been
able to cost these long-term support contracts and, therefore,
they feel more confident abroad when they are exporting at being
able to offer that long-term service, that long-term support arrangement,
to other customers and clients around the world; whereas their
competitors, in whose home market the local military may still
be procuring by the old system (and generally are) including,
in many cases, the Americans, are not used to that and so they
find the costs of this particular type of risk extremely difficult
to predict precisely and they find themselves at a competitive
disadvantage in offering a competitive product but with a long-term
support contract. These are big changes and I think, again, we
perhaps are not good enough at blowing our own trumpet and they
are not sufficiently appreciated by the general public. Then there
are the other things which we are working on at the present time,
and which I have just mentioned in answer to an earlier question.
Q501 Robert Key: Since the Gray report
was published, I think I am not alone in having the impression
that the Ministry of Defence does not really take it very seriously,
it will soon be forgotten and it is an eccentric inconvenience.
Is that, in fact, how you see it, or are you going to learn lessons
and introduce reform?
Mr Davies: No, I think that we
have looked at it critically, in the original sense of the word
critically. That is to say, we have tried to engage with it, we
have tried to see where there are lessons which we can learn from,
we have tried to make sure that there is no kind of ego preventing
us from adopting any of the proposals. On the contrary, we have
adopted a number of proposals, as you know. There are other areas
where we do not follow the large argument or logic and where we
do not actually accept the proposals. I think that we have had
considerable engagement with that document. My colleague, Lord
Drayson, has been leading most of the work on that particular
subject because most of it looks at the longer-term horizon, but
I think what I have just said characterises the attitude of the
Ministry of Defence as a whole. We want to gain from it everything
we can gain and if we decide we want to go into a particular direction
we are determined to make a success of going there.
Q502 Robert Key: The Ministry of
Defence website actually says you will work with Lord Drayson
on acquisition reform. Was that what you were referring to in
the Committee you mentioned a little while ago that you had established,
a Procurement Policy Committee. Is that right?
Mr Davies: Policy and Priorities
Committee.
Q503 Robert Key: That is the one.
Mr Davies: The PPC. That is a
Committee which I chair. It is a practical working Committee and
it is a way of bringing together people outside the formal structure
of the Defence Board, and so forth, looking forward, including
to the medium and longer-term, to what our priorities ought to
be in equipment procurement so we can generate something of a
consensus, hopefully, about that and that guides some of our decisions
and guides each of us individually in the decisions we have to
take subsequently. That is the purpose of that. This is all to
do with the management of the current programme so that falls
within my responsibility, not Lord Drayson's responsibility.
Q504 Robert Key: So he is not a member
of that?
Mr Davies: No.
Q505 Robert Key: How exactly are
you working with Lord Drayson?
Mr Davies: Very amicably, but
we have separate responsibilities which were set out quite clearly
at the time of the last reshuffle. I am responsible for the procurement
programme, the equipment programme. As I said earlier, I am responsible
for the DE&S, responsible for a number of the agencies, all
of which produce some kind of defence goods or services, like
DSDA (Defence Storage and Distribution Agency), DSG (Defence Support
Group), the AWE, of course, and so forth. Those are my responsibilities.
I also have, since that reshuffle in the summer, the responsibility
as Defence Minister for assisting and promoting British defence
exports. That is a new responsibility which I take very seriously.
Q506 Robert Key: Is there a single
team in the Ministry of Defence that is responsible for developing
a strategy for acquisition reform?
Mr Davies: Yes, Lord Drayson has
his own group, which I am sure he will tell you about when he
comes before you.
Q507 Robert Key: Who will be members
of that, apart from Lord Drayson, do you know?
Mr Davies: That is a matter for
Lord Drayson.
Robert Key: Thank you.
Q508 Chairman: Minister, can you
tell us how the MoD is going to improve its costing and forecasting,
as Bernard Gray suggested needed to be done?
Mr Davies: I think General Sir
Kevin has already referred to the fact that he is investing a
lot in human capital, both training people that he has got and
also, where necessary, importing new skills. I know he believes
that is one of the skills that he particularly needs to refine
or improve—the whole business of cost accounting. I do not
know whether he would like to say a word or two about that.
General Sir Kevin O'Donoghue:
I think there are three areas of cost estimation which we need
to improve on. The first is the original cost estimation, the
parametric costing, to see what a project should cost, and that
we will do in an organisation that will live in DE&S but will
be accepted across the board as the truth, the single costing.
We then need what I call cost engineering, which is engaging with
companies who have some very expert contract lawyers, and we need
some greater expertise in that area, and then I would call the
final area cost validation, which is, once a contract has been
let, are we paying for what we are getting? So those three areas.
We are increasing the size of the staff in that area, we are increasing
their training and we almost certainly in the short-term, if not
in the longer-term as well, will need to draw in some expertise
from outside in those parametric costing areas.
Q509 Chairman: Will this be ready
in time to produce reliable data for the Strategic Defence Review?
General Sir Kevin O'Donoghue:
Yes. It already produces costings for the major projects. What
has changed is that it is now mandated that those costings are
the costings used right across the Ministry of Defence, and other
bits of the Ministry will accept those costings as the basis for
the SDR.
Q510 Robert Key: In the past four
years, Minister, the research budget in the Ministry of Defence
has fallen by about 20%. That is a cash cut of £100 million
a year to the defence research budget. Why are you continuing
to cut defence research?
Mr Davies: It is a very unfortunate
victim of the pressures we have been under. Some of the reduction
you refer to actually has not had great cost to us because I discovered
there were some programmes which really had a marginal significance
for defence. We were spending money on things like climate change.
You can always argue that everybody should be interested in climate
change, but I think we were able to dispense with some of the
programmes without any loss of defence capability. There are undoubtedly
some programmes that we have had to cut, or some prospective programmes
we would like to have given, particularly to industry, which we
have not been able to give, which I very much regret, but I repeat,
Mr Key, my job is a difficult job and one never likely to make
one very popular anywhere because it is a job of setting priorities.
We cannot buy everything we would like to buy in any given year,
we cannot buy everything we would like to buy at all, clearly,
so we have to make these difficult decisions and these difficult
sacrifices, and we have to decide that we are only keeping what
is the highest priority in terms of defence capability. There
is no way in which we could say that if we had an additional marginal
pound we would rather spend it on something other than we are
actually spending it on. That is the way I try and look at it.
Q511 Robert Key: I think that is
refreshing, because in the response to this Committee's Defence
Equipment 2009 Report you argued that, in spite of those fierce
cuts: "We believe that this overall effort will maintain
and improve our capability", which sounded a bit strange;
but I think realism is very important and you have given us realism
there. For how many years in the future do you think there will
be continuing decline in the defence research budget?
Mr Davies: I hope there will not
be, Mr Key. We have come down to this level of around £450
million, if I recall, roughly, and my hope is that we do not get
too much below that. That is certainly my hope and intention.
Q512 Robert Key: The Ministry of
Defence gave us the impression that you were seeking to shift
the burden of research more to the private sector. Is that a part
of the strategy?
Mr Davies: Let me put it this
way. Obviously we want research to be done. The important thing
in the country's interest in the future of defence capability
is that research is done. We recognise that companies are more
prepared to spend their shareholders' money if they can spend
it alongside ours, so we generally look for some kind of additionality.
If we are commissioning work from companies we like to see that
they are putting in their own parallel investment. Where companies
are making an investment we like to be able to reward them at
a certain stage by perhaps coming along and joining them and adding
to the flow of funds for that particular project if it looks to
be promising. So it is not a simple case of saying we cannot do
quite so much so industry must do more. We are trying to encourage
industry to do all they can all the time, and we will continue
to do so. I am very sorry, and of course industry is sorry, we
have had to make this cut back. As I said, we do not think it
is part of a kind of secular trend going on downwards. I trust
we are not going downwards. That really is my firm intention.
Though if we stay there, I cannot promise that we are going to
go up dramatically because we continue to have the financial constraints
we have been talking about.
Q513 Robert Key: Yesterday's announcement
of £50 million for three years by the Prime Minister, which
will go on research into IEDs and intelligence, is very welcome.
Is that part of the Ministry of Defence's core budget or is that
a new expenditure actually under the Treasury Urgent Operational
Requirement regime?
Mr Davies: As a matter of fact,
Mr Key, that is a very pertinent question to ask me, because I
am about to start discussing that exact matter with the Treasury.
The Prime Minister, as you know, only made that statement yesterday
afternoon, and the Prime Minister, as I have already told you,
wanted, and rightly wanted, before he took final decisions on
any of these things to be able to run it across the people he
was meeting in Afghanistan, people actually at the frontline,
the people who are in command of our brave troops there and who
know better than anybody else what sort of requirement needs they
really have. So anything that I might say here, anything that
the Chief of Defence Staff might say, although the Chief of Defence
Staff is, of course, with him in Afghanistan, and anything that
any of the rest might say, he wanted to be able to digest it and
talk to the key people at the frontline before he finally makes
a decision. So all these matters are still very much in negotiation.
Robert Key: We wish you well in your
discussions with the Treasury, Minister.
Chairman: Moving on to FRES and armoured
vehicles, Linda Gilroy.
Q514 Linda Gilroy: In our Report
in 2007, we said: "The MoD's attempts to meet its medium-weight
vehicle requirement was a sad story of indecision, changing requirements
and delay", and in a speech in October you appeared to agree
with that, saying it had been a perfect disaster and that you
had stopped it. Is the FRES programme still in existence or not?
Mr Davies: No, it is not. Let
me be quite clear about this. I am not sure that when your Report
came out I may not have been quite as generous as I might have
been in endorsing some of the words you used. I have, of course,
since then had an opportunity to look at this in greater detail.
I think this was a sad and sorry story and we have changed, and
I take full responsibility for that. We have changed the strategy
entirely in this matter. Let me speak very deliberately, because
I do not want there to be any confusion about it. The FRES programme
originally was a very idealised vision of a future family of armoured
vehicles which would be specified in abstract, novel vehicles
to meet our ideal specifications which would then be tendered
out to industry to produce, and the idea was that this would be
a set of vehicles which would be rapidly deployable. Above all,
they would have a very large commonality of parts and systems
and, therefore, considerable synergies in support and in training,
and that is a very attractive vision, but I am afraid it was too
attractive a vision; it was too idealised a vision, in my view.
You know what happened. You know better than I do what happened,
you have had probably more time to focus on the historical research
than I have had. Clearly it took a very long time to agree on
specification. It was very difficult to procure anything. At one
time we, I think, appointed an external co-ordinator or integrator,
and that did not work out very well, so a number of classic mistakes
were made. I take the view, Mrs Gilroy, that what we should be
doing in defence procurement is reducing risk, reducing cost,
reducing time—they all hang together. So what I want to
do, and what we are doing in this particular case, is not to go
in for these idealised solutions but, wherever possible, to try
to find something that is in this world which either can be obtained
and has been tried and tested or can be modified slightly in a
clearly defined way and will meet a large proportion of our requirements.
Whether it is 70% or 80% or 95% you can always argue about, but
I prefer to go with something that is concrete and actually exists
than some sort of image of something which might be totally ideal.
So the FRES programme is dead. We also found that we could not
contract for the Utility Vehicle, we could not agree on contractual
terms with the potential supplier. All sorts of things went wrong.
Anyway, what we are doing now, as I said earlier on is a general
principle to do, we are going to a limited number of people; we
are looking to see which people have something serious which might
meet our capabilities; we are engaging with them. We want a rapid
timescale to try to see what they can offer us, and we are procuring
on the most rapid a timescale possible, and what I am trying to
do is to put together procedures of procurement which are not
as rapid as the UOR because you cannot do that in long-term procurement.
You do need to have an element of permanence, an element of integration
with other systems which you do not necessarily have to go for
in the UORs, which are just needed for one campaign but much quicker
than the classic system. That is what we are doing with the reconnaissance
vehicle and that is what we will be doing with the Utility Vehicle.
Just to give you an example, I think we agreed on the specifications
for the reconnaissance vehicle, which were broadly drawn, not
narrowly defined, in about March, and we went to industry in about
May and we made a formal invitation to tender about June, if I
recall, and we asked for their responses by October. We have got
them and we are currently evaluating their responses, and I shall
be down with General Sir Kevin in Abbey Wood going through a lot
of things in connection with this later this week and we will,
I hope, sign a contract in February, something of this sort. That
is my target. I think you will agree that is pretty rapid compared
with the previous timescale. We will be doing the Utility Vehicle
on the same basis. Let me emphasise one point. It is a very important
point. Of course, where we can get a degree of commonality, we
will go for it, particularly in the area of, let us say, sensors
or weapons or some other system of that kind. These vehicles all
need to be able to fight together, they will need to be able to
work together, they will need to be rapidly deployable, they will
need to fit into an A400M, supposing we procure that aircraft.
So there will be that degree of coherence—as much coherence
as we can get—because it is a difficult system. FRES is
dead.
Chairman: Do you think you could stop
just for a moment, please. This flow of words is just overwhelming.
If you could try and limit your answers to, say, two shortish
sentences, that would be helpful because we are being washed away
here.
Q515 Linda Gilroy: Maybe just a simple
yes or no answer. If I have understood what you are saying, it
sounds to me as if FRES, the original concept, has gone but there
is still something called FRES. General Sir Kevin told us last
week that the FRES UV programme has stopped but the overall FRES
programme is continuing. Is there a programme still called FRES
and is it just that it is entirely different?
Mr Davies: No. I intend to ask
the Army Board to propose another name because the name is confusing.
It relates to a concept which is no longer valid, no longer exists.
Q516 Linda Gilroy: So it is not a
Future Rapid Effect System you are after, it is a fleet of vehicles.
Mr Davies: It will be a future
set of armoured fighting vehicles which will be rapidly deployable,
but I have decided that, since the concept has changed, the name
should change, otherwise we will have a great confusion. We will
have a new name.
Q517 Linda Gilroy: Can we also have
something much simpler, describing what is actually being procured
rather than something which nobody understands? Can I move on?
Mr Davies: There is one thing
I must correct there. We have not stopped the Utility Vehicle.
We will be procuring the Utility Vehicle. It remains my objective
that we shall have the Utility Vehicle in service in 2018, in
nine years or whatever it is.
Q518 Linda Gilroy: That is not part
of an overall concept?
Mr Davies: But it will not be
called FRES. We are going to change that name. The Army Board
normally makes these name changes and I am going to ask them to
consider alternative names.
Q519 Chairman: So is the programme
dead?
Mr Davies: The existing programme
FRES, yes.
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