Examination of Witnesses (Question Numbers
120-128)
MINISTRY OF
DEFENCE
Q120 Chairman: Admiral, you are head
of capability. There is nothing new about this problem of affordability,
is there? You were aware of it at the time that you committed
to the carriers and the Joint Strike Fighter, were you not?
Vice Admiral Lambert: I think
that the problem with affordability has increased year on year.
We have always said that each planning round is worse than the
last. I think that we are now at the point where there are some
major issues and those issues can only be addressed through a
defence type of review.
Chairman: There are a couple of supplementaries,
first from Mr Bacon and then Mr Mitchell.
Q121 Mr Bacon: Sir Bill, I have one
question about the comment you have just made. You said that we
have had a tendency at the Ministry of Defence to be over-optimistic.
Do you use the techniques of optimism bias in project appraisal?
They are well established and have been for years. I see the Treasury
Officer of Accounts laughing. I remember being in a seminar at
the Treasury years ago where optimism bias was discussed. I do
not know how widespread it now is in its use in project appraisal
throughout Whitehall, but it has been around for quite a few years.
Do you use it?
Sir Bill Jeffrey: We do. Whether
we call it that or not, we certainly do it. As I said earlier,
we are consciously building skills in cost estimation and creating
within the Department an independent cost assessment function,
whose assessments of cost will be authoritative and will be the
only ones that we work to.
Q122 Mr Bacon: General, you looked
like you were about to say something.
General Sir Kevin O'Donoghue:
I think that is absolutely right. Where I think we got it wrong
in the past is that there have been more than one set of costs
and they are suppressed. The frontline wants the kit; industry
wants to sell it to us; my teams in the past have perhaps been
over-eager to get on to the point—
Q123 Mr Bacon: It is not unfamiliar.
This is the world. If you are buying a car, there are different
sets of costs. Actually, there are different sets of lawyers,
depending upon what advice you want as well. It is a common theme.
General Sir Kevin O'Donoghue:
What we have done now is set up a cost estimation organisation,
which Lord Drayson has decreed will be the one and only true cost
that we will all use. That will be an independent cost estimation.
Q124 Mr Bacon: You say that "will
be", when will it be set up?
General Sir Kevin O'Donoghue:
It is set up already, but it is not big enough to look across
more than the major Cat A projects. It needs to be able to look
at the Cat A and Cat B projects; it needs to give the Admiral
independent advice on cost.
Q125 Mr Bacon: Just for the clarification
of the Committee, what is a Category A and a Category B project?
General Sir Kevin O'Donoghue:
Cat A is over £400 million, Cat B is over £100 million.
Mr Bacon: So Mr Hutton was right, was
he not? You need not answer that!
Q126 Mr Mitchell: Optimism bias is
about all that has kept me going for 30 years as a Back Bencher!
I want to ask about pessimism bias. We seem agreed that there
is a kind of affordability gap, whether it is £36 billion
or the IPPR £80 billion. The Report summary on page 4, paragraph
2, says that this will "need to be addressed ... as part
of the Strategic Defence Review which is expected after the General
Election". The general election is 6 May. The Secretary for
Defence told us that. I announced it before, well before. However,
a Defence Review takes several months, say the end of the year
at the earliest. Now there is a year's saving that you could make—and
these are quite substantial savings—by cancelling projects
now. Is that not possible?
Sir Bill Jeffrey: First of all,
I am in no position to confirm or deny the date of the general
election! However, the shape and timing of a Defence Review will
depend on the outcome of the general election. My assumption is
that it will take most of the rest of the current year, but a
great deal depends on what ministers of the day decide. It is
always open to us—and this is the dilemma we faced in the
period that we have been discussing—to decide to cancel
things without the benefit that a Strategic Defence Review provides.
As a matter of fact, observable fact in the last few years, we
have not done much of that. I suspect, as close to an election
as we are now, ministers, both before and after the election,
will conclude that the right thing to do is to have the thoroughgoing
examination that a review enables, but do so against the fiscal
context that we have been discussing this afternoon.
Q127 Mr Bacon: If you are doing your
job, Sir Bill, you and your staff will be writing various possible
Defence Reviews so that, on day one, whoever takes over as Secretary
of State for Defence will have handed to him his options, will
you not? If you were doing your job, would you not be doing that
now?
Sir Bill Jeffrey: I hope the Committee
has some confidence that I will be doing my job, but we do. We
will be trying to prepare ourselves so that we can hit the ground
running in support of whichever ministers emerge from the election.
Indeed, the approach that the present Defence Secretary has taken,
which is to ask us to prepare the Green Paper which he plans to
publish next week, and to prepare it with the assistance of an
advisory forum that he has put together with representatives from
the other two political parties, has been administratively very
helpful to me; because it means that in these last few months,
in preparing the Green Paper, we have been able in a non-partisan
way to do some of the essential preliminary work that will enable
us to get stuck into a Defence Review very quickly after the election.
Chairman: Mr Carswell asked you a couple
of questions that you said you would be happier to reply to in
private. Mr Carswell has told me that he does not want to move
into a private session. He does not approve of them and he might
blab afterwards.
Mr Carswell: I will blog rather than
blab!
Chairman: That has killed off his chance
of ever being given a job by any part of the establishment!
Mr Carswell: Good!
Chairman: And he says "good"
to that! But before we finish I have one final question to put
to you, which I suppose sums up. Frankly, the budgetary and governance
arrangements of your Department, Sir Bill, are unacceptable to
this Committee. Will you commit yourself to gearing up your entire
Department to redressing this budget deficit and achieving a balanced
budget in your Department, whatever financial settlement you receive
over the forthcoming years?
Q128 Nigel Griffiths: A planned budget
in our time.
Sir Bill Jeffrey: I do, Chairman,
and I would say two things. The first is that I hope it has been
clear from this session that the management of the defence budget
over the last few years, for all the reasons I started with, has
been extraordinarily difficult. I think some of the changes we
are now making institutionally—and I do point to the ten-year
programme as being a means of planning more effectively than it
is possible to do with only, at best, a three-year horizon—these
are changes that should enable us to improve the position significantly.
The only proviso I would add is that, in the end, having a defence
programme that is manageable within the resources provided depends
on ministerial decisions about the content of that programme.
Chairman: Thank you, Sir Bill, Sir Kevin,
Admiral.
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