Examination of Witnesses (Question Numbers
80-99)
MINISTRY OF
DEFENCE
Q80 Chairman: The Comptroller and
Auditor General would like to comment.
Mr Morse: First, in our Report
we characterised it as an illustration, not a prediction. I think
that is right, is it not?
Mr Banfield: Yes.
Mr Morse: Secondly, I do not regard
it as by any means the extreme end of what we could have put in
the Report had we wished to be alarmist, to be quite frank. Because
if you actually look at public comments made by a number of bodies
about what they would expect to happen over the next four years,
if there was a much more severe regime in only the next four years
the rate of subsequent growth in the budget required to retrieve
that would be in double digits, and that is quite an unlikely
event. So we took a view, understanding—and we had long
discussions with the Department about it—the implications
that in the interests of reality it was necessary to produce some
actual concrete number to illustrate the scale that we were potentially
talking about.
Q81 Mr Bacon: That is a very interesting
phrase, Comptroller and Auditor General—"in the interests
of reality". I am glad that the NAO has published this figure;
it is reality which the MoD has been hiding from for a long time,
is it not? Ducking and weaving and if there is a problem with
an Equipment Programme that is supposed to take eight years you
suddenly say, "We will just have it take nine years"
as if somehow time is a free given. I find these figures absolutely
staggering. I was at a breakfast yesterday and John Hutton, who
used to be Defence Secretary was speaking, and one of the things
he said was that in the public sector ministers and civil servants
often talk about £200 million as if it is just a small sum
of money that is neither here nor there. "It is not,"
he said; and he is right. But we are talking here about £674
million which are net cost increases, according to this Report
on page 5, purely attributable to the decision to delay. Not bad
management, bad project management or anything else. Could you
explain to me the nature of this net increase of £674 million?
Is that mainly extra payments that you are being required under
the contract to make to the contractor because they are going
to have their shipyard tied up for a year longer than they thought
of and, and, and, or what?
Sir Bill Jeffrey: It is broadly
payments of that sort and because the expenditure will be incurred
over a longer period there is a substantial element of inflation
in it as well. The General might want to comment.
General Sir Kevin O'Donoghue:
That is correct.
Q82 Mr Bacon: A "substantial
element of inflation"; how much inflation? It is only one
year extra, is it not? Or how many years extra is it? The decision
to slow the rate of manufacture of the Queen Elizabeth Class aircraft
carriers is leading to this net increase of £674 million;
that is a decision to slow the rate of manufacture by how many
years?
Sir Bill Jeffrey: Between one
and two years.
Q83 Mr Bacon: So between 12 and 24
months. So when you say "substantial extra inflation"?
General Sir Kevin O'Donoghue:
£250 million[2].
Q84 Mr Bacon: Of extra inflation?
General Sir Kevin O'Donoghue:
Of extra inflation over the two years.
Q85 Mr Bacon: Really? What is the
total cost of the aircraft carriers?
General Sir Kevin O'Donoghue:
£5.3 billion.
Sir Bill Jeffrey: Somewhat in
excess of £5 billion.
Q86 Mr Bacon: 250 divided by £5
billion gives you 5%, so you are assuming 2.5% inflation per year
for two years on all your costs, in addition to the extra payments
you have to make to the manufacturer; is that right?
Sir Bill Jeffrey: To be clear,
Mr Bacon. I am not for a moment—and I hope it was clear
from my answers to earlier questions—arguing that this was
a decision we would have made in any other circumstances. It is
a decision which ministers took, presented with a range of options
...
Q87 Mr Bacon: Can you just remind
us when was the decision taken to slow the rate of manufacture.
Sir Bill Jeffrey: It was taken
in the latter part of 2008.
Q88 Mr Bacon: I know that it was
seven months after the contract was signed but exactly when was
the decision taken?
Sir Bill Jeffrey: The latter part
of 2008.
Q89 Mr Bacon: The credit crunch started
in September. Northern Rock, which this Committee took evidence
on, was September 2007. It was very clear there was a problem
by much earlier in 2008 than December 2008. It was clear that
tax revenues were dropping off the cliff by much earlier than
that. What I find difficult to understand is why you signed the
contract to commit you to this stuff and then, only seven months
later, you commit yourself to a slowing down which will cost you
an extra £674 million. The education budget for the county
of Norfolk—not just my constituency but for the whole of
the county of Norfolk—is £434 million for a year. This
is more than that. It would pay for all of that for a couple of
years or a year and a half. If you add on the Astute, the extra
cost delays from that, it would pay for all the education of all
the children in Norfolk for two and a half years. These are staggering
sums of money and you almost do it casually. How can you sign
a contract and, only seven months later, reach a decision with
such calamitous consequences for the public purse? I realise it
was because ministers decided to but you are advising ministers.
Sir Bill Jeffrey: This was certainly
not remotely something that was done casually. It was the considered
reaction to the kinds of budgetary pressures I described earlier
in the session, in a situation in which the options which would
have had a more damaging effect on longer-term military capability
were extremely unattractive to ministers, for obvious reasons;
particularly given that we had not had a Defence Review for some
time and in which there was also a strong and understandable desire
to redirect resources towards more operationally relevant priorities.
Presented with a range of ways in which we could take cost out
of the programme, ministers at that time decided that, sub-optimal
as it is, for all the reasons we are discussing this afternoon,
delaying the carrier was least bad.
Q90 Chairman: Sir Kevin, put it this
way: if you change the period of the contract, does this not undermine
your ability to protect the MoD's interests?
General Sir Kevin O'Donoghue:
It makes it more difficult to hold the contractors feet to the
floor.
Q91 Chairman: If so, why have you
not personally resisted these decisions?
General Sir Kevin O'Donoghue:
I am not sure it is up to me to personally resist them.
Q92 Chairman: Who is it then?
General Sir Kevin O'Donoghue:
These are decisions by ministers, who chose to spend more money
on other sorts of capability, particularly for current operations,
than on the aircraft carriers. That is a political decision; that
is a capability requirement.
Q93 Nigel Griffiths: There is a lot
of emphasis on the role of helicopters in modern defence requirements
and the likely future role of them. I am a little concerned that
at paragraph 2.11 on page 26, "The Department did not undertake
formal operational analysis on the impact of the reduction"—of
the Lynx Wildcat flying hours. Why was that?
General Sir Kevin O'Donoghue:
I am sorry, could you give me the reference?
Q94 Nigel Griffiths: Page 26, 2.11,
the last three lines.
Sir Bill Jeffrey: I think all
this sentence is saying is that when the Equipment Examination,
which we have discussed earlier in a much higher profile context,
namely the decision on the carrier, was being undertaken, the
option of reducing the flying hours of the Lynx Wildcat was on
the table and there was military advice available to the effect
that it was a manageable reduction; but, as the NAO brings out,
there was not a formal operational analysis as such.
Vice Admiral Lambert: There are
lots of ways of doing operational analysis. One way is to use
a Military Judgement Panel; another way is to do it in a scientific
way, of looking at a whole series of criteria.
Q95 Nigel Griffiths: What is a Military
Judgement Panel?
Vice Admiral Lambert: It is, like
this room, full of people who are experts, asking them their views,
voting accordingly, and you get a series of subjective views which
brings it up to a more objective way of looking at a problem.
Q96 Nigel Griffiths: Not that in
particular but what the issue highlights, for instance of the
Lynx and the Merlin and reflected in figure 10 on page 21, seems
to be a sort of mix of available cuts or delays to meet the money.
Was it considered that one big hit might be a better way of achieving
this i.e. cancelling the QE Class aircraft carriers.
Sir Bill Jeffrey: I can hear Mr
Davidson coughing! In a way, it brings us back to the point I
was making earlier, which is that we have faced these cost pressures
over a period when there has not been the kind of strategic review
that you would expect to have before making major decisions that
would reduce military capability substantially long-term. It is
inevitably a consequence of that, I fear, that when we faced this
issue a couple of years ago—and we have done almost annually
in the last few years—we were looking at less dramatic but
none the less cost-reducing measures such as the two you have
just referred to. What we try to do is to manage that process
in a manner that has the least adverse impact on military capability
overall.
Q97 Nigel Griffiths: Yes, but it
does seem plain on the Lynx that the reduced numbers are not sufficient
to meet military tasks.
Vice Admiral Lambert: I would
disagree with that. I think that, as we see in theatre, some of
the military tasks, ie the intelligence collection-type tasks,
the ISTAR-type tasks that Land uses helicopters for, will be delivered
by other means. We have seen some of that task being done by unmanned
air vehicles. The maritime task will be a combination of both
Lynx and Merlin, and I think we will end off with the number of
Lynx that we require.
Sir Bill Jeffrey: Perhaps I may
add that I also understand it to be the case, and the Admiral
will tell me if I am wrong, that to some extent the reduction
in planned numbers was achieved through some rationalisation of
the Army and the Royal Navy variants of the Lynx Wildcat; so that,
between the two Services, it was possible to deliver similar outputs
with fewer aircraft.
Vice Admiral Lambert: It is combining
the training requirements and other lines that allow us to reduce
the amount of equipments that we require.
Q98 Nigel Griffiths: You have raised
unmanned vehicles and figure 15 gives a very good, simple chart
for the layman on that. However, there is not good information
on the overall costs of the programmes. Is that defensible? If
these are such, as I read, a great way forward and especially
a way of protecting the lives of both pilots and others, why is
there not good information on overall costs of the programmes?
Vice Admiral Lambert: We can provide
the numbers for Watchkeeper.[3]
That programme is delivering and will deliver to theatre at the
latter part of this year. We have another programme which is called
DABINETT, and we can let you know the amounts that we have allocated
in the order of magnitudes towards DABINETT for the future.[4]
We also have urgent operational requirement for delivering Reaper
into theatre.
Q99 Nigel Griffiths: What has been
the problem? Why did the Programme Boards not have good information,
as the Report says?
Vice Admiral Lambert: I think
they have good information on Watchkeeper. The issue is that the
requirement for the more strategic unmanned air vehicles such
as Reaper, and in the future DABINETT, has come in reasonably
quickly during this particular campaign. Therefore, they would
not have had the numbers for the in-year requirements and the
requirements over the short term.
2 Note by witness: The correct figure is £374M Back
3
Ev 16 Back
4
Ev 16 Back
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