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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