Ministry of Defence: Major Projects Report 2009 - Public Accounts Committee Contents


Examination of Witnesses (Question Numbers 100-119)

MINISTRY OF DEFENCE


  Q100  Nigel Griffiths: What about the Falcon communications system? Why has that been downgraded in importance?

  Vice Admiral Lambert: I do not think it has been downgraded in importance. What has happened with Falcon is that, like many of the equipment programmes, we have to look at the priorities across the piece. Every year we do look at the priorities we give these equipments and, in a constrained budget, we have to look at where we invest our money and where we disinvest from. At the end of the day, however, we are trying to deliver the capabilities to meet defence policy as currently laid down.

  Q101  Mr Davidson: Can I ask whether or not, if the aircraft carrier had gone originally to plan, the Joint Strike Fighter would have been ready to go on board it?

  Sir Bill Jeffrey: It is quite a difficult question to answer, because we make estimates and sometimes, as this Committee knows well, they end up changing. Certainly part of the judgment at the point when the decision to delay the aircraft carriers was taken was that—and I put to one side the important arguments about value for money that we have heard this afternoon—in capability terms we were unlikely to lose much, if anything, because the aircraft carriers would still be delivered at around the time when we were expecting the first Jump Strike Fighters to be delivered.

  Q102  Mr Davidson: Let me be clear. You now expect the aircraft carrier to be delivered around the time, I think you said, when the first Joint Strike Fighters are available—which effectively means that, had the Government not changed the schedule for the aircraft carriers, you would have built two aircraft carriers and not had any planes to put on them.

  Vice Admiral Lambert: We have Harriers on our current aircraft carriers and the Harriers can go on the future aircraft carriers and, when Joint Strike Fighters come, Joint Strike Fighters will take over the Harriers' role.

  Q103  Mr Davidson: But the plan is to have the new carriers and the new planes and, in fact, had you gone according to schedule you would have ended up with the new carriers and the old planes.

  Sir Bill Jeffrey: That is true, although—

  Q104  Mr Davidson: So in those circumstances it is not unreasonable to accept the delay in the new carriers?

  Sir Bill Jeffrey: In capability terms that is why we considered that it was lower impact than other things that were being examined; because in capability terms we could continue in service, as the Report brings out, the existing class of carriers for a year or so longer.

  Q105  Mr Davidson: Can I ask the National Audit Office whether or not that particular point was taken into account in establishing whether or not the delay was value for money?

  Mr Morse: Yes, it was.

  Q106  Mr Davidson: What conclusion did you draw?

  Mr Morse: That the issue is that, seven months after deciding to deliver the carriers over the one period, to extend it by a year still drove very substantial cost growth. I do not think, Mr Davidson, that there was—unless the MoD wants to enlighten me—an enormous amount of new information about when the Joint Strike Fighter would be available during that time. General Sir Kevin O'Donoghue is nodding. That is my understanding, therefore.

  Sir Bill Jeffrey: Perhaps I could clarify a little, subject to Sir Kevin's views on this. I do not think it was so much that the Joint Strike Fighter was slipping, so we might as well slip the carriers; it was more that, at the time when we had to address the option of delaying the carriers, we could be confident that even by delaying them we would still deliver them at around the same time as the Joint Strike Fighters were being delivered.

  Q107  Mr Davidson: The new planes could not fit on the old carriers but the old planes can fit on the new carriers?

  Sir Bill Jeffrey: Correct.

  Q108  Mr Davidson: Can I clarify about the next set of orders for shipyards? My understanding was that, if you had not delayed the carriers, you would have basically run out of work for the shipyards; because the Future Surface Combatant was not coming along until a later period and that that effectively would have meant that the shipyards, which is an integral part of the Defence Industrial Strategy, would have had no work for a period, unless work had been found.

  Sir Bill Jeffrey: I do not think we are as yet clear enough about the timescales for the Future Surface Combatant to confirm that in terms. I certainly do not think that we could have justified the delaying of the aircraft carrier construction on grounds of industrial continuity, although undoubtedly by doing so we will keep the yards occupied over that period of time.

  Q109  Mr Davidson: Given that it is part of the Defence Industrial Strategy to keep the shipyards open in order to retain that capacity, what else would you have put in had the second carrier been launched in 2016?

  General Sir Kevin O'Donoghue: As I am sure you are aware, there are three classes of the Future Surface Combatant. The right way to go for capability reasons is the way we are going, which is the Class 1 and the anti-submarine warfare frigate as the first in line. We could have put the third-class or the second-class in first. Shorter design time would have kept the shipyards—

  Q110  Mr Davidson: So it would have gone in in 2016?

  General Sir Kevin O'Donoghue: There are a number of levers we could have pulled to keep the skill sets up in the dockyards for when we were ready to put the Future Surface Combatant in.

  Q111  Mr Davidson: Would there have been cost implications if you had moved the Future Surface Combatant forward to 2016? Would it have been affordable?

  General Sir Kevin O'Donoghue: I do not know but I do not think we would have wanted to do that, because there is a finite design time to design the ships before you—

  Q112  Mr Davidson: If you did not do that, you would have a gap and the shipyards would have no work.

  General Sir Kevin O'Donoghue: No, because we could have put a simpler ship in—a ship that is simpler to design—such as the Class 2 or the Class 3 ships. That is why I say there are a number of levers we could have pulled. In the event, we did not have to and we are doing the right thing.

  Sir Bill Jeffrey: I am tempted by your line of question, Mr Davidson, because it would be nice to be able to say that this slippage made that kind of industrial sense, but I do not think that was the driving motive.

  Q113  Mr Davidson: Could I ask about the Type 45? Am I right in thinking that during the most recent period the cost of the platforms has come down because of early delivery?

  Sir Bill Jeffrey: I think this Report brings out—and Sir Kevin might want to say something about the more recent period than this Report covers—that, after all the vicissitudes of the past, which we have been into with this Committee, in the year covered by this Report the estimated cost remained absolutely steady and in fact we will get delivery of the first in class some months earlier than we had previously been assuming.

  Q114  Mr Davidson: Yes, but saying the costs are steady, it is a decrease in the platform cost and an increase in the systems cost, is it not? So the two balance themselves out effectively.

  General Sir Kevin O'Donoghue: You are right, the cost is coming down now—not over the period of this Report—but that is a reduction in the cost of capital and a reduction in inflation because they have come in earlier than we thought.

  Q115  Mr Davidson: Can I clarify and seek some help on this, because there has understandably been quite a lot of focus on the bow wave effect, so to speak. Perhaps we can strip out the bow wave effect; because it seems to me that questions of delay because of ministerial decisions are in a sense political and to some extent some of those are beyond the remit of this Committee. As to the underlying costs, as it were, I am not clear whether or not projects have been kept better under control than they have in the past—because we have had some of the legacy projects, which were horrendous, and we have discussed that over a period. I now find it very difficult to see whether or not, leaving aside the bow wave stuff, things are much better than they were.

  Sir Bill Jeffrey: Two points on that. The first is that, to quote the Report at paragraph 10, "Taken together, these cost and timescale indicators suggest that project control has improved in 2009". As I said at the very beginning of the session, we are not there yet by any means but I take some comfort from that. On the bow wave, I guess it is always the case that in the early years of a ten-year period there are more identifiable commitments than in the later years. The sort of picture one sees therefore has that hump in it. I think that, to attempt to answer more completely the question Mr Bacon put earlier, I certainly do not dispute that if you examine our essential estimate of the existing programme and set it against likely outcomes in terms of planned expenditure, the next Defence Review will have to address a very significant affordability issue.

  Q116  Mr Davidson: Absolutely. It seems to me that the whole question of affordability is for another place. We ought to be discussing whether or not you are improving the cost management and time management of the existing projects. Apart from the bow wave effect, unless I am mistaken, you are doing much better than you have in the past.

  Sir Bill Jeffrey: I believe so and I do not think that is something we are complacent about. I do not think the CDM is complacent about it for a moment; because, as Mr Gray's report brought out, there are still issues for us to address about cost estimation in particular. I think a lot of the effort in the Defence Equipment and Support organisation at the moment is around building authoritative cost estimation centres that are not in the project teams themselves, building skills and estimating the costs, should-cost techniques and that kind of thing. I think that for all sorts of reasons, as Bernard Gray observed, there is a tendency in our organisation to be over-optimistic about cost, and that is the source of some of the problems that we have been discussing this afternoon. We have to get better at that. I think we are getting better at it and there is some evidence in this Report to support that.

  Q117  Mr Davidson: Some of my colleagues have touched on this point already but this seemed to be very important. Once you start negotiating with suppliers with whom you have signed contracts, the real danger then is that they just take you for a ride, because they have got you over a barrel; you have signed the contracts and so on. To what extent are the contracts that you have now much more open-book and much more partnership than they were, so that you can avoid being exploited in a way that perhaps you have been in the past?

  Sir Bill Jeffrey: I think—and there are one or two individual inquiries that this Committee has undertaken which have demonstrated this—that, where we have succeeded in turning projects with longstanding problems round, it has been because we have moved from imagining that with a contract of a particular kind we were transferring risk to the supplier when we were not actually, into something more like a partnership in which there is a greater transparency and there is a genuine sharing of risk, and the supplier is incentivised to reduce costs in our interests and his own.

  Q118  Mr Davidson: Can you point to any example here where there is clear evidence that risks were transferred to the supplier and the supplier suffered?

  General Sir Kevin O'Donoghue: I am not sure about the supplier "suffered".

  Q119  Mr Davidson: You see, unless you see blood on the floor or pain you have no evidence really that your risk has been transferred.

  General Sir Kevin O'Donoghue: No, I think we do transfer costs and some of the in-service support cost contracts are very good examples. Rolls-Royce, we tend to buy power by the hour, for availability. We incentivise them to build in reliability in the engines. A very good example—there is a sign in the Rolls-Royce aero engine operation centre from Rolls-Royce management to their workforce, "Remember! Spares are now a cost, not a profit". This is the behavioural change that we are trying to develop with this change in the way we do business. You are absolutely right. Open-book accounting: gain share; an agreement to look at the prices and the profit margins; contracting for availability; start small; contracting for availability of spares; go for platform availability and then go for mission availability. Completely open-book accounting. That is the direction we are going in.

  Sir Bill Jeffrey: An area of the Report we have not touched on this afternoon but is one of the new elements of it is the examination of five significant in-service capabilities where, over the year, we saw an overall decrease in costs of £274 million.


 
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