CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 99-iiiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREDEFENCE COMMITTEE
DEFENCE EQUIPMENT 2010
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This is a
corrected transcript of evidence taken in public and reported to the House.
The transcript has been placed on the internet on the authority of the
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The transcript is an approved formal record of these proceedings. It will be printed in due course. |
Oral Evidence
Taken before the Defence Committee
on
Members present
Mr James Arbuthnot, in the Chair
Mr David S Borrow
Mr David Crausby
Linda Gilroy
Mr David Hamilton
Mr Dai Havard
Mr Bernard Jenkin
Mr Brian Jenkins
Robert Key
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Witnesses: Mr Quentin Davies MP, Minister for Defence Equipment and Support, General Sir Kevin O'Donoghue, Chief of Defence Materiel, and Vice Admiral Paul Lambert, Deputy Chief of Defence Staff (Capability), gave evidence.
Q393 Chairman: Minister, good morning.
Mr Davies: Good morning, Chairman.
Q394 Chairman: Would you like to introduce your team, whom we have met before?
Mr Davies: With great pleasure, although I think they are well known to the Committee. On my left is General Sir Kevin O'Donoghue, who is Chief of Defence Materiel and Head of the DE&S, the Defence Equipment & Support organisation, and on my right is Vice Admiral Paul Lambert, who is Head of Capability. They are my two principal collaborators.
Q395 Chairman: Can we begin by asking about the timetable for the various equipment announcements that are coming over the next few months because we have a statement this afternoon, as I understand it, we have something coming out next month, and at some stage we are going to have a decision on Trident? Tell us what the general timetable is if you would not mind.
Mr Davies: Chairman, the only things I can say to you are that a statement was made this morning which you know about, which you have received, about helicopters, and an oral statement is being made by the Secretary of State this afternoon in the House, I assume at 3.30, on the future defence spending plans for the coming year. Beyond that we do not have any timetable for any particular set of announcements, but obviously we will make announcements from time to time as soon as we are able to make them.
Q396 Chairman: What was this statement about helicopters this morning?
Mr Davies: There was a statement, I understand, put out this morning about helicopters; is that right? It was a written ministerial statement.
Q397 Chairman: When is that going to get to us?
Mr Davies: I am rather surprised it has not got to you.
Q398 Chairman: So am I.
Mr Davies: I am told that the Committee should have received it by now. I do not know why that has not happened, Chairman, I am sorry.
Q399 Chairman: This is a poor start, if I may say so, because we are having an equipment hearing in front of the Defence Select Committee. You have known for weeks that you were going to make a helicopter announcement, you have known pretty much what it was, and yet you come before us today and you say you are surprised we have not had it. Well, we have not had it. What is this announcement? Can you tell us roughly what is in it?
Mr Davies: Chairman, we will try and get a copy of it to you right away. Let me just say first of all that it is not correct that we have known for weeks what these announcements were going to involve -----
Q400 Chairman: I have.
Mr Davies: ----- simply because although
we have been deliberating on this for some time and, of course, I have been
playing a full part in that (although I have not played a part in that just in
the last few days), and the Prime Minister wanted, in the light of his visit to
Afghanistan, to come to final decisions on this matter. The Secretary of State himself came back from
Chairman: We have an awful lot of those.
Q401 Mr Jenkin: What is in the Statement?
Mr Davies: I think we had better get this helicopter statement here and then I will read it to you.
Q402 Mr Jenkin: Rather than read it to us, Minister, can you summarise what is in it?
Mr Davies: I would rather have the statement in front of me if you do not mind.
Q403 Mr Jenkin: Presumably you know what is in it.
Mr Davies: I know the substance of it, yes, but -----
Q404 Mr Jenkin: Could you just tell us the substance of it, please?
Mr Davies: It is very good news, Mr Jenkin; it is extremely good news. It is something -----
Q405 Mr Jenkin: That is a subjective assessment of it. Can we just have what is in it?
Mr Davies: It is something that I have
been working towards for at least six months and which we discussed when I last
came before the Committee, which is a major investment in new lift helicopters
and Chinooks. We are planning to buy 24
new Chinooks and two of them will be to replace the Chinooks which have been
damaged and destroyed in theatre and the remaining 22 will be additions to the
fleet. That is an enormously important
enhancement of our Chinook fleet, which will be now 70 when those deliveries
are completed, and there will be a corresponding increase in the availability
of Chinooks for
Q406 Chairman: What about Wildcat?
Mr Davies: Wildcat is doing well. It has had its first flight.
Q407 Chairman: No, not how well is it doing. Does the helicopter announcement include purchases of more Wildcats?
Mr Davies: Chairman, we are already committed to buying 62 Wildcat. There is no change in that at all. The Wildcat is on target, on schedule and doing well. As I said, it has already had its first flight fairly recently.
Q408 Mr Havard: I want to go back to the Chairman's first question which is about the sequencing of events. We were told, and it is in this NAO report here, about the Strategy for Acquisition Reform in the new year. "New year" is a fairly elastic term; I have asked this question before and I was told it was going to be early in the new year. How does this Statement that is being made today relate to the Strategy for Acquisition Reform that is going to be announced in the new year? The Concept phase of Trident was due to be announced about last September. I was then told it was going to be December. It is already December the something-or-other, so where does that fit with the sequence of events? I was then told that this stuff about DIS and DIS2 was coming and that some of these things might be coupled together with a Green Paper which might be in February, etc. The question I am asking is, can somebody somewhere, along with all of that list, pick up the questions we have asked in the past about the various changes to performance management systems that are supposed to deliver these changes as they come, and what the sequence of events is for the implementation of these various different programmes and activities, because frankly I have now lost the plot? Unless I am listening to the BBC at half past six in the morning I do not know what is going on and that seems now to be a constant strategy, and, frankly, it is unacceptable.
Mr Davies: Mr Havard, all I can say is that there has been absolutely no attempt to be anything less than totally straightforward -----
Q409 Mr Havard: I am not suggesting it was a deliberate activity; forget all of that. Maybe it is a cock-up, but, whatever it is, it does nothing to illuminate the argument as far as we are concerned so that we can do proper scrutiny of your activity, which is what we should be doing on behalf of the British people.
Mr Davies: I am not concealing any statements from you and I have no plans to make any statements myself. No doubt I will be making them but I have not got any current plans to make any statements about the equipment procurement activities for which I am responsible. I should say that I am responsible, as you know, as Defence Equipment and Support Minister, which could be translated as procurement and logistics, for those two things for the current equipment procurement programme, and, of course, for the DE&S, and of course the management of the programme and the DE&S we continue to make changes and improvements in. I can talk about that if you like. Lord Drayson has been asked to look forward at potential new models for acquisition reform. He will be bringing forward his ideas in due time, I do not know when. I believe he is coming before you, Chairman, so there will be a lot of opportunity to talk to him about that, but that very much is a matter which I think it would be better to refer to him because he will be able to tell you how close he is to coming to conclusions on that matter.
Q410 Mr Havard: Can someone give me the matrix of activities and the timelines of resourcing with all of these various developments and a little bit more information about which one comes before what?
Mr Davies: I think I have just explained to you, Mr Havard -----
Q411 Mr Havard: No, you did not. I knew all of that. What I do not know is what is happening when, in due time, some time, somewhere. It is not good enough.
Mr Davies: The implication is that I have in my mind a schedule which I am concealing from you. Nothing could be further from the truth.
Q412 Mr Havard: You ought to have a schedule even if you have not got one, and I would like to know what it is and whether you have written it.
Mr Davies: All I can tell you is that the Secretary of State is making a statement this afternoon in the House and that is the only statement which I am aware of which is currently planned to be made. No doubt there will be further statements in the new year but I have no date for them.
Q413 Chairman: But, Minister, you must know roughly when the Defence Industrial Strategy is expected to be announced. Say January or February?
Mr Davies: I think it probably is in January or February; it is in the early new year. That is what we have stated and I am sure that is true, but I am not in charge of that aspect of matters so I cannot be more precise, Chairman. I cannot wade in on somebody else's territory and announce publicly when they will be reporting.
Chairman: I see; okay.
Q414 Mr Jenkins: Perhaps I could ask you on the announcement of the new-raising helicopter numbers. Are they being built in this country or are they being built abroad? How does that fit in with our Defence Industry Strategy to maintain the skills base in this country and are they being supplied by the same manufacturer who supplied us in the recent past with a load of helicopters which could not fly and we had to pay again to put them right? Is it the same company?
Mr Davies: Mr Jenkins, first of all, I understand why you are asking the question. Where we can we obviously like to support employment in this country and we like to support the British defence industry -----
Q415 Mr Jenkins: The answer is no.
Mr Davies: ----- and we do many things
in order to achieve those two purposes, but when it comes to the crunch what we
have to do is buy the best equipment that money can buy for our Armed
Services. We have to do everything we
possibly can to make sure we contribute to the success of current operations
and above all contribute to the saving of lives of our personnel. Those are the overriding considerations and
we are buying Chinook because Chinook is simply an incomparable aircraft. It is much bigger than any other aircraft
that we might think of. In fact, apart
from Russian ones, which, for obvious reasons, we would not want to purchase,
it is the biggest in the world. I am
quite convinced that is the right vehicle for us. I have had endless conversations with people,
including in the front line in
Q416 Mr Jenkins: As it is the same supplier you are going to be very careful when you go through the order small print because there is nothing worse than getting a car delivered and finding that it has got no wheels - "Oh, you wanted a car with wheels?". You do not deal with those people unless you are very careful. Can we have an assurance that you will be extra careful with this company and this contract in future?
Mr Davies: Mr Jenkins, we certainly are and I can assure you that some very competent people are working on this. We are very conscious of the lessons from the past in this as in other fields. We do not forget these lessons, but I would like to ask General Sir Kevin if I might, since you ask for that kind of assurance, to say a bit more about the arrangements we have for negotiating the purchase of this helicopter and the arrangements we have for supporting it and making sure it delivers the capability that we expect of it.
General Sir Kevin O'Donoghue: And I think we need to remember that, setting aside the Mk3s, which we have discussed before and were a bad procurement and I accept that, the other Chinooks we have are outstanding aircraft and they are doing sterling work out in theatre. Of course we will make sure that the contract for the new ones is as you would wish.
Q417 Mr Jenkin: May I just place on record my entry in the Register of Members' Interests about a defence manufacturer that sponsored a charitable event? Can I ask very briefly about Merlin? Was there a competitive tender for this order because they could be built by Boeing in the United States or they could be built by Finmeccanica?
Mr Davies: We have to procure them in the cheapest and most effective fashion, Mr Jenkin. We are not interested in cutting any corners.
Q418 Mr Jenkin: So was there a competitive tender?
Mr Davies: We are not going to cut any corners but equally we are going to make sure we get the best possible deal.
Q419 Mr Jenkin: Was there a competitive tender?
General Sir Kevin O'Donoghue: We have not gone to tender yet.
Mr Davies: We have had some additional discussions with the supplier, with Boeing, but we have not concluded a full production contract yet and you would not expect us to.
Q420 Mr Jenkin: Will there be a competitive tender?
Mr Davies: There will be an announcement of intention.
Q421 Mr Jenkin: Will there be a competitive tender?
General Sir Kevin
O'Donoghue: It is possible. If Finmeccanica from
Q422 Mr Jenkin: What is happening to the Future Medium Helicopter? Is that being scrapped now?
Mr Davies: Yes, and that is exactly what I intended to achieve in the summer and that is why I said I had been working towards this for quite a long time, for many months. In fact, we discussed it when I last came before this Committee. It seemed to me some time ago, in the spring of this year, I suppose, that the plans we had needed to be opened up again to question, the plans we had, as you know, which would procure the Future Medium Helicopter halfway through the next decade, and meantime we should invest money in upgrading and lengthening the life of the Sea Kings and the Pumas, and I thought there were several problems about that. One was that if we were going to procure the Future Medium Helicopter in the middle of the decade we ought to be procuring it now much more quickly, and, secondly, that maybe we could save some money by not going ahead with those particular upgrades. Eventually I was persuaded that that would leave an undue gap which we could not fill. We must not, of course, leave a gap in helicopter capability so we have gone ahead with the Puma upgrade but not the Sea King upgrade except for minimum expenditure on Sea Kings for safety purposes to keep them flying, and that is the intention. We have come now to an agreement and I hope we will be getting on contract shortly 24 new Chinooks which are the ideal helicopter we need for lift purposes.
Q423 Mr Jenkin: May I just ask Vice Admiral Lambert does the scrapping of the Future Medium Helicopter leave gaps that require to be filled in other ways in our capability?
Vice Admiral Lambert: No, it does not. We had a careful look over the summer at the
Future Medium requirement and on detailed analysis what we really want is
lift. That is what is needed in
Q424 Robert Key: But, Chairman, the Merlin fleet itself is not being upgraded as was planned. Only 30 are being upgraded, leaving eight not upgraded. Is it wise to base the entire helicopter strategy on the need for Afghanistan's purposes? After all, we are talking about the day when we withdraw from Afghanistan. Surely you cannot say the whole of our helicopter strategy is based upon our current needs in Afghanistan while at the same time not upgrading Merlin and talking about abandoning the Future Medium Helicopter.
Mr Davies: We are not doing that at all,
Mr Key. Rather, we are doing the
reverse. The future of Merlin will be as
a naval helicopter. That is the future
vocation of Merlin as we see it and that is a very important vocation role for
Merlin. We are deploying Merlin at the
present time in
Vice Admiral Lambert: The 30 Merlin helicopters you are talking about which we are upgrading are the anti-submarine warfare helicopters. We will marinise the Mk3s to give them amphibious capability.
Q425 Chairman: Minister, the Major Projects report out today, which I am just about to come on to, says that as a result of your decision to upgrade only 30 instead of 38 Merlin helicopters the Merlin force will be unable to provide simultaneous anti-submarine protection to more than one naval task force, such as an aircraft carrier or amphibious group, unless supplemented by Merlin helicopters used for training. Is that right?
Mr Davies: That sounds correct. If we had an anti-submarine threat against two task groups simultaneously I think we would pull out all the stops to get all the helicopters we could out there.
Q426 Chairman: So there is the additional problem of having fleets of helicopters within fleets and the logistic problems that go with having two different marques of the same type of helicopter, which adds to the expense of maintaining those helicopters?
Vice Admiral Lambert: One of the things we have been trying to do is drive out first of all fleets within fleets and also drive out the number of different types of helicopters we have got. The strategy that was announced earlier this morning drives out a class of helicopters, it reduces the number of types of helicopters and it brings us into an era where we can see four main helicopter types going forward with the Chinooks doing the heavy lift, two types of Merlin, one which will be the anti-submarine helicopter and the Mk3 doing the amphibious lift, the Lynx helicopters with the Wildcat and the attack helicopters. As an addition we are moving forward with the Puma to fill a particular niche capability but it reduces helicopter types and we are trying and drive out fleets within fleets.
Mr Davies: If I may summarise, Chairman, we are trying to do exactly what you suggest and I am very conscious of the need to do that. We are trying to minimise the number of different types of helicopter. The result of the strategy which was announced this morning will be to remove the Sea Kings, which is a considerable simplification. The results of the announcement I made in August, the investment in the Project Julius and in the 714 engines for the Chinook, will mean that all our Chinook fleet will be of one type - the same cockpit, the same engines and so forth, so that is a considerable simplification. Equally, we have got the Wildcat, which will replace Lynx, so it is only in the Merlin going forward where there are going to be two different variants of one type of helicopters. That is not desirable but it is a very considerable improvement on the present situation.
Q427 Chairman: As you know, Minister, we are entirely with you on the Sea King - entirely. However, it worries me at any rate that you are creating a fleet within a fleet in order to save up-front costs in the Merlin fleet with the consequent expense later on down the line, in other words, making the precise problem that you are trying to resolve in other ways.
Mr Davies: Yes, of course.
General Sir Kevin O'Donoghue: If I may, Chairman, we have 38 Merlin Mk 1s of which we are going to convert 30. We will not then use the other eight for anti-submarine warfare. We have 28 Merlin Mk 3s currently flown by the RAF for land use. We will need to modify those so they can operate off amphibious shipping. We will probably need to convert the tail rotors so they fold, certainly the main rotors will need to fold, so we will in effect have one fleet of 58 Merlins, 30 of which will be optimised for anti-submarine warfare and 28 of which will be optimised for amphibious lift. Actually, the helicopters are the same.
Mr Davies: Can I just add something which will be of interest to Mr Jenkins and Mr Jenkin as well, and that is that the work that General Sir Kevin has just described on the tails and the heads of the Merlins and so forth, marinising them, making them all suitable for naval work, will be work undertaken by AgustaWestland in this country, so that is a positive contribution to the Defence Industrial Strategy in terms of helicopters in this country. I thought I would just make that point.
Q428 Chairman: I think I would describe this start to the morning as rather tetchy because there was this announcement about helicopters that was apparently released by the Ministry of Defence at 9.30, it was sent to the Defence Committee at 10.39 and you announced it in front of us after the release but before it was sent to us. Let us get on to something different, which is the Major Projects report, which was released at one minute past midnight this morning. It is pretty startling stuff, I think you will agree, with the Auditor and Comptroller General saying the current defence programme is unaffordable, that the delays to the carriers reflect poor value for money, that the Ministry of Defence has a multi billion pound budgetary black hole which you are trying to fix with a "save now, pay later" approach. Normally the Major Projects report is pretty bad reading for the Ministry of Defence and people within the Ministry of Defence feel they are doing a bad job; yet in this case it is quite plain that people within the Ministry of Defence are doing a pretty good job because Mr Morse says that the budgetary black hole gives a misleadingly negative picture of how well some major projects in the MoD are managed, but overall would you not say that it presents a pretty bleak picture?
Mr Davies: Chairman, I think it presents a fair picture in the sense that we obviously do not have ideal financial circumstances. We do not have an unlimited amount of money. It would be very nice to have an ideal amount of money.
Q429 Chairman: It sounds like the statement of the Japanese emperor after the dropping of an atomic bomb.
Mr Davies: I think he did say something
like that. I seem to remember the
quotation. I think the war had not gone
entirely favourably for
Q430 Chairman: A multi billion pound budgetary black hole.
Mr Davies: There are limitations, of course; we cannot do everything. Part of my job is establishing that we have got the right priorities. We continually review those priorities. Sometimes we therefore have to say maybe we are going to have to abandon something or else put it off or extend the period of procurement of some new system. We did that in the case of the carriers.
Q431 Chairman: At a cost of over a billion pounds.
Mr Davies: No, no. If you look at the figures in front of you -----
Q432 Chairman: £1.124 million in costs in subsequent years.
Mr Davies: But the cost of rescheduling the carriers, of re-profiling the procurement, was actually £674 million, a lot of money, I know, and you will see that in the report.
Q433 Chairman: Where are you going to find that £674 million?
Mr Davies: That is part of the new cost of the carriers, so we will be finding that over the period of procurement of the carriers.
Q434 Chairman: Is that the "save now, pay later" approach?
Mr Davies: I am not trying to disguise from you that by deciding that we could not afford everything that we wanted to buy this year we had to put some things off, but principally the carriers, and I thought it was responsible to do that with the carriers because we do not need the carriers until the JSF is available to fly off the carriers and they cannot be made available before 2016 anyway. That was a rescheduling which involved no loss of national defence capability but, of course, it involves a cost. When you push things forward it always involves a cost and I do not dispute that and do not deny that. It is a substantial cost, £674 million is over ten per cent of the cost of the two carriers, which is about £5.2 billion.
Q435 Chairman: Which is what he describes as a "save now, pay later" approach.
Mr Davies: I think that is a necessary thing to do and it is a good deal better, Chairman, than cancelling a major defence programme. I think that your party are indicating that they want to cancel the carriers. We are not going to cancel the carriers; we are totally committed to carriers; the carriers must be built for the sake of the country's long-term defence needs.
Q436 Chairman: As you know, I do not speak for a party.
Mr Davies: I recognise that but I make the point because that was an alternative. We could have simply cancelled a major defence programme. I would not have wanted to do that. The Government would not have wanted to do that. We have not done that, but we cannot buy in year more than we have the money for; I recognise that. We all recognise we have to live under financial disciplines. Every family, every business in the country has to live under financial disciplines, and if you put off purchasing something when you do purchase it it may cost more; that is a fact of life.
Q437 Chairman: How did it come about that six months after you had done the contracts for the aircraft carriers you suddenly discovered you needed to delay them by two years?
Mr Davies: I do not think we discovered we needed to delay them. We discovered that -----
Q438 Chairman: You wanted to?
Mr Davies: I had to look through the programme and see where we could make some particular adjustment which would enable us to avoid cancelling important but long term defence capability, and particularly to avoid not buying in the short term things we urgently needed in the short term, including for current operations. This is what I call priority setting. It always involves difficult choices. There are never simple choices. There is never 100% on one side of the equation; it does not work like that. You just have to try and make sure you have achieved the best overall solution. I believe we did achieve the best overall solution. I believe that any solution would have involved either serious loss of defence capability, which we have not done, or some increase in the full life cost of the programmes that we delayed. I accept that and we chose the carriers because, as I have just explained, that involved no loss of defence capability, and that was a very important consideration in my mind.
Q439 Mr Jenkins: Minister, I do not think anyone is trying to blame you or this present week's or year's Government. It is a long term problem. In fact, you may remember that we sold the homes and the houses and the beds of our sailors and soldiers and airmen to raise money to fill a black hole in the defence budget previously, so it is not a new problem. For ten years I have been involved with PAC and looking at PAC reports where they constantly criticise some of the legacy projects and have said why do they override them, why do they cost more. No; it is the feeling that things just have not got better. I do not feel assured that the Department is any better at turning down some of the requests to go on the wants list rather than the needs list and adding to the problem of pushing stuff to the right and extending this date rather than knocking it on the head. Do you feel that things are getting better? The Gray report has come in to point out the weaknesses we have known for ten years or more. Why was it not done before?
Mr Davies: Mr Jenkins, let me deal with
both of those points, first of all whether this is a constant feature of
defence procurement and whether it has happened in the past, and secondly
whether things are now getting better.
There is no doubt in my mind that it is a constant feature of defence
procurement and there is no doubt that some of my predecessors have taken the
wrong decision. Take the Conservative
Government of the early 1980s when John Nott was Defence Secretary. They tried to get rid of the carriers
altogether because they found themselves in a financial crunch, just a few
months, as it happened, before the Argentineans invaded the
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 ten-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 ten-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 ten 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 ten-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 ten-year horizon what is the net impact of that over the ten-year period?
Mr Davies: The net impact over the ten-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 ten-year horizon?
Mr Davies: That is to be looked at over a ten-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 ten-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 ten-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 ten-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 ten-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 ten-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 ten-year mark. If you could say to us that £15 billion has been found over the next ten 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 ten-year mark". I would have thought you could give us a figure for what you have pushed beyond the ten-year mark, even if you cannot specify which programmes you have pushed beyond the ten-year mark.
Mr Davies: I can see exactly, Mr Borrow, what you have in mind. We have undoubtedly pushed some things beyond the ten-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.
Vice Admiral Lambert: You do raise a very good point and we are very aware of it. In the past with a ten-year programme there has been a temptation to push things just beyond the ten-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 ten
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-
Q460 Mr Jenkin: What is the effect of the PBR on that assumption?
Mr Davies: I am taking up your earlier question. "If the defence budget remains flat in cash terms after this time then the extent of the over-commitment widens to £36 billion". I am just explaining that "flat in cash terms" would be a dramatic and obviously desperate situation to be in. It would mean that our defence budget was falling by the rate of inflation every year in real terms, say 2.5%. At the end of that time I cannot believe we would have much in the way of national defence left at all. If you were going to recruit soldiers, sailors and airmen and say, "Join up and we guarantee that you will have falling real terms remuneration of 2.5% compound per annum", I think not.
Q461 Mr Jenkin: Can I refer you to the graph?
Mr Davies: Yes.
Mr Jenkin: And there is a corrected graph at the front of the document. The flat dotted line shows the projected defence budget using departmental assumption of 2.7% growth per annum beyond 2012-13, okay? What is the effect of the PBR on that assumption? It is not right any more, is it?
Chairman: The Pre-Budget Report.
Q462 Mr Jenkin: It is going to get worse, is it not?
Mr Davies: I am sorry; you have asked me to read a graph while listening to your question. It is a bit difficult to do that at the same time.
Q463 Mr Jenkin: But the assumption in that graph is a 2.7% cash increase each year, okay? That is not going to happen next year, is it? It is going to get worse, is it not?
Mr Davies: No, on the contrary; we remain next year in the current Comprehensive Spending Review period and that provides for a 1.5% real terms increase in our budget, and beyond that - we only take these decisions one year at a time - I cannot tell you where we shall be but if you told me that for the following ten years we would be limited to flat cash, as I have said to you, that would -----
Q464 Mr Jenkin: No, I am not talking about flat cash. I am talking about the assumption in the graph.
Mr Davies: If we then have flat real, which is what you are suggesting, in other words the rate of increase is the prospective inflation rate of two point something per cent, then the £6 billion applies. It would have been £21 billion originally and it is now £6 billion.
Q465 Mr Jenkin: But we are not going to have that increase. I can quote you the figures from the Pre-Budget Report. This year it is £38.9 billion; next year it is £36.7 billion. I appreciate that reflects Urgent Operational Requirements taken into the current year and not into the next year but the fact is the core budget is declining next year, is it not?
Mr Davies: No. I do not know where you get this idea from.
Q466 Mr Jenkin: Would you be able to give us the figures, explain to us what the effect of the Pre-Budget Report is on the core budget?
Mr Davies: The Pre-Budget Report, Mr Jenkin, and I have listened to this with some interest, does not actually make a statement about the future growth of the defence budget. The Chancellor, when he made his Pre-Budget Report statement, the Autumn Statement, the other day, did not actually make a statement about the future rate of growth of the defence budget.
Q467 Mr Jenkin: So what is going to be the rate of growth in the core budget next year?
Mr Davies: I do not know that, Mr Jenkin. That is something which we will obviously be discussing in the next year. At the moment we are talking about the budget for 2010-11. We are going ahead one year at a time, so no doubt this time next year I will be happy to answer your questions about the following year's budget.
Q468 Mr Jenkin: So it is not going to get worse?
Mr Davies: I do not know, Mr Jenkin, but I do not know what the budget is going to be. Let me just sum up what I am trying to say to you. I do not know what the budget is going to be in the future any more than you do, but what I do think is implausible -----
Q469 Mr Jenkin: But I thought that was the whole point of having a three-year plan.
Mr Davies: No, we are making an assumption here going forward over the ten-year period of a flat real terms budget. What you asked me to consider at one point was not a flat real terms budget but a flat cash budget which would mean a decline in -----
Q470 Mr Jenkin: No.
Mr Davies: I am glad you have moved away from that because I have convinced you perhaps that that was a completely unrealistic assumption to make. It would obviously be disastrous if it were imposed on us but I have absolutely no reason to suppose it will be and I cannot believe it would be by a Labour Government.
Q471 Mr Jenkins: Can I go back to this £15 billion reduction, which is a great figure? I thought the previous question with regard to pushing it beyond the ten-year line was an excellent question; I wish I had thought of that myself. I am disappointed that we cannot now know what programmes are cancelled but we will obviously find out in the future. Can you give me an assurance that you will not follow the same path that the MoD followed in the previous round? When they were told they had to reduce the size of their stores one of the things they did was to reduce the price of boats from one pound to one penny and therefore came back and said, "We have reduced the cost of our stock". They had not reduced the cost; they had reduced the cost on paper. Can we have an assurance that this reduction of £15 billion was not brought about by somebody going through the programme with a pencil and remarking downwards what they estimated the cost of the programme was?
Mr Davies: I am sure you can have that assurance. The work would have been done by teams in the DE&S and I can ask General Sir Kevin if he would like to deal with that point directly.
General Sir Kevin O'Donoghue: He can have that assurance; that was not done. In fact, what we are trying to do, and I explained ten days ago what we must do, is get our cost estimation much more accurate, and that is the process we are going through.
Q472 Chairman: Minister, there is one question I want to ask you to repeat the answer to; I am sorry about this, and it is the question of this £15 billion. I am not minded to accept that you should keep from this Committee the make-up of that £15 billion because I do not understand how we can conduct proper parliamentary scrutiny if you do keep that sort of thing from us. Please would you explain again why it is you feel it is right to keep the make-up of that £15 billion from this Committee?
Mr Davies: Mr Arbuthnot, first of all, I would not want to answer that question without warning of it, because I simply cannot come out with a whole list of projects of what we have done to them, where we have moved, which one, and so forth. I would need to have a comprehensive printout to be able to do that.
Q473 Chairman: That is a different question.
Mr Davies: That is a different question, I quite accept that, but the reason I was not expecting to be asked that question or prepared to give that kind of answer is because, traditionally, we have never done that. We did not do that in your time in government; we have never done that. We have always regarded the long-term equipment programme as a confidential document - confidential for the reasons I mentioned. We want to be able to change it without upsetting our relationship with industry in any way, we want to be able to keep our powder dry, we want to be able to benefit from the market opportunistically on occasion, and that sort of thing. We do not necessarily want everybody to know exactly what our plans are. At the same time, I am a great believer in principle and transparency, as I know you are, and we have made a commitment, the Secretary of State has made a commitment, to a more transparent approach to the longer-term planning of our procurement budget. That is a commitment he has already made. We are looking at how that commitment can be best delivered, and I will certainly transmit to him your comments to me this morning, which I take very seriously: I think they are very reasonable comments to make by a select committee. It is the classic job of Parliament to press the executive branch for more information on these matters and I am very sympathetic to it, so maybe we shall be able to come up with something. If we do, I think it will be necessary to transmit it to you in writing. This is something we will try and focus on and I will try and ensure we do it favourably.
Chairman: I would hope that you would because we have a job to do and you need to help us to do that job.
Q474 Mr Jenkin: Chairman, industry knows all these figures and background. You give far more information to the contractors than you are giving to us.
Mr Davies: No, Mr Jenkin, each individual contractor, in respect of his particular discussions with us obviously knows more than we tell you, that is perfectly true, but contractors as a whole, industry as a whole, do not know about other contractors, and so, as a whole, they do not know more. That is certainly not correct. As I have explained, we certainly do not reveal to industry what our long-term purchasing intentions are. We do that in our own time when we think it is the right moment to do it. For example, on helicopters we decided recently we had better open some discussions with Boeing to see where they were in terms of delivery and price and all the rest of it because we wanted to buy these new helicopters quite late in the day.
Q475 Chairman: How can anyone conduct a Strategic Defence Review on this basis?
Mr Davies: I think the Strategic Defence Review is really about our view of the world, the likely evolution of the world, the threats that emerge in the world, the capabilities we need to meet those threats.
Q476 Chairman: And how we deal with them.
Mr Davies: Exactly, and, therefore, we may well get involved in the kind of capabilities that we need, whether we need to invest more in cyber, whether we need to invest in anti-ballistic capabilities. All these sort of question will arise in the second phase of analysis in the SDR, but when it comes to saying how much money you need to purchase a particular requirement and whether you need this requirement or that requirement, it is a very long assessment phase, it is a very long time before you get to that, and, what is more, you come up with a level of detail which, as I say, is something you do not necessarily want to give to your potential commercial counterparts.
Q477 Linda Gilroy: One of the things that have been happening in recent times is signing some very long-term agreements, terms of business agreement with BVT and also with Babcock. If we, as a Committee, were to choose to scrutinise a particular TOBA (Terms of Business Agreement), would that enable us to see some of the issues that we are having problems in defining at the moment?
Mr Davies: I think they are very interesting agreements we have had, and it is a formula which I like and I think we may extend in other directions. Again, for the reasons I mentioned, I am not going to tell you now in which direction, but they are working very well. On the other hand, whether it would help you to understand the issue of the £15 billion, how we made the £15 billion reduction and the long-term expenditure expectations, I am not sure that it would, because the TOBA means that we are actually committed for 15 years, as you know, to pay certain minimal amounts of money to the naval shipbuilding industry to maintain that capacity there. That is something which is a contractual liability and we cannot reduce that. So I can assure you that the savings have not been taken from the TOBA.
Q478 Mr Jenkin: One last point on the core budget. I am really astonished at the answers that you have been giving to me. The Institute of Fiscal Studies has reported that the non-protected government departments will effectively have to take a 16% cut in their funding. Are you actually telling us that MoD, which is a non-protected department, is not going to be making any contribution to those cuts?
Mr Davies: Mr Jenkin, what I am telling
you is this. First of all, I know
nothing about the
Q479 Mr Jenkin: The core budget, yes. That is what I asked you about. It was the Pre-Budget Report.
Mr Davies: And I repeat it to you, Mr Jenkin. You suggested to me - and perhaps it was bluff because I think you were listening at the same time as I was to the Chancellor - that the Chancellor had made some statement about the future level of the defence budget. I can assure you he did not.
Q480 Mr Jenkin: There was an implication about what the Chancellor announced, was there not?
Mr Davies: You choose to extrapolate from whatever the Chancellor---
Q481 Mr Jenkin: Yes I do. In the absence of clear answers I choose to extrapolate.
Mr Davies: My dear Mr Jenkin, I am giving you completely frank answers. I am not concealing from you a number. We have not engaged in those discussions. We have not come to conclusions on that matter. We are engaging in discussions at the present time about our budget next year and the Secretary of State is going to be making a statement on that this afternoon, as I have already said.
Q482 Mr Crausby: Can I take you back to where we expected to begin today, of course, on the Gray report. I guess to some extent the Committee has an inkling of how you feel about the Report but, for the record, what do you think about Gray's analysis of the problems that exist within the Ministry of Defence in relation to defence procurement?
Mr Davies: I think there was some good analysis there. There was some provocative analysis, which is always useful. It is always good to be stimulated by critical comments and so forth and have an opportunity to re-examine ourselves in the light of other people's comments, and I welcome that. Some of the recommendations, as you know, we have accepted, and one or two, including one very major one, which we have declined.
Q483 Mr Crausby: The CDM in his evidence to us told us that he disagreed with Gray's figures. I think he said he did not accept the maths. What steps are being taken to resolve the differences between the figures so that we can come to some agreement as to what the real numbers are?
Mr Davies: I read Mr Gray's report and I think you had a discussion of it when General Sir Kevin came the other day and went through some of those issues. It is not for me to explain Mr Gray's numbers. I believe Mr Gray is coming before you and I am sure he will be able to explain the numbers to you.
Q484 Chairman: Have you spoken to him about them?
Mr Davies: Yes, I have.
Q485 Chairman: The figures?
Mr Davies: I have asked him several questions. I have not always had answers which totally convince me that the numbers are right but, as I said, Mr Gray is responsible for his numbers, I am not responsible for his numbers, and I am sure it is right that you should ask him about them.
Q486 Mr Crausby: So you have not been able to reach agreement on the numbers, you still both agree to differ then.
Mr Davies: No, it is not my responsibility to reach agreement with him on any particular set of numbers. I have read his report with considerable interest and I noted a number of issues, some of which I found persuasive. Some of his judgments I found persuasive, some of his judgments I found less persuasive; some of his recommendations I thought attractive, some of his recommendations I thought less attractive. I think that is how I have already explained it. If you have got issues about his numbers - I know that you questioned, the other day, CDM and some of his colleagues on the numbers - those questions should really go to Mr Gray. I am not going to put myself in the position of answering for Mr Gray.
Q487 Mr Crausby: Can I ask then about Bernard Gray's view on Through-Life Capability Management? He described it as fearsomely complex and fraught with potential pitfalls in practice. We interviewed industry representatives as well and they told us that TLCM is achievable and that it will be effective, but their view was that the MoD had been aiming for a gold star when they had not really mastered the basic principles. Was that a fair analysis by industry and Bernard Gray?
Mr Davies: I think TLCM is the right way to go. I think it is not only a good idea, it is necessary idea. I think it has already brought improvements and, if I can just take you through what it amounts to, I think you will agree that it is a sensible idea. The first thing is that it means that we look at the through-life cost of systems that we purchase so that we do not just look at the immediate cost of the hardware, we look at the cost of supporting the equipment, we look at the cost of training, the costs of infrastructure that are associated with that equipment and we look at them through-life. That is a rational and sensible way of making investment appraisals, which would be standard practice in the private sector. You may say: why did not Government use it before? I am glad the Government has in this case now introduced it. It makes a lot of sense. The second thing is that we need to look at capability in a coherent way, because capability can be delivered by purchasing some hardware, it can also be delivered sometimes by purchasing just software. It can be delivered by different tactics, by training of different kinds. We need to look at all that in a coherent way. It is exactly what Admiral Lambert does every day and the people who work for him, the chairmen of the Programme Board. I think that TLCM has introduced a new rigor into our investment appraisal process and a new coherence into our decisions. It has already delivered results, it is part of the improvement process which I discussed earlier with you, and I am very committed to it. I think we are all committed to it. I do not know if my colleagues would like to add anything.
Q488 Mr Crausby: Can I just say, no-one questioned the wisdom of Through-Life Capability Management. What Bernard Gray questioned was the MoD's capability to deliver it.
Vice Admiral Lambert: I think Bernard Gray highlighted a real risk that we can, or could, over complicate these issues. Once a risk has been identified, I think it becomes a lot clearer how we should manage it. I run a governance board together with the Chief Operating Officer from Sir Kevin's organisation whose remit is to make sure that we do manage Through-Life Capability Management correctly. I am very keen that we do not over complicate it, that we keep it as simple as possible, that we have got the right management information systems so we can do Through-Life Capability Management. One of Bernard Gray's other risks that he highlighted was that we could turn Through-Life Capability Management into a talking shop: too many people sitting round the table just talking rather than having single points of accountability. Again, we are very aware of that risk. So, I think, in response to Bernard Gray, I would say that we are aware of the risks and we are trying to manage them.
Q489 Mr Havard: Mr Gray makes his observations, but the NAO make their observations in this report that was published this morning and they congratulate you in the sense of trying to do some of these things and some of the architecture that you are putting in place to try and deliver it: the defence lines of development and the project management boards, and so on. At the same time they are rightly pointing to gaps that you have got in those processes as they currently stand, particularly the question about management information in order to make the decisions you want to make on these boards, and they make observations about how and when you might improve that and say something about what you have said about what you are doing about improving it. They say you are telling them that there is going to be a new tool for collecting both financial and non-financial data in place and operational by March 2010 in order to illuminate these processes. They also talk about training programmes for project management for frontline commanders, and so on. Can you tell us a little bit more about what you are actually going to do in those areas as a consequence of these observations that are made today?
Vice Admiral Lambert: We are mandating a management tool across the piece, as you can imagine, across the Ministry of Defence. There is quite often a habit of using different management tools in different areas, and so we have mandated the same management tool across all the lines of development so that we are all talking the same language. We hope to have that in place by March so that the programme managers' chairs can see the information in a coherent way. We have already started the training schemes across the piece to make sure that Through-Life Capability Management is part of the normal training packages of anybody involved in that side of the business, so it is working away. It is what we would be doing and are doing at the moment.
Q490 Mr Havard: I understand that, consequently, next year, when we see the major projects, you are going to be changing the emphasis to look more at the performance of in-service capabilities rather than the stuff about contractual relationships. Is that going to be achieved? Am I going to have a lot more illumination on that question when I read these documents next time?
Vice Admiral Lambert: I think the documents already start to demonstrate a capability output. In the documents you will see that the risks against each line of development are starting to be put in place. We only introduced this in the summer of this year and we are already starting to see where we need to concentrate management effort, which does not always have to be concentrated on the equipment line, some of the other lines we are having to concentrate to make sure that the capability output is what we want to achieve.
Q491 Mr Havard: How does all of that fit with the broader project management review that is taking place of the whole of the MoD, and how does this acquisition and projects management fit in that larger matrix? Can you also explain to me how Through-Life Capability Management actually fits with whole-life capability management in terms of how you decide to make an acquisition in the first place?
Vice Admiral Lambert: How we make a decision on acquisition is that we do audits of capability areas, either annually or biannually, and once we have done the audit we will see where there are capability shortfalls and if there is a capability shortfall we will see which of the lines of development can help us fulfil that shortfall. For example, if in one area we see we have got a capability shortfall, we may be better off spending some money on training rather than on equipment, and it is at the programme board level that they will decide if there is an equipment shortfall rather than a shortfall in one of the other lines of development.
Q492 Mr Havard: I will just ask you one last question because there is an observation at the end of this section in the NAO report that I was just looking at which talks about Through-Life Capability Management. At the end they throw away a remark which is talking about training courses for commanders and so on. They say: "We have also noted differing approaches to the extent and the timing of industry involvement in discussions". Can I come back a little bit to one of the questions that was raised earlier? How can that happen? When you do it, you are obviously giving visibility about what it is you want to industry. You say you cannot tell us these things, but you are going to have to have a way of timing these things for industry, and at the moment it seems as though different parts of your organisation do that differently.
Vice Admiral Lambert: Industry is invited along to Through-Life Capability Management courses where the totality of the defence budget and how we manage the defence budget we do not go into. However, within certain programme boards, when it is appropriate, industry is invited along to the programme board to assist with the Through-Life Capability Management of that programme.
Q493 Mr Havard: When you decide it is appropriate to invite them, you invite them?
Vice Admiral Lambert: Yes.
Q494 Mr Havard: Is that the point at which we will see a development of platforms? If you are going to try and embellish something, change it, modify it, are those the major points at which those changes take place and those invites happen?
Vice Admiral Lambert: The invites will occur when it is appropriate with the appropriate industries. So, as you can imagine, when we are discussing the Type 45 project, we will invite BAE Systems and MBDA along to that part of the programme, but not for the entirety of the programme board.
Mr Davies: Can I say as a general point, Mr Havard, there is always a balance to be struck. We need to have a close relationship with industry, we need to know what industry can offer to us. It would be absolutely ridiculous to conduct the capability function in a vacuum without knowing what capabilities industry may have identified which might be useful to us. So we need to have a dialogue, but at the same time we cannot commit ourselves to industry too soon, and we do not want to create a monopoly situation unless we have decided to have some long-term exclusive partnership with someone. We have to strike a balance. It is an ad hoc matter when the programme boards or where the IPTs and the DES decide to open a dialogue with industry, what meetings they invite them to, what degree of visibility they give industry of what our plans or our needs are, and then the dialogue proceeds, but I do not think you can have a general principle saying it will almost always happen in exactly these circumstances. You cannot define exactly the circumstances. You have to trust the management decision.
Q495 Mr Havard: I appreciate all of that, but what I am searching for is how does the Through-Life Capability Management of an existing thing that you are looking at as you evolve it in its life, and the decisions you are making tactically about how you are dealing with it now, fit with the whole of life capability decision management process in the first place? You must have a view of what you are requiring in the first place: the whole of its life and how you are going to account for all of that. That calculation presumably changes because of changes you make in the Through-Life Capability. You might decide to add something to it that you never thought you would put in in the first place. How does this accounting process work?
Vice Admiral Lambert: We would only put something on to a platform if there was a capability need and a capability shortfall in the first instance. The whole process starts from capability shortfalls and how we are going to fill them.
Q496 Mr Crausby: Can we discuss the question of reduced numbers of staff in Defence Equipment and Support? The defence programme is designed to reduce numbers from 27,000 in 2007/2008 to 20,000 in 2012, and some reductions are taking place already, but clearly there is some way to go. What are the consequences of these reductions in staff? Are they real or is there a shifting of these responsibilities elsewhere?
Mr Davies: I am going the ask General Sir Kevin to answer this, because he is actually the author of that programme, which I totally support. I think it has been very well conceived and is in the process of execution at the moment. We have come down in DE&S, which is more logistics, more support than it is actually equipment procurement - roughly 7,000 people involved in defence equipment there - and the balance in logistics and support and the numbers have come down by 25,000, I think, Kevin, since you started off, to 22 today, and we are hoping to get down to 20. I personally think that there is a point, of course, below which you must not reduce, but there is a point at which actually reducing numbers increases the individual responsibility of individual teams and actually motivates people and sometimes gets better productivity out of them and better decision-making processes.
General Sir Kevin O'Donoghue: Is some of the work being done elsewhere? The answer is, yes, it is being done in industry. As we outsource, as we change the boundaries between what we do and what industry does, then, yes, some of the work is being outsourced and done in industry. One of the implications or one of the issues that is very important is in order to come down to 20,000 we have to upskill and reskill and I must continue to spend money on upskilling and reskilling. We need to continue to bring in apprentices, we need to continue to bring in graduates and I need to continue to bring in those experts that we cannot grow in the short-term within DE&S.
Q497 Mr Crausby: Bernard Gray talked about skills, did he not, as well as quite an important part of that, and when we interviewed industry they agreed with that. It does seem to me that you train them and they claim them. I know that is always a difficulty, but what do you do about ensuring that you do not lose the very best people that you introduce to industry, thus giving industry a bigger advantage than you have?
General Sir Kevin O'Donoghue: I do not think we lose that many people. I think that the Civil Service in DES, the Civil Service right across the Department, is an extremely loyal Civil Service. They are certainly a key part of what we do delivering UORs, for example, working all hours, seven days a week to deliver kit to the frontline. It is the reward of doing that, knowing that they are making a difference to the soldiers, sailors and airmen on the frontline that retains them. So I do not think it is as big a problem as perhaps you might think, but, of course, it happens.
Q498 Mr Crausby: Industry seemed to think that it was a problem. Their view was that there needed to be an appropriate skills strategy.
General Sir Kevin O'Donoghue: I thought you were talking about the drain from my organisation to industry.
Q499 Mr Crausby: The question of skills and the general level of skills. Industry took the view, as Bernard Gray did, that skills were too low within the MoD?
General Sir Kevin O'Donoghue: I have in my organisation 700 people with project management qualifications, external civilian project management qualifications. That is a pretty good record. I suspect we have got more qualified project managers than most others. There is a skills programme and we are spending money on it. I am spending the same amount this year as I spent last year and I will spend the same next year. It is vital, we have to continue to reskill, and I accept that and we are doing it.
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 ten 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.
Q520 Chairman: Or is it a change of name?
Mr Davies: I have already explained. On the substance, Mr Arbuthnot, it is already dead, but let us today, now, in this Committee, say that we will also bring the name into line with the reality.
Q521 Chairman: I am confused now because the Chief of Defence Materiel says it is not dead and you say it is dead. It would be helpful if there were some synergy between the two.
Mr Davies: I actually discussed this with him before this meeting and I think we were agreed, but I will, of course, let him answer directly. We are all agreed on the substance; we are now agreed on the name. Not surprisingly, General Sir Kevin did not want to anticipate anything I was going to say this morning by announcing last week that he was going to change the name. We are actually going to change the name as well as the substance, but I would be delighted---
Q522 Chairman: He had the opportunity to agree with you, because you had said in your speech in October that the programme was dead, and he said, "No, it is not dead." Is it dead?
Mr Davies: Let me repeat. We are procuring the reconnaissance vehicle, we will be procuring the Utility Vehicle but the FRES notion, the FRES concept is dead, yes.
Q523 Linda Gilroy: Is what is dead there the degree of commonality of the vehicles that you will be procuring, or are you still aiming for that?
Mr Davies: Yes, the degree of commonality is not practical because we will be procuring quite different vehicles from different manufacturers, and so that concept is not valid, it is dead. Today, at this meeting of the Select Committee on Defence - I cannot think of a better locus, if I may so to do this - let us bury FRES. It is not only dead, let us formally now, today, bury FRES, shall we?
Q524 Chairman: CDM, is FRES buried?
General Sir Kevin O'Donoghue: Indeed.
Q525 Linda Gilroy: This has a commonality, I think, with Monty Python and the dead parrot, but we will move on.
Mr Davies: There is a hole in front of me, Mr Arbuthnot, that might serve very usefully!
Q526 Mr Havard: In terms of the financial decision-making about whatever this thing is, is this now seen as part of an existing programme capability, or is this something that General Sir Kevin is now going to look at putting forward the financial structures that will be common across all the various parts of the MoD when they deal with it? Where does it sit? Is it an iteration of existing capability or is this now a new decision about something that is going to happen and Sir Kevin will set out what the rules are for the game right across the piece?
Mr Davies: We have three major core armoured vehicle programmes at the moment apart from the vehicles procured to Afghanistan, and they are the Warrior upgrade, the reconnaissance vehicle and there will be a degree of commonality there because they are both going to have the same cannon so that is splendid and it happens to work out that way. I hope contracts for both of those will be signed within the next two or three months, seriously, and then there will be the Utility Vehicle, which we will be procuring over a longer timescale. We will find some name to encompass and encapsulate those three vehicles.
Q527 Mr Havard: Call it "Kevin" if you like. I do not care what you call it, as long as we have it.
Mr Davies: What interests me is the facts, the substance. Have I explained the facts and the substance sufficiently?
Q528 Mr Havard: Yes. What I am trying to get at is there was a Scout vehicle as well. There are different questions about armoured fighting vehicles that are going to come. Some will be, in a sense, iterations of existing capability, others will be new decision-making, and I am trying to get where this thing about through-life and whole-life is. The whole-life decision is about when you acquire it in the first place, and that is the financial tools that General Sir Kevin sets out, as I understand it. Is that going to fall to his remit or is this some sort of iteration of an existing financial programme irrespective of whether you change the name?
Mr Davies: Every capability definition,
requirement definition falls to Admiral Lambert and every procurement falls to
the responsibility of General Sir Kevin O'Donoghue. There will be no doubt about that at all. That is the only way we do things. We do things in this totally coherent
fashion. We do not have some other
organisation which procures certain things, or anything of that sort -
absolutely not. We distinguish in our
own minds between the core requirements, the long-term requirements of the
British fighting services - you know about that - and the UORs, which
are temporary. There is an issue if
Q529 Chairman: I think it is unwise to talk about FRES as being done in a totally coherent fashion.
Mr Davies: We are not talking about FRES at all.
Q530 Linda Gilroy: So as I can understand that in terms of the new way of doing things, the programme boards, how will that look different? Will there be one programme board that deals with all of these vehicles?
Mr Davies: All armoured vehicles, yes. Do you want to say a word about that?
Vice Admiral Lambert: Yes, it sits within one of my heads of capability areas. The issue that it is trying to solve at the moment is for a Scout-type replacement, and he has reprogrammed what he has available to make sure that the most important operational need is met first, which is why the Scout is right up there as the first thing he is moving ahead with. The next area where he has got the capability shortfall will probably be in the armoured fighting vehicle area, and so the Utility Vehicle will probably be the next one. Again, it starts with a capability shortfall and then looking at the best way of filling that shortfall.
Q531 Linda Gilroy: The programme of UORs is continuing. Is that under the same umbrella as well?
Vice Admiral Lambert: Yes, it is. We will have to look at at what point another vehicle ought to come in and replace those vehicles important to UORs or whether we can run the UORs and have a replacement vehicle a little bit later. So that is all looked after in the same programme board.
Linda Gilroy: I think probably most of the questions that fell under there have been explored, Chairman, unless you can spot one that has not.
Chairman: No, I think I agree with that.
Q532 Mr Jenkin: A400M: it has flown, I understand?
Mr Davies: It has indeed, and I witnessed it myself. It not only flew but, to my great surprise, it flew for two and a half hours and made a number of manoeuvres on the first flight.
Q533 Mr Jenkin: When is the in-service date now? I remember the last time we asked about this we could not have an in-service date because it had not flown. Now it has flown it must have an in-service date!
Mr Davies: It flew on Friday,
Mr Jenkin. The purpose of my going
to
Q534 Mr Jenkin: That was all very interesting, but when do you think this aircraft will come into service? That was my question.
Mr Davies: That will be part of the renegotiation. At the moment, the indications are that deliveries should have started early in 2011 but they will now start perhaps in 2014. I think it is 2014 which EADS is hoping for. If and when we can renegotiate this contract, Mr Jenkin, there will be a precise delivery schedule in the contract and, let me assure you, there will be liquidated damages if that new delivery schedule is not reached. We have not got to the point yet when we have finally agreed on that schedule, but we are talking about three years' delay, roughly. I cannot give it to you more precisely than that.
Q535 Mr Jenkin: What are the financial effects of the delay?
Mr Davies: We were talking about delays in another context. Delays always, I am afraid, mean increases in cost because fixed costs run on for longer and fixed costs in defence manufacture are always very heavy. Just as we were talking about with the carriers, there are obviously costs, but the issue is whether the costs can and should be borne by EADS or by others. Clearly EADS have a contractual obligation to us and we expect EADS to fulfil their contractual obligation and when our defence suppliers sign a fixed price contract with us we mean to hold them to it.
Q536 Mr Jenkin: Is this adding to cost pressures within the ten-year time horizon, or is the delay actually helping us close the gap?
Mr Davies: It is a good question, but actually, as you will see from the major projects report which has been before us, and I only got it myself yesterday, that is included there as part of our cost overruns because we have made a provision in our accounts, as you would expect.
Q537 Mr Jenkin: Of £653 million.
Mr Davies: Correct.
Q538 Mr Jenkin: Where are we going to get that money from?
Mr Davies: Mr Jenkin, I cannot answer that question until I know whether we are going to succeed on a renegotiation or not. I am not going to ask anybody for money unless I know that we are going to succeed in renegotiation. I do not know at the present time whether we are going to succeed in renegotiation or not but, I repeat, we are making a prudential provision there. It is not in any way a commitment to spend that money or give that money to EADS, let me assure you of that.
Q539 Mr Jenkin: When do you think the negotiations will be the concluded?
Mr Davies: They must be concluded fairly soon. I originally said that I wanted to try to drive our colleagues forward, and I wanted to have agreement on the main terms by end of this year. We are clearly not going to achieve that, but we are asking for a response to our latest initiative by 31 December.
Q540 Mr Jenkin: So you are trying to push this forward.
Mr Davies: Yes, we are trying to push this forward with all due despatch, Mr Jenkin.
Q541 Mr Jenkin: DCDS (Capability): how are we coping without this capability for an extra three years? I remark that the air bridge to Afghanistan has been described to us extremely fragile.
Vice Admiral Lambert: It is extremely fragile. The current operation is it is remaining at the top of our priority. We are looking at how we can reduce that risk to the air bridge and we are considering whether we need in the interim to take on additional aircraft to reduce that risk.
Q542 Mr Jenkin: Has a firm decision been made about a C17?
Vice Admiral Lambert: We are still considering that as an option.
Q543 Mr Jenkin: When will that decision be made, Minister?
Mr Davies: I think, Mr Jenkin, I must ask you to wait for the Secretary of State's announcement this afternoon.
Q544 Chairman: I think that is a fair enough answer. Is there a risk that a decision on A400M might be delayed by election purdah in this country?
Mr Davies: Mr Arbuthnot, if you are asking me to speculate on the date of the election, I clearly cannot do that.
Q545 Chairman: I am not really.
Mr Davies: The Prime Minister could ask the Queen for dissolution this afternoon, I have no idea. I am hoping that we will resolve this matter very shortly. When I say "very shortly", it means within a matter of weeks, not in a matter of months, certainly not in a matter of years.
Chairman: That gives a helpful indication,
Q546 Robert Key: It seems to me, Minister, that, rather like FRES, Smart Procurement is dead when it comes to the A400M. One of the great tenets of Smart Procurement was that there should be a not-to-exceed level, and today's report from the NAO, Appendix 3, figure 4, points out that the risk differential, that is the difference between the budgeted cost and the highest not-to-exceed cost, is in fact six times what it should have been. That is a 600% overrun cost here. Is that actually right?
General Sir Kevin O'Donoghue: A big chunk of that is foreign exchange. It is very, very difficult to establish at the start of a project what the value of sterling might be three, four, five, six years out. So a big chunk is foreign exchange.
Q547 Robert Key: How big?
General Sir Kevin O'Donoghue: I do not know.
Q548 Robert Key: Ten per cent, 20%?
General Sir Kevin O'Donoghue: No.
Mr Davies: Quite a large amount. What I can tell you is that for the last couple of years foreign exchange losses have cost us about £300 million. It is quite a significant factor.
General Sir Kevin O'Donoghue: If I may go on, there is a chunk of foreign exchange, a chunk is inflation because as projects move out, of course, inflation bites, and the third chunk is cost of capital. So that is the basic reason for the increase. I have to say that Smart Procurement is very difficult in an international collaborative project.
Q549 Robert Key: So European collaboration is dead then?
General Sir Kevin O'Donoghue: No, I am just saying it is difficult. I said last time, you have to have collaborative projects because you will never be able to afford the equipment you need unless you collaborate with partners. My preference is for a bilateral project rather than a seven or eight-way project, which is always a challenge.
Q550 Robert Key: Bilateral as in buying more C17s?
General Sir Kevin O'Donoghue: No, or with our European partners, whichever route you go down. I am talking in general here.
Q551 Robert Key: Which would you prefer?
General Sir Kevin O'Donoghue: I would prefer a bilateral project with whoever is going to share the non-recurring costs and get greater numbers and, therefore, the unit prices goes down.
Robert Key: There we are, Chairman: Typhoon, A400M. I think that is probably the end of that, do you not?
Chairman: Back to the carriers, just when you thought you were home-free.
Q552 Mr Borrow: A lot of the carrier stuff we have talked about. You mentioned earlier that you took the opportunity of slipping the carrier programme backwards to tie in with the availability of the JSF and, coincidentally, that enabled you to save a bit of money upfront.
Mr Davies: It was the other way round, to be quite honest, Mr Borrow. We needed to make some savings in the immediate future - we needed to find some money, we needed to find some room - and looking at the defence capability costs of any of the alternatives which were before me, they all had costs, they all had undesirable features. It occurred to me immediately, or pretty much immediately, that we could delay the carriers without a loss of capability because the aircraft that we were going to use on the carriers would not be available. So it was the other way round. It was driven, and I admit it was driven. The impulse was the need to save money and to make sure that we were spending money most effectively in support of defence capability.
Q553 Mr Borrow: Lancashire aerospace workers are very pleased with the Government's commitment to the carrier programme, because there would not be any point in buying carriers if you did not have anything to fly off them.
Mr Davies: Precisely.
Q554 Mr Borrow: The question I then ask is: how many JSFs do you intend to buy?
Mr Davies: Up to 150.
Q555 Mr Borrow: At what point do you think you will be ready to commit yourself to the programme?
Mr Davies: First of all, we have got to
go through the test and evaluation phase.
We have bought two aircraft, three aircraft. Is it two rather than three? I am told three on one side, two on the
other, but, anyway, we are talking about three aircraft. I think we have actually purchased two, but
we need them for the test and evaluation work.
We are going to fly them. Our
pilots will be flying them in conjunction with the American pilots, and the
Americans will have, I do not know, 15 aircraft in a test and evaluation
process, and that is going to go on for a couple of years. The idea is to get to know the aircraft
intimately, to see what its strengths and weaknesses are, to see what
modifications might be introduced, and only then will Lockheed Martin design the
final production aircraft, and then we will order, I hope, the production of
aircraft at the end of this process. Let
us say we order them in 2014: the earliest we could get them would be
2016. Hence, 2016 I have already
referred to. We are totally committed to
this programme, Mr Borrow, and, as you rightly say, a lot of people in
Q556 Mr Borrow: Our biggest defence company have also got a lot at stake, because they are currently investing £800 million in the factory to make our bit of the JSF. Obviously that will be undermined if we did not go ahead with the order.
Mr Davies: Quite right. This is a wonderful piece of good news for British industry. I think there are reasonable grounds for expecting that the British content in this programme will be between ten and 15%. That is enormous. Probably Lockheed Martin will end up building 3,000 aircraft. Can you imagine, 3,000 aircraft, make an estimate if you will: something less than $100 million, but not much less, per aircraft. You can see the scale of this programme. We are talking perhaps a quarter of a trillion dollar programme, and if we had, in this country, ten or 15% of it, that is an enormously important factor for the very, very high skill, high-tech industries which are focused on aerospace and military aerospace.
Q557 Mr Borrow: In terms of this being ready to come in 2016, are you confident that our existing carriers and aircraft will be capable of operating until we are ready to phase in the new carriers?
Mr Davies: Let me get you a professional naval opinion on that question.
Vice Admiral Lambert: The aircraft are capable of flying, operating until at least the end of the next decade, so, yes.
Q558 Chairman: And the carriers?
Vice Admiral Lambert: The carrier programme: we are still looking at the fine detail of that.
Q559 Chairman: That sounds rather depressingly like a, no, you are not confident that the existing aircraft carriers will be capable of operating until the end of the decade.
Vice Admiral Lambert: It is still part of work that we are conducting at the moment.
Q560 Chairman: So you do not know the answer.
Vice Admiral Lambert: No, it is still part of work we are conducting.
Q561 Chairman: So there might be a gap.
Vice Admiral Lambert: At the moment I cannot say whether there is gap or not; it is still part of work we are undertaking.
Mr Davies: We have got one refit.
Q562 Linda Gilroy: When we spoke about the Illustrious carrying on before, we were told that there would not be any additional cost because it was due for a maintenance refit anyway.
Mr Davies: That is right.
Q563 Linda Gilroy: Is that under reconsideration?
Mr Davies: No.
Q564 Linda Gilroy: So what would be the problem about continuing?
Vice Admiral Lambert: As I said, the full capability planned for Carrier Strike is we are making sure, as we plot out the capabilities right across the piece, that there is not going to be a gap, but I cannot give that assurance at the moment.
Q565 Chairman: Minister, do you remember telling this Committee that there was going to be no defence cost to the country whatever by delaying the carriers?
Mr Davies: Yes, I do, and I said "defence capability cost". I remember we had an exchange about that. I did not say "financial cost". I would have recognised if we had a financial cost, but there is no defence capability cost.
Q566 Chairman: What about this gap that we have just heard about?
Mr Davies: You must not interpret Admiral Lambert's remarks as being to say that there is going to be a gap. He has not completed the procedures to make sure that there is not going to be a gap. As Mrs Gilroy has just said, before we had an issue about delaying the new Carrier Programme, we had already factored in a refit for Illustrious, which takes forward capability for several years, and so I am confident that we will be able to reassure you once Admiral Lambert has completed his studies, but, as a cautious individual, until he has completed his study he does not want to give you a more definite response. Is that correct?
Vice Admiral Lambert: That is absolutely right. It is the first time we have looked at all the lines of development for both the current carrier programme and the future carrier programme, and within that there is a complicated programme of transition between different aircraft, different ships, and until we have competed that work I would not like to say that I can guarantee there would be no gap. It is working away at the moment.
Mr Davies: The purpose of conducting these studies is, by definition, that until you have completed them you cannot give a certificate saying, "I am certain that there will not be a gap."
Q567 Chairman: Do you not think this is something you ought to have considered before the decision to delay the carriers was taken?
Vice Admiral Lambert: Yes, but---
Q568 Chairman: Did you not consider it?
Vice Admiral Lambert: Yes, we did, but, again, as I said, we are looking at all the lines of development and until that work is complete I cannot give that assurance.
Q569 Chairman: Can you?
Mr Davies: Chairman, I have already said that I believe that the Illustrious refit, which is already in the programme, or was in the programme (it was already provided for financially), will carry forward Illustrious' life for quite a number of years, and that will take us, certainly, beyond the time at which we are expecting to bring the new carriers into service.
Q570 Chairman: You have just heard the Admiral unable to give that assurance.
Mr Davies: He has not completed his procedures, but I am reasonably confident that will happen.
Q571 Chairman: Why should you be if he is not?
Mr Davies: I do not think he is unconfident, but he has not completed his procedures. It is a little bit like a doctor who will not issue a death certificate until he has carried out an autopsy even though you may have a pretty good guess as to why the patient died.
Q572 Mr Crausby: If there is a gap, will you rethink the programme? I know you do not want to issue a death certificate until you know why the patient has died, but what a doctor is there to do is prevent the patient from dying.
Mr Davies: Absolutely.
Q573 Mr Crausby: So it seems to me sensible that you would want to prevent the gap.
Vice Admiral Lambert: If at the end of our analysis we find that there is a gap, we will look to see what it is, what the risks are and whether we can cover those risks. Our premise is that we want to ensure that capability is maintained throughout that transitional period.
Q574 Chairman: Why on earth did you not complete this analysis before making a decision to delay the carriers?
Vice Admiral Lambert: The initial analysis was done. What I am saying at the moment is we are doing some deeper analysis to ensure that I can give that reassurance that across all the lines of development there are no risks which are likely to come good that could cause a gap, and that is working away.
Q575 Chairman: What was the purpose of the initial analysis?
Vice Admiral Lambert: The initial analysis will look at individual programmes.
Q576 Chairman: What was the purpose of the initial analysis that gave you some confidence of which you are now not able to assure the Committee?
Vice Admiral Lambert: The initial analysis will look just at single programmes. What we are doing here is looking at a complicated transition of a number of programmes across a whole series of lines of development, and it is normal work that we would do with a complicated programme.
Q577 Chairman: It is perfectly normal, is it, to have a gap in capability of something as large as aircraft carriers?
Vice Admiral Lambert: No, it is not, but I have said before our normal process, once we have made any changes, is to go back and revisit the decisions to make sure that we have not missed anything out, and that process is being undertaken at the moment.
Q578 Chairman: But your default position, then, is that you think you may have missed something out, because otherwise you would say, "We are just double checking this, but, no, we can give you that confident assurance." But you have not said that.
Vice Admiral Lambert: I have said that we are conducting the work at the moment.
Mr Davies: I think it does fall into the category of, "We are just double-checking this." Is that not the case?
Chairman: Perhaps you could conduct your discussions back in the Ministry.
Q579 Mr Hamilton: The only point I make - and I am looking at the route programme here, the schedule that is in there (and Linda asked the question) - is that apart from the gap that may or may not happen, there will also be a cost implication if that is delayed again. Was that considered when you decided to knock back the carrier again?
Vice Admiral Lambert: If there is a risk, we will see what we need to do to cover that risk. There may be a cost implication. There are other ways of covering risks other than using finance.
Q580 Linda Gilroy: You have referred to the defence lines of development again, and it is well-known what these headings are, they are in the Report. Is it possible for you, either now or in a note to the Committee, to give an idea of how many of the defence lines of development are at risk in relation to the future carrier programme and which ones they are?
Vice Admiral Lambert: We have a senior responsible owner who is managing all the risk across all the lines and the risks change daily. He is at the moment conducting a fundamental analysis to make sure that there is not going to be any gap during the transition stage.
Q581 Mr Havard: The capability gap is not the fact that you will not have the capability, but how you manage the capability might change. Are we going to see a lot of sailors having a lot more shore leave; are we going to see a lot less fuel burned; are these things just not going to be sweated as assets and used out at sea? Is that what we are going to see? We are going to see the existing carriers parked up a little bit in order to extend their life. Is that where we are going?
Vice Admiral Lambert: I did not say that there is a problem with the carrier life. All I am saying is that we are conducting fundamental analysis.
Q582 Mr Havard: These are the other ways you can avoid it. You do not spend the money because you just do not send the ships out.
Vice Admiral Lambert: There are lots of ways of covering risks if there are risks across a whole complicated transitional programme.
Q583 Chairman: How much are these carriers going to cost?
Mr Davies: About £5.2 billion for both of them.
Q584 Mr Havard: We are having two, are we?
Mr Davies: Only two, yes.
Q585 Mr Havard: We are having two?
Mr Davies: Of course we are.
Q586 Mr Havard: That is all right then. There was a suggestion on the wireless this morning we might only be getting one. I just wanted to check we are still getting two.
Mr Davies: That is complete rubbish, Mr Havard. I do not know where that came from.
Q587 Mr Havard: The trusty old BBC.
Mr Davies: In defence of the Government, there are an amazing number of false stories circulating all the time. It is just part of the world we live in.
Chairman: We will move on to the MARS programme.
Q588 Linda Gilroy: I asked General Sir Kevin about this last week and at that point looking at the issue about the MoD having an exemption to operate single hulled tankers after 2010, but, of course, ports are not exempt and many will ban visits by single hulled tankers. So, Minister, are you able to give us a picture of how this could restrict the continued use of the single hulled vessels that we have got?
Mr Davies: We have no such indications at the present time. As you said, we have an exemption from the ban because they are military tankers. Do remember that we have - and I know you know this - two double hulled militarily specified naval tankers (the Wave Class tankers) and those could always be used in circumstances in which it was absolutely necessary to have a double hulled tanker. We are addressing this need, this requirement. I know you are aware that I cancelled the original competition. I simply felt that the original design was over specified. That is to say, not over specified but very fully specified and we did not quite need the full capabilities and the amount of money that I was being told we would have to spend on buying six tankers at that specification seemed to me to be excessive in terms of our priorities. So as part of the general process of looking through the Defence Equipment Programme and having to take some difficult decisions I took that one, but in no sense did I say we should not have the capability. I just said we did not want to have quite such expensive capability. What we have agreed subsequently is that we should do what I have said to you I would like to do, and will do increasingly in these days, which is to have a competitive dialogue with industry, and we have invited industry to make proposals to us, not just for new-build but for charter, for second-hand sale, all kinds of possibilities that might exist, and we have got quite a lot of responses to that already and those responses are being assessed and I hope that we will be able to reach a conclusion with a couple of months.
Q589 Linda Gilroy: I suppose, from what you have just said, you would not be able to give me an in-service date for the new procurement and, therefore, a timescale for how long you may have to manage the issue?
Mr Davies: No, I am afraid not. The consequence of going this way round - I have explained the reasons why I prefer to go this way round (saying to industry, "What can you offer?") - is that you will reduce the risk of a bad deal, you get a much better knowledge of the situation, you do not miss opportunities you otherwise might miss, but you do not start off and specify, "I want this capability on exactly that particular date." Therefore, I cannot, in advance of commercial discussions, tell you what the in-service date will be.
Q590 Linda Gilroy: Astute was part of the Short-term Equipment Programme. The NAO is now telling us that there will be a period between 2015 and 2021 when there will be a shortfall in submarine availability against the Department's stated requirement. What is going to be the consequence of that shortfall?
Mr Davies: I do not think it is a very serious gap. I hope it will not be. We will have to see how the rest of the programme develops, but I am hopeful. There is always a big experience curve effect in these matters, you know. The first of class has problems - there always will be unanticipated difficulties because you have never built that particular type before - and then the second of class, the third of class becomes easier and cheaper, less delays, and so on and so forth, but remember that we need seven.
Q591 Linda Gilroy: I think what I am more interested in, in any event, is how it impacts on the skills base. When we have looked into this before it has been an issue of saying that there needs to be a 22-month drumbeat in order to maintain the skills base, which is pretty fragile. Therefore, are there consequences to the skills base and what is the health of the skills base at the moment?
Mr Davies: I think it is much better than it was. You are absolutely right, the drumbeat is important. I am advised that you really need a drumbeat between 22 and 26 months, and that is what we are going for. The skills base is being improved the whole time. The skills base deteriorated, Mrs Gilroy, because there was a gap between the build of the last Vanguard class and the first Astute class, and what happens then is people go away and they go and get other jobs, and so on and so forth.
Q592 Linda Gilroy: That is the historic fragility. I am interested in the ongoing fragility of the skills base and whether extending the drumbeat is going to put that under even greater pressure?
Mr Davies: All I can say is I am very conscious of that, and we will not do anything which threatens the skills base. It is immensely important to us; it is an immense national asset. We need to build the Astute class, we then need to build a successor class to replace the Vanguard and so there must be a constant availability of, hopefully, a steadily improving skills base in Barrow-in-Furness.
Q593 Mr Jenkins: Minister, what would your reaction be to a statement that foreign suppliers have a distinct advantage over British suppliers, insofar as they have less visits from the suits and uniforms from your Department, who constantly occupy their time changing conditions and appear to infuriate some of the British suppliers but actually add cost to any procurement? Would you say that you will look at how many visits they make to British suppliers as opposed to foreign suppliers and maybe see if there are any implications of your staff not having enough to do?
Mr Davies: I am going to give General Sir Kevin an opportunity to answer this in a moment, because, of course, all these people you are referring to work for him. I encourage contact between the IPTs and the military in general and industry. I think it is important for both sides; it is educational for both sides. It is very important. I think it is an advantage for British industry. British industry have more constant contact with their customers and with the requirement setters in the Ministry of Defence, because they then know more about our requirements and there is an exchange of information which is useful to both parties. I encourage that. I encourage our people to go to international exhibitions, for example, when we have them in London, conveniently located, so as to make contact with industry and get a feeling of what is going on in industry, and also to hear from industry what particular new capabilities might be available, what new techniques, what new technologies. I do not read anything sinister or damaging into these contacts and I am surprised you ask the question that particular way round, but I am going to ask General Sir Kevin answer to it because I think you are talking about people largely in his IPTs.
Q594 Chairman: I think you had the opportunity, did you not, Sir Kevin, a couple of weeks ago to answer that question? I think you did answer it.
General Sir Kevin O'Donoghue: Yes.
Chairman: I think you did. Are there any further questions? There are no further questions. Gentlemen, thank you very much indeed for another very interesting session on defence equipment. We will look forward to the statement in the House of Commons this afternoon.