CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 99-ivHouse 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 Mike Hancock
Mr Dai Havard
Mr Bernard Jenkin
Mr Brian Jenkins
Robert Key
Mrs Madeleine Moon
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Witnesses: Mr Bernard Gray, author of Review of Acquisition for the Secretary of State for Defence, and Mr Iain Evans, Chairman, LEK Consulting, gave evidence.
Q595 Chairman: Good morning and welcome to the Defence Committee. We have been taking a lot of evidence about the state of equipment acquisition and, specifically, about your report as well, but I would like to begin, if I may, by asking you to introduce yourselves, if you would.
Mr Gray: My name is Bernard Gray and I am, in my day job, the Chairman of two companies, TSL Education, which is an educational publisher, and Group GTI, which is a graduate recruitment business, and I have been running TSL for about five years and GTI over the last few months. In my non-day job, I have worked over the course of the last 12 months on this Review of Acquisition at the behest of John Hutton.
Mr Evans: My name is Iain Evans. I am Chairman of LEK Consulting, which is a corporate strategy consulting firm. We worked with Bernard on this report, providing him with the analytic support from the team that I ran, investigating all the data at the Ministry.
Q596 Chairman: Were you paid for your work?
Mr Gray: No, barring travel and accommodation expenses, where appropriate.
Q597 Chairman: Were you employed by the Ministry of Defence?
Mr Gray: No.
Q598 Chairman: But, after the Report was produced, you worked with the Ministry of Defence to bring some conclusions to it?
Mr Gray: Yes.
Q599 Chairman: When did you stop doing that?
Mr Gray: In December.
Q600 Chairman: At the same time, you took up some form of position advising the Conservative Party, did you? What was that about?
Mr Gray: I was asked in December by the Shadow Chief Secretary to form part of also a pro bono board to advise the Opposition on efficiency in Government across the board, not specifically in relation to the Ministry of Defence.
Q601 Chairman: We will have various questions to ask you about whether that diminishes the value of your report or whether it could be perceived to do so. Are you a member of the Conservative Party?
Mr Gray: No, I am not a member of any party.
Q602 Chairman: Do you think it does diminish the value of your report?
Mr Gray: Well, I think that the facts in the Report speak for themselves, so it is a piece of objective analysis which I did not produce for party-political reasons in one direction or the other under either set of circumstances. I was asked to do a piece of work by John Hutton, I did it to the best of my ability and you see the results in front of you. I have been asked to do a piece of work by Philip Hammond, which has not yet substantively started, and I have to judge that in combination with a group of other people who have been asked to do that work when we come to see the results of that.
Q603 Chairman: I want to cover this issue of the politics of it to the extent that the Committee wants to right at the beginning to get this out of the way, so are there any other questions that the Committee wants to ask about this issue? No. Now, this may seem an unfair question, but, if you had to identify the key nugget of your report, what would it be?
Mr Gray: Well, interestingly, when we went round taking evidence, at a very early session, and I am reluctant to say it, the Treasury actually offered us an observation which proved quite accurate. They said that they thought there were three key weaknesses inside the Ministry of Defence. The first one was that the programme was substantially out of balance, the second was that there was a lack of clarity and leadership within the Ministry of Defence in Main Building, particularly at the head of the organisation, that who gets to decide who is accountable, who is responsible and all of that sort of thing was unclear, and the third key component was that there were insufficient skills inside of DE&S to discharge the job once they had been given it. I think actually, to give credit where it is due, that is a pretty accurate summary of the key points.
Q604 Chairman: What do you mean or what did they mean by "out of balance"? How do you balance things?
Mr Gray: Well, as you can see from a number of the graphs inside the report, the proposed equipment acquisition by the Ministry of Defence is substantially in excess of any likely projected future funding, so I do not know any more than anybody else does what exactly the Ministry of Defence's settlement will be in the next CSR Round and beyond that, but I find it hard to imagine that it would be generous enough to fund what the Ministry of Defence currently says its equipment programme is going to cost, and that current estimate itself, if history is any guide, is likely to be an underestimate of what the outturn actually is.
Q605 Chairman: So essentially "out of balance" means substantially under-funded?
Mr Gray: Or excessive demand, yes.
Q606 Chairman: We will come on to that later. The next issue was lack of clarity of leadership. Does that really mean lack of clarity of decision-making?
Mr Gray: I think it is both actually.
Q607 Chairman: And insufficient skills?
Mr Gray: Yes.
Q608 Chairman: Now, when the Chief of Defence Materiel was in front of us, and I have to say that it caused me at any rate some difficulty, he said that he did not agree with at least some of your figures.
Mr Gray: Yes.
Q609 Chairman: What, can you tell us, has been done to resolve those disagreements?
Mr Gray: Well, like you, I was surprised by what he, Dr Tyler, and, to a certain extent, Guy Lester said to you. The process that we went through was two-fold or two-pronged, if you like. Iain and I spent the first five months of the year interviewing some 200 people from a variety of different areas, including lots of people inside the Ministry of Defence, people in industry, some of our allies, some people in academia and so on and so forth. At the same time, an LEK team worked extensively with the Ministry of Defence in both Main Building and in Abbey Wood abstracting the data from MoD systems in order to allow us to analyse, statistically speaking, what was going on with the programme, so about five or six people worked on that. We then had a whole variety of meetings, synthesising these two outcomes, in April and May and presented the draft output of those findings to the Department, including to the three individuals who came and gave evidence to you in early June. We then had a significant amount backward and forward about helping people understand things or slight corrections or, in a number of cases, "Would you mind aggregating this, that or the other together?" either for national security or commercial confidentiality reasons so that one could not entirely distinguish exactly which programme one was talking about on a couple of occasions. As far as we are concerned, any questions we were asked and any issues that were raised were answered in that process, which was substantially complete by early July and, to our knowledge, the people who are in charge of numbers inside of Abbey Wood and in MoD Main Building are in agreement with us about our numbers.
Q610 Chairman: When you say "to our knowledge", what is the meaning of that phrase? Do you mean that you know that they are substantially in agreement or, as far as you know, they are substantially in agreement?
Mr Gray: What I mean is that we held extensive dialogue with them and any issues they raised with us we thrashed out to resolution so that there were no unaddressed questions, so whether they had something in the back of their minds that they never raised with us, I cannot speak to, but, as far as I know, we answered all their questions.
Q611 Chairman: And are you satisfied that you had access to the data that you needed and to the people that you needed in order to complete your report?
Mr Gray: Yes. We had to push hard in the first two or three months where there was reluctance to give us that access, but we did get it, and there were one or two points made by Dr Tyler that I would like to address at some point in this discussion.
Q612 Chairman: Can you identify those by headline now?
Mr Gray: Yes, he said that we had picked an unrepresentatively small sample of projects, for example.
Q613 Chairman: Fine, we can address that. Anything else?
Mr Gray: And that we had deliberately distorted for effect.
Q614 Mr Hancock: Distorted what?
Mr Gray: That we had distorted the data for effect, and the point made separately by Guy Lester about, what we would tend to refer to as, the 'frictional cost', ie, how much does it cost us on this programme and so on.
Q615 Chairman: So those are the three headline points, and we can come on to those later. Mr Evans, do feel free to join in, if you want to. So you had access to the people, you had access to the data, you gave your report in draft to Abbey Wood and to the Ministry of Defence in June and they had the opportunity to pore over it and to say, "I agree" or "disagree" here or there and, so far as you know, they did not draw to your attention, at any rate, any agreements or disagreements?
Mr Gray: There were a number of detailed points which we thrashed through and resolved, some things where they said, "It's not quite like that", and one or two bits they asked us to aggregate together, so there was a little bit of, as it were, editorial work, but nothing substantive, and that process of dialogue took place over a month which, we thought, pretty well completely covered off any outstanding issues they might have about what we had done.
Q616 Chairman: Did you speak to Dr Tyler about it?
Mr Gray: We did not speak to Dr Tyler in that process because we were directed to talk to the Chief of Defence Materiel.
Q617 Mr Hancock: Were you accused of going further than you should have done?
Mr Gray: I am sorry?
Q618 Mr Hancock: Were you accused at any time of going beyond your brief?
Mr Gray: No.
Q619 Mr Hancock: Were you welcome?
Mr Gray: In some places and not others.
Q620 Mr Hancock: Was there a resistance to you?
Mr Gray: In some places.
Mr Evans: There were two major pieces
of analysis that were undertaken, one in relation to the equipment programme
where the data, generally speaking, rests at Main Building, and we worked
directly with Defence Capability and his designated junior officer to make sure
that we interpreted everything in the equipment programme correctly, and they
signed off on all our conclusions on the equipment programme. As a separate exercise that happened at Abbey
Wood, which relates principally to the management information systems at Abbey
Wood, the most important of which is a system called CMIS where all the big
projects are present, we went through every single one of those major projects
in co-operation with the individuals down there who were designated to make
sure that we interpreted the material correctly. We spent some time agreeing with them which
projects were appropriate to include in the analysis and which were not. We gave them the final list on June 2 and
they did not have any questions beyond that and, as far as we are concerned, we
are agreed with the designated officials who are empowered to check that our
work was correct both at
Q621 Chairman: Did any of those questions include the suggestion that there was an unrepresentatively small sample of projects that had been taken?
Mr Evans: No, it was never raised with us as an issue at all at any point, and it is manifestly untrue as well.
Q622 Chairman: Did any of those questions suggest that you had deliberately distorted the data for effect?
Mr Evans: No.
Q623 Mr Hancock: But could you have done?
Mr Gray: Well, when we came to that point, it was about the methodology about how we ended up with the sample that we ended up with, which will basically answer the question no.
Q624 Mr Hancock: But, when you are telling us that the Ministry of Defence gave you people to enable you to interpret the data correctly, to me that means to interpret it to their way of thinking. Were there disputes over the way in which some of this data was relayed to you?
Mr Evans: Yes.
Q625 Mr Hancock: And did your interpretation vary distinctly from what the interpreter from the MoD was suggesting to you that you should read into it?
Mr Evans: These are complicated projects and there is a lot going on, there are lots of moving parts, so our general stance throughout was, if they ever did raise an objection to our including a project, we would tend to exclude it.
Q626 Mr Hancock: Why?
Mr Evans: Because the analysis was going to be powerful enough without it and there was no need to have an argument about something which was not going to be material to the answer.
Mr Gray: If anything, the flattery in the numbers favours the Ministry of Defence because, where there was a grey area, to use a pun, we gave them the benefit of the doubt.
Q627 Robert Key: Mr Gray, you said that in some areas you were made welcome and in some less welcome. Where were you made welcome?
Mr Gray: Well, I think that inside Main Building, particularly at medium and junior levels, there is quite a lot of recognition of a need for change, so, when you get to more senior levels, I think people become a bit more concerned about the implications of all of this. One very senior military officer said to us, for example, that, what is referred to as the 'second floor' which is the programming community, the people who actually put the programme together were very keen for change because they could see the whole system grinding to a halt under current circumstances and something was needed to catalyse that, so groups like that, for example, are keen for change. Other groups, which one might view as vested interests with something to lose as a result of change happening, were less welcoming.
Q628 Robert Key: And they were the more senior officials and officers?
Mr Gray: The more senior officials and officers had something more of a sceptical view about whether there was a problem, and it is natural enough, I suppose, if you have somebody from the outside coming and poking around inside your organisation and that is often an unwelcome thing under any circumstances.
Q629 Robert
Key: Was there a geographical difference as
well? For example, were you more welcome
at
Mr Evans: I would say not. If I might add because I do these sorts of studies all the time in my professional life, we were pretty well welcome, I would say. The feelings inside the Department both at Main Building and down at DE&S, an awful lot of people, the vast majority of people, care passionately and deeply about these processes and want to get them right and were well aware that things were not going right and gave us very considerable help in guiding us and helping us. It is true, they were more sceptical at more senior levels, but, I have to say, even there, compared to what I have seen at major corporations, it was a pretty welcoming and friendly environment in which to do our analysis, which was complicated and difficult, and we could not have done it properly without the level of support we got which was widespread, and many of the ideas in our report are ones which came up from the bottom-up from people who know the system as part of their everyday lives.
Q630 Mrs Moon: You have painted a very different picture, the two of you. Mr Gray, you have painted a picture of almost antagonism and, Mr Evans, you have painted a picture that it is difficult, that change is painful and that you got a positive response.
Mr Gray: I think the distinction I would probably draw here is that in the phase of going round acquiring the data, I think what Iain says is true. If you then look at the period after which emerging conclusions started to come out about what one might do about this, then I think that situation was somewhat different. If I think, Iain, about one senior meeting we attended in mid-June, that was not the most welcoming meeting I have ever been in.
Mr Evans: That is absolutely true. I do not think there is a difference of opinion here. If you go down into all the many, many people that went into the extreme detail of each of the projects, in general that process was as good as I have seen in terms of co-operation. As the more controversial or contentious items that we came up with in the Report were discussed at more senior levels, naturally speaking, there was some more scepticism and resistance in relation to that, but, if you were to ask me in broad terms were we doing this in the face of opposition, no, we were not. We had high levels of co-operation throughout the organisation and that has helped make sure that the analysis is robust and supported by many people in the organisation. The fact that, as Bernard correctly says, there is a more sceptical view at the more senior level and as the report developed, that is also true, but I would not say that is a particularly unusual event either.
Q631 Mrs Moon: I do think that we need to be aware of what you said because what you are saying, Mr Evans, paints a very different picture from what Mr Gray has said, certainly in my mind. One of the things, Mr Gray, that you said was that you had particular opposition from those who had things to lose. Who were those people and what was it that they had to lose?
Mr Gray: Well, the
Q632 Mrs Moon: And who were they?
Mr Gray: Sorry?
Q633 Mrs Moon: Who are you referring to?
Mr Gray: Well, I do not really want to turn it into an ad hominem observation on people, but we were proposing significant change inside DE&S, for example, and some of the dislike for what we recommended certainly came from senior levels in DE&S post the preparation of the draft report. There were other people inside, and essentially what we are proposing is a concentration of power within the Ministry of Defence to give power and accountability in tighter hands for the purposes of making effective decisions, and some of the groups who would thereby lose out, for example, some of the single Service Chiefs, were also unhappy with that in some regards.
Q634 Mr Jenkins: One of the questions I was thinking to ask I will try and elaborate slightly, but, when you referred to "they", you might be able to help us by saying who actually puts anything into the programme, where did this initiation start and who are the people to deliver it, to deliver it into the programme, not deliver it out of the programme? It is certainly not the defence industries. They cannot roll up and say, "I think we should put this in the programme". It might be the uniforms, it might be somebody in the Civil Service in the MoD, or it might be the political people, but who actually, do you think, takes the decision, "This should go into the programme" because that is where the problem starts, is it not?
Mr Gray: Well, there are a lot of people who attempt to get their finger into that pie, which does not help. The group specifically charged with the responsibility is what was the Equipment Capability Group and now, and they keep renaming everything, I think it is called the 'Capability Group' now which is run by Vice Admiral Lambert, who was here just before Christmas, so he is the senior officer responsible for that area and he has a team of a couple of people working for him who assemble the various different components of what goes in in generating requirements for the programme and will try to get programmes going, but there will be a lot of other people who attempt to influence that group and then the Defence Board above it about what should or should not go into the programme, and part of our proposal was to try and corral that process more effectively.
Q635 Mr Hancock: When you first started, you told us that you had been invited in by John Hutton to do this. This whole system had been creaking for a long, long time, so what was it that finally broke the camel's back which prompted him to bring you in? What was it that he was trying to sort out which had been allowed to go on for such a long time?
Mr Gray: Well, I do not know specifically, you would have to ask John. He did not say to me, "I've asked you in because of X", but, if I were guessing, he had only relatively recently been appointed Defence Secretary, a couple of months prior to asking me to come in, and the so-called equipment examination was going on which was potentially going to produce some unpalatable equipment choices, and obviously there had been longstanding comments by the NAO and this Committee and a whole variety of other people about the performance of the equipment programme and my sense of it, from talking to him, was, "I have asked to be Defence Secretary. I am going to make a good effort to try and sort this problem out while I am in office here".
Q636 Mr Crausby: The bottom line is that you concluded that the defence equipment plan is unaffordable, and you appear to believe that that is not as a result of recent problems with the economy, but has occurred over ten years since the Strategic Defence Review. You are saying that it has substantially overheated and is unaffordable on any projection of the budgets. Now, regardless of what John Hutton thought previously, what do they think now? Do Defence Equipment & Support accept your view and do Ministers accept your view?
Mr Gray: I do not think that there is a wholly singular view inside the Ministry of Defence about the answer to that question. There are a substantial number of people, and I believe that includes the Secretary of State and Lord Drayson, for example, who accept the analysis in this report and are intending to do something about it. There are other people, some of whom came and talked to you, who appear, as far as I can tell, to think that there is not a problem, so I do not think there is a single view inside the Ministry of Defence.
Q637 Mr Jenkin: Can I just ask for clarification, what is the problem? If it is a problem that the programme is too big for the budget, is that the main problem because a lot of people in the Ministry of Defence think that is the problem and that a lot of these other problems arise from that?
Mr Gray: Well, I think that the overheating of the problem arises from some of the structures they have got. As I outlined to the Chairman at the beginning, I would characterise it in three big buckets really, and I do not know whether you would agree, Iain, that the programme is itself overheated, that there is a dysfunctional decision-making process in Main Building for both resolving those issues and keeping the programme under control and then there is insufficient skill within DE&S to deliver the programme, and those three buckets are all important.
Q638 Mr Crausby: I get the impression that you do not think that the programme was unaffordable in 1998, but, as a result of organisational change in underlying behaviours, you have made the point that that is the reason why the programme has effectively become unaffordable over the period. I think the real question is: what should we do about that now? That, I think, is what this Committee should get down to, and you have made the point that you recommend the formation of an executive committee, so why do you think that another committee will make a real difference? Can you give us some insight into your recommendation on the formation of an executive committee of the Defence Board?
Mr Gray: Just to address the first
point that you made about the growth of the programme, my overall observation
would be that this process has happened for a long time and that the reason
that Defence Reviews are controversial is that it is the only mechanism the
system has for bringing the defence programme back under control, so what you
see is a Defence Review which brings the programme back to approximately the
right size periodically over the last 40 years and you will see a drift up in
the size of the programme to an unaffordable level, at which point we have a
Defence Review to bring it back into line, so it is true that it has got
further out of line since 1998, but that is just the most recent example of a
systemic problem. As far as what can be
done to bring it back under control is concerned, the set of proposals that we
have put forward, if you take the three buckets, let us have a Defence Review,
which is common ground, I think, but let us have a Defence Review which is
properly costed and then properly funded in order to bring the programme back
into line to address the first issue, and there are a variety of extra things
that one needs to do to make sure that the Ministry of Defence is not, in a
benign sort of way, lying to itself about the affordability of what it is
proposing in the future, and then let us set up a process that keeps that in
line, so that is the first set of recommendations around getting the programme
into some kind of balance. We then make
a set of proposals which are around reforming the way that the Ministry of
Defence Head Office makes decisions which tries to constrain people out of
wishing for everything, so the attempt to make the Permanent Secretary legally
responsible to Parliament for a balanced programme, for example, is an effort
on our part to force him to say no to people who want things in the Department
that the Department cannot afford, and there are a variety of mechanisms around
that. Now, they are, in some sense,
bureaucratic and legal frameworks for a bureaucratic and legal system. If this were a private company, you would
probably do something different, but they are the best effort that we can think
of which tries to put pressure on the Department not to wish things it cannot
afford in
Mr Evans: It appears controversial that we state that the programme is unaffordable, though it seems obvious to us that it is, but one of the things we have touched on here which we are much more explicit about in the Report which is a very important matter, I would suggest, for the Committee to focus on is the sort of behaviours in the system which will tend to force the programme out of balance and to become unaffordable over time. Well, this is not a political matter and in fact it is common and, if we talk to our allies, the French, the Americans and so on, they have very, very similar problems and the reason is the competing behaviours across the Services and the fact that things are rarely cancelled, so you get them into the programme, you will get them eventually, which creates a whole set of behaviours which mean that, with the best will in the world, with well-intentioned and smart people doing what they think is the best excuse for their jobs, nevertheless, it will tend to force the programme to be unaffordable. We analysed that, I think, quite carefully and correctly and quite a lot of negatives we put in place, for example the executive committee and also the change to the IAB, are designed to rein in that day-to-day behaviour to make sure that, once the Strategic Defence Review got the thing in balance, it would remain in balance, whereas all the incentives we could see both here and internationally will tend to force it out of balance and that is a very important matter to address.
Chairman: Mr Evans, I did not get the impression from this report that this was a problem which started in 1998. There were problems which I recognised very clearly from when it was all my fault.
Mr Jenkins: It was! That is where it all started, Chairman!
Q639 Mr Borrow: From the evidence session we had before Christmas, I got the impression that, in a way, the MoD think they can put so many particular projects in the programme because then, when they know the money that is available, they simply can delay and stretch out projects and, instead of that being an exceptional thing to do in particularly difficult circumstances, that was just the way you managed the process and also you can put things in the programme and then at a later date, because they are in the very early stages, you can suddenly say, "Well, we don't need to do that, but we've spent £X million on it and we can quietly drop it", and a lot of people did not know it was in the programme anyway, so it has just disappeared. Am I right in that assessment?
Mr Gray: Certainly they love these things mightily, so they rarely drop anything and, in fairness to them, they are often criticised if they do. If they have spent some money on a project which they later decide they do not need, then they get criticised pretty heavily for that and sometimes unfairly, I think, but certainly the behaviour of putting things in the programme and slowing everything down is endemic and it is expensive and they do not, systematically at least, understand how much that actually costs them. If you went and talked to any large-scale capital contracting organisation and said, "Suppose I did the same project over an extra 25% of time, would that cost me any money?" they would look straight at you and say, "Of course it will". The Ministry of Defence appears to believe in quite large quarters that this thing does not cost them significant money and they certainly do not make any effort to cost that, yet in fact it does cost them significant money. For example, somebody asked before Christmas ----
Q640 Mr Jenkin: Carrier?
Mr Gray: Well, certainly Carrier was a big debate, but somebody asked about A400M and the MinDE&S said, "Well, of course it's going to cost more money", so narrowly, when you look at an individual project which is going to be delayed by a period of time, you can see it, but they appear to believe that a rescheduling of the problem overall to slow everything down does not cost them serious money when in fact it does.
Q641 Chairman: You said you wanted to address the issue of frictional costs, which was raised in front of us before. How did you want to address that?
Mr Gray: Well, Guy Lester said that he intuitively felt that our number was too high in his evidence. I am not one for finance by intuition myself, but, in fairness to Guy, he made known to us his objection to our conclusion in the course of our work, so he had raised that issue with us. The way we approached this was to say that nobody before has tried to produce any estimate of the cost of this behaviour and it is difficult and judgmental to form an accurate view about exactly what all of that delay costs because many of the data do not exist, but we did try to do our best to measure how much this was costing and, if I can just refer to my notes about how we did that ----
Q642 Chairman: It is 7.71.
Mr Gray: Forgive me, I have just drawn out some separate data. To take the largest bucket, which is the direct, what we call, 'unproductive programme costs', what we did was we took the largest sample where we had complete data which, as it turns out in this case, was 29 projects and mapped the degree of delay versus the degree of cost increase and we found a statistical correlation for that increase and we measured that, which showed that, broadly speaking, it cost about 1/2% of the total programme cost per month of delay of the programme and, if you then do the maths from the NAO which says that basically the programme slips by about 21/2 months a year and that the approved programme is of the order of £70 billion, it turns out that that component has a central annual cost overrun of about £875 million. Now, there will be a variety of reasons for the delay. Some of that will be a genuine technical difficulty that Dr Tyler points to, but some of it will be deliberately slowing things down because they do not have enough money in any individual year to do the amount of work that they have proposed to do, and some of it will be as a result of the system deliberately undercosting programmes in the first place, so again running into a cash constraint. That is the example of the first item in our list where we have then put in a range of between £500 million and £1.2 billion per year in cost for that component. Now, Guy does not like our methodology for that, but then he has not produced another one, and I think our answer to that would be, as it were, in the progress of science in this. We have put the first estimate that anybody has ever tried to put on the table to try and capture the costs of the delay in the system because it is only when you measure things that people start paying attention to them. I am sure that it would repay further work to try and refine this and we would be interested to participate in a debate which did that, but we think that the frictional cost estimate components that we have built up in the way I have just described is a statistically valid approach, and the key point is that, whatever the precise number is, it is a large number of hundreds of millions of pounds at the least which is going to non-productive work inside the Ministry of Defence as a result of the way they organise themselves.
Q643 Mr Crausby: You focus in your report on the need for strong programme and financial management skills, and there are some who would argue that you have placed insufficient emphasis on defence expertise. Do you accept that that is a valid criticism? It is a complex question that current operations will always have an effect on, so how do you expect the MoD to deal with this question of strong financial management skills and, at the same time, be prepared to fight a war?
Mr Gray: Well, the people responsible for financial management inside the Ministry of Defence are, by and large, not the people fighting the war, and many organisations have to deal with complex financial matters.
Q644 Mr Crausby: But there is a need for current operational knowledge, is there not, surely in order to decide what equipment is necessary and what price we are prepared to pay for it?
Mr Gray: By and large, our focus was on, what is called, the 'mainstream equipment programme' which excluded the UORs, by and large, in our analysis, so the things which are going on for rapid deployment of things to theatre lie outside the scope of this. We are talking about the acquisition of things like Type 45 and Carrier and Typhoon and so on and so forth which are not largely currently operational issues.
Q645 Chairman: So you excluded the Urgent Operational Requirements?
Mr Gray: Yes, they are not in the statistical part of this report.
Q646 Chairman: You excluded pay and rations?
Mr Gray: Yes.
Q647 Chairman: You excluded pensions?
Mr Gray: Yes, so it is around how does one run a complex programme management organisation, and I think we would agree that defence is a complicated business where you have short production runs and individual bespoke skills and so on and so forth, but that says to me that it is all the more important to have the best possible skills doing that job because it is genuinely difficult. We found, for example, when we went to see the Finance Department of DE&S that half of their management accounting jobs were not filled by a team of qualified accountants and the explanation of the Finance Director for that was that they paid insufficient wages to attract qualified accountants into those jobs, so that is an example where the way that the system works at the moment, which is trying to press down on the operating costs of DE&S and that means pressing down on the cost of, for example, the accountants inside DE&S, is not serving the overall interests because you do not have sufficiently skilled people trying to run the finances.
Q648 Mr Crausby: You have talked about independent scrutiny, so how would that work? Would an independent accountant have sufficient defence expertise to deliver that? Tell us about how, you think, that would work.
Mr Evans: On that particular point, there is a whole set of science around parametric data which is that these things over time have been built before and they cost certain amounts before and people can reverse-engineer what our current capability is in the context of that, and there is a profession of cost estimation associated with that. Those skills, in general, of the Department have had less emphasis in recent times and we came across examples where the data that you would expect a particular programme to cost have been ignored when the original estimation was put in place. When we talk about improving cost estimation, we want to give more power to that particular function so that right from the beginning the programmes are planned and planned around the very best cost estimates that can be available out there, which is currently not the case.
Q649 Mr Jenkin: Can I ask about the effect of Treasury influence in all of this, and we accept that you broadly endorse the Treasury analysis of the shortcomings of the procurement process. But how has the Treasury itself contributed to the amelioration of those problems, or has it actually contributed to the problems themselves by over-complicating approval by trying to extract efficiency all the time, and indeed at the outset of the 1998 Defence Review people like Lord Guthrie now openly say that the programme was already bigger than the Treasury was prepared to fund?
Mr Gray: Yes, and I think in relation to that last remark, with the benefit of hindsight, the efficiency target which was set to the Ministry of Defence as a whole in 1998 in order to make the programme balance, which required it to make 3% efficiency savings per year, was excessive, so ----
Q650 Mr Jenkin: So is the Treasury equally guilty of false optimism?
Mr Gray: I think, in a sense, it is on both sides. It is both a force for good and a force for evil in this, and it is one of the reasons I hesitated about attributing that analysis to them because it appears partial. I believe that Treasury officials are actually trying to make the Ministry of Defence do the right thing, by and large, and are, in their own special way, trying their best to get the right result, so, in that sense, even when they are trying to put a clamp on some of the approvals processes, what they are trying to do is force a measure of realism in the Ministry of Defence which has sometimes been absent. Where they, I think, do not help, because essentially the only power that the Treasury has over the Ministry of Defence is to say no to things, that is the only point at which they can actually make something bite, so they try to use that power sometimes, whether that is locally legitimate or not, in order to force the Ministry of Defence to face up to things. In my view, they are trying to do the right thing about that. Where the Treasury is unhelpful, and this would apply across public spending as a whole, I suspect, if the Ministry of Defence did the right thing which led to a greater efficiency inside of the system, there would be a tendency by the Treasury to claw that back and to say, "Well, you've made the process of delivering the same output more efficiently, so we'll take that", and the reason that is a bad thing is because it does not encourage anybody to do the right thing. If you think that you are going to lose all the benefit of making painful change, downsizing your own staff and doing all of those kinds of things and handing away power and the only person who is going to benefit is the Treasury and the size of our approach to the gilt market is slightly smaller than it otherwise would be, you are disinclined to do that, whereas, if you think, "If I make this efficiency gain, I can turn it into more military output for my people", then you might be more inclined to do it, so I think, in that sense, the way that the Treasury system works is unhelpful.
Q651 Mr
Jenkin: I get the point about perverse incentives, but
in any business, if the Ministry of Defence were a subsidiary and the Treasury were
the head office, the chief accounting officer of the holding company would have
his own accounting officer in the Ministry of Defence fully engaged with the
decisions being made and the accounting officer in the Ministry of Defence
would report to the chief accounting officer of the company as a whole. Is that not something that is completely
lacking in
Mr Gray: It works in different ways in different companies and, largely, the embedded management accounting chain, which is what we are talking about here, in the organisation of companies is a sort of double agent. It both works for the operating unit and it works for the finance department and it has to balance those two responsibilities.
Q652 Mr Jenkin: But how do we get the Treasury to take more responsibility for some of the perverse effects of their behaviour?
Mr Gray: Well, I would set up the rules so that they were not clawing back the gains of good behaviour.
Q653 Mr Jenkin: As simple as that?
Mr Gray: That is probably the best way. If you just perch somebody on the Ministry of Defence Board from the Treasury in order to try and get them to see sense, as it were, my suspicion is that the decision-making will just migrate to some other body which does not have the Treasury in it.
Q654 Mr Jenkin: Presumably, the Treasury has encouraged more and more steps and hurdles to be put into the approvals process. Did you identify some of those steps and hurdles that should be taken out because they themselves make the approvals process more expensive?
Mr Gray: No, what I was referring to is that I have observed in recent times that, when a specific programme comes up which requires under the rules Treasury approval, that approval has sometimes been slow in coming, not that there is a process by which they have inserted extra steps, but more that the Treasury dragged their feet in an effort to press the Ministry of Defence to change the way they do things.
Mr Evans: There is an important recommendation which is that the Department should get a sort of ten-year budget or agreement or outline plan agreed between the Treasury and the Department. We grappled with this question of perverse incentives and how do you get them efficiently which seemed a benefit to the group, and our conclusion on that, was that, that was quite hard to do, but, if there were a much longer-term budget framework, however exactly that was defined, that did not mean that everything was measured on a year-by-year basis, and that would seem to us to encourage more efficient behaviour. Second, with complex programmes like this which go over multi-years, inherently year-by-year accounting is pretty unhelpful because you cannot switch things between years to optimise things, so, whilst I think it may be imperfect in the sense it does not address all the points you are making, there is a very important recommendation there about giving a much longer-term planning horizon agreed between the Department and the Treasury, which certainly, I think, is one of the better-supported recommendations at the Department ----
Q655 Mr Hancock: But in your executive summary you used this paragraph: "Unfortunately, the current system is not able to flush out at an early enough stage the real costs of equipment". Now, when George Robertson came here after the Defence Review and sat in front of this Committee in 1998, he said, "SMART Procurement is with us and from now on we are going to do just this". In your report, you do not even mention SMART Procurement and the results of it, but the truth of the matter is that SMART Procurement has not delivered what it said because your opening paragraph virtually says that that is not the case, so why did that fail when we were told that they were going to get it right before they actually embarked on these long programmes?
Q656 Chairman: I think we are going to come on to that later actually.
Mr Gray: Well, the one-sentence answer is: because it has not been implemented.
Q657 Mr Hancock: It has not been implemented?
Mr Gray: That is right.
Q658 Robert Key: Chairman, it was good to hear Mr Evans confirming that in the Ministry of Defence employees are well-motivated and determined to do their very best to deliver, and then we heard Mr Gray say that there are deficiencies in qualified accountants because the Ministry of Defence will not pay proper wages to attract that skill. What other skills, do you feel between you, are lacking at a senior management level in the Ministry of Defence? Accountancy clearly is one, but what other management skills, do you think, are missing?
Mr Evans: Well, I would say it goes beyond accounting to general financial planning disciplines and the seniority of people responsible for that is insufficient and too low, so that whole side of things does not have enough weight in the system. The second is we are concerned about the project management capability of the DE&S in part on two of the ventures, and one is absolute capability and the second also is the turnover and the relatively short longevity of people in position on multi-year programmes where it seems a lot of people responsible do not stick with projects for long enough, so there is a tenure problem as well as a capability problem. I think many of the systems that underlie those things, such as the management information systems, do not seem to us to be very strong, so I suspect that there is an underlying system architecture set of questions and capabilities there as well. I think those would be the three that I would refer to initially.
Mr Gray: We highlight in the Report where we are concerned about a lack of engineering skills, project management skills, general management skills and indeed general management freedom of action and some of the constraints, so, for example, the senior management at DE&S are not necessarily able to select their two-star appointees, which is a circumstance that I, as a senior manager in industry, simply would not tolerate. I would not have wished on to me somebody in a senior sort of two-star position that was somebody else's choice and I had to make the programme work with that. If I am going to take responsibility, I am going to pick the people who are going to do it, for example. As well as the systems weaknesses, when we came to look at this to digest some of the previous evidence, one of the interesting parts is that the equipment programme plan produced by Main Building and the programme as managed by DE&S through the system called CMIS do not match and they are not reconciled to one another, for example, as an example of the system weaknesses. One has to go through and do a manual inspection to try and work out from the programmes in CMIS how they relate back to the programmes inside the Ministry of Defence Main Building, so there are skills weaknesses and information systems weaknesses.
Q659 Robert Key: But the Ministry of Defence is the purchaser of products from the defence industry. I wonder if the same concerns apply to the defence industries. Do the defence industries promise things they cannot deliver? Is their risk assessment adequate? Is their costing structure adequate, or are they just making up the numbers in order to sell their products to the Ministry of Defence? We cannot just blame the Ministry of Defence for this, can we, because a lot of the time the Ministry of Defence is second-guessing the pricing of products by the defence industry?
Mr Gray: Sure. There is a well-known phrase, caveat emptor, and we are all sometimes victims of suppliers who promise us things which they are unable to deliver. I think Mr Hancock made a similar point in previous evidence sessions, that we did not mention the defence industry in this context, but it is a fair point, that they are a contributor to this conspiracy of optimism, but it is, in a sense, the Ministry of Defence's responsibility to try to see through that and sort it out. I will give you two specific examples where one at least could get a better answer. The parametric data which Iain referred to earlier suggested that both the A400M and the Carriers were going to cost more than the Ministry of Defence had originally estimated and yet that parametric data was ignored in the case of the A400M because we had a contract with Airbus. Therefore, Airbus were on hook to deliver at a certain price, except of course that now they will not and presumably governments will share some part of the burden of that increased cost as well as Airbus suffering some losses, and in the case of the Carriers we all know the story. So, if one had only looked at the parametric data and taken that parametric costing as a guide, whatever industry said and whatever the Navy programmers said or the Air Force programmers said in either case, one would have got a better answer than we have today.
Q660 Robert Key: So this all led you to your conclusion that equipment project performance was relatively poor with delays of around 80% and cost increases of around 40% against initial estimates, and you said that DE&S' management of risk appears to be relatively poor. In our last session on 15 December, I did indeed refer to the A400M, and the NAO Report which had just been published pointed out that the risk differential was six times what it should have been, so, when it comes to these issues, particularly where foreign purchase and collaboration is concerned, is there enough attention paid to potential fluctuation in exchange rates because I suspect not? General Sir Kevin O'Donoghue said that foreign exchange was responsible for a big chunk of this mismatch here.
Mr Gray: Yes, I would ask for that to be quantified, if I were you. We heard similar things and a single-digit percentage was accounted for by that when we looked, but I think it is not just a problem of international products, it is a general problem that, for a whole variety of incentive reasons, most people inside the system choose to take an optimistic view of the likely outcome of project X and assent to over-optimistic cost assumptions which are then not validated. If you took the A400M as an example, they have data going back to the Second World War which tells you how much it costs to build a transport aircraft and it is a pretty straight-line graph which would tell you that the A400M was going to cost substantially more than we had it on contract for. Now, if you are the Ministry of Defence, you turn round and you say, "Well, we've got it on contract for this and, therefore, we've got a great deal", or you take my view all the way through this programme that gravity will assert itself and this programme will end up costing what it should have cost on the line here and somehow or other everybody is going to have to pay to that, whether that is some combination of Airbus and governments. So they chose to take the optimistic view which is, "We've got Airbus on the hook for a programme at this cost and, therefore, that's what we are going to put it in the programme at".
Q661 Robert Key: I did ask General Sir Kevin to quantify that and he answered, at question 547, "I do not know". The Minister then came in and said, "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 which is a significant factor".
Mr Evans: But £300 million is not a large amount in the context of what we are talking about and you do tend to have people talk about foreign exchange losses where the exchange rate goes against us, but over periods of time going back four or five years we really have to tell you about the consequences of exchange rates going in our favour.
Q662 Mr Borrow: Just going back to this conspiracy of optimism issue and how things get in the programme. Would I be wrong in assuming that both from industry's point of view and from the Service Chiefs' point of view, there is a strong incentive to actually get projects into the programme with perhaps a back-of-an-envelope estimate. But, once you have got it in the programme, whatever Parliament decides in terms of the budget overall for MoD and whatever Treasury decides, it is in the programme at a figure less than it would realistically cost, but, as long as you are a Service Chief or somebody from the defence industry and you have managed to get it in that programme, eventually it will arrive and you may get more money out of the Treasury because at some point in the future you can turn round and say, "We need this bit of kit, but you're not providing enough money to do it". Therefore, the Treasury have got to open the purse a bit more than they would have done had the whole project been controlled properly in the first place?
Mr Gray: That definitely happens and they definitely hope they are going to get more money into the system as a result of over-programming, and whether they do or not depends on the circumstances, but the other problem that it generates is that it means that all programmes are run more slowly than they otherwise would be, which leads to substantial costs for keeping everything going for longer because you are trying to build things slowly because you can only afford, for argument's sake, two-thirds of what you have ordered.
Q663 Mr Hancock: Before I ask my next question, I want to just go back to the question you were answering just now when you said that they took the optimistic view. If they took the real view, they would then have to answer the question, "Do we continue or not?" would they not, so surely the answer is that they avoided that because they did not want to make that bad decision and to tell people that they were going to scrap the Airfreighter or the Carriers, for example?
Mr Gray: "Bad" as in difficult?
Q664 Mr Hancock: Well, Ministers have to make very difficult choices and they have avoided making choices, have they not, by distorting the information to give this optimistic view, so in fact it helped no one?
Mr Gray: Well, there tends at this point in the conversation to be a lot of focus on Ministers and I do not think that Ministers are the primary and certainly not the sole source of the problem here because everybody wants to avoid taking the difficult decision.
Mr Hancock: Of course.
Mr Gray: So the Service Chiefs and the Civil Service also wish to avoid the unpleasantness of difficult, controversial and headline-grabbing decisions, so what often gets served up to Ministers of whatever party and whatever government will be a recommendation to carry on with things, so it is not the case that the system is sitting there gagging to cancel projects and Ministers are saying no; that is not the way it works. The way it works is that everybody up to and including Ministers have an interest in the system carrying on the way it is.
Q665 Mr Hancock: Why do you believe that all of your recommendations need to be implemented and, given the fact that the MoD have already rejected some of them, how do you feel about your report surviving?
Mr Gray: Well, there is both: do they say they are going to do them and do they actually do them? Therefore, there is a following through of the intent as well as the letter of the proposals that they have assented to, and I think it is not obvious that they will all get followed through, but I think people are making good efforts. As far as DE&S are concerned, we recommended that the GOCO option be explored and we did not say, "Do it straightaway" but we said, "Do the work to understand what would be involved" because we wanted to solve all of the skill problems and the framework management action problems that DE&S has which we do not think it can solve under being on the vote in its current structure.
Q666 Mr Hancock: But you do not explain, do you, in your report how that would operate, how that would deliver what you want it to? It says the things, but it does not actually explain how the benefits could materialise from that, does it?
Mr Gray: Well, I am conscious of time. What we are trying to do with it is to create an entity which was capable of taking management decisions, probably to employ fewer people at higher skill to manage that project and with the people able to take the management decisions required to put the skilled people on projects and to import the management information systems and so on that we have talked about, and we were sceptical that that could be done in the current on-the-vote structure, so what we have said is that, looking across the range of models to DE&S that we can imagine, our central assumption is that the GOCO would be the best operating model for this, but that we should all do more work over 12 months in order to understand the implications of that.
Chairman: We will come on in just a moment to the alternatives.
Q667 Mr Hancock: I asked just previously about why SMART Procurement did not work. You, in your review, looked at previous attempts at reform. What did you learn about why they did not succeed in particular and, despite all of the promises, you never hear it now in the MoD, nobody ever mentions SMART Procurement now. Drayson will not mention it, but he mentioned it enough in previous evidence sessions, but why did it not get implemented?
Mr Gray: One of the reasons why we proposed the answer that we did was that we think the vested interests against change in the Ministry of Defence and in probably most other departments are very strong, so, to a certain extent, putting things outside the control of the status quo vested interests is one way of attempting to achieve the necessary change, so, unless you have a strong body which is motivated and incentivised to give rise to that change over time, the danger is that initiatives fritter away. I was not there for the intervening period, but over the implementation period I think Peter Spencer, for example, made a good effort to try to implement SMART Procurement, but that initiative was then lost in the merger of DE&S.
Q668 Mr Hancock: He was pushed away, was he not? He was surplus to requirements.
Mr Evans: I think there are several problems that come before SMART Procurement and, unless they are solved, SMART Procurement itself will not solve the problem.
Q669 Mr Hancock: But you have got to have SMART people, have you not, and does the Ministry of Defence ----
Mr Gray: Iain is right that, to a certain extent, one of the things that we do here which was not done previously is identify that DE&S is being asked to answer an impossible question.
Mr Hancock: My last point to you then is that you must be very pessimistic then about the chances of your report doing the breakthrough that is necessary. They have already rejected the one thing that you say is critical, so what chance have these proposals got of success, honestly?
Q670 Chairman: I do not think you do say that it is critical.
Mr Evans: We do not say it is critical. In fact, we do not actually recommend it, but we recommend that it is looked at. The sequence of recommendations that are the most important ones to follow are the ones relating to the planning and control of the programme at the centre, so the DE&S is asked a sensible question. Unless that is a necessary condition that the system will operate properly that that is brought under control, I think probably one of the insights from this project has been that that is laid out in a way which I do not think has been done before and that is, in my personal view, the single, most important thing to do. There is a set of lead recommendations associated with that and that includes the Strategic Defence Review, the new executive committee for decision-making about what stage is the programme, the control of the IAB and a budget framework with the Treasury which allows this programme to be managed over an appropriate time-frame.
Mr Gray: Necessity is the mother of invention. They are in a very tight corner and, therefore, one is more optimistic that they will take some difficult decisions when they are under that much pressure, particularly as I think Paul Drayson and the Secretary of State are keen for them to do something but, I agree, it is a hard challenge.
Q671 Mr Jenkin: Should the Treasury allow more flexibility for money to be switched between programmes in the context of that ten-year budget horizon?
Mr Gray: I think the focus of effort should be on balancing the programme properly and making sure that those systems work well. I think that is a second-order issue probably and they are going to die of something else before they die of that.
Q672 Mr Jenkin: But it is about giving responsibility to the people who have actually got responsibility.
Mr Gray: I just think there are only so many things you can focus on and I would focus on those other issues first.
Q673 Mr Jenkin: Can you just explain what alternative model you might be considering and what are the benefits and drawbacks of changing the status of DE&S to a trading fund?
Mr Gray: Well, obviously there are next-steps agency, trading fund, outright privatisation, leaving it on the vote and GOCO which are, I think, the five principal types of business model that we have considered for it. A trading fund would have the advantage of ensuring that there was clarity between the requirements community and the head office on the one hand and DE&S, as the deliverer of the programme, on the other. I think over recent years the Ministry have accepted that that clarity which was supposed to be delivered out of SMART Procurement has been blurred significantly, but the trading fund would give some management freedom of action to the trading fund chief executive, but not as much as a GOCO would, so it would be a step in the right direction, in my view, but maybe not far enough.
Q674 Mr Jenkin: Thank you for rescuing my incoherent question with such a coherent answer. Can I also ask about PFIs. Some of these PFIs are extremely large and complex. The Future Strategic Tanker Aircraft, where the Australians got the same model airborne and operational before we had got our project approved, should we be revisiting this whole idea of very complex, large PFIs? Are they really risk transfer or is it just a way of off-balance sheet financing?
Mr Gray: Well, you mentioned earlier that the Treasury are not terribly helpful in this. It must be economically rational for us to be flying modern aircraft in the tanker transport role, and why do I say that? Because there are not any airlines that I know around the world that are still flying Tristars and VC10s on a regular basis and, presumably, they are making economically rational decisions about flying more recent aircraft. The difficulty that the Ministry of Defence has is that, unlike the airlines of the world, there is some significant retrofitting of these, but, by and large, they are built by Airbus, and the Treasury do not like them to borrow money, whereas British Airways or anybody else will ease these aircraft and spread the cost of ownership over the lifetime. The problem for the Ministry of Defence, with the Gladstonian cash accounting that we do, they have to expend the acquisition of the aircraft upfront, so the full cost of an A330 arrives in the Ministry of Defence's bill in the year of acquisition and that is a problem for the Ministry of Defence affording to make an economically rational decision because it spends more money maintaining VC10s and Tristars than it would do, by a large margin, maintaining A330s, but it cannot get access to the capital that allows it to replace the airplanes, so PFI is an inelegant solution in some ways. We did not look in detail at PFIs in this, but my question back to you would be: it may be overly complex, and I might agree with you, but how do we allow the Ministry of Defence to get into a position where it can make a rational choice?
Q675 Chairman: So it is the Treasury that is economically irrational?
Mr Gray: The Treasury believes that it has the lowest cost of capital - if you look at the gilt yield versus what would be required to lease from a bank, that is true - but the problem is those three or four percentage points of interest are more than offset by the additional cost of the Ministry of Defence flying old aircraft rather than new.
Q676 Mrs Moon: Mr Evans, I would like to ask you about where we stand in comparison to other countries. We have heard that there are vested interests opposed to change and that they are very strong but, equally, looking at your sector on international comparators, it seems to be an international problem. Actually nobody seems to be getting this right, so what can we learn from the changes that other countries are trying to introduce? Everyone seems to be trying to push this forward and make these changes. Are there lessons that we can take that will show us how to deal with those vested interests opposed to change and bring the changes into place?
Mr Evans: I think you are perfectly correct, as we state, that forms of these problems, and of course fairly similar forms of these problems, appear to occur in many different countries systematically over time and, I think, in talking to them, one of the things that helped us realise was that we had to look beyond any particular short-term period, or whatever, to look at more systematic behaviours and incentives as part of that. I do not think we have uncovered anyone who has got a magic solution to this. There is not a set of things, I think, you can look at internationally and bring here. Having observed all that, we then tried to think through carefully the individual recommendations, particularly in relation to planning and changing the essential incentives, to try and overcome problems that others have grappled with but not solved, and our recommendations are our best attempt to do that.
Q677 Linda Gilroy: Mr Evans, just now you mentioned that two of the four linked recommendations to achieve the sort of sensible questions from central planning were the Strategic Defence Review, the requirement for that, and also the ten-year budget; so my questions are on that. First of all, on the Strategic Defence Review, possibly to Bernard Gray, how far are the recommendations you have made in your work being co-ordinated with the work of the Green Paper and the Strategic Defence Review, as far as you are aware?
Mr Gray: I think that for a variety of independent reasons people have ended up in a similar place about that. As far as I am aware, they are taking it forward as part of that process.
Q678 Linda Gilroy: But you are not involved in any shape, way or form yourself?
Mr Gray: I have not been involved in the Green Paper process.
Q679 Linda Gilroy: On the ten-year budget your recommendation was quite clear, but the Secretary of State talked in terms of a ten-year indicative planning horizon for equipment spending agreed with the Treasury. Is that going to be sufficient to improve defence capability planning?
Mr Gray: I would go further. One of my concerns here is that, if one chips away at parts of all this all the way round, you end up in the situation that Mr Hancock described where we will be sitting here in ten years' time saying, "Why has this not happened?", and the answer is because we only did all of the individual components in a half-bloodied way.
Q680 Chairman: What is the difference then between a ten-year rolling budget and a ten-year indicative planning horizon?
Mr Gray: If I told you that you had a ten-year budget, Chairman, and I told you I will agree an indicative planning horizon for you about the money you can spend over the next ten years, we would probably recognise the difference, would we not? I would not necessarily myself go out and commit myself on the basis of an indicative plan. It is a sort of promise with one's fingers crossed.
Q681 Linda Gilroy: To go back to where we began, does how we do the politics get in the way of that? Are there any international examples that you came across in your studies that would show us any way forward on that, because ten years is a long time?
Mr Gray: I think politics does get in the way. In my view, this is not largely a party-political issue, it is a managerial issue which has spanned governments of all stripes over a long period of time and applies in all countries. The bureaucratic policies, in a sense, the power structures within the Ministry of Defence between the Civil Service and the individual Services, between the Services themselves, between those politicians, between political parties, are all unhelpful. I think in an unlikely world where we were able to achieve a more bi-partisan approach to these things we would be more likely to tackle the problem, but that is not the nature of our system unfortunately.
Mr Evans: The recommendation that we should have a Strategic Defence Review in the first year of each parliament is an attempt to take the politics out of that. The Americans do this every four years, and it is invariably very controversial. We would like to make that process less controversial because it is an important reset mechanism. If then, on top of that, we layered over proper multi-year planning on the budgets that came out of that, that would be a substantial improvement. The stronger that is, the more we welcome it. The weaker it is, the less likely it is to succeed.
Mr Gray: There is an example from the Americans.
Q682 Chairman: I am afraid we have to move on.
Mr Gray: Bi-partisan base closures would be an example.
Q683 Chairman: We have to move on because Lord Drayson is coming in front of us now. Thank you both very much indeed for coming in front of us and for giving us helpful evidence and for writing a fascinating and very useful report.
Mr Gray: Thank you.
Mr Evans: Thank you very much indeed.
Examination of Witnesses
Witnesses: Rt Hon Lord Drayson, a Member of the House of Lords, Minister of State for Strategic Defence Acquisition Reform and Sir Bill Jeffrey KCB, Permanent Under Secretary, Ministry of Defence, gave evidence,
Q684 Chairman: Good morning. I am sorry to keep you waiting. To both of you, in your different ways, I say welcome back. It is good to see you back, Lord Drayson, Minister. Sadly, you did not win the race but, nevertheless, it is good to see you back. Would you mind beginning by setting out what your responsibilities are in relation to procurement reform and how you integrate those responsibilities with the Minister for Defence Equipment and Support, please?
Lord Drayson: Yes. Thank you, Chairman. I am delighted to be back in front of this Committee. My responsibilities relate to the reform of the acquisition process, specifically within that, the implementation of the recommendations which came out of the Bernard Gray Review and, in addition to those responsibilities around acquisition reform, I am responsible for science and technology within the Ministry of Defence. In terms of the dovetailing of that with the responsibilities of the Minister for Defence Equipment and Support, he is responsible for the procurement processes that are taking place today. I am responsible for implementation of the reform processes to improve the way acquisition is done in the future.
Q685 Chairman: How much time do you spend in the Ministry of Defence and how much time in your other department, would you say?
Lord Drayson: It has obviously waxed and waned since my appointment back in June in terms of the intensity of focus. For example, a real peak around the time that we were working with Bernard and the LEK team in terms of the recommendations of the Report, but I would say, approximately, 25% - around that figure.
Q686 Chairman: 25% in the Ministry of Defence. Will the Chief of Defence Materiel and the Minister for Defence Equipment and Support also be involved in the Acquisition Reform Strategy, and how?
Lord Drayson: Yes, Chairman, they have been involved, in the sense that they have been, in particular, in the case of Sir Kevin O'Donoghue, CDM, in terms of the process by which the Bernard Gray Review took place and then the discussions that took place relating to the recommendations which came out, the first instance coming out in July with the draft report, and then, through the process, as we have responded to the Review and have committed to the implementation of an eight-point plan which the Secretary of State announced in October, clearly they share, as does the whole ministerial team, the recognition of the central importance of making sure that these improvements are implemented with full vigour. We are, I think, fortunate in that we have clear ministerial focus around the reform process. This is my job to make sure it has happened and I am very, very clear, in part because of my previous experience of having done the Min DES ministerial role. I know that for this to be successful it has to have the buy-in of Min DES and CDM.
Q687 Chairman: Can you really achieve that in the run-up to an election with only 25% of your time, given how much vested interest there is in maintaining the status quo?
Lord Drayson: I am optimistic, I would say realistically positive, that the acquisition reform process which the Department is on now will be effective. I am sure we will discuss why I believe that, but I think that, actually, being in the run-up to a general election and given the level of pressure which is on the Ministry of Defence because of the intensity of operations, for one thing, provides an opportunity to get clarity around the importance of these issues and to get a focus on tackling some of the problems, which are very longstanding problems and not unique to the United Kingdom; a recognition that they have to be addressed and they have to be solved if we are to make a significant further improvement in defence acquisition. I believe actually the pressure helps people take tough decisions, make the changes that need to be made, and I can point to evidence, I think, where I can say the progress that we have made to date on the implementation of this eight-point plan, which I am happy to give an update to the Committee on, provides evidence that that optimism is justified.
Q688 Mr Crausby: In what way was the Gray Review an independent review? Who paid for the work that was done and who set the terms of reference?
Lord Drayson: It was independent in the sense that the terms of reference were set, the Review was asked for and kicked off, by the previous Secretary of State, and he asked for a very thorough review by Bernard Gray. It was paid for by the Ministry of Defence, but it was described to me when I was appointed as a full pulling up the carpet and having a good look. Therefore, I think the stark conclusions and clarity which come out of the Review show that that is exactly what was done. When the present Secretary of State was appointed in the summer and when I was appointed, it was clearly about maintaining that policy and making sure that Bernard Gray and the team had every opportunity to gather the data that they needed to look in the nooks and crannies that they wanted to, to be able to come up with a full and frank analysis of what they saw the problems were.
Q689 Mr Crausby: The Chief of Defence Materiel, when he gave evidence to us, did not seem that impressed with some aspects of the Review; in fact he said that he did not react to every review that was done. Industry representatives expressed a fear that the Gray Review would live as a document but not as a reform programme. Do you see it this way and, if that is the case, how will the main reform work this time?
Lord Drayson: I am committed, as the Minister for Acquisition Reform, with that clear point of responsibility, to making sure that the reforms do take place in my time as a minister. I think some of the comments which have been made by CDM and others reflect the fact that this was a very tough review, and we can all take comfort in the fact that there is the evidence that it was a tough review in that some of the reactions to the conclusions have been - how can I put it - reflected in the scrutiny which took place. You would expect, if a proper review were done, not everyone to like it. I think that is a good sign. The way in which the Ministry of Defence asked for this thorough review to be done and then, when receiving the Report (which was a pretty stark report), accepted the Report and accepted all but one of the recommendations of the Report, I think, shows that, as a whole, the Ministry of Defence has fully embraced this, and I believe that from the Secretary of State and from the Permanent Secretary down the Department is determined to make this happen.
Sir Bill Jeffrey: Could I add to that, Chairman. I do not know who the vested interests determined to resist change in this area are, but they certainly do not include the Permanent Secretary. I saw this review as an opportunity. I thought that it would give us a chance to look carefully at the work we have been doing over the last three years to improve the capability end of this, the professionalism of the project teams and all the work that CDM is responsible for in particular. In fact, I think Bernard Gray and his team came up with a very insightful report that touches on something that had been concerning me for some years, which was the manageability of the equipment programme and how we could improve that. Whatever the result of the General Election, I think it will be the responsibility of, if you like, the permanent team in the Department to carry the spirit of these changes through in exactly the way that the Minister has described.
Q690 Chairman: The pair of you seem a lot more enthusiastic about it than the Minister for Defence Equipment and Support. Do you wish to comment on that?
Sir Bill Jeffrey: A lot of weight has been put, I think, on the fact that the CDM talked about not recognising some of the figures. I think by that he had in mind in particular the assessment that the view made of the potential cost, so-called frictional cost, of delaying ---
Q691 Chairman: No, what he was referring to at that stage was the change in the integrated project teams and the change of personnel within those teams. I think he would also like to have extended that to all the other figures which were inconvenient, but that was what he was actually referring to at the time.
Sir Bill Jeffrey: He can speak for himself, but I think in the area for which he is principally responsible, which is the upskilling element of this within DE&S, and the approach that Ministers have taken since Bernard Gray reported, which is to encourage us to look hard at some kind of partnership with private sector experts, to accelerate the process of building skills in DE&S, is one that very much has the CDM's support.
Chairman: It is unfair of me to tease you about a minister's views.
Q692 Mr Crausby: Could I turn to the question of openness. Lord Drayson, you have spoken of the need for greater openness regarding MoD spending. How do you intend to deliver that, and do you see that as crucial?
Lord Drayson: Yes, I do see it as
crucial. Clearly, it has to be done
within the constraints of national security and, in some cases, relating to
commercial confidentiality, but the more that we can have transparency about
the acquisition process, the more effective I believe it will be. I think it will also help in terms of
developing a better understanding of the complexity of the acquisition
process. This is not easy, and it is
fair for us to be subject to absolute scrutiny from the press, and so forth,
but when one looks at the benchmarking of the
Q693 Mr Crausby: Do you accept that the lack of transparency has exacerbated the size of the financial hole in the equipment programme?
Lord Drayson: I think, as Bernard Gray has said in his report, good people have made good decisions driven by the system as it stands today. Therefore, that has led to the inter-Service rivalry; it leads to more equipment going into the equipment programme at an early stage and the over-specification of projects as they go forward: it is too easy to get projects into the programme, very few projects are cancelled. What that means is that over time you get to an over-heated defence programme overall. The only way that the Ministry of Defence can manage to be within its near-term budgets, therefore, is to delay projects. If we look at the latest MPR when the National Audit Office recognised the improvement in project management which had been achieved by the Department, more than 80% of projects delivered on time and to budget, and it recognised the implementation of SMART Acquisition has had an effect, is improving projects, but over 737 million of the overspend net cost change was down to decisions that the Ministry of Defence had taken to delay projects. I believe these reforms go to the heart of that problem. It is a combination of the transparency with the regular strategic defence reviews, with the other initiatives relating to improvement of skills and project management information databases, the sort of nitty-gritty of good management, but really the thing that is at the heart of this, which we must ensure gets fixed as we go through this General Election, is this package of the transparency with the regular reviews.
Sir Bill Jeffrey: Also, to reinforce what Lord Drayson has said about the linkage with defence reviews, arguably one of the reasons why we are better at getting projects into the programme than ever cancelling them, particularly when you get further through the cycle, both politically and in the space between defence reviews, is that it is hard to make cancellations whose impact on ultimate defence capability is of a character that one might expect to be preceded by the kind of analysis that takes place in the defence review. Personally I warmly welcome the prospects that we now have of regular defence reviews of the kind that Mr Gray recommended.
Q694 Mrs Moon: We have talked about being in a tight corner, and in this tight corner there seems to be the MoD's acceptance of the report. At the same time, we are told there is also a vested interest against change. When you are faced with change and there is resistance and tension to change, what you often get is displacement activity where people try and shift the focus and move the attention away from the change that is required. Is that happening in the Ministry of Defence and are you able to still drive the change, despite attempts to shift the focus into a displacement activity about personalities, programmes, etc., within the Ministry of Defence?
Lord Drayson: If I could answer that first and then hand over to the PUS. I do not see a huge amount of displacement activity going on. I do think it is normal to see in a large complex organisation significant resistance to change. It is the nature of human beings within an organisation. It is something I have seen in my business life; it is something I have seen in political life. We should regard this as normal. We should be rigorous in focusing on the implementation of this change in the most practical way that we can, and that means, in part, bringing people with us, persuading them that these changes are in the long-term interest of defence, which is what motivates people, in my experience, within the Ministry of Defence over everything else, about delivering a better outcome in terms of our military capability for our Armed Forces and explaining why. I think there are some very powerful intellectual arguments which resonate, and have resonated, with people in the Ministry of Defence which have come out of here, but then to balance that also with a pretty clear focus that we are going to get this done, it will be done on time and we are committed to it.
Q695 Mr Hancock: Could I go back to where you started, Lord Drayson, when you said that Bernard Gray was given an opportunity of lifting the carpet and going right under it. I thought from your previous existence in the MoD you had been under the carpet and that was your role there. I also found that when the Permanent Secretary said that he welcomed this as being an opportunity to put right things he had seen coming for a long period of time. Why has it taken so long then?
Lord Drayson: I accept that for me, as a former minister for defence procurement and then Min DES after the merger, this report made uncomfortable reading. There is some pretty stark data in this report, but I welcome it because I think that what it does is it goes to a level of analysis which, first, does build on all the efforts that my predecessors and I have made to improve defence procurement, it recognises in the Report the good job that it has done, particularly the good job that was done in achieving the merger of the DPA and the DLO during a time of very high operational activity; the way in which the great majority of projects are delivered on time and to budget; the huge complexity, and so on and so forth, but it also says that reforms like SMART Acquisition, Through-Life Capability Management, the merger of the DPA and the DLO have all been steps. Reform is a continuous process of improvement, but the thing that struck me when I first read the recommendations from the Review was that, because Bernard went into this from a certain perspective, he put his finger on the central issue relating to the decision framework which had not been addressed previously. I do believe that if that is addressed - if we can get a clear ten-year budget, if we do have in every parliament an SDR, if we do have an annual audited review of affordability - it will make a step-change improvement, because it will make a linkage between the short-term decision making and budgeting and the longer-term. I think it will be uncomfortable for future defence leadership, whoever is running the MoD in the future.
Q696 Mr Hancock: Before Bill comes in, could I pull you up on that one point. You said "if we get a ten-year rolling budget", but you have indicated that you prefer a ten-year indicative planning horizon. Are you now changing your view on that and saying it is better to have a ten-year rolling budget and that is what you will be hoping to get from the Treasury?
Lord Drayson: I think that in his review
Bernard's recommendation was a legally binding budget, as the French have. The French have a six-year budget and,
although the French do not do procurement better than we do in the
Q697 Mr Hancock: That is not the same, though, is it?
Lord Drayson: I accept it is not the
same. Certainly it is not the same as a
legally binding commitment, but I think it is important progress. Would it be better if it went further? Yes, it would, but within the political
system that we have, the way we operate within the
Q698 Chairman: You are a very refreshing man to have in front of the Committee, I must say.
Sir Bill Jeffrey: Just to enlarge on that a little bit, on the last point the important word was "planning", because (and it is almost a constitutional point) in our system I do not think it would be realistic to expect the Treasury to commit successors over a long period absolutely. What we will have for the first time is the confidence of a set of numbers off into the future within which we can plan. The absence of such a clear planning horizon is one of the reasons why it is often internally hard to back up arguments for restraint because beyond a certain point, as things have stood hitherto, we simply do not know what the defence budget will be; so I think this is a real step forward. On your earlier question, Mr Hancock, like the Minister, I see this as a continuum. I recall, within weeks of taking on this post, coming to this Committee and saying that I thought this was one of the most important areas that I was becoming responsible for. I think, in the continuum (and I somewhat disagree with Bernard Gray over whether we are implementing SMART Acquisition or not) what we have been doing is following through the SMART Acquisition principles, working hard on skills and the merger of the DPA and the DLO, as the Minister said. It is reassuring somewhat, although I would like to have made faster progress, to see that in the last NAO MPR report the analysis is broadly favourable to the trends in project management as such. What I meant by my earlier comment was that the overheatedness of the defence equipment programme has become a concern to me over the last few years, as it has been to Ministers in fairness, and the way in which the Gray Report illuminates that and the institutional factors that are connected to it, I think, we should find useful.
Q699 Chairman: You said the Major Projects Report of the NAO was broadly favourable to the trends. It said that the Defence Equipment Programme was completely unaffordable.
Sir Bill Jeffrey: It did, but my point was about project management and programme management capability. Maybe I am clutching at straws, Chairman.
Q700 Chairman: I think you may be. Shall we move on?
Sir Bill Jeffrey: The Report does say that on the performance of specific projects the NAO's analysis suggests signs of improvement in project cost control with innovative decisions being taken to ensure progress.
Chairman: Green shoots.
Q701 Mr Havard: Could I ask you about this planning horizon as opposed to a budget for a second. Just before you came in, Bernard Gray told us that the question about PFI as opposed to how you spend money in other ways. For example, a large project like the tankers, you might want to buy the aircraft upfront with the money, that is the way the Treasury would force you to go at the moment, to buy the assets all in year one, and you might resist doing that, but it might be the best thing to do because over time you might spend more money by doing it the way they say. Where within this ten-year planning horizon process is this debate about how you could spend the money within that ten-year period, or would they say, "Well, you have spent it all in year one. That is your problem. You are getting nothing for the next nine"? What is the balance between how you could spend the money? Is there something you could say to us about this agreement with the Treasury that might allow us to understand how it would work as opposed to a budget in the old sense?
Lord Drayson: I think the central point here is the two dimensions of the planning horizon in terms of the portfolio versus projects and the projects in which one can have confidence are going to undergo relatively little technological or environmental change during that period of PFI, let us say it is 25 years. The fundamental principle of difference is that, where you have a defence capability where you can be reasonably certain that the operational environment or the technology is not going to dramatically change, then you can commit in that project envelope to a PFI programme. Therefore, air tankering is an example where you could have a reasonable degree of confidence that would be right; armoured fighting vehicles, no chance. The ten-year framework is about the whole equipment plan and, therefore, it is about giving the Ministry of Defence the ability to take decisions in terms of the flexibility of spending between projects such that they can cope with the reality of the nature of defence - the enemy changes its tactics, technology changes, inflation may change - but at the same time having the confidence that it can do that within an overall planning envelope for the equipment plan as a whole, which is acceptable. That is not the way it is done at the moment, it is done by Treasury approval on specific projects, but we have seen the advantages with certain PFIs. The track record of PFIs shows that they come in more often on time and to budget because, on the one hand, of the discipline that has to go in up-front around the planning, but the other very important advantage is this long-term planning process and the confidence that you have up-front.
Q702 Mr Havard: Can you say this is a question about, on an individual project, capital spend versus Through-Life Capability, as it were - that sort of issue?
Lord Drayson: Yes.
Q703 Mr Havard: The protocols that you have got with the Treasury about how this process is going to work: can you reveal some of that to us in the longer-term so that we can understand how these processes will be changed, will be different?
Lord Drayson: Yes. We have an agreement in principle with the Treasury. That was announced back in October. We will be presenting, with the publication of our strategy for acquisition reform, more detail on all of these aspects.
Q704 Mr Havard: When?
Lord Drayson: Shortly.
Q705 Mr Havard: Shortly?
Lord Drayson: Yes.
Q706 Mr Havard: This year?
Lord Drayson: In alignment with the publication. It will be done on the same day as the Green Paper.
Chairman: On the same day as the Green Paper?
Q707 Mr Jenkin: Shortly.
Lord Drayson: Shortly.
Chairman: Shortly.
Q708 Mr Borrow: In the earlier session we discussed for a bit this conspiracy of optimism whereby the industry, Service Chiefs and everybody has an incentive in underestimating the cost of projects, being optimistic about them and getting them into programme and, assuming that eventually they will come out at the other end, even though they may take a lot longer, but at least if they are in programme, you would want a political battle to actually get them underway. There is a reluctance then to recommend to Ministers that this should be cancelled because it does not fit within the budget we have got in a particular year or for a group of years. In what way do you think the changes will stop that happening? I see that as being the core issue that we have got to rein in to a realistic level.
Lord Drayson: Yes. A number of the elements in the package, this eight-point plan, all have to be implemented for this to be resolved, I believe. I do not believe that we can pick and choose. For example, it is important that there is this sub-committee of the Defence Board, chaired by the Permanent Secretary which does not have the Chiefs on it, which is charged with ensuring the affordability of the equipment programme on an annual basis linked to the SDR. That is one element of it. The other element is that up until now projects could come into the Defence Equipment Plan without going through any ministerial scrutiny. At the point that the Minister becomes aware that a project is in the plan, it has already been pregnant for quite some time; therefore, there is a cost of cancelling it. There are two examples. I think the phrase "conspiracy of optimism" is not fair to the individuals, because I do believe that individuals, whether they are Service people, civil servants within the Ministry of Defence or Ministers within the Ministry of Defence, sincerely do try to do what they believe is the right thing - I have seen that in my own experience - but within a framework which is flawed and, if we want them to be able to make better decisions, we need to change the framework. That is exactly what I believe this will deliver.
Q709 Mr Hancock: You claimed you changed it. You claimed, Lord Drayson, that that system had changed with SMART Procurement. I was surprised you have actually mentioned it twice already, because most Ministers have avoided mentioning SMART Procurement as if it had failed. Bernard believes that it was not implemented, and I am interested to know how you feel it has been, because if SMART Procurement had been introduced, as it was supposed to have been some eight years ago now, we would not have been experiencing some of the problems we have had that have come out in the last 18 months, for example, on various projects.
Lord Drayson: First, I would point to the data. If one looks at the data that was achieved by the DPA under Sir Peter Spencer ---
Chairman: He told us that SMART Procurement had not been properly implemented.
Q710 Mr Hancock: And he went.
Lord Drayson: But if you look at the improvement in performance that was achieved under that reform programme, I think you can fairly conclude from that data that it did have a positive effect. I can accept certainly Sir Peter's view that it could have been implemented more vigorously, but I believe that the challenge of defence procurement, the job that has to be done to do it well, has changed over the last ten years as the nature of the environment has changed. I believe, therefore, what has happened is that there was a focus around the problems which are identified and solutions found in SMART Procurement. There were then the problems which are identified through the separation between decisions about buying equipment and decisions about maintenance and development, Spiral Development, which came up with the solution of Through-Life Capability Management and the idea of creating an organisation which was responsible for equipment through-life, from acquisition through to disposal. That is an evolution of the improvement in defence procurement. It is not that the first reform did not work, it is that the first reform took us so far, we recognised that there were further problems, further issues, which had to be addressed and I believe that the Gray Review has built on that. Gray Review itself says that the merger of the DPA and the DLO was a success and recognises the success of other things, such as the Defence Procurement Strategy.
Q711 Mr Hancock: To be fair to the Gray Report, he looked historically at the other things that had been introduced from time to time. Nothing could have been more enthusiastically introduced by politicians, George Robertson, John Reid, John Spellar, all of the Ministers, all of whom came here enthusiastically exposing SMART Procurement, and yet there was a resistance within the Ministry of Defence, as Bernard had found in his report, to other methods of change that had been introduced. Sir Bill, why is there this inbuilt reluctance of the Ministry of Defence to both welcome the change rather than actually implement the change?
Sir Bill Jeffrey: I do not believe there is, Mr Hancock. The point I would make is the one the Minister made, which is that this is a continuum. This is not an area, nor do any other countries find it to be an area, in which there is a single silver bullet solution. We have been implementing SMART Procurement and the principles that were set out ten years ago. Indeed, if you look at the Gray Report, he finds in the deep analysis that post-SMART Procurement projects are actually performing better in terms of time and cost than those that predate it. We have moved on from there, as the Minister said, and in the last few years have been focusing, in particular, on the fact that we will not manage this business as well as we could if we separate initial acquisition from through-life support; so we have brought the two together. The next issue (and it is the one that the Gray Report focuses on) is the fact that if we do not have a well balanced, well managed overall equipment programme, then the endemic tendency to overestimate cost and, therefore, to add to it when projects have to be slipped will get us as well. We have got to address that. I conclude that this is, in a sense, a never-ending task. We just need to keep approaching it from all angles.
Q712 Chairman: Can we come on to the cost of slipping, because in the Bernard Gray Review - it is paragraph 7.7.1 on page 135 - he goes into the calculations that he makes for capturing the full cost of delay to delivery of new equipment, and he comes out with the estimated annual cost of delay of a low estimate of £920 million and a high estimate of £2.15 billion. That is not evidence as such; it is more of a calculation. Is it a calculation that you accept? If you do, what are you going to do about it and, if you do not, have you got a better one?
Lord Drayson: Yes, I do.
Q713 Chairman: You do accept it?
Lord Drayson: I do accept it. The Gray Report does say that this is not an exact science, as you accept, but the point that it makes is a very fair point and I do recognise it and I do accept it. I think, to relate this to the point which we were just discussing related to SMART Procurement, if you have a project and you apply SMART Procurement principles to it and you have a project which is absolutely on time and to budget and then you cannot afford it and you have to delay that project for two years because you have not got the money for the next two years' spend, the suppliers that you are negotiating with throw up their hands and say, "What do you expect us to do with this standing army of people that we have in the ship yards" - if it is a ship - "ready to take the project to the next stage?"
Q714 Chairman: I agree.
Lord Drayson: And so we have to stop doing this.
Q715 Chairman: Yes, indeed, but now we have a problem, because you accept this calculation. Unfortunately, the Minister for Defence Equipment and Support does not. He says there is absolutely no evidence for it. What do we do about that? He said that on the floor of the House.
Lord Drayson: I think, in front of your Committee, Chairman, you asked him about the A400M and he said in his answer to the A400M, "Yes, if that project is delayed, because of the fixed costs relating to the programme, the costs will go up", and so I do believe that he has accepted it.
Q716 Chairman: Yes, all of that. What we are trying to do here is get into the general cost of delay to the delivery of new equipment, and if you and the Minister for Defence Equipment and Support are saying diametrically opposed things about this paragraph of the Bernard Gray Report, I think you recognise it puts us in a bit of difficulty.
Lord Drayson: I understand the point you are making, Chairman. I believe that I am expressing in a different way what my ministerial colleague expressed, I think, when he was interviewed, where he expressed the nature of having to make decisions. I think he used the example of buying a family car in terms of having to put off in the future because you do not have the budget today. This is the nature of things. The point is that this has a significant cost to defence. The MPR in the last report recognised that was £737 million of net additional costs. Our system, as it exists today, does not make a linkage between these in-year decisions and the long-term equipment programme plan. That is what has created the so-called bow wave that you and I have both tackled in our roles as procurement minister. This has got to be addressed.
Q717 Chairman: I am in full agreement with you. Could we move on to something different, please, the cost in terms of skill loss of staff rotation. The Bernard Gray Report says that that is a genuine cost, a key factor affecting the performance of project teams. Do you think that it is a key factor?
Lord Drayson: I think that one looks at the data, and the data which I have seen says that the average tenure is something like 39 months. It has been 38, 39, 40 months over the last three years, so it has not been a material change, and so that data suggests that a three-year approximate tenure is not an issue. Anecdotally, in my own personal experience as a minister in the MoD, I did see on occasions, mostly because of the military career planning process, rather shorter tenure of project leaders than would have been ideal and that by the time a person has got up to speed you would see them in a relatively short tenure within a job. I would say that the data is suggesting not so, but I feel this is an issue which we need to look at very carefully indeed. I have asked the Chiefs of the Services to take very seriously the idea that they should be flexible in their career planning within the Services to ensure that those people posted into defence procurement, particularly into the major IPTs, are posted with sufficient flexibility that they can make sure that they are able to effectively carry out that role. That is not a very clear answer, but that is the sense.
Sir Bill Jeffrey: Might I add one point, Chairman. Following the exchanges which you heard earlier with the CDM in particular, there has been some further work done on tenure of IPT leaders in particular, and that is the work that the Minister has just alluded to. It does suggest that, when you look at the whole period of IPT leaders' tenure in their post, it has been pretty constant over the last few years at around 36, 38 months - that sort of period - and that material is among material which we will be getting to the Committee as quickly as we can.
Q718 Chairman: That would be helpful because Bernard Gray himself says the rapid rotation of managers through jobs was a problem ten years ago and remains one today, but he suggests elsewhere in the Report that it is growing rather than reducing. If you are taking this as seriously as you both say you are, that would be a good thing.
Sir Bill Jeffrey: There is some analysis which suggests that it is a steadier picture than. My own view is that we probably need more continuity than we have even now, particularly on the military side, where we have been trying to move in recent years towards two different approaches: short secondments, where what is being provided is military advice based on current operational experience and longer term growing of people with acquisition as an anchor in their military career. In the latter case the sensible thing to do is to attach people to project teams for three, four, even five years, just as their Civil Service equivalents would be.
Q719 Mr Hancock: Were you aware of the shortage of skilled accountants within your organisation; that many of the people holding fairly difficult jobs in accounting for this did not have accounting qualifications?
Sir Bill Jeffrey: I do not have the figures at my fingertips, Mr Hancock, but certainly we have, within the finance community across the Ministry of Defence, a significant and rising number of people with accountancy qualifications. We still have some who do not.
Q720 Mr Hancock: That was not the question. The question was, were you surprised at the large number of people, who were doing fairly responsible jobs of keeping the accounts of the MoD on these projects up to speed and accurate, who did not have any relevant accounting qualifications? Were you aware of that? In fact, the evidence we were given just an hour ago suggested the reason was that you were not paying enough to get the people with the right skills to make sure that the accounting of many of these projects was done correctly.
Sir Bill Jeffrey: Perhaps I ought to offer the Committee a note on this, because I can certainly give more information about the extent to which we have accountancy skilled people in these posts and, indeed, whether there is any issue about pay. We are always going to find it quite hard to be completely competitive with the outside world, but the trend in recent years has certainly been towards the professionalisation of the finance function right across the MoD.
Chairman: You cannot have been surprised by it, because until recently the Director of Finance did not have the accountancy qualifications that the current one has.
Q721 Mr Hancock: I want to ask Lord Drayson about transparency. I was interested in what you were saying earlier about transparency and the need to get more transparency. I was interested to know who your target audience was. It really takes into account the question that David Borrow asked about the issue of over optimism and, consequently, nobody ever getting the true figure out. If you have increased transparency, will that overcome the issue of you always opting for the super optimistic price rather than the realistic price? Does the transparency work you are wanting to do actually help Parliament and the public have a greater understanding of why things go wrong cost-wise?
Lord Drayson: I think that making
decisions about defence equipment will always be high profile because they will
have consequences which can affect people's lives either on the battlefield or
in terms of their jobs and capabilities in manufacturing and so on and so forth
in the
Q722 Chairman: Minister, when Guy Lester, the Director of Capability Resources and Scrutiny, came in front of us, he said that Defence Equipment and Support had estimated that there was a ten-year funding gap of £6 billion at the start of this planning round but it had been £21 billion at the start of the previous planning round. Do you agree with those estimates?
Lord Drayson: Yes.
Q723 Chairman: That is £15 billion savings that were achieved. Do you know how exactly?
Lord Drayson: A combination of making decisions to delay projects and to remove certain capabilities. I think a significant decision was the decision to delay the aircraft carriers, for example.
Q724 Chairman: As I think you would accept, that added £674 million to the cost of the aircraft carriers, and so that was not exactly a reduction of the funding gap.
Lord Drayson: Of course these are estimates because in the budget we do not have a ten-year planning framework at the moment, but I think that the decisions which have been taken to delay projects are at the heart of the increase in the over-budgeting within the Ministry of Defence equipment programme. Whether you call it the bow wave or the over-planning within that, I think the delaying of projects is the key driver of it, but I think that coming up with a ten-year programme which is then visible and committed will be the solution to it.
Q725 Chairman: But you have been saying that delaying projects adds to the cost of those projects. We are talking about a ten-year rolling indicative planning horizon now. You are suggesting that £15 billion of savings have been achieved by delaying projects, which adds money to the cost of those projects. I am feeling very simple here, because I do not understand quite how all of this adds up.
Sir Bill Jeffrey: The first point to make is that the figures that Mr Lester gave the Committee relate to the whole defence programme. The £21 billion excess of the projected defence budget over the Future Defence Programme was related to the whole programme and included elements like the costs of Armed Forces pay settlements ---
Q726 Chairman: They are going down, are they?
Sir Bill Jeffrey: --- to the extent that they exceeded the inflationary assumption in the baseline.
Q727 Chairman: Are Armed Forces pay settlements going down?
Sir Bill Jeffrey: For each of the last three years they have exceeded the assumption about inflation in the underlying figures.
Q728 Chairman: But I am trying to identify here this £15 billion worth of savings.
Sir Bill Jeffrey: The majority of them were found through the equipment examination, and the main elements of that were announced by John Hutton on 11 December 2008. They included some restructuring of the FRES programme, of which the Committee is aware. They did include the delay to the aircraft carriers, although, as you say, longer-term that added to costs. They included the deferral of the fleet tanker element (MARS) and a reduction in the Lynx Wildcat contract from 70 to 62. As announced at the time, there were some quite significant decisions taken through the equipment examination which helped meet the challenge as identified at the beginning of the 2008/2009 period.
Q729 Chairman: Could we have a list of them, please?
Sir Bill Jeffrey: We can certainly provide the Committee with a note on that.
Chairman: That would be extremely helpful.
Mr Hancock: Sir Bill, when John Hutton announced in Parliament the delay on the carriers and then at a press conference later said there would be little or no extra cost because of the delay ---
Chairman: I do not think he did say that.
Mr Hancock: Yes, he did.
Chairman: He said there would be no defence cost.
Q730 Mr Hancock: What does that mean? Who was going to pick up? Somebody must have briefed him. Surely there was some analysis before that decision was made by your officers, Sir Bill, and yourself? You must have been advising the Secretary of State, "Oh, by the way, this is going to cost close to £700 million more." Yes or no?
Sir Bill Jeffrey: Not the precise figure, but the fact that deferral would increase costs.
Q731 Mr Hancock: Did you say it would run into hundreds of millions of pounds?
Sir Bill Jeffrey: I am sure that Ministers were aware of that. Like the Chairman, I do not recall Mr Hutton saying that the cost would not be affected. I think he meant that, particularly given the expected delivery dates of the Joint Strike Fighter, the impact, in defence terms, would not be as great as might be supposed.
Mr Hancock: But it was £600, nearly £700 million.
Q732 Chairman: In fact, I think on the same day I put to him on the floor of the House the question: is this going to cost, as I had heard, an extra £600 million - I was £74 million out - and the answer I got was, "We do not know how much extra financial cost it will be, but there will be no defence cost."
Sir Bill Jeffrey: I think by that he must have meant defence capability cost.
Chairman: Defence capability. Thank you.
Q733 Mr Hancock: Can you write to us, Sir Bill, and tell us what you gave in the way of advice on that decision about the cost overrun by delaying it, because it is fundamental to all that you have been saying about trying to get it right?
Sir Bill Jeffrey: I need to be quite careful about protecting the confidentiality of the advice of officials to Ministers.
Mr Hancock: Have a go then, would you?
Q734 Chairman: I think you are right about protecting the confidentiality of advice by officials, but it would be helpful if you could tell us what Ministers said at the time about the cost of delaying the carriers and precisely what they said in public to ensure that we have that in front of us.
Sir Bill Jeffrey: We can certainly do that.
Q735 Mr Havard: In this list that you are going to explain of what was deferred or otherwise in the particular accounting period, the accounting process that went on to achieve this notional figure of £15 billion or whatever, will you please explain whether one of the elements in those calculations was the business about the future of Trident? The concept phase for Trident, as I understood it, was due in September. I was then told it was going to be December, and I still see nothing about it. Is the cost associated with the next stage from that and the publication of what has come out of the concept phase part of that list?
Sir Bill Jeffrey: I am not sure which list you mean, Mr Havard.
Q736 Mr Havard: I thought you were going to try to explain to us what had made up this 21 billion in one area.
Sir Bill Jeffrey: Yes, we can certainly provide a fuller note.
Mr Havard: If it is not just part of that, can you please explain it anyway?
Q737 Chairman: There is a different question. The Minister suggested in the House of Commons in Defence Questions yesterday that the Trident decision was being delayed for a few months. Can you give us any more information about that?
Sir Bill Jeffrey: That is certainly the case. The concept phase that we have been going through is really a judgment about when the key early decisions are best made, and the work is certainly not yet well enough advanced for some of the decisions on which more substantial amounts of money than have so far been committed to the assessment phase could be made. As the Minister said in the exchanges yesterday, we are some months away certainly from what would be called in conventional programmes the Initial Gate decision.
Q738 Chairman: It sounds inevitable that that decision process will have to be taken after the General Election?
Sir Bill Jeffrey: It is more likely than not, yes.
Q739 Chairman: Will it not fall foul of "purdah" before the Election?
Sir Bill Jeffrey: Were it taken in the immediate weeks before the Election and were there to be a necessary public statement connected with it, it would be caught by "purdah" because, as you know very well, Chairman, the "purdah" conventions are to do with public statements during the immediate pre-election period.
Q740 Chairman: As a matter of interest, when are you considering that "purdah" starts?
Sir Bill Jeffrey: I will be guided on that by the Cabinet Secretary. It is not a completely flippant response because there is a common approach to this across government. It depends, I think, on when the Prime Minister calls the Election.
Q741 Chairman: Does that mean the "purdah" cannot start before the Prime Minister calls the Election?
Sir Bill Jeffrey: I am not sure technically whether it can or not, but it is precisely the kind of important issue for which we keep the Cabinet Office, because we ought all to do the same thing.
Chairman: That is what we have a Cabinet Office for, yes.
Q742 Mr Havard: There must be default date, because the Election has to take place by a particular time.
Sir Bill Jeffrey: Indeed; yes.
Q743 Mr Havard: What is that default date?
Sir Bill Jeffrey: I do not know offhand whether that could precede the calling of the Election. I will check that.
Chairman: Let us get on to Bernard Gray's recommendation about the Government considering a government-owned, contractor-operated institution to run Defence Equipment and Support.
Q744 Mr Hancock: Why did you turn it down?
Lord Drayson: Because I believe that it is vital that the military are fully involved in the process of defence acquisition. I do not believe that buying defence equipment should be seen as a semi-detached activity from defence. I believe that in the modern environment in which we operate equipment is absolutely vital to defence capability. To ensure that equipment is fit for purpose, you need people who really understand the challenge that equipment is going to go through, those are military people. Particularly when we are faced with operational pressures, like we have been in Iraq and are now in Afghanistan, in my view - and it is the view that we came to in the Ministry of Defence as a whole - that a GOCO structure, whilst providing advantages which I accept in terms of improvements relating to skills, project management and so forth, which you would get from a private contracting model, would lead to an increased detachment of the military from that process. I believe that that would be very bad. Therefore, I believe that what we should do, and what we are doing, is implement the changes to get the advantages that you would get from a GOCO structure: common project management tools, improved skills, a clear project management charging structure between the people responsible for the projects and the people who are the customers for the project. I learnt as Minister for defence procurement myself that when the military have real ownership of a piece of equipment - I am very much going to the operational bases in Iraq and Afghanistan, and there was a real difference between those projects where the military personnel felt that they had been fully involved in that procurement process - they felt it was their piece of kit, they were proud to show it to you. Where that kit had disadvantages they felt that they owned those problems too. This created an optimum, a working relationship, between the civil servants and the military. You need a blend of skills, and I believe that the GOCO would have put a split between that and that would have been a problem. I believe that Bernard Gray and LEK accept that point.
Q745 Mr Hancock: What about the idea of the DE&S being a trading fund?
Lord Drayson: I think this is an idea which is still on the table but which would have also some of those disadvantages in terms of putting it slightly at arm's length. I think it would be wrong for the Ministry of Defence to go down a road which said that the procurement of equipment was not core business for the MoD. If we look at the data which we have been generating for the Green Paper, for example, about the drivers of the costs of defence, the long-term trends around the amount that we have to spend on capital equipment today for every individual member of our Armed Forces, whether they are in the Air Force, the Navy or the Army, that is going up and up. The leverage that you get from that equipment means that we need Armed Forces which have more and more equipment in the future and, therefore, we need to make sure that our military personnel are fully involved in that process. If you privatise this or if you go down a structure which would prevent that, I think that would be a mistake.
Sir Bill Jeffrey: If I might add, the corollary of keeping the procurement function inside the tent, which for all the reasons the Minister gives personally I would support, is that we have to be clear, and, indeed, clearer than we have tended to be, about exactly what the respective roles and responsibilities of the central capability response, on the one hand, and the providers of procurement services on the other are. One of the points is to achieve much greater clarity about the business relationship between the centre and the DE&S organisation.
Chairman: You have to go in five minutes, I know.
Q746 Mr Havard: Could I just be clear then. What Bernard Gray says is that, as a minimum, you should do the trading fund. That is basically what he says in his report. What you are saying is that you do not need to do either the trading fund or the GOCO because the reform process that you are putting in place deals with all of the other process issues that are said by Gray a trading fund or a GOCO would stimulate you to do, which are really the important things.
Lord Drayson: Yes.
Q747 Mr Havard: Is that right?
Lord Drayson: That is right. I think that we should adopt a mindset that says if a GOCO was structured and you had a competition and a company won it (and you can think of the type of company that might win it), what would the management of that company do? They would do things like make sure that everybody who is running a management information system within DE&S is using the same system; you would make sure that the people have the necessary skills, these are the sort of things. I do believe that if you went down the route of this separation, it would not happen immediately, but after a while there would be this detachment because you would not have the integration of the military career structure into the GOCO. You would have people seconded, but they would not be people who just six months ago had come back from the latest HERRICK tour, and that would be a real disadvantage. One of the things which I think we can point to is how that has got a lot better. We have seen this in terms of the effect that we have had on UORs where I think we have a really excellent track record.
Q748 Mr Hancock: One of the issues is the skill issue, is it not? The Report recognises that within DE&S there is a skill shortage. Industry - when they have given evidence here - are concerned about how they are going to maintain skill levels. How are these reforms going to help counter the lack of skills you have got? How are you going to recover or keep hold of those skilled people you desperately need and that industry needs to attract, because you are going to give them a fairly settled vision of the next ten years of defence spending?
Lord Drayson: I think, first, we have to make sure that we have got a sufficient number of talented, highly skilled people coming from industry into DE&S. Dr Tyler is a good example. He is a very effective manager, he has a huge amount of experience; he came from industry and he has had a very positive impact on defence procurement. We need more people coming from industry. We need a clear process whereby people can come in and out of the defence procurement part of the Ministry of Defence. Also we need to develop recognition within the military of the central importance of defence equipment procurement to the delivery of military capability and the mindset that a modern, young officer would be expected to have a high degree of technological competence, because he or she is going to have to be responsible either in the operation of such equipment, or in the development and procurement of that equipment, in the future and regard that as a central part of their development and leadership training.
Q749 Mr Hancock: But they are different things, are they not?
Lord Drayson: Yes, they are complementary.
Q750 Mr Hancock: You could have a good operational officer but he would not, by necessity, have the sort of skills that is actually going to refine equipment or develop new equipment. How are you going to survive?
Sir Bill Jeffrey: I would say on skills that we have seen some improvement in recent years; we need to accelerate it. One of the points in the announcement that the Minister mentioned that relates to this proposes something that we are very keen to follow through, which is some of kind of active partnership between procurement experts and DE&S to build DE&S' capability internally. I also think, and I hope the Committee agrees with me, that, although we keep self-critically looking at this issue, we must not forget that we have some very highly skilled people working for us doing a very good job. Any time I visit there I am greatly impressed by the quality of what I hear and the effectiveness with which people are deploying their own skills.
Q751 Chairman: That is a point that Bernard Gray makes right at the beginning of his report.
Lord Drayson: He does.
Chairman: I think we would certainly
agree with that. I am going to draw this
to a close, because it is near