Evidence heard in Public

Questions 1 - 115



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Oral Evidence

Taken before the Defence Committee

on Wednesday 4 September 2013

Members present:

Mr James Arbuthnot (Chair)

Mr Julian Brazier

Thomas Docherty

Mr Jeffrey M. Donaldson

Mr Dai Havard

Mr Adam Holloway

Mrs Madeleine Moon

Penny Mordaunt

Sir Bob Russell

Bob Stewart

Ms Gisela Stuart

Examination of Witnesses

Witnesses: Bernard Gray, Chief of Defence Materiel, Ministry of Defence, and Susanna Mason, Director General, Exports and Commercial Strategy, Ministry of Defence, gave evidence.

Q1 Chair: I understand that I must begin with the words, "Order, order. Welcome to this afternoon’s session." So, welcome to this afternoon’s session, Mr Gray. Susanna Mason, you have not been before us before, I think. You are most welcome. Please feel free to join in as appropriate or as Mr Gray allows you.

In 2009, you produced your report, and you identified, essentially, three issues: an overheated programme, a series of broken relationships within the Ministry of Defence and a shortage of skills, which all added together to produce a procurement system that was, essentially, broken. Now we have been told-whether we believe it or not, we have been told-that the procurement system is now balanced. We have been told that the Levene reforms are resolving the relationship problems, which leaves the GoCo essentially aimed at resolving the shortage-of-skills problems. Is that a fair analysis? It would suggest that it might be possible to resolve some of the problems of the MOD without resort to a GoCo.

Bernard Gray: Good afternoon to you all. I think that is a partial statement, and I would like to draw a distinction between an acute and a chronic condition. Over the last 50 years that we have looked at, we have seen a programme that slowly silts up and arrives at some crisis point, usually either coinciding with a defence review or itself prompting a defence review. That causes us to hack the programme back to a size significantly smaller than it is today, after which it accretes again over some period of time, so you have a sort of sawtooth motion going on.

My view of the current situation is that we have done what has sometimes been done in the past: we have cut the programme back to size and therefore it is approximately the right size for the amount of money that we have got, but what we have not yet been able to do completely is to remove all the forces that cause it to accrete over time. Left to its own devices, my personal opinion is that we would come back in 10 or 15 years’ time and we would find a substantially overheated programme with all the problems that we were looking at between 2005 and 2010. Part of what we are trying to do is to resolve the drivers that give rise to the underlying chronic complaint, not just the current symptomatic presentation.

Why would a GoCo help? We can debate it, but I think it would be reasonable at least to assert at this point in the conversation that it might help with the skills issue. We can come back to that. Why might it help with the other issues? Our opinion about that is driven by two dimensions, one of which is to expose to the people setting requirements-so now largely in the front-line commands-the cost of what they are proposing to do.

One of the drivers of the way that it has accreted in the past has been when people in the front-line commands want to do something quite difficult for very little money-my joke about this is: "We wish to put a tank on the moon for 50p"-and in various different ways try to influence people in DE&S, whose job it is to price up that requirement, to agree with them that putting a tank on the moon will only cost 50p. There is no boundary that causes the DE&S folk to act differently today. A discipline that a GoCo-type contractual boundary would introduce is that the financial interests of the GoCo would be affected by agreeing with an inappropriate proposition. Therefore, as regards estimating the cost of putting a tank on the moon at £25 billion as opposed to 50p, having the skill to cost it and the incentive to cost it accurately are important characteristics that we do not have today.

Similarly, in dealing with the aggregate programme at the centre, there is sometimes a desire for people to wish to have more than is deliverable on aggregate. Again, having a contractual interface there imposes a discipline that makes it, not impossible but harder for the Department to wish itself into a position that it is not in. Therefore the GoCo has a disciplining function which affects the first two questions as well as the third.

Q2Chair: How precisely does that disciplining function work? What are the mechanisms that stop the tank getting on to the moon for 50p within a GoCo that would not exist within the current Ministry of Defence?

Bernard Gray: You cannot absolutely prevent anything but the incentive structure is there. The GoCo would be paid relative to what it said it was going to cost to do the job in the first place versus what the outturn was. Thus it has absolutely no incentive to under-price the job in the beginning. In fact, more often we hear the criticism the other way, saying will they not just over-price in order to give themselves an easy life. There is an appropriate tension between the customer who wants the capability for the minimum possible price and the GoCo contractor who wants the easiest life. That tension happens in most negotiations, resulting in some kind of equitable view as to what the total cost will be.

Q3 Chair: So it is the reward mechanism written into the contract?

Bernard Gray: Yes, that is correct.

Q4 Chair: May we see that reward mechanism?

Bernard Gray: In the draft contract?

Chair: Yes.

Bernard Gray: I do not know that we have published all those details yet but we can certainly send to you what we have got in the draft contract. It is quite a long document. We can flag up the relevant parts.

Chair: That would be helpful. Thank you.

Q5 Thomas Docherty: Just following on, the issue for the last 16 years has not been the cost of putting the tank on the moon, it has been procuring the tank itself. The vast majority of our greatest hits on overspends, on running late, are caused by other things, Mr Gray. They are caused by politicians moving to the right. You shake your head, but take the Queen Elizabeth class carrier project. It is not that Aircraft Carrier Alliance made errors on their original figures, it is that my party in government moved decisions to the right. The current Government changed its spec. Looking at other programmes, that has been a common theme. It has been political problems, or lack of understanding by Government, if I can put it like that. How does GoCo fix those problems?

Bernard Gray: The reason I shake my head is that I am not convinced that the causal relationship is the way round that you say it is. My personal view is that the reason that the 2009 delay in the carrier occurred was that the programme was overheated. People had allowed the programme to get too large, and then where you do get political interference is in which things you have to slow down. If you have over-ordered, there is too much in the programme and you cannot afford the cash-flow payments for it all, which is the situation we were in between 2005 and 2010-not uniquely then but we were in that position then-then people have to make choices about what to slow down. My personal experience since being in this job, since we have effectively cut the programme back to a manageable size, is that political interference is not particularly a problem. The competence of both industry and DE&S to be able to manage the programme is a much more significant issue in the delivery of the programme than Ministers attempting to interfere in decisions about how things should be specified.

Q6 Chair: We said we would get on to the skills issue, which is the main reason that has been given by you amongst others for the need for a move to GoCo. Has there been a competency audit of DE&S?

Bernard Gray: I would not necessarily say so in so many words, but we commissioned Booz Allen some 18 months ago to do a set of work around DE&S, benchmarking DE&S’s skills against those of other Government organisations and international private sector organisations. It has a database of around 150 of those exercises that it has run worldwide. Although it varied a little bit between one competence set and another, broadly speaking we were in the lower quartile of that performance.

Q7 Chair: Could we see the result of that Booz Allen work?

Bernard Gray: Sure.

Q8 Mrs Moon: I was trying to listen very carefully to what you said about the real difference that you felt a GoCo would bring, and, quite honestly, it seems to be down to a power relationship. What a GoCo has is the power to say no.

Bernard Gray: It has the power to say no to some things. Certainly, it can say, "You may wish this job to cost 50p but it is actually going to cost £500 million."

Q9 Mrs Moon: Why cannot DE&S say no? Why do we need to go down a GoCo route? Why, as is, can that responsibility for saying, "No, that is not feasible; that is not achievable" not be part of that relationship?

Bernard Gray: Because at the moment, people who work in DE&S are either civil servants or military personnel who are, in some sense, beholden to the Ministry of Defence civil service and the wider civil service for their futures or their relevant military service. Even being fair to people, it is quite difficult to disagree with other very senior people in the centre of the Department who want something to be true.

Q10 Mrs Moon: So it is power?

Bernard Gray: Their careers are part of that problem. At the moment, effectively, in the way that life has, organisations have a way of helping people understand which way is up, and it is very difficult for individuals to stand out against that. I make no criticism; in fact, I stick up for the DE&S people, because they are put in an impossible position.

If we go back to the aircraft carrier issue, people were required, at an absurdly short period of notice, to provide a costing to insert cats and traps into the system. Had I been there at the time, I hope-it is always easy to be a Monday morning quarterback about these things-that I would have turned around and given the right answer. In response to the question "Can I have an answer by the close of play today?" the right answer would be, "No, you can’t." I hope I would have said that.

I am in something of a privileged position in all of this to be able to say that. I do not think it is reasonable to expect a member of the body of the kirk to turn around and push back against extremely senior people when they are demanding things and saying, "The most senior people in the country want an answer by 5 o’clock, so you had better give me one."

Q11 Mrs Moon: Following that argument, what you are saying is that any relationship that comes to spending money in Whitehall needs to be privatised, because the people who are told, "Make this happen" have to be able to say no.

Bernard Gray: I am not making that argument only because I have not analysed any of the other situations, and I would not generalise from a specific.

Q12 Mrs Moon: But the same people are reliant on the customer for their promotion.

Bernard Gray: They may be, but I choose not to speculate. If you want me to go and study some other thing, I will go and study it and offer you a view. I have not done so, but I can say that in this circumstance, people in the middle in DE&S have been put in an extremely difficult position on a daily basis.

Q13 Sir Bob Russell: I am still puzzled as to how their different employment status would affect their day-to-day work. My understanding is that under the plans, more than 16,500 Government staff at the MOD’s defence equipment and support unit would be transferred to a private sector employer. They would be doing the same job, would they not, but in the private sector rather than the public sector? How would that alter their day-to-day working-the 16,500 people who overnight would go from being public sector workers to private sector workers?

Bernard Gray: So their nominal responsibility today and their actual responsibility in the future would be to do the best job they could with their own skills and abilities to deliver the programme as well as possible. The issue, I think, is that at the moment they are placed in a situation where they have something of-to put it politely-a conflict of loyalties. They have a loyalty to DE&S in delivering their programme and they have an overall loyalty to the Department, which might want to go in a direction that may or may not be valid. In the future their job will be restricted to delivering the programme and telling the truth to the centre, whether the centre wanted to hear it or not. Their defence to that would be, if you do a good job within DE&S delivering the programme and you manage the programme well and it flourishes, you are likely to be promoted and rewarded within that structure, as a way of saying, "You are a good programme manager and you all did well", because they are specialists in programme management, engineering or one of the other functions we have. They would not be looking over their shoulder so that the only way to get promoted is to be a generalist civil servant and go through a whole variety of jobs; you may happen to be in DE&S today but you might be in some policy job in the centre tomorrow. What is going to count is all your annual appraisals and scoring systems that people have put in place, which in the civil service world include, "How agreeable is this person?" If you and DE&S have been turning round and saying, "I’m terribly sorry, this is quite difficult; no, you can’t have it today; yes, it’s going to cost this," that does not make you terribly popular in some circles.

Q14 Chair: The reason I have always thought you are an excellent witness in front of this Committee is that you always wish to be as open with us as possible. One of the things we have asked for is if we could see the bids and the investment appraisal and the proposal for DE&S-plus. I wonder whether we could do that. I have written to the Secretary of State to ask for those. Would it be possible for you to let the Committee have those documents in confidence, to the extent that it is necessary?

Bernard Gray: The short answer to the question is that I don’t know. I will find out what the confidential status is of the bid documents prior to decision and, indeed, afterwards. There will be a process around handling all of that-about the provision of those documents-which I simply don’t know. I think "when" depends partly in relation to the DE&S-plus issue as well. If we are going through an active evaluation of those things, very few people inside even the Ministry of Defence, which will deliberately compartmentalise this, will have any sight of that, in order to protect the integrity of the competition and to prevent the risk of challenge by people saying, "People who didn’t need to know"-I am not saying that you don’t need to know; I am just saying that you have to restrict as much as possible access to that commercial information while it is going on. What we don’t want to do is spend a huge amount of time and effort running the competition, only to have somebody file a complaint against that competition because we disclosed information to people that we didn’t need to and it leaked, or some other thing. It is not that I don’t have a desire to be helpful on the point; I just need to check what our commercial policy decisions are about that.

Q15 Chair: But you know that the Ministry of Defence would classify a lunch menu if it possibly could.

Bernard Gray: It probably does-as a serious health hazard. In this kind of case, bid documents with numbers in them in the course of a competition evaluation are held very tightly. Let me find out what I can do for you.

Chair: Thank you very much.

Q16 Thomas Docherty: Would you accept that the concern that follows on if you do not share-am I right in thinking that you have not shared this, even on Privy Council terms, with the Shadow Defence Secretary?

Bernard Gray: "This" being-?

Thomas Docherty: The bid documents.

Bernard Gray: To be clear, when you say "bid documents", do you mean the submissions from the bidders?

Chair: Yes, but I do not think that the numbers in those bid documents will be needed. I don’t think that they will be relevant. Essentially, what we want to see is how the appraisal of the investment was been done-how they were being compared.

Q17 Thomas Docherty: So would you accept that, because this is a new concept, you are asking both this Committee and Parliament as a whole to take a large step in the dark when the MOD is unwilling to show them where that dark hole goes to?

Bernard Gray: Just to try to be clear about what kind of documentation we are talking about here, we have an assessment framework that we will put any of the bids against. So it says you need to achieve this, that and the other thing in these different categories as a marking scheme. Similarly, we will put DE&S-plus against the same marking scheme. We will probably talk about DE&S-plus a bit later. So we have a marking scheme. We have a draft contract and a set of "invitation to negotiate" documents that we have sent out to the two bidders. Subsequently we will have their submissions back to us. So there are three different types of thing. I am grappling slightly over which-all is a good answer. However-

Q18 Chair: No, while of course all would be the best of all possible worlds, the marking scheme itself will possibly be of the greatest of interest to us. The contract would certainly be of some interest although I recognise that it might be cupboards full of papers.

Bernard Gray: It is about 750 pages.

Q19 Chair: What we are really interested in would be the marking scheme and the selection criteria that made you say that this one is better than that one.

Bernard Gray: Okay. Let me go away and see what I can do. The marking scheme itself is worth a discussion. It is a fairly bald document. If we were able to give it to you I would recommend that we give you some kind of briefing to explain what is in our minds.

Chair: That, too, would be exceptionally helpful.

Q20Thomas Docherty: Do you understand why Parliament as a whole is sceptical or cautious about this? It has been asked to take an unprecedented step. No other nation has done this. There is somewhat unusual reluctance from the MOD-

Chair: The point has been made and reiterated. What you can give us would be much appreciated. The more open you can be, as ever, the better.

Bernard Gray: I am not conscious that in the middle of other competitions the Ministry of Defence gives to this Committee or others details of bids.

Q21 Chair: But I think one of the things that we will come on to this afternoon is the fact that there never has been a competition like this anywhere in the world.

Bernard Gray: Granted. But Mr Docherty was saying that, somewhat unusually, we are not sharing it. I am saying that I do not think it is unusual.

Q22 Thomas Docherty: I can work out what the aircraft carrier pretty much does. It sits in the water and you take off from it and I know roughly speaking what its top speed is and I know roughly speaking what you are going to pay for it. With GoCo, frankly, we don’t know what it looks like, what its top speed will be and what will operate from it. That is the difference, Mr Gray. With any item of individual procurement we can go to the MOD and say, "What does that strike fighter do? What does that carrier do? What does that tank do?" With GoCo, we haven’t got a clue.

Bernard Gray: Okay. I am sure we can do more to help you on its boundary, structure and purposes and how we would evaluate them. I am sure we can do something.

Chair: Thank you very much.

Q23 Mr Holloway: Following on slightly from Mrs Moon, did you ever consider having a sort of super stream of people within the MOD who do project management and procurement as a career?

Bernard Gray: We have looked at a whole series of alternatives. As we may come on to talk about, we are running an on-the-vote alternative option called DE&S-plus. It asks what is the best way within the public sector that we could run this activity in defence. The model that you point to is in some ways similar to the French model where the DGA, our sister organisation, can recruit about a third of its work force on six-year fixed-term contracts at commercial rates, which is their way of attempting to tackle part of the problem of accessing skills. That ends up with, as yours would imply, a sheep and goats division between different types of people in DE&S, with some of them being on much higher remuneration rates than others simply as a result of the mechanism by which they came into the business. That has its own problems. Yes, we have looked at a whole variety of problems and we will look at what we think will be the best public sector alternative to try to crack the problem.

Q24 Mr Donaldson: Has any nation gone down this road of GoCo in terms of defence acquisition on this scale before?

Bernard Gray: Nobody has done it on this scale before. There are very many similar activities in the United States on a scale that is about a third the size of this-about $5 or $6 billion. That includes most of the nuclear enterprises all the time since the second world war. Effectively, most of the US nuclear system has been run by a series of different GoCos since the second world war. There are other countries that have either looked at it in the past or are looking at it currently. I know that Australia and, interestingly, France are interested in what we are doing, as well as the United States.

However, I am finding it a difficult argument to say that when something is done for the first time that is a bad thing. I understand the point about risk, but we have to understand the risk of where we are today. The analysis we did in 2009, which has been confirmed by everything that we have done since, says that our current way of doing things effectively costs us somewhere between £1.2 billion and £2 billion a year. So being where we are today is not free. The reason that I am here at all is because we have a problem.

The question is, what is the best way of tackling that problem? Part of the issue about why other people may not have done this on this scale so far-although, as I say, the Australians are very interested-is the fact that the outcome is some distance away from the causal relationships. Everybody sees that most people have the same problem. The Israelis are often touted as a good example of procurement. When I talk to the Israelis, they say, "Yes, we have the same problem that you do; we just bury it in a different way".

Q25 Sir Bob Russell: Sorry, could you say that again?

Bernard Gray: Most other countries have the same problem that we do, which is overrunning in time and cost. The Israelis are often touted by people as an example of good procurement; but when I talk to the Israelis and say, "Everybody says that you do a good job", they say, "Well, not really; we just hide it better than you".

Q26 Sir Bob Russell: Surely not.

Bernard Gray: That is what they said; I do not know whether it is true.

Q27 Sir Bob Russell: I thought everything was done above board?

Bernard Gray: It is a question about where the costs arise. So everybody pretty well has the same problem. Part of the issue is that people haven’t necessarily associated the out-turn of this problem-the arrival of equipment very late and over cost-with the underlying causal reasons why that is happening, because they are quite a long way back. I think that one of the reasons that other people have not done this is because they have not necessarily got to the bottom of analysing why this problem occurs. That is the point you were making earlier on. People say, "Well, we balance the programme, so why do we need to do anything?" That is a bit like me saying, "Okay, I went on a crash diet, I lost some weight and now I’ve started eating doughnuts again. What’s the problem-I’m 11 stone, and I can keep eating doughnuts because I’m 11 stone". Well, I might be 11 stone momentarily, but I’m not going to stay there if my behaviours don’t change. So there is an underlying change that needs to be got to.

Many other people have not been under the same economic pressure that we have, where we are trying to compete at the highest level of military capability with a constrained budget. The United States is at the highest level but it has a much less constrained budget than we do; other people have lower military ambitions. It is the conflict between our attempt to stay at the highest level on relatively modest means that causes us to be outstretched and puts us in the front trench with this.

Chair: I am intending to move on from this question unless anybody-

Q28 Thomas Docherty: You said that most other countries don’t procure well-so who does? Is there a country about which you say, "That’s where we want to get to"?

Bernard Gray: Not today.

Q29 Thomas Docherty: So if everybody in the world does not procure well-

Bernard Gray: We do not have good visibility of lots of countries.

Q30 Thomas Docherty: Indeed; the Chinese have their own particular incentives if you do not get it right. As I said in the Second Reading debate, if nobody procures well, is there not the possibility that inherently there is no such thing as procuring well?

Bernard Gray: That would be something of a counsel of despair. You can certainly do things which will cause it to be better than it is, and having, for example, a stability of requirement-being clear about what you want at the beginning and sticking to it-is definitely a way of making things less costly. Understanding the time value of money is another way of doing that. It says, "Actually, we know", so both not changing your mind about what kind of aircraft carrier you want to buy and not delaying it, are two very good ways to save money. There is definitely a difference that human beings can make between good and bad. The question is: what structurally is most likely to achieve a good outcome?

Q31 Ms Stuart: I cannot let you get away with this assertion that other countries simply have not assessed the problems: they have. May I suggest to you that the difference is that certain nation states say "There is a price to be paid for doing things in the interest of the defence of the realm whatever the cost" and others wish to make a cost equation. It is the difference in the cost equations that brings out different outcomes.

Bernard Gray: No, I would not accept that because if, for argument’s sake and just to pick a central point, we are wasting £1.5 billion today, that money is going into unnecessary overhead in industry and in the Ministry of Defence.

Q32 Ms Stuart: No, no one starts off by saying "I wish to waste a billion pounds". However, a nation state may say it is now interested in having, for example, three aircraft carriers because that is what we need as an island, and then we will pay the price for it.

Bernard Gray: Sure, but my point is not about that. Procurement of three aircraft carriers may be a good or a bad thing. I am not talking about what military capability we buy; I do not decide that. My point is that if we decide to buy two or three aircraft carriers, what is the most cost-effective way of doing it. That is my job. I am saying that there is a difference between a good and a bad way of doing it, and Governments the world around are not good at recognising-as the British Government have not been good at recognising-that taking longer to build the same object costs you more money.

Q33 Penny Mordaunt: To continue on the theme of risk, I want to look at what the potential upside to the taxpayer might be. As I understand it, you are not transferring operational or financial risk because a delivery company would not want to take all that on. What are the risks that you would be transferring to the delivery company through the GoCo route? What is your driver for change in that respect?

Bernard Gray: It is not necessarily that they would not be prepared to take on the risk; it is that the price that they would charge us for it would be a price that we would not be prepared to pay. Insuring against the totality of the £14 billion a year of programme spend would be a number that is probably unaffordable to us. The mechanism that we are proposing to use in order to control this is to say that the profit that they can make on running this operation would be determined by the degree to which they are controlling the cost of the programme. If they deliver the programme for less money than we have dialled into the budget, then they effectively get, on a profit-share basis, some proportion of that. Therefore, their incentives are around managing the cost of the programme properly. We are not seeking to create a sort of super-prime contractor here; what we are trying to create is a managing agent who has the same interests as us; their interests are aligned around controlling and driving down the cost of the programme.

Q34 Penny Mordaunt: So that is some financial risk upside to the taxpayer. What about in terms of quality? What risk might we be incurring in terms of the actual outputs that they will be producing?

Bernard Gray: Our view is that because they will be better able to recruit, retain and incentivise people, and those people will make progress through the organisation based on the core competence that they have for a procurement organisation as opposed to a general civil service capability, they will be better able to attract good people. They also have existing methodologies. Both of the bidding consortiums contain project management companies, whose job it is to put up power stations, liquid gas terminals, pipelines and those kinds of complex programmes. They have tools that they use every day that they can bring in to help them manage the programme. Both in tools and in their ability to recruit, retain and skill with current organisation, we believe that they will have a higher quality of capability than we have today, and that that will actually then be more likely to be reflected in superior programme forms.

Q35 Chair: So they will be incentivised by the contractual mechanism, which pays them more the better they manage the programme. Yet surely they will therefore have an incentive to ensure that that process is as easy as possible for them right at the beginning. It is a process that is going to have to be overseen by the Ministry of Defence, which will surely have just got rid of all its skilled personnel to GoCo. Therefore, you will not have the bargaining power to ensure that that incentive is correctly positioned.

Bernard Gray: It will not have got rid of and let go to GoCo all of its skilled personnel. We have the cost assurance and analysis service, which is effectively doing a check. It currently sits in my organisation, within DE&S, and one of the functions that it performs is to analyse and check people’s estimate of large projects. They sit outside of the project teams and analyse what they are doing. We propose to move that part of their function to sit within the Ministry of Defence, working for an organisation that, at the moment, we rather inelegantly call the "governor organisation".

There will be a contract management oversight and a programme management oversight capability within the Ministry of Defence. It is very important as part of this process that the Ministry of Defence retains an intelligent customer capability. We have a whole strand of work under Major General Peter Fox to construct that intelligent customer, which includes functions such as CAS and a significant part of Susanna’s central commercial stuff, for example.

Q36 Chair: So this absolutely key part of making sure that the incentives are right would still be subject to the civil service terms and conditions and therefore probably paid considerably less than the GoCo operatives.

Bernard Gray: In my view, it is easier to recruit a few hundred people either on different terms, or people who may be public spirited enough to wish to do that than it is to go out and recruit 16,000 people to execute a main body of work. It is a crucial distinction that says we need to recruit relatively few people to oversee the programme than we need to deliver it. But it is important.

Q37 Mrs Moon: It just seems a very cynical world where commitment is bought, rather than it being something that you bring by public service and a commitment to your country, but there we go.

What are the risks about defence acquisition? What have you looked at in terms of the highest risk areas and how they will be mitigation?

Bernard Gray: Sorry, I missed the beginning of your question.

Q38 Mrs Moon: We are outsourcing defence acquisition. That is the whole point of GoCo. What are the risks? How do you think they will be mitigated?

Bernard Gray: Can I make an observation on your point about cynicism and public service? The public sector has been subject to pay restraint for some time. In our area, it was not a top payer before. It is an important point. We are fundamentally a different type of organisation from the policy civil service. Our organisation is composed of engineers, programme managers and finance professionals. They have a significant choice in exercising those skills about where they do it.

At the moment, I am-as I think I have said to the Committee before-losing significant numbers of people in their 30s and 40s because they can make, on average, twice as much money in the private sector as they can make in the public sector. However public spirited they are, they have families to raise and bills to pay. It is very difficult to expect people, on a systematic basis, to work for half the money just in the national interest. So I would not accept that it was cynical.

A number of people who have been effectively at deputy director level in my organisation have left in the past six months, and they have all come to talk to me and said, "I want to continue to work here but fundamentally I cannot afford to. I have a young family and cannot justify working here at half the money to my spouse"-they have been both male and female. I have said to them, "I understand why you are having to make this choice." I refuse to be critical of them or to regard them as cynical. It is a fundamentally different situation to that of the policy civil service, where if you want to be a policy professional, you either work in a think tank, as an academic or in the civil service, and the civil service is probably the highest paying employer in that group. We are not the highest paying employer of the type of people we have.

Q39 Mrs Moon: I would like to make it clear that I was not criticising your work force at all-quite the opposite. I was, if anything, criticising a view that public service should not be well paid and should not acknowledge the value of those skills within public service. In fact, we have just gone through three years of criticism of public service being feather-bedded employment. That is quite the opposite of what you are suggesting that I was suggesting.

If we could go back to my question: what are the identified risks with the outsourcing? What have you identified as the risks and how do you intend to mitigate them?

Bernard Gray: I apologise if I misunderstood your point.

Mrs Moon: You did.

Bernard Gray: Well, I apologise.

Mrs Moon: And I accept it.

Chair: Right, now let’s get on, shall we?

Bernard Gray: The risks are to the competition-does the competition proceed and do we get effective bids? One of our mitigations for that is that we have our public sector DE&S-plus alternative in place. The risks are of a contractor, when appointed, failing to deliver on what it said it could do. In order to mitigate that risk, we have set up on the Ministry of Defence’s side a structure that allows us to step in and take control of the situation if we are unhappy with it. That includes appointing a major contracting firm-in this case, Jacobs Engineering-to work on the Ministry of Defence’s side as part of that governor organisation. So, one of the half dozen or so companies in the world capable of doing this job is already working for the Ministry of Defence on the Ministry’s side, and would give us a significant ability to step in and re-take control of the organisation if required. We have already talked about the tension in agreeing the pricing for jobs. Our mitigation for that is to move the cost assurance service-or at least part of it-into the centre of the Ministry of Defence. Those would be three of the big risks I would highlight.

Q40 Mrs Moon: Part of the problem we have is that although you have talked about the importance of ensuring that you get effective bids, about the risk that you do not, and about the failure to deliver, how are you going to know that Defence Equipment and Support as is would not have been able to make those effective bids and deliver? What are you going to build into that contract to ensure that what already exists is going to be that much better? Given that there has to be a profit involved here for whoever takes this on, how are you going to ensure that the profit that the company makes does not outweigh the cost to the public purse of getting rid of what we already have?

Bernard Gray: On the latter point, I think I have already said to Ms Mordaunt that we have an incentive structure that says that they make money if we make money.

Q41 Mrs Moon: Is that not how it is now?

Bernard Gray: No. You are talking about the contractors through the chain. We are saying that DE&S does not make money if the Ministry of Defence makes money now.

Q42 Mrs Moon: No, but the Ministry of Defence makes money if DE&S makes money.

Bernard Gray: What we are looking at is-let us look at the GoCo. The GoCo managing company will only make money if it saves money for us. That is the way that the deal is set up. Therefore, their fee is dependent upon their saving money against the baseline programme that we have today. We know what we are predicting the programme will cost today, out over the next 20 years, and that is the baseline against which they are going to be judged. If they save us money against the delivery, against that in time and cost, they will save money. If they don’t, they won’t.

It is not the case that making a profit is essentially a bad thing or a net loss to somebody. The idea that the fact that Amazon makes a profit means that book-readers lose out, is not the way it works. What they manage to do in running that business is to run it on a more cost-effective basis that allows it to both make a profit and do it cheaper.

Q43 Mrs Moon: But the profits from DE&S apparently go back into the MOD.

Bernard Gray: We don’t make a profit in that sense, and our programme performance over the last 20 years would not have caused us to make a profit in the way that we are describing now. Fundamentally, if our performance over the last 20 years was judged in accordance with the way they are going to judge the GoCo, we would have never got to dollar one because we always miss.

Q44 Chair: Risk: very tight timetable.

Bernard Gray: Yes, that is a risk.

Chair: You are going to come down from two invitations to negotiate in September, to a preferred bidder in December and then you are going to evaluate that against this unknown concept of DE&S-plus by March. That is very tight. Isn’t that a risk?

Bernard Gray: It is a risk.

Q45 Chair: How are you mitigating that?

Bernard Gray: We have very strong teams in the GoCo evaluation and in DE&S-plus. In fact, we are adding further resource to DE&S-plus to ensure that it hits its deadlines. We are within a month of the progress dates that we set down in January, when we put our initial date business case into the centre of the Ministry of Defence and had it audited by the IABC. At the moment we are, give or take, on track.

Q46 Chair: When you say within a month, does that mean that you are a month late?

Bernard Gray: Yes it does. We are conscious that we have that month to catch up. It is a very demanding timeline and it also requires, as part of that process, the approval process inside Whitehall. Not only do we need to have negotiated an effective outcome, but we then need the approvals process in Whitehall to work well.

Q47 Chair: Your experience of that is?

Bernard Gray: Sometimes it does and sometimes it doesn’t.

Q48 Mr Brazier: Why is there no legal protection for intellectual property in terms of GoCo? In fact, in part 2 of the Bill there is actually a criminal offence for the single source staff. With all the concerns, why is there no legal protection?

Bernard Gray: There is legal protection. At the moment it happens to be civil law rather than criminal law, so in the contract and the articles of association of GoCo-the draft ones that we have out there-they have an obligation to protect any intellectual property that they are holding. The principle underlying this is one that has operated for a long time in the United States. They have organisations called FFRDCs which, from memory, is Federally Funded Research and Development Corporations. Similarly to GoCo, it will hold intellectual property for other defence contractors. In some cases, FFRDCs in the United States are run by OEMs like Lockheed, and they hold data in that case from perhaps Boeing, for example. They are constitutionally barred from competing against the people in the sector that they are evaluating that data on. Therefore, in our case, in the articles of association and in the draft contract, it will be set out that in perpetuity they are not able to take that data and use it in some third-party environment. There are very strong civil constraints within the GoCo proposed contract.

Ms Mason has a proposed criminal sanction. The reason that there is a difference between the two is that within the SSRO, we are going to require the industry to declare a significantly greater amount of detailed information than they do to us today. A concern on behalf of industry is: does the SSRO hold that very detailed information safe? Therefore there has been pressure from industry to say, "We need some increase in sanction against that."

We have debated this point because, at the moment, we think that on our side the civil sanctions are pretty onerous and sufficient. But we accept that there is a difference between us in the two things, and it may well be that we turn around and say, "Evaluating all those things together, why don’t we have the criminal sanction apply to both sides, on top of the significant civil sanctions that exist?" We are thinking about that.

Q49 Mr Brazier: I am glad that you are thinking about it. I just want to widen it a little. Both consortia are American-led. If we think for a moment about an individual rather than a company breaching either IPR or soft IPR, for example commercial-in-confidence stuff-an American citizen who has gone back to America and working for a different company-how would you pursue them through the courts? How would you enforce this?

Bernard Gray: I think we need to be careful about the distinction between parent companies and the operating company that would be running this operation. A company running the GoCo would be a British limited company. Its chief executive or chairman, according to our formulation of the documents, would have to be a British citizen. There would be specific controls put in about what information could be passed from the operating company that does all the evaluation work, through the holding company, which has a financial interest, back to the parent.

This is in no way different from a whole variety of current arrangements with OEMs in the UK. Just to cite a couple of examples, Thales UK and Lockheed Martin UK have to hold significant sensitive information that is of great importance to the UK Government, not to be shared with any other Government, however friendly. Those arrangements have been in place for many years, if not decades. That means that the parents in Lockheed Martin US or Thales France cannot see that information.

Q50 Mr Brazier: Those are state secrets, but the big concerns that have been raised with us from the industry are not about state secrets, but about commercial-in-confidence stuff, particularly for SMEs and others. The way in which they structure a bid-that sort of information is sometimes priceless to a competitor. If someone who is not a British citizen leaves, goes to another company and takes that with him, it is very difficult to pursue them in a foreign court.

Bernard Gray: But we can pursue the company as well as the individual. My point is that your argument would equally well apply to either commercial information or national security information disclosed to a non-British citizen working for a UK subsidiary-in this case, Thales or Lockheed Martin. We have a range of civil penalties that we can apply, including potentially taking away their right to operate the business. We are saying, both for internal consistency and, since we are taking the power, if Parliament chooses to vote it anyway, in the case of the SSRO, it may be as well to apply that to the rest of the DE&S business.

Q51 Chair: I have little doubt that this will come up in the deliberation of the Defence Reform Bill.

Bernard Gray: I can see the logic of the position.

Q52 Ms Stuart: Before I move on to accountability, if the Governor of the Bank of England can be a Canadian, why can’t the CE for the GoCo?

Bernard Gray: We require one or the other, in order to make sure that we have somebody whom we can hold to account. We choose to make it so.

Q53 Chair: So the chief executive officer could be American but the chairman would have to be British?

Bernard Gray: Or vice versa.

Q54 Ms Stuart: In your opening statement you very accurately described the tensions that are required for good decision making. If it gets too comfortable or if people cannot say no any more, then you have a problem. Now, as GoCo would go on and work with the MOD, isn’t there a danger that they, too, will become too comfortable in the way that they work with each other? Therefore if you think about the constitutional framework of how you are held accountable, Parliament would be the natural place to make GoCo more answerable. How do you think that structure should work?

Bernard Gray: Sure. We are proposing periodic rebidding of the process. In some ways you could make an argument that says this is a bit like auditors of major companies. To what extent is familiarity a good thing? Does it become a bad thing over time? We propose an initial period of up to a maximum of nine years and then you would re-compete the contract. We are devising the technical structure to make it as easy as possible for us to decapitate it and remove the parent companies and insert another management company and leave the body of the kirk unchanged. It is not that we imagine we would keep that grouping forever. Certainly they would have to earn their spurs and re-earn their spurs.

As for accountability, if we took the GoCo route-if that was the preferred option that came out in the end-there would be a number of levels of accountability to Parliament, which is a good thing. First, the Secretary of State remains responsible for the activities of GoCo. Acting on his behalf, it is effectively his agent. He would therefore come before this Committee or the full House to answer on any of its activities. He would have oversight of that. Secondly, we would propose that an additional accounting officer be created. The permanent secretary would continue to be accountable for the Ministry of Defence expenditure to the PAC, but we would propose that either the chief executive or the chairman of GoCo was also an accounting officer, as an additional officer, and therefore would be obliged to attend the Public Accounts Committee in order to explain what they were doing.

Q55 Ms Stuart: But only the Public Accounts Committee? There are some real problems. I would expect them to be answerable to the Defence Committee.

Bernard Gray: I am just saying that in a technical sense the accounting officer thing obliges them to turn up there. I am quite happy that they should come here too.

Q56 Ms Stuart: But if you think about it and try to marry the length of decision making: first, there would be a number of contracts that GoCo will enter into which will be longer than nine years. In a parliamentary cycle, nine years is almost two Governments which may not necessarily be of the same colour. It certainly would not be the same Secretary of State for that period. Could you tell us a little bit more about how you will measure whether GoCo is successful and do so in a way that would be accessible to Parliament?

Bernard Gray: Sure. There are a number of different measures which come to the management information and the management control of the entity. Let me just pick on some of the major ones because there is a whole raft. If I split the programme into two halves, which is roughly speaking what it is, the first half is the acquisition of new equipment which definitely runs according to the long timescales that you describe. There, we will use the programme management tool of earned value analysis-EVA or EVM as it is variously referred to. That basically tracks the state of completion of a project against the expenditure and how it is progressing against those milestones. If you took something that was long term, like the carrier programme, we would be tracking that against its EVM progress to know how it is doing. That is how we track the capital works programme at Aldermaston, for example, which is a similar type of activity.

Q57 Ms Stuart: Would you publish that information in time?

Bernard Gray: At the moment that comes into the Ministry of Defence as internal analysis where our project team evaluates how the AWE, in that case, is doing against its EVM. But the carrier people also produce the same data. In relation to the support programme-

Q58 Ms Stuart: But when would Parliament know? What is troubling me is that at the moment the PAC will publish something that says something really awful was done three or five years ago, which is frankly useless in terms of putting it right. What is the mechanism by which the Defence Committee can keep a current eye on whether things are on track on not?

Bernard Gray: I would be very unwise to speculate on the usefulness of a report published by the Public Accounts Committee. It is extremely useful.

Q59 Ms Stuart: For historical analysis, but not for putting things right as they happen.

Bernard Gray: Yes, but they do not just look at individual programmes like the carrier programme; they have the annual major projects report in which they look at a subset of around 20 of the largest programmes. They ask how are they doing; what has happened in the last 12 months; and have they slipped or not slipped. I would see the new equipment aligning around that. The National Audit Office would be abstracting from our EVM analysis how those major projects are doing and using that in an audit sense to say, "Are the major programmes on track or not?" on an annual basis.

Q60 Ms Stuart: In what intervals would you expect those reports to be made available either to the PAC or to Parliament?

Bernard Gray: It is not for me to decide. It is for the PAC to decide how it wants to instruct the NAO, but I would imagine some version of the major projects report would carry on as it does at the moment, so there would therefore be an annual assessment of how they are doing on the capital equipment programme. On the support side, which we often leave aside, but it is the same amount of money again, the cycle time for spending that money is much shorter. You are doing the servicing work and the key metrics are around availability and so on. In publication terms, that is something that we need to do more on, because everybody tends to focus on the new acquisition, but making sure that we spend the money that gives us the availability of equipment that we are expecting is as important.

Q61 Chair: While we are on parliamentary accountability, can I take you back to your 2009 report? Could you set out what you proposed in that report about the answerability of the accounting officer to Parliament? What did you say there?

Bernard Gray: I probably said a number of things, but I think I put in legal accountability.

Q62 Chair: I am referring to the bit about the accounting officer certifying to Parliament that the equipment programme was true. Where does that proposal, which struck me as being excellent, come into your proposals here?

Bernard Gray: We already have the NAO’s assessment. The Government chose to interpret that recommendation. I had said we should have an accounting firm do it in much the same way as you would with a major company, so the directors are therefore effectively having to give an assurance letter that says that the data they have given to the auditors are true and fair and all that kind of stuff. The way that we have implemented that is to say that the NAO come in, rather than a private sector organisation, and the NAO published their first report just before Christmas last year.

I can tell you from the inside that that caused people to look very carefully at what they were writing down. Although it is not formulated quite in the way that I might have done it in the first place, the fact that that statement about the affordability of the programme is out there and that the NAO has access to those numbers has caused people to focus very hard on what the programme costs and whether it is balanced. I believe it was a significant contributor towards those people who would have wished to travel in hope being seen off by those people who actually wanted to balance the programme.

Q63 Chair: Do you think it is as effective and as strong as what you were proposing in 2009?

Bernard Gray: The world is an imperfect place, Chairman.

Chair: That sounds like a no.

Bernard Gray: It was a statement of the general, less than perfect nature of life. It is a compromise that was arrived at, which largely achieves the effect. I would much rather the Department agrees to do something that has been a driver of behaviour and that everyone agrees should be done, than to have a contentious issue not addressed.

Q64 Chair: Could the ambitious among us still move towards that as a long-term goal?

Bernard Gray: One of the issues that you would need to address is that it goes deeper into the accountability of permanent secretaries and accounting officers more generally, which is one of the-

Q65 Chair: So that was the problem, was it? Facing lots of other Departments in Government.

Bernard Gray: That might be a problem.

Q66 Mrs Moon: I am interested in where we go next in terms of DE&S-plus. How will it be facilitated to be an effective alternative to the GoCo? How do you think DE&S-plus will rectify some of the problems that you thought existed in 2009? What will be the difference?

Bernard Gray: In essence, it must try to pass the same test as the GoCo. It must try to solve the same problems, or many of them. Where we have got to so far is that on the skills question and the recruitment retention side, our work force is very different in character from the general civil service, and at the moment pretty much all our HR rules were designed for the mainstream policy civil service. They do not suit us particularly well, so we have pulled together a set of proposals that we have put into the centre, by which I mean the Cabinet Office and the Treasury, saying that we would like to have the freedom to be able to do the following things to be a more effective and agile employer of our work force within the public sector. That is a block of freedoms that we are seeking.

We are also looking at the additional question. I tax and challenge both groups: the GoCo group and the DE&S-plus group. On the GoCo group, I will push hard, and have done, on the intelligent customer side, for example. On the DE&S-plus group, one of the key questions for us is about the management freedoms we need to operate and run the business effectively. To be clear, I have zero freedom to do anything relating to the HR terms. I cannot pay any individual within my organisation any more money, for example. If they are going to walk out of the door tomorrow, I can do nothing about it.

Q67 Mrs Moon: A bit like being a Member of Parliament.

Bernard Gray: So I have no freedom to operate at all as a manager of a large business in the management of the work force. We need some freedom to be able to do that.

I quite like the current competitive tension because I am a negotiator. I am looking for the best answer, so I am pushing the private sector by saying, "I have this public sector alternative here, and it can offer me X; what can you do for me?" And I am pushing the public sector by saying, "Well, there is a private sector alternative; what is the public sector going to do to remain competitive in this field?" I like that structure.

The key question to the public sector is what can it do that would make any freedoms awarded to DE&S endure. What stops someone at the next party political conference making a sweeping statement about doing X with the public sector which will remove all the freedoms that we have just spent two or three years implementing? What can be done to give some kind of boundary within the public sector to DE&S-plus that would allow people to have the confidence to invest their careers without being subject to whim? If the intelligent customer is the tricky question on one side, the enduring nature of the freedoms of DE&S-plus is the trickiest question on the other.

I have put a number of alternatives, one of which I do not wish to discuss yet because they are going away to think about it. It was a bit of a eureka moment a couple of months back to say, "What about X?" I am pushing them hard to ensure they come up with-not only that it would change but it would stay changed-viable alternatives.

Q68 Mrs Moon: So you still see DE&S-plus as a potential viable alternative to the GoCo.

Bernard Gray: Yes. I know people choose to interpret. My assertion in the 2009 report is that this is the way I can see this getting done. Because at that time I saw no preparedness at all on behalf of the public sector to move. I don’t yet know what will happen, either with the bids or the Treasury or Cabinet Office attitude to DE&S-plus. My point is that I don’t have to make that choice today. I run the competition within the private sector on the one hand between two competitors and with DE&S-plus at the other. We can all sit down at the end of that process and look at what is the best alternative we have got on the table and you make the choice then. I don’t have to back any particular horse at this point.

Q69 Mrs Moon: Why would you not need, within that equation, to have DE&S as is-or was-as a benchmark of where you are trying to make the improvements from? Why would you rule that out?

Bernard Gray: We have it there in a sense, as I have said, in a variety of ways: what are estimates around programme, what are the size and shape. It is the departure point for anything else. To be honest, I haven’t found anybody who wants to keep it the way it is.

Q70 Mrs Moon: At the moment it feels, though perhaps I have the feeling wrong, as if you have two private sector companies and you have got to bring them down to one, and you have got DE&S-plus. In the assessment between the two private sector companies, is DE&S-plus being subjected to the same testing of how they would do certain things, what their capabilities would be? Are you doing that at exactly the same time before you then run them off against each other?

Bernard Gray: The short answer is that, yes, it will have to pass the same tests. So, we will come down the evaluation and it will have to pass the same tests on the same time scale. For the variety of reasons we discussed before, we are keeping all of the teams completely separate and nobody has access to all of that data, with the exception of me and one or two other people. We have evaluation panels and so on set up to evaluate it but we have not got to that point yet, so they haven’t seen what that product looks like yet. The intention effectively is that they have to pass it. They are trying to answer the same questions.

In different ways they have to address the same sorts of questions; they will just approach them in different ways. For example, in the public sector case, as with the private sector case, it is questions such as, "How credible is your plan and your management team? How credible is it that you will be able to go out and do this thing?" Similarly, we are requiring of the private sector contractors, "Who will you get to come in and populate some of the senior levels of this structure? Who are the individuals?" It is not just, "We have got a bunch of good people." It is, "Okay, name, rank and serial number. Who are the people you would be fielding?"

Q71 Mrs Moon: So, DE&S would also be asked who they would recruit.

Bernard Gray: Yes, in the first instance. One of the ironies about this-I don’t know if you think it is good or bad-is that I am assuming that if it is DE&S–plus it is me. There are days when that is a good thing and days when it is not. I am assuming, for the purposes of this conversation, that I would end up remaining as the chief executive of DE&S-plus, if that is the way the Government chose to go. If they chose to go the GoCo route I would end up running the governor organisation.

Q72 Mrs Moon: Isn’t that a bit of a liability for DE&S-plus?

Bernard Gray: It may be.

Q73 Mrs Moon: At the moment, its current chief executive isn’t driving its case.

Bernard Gray: No, I am. I am out there as the Socratic judge. To be honest, the chief executives in waiting of the private sector competitors are not the people who will be driving forward that case. You have people who are-

Q74 Mrs Moon: But they would be likely to, wouldn’t they? They would be reporting that.

Bernard Gray: Yes, but my point is that if you look at the people who typically would be somewhat involved, you have the people who are going to run the entity and the people who bid for the deal. I am interrogating the GoCo side-it is possible that the Government may choose to turn around and make some other choice, but I am just assuming that I am holding the baby on this until otherwise notified. I am trying to ensure, on both sides, that we get the most robust answer. Ironically, I get to keep running the large organisation if we go the DE&S-plus route. My only point is that I do not get to keep running the large organisation if we go the other way.

Q75 Chair: What you are essentially trying to do is to persuade the Treasury to loosen some of the restrictions on the civil service terms of employment for DE&S-plus. Is it possible for them to do that for DE&S without also doing it for all the other Government Departments?

Bernard Gray: That is the question.

Q76 Chair: And the answer is?

Bernard Gray: We do not know yet. It comes down to status questions, because there are many different groups of public sector workers. Teachers and doctors, for example, are paid according to different terms and conditions than civil servants and people in local government are paid differently, so there are different classifications of public sector worker. As I think Mr Holloway indicated earlier on, could you have a classification of this engineering stream as a separate thing? It would be possible to do that. I had a conversation with Nick Macpherson at the Treasury, in which he was encouraging about the possibility of doing something. He pointed to the Debt Management Office, which is a relatively small group of people, but they effectively manage the issuance and payment of gilts. They are paid much more according to City-type salaries than they are according to civil service-type salaries. Now, that is a much smaller organisation than ours in population terms, but it would be possible for them to classify us differently if they chose to. On the other hand, there will be a natural anxiety. If DE&S says that it is different, you may get other parts of the public sector turning around and saying that they are different for x reason or y reason, so it is a problem.

Q77 Mrs Moon: If the Treasury does not agree to that liberalisation of employment law, DE&S-plus is dead in the water.

Bernard Gray: It is harder for it to compete. By the way, it is not employment law; it is the way that the Government-

Q78 Mrs Moon: But if the Treasury does not loosen those strings, it is dead in the water.

Bernard Gray: I would not go as far as saying that, but we do not know what we will get out of the other side yet. You are trying to get me to prejudge an experiment that has not yet been run. When I get to the end of the competition and come here to discuss it, we will see what we have in DE&S-plus, what we have in GoCo and which looks like the most viable contribution towards maintaining the acquisition and support of matériel for the armed forces.

Q79 Thomas Docherty: I want to take you back to when you said that no one is advocating DE&S. That is not the reason for wanting a comparator. Do you understand that the reason for wanting a comparator is that you are asking Parliament to take a big punt, but there are risks and costs involved in making changes? Do you not understand why parliamentarians are very nervous about making a change that involves a cost both in time and resources without knowing what the benchmark is of continuing over the period ahead?

Bernard Gray: I do absolutely understand the point and I think I said that the benchmark data-we have a work force plan, as well as an equipment plan, which stretches out to 2016. We are just kicking off the next iteration of that work force skills plan, which will take it out for a further two years, and that will run over the course of the next nine months or so, which forms the benchmark data for our staff overheads structure, skill sets and organisational lay-down, which is the next generation of the Booz Allen work that we referred to earlier on. So, effectively, two years on I am doing the same thing again. That, along with the equipment plan baseline for the delivery of all the equipment to time and cost and all the support elements of that, and the annual support plans-they are the action plans and the basis for the work force against which the other two have to operate.

Q80 Thomas Docherty: So there is an "as is" comparator?

Bernard Gray: Yes, and I said there was.

Q81 Thomas Docherty: So why did the Minister say that there was not when he gave evidence? Why, on Tuesday morning, was there a debate about why there is not an "as is"? Why did a very distinguished analyst suggest on Tuesday that there is not an "as is" comparator?

Bernard Gray: There is an "as is" baseline. The point that I am making here is that we have a baseline of what the organisation would have looked like if we did nothing to it. I have indicated where that stretches out, and I am then kicking it forward for a further two years. That is the benchmark against which everything else will be assessed. Everybody is of the opinion that DE&S should be reformed in one way or another, and therefore the reality of the situation is that we will seek to move that baseline on, either within the public sector in the shape of DE&S-plus or within a GoCo arrangement under the competition that we have got running at the moment. One of those two answers will be the evolution of the baseline that becomes the answer.

Q82 Thomas Docherty: Let me be quite clear on this one. At the end of this process, before you make the decision or send the recommendation to the Secretary of State, it will be possible for the House of Commons Defence Committee to have from you that, for argument’s sake, if we did the GoCo, your best prediction is that we would save-I will pull out a random figure-£1 billion a year over the next 10 years compared with the baseline, and that we will save x employees, programmes will move and DE&S-plus will do £800 million over the same period compared with proceeding as we are currently.

Bernard Gray: That is correct. But that is not the same thing as an option because the difference is that I do not think anybody wants to say, "Okay, let’s do nothing then."

Thomas Docherty: No.

Q83 Mr Brazier: This brings us to the point where you are saying that we really cannot do nothing. You told us in May last year that you had reached the point where, because of staff reductions, you would have to lower output. Are you basically saying that the reason you are not taking the status quo as a baseline is because it really is not credible at all?

Bernard Gray: On the basis of the way we do business today, the structure is extremely stressed. The reason for answering the question in that way is that there are a variety of ways in which Government do business, which are not terribly helpful to reducing the cost of operating it. I could imagine that if this were a different type of organisation, you probably could live with fewer people. The way in which the Government do business has very high frictional interdiction problems of people from a whole variety of areas coming in, stakeholders being managed, committees being met and all that kind of stuff, which means that it takes more people than it would do under a more efficient structure to get things done. If I could imagine some different world where the public sector operated differently, maybe we could live with fewer resources, but we are very stretched against the current task in the way in which the Government currently do it.

Q84 Mr Brazier: Can you tell us, following on from that, whether the media reports were right when they claimed that some hundreds of staff were made redundant and have now come back to work in their old jobs with the redundancy payments?

Bernard Gray: Not as far as I am aware.

Q85 Mr Brazier: Nobody who has been made redundant has been re-recruited?

Bernard Gray: Well, I will go away and check, but I am not aware of that. I think the right answer is that I will write back to you. I should be a bit careful about that, but I am not aware of it.

Q86 Chair: Mail on Sunday, 18 August.

Bernard Gray: I am aware of the report, but I am not aware of whether it is true.

Q87 Sir Bob Russell: In the case of the UK’s plan to outsource procurement of military equipment to the private sector, is it likely that the contract will be won by a non-UK company?

Bernard Gray: I am sorry, could you say the beginning of that again?

Q88 Sir Bob Russell: I deliberately picked my words carefully, so I will try and repeat them carefully. Is it the case that in terms of the UK’s plan to outsource procurement of military equipment to the private sector, it is likely that the contract will be won by a non-UK company?

Bernard Gray: The GoCo competition that we are running at the moment is composed of two consortia, both of which contain an American and two British companies, as parent bidders, if you like. The company that runs this will be a UK limited company, but the parent shareholders of that would be, in both cases, partly American. So the short answer to that question is yes, I suppose.

Q89 Sir Bob Russell: So we have one of the major military nations in the world, with its procurement with a significant stake held by foreign companies.

Bernard Gray: Yes, but in the way that I described before, that already happens in some of the most sensitive areas. For example, AWE has two American shareholders and one British shareholder in that structure. Our nuclear weapons manufacturing, maintenance and development facility has a preponderance of US companies running that, for example-if you call it in that way. The reality of the situation is that AWEML is a UK-registered company and operates under similar constraints.

Q90 Sir Bob Russell: But lots of companies are UK-registered; the question is about them being foreign-owned.

Bernard Gray: I understand, and I am saying that we place constraints on-there is a boundary around-what that UK company, which houses all the information, finances and national security issues, can pass beyond its boundary. That operates today, both in the nuclear weapons field and in the GoCo in Aldermaston, and it also applies to other major contractors-as I have said, in the case of, for example, Lockheed Martin UK and Thales UK.

Q91 Sir Bob Russell: I will leave that bit there. Earlier, I asked about 16,500 Government staff who could, if the project goes ahead, be transferred from the public sector to the private sector. Later on, in answer to a colleague, you were saying how difficult it was to keep some of your key staff on their salaries when they can get double elsewhere. How many of those 16,500 staff, all of whom, of course, would be transferred across on TUPE contracts, can look forward to having their salary doubled?

Bernard Gray: It is not for me to make the proposal around what the GoCo contractor would do. It is their job to say how they would organise the business in order to live within a cost envelope that we would give them-how can they drive out costs and how would they drive programme performance? There are two important issues here that may not be immediately obvious, because it is not, by any means, all about staff costs. The staff costs at DE&S are about 8% of the costs that we spend, so 92% of what we spend is on programme. The real value here is not in anything to do with shifting the staff costs up or down by 5%; it is in driving value in the 92% of the programme-that is where the money is.

Split across both the programme and the staff side, we spend over £400 million a year at the moment on supporting our activities with third-party companies. We will go out and get advice, help, analysis-whatever-in order to allow us to run the programme to the tune of over £400 million, which is effectively augmenting and supplementing skills and activities we do not have in-house right now. Some of that is always going to exist: so, for example, we no longer have a ships architects department, because we do not design enough ships. In a make/buy decision, we are always going to go out and buy ships architects services from a commercial firm, and we do today.

However, other aspects of it are in fairly straightforward financial analysis, where we do not have enough finance people of high enough levels of skill to be able to do the job, so we go to accounting firms and others for it. My point is, if we were appropriately skilled as an organisation, we could significantly cut our third-party spend.

Q92 Sir Bob Russell: Chairman, I will just make the observation that I was employed by the publicly-owned British Telecom. When it was privatised in 1985 the employment profile of the company rapidly changed. May I ask how many bids you have received to run the GoCo?

Bernard Gray: We are in negotiations with two consortia.

Q93 Sir Bob Russell: Are you able to give a detailed make-up of each consortium?

Bernard Gray: I can tell you who the main companies are. One of them is led by a company called CH2M HILL, which is the company that did the Olympics, with Serco and Atkins. The second is led by Bechtel, which has a significant track record around the world, and is supported by PwC and PA Consulting. Those are the two consortia.

Q94 Sir Bob Russell: They are all good guys, are they?

Bernard Gray: I can’t say I have ever been to a bar with any of them.

Q95 Sir Bob Russell: Was there a third bidder that did not materialise?

Bernard Gray: There was a third consortium that expressed interest and then withdrew.

Q96 Sir Bob Russell: But you have no further information as to why it withdrew?

Bernard Gray: I have my views about why it may have withdrawn, but I do not know.

Q97 Sir Bob Russell: Are you surprised that for such a massive contract there have been only two bidders?

Bernard Gray: I think we would have hoped for one or two others, but we were always in the market for two to four. We placed very significant constraints around this competition. Part of the problem is that we have constrained out any of the defence contractors for conflict of interest reasons. You also need to be able to operate at a sufficient scale to be able to do this job, with a sufficiently strong track record to be credible. We debated earlier what the incentive structure is. We have quite a demanding incentive structure; they have to do well to make money on the proposals. That makes it quite tough, in a number of dimensions.

Sir Bob Russell: Thank you.

Q98 Chair: You said you have your views about why they may have withdrawn. I will not ask you what those views are. I will ask you instead what you think would be the downside of putting in a bid for something such as this?

Bernard Gray: It costs quite a lot of money to run a competition. It can cost up to £10 million.

Q99 Chair: Do you think the competition has changed to any significant degree from the point that it was at earlier in the year when there were three bidders in?

Bernard Gray: They were issued with invitations to negotiate at the beginning of July. I have never been in a situation for any material period of time when we have actually had three bidders in. We had a bunch of speculation about how teams would form up before that.

Although one would always like a wider field, I think this is a very interesting contract for people to pursue for a variety of reasons. I know a number of other Governments are interested in doing something similar. It would be a huge calling card for someone to be able to go along and say, "We are doing this for the British Government." The two lead companies in the consortia are global companies with a real interest in being able to demonstrate that they can do this, and they will compete strongly with one another. I feel that we have a robust competition with them, because they both really want to win, notwithstanding the fact that we have put tough conditions on it. They are also up against the public sector.

So, from where I started all of this, I would be very disappointed indeed if I did not end up further forward. Rather than a process in which you say that the experiment was that, two years ago, I came in as an individual just to do what I can to try to improve the situation and then leave at some point in the future, I feel as though, in running this process and coming out either with DE&S-plus or a GoCo, we will be in a substantially strengthened position within Government on the delivery of defence equipment relative to where we otherwise would have been. So, yes, we have a robust competition and we have, effectively, three players in it, because DE&S-plus is a player.

Q100 Mrs Moon: Is it costing DE&S-plus £10 million to take part?

Bernard Gray: It is not costing them £10 million, but they do have external resources available to them that we have provided through our bid process. We are not only putting internal resource on it; we are giving them access to external accounting, analysis, legal and end contract management.

Chair: You talked about conflict of interests.

Q101 Ms Stuart: Yes. You said that you excluded defence contractors on that basis, but you will never be able to eliminate conflicts of interest completely. Could you say a bit about how you intend to manage those conflict of interest situations and whether there are situations that you could envisage where it would become unacceptable? You gave examples of where you do manage conflict of interest; in nuclear it is fairly well defined. I also wonder whether at some stage we could hear Susanna Mason; I would hate it if she had been here for the entire session without having said anything.

Bernard Gray: I appreciate that. You have not asked her any questions.

Ms Stuart: I was wondering whether, as director of export, conflict of interests would be something about which she would answer.

Bernard Gray: I would be delighted if you asked her some questions so I could put my feet up for a bit.

Ms Stuart: Well, you kick off.

Bernard Gray: Within the governor, we will have a permanent group looking at conflict of interest in the way that we do now. Effectively, if there was something that potentially gave rise to a conflict of interest, we would examine it on a case-by-case basis. We have already been through an exhaustive effort, in pre-qualifying everybody for this, to look through all the potential conflicts of interest. Inevitably you have to take it on a case-by-case basis, but we may well be in a situation where, if there was one, we would say that people have to accept that they are constrained from certain types of work with us. As it happens, neither Hill nor Bechtel do particularly large amounts of work for us at the moment, and that is therefore not a particularly big problem. But they are having to accept that this would be the predominant flavour of what they are doing for the UK Ministry of Defence.

If a particular thing came up, we would look at it from the governor organisation, with the conflict of interest people and commercial people there, to say, "Okay, how do we resolve this?" Broadly speaking, by and large it will have to be resolved in favour of a Caesar’s wife judgment about the people running the GoCo. Susanna Mason.

Ms Stuart: I would just love to hear your voice.

Bernard Gray: She has a much better voice than me.

Chair: We were just about to come to a question that will allow her to answer-a question about exports.

Q102 Mrs Moon: I was looking forward to directing my question to you, Ms Mason. It is about how the GoCo will incentivise and reinforce certain desired outcomes, around exports, for example, but also around the protection of SMEs in this country.

Susanna Mason: There are two things with exports: exportability, which is designing an original piece of equipment or a service to make it attractive to others, and actual exporting, which involves orchestrating the conditions, once you have something, whereby either the company or the Government can offer it to another country.

Exportability, which is at the very beginning of the procurement process and the capability decision process, will lie within the front-line commands. It is for them to decide how much of that design they wish either to compromise, to make sure that it has characteristics that can be exportable in future, or not to compromise, because they want it to be specific to the UK and we don’t particularly want to export that particular item. After that, the requirement goes to the GoCo, and the GoCo’s job is to buy it, not to have a view, from first off, on whether its exportability is acceptable or not.

There is no doubt that the experts in the procurement organisation will be able to advise in terms of costings, doability, time or length as to whether some of those exportability decisions have been completely thought through, are a good idea, or whether it is better, perhaps, in blue than in pink, because that is cheaper to procure. The actual decision on exportability, however, does not lie or rest with the GoCo. It procures what it is being asked to procure. That is the same whether it is a GoCo or DE&S now. But there is no doubt that there is expertise in the organisation that other parts of the organisation should draw upon when having those debates.

Exports are at the other end of the system, where we actually have a product and somebody else would like to procure it. Again, whether it is a GoCo or DE&S-plus, there is the fact that various members within DE&S have skills and need to contribute to making sure that export is as attractive to the buyer as it possibly can be. There is no doubt that, if the GoCo, within its contract, needs to have provision in relation to another part of the organisation-exports will always be held in the centre of the Department in terms of the decision on whether we are going to export to somebody-we will, in effect, have to pay it to help us do that export. At the moment it is the same with DE&S: the centre of the Department asks for DE&S help when required. So the actual fact that the organisational construct of DE&S may change will not, in a sense, affect exportability or exports; but we absolutely will need to call on its expertise, as we do now.

Q103 Mrs Moon: How can we make sure that there is protection built in for our SMEs?

Susanna Mason: That is more for CDM to answer; I can answer it for the single source, but SMEs is much more for CDM.

Bernard Gray: It is a genuinely difficult question: not about the protection of SMEs in this case, but about how we better involve SMEs in our processes. As the Chairman asked, what is the downside of bidding in this process? Bidding on our contracts is expensive, which it makes it hard for SMEs to do under current circumstances. The Government as a whole have a casual disregard for cash flow, which means that we do not understand that small companies cannot wait around for two years until we place an order. Once we place the order, we may pay promptly, but making the decision to place the order may have taken such a long time that they have starved to death in the meantime. When we say, "We will place an order with you", we’ll place an order for five times their annual production and expect it a week on Monday. We are not terribly good at matching this very large bureaucratic structure and the small structures, as a general proposition.

I do not know that the problem is any harder in the case of GoCo. We have had a strong drive from the Government in the last two or three years to try to do more with SMEs. The Centre for Defence Enterprise is a very good nursery ground start for some of that. Building on mechanisms like that will give people either some seedcorn funding or native guides that tell them how to get into the structure, which are good ways of trying to sponsor the development and incorporation.

The other part about it is, how do the primes go about things? BAE Systems conducts only about half the work it does in-house, and about half goes out to other companies. It is about making sure there are ladders that allow people to get access to that. It is a parallel problem that exists under any model. We have made progress, but there is more that we can do, and those are the kind of vectors that I would see as effectively trying to sponsor and encourage. We have done work with NDI, for example, to help sponsor it, but it is quite hard.

Q104 Thomas Docherty: International allies are highlighted in the impact assessment for the Bill as the biggest risk facing GoCo. I understand that you had a successful trip to the United States earlier this year but, notwithstanding that, on what scale do you place that risk?

Bernard Gray: I do not think that it is a black and white issue. I do not wish to presume on formal decisions that other Governments have not yet made, but we have a process running with the US Department of Defence where my opposite number, Frank Kendall’s office, has a task group set up to work its way through the issues, as we described earlier this year. That process is ongoing and, by and large, we are finding that the things that people thought were problems have turned out to be slightly myth and legend rather than actual problems. We are working our way through that list, and I am pretty confident-not wishing to presume on their good will-that we will resolve the issues. I think that Mr Kendall is also confident that we will manage to resolve those issues.

We then have some specialist areas. We have visited, for example, the nuclear propulsion teams and the nuclear weapons teams in the United States. Again, I have had positive indications from both sides, particularly the nuclear weapons team, that they are happy with the way in which we are going, and comfortable with it. Therefore, I am reasonably confident at the strategic level-I am putting it politely because I do not wish to presume-that we will work our way through the issues. The underlying problem then is to make sure that, at a working level, on a day-to-day basis, in five years’ time, other people are not being difficult.

There is a concept in the United States called the iron majors that says, "It doesn’t matter what the Defence Secretary says, there is an iron major who sits down and runs some individual programme here that says, ‘I am not co-operating with you’." It is a known thing, even within the United States itself, that they won’t-even to another part of their own service-release some information. I am conscious that we will have to sweat that issue but, at least strategically, I am reasonably confident that we will work our way through it with the United States.

France has expressed interest in what we are doing. It is very pragmatic about it. I have had a number of conversations with my French opposite number when he has asked me what we have in our minds, how we are thinking about it and so on, but he has never said, "This is going to make it difficult for us to work together".

Q105 Chair: Is it interest or bewildered curiosity?

Bernard Gray: It is interesting to note that the French private equity industry is substantially larger than the German private equity industry, which says that some of the folklore impressions of France are not quite accurate. It is an entrepreneurial country, too, as well as being a dirigiste country. I have huge respect for the DGA and France. They have not only a lot of technical expertise, but a lot of commercial expertise. I think that it is a genuine interest.

Q106 Thomas Docherty: You said that you are working through the issues. May I clarify that you would have to have resolved those issues before you pulled the trigger next March?

Bernard Gray: Yes. We have been working on them for nine months. We are working through-I can’t remember exactly, but I think that it is about eight different buckets of types of issues, for example, how foreign military sales would work; how the handling of the IPR would work; how the handling of security would work. We are working our way through a whole set of issues. Having got to an agreement about how they would all operate-we have some, but not all, of them done so far-we will then run test cases against two or three major examples, which will include procurement of the F35 and procurement of the common missile compartment for the successor submarine. Against that, we say that we now have agreement in principle, so now let us run some practical examples and see whether we encounter any other problems to make sure that we are completely happy with it. We will have finished that process before we make a decision.

Q107 Thomas Docherty: Is that therefore a risk, in that if you have not been able satisfactorily to resolve all those discussions, that in itself could delay moving forward?

Bernard Gray: Anything is a risk stated like that; there is a risk that people will not get up tomorrow. Of course it is possible that we won’t, but I have no indication that we will fail to do that.

Q108 Thomas Docherty: So you are confident that, by the dates you are setting out, you are going to do it?

Bernard Gray: Yes.

Q109 Thomas Docherty: As I understand it, the United States is prohibited by law from transferring information on anything other than a Government-to-Government basis. I am trying to get my head around how that could then work with GoCo. Could you briefly explain how you are solving that problem?

Bernard Gray: I do not think that the situation is quite as simple as that. I would make the point that we have significant co-operation with the United States in the nuclear field today, when all our operations for the last 20 years have been run inside a GoCo. Aldermaston, AWE, is a GoCo and has been a GoCo since 1991 and co-operates significantly with the strategic weapons systems people in the US navy, and has done for the past 20 years, over Trident. It is not a problem. One of the reasons that I had confidence in the first place about saying that, from a security point of view, this was a doable thing, was the knowledge that that situation has existed in a stable state for a long time.

When we looked, for example, at the foreign military sales issue, there were lots of suspicions that there were a whole bunch of things that could not be done. It turns out that, in order to sign the agreement for foreign military sales, we need one public official to be able to sign a memorandum on our side to execute the whole thing. That is all that we needed. Even in a world where we went to GoCo, I think that we will manage to summon one civil servant within the Ministry of Defence who is able to sign something.

The reality of the situation is that we have ways of making sure that the right information gets to the right places, but not transmitting information that does not need to go. We have ways of compartmentalising, in any set of circumstances, who gets to see information. The fact that you happen to work for DE&S today, and that you happen to be a civil servant, does not give you access to US data.

Q110 Thomas Docherty: My understanding is that clause 14(7) provides provision in the Bill for the Secretary of State to exempt single-source contracts. I do not think that it gives a reason why he could do that. Is that envisaged so that, for example, on the common missile compartment, you can take it back out of the GoCo if you are unable to resolve this issue with the United States?

Susanna Mason: No, it is confusing the two things. You are absolutely right; in the clause the Secretary of State has the ability to exempt, and there are a number of reasons for that. One is that, if there are any highly sensitive programmes that it would be inappropriate for the SSRO to have the information on, then we need that protection. Although we place some things single source and there is no competition, it is sometimes because it has to have a compatibility with what we have already got, but it is actually a market good. Our computer systems use a particular type of hardware, we have to use that hardware, and if we want some more, there is a market for it. It is absolutely under competitive pressure everywhere else, but it just so happens that we have got to let it single source. In that case it does not need the rigour of the regime. That is the reason for the ability to exempt.

FMS is a very specific case under that exemption as well, by the very nature of the FMS system. We have different rights afforded to us anyway through the American system so it would not apply in FMS. However, the single source regulations are not something that GoCo can choose to use or not to use, and it is procurement across the MOD; it is any procurement that is single source across the entire MOD--DE&S or the GoCo do not buy everything. The regime is a blanket that allows everybody to run the system if it is single-sourced. There is no confusion as to whether the GoCo has a choice.

Q111 Thomas Docherty: The Secretary of State needs clause 14(7) to say I cannot agree with Secretary Hagel on the common missile compartment. Bernard Gray is phenomenally charming but we just have not got there. Right, I am taking CMC out of GoCo.

Susanna Mason: No. It is nothing to do with the single source requirements. That is just a decision open to the Secretary of State to say, "I do not wish the GoCo to buy this particular capability." The fact that it is FMS is interesting but not relevant.

Q112 Chair: We are expecting a vote any time now. At that stage, I shall call this Committee meeting to an end. We have moved seamlessly on to single source contracts. I have a couple of quick questions. One is a concern raised with us by industry that it should be possible for the Ministry of Defence to challenge a contract price up to two years after the contract has been completed. This creates some uncertainty for investment proposals for industry. How do you respond?

Susanna Mason: It is not part of the Bill and it is not written in that way. The regulations are still being compiled. The debate is about the provision. A lot of our contracts are long. They are 10, 20 years. Our longest is a lot longer than that. We shall put a provision in regulations that says, as we examine the costs of a particular programme, if we can see that the original costing is drifting so far from the baseline, a provision allows that to be addressed. The worry that industry has that it is two years after the end is still being debated. There is a debate that says, if we find out that it has been even worse than that, why would we put a bar of two years; or the debate may say, we will do the reconciliations in a specific amount of time so that there is not that uncertainty. But the uncertainty would come far sooner than two years after the end of the contract if that is how the contract was operating-if the costings were drifting that far apart. So it is a protection at the end of the contract, but the real issue is the fact that the regulations need to allow both sides-it is a protection for both sides-to make sure we are controlling the costs as we go through the programme.

Q113 Chair: It sounded a rather one-sided concern.

Susanna Mason: I can imagine. Our aim is never to dissuade or disincentivise industry to work in our sector.

Q114 Chair: Thank you. ADS at least is concerned that the single source regulator will not be as independent between the MOD and industry as would be ideal. Do you have any views?

Susanna Mason: I think their contention is that there is not independence because the Secretary of State appoints the board, and indeed there is provision in the Bill-

Q115 Chair: And can remove.

Susanna Mason: And can remove. And there is also provision in the Bill that the SSRO can be disbanded. On the first point, the easiest one, the Cabinet Office requires all NDPBs to be reviewed on a triennial basis. It would be unusual if there were no clause that allowed something to be disbanded if it no longer had a use. It is not in there as a threat that if something happens this will just be collapsed. Contracts running across the current system are 48 years old. Some of the contracts that will run under this system will have 40 years to go in the future, so this is not a provision that is to be used lightly. It is a standard provision that a body needs some ability to be shut down. So that is that one.

With regard to the Secretary of State appointing the board, that is the provision in the Bill. However, it is through the normal OCPA rules. Positions will be advertised in the national press. It is not a placement in the sense that the Secretary of State will go out and place somebody. It is through absolutely normal rules. The chair will be the person appointed. They have already been appointed to us from OCPA. There is an independent member. There is a member from industry through the CBI, and I myself shall be on the board. While technically the Secretary of State will sign off the appointment, the entire process of appointing that person is independent, and that is the same process by which the other board members will be appointed. The SSRO itself, once the board members are appointed, will appoint its employees without any say or interference from the MOD.

Chair: I think you have a bit of work to do to persuade industry, but no doubt you will be doing that work. It being 4.30pm now and the vote being expected at 4.30pm, I ought to draw this Committee to a close. In doing so I should like to thank both of you very much for a lucid and extremely well-informed and helpful evidence session.

Prepared 9th September 2013